PRACTICAL ASPECTS

OF

INSOLVENCY LAW

(Second Edition)

INSTITUTE OF INSOLVENCY PROFESSIONALS

A Whol y Owned Subsidiary of ICSI and Registered with IBBI

( Formerly known as ICSI Insolvency Professionals Agency)

First Edition April, 2017

Second Edition May, 2018

Price : Rs. 650/- (Postage extra)

ISBN Number 978-93-86676-00-9

©

INSTITUTE OF INSOLVENCY PROFESSIONALS

A Whol y Owned Subsidiary of ICSI and Registered with IBBI

( Formerly known as ICSI Insolvency Professionals Agency)

All rights reserved. No part of this Publication may be translated or

copied in any form or by any means without prior written permission of

the ICSI Institute of Insolvency Professionals.

Disclaimer :

Although due care and diligence have been taken in the publication

of this book, the ICSI Institute of Insolvency Professionals shall

not be responsible for and loss or damage, resulting from any

action taken on the basis of the contents of this book. Any one

wishing to act on the basis of the material contained herein should

do so after cross checking with the original source.

Published by :

INSTITUTE OF INSOLVENCY PROFESSIONALS

A Whol y Owned Subsidiary of ICSI and Registered with IBBI

( Formerly known as ICSI Insolvency Professionals Agency)

4th Floor, ICSI House, 22, Institutional Area, Lodi Road

New Delhi 110 003

Phones : 011-4534 1099/48 Email : info@icsiip.com

Website : www.icsi ip.com

Printed at Chandu Press/500/May, 2018

(ii)

PREFACE

Insolvency Resolution, the term, its relevance in the Indian context and the

activity in its entirety, holds significance for reasons more than one. While

on one hand, the process guides the Indian corporates on the verge

insolvency and bankruptcy to find ground and a befitting future; on the other,

it finds place in the World Bank’s Doing Business Index. The fact that India

has risen up the ladder of this Index is a result of a long list of multifarious

functions is evident but the role played by the eased out corporate resolution

mechanism is inevitable.

The entire process of resolution of corporate insolvency has not only just

undergone a facial makeover but a turnaround of sorts. From forming part of

the Companies Act to being given a dedicated legislation under the garb of

the Insolvency and Bankruptcy Code in 2016, the journey over the past five

decades or so has been quite enthral ing.

However, alike various other legislations, and furthermore, courtesy the

nascent stage of the law and the process entailing, the entire corporate

insolvency resolution mechanism has witnessed plethora of chal enges in

the practical application of the law, ranging from the initiation of the process

to the hurdles facing insolvency professionals in taking over the business

of corporate debtors, conducting meetings of committee of creditors, drafting

and presenting documents before adjudicating authorities, the list seems to

run long.

The book has been developed with the objective to cover al practical aspects

of the legislation including but not limited to regulatory interpretations,

landmark judgements, duties and liabilities of insolvency professionals, etc.

It would surely be of assistance to the resolution professionals as regards

the manner of applying to the National Company Law Tribunal for pursuing

the process of resolution and also in identification of significant aspects,

documents involved, critical issues of resolution process settled through

land mark judgements, etc.

(i i)

I would like to commend the dedicated efforts of the Team - ICSI Institute of

Insolvency Professionals led by CS Lakshmi Arun, Head (Education &

Training) (Designate) and Company Secretary, consisting of Mr. Vinay Kumar

Sanduja, Senior Consultant, Ms. Anchal Jindal, Consultant, Mr. Amarjeet

Singh, ex-senior consultant, Ms. Mehreen Rahman, ex-consultant, ICSI-IIP

in revising this book under the overal supervision of CS Alka Kapoor, Chief

Executive Officer (Designate), ICSI Institute of Insolvency Professionals.

I am sure that this publication wil prove to be extremely helpful to the

insolvency professionals.

CS MAKARAND LELE

President

May 11, 2018

Institute of Company Secretaries of India

(iv)

ABOUT THE BOOK

The Insolvency and Bankruptcy Code, 2016 (Code) and the regulations

framed there under have undergone various changes in the recent past

including the passing of Insolvency and Bankruptcy Code (Amendment)

Act, 2018, Insolvency and Bankruptcy Board of India (Insolvency Resolution

Process for Corporate Persons) (Amendment) Regulations, 2018, various

circulars issued by Insolvency and Bankruptcy Board of India (IBBI), Reserve

Bank of India (RBI) etc. Besides a number of landmark cases pronounced

by National Company Law Tribunal (NCLT) and National Company Law

Appellate Tribunal (NCLAT) and Supreme Court have contributed towards

development of jurisprudence on the Code.

First edition of the publication “Practical aspects of Insolvency Law” was

very well received and on popular demand ICSI Institute of Insolvency

Professionals (ICSI IIP, formerly known as ICSI Insolvency Professionals

Agency) has come out with this updated second edition of publication

“Practical aspects of Insolvency Law” which covers practical nuances

during a resolution process including various procedural and drafting

aspects.

Present thoroughly revised second edition contains formats of minutes/

agenda for the meeting of Committee of Creditors, Model Information

Memorandum, Model Resolution Plan, format of Expression of Interest etc.

Besides, this second edition contains updated judgements that would help

Insolvency Professionals get an insight into the interpretation of provisions

of the Code by NCLT, NCLAT, High Courts and Supreme Court.

I am certain that this publication will serve as a guide for Insolvency

Professionals when taking up assignments and during the corporate

insolvency resolution process (CIRP) and performing role of Interim

Resolution Professional (IRP), Resolution Professional (RP) or Liquidator.

(v)

In any publication of this kind, there is always cope for further improvement.

I would be personal y grateful to receive feedback/suggestions from the

readers for further refinement in the next edition of this publication.

CS ALKA KAPOOR

May 11, 2018

Chief Executive Officer

ICSI Institute of Insolvency Professionals (ICSI IIP)

(vi)

CONTENTS

Chapter

Topic

Page

No.

No.

I.

Applicability of the Insolvency and Bankruptcy

1

Code, 2016

II

Understanding the basic definitions under the

3

Code & their interpretation through various judgments

III

Eligibility, Qualifications, Duties and Liabilities of

9

Insolvency Professionals

IV

Model Application for initiating CIRP by Financial

29

Creditor, Operational Creditor and Corporate Applicant

V

Check list by NCLT for scrutiny of an Application

71

and Dress Code

VI

Territorial jurisdiction of various benches of NCLT,

76

their Location and Addresses

VII

Role of Interim Resolution Professional

78

• Public announcement and regulatory intimations

79

• Claims and constitution of Committee of Creditors

81

• Committee of Creditors

90

• Conduct of CIRP during the tenure of Interim

93

Resolution Professional

• First Meeting of Committee of Creditors

97

• Voting by the Committee

102

VIII

Information Memorandum

140

IX

Contents of Resolution Plan and Model Resolution

157

Plan

X

Critical Issues Settled Through Landmark Judgments

192

(vii)

(viii)

PRACTICAL ASPECTS OF INSOLVENCY LAW

1

CHAPTER - I

APPLICABILITY OF THE INSOLVENCY AND

BANKRUPTCY CODE, 2016

Applicability of the Insolvency and Bankruptcy Code, 2016, as on date

of notification i.e. 1st December, 2016

Section 2 of the Insolvency and Bankruptcy Code, 2016 (“Code” ), provides

that the provisions of the Code shal apply to:

(a) any company incorporated under the Companies Act, 2013 or under

any previous company law;

(b) any other company governed by any Special Act for the time being

in force, except in so far as the said provisions are inconsistent with

the provisions of such Special Act;

(c) any Limited Liability Partnership incorporated under the Limited

Liability Partnership Act, 2008;

(d) such other body incorporated under any law for the time being in

force, as the Central Government may, by notification, specify in this

behalf; and

(e) partnership firms and individuals, in relation to their insolvency,

liquidation, voluntary liquidation or bankruptcy, as the case may be.

Applicability of the Code vide the Insolvency and Bankruptcy Code

(Amendment) Act, 2017

In view of the amendments brought out in the Code, vide the Insolvency

and Bankruptcy Code (Amendment) Act, 2017 (“Amendment Act” ) dated

18th January, 2018, clause (e) of section 2 of the Code has been substituted

with the following :

(e) personal guarantors to corporate debtors;

(f) partnership firms and proprietorship firms; and

(g) individuals, other than persons referred to in clause (e).

1

2

PRACTICAL ASPECTS OF INSOLVENCY LAW

Thus, the Code is applicable to fol owing :

“(a) any company incorporated under the Companies Act, 2013 or under

any previous company law;

(b) any other company governed by any special Act for the time being in

force, except in so far as the said provisions are inconsistent with

the provisions of such special Act;

(c) any Limited Liability Partnership incorporated under the Limited

Liability Partnership Act, 2008;

(d) such other body incorporated under any law for the time being in

force, as the Central Government may, by notification, specify in this

behalf;

e) personal guarantors to corporate debtors;

(f) partnership firms and proprietorship firms; and

(g) individuals, other than persons referred to in clause (e),”

PRACTICAL ASPECTS OF INSOLVENCY LAW

3

CHAPTER - II

UNDERSTANDING THE BASIC DEFINITIONS UNDER

THE CODE & THEIR INTERPRETATION THROUGH

VARIOUS JUDGEMENTS

A. “DEBT”

Section 3(11) “debt” means a liability or obligation in respect of a

claim which is due from any person and includes a financial debt and

operational debt.

B. DEFAULT

SECTION 3(12) “default” means non-payment of debt when whole or

any part or instalment of the amount of debt has become due and

payable and is not repaid by the debtor or the corporate debtor, as

the case may be.

In Neelkanth Township and Construction Pvt. Ltd. vs. Urban

Infrastructure Trustees Ltd. [SEE ANNEXURE TO CHAPTER X], a question

arose before the National Company Law Appel ate Tribunal (“NCLAT” )

that in absence of record of default as recorded with information utility

or ‘any other record or evidence of default’ specified by Insolvency

and Bankruptcy Board of India (“IBBI” or “Board” ), whether

application under section 7 of the Code is maintainable? It was held

by NCLAT that:

(i) Under section 239 of the Code, the Central Government

has framed rules known as Insolvency and Bankruptcy

(Application to Adjudicating Authority) Rules, 2016

(“Adjudicating Authority Rules” ). As per Rule 41 of

Adjudicating Authority Rules, Financial Creditor filing

application under section 7 of the Code is required to apply

under Form I. Part V of Form I deals with Financial Debts,

which includes documents, record and evidence of default.

(ii) IBBI has framed Insolvency and Bankruptcy Board of India

(Insolvency Resolution Process for Corporate Persons)

3

4

PRACTICAL ASPECTS OF INSOLVENCY LAW

Regulations, 2016 (“CIRP Regulations” ) which, under

Regulation 8, provide for filing of claim by Financial Creditor

under Form C.

(iii) The rules framed by Central Government having prescribed

the documents, record and evidence of default, the NCLAT

rejected the contention that in absence of Regulations being

framed by Board, the application deserved to be dismissed.

C. “ADJUDICATING AUTHORITY”

SECTION 5(1) “Adjudicating Authority”, for the purposes of this Part,

means National Company Law Tribunal constituted under section 408

of the Companies Act, 2013.

In J K Jute Mills Company Limited vs. M/s Surendra Trading

Company [SEE ANNEXURE TO CHAPTER X], decided by NCLAT, it was

observed that the Code empowers the ‘Adjudicating Authority’ to pass

orders under section 7, 9 and 10 of the Code and not the National

Company Law Tribunal (“NCLT” ). It is by virtue of definition under

sub-section (1) of section 5 of the Code the NCLT plays its role as

‘Adjudicating Authority’ and not that of a Company Law Tribunal.

Therefore, in strict sense, mandate under section 420 of the

Companies Act cannot be transpose in Code by reading ‘orders of

Tribunal’ as ‘orders of Adjudicating Authority’. The NCLAT thus held

that Adjudicating Authority under the Code plays different roles as

compared to NCLT under the Companies Act.

D. “DISPUTE”

Section 5(6) “dispute” includes a suit or arbitration proceedings relating

to – (a) the existence of the amount of debt; (b) the quality of goods

or service; or (c) the breach of a representation or warranty.

Different opinions have been expressed by different benches of NCLT

with regard to meaning of the term ‘dispute’.

In a judgment delivered in Mobilox Innovations Private Limited

vs. Kirusa Software Pvt. Ltd. [SEE ANNEXURE TO CHAPTER X] by Hon’ble

Supreme Court of India, the issue has been settled and it has been

held that the term ‘dispute’ cannot be limited to a pending suit or

arbitral proceeding and the word ‘and’ has to be read as ‘or’. Thus,

the definition of word ‘dispute’ is inclusive one and not exclusive

one.

PRACTICAL ASPECTS OF INSOLVENCY LAW

5

E. “FINANCIAL DEBT”

Section 5(8) “financial debt” means a debt alongwith interest, if any,

which is disbursed against the consideration for the time value of

money and includes –

(a) money borrowed against the payment of interest;

(b) any amount raised by acceptance under any acceptance credit

facility or its de-materialised equivalent;

(c) any amount raised pursuant to any note purchase facility or the

issue of bonds, notes, debentures, loan stock or any similar

instrument;

(d) the amount of any liability in respect of any lease or hire purchase

contract which is deemed as a finance or capital lease under

the Indian Accounting Standards or such other accounting

standards as may be prescribed;

(e) receivables sold or discounted other than any receivables sold

on nonrecourse basis;

(f) any amount raised under any other transaction, including any

forward sale or purchase agreement, having the commercial

effect of a borrowing;

(g) any derivative transaction entered into in connection with

protection against or benefit from fluctuation in any rate or price

and for calculating the value of any derivative transaction, only

the market value of such transaction shall be taken into account;

(h) any counter-indemnity obligation in respect of a guarantee,

indemnity, bond, documentary letter of credit or any other

instrument issued by a bank or financial institution;

(i) the amount of any liability in respect of any of the guarantee or

indemnity for any of the items referred to in sub-clauses (a) to

(h) of this clause.

F. “OPERATIONAL DEBT”

Section 5(21) “Operational Debt” means a claim in respect of the

provision of goods or services including employment or a debt in

respect of the repayment of dues arising under any law for the time

being in force and payable to the Central Government, any State

Government or any local authority.

6

PRACTICAL ASPECTS OF INSOLVENCY LAW

In Renish Petrochem FZE vs. Ardor Global Pvt. Ltd. [SEE ANNEXURE-

II.1] Renish Petrochem FZE supplied various goods to Ardor

International Limited and the outstanding of Ardor International Limited

was Rs.15,35,40,909. The goods were supplied on the condition that

payment of al and any sums of monies due and payable by Ardor

International Limited shal at all times be guaranteed by Ardor Global

Pvt. Ltd. - Corporate Debtor in this case. In this regard, Deed of

Guarantee dated 01.09.2014 was also entered into between Renish

Petrochem FZE and Ardor Global Pvt. Ltd. It was contended that

Ardor Global Pvt. Ltd was a Principal Borrower from a different bank

i.e. Central Bank of India whereas, it was only a guarantor to Ardor

International Limited, therefore, insolvency proceedings insolvency

could not be initiated by Renish Petrochem FZE, against Ardor Global

Pvt. Ltd. The Adjudicating Authority noted that the provisions of

Contract Act clearly show that liability of Principal Borrower and that

of Guarantor is co-extensive to that of Principal Debtor and thus, it is

wrong to contend that Operational Creditor i.e. Renish Petrochem

FZE could not proceed against Ardor Global Pvt. Ltd.

It was further contended that amount due under a contract of

guarantee from Corporate Debtor is not an ‘operational debt’. The

Adjudicating Authority noted the definition of word ‘claim’, as defined

in section 3(6) and observed that when the definition of ‘claim’ is

inserted into the definition of ‘operational debt’ in section 5(21), it

includes ‘amount payable under Guarantee Agreement’ also and thus

an ‘operational debt’. It was further observed that perusal of Deed of

Guarantee dated 01.09.2014 executed by Corporate Debtor in favour

of applicant showed that Corporate Debtor undertook to pay entire

amount due by Ardor International Limited towards supply of goods

to it not only as a guarantor but also as sole principal obligor.

In M/s Wanbury Ltd. vs. M/s Panacea Biotech Ltd. [SEE ANNEXURE-

II.2], question before the NCLT, Chandigarh Bench was whether the

claim for interest fal s within the term ‘debt’ which the corporate debtor

(in that case) was liable to pay, failing which the operational creditor

is entitled to an order of admission in terms of section 9 of the Code.

The Bench observed that “there is a marked difference between the

definite of term ‘financial debt’ and ‘operational debt’. Under section

5(8) of the Code, the term ‘financial debt’ means a debt along with

interest, if any, which is disbursed against the consideration for time

value of money and that is an inclusive definition. In the definition of

the term ‘operational debt’ under section 5 (21) the word ‘interest’ is

PRACTICAL ASPECTS OF INSOLVENCY LAW

7

not mentioned.” Accordingly, it was held that the term ‘operational

debt’ does not include ‘interest’.

In appeal before the NCLAT however, since the matter was settled,

there is no authoritative pronouncement by NCLAT on this aspect.

G. “FINANCIAL INSTITUTION”

Section 5(14) ”financial institution” means —

(a) a scheduled bank;

(b) financial institution as defined in section 45-I of the Reserve

Bank of India Act, 1934;

(c) public financial institution as defined in clause (72) of section 2

of the Companies Act, 2013; and

(d) such other institution as the Central Government may by

notification specify as a financial institution.

In Smart Timing Steel Ltd. vs. National Seed and Agro Industries

Ltd. [SEE ANNEXURE TO CHAPTER X], NCLAT interpreted the term financial

institution and held that filing of certificate from such financial

institution is mandatory.

In Macquarie Bank Limited vs. Shilpi Cable Technologies Ltd.,

[SEE ANNEXURE TO CHAPTER X], a question arose whether filing of

certificate from a financial institution maintaining accounts of

operational creditor confirming that there is no payment of unpaid

operational debt is mandatory or directory? The question arose in the

backdrop of an operational creditor maintaining accounts with a foreign

banker who failed to file certificate from a financial institution under

section 9(3) (c) of the Code.

Hon’ble Supreme Court observed that there may be situations where

a foreign supplier may have a foreign banker who is not within the

meaning of ‘financial institution’ under section 3(14) of the Code.

However, such foreign supplier would be an operational creditor as

established from reading of definition of ‘person’ contained in section

3(23), as including person resident outside India, together with

definition of ‘operational creditor’ in section 5(20). Thus, the Code

cannot be construed in a discriminatory fashion so as to include only

those operational creditors who are residents outside India who happen

to bank with financial institutions which may be included under section

3(14) of the Code.

8

PRACTICAL ASPECTS OF INSOLVENCY LAW

Thus, Hon’ble Supreme Court held that filing of certificate from a

financial institution maintaining accounts of operational creditor

confirming that there is no payment of unpaid operational debt is not

mandatory but only directory.

H. “FINANCIAL CREDITOR”

Section 5(7) ”financial creditor” means any person to whom a financial

debt is owed and includes a person to whom such debt has been

legally assigned or transferred to.

In Nikhil Mehta & Sons vs. AMR Infrastructure Ltd. [SEE ANNEXURE

TO CHAPTER X], NCLAT interpreted the term ‘financial creditor’ and held

that the buyers (in that case) were “investors” who had chosen the

“committed return plan”. NCLAT noted from the Annual Return and

Form 16-A of the Builder that they had treated the buyers as “investors”

and borrowed amount pursuant to sale purchase agreement for their

commercial purpose treating at par with loan in their return. The amount

disbursed by buyers was thus ‘against the consideration of time value

of money’ and the buyers were ‘financial creditors’.

In Neelkanth Township and Construction Pvt. Ltd. (supra), NCLAT,

while considering the question whether the appel ant, in that case,

was financial creditor or not, considered the definition of ‘financial

creditor’ and ‘financial debt’ and observed that ‘debentures’ come within

the meaning of ‘financial debt’. Since the appel ant in the present

case was a debenture holder, the appel ant was held to be financial

creditor.

I. RESOLUTION APPLICANT

Section 5(25)1 “resolution applicant” means a person, who individually

or jointly with any other person, submits a resolution plan to the

resolution professional pursuant to the invitation made under clause

(h) of sub-section (2) of section 25.

1 Substituted by section 3(a) of the Insolvency and Bankruptcy Code (Amendment) Act,

2017 (w.e.f. 23-11-2017).

PRACTICAL ASPECTS OF INSOLVENCY LAW

9

CHAPTER - III

ELIGIBILITY, QUALIFICATIONS, DUTIES AND

LIABILITIES OF INSOLVENCY PROFESSIONALS

Insolvency Professionals

Section 206 of the Code provides that no person shal render his services

as insolvency professional under this Code without being enrolled as a

member of an insolvency professional agency and registered with the Board.

Section 207 of the Code provides that every insolvency professional shall,

after obtaining the membership of any insolvency professional agency,

register himself with the Board within such time, in such manner and on

payment of such fee, as may be specified by regulations.

Eligibility for Enrolment as an Insolvency Professional

In order to enroll as an Insolvency Professional, a professional needs to

comply with the eligibility criteria as provided under Regulation 4 of Insolvency

and Bankruptcy Board of India (Insolvency Professionals) Regulations, 2016

(“IP Regulations” ). The stated Regulations provide that, that no individual

shal be eligible to be registered as an insolvency professional if he-

(a) is a minor;

(b) is not a person resident in India;

(c) does not have the qualification and experience criteria specified in

regulation 5;

(d) has been convicted by any competent court for an offence punishable

with imprisonment for a term exceeding six months or for an offence

involving moral turpitude and a period of five years has not elapsed

from the date of expiry of the sentence;

Provided that if a person has been convicted of any offence and

sentenced in respect thereof to imprisonment for a period of seven

years or more, he shall not be eligible to be registered;

9

10

PRACTICAL ASPECTS OF INSOLVENCY LAW

(e) he is an undischarged insolvent or has applied to be adjudicated as

an insolvent;

(f) has been declared to be of unsound mind; or

(g) he is not a fit and proper person.

For determining, whether an individual is fit and proper under IP Regulations,

2016, IBBI may take account of any consideration as it deems fit, including

but not limited to the fol owing criteria:

(a) Integrity, reputation and character,

(b) Absence of convictions and restraint orders, and

(c) Competence, including financial solvency and net worth.

Further, in addition to the above stated Regulations, professionals also

need to take in consideration Bye-Law 9 of Insolvency and Bankruptcy

Board of India (Model Bye-Laws and Governing Board of Insolvency

Professional Agencies) Regulations, 2016 (“Model Bye-Laws

Regulations” ) which provides that no individual shall be enrol ed as a

professional member if he is not eligible to be registered as an insolvency

professional with the Board.

Proviso to Bye-Law 9 of Model Bye-Laws further provides that the Governing

Board may provide additional eligibility requirements for enrolment.

Second Proviso to Bye-Law 9 of Model Bye-Laws further provides that

such additional requirements shall not discriminate on the grounds of religion,

race, caste, gender, place of birth or professional affiliation.

Qualifications for registration as an Insolvency Professional

In order to enroll as an Insolvency Professional, besides eligibility criteria, a

professional also needs to fulfil the qualification criteria also as specified

under Regulation 5 of IP Regulations which provides that:

An individual shal be eligible for registration, if he –

(a) has passed the National Insolvency Examination (not yet in force);

(b) has passed the Limited Insolvency Examination and has fifteen years

of experience in management after receiving a Bachelor’s degree

from a university established or recognized by law; or

(c) has passed the Limited Insolvency Examination and has ten years

of experience as –

PRACTICAL ASPECTS OF INSOLVENCY LAW

11

• A Chartered Accountant enrol ed as a member of the Institute

of Chartered Accountants of India,

• A Company Secretary enrol ed as a member of the Institute of

Company Secretaries of India,

• A Cost Accountant enrol ed as a member of the Institute of

Cost Accountants of India,

• An advocate enrolled with a Bar Council.

Duties of an Insolvency Professional

While practicing as an insolvency professional, the professional member

has to perform certain sets of duties as illustrated under Regulation 13 of

Model Bye-Laws Regulations which provides that every Insolvency

Professional is mandatorily required :

(a) To act in good faith in discharge of his duties as an Insolvency

Professional.

(b) To maximize the value of assets of the debtor.

(c) To discharge functions with utmost integrity and objectivity.

(d) To act independently and impartial y.

(e) To discharge functions with the highest standards of professional

competence and professional ethics.

(f) To continuously upgrade the professional expertise.

(g) To perform duties as quickly and efficiently as reasonable, subject to

the timelines under the Code.

(h) To comply with applicable laws in the performance of his functions.

(i) To maintain confidentiality of information obtained in the course of

his professional activities unless required to disclose such information

by law.

Further, in addition to the above mentioned duties, every insolvency

professional shall also take in consideration the following duties as prescribed

by IBBI vide its various circulars:

(I) Disclosures by Insolvency Professionals and other Professionals

appointed by Insolvency Professionals conducting Resolution

Processes

12

PRACTICAL ASPECTS OF INSOLVENCY LAW

Circular No. IP/005/2018 dated 16th January, 2018 provides that an

Insolvency Professional shal disclose his relationship, if any, with

(i) the Corporate Debtor, (i ) other Professional(s) engaged by him,

(i i) Financial Creditor(s), (iv) Interim Finance Provider(s), and (v)

Prospective Resolution Applicant(s) to the Insolvency Professional

Agency (“IPA” ) of which he is a member, within the time specified

as under

Relationship of the Insolvency

Disclosure to be made within

Professional with

three days of

Corporate Debtor

his appointment.

Other Professionals [Registered

appointment of the other

Valuer(s) / Accountant(s) / Legal

Professional.

Professional(s) / Other

Professional(s)] appointed by him

Financial Creditor(s)

the constitution of Committee

of Creditors.

Interim Finance Provider(s)

the agreement with the

Interim Finance Provider.

Prospective Resolution

the supply of information

Applicant(s)

memorandum to the

Prospective Resolution

Applicant.

If relationship with any of the above

of such notice or arising.

comes to notice or arises

subsequently

The circular further provides that an Insolvency Professional shall

ensure disclosure of the relationship, if any, of the other professional(s)

engaged by him with (i) himself, (ii) the Corporate Debtor, (iii) Financial

Creditor(s), (iv) Interim Finance Provider(s), and (v) Prospective

Resolution Applicant(s) to the IPA of which he is a member, within the

time specified as under:

Relationship of the other

Disclosure to be made within

Professional(s) with

three days of

The Insolvency Professional

the appointment of the other

Professional.

Corporate Debtor

the appointment of the other

Professional.

PRACTICAL ASPECTS OF INSOLVENCY LAW

13

Financial Creditor(s)

constitution of Committee of

Creditors.

Interim Finance Provider(s)

the agreement with the Interim

Finance Provider or three

days of the appointment of the

other Professional, whichever

is later.

Prospective Resolution Applicant(s)

the supply of information

memorandum

to

the

Prospective

Resolution

Applicant or three days of the

appointment of the other

Professional, whichever is

later.

If relationship with any of the above

of such notice or arising.

comes to notice or arises

subsequently

Under this circular, the IPAs have also been cast with a responsibility to

disseminate such disclosures on its website within three working days

of receipt of the disclosure. The circular is annexed as Annexure III.1.

(II) Fees payable to an Insolvency Professional and to other

professionals appointed by an Insolvency Professional

Circular No. IP/004/2018 dated 16th January, 2018 provides that an

Insolvency Professional shal render services for a fee which is a

reasonable reflection of his work, raise bills / invoices in his name

towards such fees, and such fees shal be paid to his bank account.

Any payment of fees for the services of an insolvency professional

to any person other than the insolvency professional shal not form

part of the insolvency resolution process cost. The circular is annexed

as Annexure III.2.

(III) Insolvency Professional to ensure compliance with provisions

of the applicable laws

Circular No. IP/002/2018 dated 3rd January, 2018 provides that a

corporate person undergoing insolvency resolution process, fast track

insolvency resolution process, liquidation process or voluntary

liquidation process under the Code needs to comply with provisions of

the applicable laws during such process. It directs that while acting as

an Interim Resolution Professional (“IRP” ), Resolution Professional

14

PRACTICAL ASPECTS OF INSOLVENCY LAW

(“RP” ) or a Liquidator, an Insolvency Professional shall exercise

reasonable care and diligence and take al necessary steps to ensure

that the corporate person undergoing any process under the Code

complies with the applicable laws.

Further, the circular provides that if a corporate person during any

of the aforesaid processes under the Code suffers any loss,

including penalty, if any, on account of non-compliance of any

provision of the applicable laws, such loss shall not form part of

insolvency resolution process cost or liquidation process cost

under the Code and states that in such a scenario, the Insolvency

Professional will be responsible for the non-compliance of the

provisions of the applicable laws if it is on account of his conduct.

The circular is annexed as Annexure III.3.

(IV) Insolvency Professional not to outsource his responsibilities

This Circular No. IP/003/2018 dated 3rd January, 2018 provides that

an IRP shal not outsource any of his duties and responsibilities under

the Code and that he shal not require any certificate from another

person certifying eligibility of a resolution applicant. The circular is

annexed as Annexure III.4.

(V) Insolvency professional to use Registration Number and

Registered Address in all his communications

This Circular No. IP/001/2018 dated 3rd January, 2018 provides that

an Insolvency Professional shal prominently state: (i) his name,

address and email, as registered with the IBBI, (i ) his Registration

Number as an insolvency professional granted by the IBBI, and (i i)

the capacity in which he is communicating in all his communications,

whether by way of public announcement or otherwise to a stakeholder

or to an authority. The circular is annexed as Annexure III.5.

Obligations of an Insolvency Professional

While undertaking any assignment under the Code, an Insolvency

Professional shall abide by Code of Conduct as provided under Section

208(2)(d) of the Code, which requires an Insolvency Professional:

(a) to take reasonable care and diligence while performing his duties;

(b) to comply with al requirements, terms and conditions sepcified in

the bye-laws of the insolvency professional agency of which he is

member;

PRACTICAL ASPECTS OF INSOLVENCY LAW

15

(c) to al ow the insolvency professional agency to inspect his records;

(d) to submit a copy of the records of every proceeding before the

Adjudicating Authority to the Board as wel as to the Insolvency

Professional Agency of which he is a member; and

(e) to perform his functions in such manner and subject to such conditions

as may be specified.

In addition to above, an Insolvency Professional is also under a mandate to

abide by the First Schedule of the Code of Conduct prescribed under IP

Regulations. The key central areas of Code of Conduct are:

(a) Integrity and Objectivity

(b) Independence and Impartiality

(c) Professional Competence

(d) Representation of correct facts and correcting misapprehensions

(e) Observance of timeliness

(f) Competence to manage information

(g) Maintenance of confidentiality

(h) To always take in consideration occupation, employability and

restrictions

(i) To charge remuneration and costs in a fair and transparent manner

(j) Not to accept gifts and hospitality

16

PRACTICAL ASPECTS OF INSOLVENCY LAW

Annexure III.1

Insolvency and Bankruptcy Board of India

7th Floor, Mayur Bhawan, Connaught Place, New Delhi-110001

CIRCULAR

No. IP/005/2018

16th January, 2018

To

All Registered Insolvency Professionals

All Registered Insolvency Professional Agencies

(By mail to registered email addresses and on web site of the IBBI)

Dear Madam / Sir,

Sub: Disclosures by Insolvency Professionals and other Professionals

appointed by Insolvency Professionals conducting Resolution

Processes.

The Insolvency and Bankruptcy Code, 2016 read with regulations made

thereunder provide for appointment of an insolvency professional [(Interim

Resolution Professional (IRP) / Resolution Professional (RP)] to conduct

the resolution process (Corporate Insolvency Resolution Process and the

Fast Track Process) and discharge other duties. These authorise the

Insolvency Professional to appoint registered valuers, accountants, legal

and other professionals to assist him in discharge of his duties in resolution

process.

2. In the interest of transparency, it has been decided that an insolvency

professional and every other professional appointed by the insolvency

professional for a resolution process shall make disclosures as specified in

Para 3 to 5 hereunder.

3. An insolvency professional shall disclose his relationship, if any, with (i)

the Corporate Debtor, (i ) other Professional(s) engaged by him, (iii) Financial

Creditor(s), (iv) Interim Finance Provider(s), and (v) Prospective Resolution

Applicant(s) to the Insolvency Professional Agency of which he is a member,

within the time specified as under:

PRACTICAL ASPECTS OF INSOLVENCY LAW

17

Relationship of the Insolvency

Disclosure to be made within three

Professional with

days of

Corporate Debtor

his appointment.

Other Professionals [Registered

appointment of the other Professional.

Valuer(s) / Accountant(s) / Legal

Professional(s) / Other

Professional(s)] appointed by him

Financial Creditor(s)

the constitution of Committee of Creditors.

Interim Finance Provider(s)

the agreement with the Interim Finance

Provider.

Prospective Resolution Applicant(s)

the supply of information memorandum

to the Prospective Resolution Applicant.

If relationship with any of the above of such notice or arising.

comes to notice or arises

subsequently

4. An insolvency professional shal ensure disclosure of the relationship, if

any, of the other professional(s) engaged by him with (i) himself, (i ) the

Corporate Debtor, (i i) Financial Creditor(s), (iv) Interim Finance Provider(s),

and (v) Prospective Resolution Applicant(s) to the Insolvency Professional

Agency of which he is a member, within the time specified as under:

Relationship of the other

Disclosure to be made within

Professional(s) with

three days of

The Insolvency Professional

the appointment of the other

Professional.

Corporate Debtor

the appointment of the other

Professional.

Financial Creditor(s)

constitution of Committee of Creditors.

Interim Finance Provider(s)

the agreement with the Interim Finance

Provider or three days of the appointment

of the other Professional, whichever is

later.

Prospective Resolution Applicant(s) the supply of information memorandum

to the Prospective Resolution Applicant

or three days of the appointment of the

other Professional, whichever is later.

If relationship with any of the above of such notice or arising.

comes to notice or arises

subsequently

18

PRACTICAL ASPECTS OF INSOLVENCY LAW

5. For the purpose of Para 3 and 4 above, ‘relationship’ shal mean any one

or more of the four kinds of relationships at any time or during the three

years preceding the appointment:

Kind of

Nature of Relationship

Relationship

A

Where the Insolvency Professional or the Other Professional,

as the case may be, has derived 5% or more of his / its gross

revenue in a year from professional services to the related

party.

B

Where the Insolvency Professional or the Other Professional,

as the case may be, is a Shareholder, Director, Key Managerial

Personnel or Partner of the related party.

C

Where a relative (Spouse, Parents, Parents of Spouse, Sibling

of Self and Spouse, and Children) of the Insolvency

Professional or the Other Professional, as the case may be,

has a relationship of kind A or B with the related party.

D

Where the Insolvency Professional or the Other Professional,

as the case may be, is a partner or director of a company, firm

or LLP, such as, an Insolvency Professional Entity or

Registered Valuer, the relationship of kind A, B or C of every

partner or director of such company, firm or LLP with the

related party.

6. An Insolvency Professional Agency shal facilitate receipt of disclosures

as required above. It shal disseminate such disclosures on its web site

within three working days of receipt of the disclosure. A model schematic

presentation of disclosures for guidance of Insolvency Professional Agencies

and Insolvency Professionals is enclosed at Annexure A.

7. The Insolvency Professional shal provide a confirmation to the Insolvency

Professional Agency to the effect that the appointment of every other

professional has been made at arms’ length relationship.

8. The disclosures shal be made in respect of ongoing resolution processes

as on date and all subsequent resolution processes. The disclosures due

on date in respect of the ongoing processes shall be made to the respective

Insolvency Professional Agency by 31st January, 2018.

9. The Insolvency Professional shall ensure timely and correct disclosures

by him and the other Professionals appointed by him. Any wrong

disclosure and delayed disclosure shall attract action against the

Insolvency Professional and the other Professional as per the provisions

of the law.

PRACTICAL ASPECTS OF INSOLVENCY LAW

19

10. This circular is issued in exercise of powers under section 196 read with

sections 204 and 208 of the Insolvency and Bankruptcy Code, 2016, in

consultation with the Insolvency Professional Agencies.

Yours faithful y,

-Sd-

(I. Sreekara Rao)

Deputy General Manager

Email: sreekararao@ibbi .gov.in

Annexure A

Disclosures by the Insolvency Professionals and other Professionals

appointed by the Insolvency Professionals conducting Resolution

Processes of ............... (Corporate Debtor)

IP/Other

Name

Profes-

PAN Relationship with

Profess

of

sional

ional

Profes- Member-

IRP/ Other

Corpo- Name

Inte-

Name

engaged

sional

ship No.

RP

Profes-

rate

of

rim

of

by the

sional

Debtor Finan-

Fina-

Prospe-

IP

(Regist-

cial

nce

ctive

ered

Credi-

Prov-

Resolu-

Valuer/

tor(s)

ider(s) tion

Accoun-

Appli-

tant/

cant (s)

Advo-

cate/

Any

other

Profes_

sional)

IRP/RP

NA

Regis

NA

tered

Valuer

Accoun-

NA

A

tant

Advocate

NA

Any other

NA

Profes-

sional

(Write

kind of

Profe_

ssion)

20

PRACTICAL ASPECTS OF INSOLVENCY LAW

Notes:

i. NA: Not Applicable.

ii. Additional rows and columns to be inserted, as required, where there

are more than one professional, financial creditor, interim finance

provider or prospective resolution applicant.

i i. Where an Accountant has relationship of kind A with a Financial

Creditor, relevant cell wil display ‘A’, as indicated in the above table.

One may click on ‘A’ to find details of relationship.

PRACTICAL ASPECTS OF INSOLVENCY LAW

21

Annexure III.2

Insolvency and Bankruptcy Board of India

7th Floor, Mayur Bhawan,

Connaught Place, New Delhi-110001

CIRCULAR

No. IP/004/2018

16th January, 2018

To

Al Registered Insolvency Professionals

Al Registered Insolvency Professional Agencies

(By mail to registered email addresses and on web site of the IBBI)

Dear Madam / Sir,

Sub: Fees payable to an insolvency professional and to other

professionals appointed by an insolvency professional.

Section 206 of the Insolvency and Bankruptcy Code, 2016 (Code) provides

that only a person registered as an insolvency professional with the

Insolvency and Bankruptcy Board of India (IBBI) can render services as an

insolvency professional under the Code. Section 23 read with section 5(27)

of the Code requires that an insolvency professional, who is appointed as

an interim resolution professional or a resolution professional, shall conduct

the entire corporate insolvency resolution process, including fast track

process. In terms of section 5(13) of the Code, ‘the fees payable to any

person acting as a resolution professional’ is included in ‘insolvency resolution

process cost’, which needs to be paid in priority.

2. The Code of Conduct for Insolvency Professionals under the IBBI

(Insolvency Professionals) Regulations, 2016 require that an insolvency

professional must provide services for remuneration which is charged in a

transparent manner, and is a reasonable reflection of the work necessarily

and properly undertaken. He shal not accept any fees or charges other

than those which are disclosed to and approved by the persons fixing his

remuneration.

3. In view of the above, it is clarified that an insolvency professional shall

render services for a fee which is a reasonable reflection of his work, raise

bills / invoices in his name towards such fees, and such fees shal be paid

to his bank account. Any payment of fees for the services of an insolvency

22

PRACTICAL ASPECTS OF INSOLVENCY LAW

professional to any person other than the insolvency professional shal not

form part of the insolvency resolution process cost.

4. Similarly, any other professional appointed by an insolvency professional

shal raise bil s / invoices in his / its (such as registered valuer) name towards

such fees, and such fees shall be paid to his / its bank account.

5. This circular is issued in exercise of powers under section 196 read with

section 208 of the Insolvency and Bankruptcy Code, 2016.

Yours faithful y,

-Sd-

(I. Sreekara Rao)

Deputy General Manager

Email: sreekararao@ibbi.gov.in

PRACTICAL ASPECTS OF INSOLVENCY LAW

23

Annexure III.3

Insolvency and Bankruptcy Board of India

7th Floor, Mayur Bhawan

Connaught Place, New Delhi-110001

CIRCULAR

No. IP/002/2018

3rd January, 2018

To

Al Registered Insolvency Professionals

Al Registered Insolvency Professional Agencies

(By mail to registered email addresses and on the web site of the IBBI)

Dear Madam / Sir,

Sub: Insolvency professional to ensure compliance with provisions of

the applicable laws.

A corporate person undergoing insolvency resolution process, fast track

insolvency resolution process, liquidation process or voluntary liquidation

process under the Insolvency and Bankruptcy Code, 2016 (Code) needs to

comply with provisions of the applicable laws (Acts, Rules and Regulations,

Circulars, Guidelines, Orders, Directions, etc.) during such process. For

example, a corporate person undergoing insolvency resolution process, if

listed on a stock exchange, needs to comply with every provision of the

Securities and Exchange Board of India (Listing Obligations and Disclosure

Requirements) Regulations, 2015, unless the provision is specifically

exempted by the competent authority or becomes inapplicable by operation

of law for the corporate person.

2. It is hereby directed that while acting as an Interim Resolution Professional,

a Resolution Professional, or a Liquidator for a corporate person under the

Code, an insolvency professional shal exercise reasonable care and diligence

and take all necessary steps to ensure that the corporate person undergoing

any process under the Code complies with the applicable laws.

3. It is clarified that if a corporate person during any of the aforesaid processes

under the Code suffers any loss, including penalty, if any, on account of

non-compliance of any provision of the applicable laws, such loss shal not

form part of insolvency resolution process cost or liquidation process cost

under the Code. It is also clarified that the insolvency professional wil be

24

PRACTICAL ASPECTS OF INSOLVENCY LAW

responsible for the non-compliance of the provisions of the applicable laws if

it is on account of his conduct.

4. This circular is issued in exercise of powers under section 196 read with

section 208 of the Insolvency and Bankruptcy Code, 2016.

Yours faithful y,

-Sd-

(I. Sreekara Rao)

Deputy General Manager

Email: sreekararao@ibbi.gov.in

PRACTICAL ASPECTS OF INSOLVENCY LAW

25

Annexure III.4

Insolvency and Bankruptcy Board of India

7th Floor, Mayur Bhawan

Connaught Place, New Delhi-110001

CIRCULAR

No. IP/003/2018

3rd January, 2018

To

Al Registered Insolvency Professionals

Al Registered Insolvency Professional Agencies

(By mail to registered email addresses and on web site of the IBBI)

Dear Madam / Sir,

Sub: Insolvency professional not to outsource his responsibilities.

The Insolvency and Bankruptcy Code, 2016 (Code) read with regulations

made thereunder cast specific duties and responsibilities on an insolvency

professional. An insolvency professional is required to perform certain

tasks under the Code while acting as an Interim Resolution Professional,

a Resolution Professional, a Liquidator or a Bankruptcy Trustee for various

processes. For example, an insolvency professional is required to manage

the operations of the corporate debtor as a going concern. He is also

required to invite resolution plans, examine them and present to the

committee of creditors for its approval such resolution plans which comply

with the provisions of the Code. To assist him in carrying out his

responsibilities, the Code read with regulations allow an insolvency

professional to appoint accountants, legal or other professionals, as may

be necessary.

2. It has been observed that a few insolvency professionals are advising

the prospective resolution applicants to submit a certificate from another

person to the effect that they are eligible to be resolution applicants. This

requirement amounts to outsourcing responsibilities of an insolvency

professional to another person. Further, this adds to cost of the resolution

applicant and delays submission of resolution plans. The Code read with

regulations do not envisage such a certification from a third person.

3. It is hereby directed that an insolvency resolution professional shal not

outsource any of his duties and responsibilities under the Code. He shall

26

PRACTICAL ASPECTS OF INSOLVENCY LAW

not require any certificate from another person certifying eligibility of a

resolution applicant.

4. This circular is issued in exercise of powers under section 196 read with

section 208 of the Insolvency and Bankruptcy Code, 2016.

Yours faithful y,

-Sd-

(I. Sreekara Rao)

Deputy General Manager

Email: sreekararao@ibbi.gov.in

PRACTICAL ASPECTS OF INSOLVENCY LAW

27

Annexure III.5

Insolvency and Bankruptcy Board of India

7th Floor, Mayur Bhawan

Connaught Place, New Delhi-110001

CIRCULAR

No. IP/001/2018

3rd January, 2018

To

All Registered Insolvency Professionals

All Registered Insolvency Professional Agencies

(By mail to registered email addresses and on web site of the IBBI)

Dear Madam / Sir,

Sub: Insolvency professional to use Registration Number and

Registered Address in all his communications.

It has been observed that a few insolvency professionals are using different

addresses and emails while communicating with the stakeholders, despite

repeated advice from the Insolvency Bankruptcy Board of India (IBBI) to

use the addressees and emails registered with the IBBI in all their

communications.

2. It is hereby directed that in al his communications, whether by way of

public announcement or otherwise to a stakeholder or to an authority, an

insolvency professional shal prominently state: (i) his name, address and

email, as registered with the IBBI, (i ) his Registration Number as an

insolvency professional granted by the IBBI, and (iii) the capacity in which

he is communicating (Example: As Interim Resolution Professional of XYZ

Limited, As Resolution Professional of ABC Limited, etc.).

3. Additional y, an insolvency professional may use a process (Example:

CIRP, Liquidation, etc.) specific address and email in its communications,

if he considers it necessary subject to the conditions that: (i) the process

specific address and email are in addition to the details required in Para 2

above, and (i ) the insolvency professional continues to service the process

specific address and email for at least six months from conclusion of his

role in the process.

28

PRACTICAL ASPECTS OF INSOLVENCY LAW

4. This circular is issued in exercise of powers under section 196 read with

section 208 of the Insolvency and Bankruptcy Code, 2016.

Yours faithful y,

-Sd-

(I. Sreekara Rao)

Deputy General Manager

Email: sreekararao@ibbi.gov.in

PRACTICAL ASPECTS OF INSOLVENCY LAW

29

CHAPTER IV

MODEL APPLICATION FOR INITIATING CIRP BY

FINANCIAL CREDITOR, OPERATIONAL CREDITOR

AND CORPORATE APPLICANT

I. APPLICATION BY FINANCIAL CREDITOR

Regulatory Framework For Initiating Corporate Insolvency Resolution

Process By Financial Creditor

Financial Creditor to File Application Either Singly or Jointly

Sub-Section (1) to Section 7 of the Code reads as under:

“(1) A financial creditor either by itself or jointly with other financial creditors

may file an application for initiating corporate insolvency resolution process

against a corporate debtor before the Adjudicating Authority when a default

has occurred”.

Section 4 of the Code provides that Part II (Insolvency Resolution and

Liquidation For Corporate Persons) of the Code shall apply to matters relating

to the insolvency and liquidation of corporate debtors where the minimum

amount of the default is one lakh rupees.

Explanation to sub-section (1) of section 7 of the Code further provides that

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.

Application To Be Accompanied With Requisite Fee and Documents

Sub-Section (2) to Section 7 of the Code states that the financial creditor

shal make an application under sub-section (1) in such form and manner

and accompanied with such fee as may be prescribed.

Schedule I to the Adjudicating Authorities Rules provides that an application

by financial creditor to initiate corporate insolvency resolution process shall

be accompanied with a fee of Rs. 25,000/-.

Further, Rule 4 of the Adjudicating Authority Rules provides that a financial

29

30

PRACTICAL ASPECTS OF INSOLVENCY LAW

creditor making application for initiating corporate insolvency resolution

process shall make the application in Form 1 and shal be accompanied

with documents and records as specified in CIRP Regulations.

Regulation 8 to CIRP Regulations provides that a financial creditor may

prove the existence of a financial debt on the basis of fol owing records:

(a) the records available with an information utility, if any; or

(b) other relevant documents, including –

(i) a financial contract supported by financial statements as

evidence of the debt;

(i ) a record evidencing that the amounts committed by the financial

creditor to the corporate debtor under a facility has been drawn

by the corporate debtor;

(iii) financial statements showing that the debt has not been repaid;

or

(iv) an order of a court or tribunal that has adjudicated upon the

non-payment of a debt, if any.

Sub-rule 2 of Rule 4 of the Adjudicating Authority Rules states as under:

“(2) Where the applicant under sub-rule (1) is an assignee or transferee of

a financial contract, the application shal be accompanied with a copy of

the assignment or transfer agreement and other relevant documentation

to demonstrate the assignment or transfer.”

Sub-rule 3 of Rule 4 of the Adjudicating Authority Rules further reads as

under:

(3) The applicant shal dispatch forthwith, a copy of the application filed

with the Adjudicating Authority, by registered post or speed post to the

registered office of the corporate debtor.

Documents to be furnished along with the application

Sub-Section (3) of Section 7 of the Code provides as under:

“(3) The financial creditor shal , 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.”

PRACTICAL ASPECTS OF INSOLVENCY LAW

31

Adjudicating Authority to ascertain default within 14 days of receipt of

application

Sub-Section (4) of Section 7 of the Code provides as under:

(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).

Adjudicating Authority to admit or reject the application

Sub-Section (5) of Section 7 of the Code provides as under:

“(5) Where the Adjudicating Authority is satisfied that—

(a) a default has occurred and the application under sub-section (2) is

complete, and there is 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 shal , 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.”

Date of Commencement of Corporate Insolvency Resolution Process

Sub-Section (6) of Section 7 of the Code provides as under

“(6) The corporate insolvency resolution process shal commence from

the date of admission of the application under sub-section (5).”

Communication of Decision by Adjudicating Authority

Sub-Section (7) of Section 7 of the Code provides as under

“(7) The Adjudicating Authority shal 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.”

32

PRACTICAL ASPECTS OF INSOLVENCY LAW

MODEL APPLICATION FOR INITIATING CORPORATE INSOLVENCY

RESOLUTION PROCESS BY FINANCIAL CREDITOR

FORM 1

(See sub-rule (1) of Rule 4)

APPLICATION BY FINANCIAL CREDITOR(S) TO INITIATE

CORPORATE INSOLVENCY RESOLUTION PROCESS UNDER THE

CODE

[ Under section 7 of the Insolvency and Bankruptcy Code, 2016 read with

Rule 4 of the Insolvency and Bankruptcy (Application to Adjudicating

Authority) Rules, 2016]

To, September 14, 2017

The National Company Law Tribunal

Principal Bench

Block 3, CGO Complex,

Pragati Vihar, New Delhi

Delhi -110014

From,

ABC Bank of India

1st Floor, XYZ Complex

Delhi-110081

In the matter of XYZ Limited

Subject: Application to initiate corporate insolvency resolution process

in respect of XYZ Limited under the Insolvency and Bankruptcy Code,

2016

Madam/Sir,

ABC Bank of India, hereby submits this application to initiate a corporate

insolvency resolution process in the matter of XYZ Limited. The details for

the purpose of this application are set out below:

PRACTICAL ASPECTS OF INSOLVENCY LAW

33

Part-I

PARTICULARS OF APPLICANT

(FOR EACH FINANCIAL CREDITOR MAKING THE APPLICATION)

1. NAME OF FINANCIAL CREDITOR

ABC Bank of India

2. DATE OF INCORPORATION OF

01.01.1978

FINANCIAL CREDITOR

3. IDENTIFICATION NUMBER OF

U00000MA1836PTC009552

FINANCIAL CREDITOR

4. ADDRESS OF THE REGISTERED

1st Floor, XYZ Complex

OFFICE OF FINANCIAL CREDITOR

Delhi-110081

5. NAME AND ADDRESS OF THE

Mr. ABC

PERSON AUTHORISED TO SUBMIT

X-999, XXX Road,

APPLICATION ON ITS BEHALF

New Delhi-110056

(ENCLOSE AUTHORISATION)

6. NAME AND ADDRESS OF THE

Mr. ABC

PERSON RESIDENT IN INDIA

X-999, XXX Road,

AUTHORISED TO ACCEPT THE

New Delhi-110056

SERVICE OF PROCESS ON ITS

BEHALF (ENCLOSE AUTHORISATION)

Part II

PARTICULARS OF CORPORATE DEBTOR

1. NAME OF THE CORPORATE DEBTOR

XYZ LIMITED

2. IDENTIFICATION NUMBER OF

V2929GF2001PTC0024152

CORPORATE DEBTOR

3. DATE OF INCORPORATION OF

JANUARY 01, 2001

CORPORATE DEBTOR

4. NOMINAL SHARE CAPITAL AND

NOMINAL SHARE CAPITAL:-

THE PAID UP SHARE CAPITAL OF

Rs. 10,00,000

THE CORPORATE DEBTOR AND/OR

PAID UP SHARE CAPITAL:-

DETAILS OF GUARANTEE CLAUSE

Rs. 10,00,000

AS PER MEMORANDUM OF

ASSOCIATION (AS APPLICABLE)

5. ADDRESS OF THE REGISTERED

4th FLOOR, PMM BUILDING,

OFFICE OF THE CORPORATE

STREET NO.1, DELHI-

DEBTOR

110044

34

PRACTICAL ASPECTS OF INSOLVENCY LAW

PART-III

PARTICULARS OF THE PROPOSED

INTERIM RESOLUTION PROFESSIONAL

1. NAME, ADDRESS, E-MAIL

NAME:-Mr. PQR

ADDRESS AND THE REGISTRATION

ADDRESS FOR

NUMBER OF THE PROPOSED

CORRESPONDENCE: -

INSOLVENCY PROFESSIONAL

OFFICE NO. 3, ABC

COMPLEX, DELHI

E-MAIL:-info@abc.com

IP REGISTRATION

NUMBER: -IBBI/IPA-004/IP-

09054/2017-18/5151

Part-IV

PARTICULARS OF FINANCIAL DEBT

1. TOTAL AMOUNT OF DEBT

TOTAL AMOUNT OF DEBT:-

GRANTED

Term loan of Rs. 1,00,53,000

DATE OF DISBURSEMENT

was given for a period of 5

years.

The aforesaid loan was

disbursed in three trenches in

the fol owing manner:

1. Rs 33,51,000 was

disbursed vide sanction

letter dated 15 January

2011

2. Rs 33,51,000 was further

disbursed vide sanction

letter dated 15 July

2011

3. Rs 33,51,000 was further

disbursed vide sanction

letter dated 15 December

2011

PRACTICAL ASPECTS OF INSOLVENCY LAW

35

2. AMOUNT CLAIMED TO BE IN

TOTAL AMOUNT OF

DEFAULT AND THE DATE ON WHICH

DEFAULT:-

THE DEFAULT OCCURRED (ATTACH

Rs. 1,15,60,950/-

THE WORKINGS FOR COMPUTATION

DATE ON WHICH DEFAULT

OF AMOUNT AND DATES OF DEFAULT

OCCURRED

IN TABULAR FORM)

January 15, 2017

Part-V

PARTICULARS OF FINANCIAL DEBT

[DOCUMENTS, RECORDS AND EVIDENCE OF DEFAULT]

1. PARTICULARS OF SECURITY HELD,

Security Held:

IF ANY, THE DATE OF ITS CREATION,

1. Deed of Hypothecation

ITS ESTIMATED VALUE AS PER

of movables dated

CREDITOR

15.01.2011 for a value

ATTACH A COPY OF CERTIFICATE

of Rs. 50 crores.

OF REGISTRATION OF CHARGE

(EXHIBIT-1)

ISSUED BY THE REGISTRAR OF

2. Equitable Mortgage of

COMPANIES (IF THE CORPORATE

immovable property

DEBTOR IS A COMPANY)

vide mortgage deed

dated 15.01.2011 for a

value of Rs. 50,53,000

(EXHIBIT-2)

3. Term Loan Agreement

dated 15 January, 2011

4. Term Loan Agreement

dated 15 July, 2011

5. Term Loan Agreement

dated 15 December,

2011 (EXHIBIT-3)

2. PARTICULARS OF AN ORDER OF

NA

A COURT, TRIBUNAL OR ARBITRAL

PANEL ADJUDICATING ON

DEFAULT, IF ANY (ATTACH A COPY

OF THE ORDER)

3. RECORD OF DEFAULT WITH THE

NA

INFORMATION UTILITY, IF ANY

(ATTACH A COPY OF SUCH

RECORD)

36

PRACTICAL ASPECTS OF INSOLVENCY LAW

4. DETAILS OF SUCCESSION

NA

CERTIFICATE, OR PROBATE OF A

WILL, OR LETTER OF

ADMINISTRATION OR COURT

DECREE (AS MAY BE APPLICABLE),

UNDER THE INDIAN SUCCESSION

ACT, 1925 (10 OF 1925) (ATTACH A

COPY)

5. THE LATEST AND COMPLETE COPY

EXHIBIT-3

OF THE FINANCIAL CONTRACT

REFLECTING ALL AMENDMENTS

AND WAIVERS TO DATE

(ATTACH A COPY)

6. A RECORD OF DEFAULT AS

EXHIBIT-4

AVAILABLE WITH ANY CREDIT

INFORMATION COMPANY

(ATTACH A COPY)

7. COPIES OF ENTRIES IN A

EXHIBIT-5

BANKERS BOOK IN ACCORDANCE

WITH THE BANKERS BOOKS

EVIDENCE ACT, 1891 (18 OF 1891)

(ATTACH A COPY)

8. LIST OF OTHER DOCUMENTS

NA

ATTACHED TO THIS APPLICATION IN

ORDER TO PROVE THE EXISTENCE

OF FINANCIAL DEBT, THE AMOUNT

AND DATE OF DEFAULT.

I, hereby certify that, to the best of my knowledge, Mr. PQR is fully qualified

and permitted to act as an insolvency professional in accordance with the

Insolvency and Bankruptcy Code, 2016 and the associated rules and

regulations.

ABC Bank of India has paid the requisite fee of Rs. 25000 for this application

through a Demand Draft issued in favour of “Pay & Accounts Officer, Ministry

of Corporate Affairs, New Delhi” on September 14, 2017.

Yours sincerely,

PRACTICAL ASPECTS OF INSOLVENCY LAW

37

Signature of person authorised to act on behalf of the financial creditor

Name in block letters: ABC

Position with or in relation to the financial creditor:

Address of person signing: X-999, XXX Road, New Delhi-110056

Annexure I (Documents to be attached with the application)

EXHIBIT-1: Deed of Hypothecation of movables dated January 15, 2011

EXHIBIT-2: Equitable Mortgage deed dated January 15, 2011

EXHIBIT-3: Copy of the term loan agreements dated January 15, 2011,

15 July, 2011 & 15 December, 2011

EXHIBIT-4: Copy of CRILC Report

EXHIBIT-5: Copy of certificate in accordance with Bankers Books

Evidence Act, 1891

Annexure II

FORM 2

[See sub-rule (1) of rule 9]

[ Under rule 9 of the Insolvency and Bankruptcy (Application to

Adjudicating Authority) Rules, 2016]

WRITTEN COMMUNICATION BY

PROPOSED INTERIM RESOLUTION PROFESSIONAL

September 14, 2017

To,

The National Company Law Tribunal

Principal Bench

Block 3, CGO Complex,

Pragati Vihar, New Delhi

Delhi -110014

From,

Mr. PQR

Office No.3, ABC Complex,

Delhi

In the matter of XYZ Limited

38

PRACTICAL ASPECTS OF INSOLVENCY LAW

Subject : Written communication in connection with an application

to initiate corporate insolvency resolution process in respect of XYZ

Limited

Madam/Sir,

I, Mr. PQR, an insolvency professional registered with ICSI Insolvency

Professionals Agency having registration number IBBI/IPA-004/IP-09054/

2017-18/5151 have been proposed as the interim resolution professional by

Mr. XXX in connection with the proposed corporate insolvency resolution

process of XYZ Limited.

In accordance with rule 9 of the Insolvency and Bankruptcy (Application to

Adjudicating Authority) Rules, 2016, I hereby:

(i) agree to accept appointment as the interim resolution professional if

an order admitting the present application is passed;

(i ) state that the registration number allotted to me by the Board is IBBI/

IPA-004/IP-09054/2017-18/5151 and that I am currently qualified to

practice as an insolvency professional;

(iii) disclose that I am currently serving as an interim resolution

professional/resolution professional/liquidator in 1 proceeding;

(iv) certify that there are no disciplinary proceedings pending against me

with the Board or ICSI Insolvency professionals agency;

(v) affirm that I am eligible to be appointed as a resolution professional in

respect of the corporate debtor in accordance with the provisions of

the Insolvency and Bankruptcy Board of India (Insolvency Resolution

Process for Corporate persons) Regulations, 2016 ;

(vi) make the following disclosures in accordance with the code of conduct

for insolvency professionals as set out in the Insolvency and Bankruptcy

Board of India (Insolvency Professionals) Regulations, 2016.

(Signature of insolvency professional)

PQR

(Name of insolvency professional entity, if applicable)

[Optional certification, if required by the applicant making an application

under these Rules]

I, hereby, certify that the facts averred by the applicant in the present

application are true, accurate and complete and a default has occurred in

respect of the relevant corporate debtor. I have reached this conclusion based

on the following facts and/or opinion:-

[please give details]

PRACTICAL ASPECTS OF INSOLVENCY LAW

39

(Signature of insolvency professional)

PQR

(Name of insolvency professional entity, if applicable)

Annexure III: Copy of demand draft as a proof that the specified fee has

been paid

Annexure IV: Affidavit inrespect of the application which is filed by

one Financial Creditor only

Verifying affidavit in Form No. NCLT-6

Form No. NCLT-6

BEFORE THE NATIONAL COMPANY LAW TRIBUNAL,

PRINCIPAL BENCH

IN THE MATTER OF INSOLVENCY AND BANKRUPTCY CODE, 2016

AND

IN THE MATTER OF XYZ LIMITED

FINANCIAL CREDITOR APPLICATION NO ______________ OF 2017

GENERAL AFFIDAVIT VERIFYING PETITION

1. I, ABC, son of XXXXX, aged 55 years, authorised representative of

ABC Bank of India, residing at X-999, XXX Road, New Delhi-110056,

do solemnly affirm and state as fol ows:

(i) I am an employee of ABC Bank of India working in the capacity

of General Manager;

(i ) The statements made in the application filed by the applicant in

the above matter are true to my knowledge and are based on

the information received by me.

VERIFICATION

Verified at New Delhi on September 14, 2017 that the contents of the above

affidavit are true to best of my knowledge and belief and nothing material

has been concealed therefrom.

Place: New Delhi

Date: 14.09.2017

Deponent identified by___________

Signature of identifier ___________

SWORN BEFORE

40

PRACTICAL ASPECTS OF INSOLVENCY LAW

II. APPLICATION BY OPERATIONAL CREDITOR

Regulatory Framework For Initiating Corporate Insolvency Resolution

Process By Operational Creditor

Operational Creditor to Deliver Demand Notice/Copy of Invoice

Sub-section (1) of Section 8(1) of the Code reads as under:

“(1) An operational creditor may, on the occurrence of a default, deliver a

demand notice of unpaid operational debt or 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.”

Explanation to Section 8 of the Code provides that for the purposes of

section 8, a “demand notice” means a notice served by an operational creditor

to the corporate debtor demanding repayment of the operational debt in

respect of which the default has occurred.

Rule 5 of the Adjudicating Authority Rules provides that an operational creditor

shall deliver a demand notice to the corporate debtor in Form 3 or a copy of

an invoice attached with a notice in Form 4 as provided in the Adjudicating

Authority Rules.

Further, Rule 5 states that the demand notice or the copy of the invoice

demanding payment may be delivered to the corporate debtor,

(1) at the registered office by hand, registered post or speed post with

acknowledgement due; or

(2) by electronic mail service to a whole-time director or designated

partner or key managerial personnel if any, of the corporate debtor.

A copy of demand notice or invoice demanding payment served under this rule

by an operational creditor shal also be filed with an information utility, if any.

In Macquarie Bank Limited vs. Shilpi Cable Technologies Ltd., [SEE

ANNEXURE TO CHAPTER X], one of the issue raised before Hon’ble Supreme

Court was whether a demand notice of an unpaid operational debt can be

issued by a lawyer on behalf of the operational creditor in terms of section

8 of the Code read with Adjudicating Authority Rules.

Hon’ble Supreme Court observed that demand notice as provided under

section 8 of the Code can be sent by a lawyer on behalf of operational

creditor. In this regard, Supreme Court noted that Section 8 of the Code

speaks of an operational creditor “delivering” the demand notice and not

“issuing” it and in this sense, delivery, therefore, would postulate that such

PRACTICAL ASPECTS OF INSOLVENCY LAW

41

notice could be made by an authorized agent. Further, Supreme Court also

took note of Form 3 and Form 5 of Adjudicating Authority Rules,which require

the person serving demand notice to “state position with or in relation to the

operational creditor”.

Hon’ble Supreme Court observed that in “relation to” is a very wide expression

which specifical y includes a position which is outside or indirectly related

to the operational creditor, including a lawyer. In view of aforesaid, Hon’ble

Supreme Court observed that expression “an operational creditor may on

the occurrence of a default deliver a demand notice…” under section 8 of

the Code must be read as including an operational creditor’s authorized

agent and lawyer, as has been stated in Forms 3 and 5 appended to the

Adjudicatory Authority Rules.

Operational Creditor to raise existence of Dispute or Repayment of

unpaid Operational Debt in reply to Demand Notice/Copy of Invoice by

Operational Creditor

Sub-Section (2) of Section 8 of the Code reads as under:

“(2) The corporate debtor shal , 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.”

Operational Creditor to File Application in case there is no existence

of dispute or no repayment of unpaid operational debt by corporate

debtor

Sub-Section (1) and (2) of Section 9 of the Code read as under:

“9. (1) After the expiry of the period of ten days from the date of delivery

of the notice or invoice demanding payment under sub-section (1) of

section 8, if the operational creditor does not receive payment from the

corporate debtor or notice of the dispute under sub-section (2) of section

42

PRACTICAL ASPECTS OF INSOLVENCY LAW

8, the operational creditor may file an application before the Adjudicating

Authority for initiating a corporate insolvency resolution process.

(2) The application under sub-section (1) shal be filed in such form and

manner and accompanied with such fee as may be prescribed.”

Application to be accompanied with Requisite Fee and Form

Rule 6 of Adjudicating Authority Rules provides that an operational creditor

shal make an application in Form 5 as prescribed in Adjudicating Authority

Rules for initiating the corporate insolvency resolution process against a

corporate debtor under section 9 of the Code.

Schedule to the Adjudicating Authority Rules provides that the application

by operational creditor shal be accompanied by a fee of Rs. 2,000/-.

Sub-Rule 4 of Rule 10 of the Adjudicating Authority Rules provides that the

application and accompanying documents shal be filed in electronic form,

as and when such facility is made available and as prescribed by the

Adjudicating Authority. However, til the time such facility is made available,

the applicant may submit the accompanying documents, and wherever they

are bulky, in electronic form, in scanned, legible portable document format

in a data storage device such as a compact disc or a USB flash drive

acceptable to the Adjudicating Authority.

Documents to be furnished with the application

Sub-Section (3) of Section 9 of the Code reads as under:

“(3) The operational creditor shal , along with the application furnish—

(a) a copy of the invoice demanding payment or demand notice delivered

by the operational creditor to the corporate debtor;

(b) an affidavit to the effect that there is no notice given by the corporate

debtor relating to a dispute of the unpaid operational debt;

(c) a copy of the certificate from the financial institutions maintaining

accounts of the operational creditor confirming that there is no

payment of an unpaid operational debt by the corporate debtor; and

(d) such other information as may be specified.”

As per Regulation 7 of the CIRP Regulations the following documents should

be submitted by an operational creditor:

(a) the records available with an information utility, if any; or

(b) other relevant documents, including -

(i) a proof of employment such as contract of employment for the

period for which such workman or employee is claiming dues;

PRACTICAL ASPECTS OF INSOLVENCY LAW

43

(i ) evidence of notice demanding payment of unpaid dues and any

documentary or other proof that payment has not been made;

or

(iii) an order of a court or tribunal that has adjudicated upon the

non-payment of a dues, if any.

(iv) Financial Accounts

Operational Creditor May Recommend the Name of a Resolution

professional To Act as an Interim Resolution Professional

As per Sub-Section (4) to Section 9 of the Code, an operational creditor

initiating a corporate insolvency resolution process under this section, may

propose a resolution professional to act as an interim resolution professional.

Regulation 3 of CIRP Regulations provides that an Insolvency Professional

shall be eligible to be appointed as a resolution professional for a corporate

insolvency resolution process of a corporate debtor if he, and al partners

and directors of the insolvency professional entity of which he is a partner

or director, are independent of the corporate debtor.

Explanation to Regulation 3 of the above Regulations provide that a person

shal be considered independent of the corporate debtor, if he:

(a) is eligible to be appointed as an independent director on the board of

the corporate debtor under section 149 of the Companies Act, 2013

(18 of 2013), where the corporate debtor is a company;

(b) is not a related party of the corporate debtor; or

(c) is not an employee or proprietor or a partner:

(i) of a firm of auditors or secretarial auditors in practice or cost

auditors of the corporate debtor; or

(i ) of a legal or a consulting firm, that has or had any transaction

with the corporate debtor amounting to ten per cent or more of

the gross turnover of such firm,

in the last three financial years.

(d) A Resolution Professional shal make disclosures at the time of his

appointment and thereafter in accordance with the Code of Conduct.

(e) A Resolution Professional, who is a director or a partner of an

insolvency professional entity, shal not continue as a resolution

professional in a corporate insolvency resolution process if the

insolvency professional entity or any other partner or director of such

insolvency professional entity represents any of the other stakeholders

in the same corporate insolvency resolution process.

44

PRACTICAL ASPECTS OF INSOLVENCY LAW

Adjudicating Authority May Admit or Reject The Application

Sub-Section (5) of Section 9 of the Code reads as under:

“(5) The Adjudicating Authority shal , within fourteen days of the receipt

of the application under sub-section (2), by an order –

(i) admit the application and communicate such decision to the

operational creditor and the corporate debtor if –

(a) the application made under sub-section (2) is complete;

(b) there is no repayment of the unpaid operational debt;

(c) the invoice or notice for payment to the corporate debtor

has been delivered by the operational creditor;

(d) no notice of dispute has been received by the operational

creditor or there is no record of dispute in the information

utility; and

(e) there is no disciplinary proceeding pending against any

resolution professional proposed under sub-section (4), if

any.

(i ) reject the application and communicate such decision to the

operational creditor and the corporate debtor if—

(a) the application made under sub-section (2) is incomplete;

(b) there has been repayment of the unpaid operational debt;

(c) the creditor has not delivered the invoice or notice for

payment to the corporate debtor;

(d) notice of dispute has been received by the operational

creditor or there is a record of dispute in the information

utility; or

(e) any disciplinary proceeding is pending against any proposed

resolution professional:

Provided that Adjudicating Authority, shall before rejecting an

application under sub-clause (a) of clause (i ) give a notice to the

applicant to rectify the defect in his application within seven days of

the date of receipt of such notice from the Adjudicating Authority.”

Commencement of Insolvency Resolution Process

Sub-Section (6) of Section 9 of the Code provides that the corporate

insolvency resolution process shall commence from the date of admission

of the application by the Adjudicating Authority.

PRACTICAL ASPECTS OF INSOLVENCY LAW

45

MODEL APPLICATION FOR INITIATING CORPORATE INSOLVENCY

RESOLUTION PROCESS BY OPERATIONAL CREDITOR

FORM 5

(See sub-rule (1) of Rule 6)

APPLICATION BY OPERATIONAL CREDITOR TO INITIATE

CORPORATE INSOLVENCY RESOLUTION PROCESS UNDER THE

CODE

[Under Rule 6 of the Insolvency and Bankruptcy (Application to

Adjudicating Authority) Rules, 2016]

September 11, 2017

To,

The National Company Law Tribunal

Principal Bench

Block 3, CGO Complex,

Pragati Vihar, New Delhi

Delhi -110014

From,

Mr. ABC

1st Floor, XYZ Apartments

Delhi-110081

In the matter of XYZ Limited

Subject: Application to initiate corporate insolvency resolution process

in respect of XYZ Limited under the Insolvency and Bankruptcy Code,

2016

Madam/Sir,

Mr. ABC, hereby submits this application to initiate a corporate insolvency

resolution process in the case of XYZ Limited. The details for the purpose

of the application are set out below:

46

PRACTICAL ASPECTS OF INSOLVENCY LAW

Part-I

PARTICULARS OF APPLICANT

1. NAME OF OPERATIONAL CREDITOR

Mr. ABC

2. IDENTIFICATION NUMBER OF

NA

OPERATIONAL CREDITOR, (IF ANY)

3. ADDRESS FOR THE

1st Floor, XYZ Apartments

CORRESPONDENCE OF

Delhi-110081

OPERATIONAL CREDITOR

Part II

PARTICULARS OF CORPORATE DEBTOR

1. NAME OF THE CORPORATE DEBTOR

XYZ LIMITED

2. IDENTIFICATION NUMBER OF

V2929GF2001PTC0024152

CORPORATE DEBTOR

3. DATE OF INCORPORATION OF

JANUARY 01, 2001

CORPORATE DEBTOR

4. NOMINAL SHARE CAPITAL AND

NOMINAL SHARE CAPITAL:-

THE PAID UP SHARE CAPITAL OF

Rs. 10,00,000

THE CORPORATE DEBTOR AND/OR

PAID UP SHARE CAPITAL:-

DETAILS OF GUARANTEE CLAUSE

Rs. 10,00,000

AS PER MEMORANDUM OF

ASSOCIATION (AS APPLICABLE)

5. ADDRESS OF THE REGISTERED

4th FLOOR, PMM BUILDING,

OFFICE OF THE CORPORATE

STREET NO.1, DELHI-

DEBTOR

110044

Part-III

PARTICULARS OF THE PROPOSED INTERIM RESOLUTION PROFESSIONAL [IF

PROPOSED]

1. NAME, ADDRESS, E-MAIL

NAME:-Mr. PQR

ADDRESS AND THE REGISTRATION

ADDRESS FOR

NUMBER OF THE PROPOSED

CORRESPONDENCE: -

INSOLVENCY PROFESSIONAL

OFFICE NO. 3, ABC

COMPLEX, DELHI

E-MAIL:-info@abc.com

PRACTICAL ASPECTS OF INSOLVENCY LAW

47

IP REGISTRATION

NUMBER: -IBBI/IPA-004/IP-

09054/2017-18/5151

Part-IV

PARTICULARS OF OPERATIONAL DEBT

1. TOTAL AMOUNT OF DEBT, DETAILS

TOTAL AMOUNT OF DEBT:-

OF TRANSACTIONS ON ACCOUNT

Rs. 1,57,596/-

OF WHICH DEBT FELL DUE AND THE

DETAILS OF

DATE FROM WHICH SUCH DEBT

TRANSACTIONS : The

FELL DUE

amount fell due on account

of unpaid salary for the month

of April 2017, May 2017 and

June, 2017.

DATE ON WHICH SUCH

DEBT FELL DUE:-

1. Rs. 52,532 fell due on

May 01, 2017

2. Rs. 52,532 fell due on

June 01, 2017

3. Rs. 52,532 fell due on

July 01, 2017

2. AMOUNT CLAIMED TO BE IN

TOTAL AMOUNT OF

DEFAULT AND THE DATE ON

DEFAULT:-

WHICH THE DEFAULT OCCURRED

Rs. 1,57,596/-

(ATTACH THE WORKINGS FOR

DATE ON WHICH DEFAULT

COMPUTATION OF AMOUNT AND

OCCURRED

DATES OF DEFAULT IN TABULAR

1. Default in respect of Rs.

FORM)

52,532 occurred on May

07, 2017

2. Default in respect of Rs.

52,532 occurred on

June 07, 2017

3. Default in respect of Rs.

52,532 occurred on July

07, 2017

48

PRACTICAL ASPECTS OF INSOLVENCY LAW

Part-V

PARTICULARS OF OPERATIONAL DEBT [DOCUMENTS, RECORDS AND

EVIDENCE OF DEFAULT]

1. PARTICULARS OF SECURITY HELD,

NA

IF ANY, THE DATE OF ITS CREATION,

ITS ESTIMATED VALUE AS PER

CREDITOR

(ATTACH A COPY OF CERTIFICATE

OF REGISTRATION OF CHARGE

ISSUED BY THE REGISTRAR OF

COMPANIES (IF THE CORPORATE

DEBTOR IS A COMPANY)

2. DETAILS OF RESERVATION/

NA

RETENTION OF TITLE

ARRANGEMENTS (IF ANY) IN

RESPECT OF GOODS TO WHICH THE

OPERATIONAL DEBT REFERS

3. PARTICULARS OF AN ORDER OF A

NA

COURT, TRIBUNAL OR ARBITRAL

PANEL ADJUDICATING ON THE

DEFAULT, IF ANY (ATTACH A COPY

OF THE ORDER)

4. RECORD OF DEFAULT WITH THE

NA

INFORMATION UTILITY, IF ANY

(ATTACH A COPY OF SUCH RECORD)

5. DETAILS OF SUCCESSION

NA

CERTIFICATE, OR PROBATE OF A

WILL, OR LETTER OF

ADMINISTRATION OR COURT

DECREE (AS MAY BE APPLICABLE),

UNDER THE INDIAN SUCCESSION

ACT, 1925 (10 OF 1925)

(ATTACH A COPY)

6. PROVISION OF LAW, CONTRACT OR

“Contract of Employment

OTHER DOCUMENT UNDER WHICH

with XYZ Limited dated

OPERATIONAL DEBT HAS BECOME

January 15, 2001”

DUE

Copy of the said contract has

been enclosed herewith and

marked as exhibit 1

PRACTICAL ASPECTS OF INSOLVENCY LAW

49

7. A STATEMENT OF BANK ACCOUNT

Bank certificate in original has

WHERE DEPOSITS ARE MADE OR

been enclosed herewith and

CREDITS RECEIVED NORMALLY BY

marked as exhibit 2

THE OPERATIONAL CREDITOR IN

RESPECT OF THE DEBT OF THE

CORPORATE DEBTOR

(ATTACH A COPY)

8. LIST OF OTHER DOCUMENTS

1. E-mail dated May 07,

ATTACHED TO THIS APPLICATION IN

2017 from Mr. ABC to Mr.

ORDER TO PROVE THE EXISTENCE

DEF, Chief Financial

OF OPERATIONAL DEBT AND THE

Officer of XYZ Limited.

AMOUNT IN DEFAULT.

2. E-mail dated June 07,

2017 from Mr. ABC to Mr.

DEF, Chief Financial

Officer of XYZ Limited

3. E-mail dated July 07,

2017 from Mr. ABC to Mr.

DEF, Chief Financial

Officer of XYZ Limited

4. Copy

of

financial

statements for the year

ended March 31, 2017,

March 31, 2016 and

March 31, 2015 showing

the mounting losses

having been incurred by

the corporate debtor

5. Reply of Mr. DEF to the

demand notice expressing

their inability to make the

payment

I, ABC, operational creditor hereby certify that, to the best of my knowledge,

Mr. PQR is fully qualified and permitted to act as an insolvency professional

in accordance with the Code and the rules and regulations made thereunder.

ABC has paid the requisite fee of Rs. 2000 for this application through a

Demand Draft issued in favour of “Pay & Accounts Officer, Ministry of

Corporate affairs, New Delhi” on September 12, 2017.

Yours sincerely,

50

PRACTICAL ASPECTS OF INSOLVENCY LAW

Signature of person authorised to act on behalf of the operational creditor

Name in block letters: ABC

Position with or in relation to the operational creditor: Operational Creditor

Address of person signing: 1st Floor, XYZ Apartments, Delhi-110081

Annex. I

FORM 3

[See clause (a) of sub-rule (1) of rule 5]

FORM OF DEMAND NOTICE/ INVOICE DEMANDING PAYMENT UNDER

THE INSOLVENCY AND BANKRUPTCY CODE, 2016

[Under rule 5 of the Insolvency and Bankruptcy (Application to

Adjudicating Authority) Rules, 2016]

September 01, 2017

To,

XYZ Limited

4th FLOOR, PMM Building,

Street NO.1,

Delhi-110044

From,

Mr. ABC

1st Floor, XYZ Apartments

Delhi-110081

Subject: Demand notice demanding payment of an unpaid operational

debt due from XYZ Limited under the Code.

Madam/Sir,

1. This letter is a demand notice demanding payment of an unpaid

operational debt due from XYZ Limited.

2. Please find particulars of the unpaid operational debt below:

PRACTICAL ASPECTS OF INSOLVENCY LAW

51

PARTICULARS OF OPERATIONAL DEBT

AMOUNT IN DEFAULT.

1. TOTAL AMOUNT OF DEBT,

TOTAL AMOUNT OF DEBT:-

DETAILS OF TRANSACTIONS ON

Rs. 1,57,596/-

ACCOUNT OF WHICH DEBT

DETAILS OF TRANSACTIONS:-

FELL DUE AND THE DATE FROM

The amount fel due on account

WHICH SUCH DEBT FELL DUE

of unpaid salary for the month of

April 2017, May 2017 and June,

2017.

DATE ON WHICH SUCH DEBT

FELL DUE:-

1. Rs. 52,532 fel due on May

01, 2017

2. Rs. 52,532 fell due on June

01, 2017

3. Rs. 52,532 fell due on July

01, 2017

2. AMOUNT CLAIMED TO BE IN

TOTAL AMOUNT OF DEFAULT:-

DEFAULT AND THE DATE ON

Rs. 1,57,596/-

WHICH THE DEFAULT

DATE ON WHICH DEFAULT

OCCURRED

OCCURRED

(ATTACH THE WORKINGS FOR

1. Default in respect of Rs.

COMPUTATION OF AMOUNT AND

52,532 occurred on May 07,

DATES OF DEFAULT IN TABULAR

2017

FORM)

2. Default in respect of Rs.

52,532 occurred on June 07,

2017

3. Default in respect of Rs.

52,532 occurred on July 07,

2017

3. PARTICULARS OF SECURITY

NA

HELD, IF ANY, THE DATE OF ITS

CREATION, ITS ESTIMATED VALUE

AS PER CREDIT OR ATTACH A

COPY OF CERTIFICATE OF

REGISTRATION OF CHARGE

52

PRACTICAL ASPECTS OF INSOLVENCY LAW

ISSUED BY THE REGISTRAR OF

COMPANIES (IF THE CORPORATE

DEBTOR IS A COMPANY)

4. DETAILS OF RETENTION OF TITLE

NA

ARRANGEMENTS (IF ANY) IN

RESPECT OF GOODS TO WHICH

THE OPERATIONAL DEBT REFERS

5. RECORD OF DEFAULT WITH THE

NA

INFORMATION UTILITY, IF ANY

(ATTACH A COPY OF SUCH

RECORD)

6. PROVISION OF LAW, CONTRACT

“Contract of Employment with

OR OTHER DOCUMENT UNDER

XYZ Limited dated January 15,

WHICH OPERATIONAL DEBT

2001”

HAS BECOME DUE

Copy of the said contract has

been enclosed herewith and

marked as exhibit 1

7. LIST OF OTHER DOCUMENTS

1. Copy of e-mail dated May 07,

ATTACHED TO THIS APPLICATION

2017 from Mr. ABC to Mr. DEF,

IN ORDER TO PROVE THE

Chief Financial Officer of

EXISTENCE OF OPERATIONAL

XYZ Limited demanding the

DEBT AND THE AMOUNT IN

unpaid salary for the month

DEFAULT

of April 2017.

2. Copy of e-mail dated June 07,

2017 from Mr. ABC to Mr. DEF,

Chief Financial Officer of

XYZ Limited demanding the

unpaid salary for the month

of April and May 2017

3. Copy of e-mail dated July 07,

2017 from Mr. ABC to Mr. DEF,

Chief Financial Officer of

XYZ Limited demanding the

unpaid salary for the month

of April, May and June

2017

PRACTICAL ASPECTS OF INSOLVENCY LAW

53

4. Copy of financial statements

for the year ended March 31,

2017, March 31, 2016 and

March 31, 2015 showing the

mounting losses having

been incurred by the

company.

3. If you dispute the existence or amount of unpaid operational debt (in

default) please provide the undersigned, within ten days of the receipt

of this letter, of the pendency of the suit or arbitration proceedings in

relation to such dispute filed before the receipt of this letter/notice.

4. If you believe that the debt has been repaid before the receipt of this

letter, please demonstrate such repayment by sending to us, within

ten days of receipt of this letter, the fol owing:

(a) an attested copy of the record of electronic transfer of the unpaid

amount from the bank account of the corporate debtor; or

(b) an attested copy of any record that Mr. ABC has received the

payment.

5. The undersigned request you to unconditionally repay the unpaid

operational debt (in default) in full within ten days from the receipt of

this letter failing which we shall initiate a corporate insolvency

resolution process in respect of XYZ Limited.

Yours sincerely,

Signature of person authorised to act on behalf of the operational creditor

Name in block letters: ABC

Position with or in relation to the operational creditor: Operational Creditor

Address of person signing: 1st Floor, XYZ Apartments, Delhi-110081

Annexure II (Documents to be attached with the application)

1. Exhibit 1: Copy of contract of Employment with XYZ Limited dated

January 15, 2001

2. Exhibit 2: Copy of e-mail communications

3. Exhibit 3: Copy of financial statements for the year ending March

31, 2017 , March 31, 2016 and March 31, 2015

54

PRACTICAL ASPECTS OF INSOLVENCY LAW

Annexure-III (Certificate from the banker that the operational creditor

has not received any payment towards the operational debt)

Annexure IV (Affidavit in support of the application in accordance with

the Insolvency and Bankruptcy (Application to Adjudicating Authority)

Rules, 2016

BEFORE THE NATIONAL COMPANY LAW TRIBUNAL,

PRINCIPAL BENCH

IN THE MATTER OF INSOLVENCY AND BANKRUPTCY CODE, 2016

AND

IN THE MATTER OF

Section 9 of the Insolvency and Bankruptcy Code, 2016

AND

IN THE MATTER OF

Mr. ABC

1st Floor, XYZ Apartments

Delhi-110081

........ Applicant

Versus

XYZ Limited

4th FLOOR, PMM Building,

Street NO.1, Delhi-110044

........ Respondent

Company Application No. _______ of 2017

AFFIDAVIT

I, ABC, son of XXXXX, aged 55 years, employee of XYZ Limited, residing at

1st Floor, XYZ Apartments, Delhi-110081, do solemnly affirm and state as

fol ows:-

1. I am an employee of XYZ Limited working in the capacity of Executive

(Purchase); operational creditor in the above matter. XYZ Limited is

the corporate debtor on the 12th day of September of 2017. The

corporate debtor, justly and truly indebted to me in the sum of Rs.

1,57,596/- (Rs. One Lac Fifty Seven Thousand Five Hundred and

Ninety Six Only) which is an operational debt.

PRACTICAL ASPECTS OF INSOLVENCY LAW

55

2. In respect of my claim I have relied on:

a) Contract of Employment according to which I am entitled to a

salary of Rs. 52,532 per month on 1st day of next month.

b) E-mail reminders sent to Chief Financial Officer, Mr. DEF of

XYZ Limited.

c) Form-3 duly acknowledged by the corporate debtor.

d) Certificate from banks along with the bank statements.

3. I have gone through the captioned application and signed the same

after verifying its contents and supporting documents. I submit that

the same are true and correct to my knowledge and I believe them to

be true.

4. I have not received any notice from the corporate debtor disputing

the unpaid operational debt.

5. The said documents are true, valid and genuine to the best of my

knowledge, information and belief.

6. In respect of the said sum or any part thereof, I have not nor has any

person, by my order, to my knowledge or belief, for my use, had or

received any manner of satisfaction or security whatsoever.

Solemnly affirmed at New Delhi on 12th day, the Tuesday of September 2017

ABC

Executive (Purchase)

XYZ Limited

56

PRACTICAL ASPECTS OF INSOLVENCY LAW

Annexure V: Written Communication by proposed Interim Resolution

Professional in Form 2

FORM 2

[See sub-rule (1) of rule 9]

[ Under rule 9 of the Insolvency and Bankruptcy (Application to

Adjudicating Authority) Rules, 2016]

WRITTEN COMMUNICATION BY PROPOSED INTERIM RESOLUTION

PROFESSIONAL

September 12, 2017

To,

The National Company Law Tribunal

Principal Bench

Block 3, CGO Complex,

Pragati Vihar, New Delhi

Delhi -110014

From,

Mr. PQR

Office No.. 3, ABC Complex, Delhi

In the matter of XYZ Limited

Subject: Written communication in connection with an application to

initiate corporate insolvency resolution process in respect of XYZ

Limited

Madam/Sir,

I, Mr. XXXXXXX, an insolvency professional registered with ICSI Insolvency

Professionals Agency having registration number IBBI/IPA-004/IP-09054/

2017-18/5151 have been proposed as the interim resolution professional by

Mr. ABC in connection with the proposed corporate insolvency resolution

process of XYZ Limited.

In accordance with rule 9 of the Insolvency and Bankruptcy (Application to

Adjudicating Authority) Rules, 2016, I hereby:

(i) agree to accept appointment as the interim resolution professional if

an order admitting the present application is passed;

(i ) state that the registration number al otted to me by the Board is

PRACTICAL ASPECTS OF INSOLVENCY LAW

57

IBBI/IPA-004/IP-09054/2017-18/5151 and that I am currently qualified

to practice as an insolvency professional;

(iii) disclose that I am currently serving as an interim resolution

professional/resolution professional/liquidator in 1 proceeding;

(iv) certify that there are no disciplinary proceedings pending against me

with the Board or ICSI Insolvency Professionals Agency;

(v) affirm that I am eligible to be appointed as a resolution professional

in respect of the corporate debtor in accordance with the provisions

of the Insolvency and Bankruptcy Board of India (Insolvency

Resolution Process for Corporate persons) Regulations, 2016;

(vi) make the following disclosures in accordance with the code of conduct

for insolvency professionals as set out in the Insolvency and Bankruptcy

Board of India (Insolvency Professionals) Regulations, 2016.

(Signature of insolvency professional)

ABC

(Name of insolvency professional entity, if applicable)

[Optional certification, if required by the applicant making an application

under these Rules]

I, hereby, certify that the facts averred by the applicant in the present

application are true, accurate and complete and a default has occurred in

respect of the relevant corporate debtor. I have reached this conclusion

based on the fol owing facts and/or opinion:-

[please give details]

(Signature of insolvency professional)

ABC

(Name of insolvency professional entity, if applicable)

Annexure VI: Copy of the demand draft as proof of payment of court

fees

Annexure VII: Affidavit inrespect of the application filed by the operation

creditor

Verifying affidavit in Form No. NCLT-6

Form No. NCLT-6

BEFORE THE NATIONAL COMPANY LAW TRIBUNAL,

PRINCIPAL BENCH

58

PRACTICAL ASPECTS OF INSOLVENCY LAW

IN THE MATTER OF INSOLVENCY AND BANKRUPTCY CODE, 2016

AND

IN THE MATTER OF XYZ LIMITED

OPERATIONAL CREDITOR APPLICATION NO __________ OF 2017

GENERAL AFFIDAVIT VERIFYING PETITION

1. I, ABC, son of XXXXX, aged 55 years, employee of XYZ Limited,

residing at 1st Floor, XYZ Apartments, Delhi-110081, do solemnly affirm

and state as fol ows:

(i) I am an employee of XYZ Limited working in the capacity of

Executive (Purchase);

(iii) I am duly authorised by the XYZ Limited by way of Board

resolution dated ............ to file the present application.

(iii) The statements made in the application filed by the applicant in

the above matter are true to my knowledge and are based on

the information received by me.

VERIFICATION

Verified at New Delhi on September 12, 2017 that the contents of the above

affidavit are true to best of my knowledge and belief and nothing material

has been concealed therefrom.

Place: New Delhi

Date: 12.09.2017

Deponent identified by___________

Signature of identifier ___________

SWORN BEFORE

PRACTICAL ASPECTS OF INSOLVENCY LAW

59

III. APPLICATION BY CORPORATE APPLICANT

Regulatory Framework for Initiating Corporate Insolvency Resolution

Process by Corporate Applicant

Corporate Applicant to File Application to Adjudicating Authority on

behalf of Corporate Debtor

Sub-Section (1) & (2) of Section 10 of the Code read as under:

“10. (1) Where a corporate debtor has committed a default, a corporate

applicant thereof may file an application for initiating corporate insolvency

resolution process with the Adjudicating Authority.

(2) The application under sub-section (1) shal be filed in such form,

containing such particulars and in such manner and accompanied with

such fee as may be prescribed.”

Application to be Accompanied with Requisite Fee and Documents

Sub-Section (3) of Section 10 of the Code provides that the corporate applicant

shal , along with the application furnish the information relating to –

(a) its books of account and such other documents relating to such

period as may be specified; and

(b) the resolution professional proposed to be appointed as an interim

resolution professional.

Schedule to the Adjudicating Authority Rules provides that an application

by Corporate Debtor to initiate corporate insolvency resolution process shall

be accompanied with a fee of Rs. 25,000/-.

Further Rule 7 of the Adjudicating Authority Rules reads as under:

“(1) A corporate applicant shal make an application for initiating the

corporate insolvency resolution process against a corporate debtor under

section 10 of the Code in Form 6, accompanied with documents and

records required therein and as specified in the Insolvency and Bankruptcy

Board of India (Insolvency Resolution Process for Corporate Persons)

Regulations, 2016.

(2) The applicant under sub-rule(1) shal dispatch forthwith, a copy of the

application filed with the Adjudicating Authority, by registered post or speed

post to the registered office of the corporate debtor.”

Adjudicating Authority to Admit or Reject the Application Within 14

Days of Receipt of Application

60

PRACTICAL ASPECTS OF INSOLVENCY LAW

Sub-Section (4) and (5) of Section 10 of the Code reads as under:

“(4) The Adjudicating Authority shal , within a period of fourteen days of

the receipt of the application, by an order –

(a) admit the application, if it is complete; or

(b) reject the application, if it is incomplete: Provided that

Adjudicating Authority shall, before rejecting an application, give

a notice to the applicant to rectify the defects in his application

within seven days from the date of receipt of such notice from

the Adjudicating Authority.

(5) The corporate insolvency resolution process shal commence from

the date of admission of the application under sub-section (4) of his

section.”

PRACTICAL ASPECTS OF INSOLVENCY LAW

61

MODEL APPLICATION FOR INITIATING CORPORATE INSOLVENCY

RESOLUTION PROCESS BY CORPORATE APPLICANT

FORM 6

[ see Sub-rule (1) of rule 7]

APPLICATION BY CORPORATE APPLICANT TO INITIATE CORPORATE

INSOLVENCY RESOLUTION PROCESS UNDER THE CODE

[ Under Rule 7 of the Insolvency and Bankruptcy (Application to

Adjudicating Authority) Rules, 2016]

14.06.2017

To,

The National Company Law Tribunal

6TH Floor, Fountain Telecom,

Building 1, Mahatma Gandhi Road,

Fort, Mumbai, Maharashtra 400001

From,

M/s ABC Pvt. Ltd., House No. ..., Building ....... 7th floor, Ashok Nagar,

Mumbai, Maharashtra.

IN THE MATTER OF M/s ABC PVT. LTD.

Subject: Application to initiate corporate insolvency resolution process in

respect of M/s ABC Pvt. Ltd.

Madam/Sir,

We, hereby submit this application to initiate a corporate insolvency resolution

process in respect of ABC Pvt. Ltd. The details for the purpose of this

application are set out below:

PART-I

PARTICULARS OF THE CORPORATE APPLICANT

1.

NAME, ADDRESS, EMAIL

M/s ABC Pvt. Ltd.

ADDRESS, IDENTIFICATION

Uxxxxxxxxxx220122

Ltd.

House no. – –, Building – – –

7th floor, Ashok Nagar,

Mumbai, Maharashtra.

2. NAME ADDRESS, EMAIL

M/s ABC Pvt. Ltd.

ADDRESS, IDENTIFICATION

Uxxxxxxxxxx220122

NUMBER AND ADDRESS OF

House no. – –, Building – – –

62

PRACTICAL ASPECTS OF INSOLVENCY LAW

THE REGISTERED OFFICE OF

7th floor, Ashok Nagar,

CORPORATE DEBTOR.

Mumbai, Maharashtra.

3. NAMES AND ADDRESSES OF

1. Mr. A, House no. – –,

ALL DIRECTORS, PROMOTERS,

Building – – –7th floor,

DESIGNATED PARTNERS OF

Ashok Nagar, Mumbai,

THE CORPORATE DEBTOR.

Maharashtra.

2. Mr. B, House no. – –,

Building – – –7th floor,

Ashok Nagar, Mumbai,

Maharashtra.

4.

DATE OF INCORPORATION OF

05.02.2xxx

CORPORATE DEBTOR.

5. NOMINAL SHARE CAPITAL AND

Authorised Capital- Rs. 2.00

THE PAID-UP SHARE CAPITAL

crores

OF THE CORPORATE DEBTOR

Paid up Capital- Rs. 10.00

AND/OR DETAILS OF

Lacs

GUARANTEE CLAUSE AS PER

MEMORANDUM OF

ASSOCIATION.

6. NAME, ADDRESS AND AUTHORITY

Mr. A, House no. – –, Building

OF PERSON SUBMITTING

– – –7th floor, Ashok Nagar,

APPLICATION ON BEHALF OF

Mumbai, Maharashtra.

CORPORATE APPLICANT.

7. NAME AND ADDRESS OF PERSON Same as above.

RESIDENT IN INDIA AUTHORISED

TO ACCEPT THE SERVICE OF

PROCESS ON ITS BEHALF

8. DOCUMENTATION TO SHOW THAT

Annexed

THE CORPORATE APPLICANT IS

AUTHORISED TO INITIATE THE

CORPORATE INSOLVENCY

RESOLUTION PROCESS

PRACTICAL ASPECTS OF INSOLVENCY LAW

63

PART-II

PARTICULARS OF PROPOSED INTERIM

RESOLUTION PROFESSIONAL

1.

NAME, ADDRESS, EMAIL

Mr. P

ADDRESS AND THE

p@gmail.com

REGISTRATION NUMBER OF

IBBI/IPA-XX/Nxxx/2016-17/

THE PROPOSED INTERIM

100xx

RESOLUTION PROFESSIONAL

PART-III

PARTICULARS OF FINANCIAL / OPERATIONAL DEBT

1.

NAME OF FINANCIAL /

Bank of Maharashtra, Lower

OPERATIONAL CREDITOR

Parel Branch, Mumbai

Bank of India, Thane, Mumbai

2.

ADDRESS OF CORRESPONDENCE 1. 80, Solatire, SV Road,

OF THE FINANCIAL /

Lower Parel Mumbai.

OPERATIONAL CREDITOR

2. 26, Thane west, Mumbai.

3.

TOTAL DEBT RAISED AND

Rs. 15,85,60,000

AMOUNT IN DEFAULT

4.

DATE WHEN THE FINANCIAL /

01.04.2008

OPERATIONAL DEBT WAS

INCURRED

5.

PARTICULARS OF SECURITY HELD, 1. 501, Building- 12B, 1st

IF ANY, THE DATE OF ITS CREATION,

Floor, SV Road, Thane,

ITS ESTIMATED VALUE AS PER THE

Maharashtra, 421302.

CREDITOR. ATTACH A COPY OF A

Equitable Mortgage

CERTIFICATE OF REGISTRATION

created vide Deed of

OF CHARGE ISSUED BY THE

Mortgage dated

REGISTRAR OF COMPANIES

01.04.2009,

Estimated value Rs.

30,25,000.

2. 101, Building- 25B, 1st

Floor, SV Road, Thane,

Maharashtra, 421302.

Equitable Mortgage created

vide Deed of Mortgage

dated 01.06.2009,

Estimated Value Rs.

25,50,000.

64

PRACTICAL ASPECTS OF INSOLVENCY LAW

3. S.No. 22/11, Village Churu,

Taluka Balesar.

Equitable Mortgage created

vide Deed of Mortgage

dated 01.04.2010,

Estimated value

Rs. 2,55,00,000

6.

DETAILS OF RETENTION OF

N.A.

TITLE ARRANGEMENTS (IF ANY)

IN RESPECT OF GOODS TO WHICH

THE OPERATIONAL DEBT REFERS

7.

RECORD OF DEFAULT WITH THE

INFORMATION UTILITY

8.

LIST OF DOCUMENTS ATTACHED

Demand Notice by Bank of

TO THIS APPLICATION IN ORDER

India

TO PROVE THE EXISTENCE OF

FINANCIAL / OPERATIONAL DEBT

AND THE AMOUNT IN DEFAULT

I, certify that, to the best of my knowledge, Mr. P is ful y qualified and

permitted to act as an insolvency professional in accordance with the Code

and the associated rules and regulations.

Mr. A on behalf of M/s ABC Pvt. Ltd. has paid the requisite fee for this

application through demand draft on date.

Sincerely

(Signature)

Mr. A

Director of ABC Pvt. Ltd.

Mr. A, House no. – –, Building – – –7th floor,

Ashok Nagar, Mumbai, Maharashtra.

ANNEXURE I: DEMAND NOTICE BY BANK OF INDIA BY REGISTERED

POST A.D.

To

1. M/s ABC Pvt. Ltd.

2. Mr. A

3. Mr. B

PRACTICAL ASPECTS OF INSOLVENCY LAW

65

4. Mr. C

Al having Address at:

House no. xx, Building xxx, 7th floor, Ashok Nagar, Mumbai, Maharashtra.

And also at:

House no. xx, Building xxx, 7th floor, Ashok Nagar, Mumbai, Maharashtra.

And also at:

House no. xx, Building xxx, 7th floor, Ashok Nagar, Mumbai, Maharashtra.

Dear Sir/Madam

Subject: Legal Notice for recall of outstanding dues Under credit facilities

granted to you by Bank of India, Malad (west) Branch, Mumbai 4000xx.

Under instructions from my Clients, bank of India, having address at xx, SV

Road, Malad (West). I have to address you as under:

1. This Notice is served upon You No.1 in your capacity as the principal

borrowers of my Clients and as such liable to repay the dues to my

Clients, under the various credit facilities granted to you No. 1.

2. This Notice is served upon You No. 2, 3, & 4 in you capacity as

Guarantors, having personally guaranteed the repayment of al the

debts and liabilities of You No. 1 to my Clients.

3. The liability of You No. 2, 3 and 4 is co-extensive with that of You No. 1

and is joint and several along with You No. 1 and You No. 2, 3 & 4 are

jointly and severally liable to repay the entire outstanding dues of my

Client.

4. That on your request, on or about July, 2xx5, my clients sanctioned

to You No. 1 the various credit facilities which were lastly reviewed on

xx.xx.xxxx on the terms and conditions incorporated in bank’s sanction

Letter No. xxxxxxxxxx dated xx/xx/xxxx.

5. That the above credit facilities are secured inter alia by the charge

created by you on your assets as under:

i) Hypothecation of Stocks and Book debts belonging to you No. 1

i ) Hypothecation of al Plant & Machinery belonging to you No. 1

i i) Pledge on term deposits of present value NIL.

iv) Pledge of recurring deposits (monthly deposit of Rs. *****) present

value is Rs. *******

66

PRACTICAL ASPECTS OF INSOLVENCY LAW

v) Equitable Mortgage over the fol owing properties:

a) On Land & Building on S. No. xx/xx at village xxxx

admeasuring xx sq. fts. in the name of Mr. A (Guarantor)

b) On Flat No. xx/xx, A Wing, Building xx, admeasuring xx

sq. ft. In the name of Mr. B (Guarantor)

6. To secure the above facilities You Nos. 1, 2, 3 & 4 have executed the

required documents in favour of my clients from time to time. You No.

2, 3 & 4 have executed valid and subsisting Deed of Guarantee in

favour of my Clients guaranteeing due repayments of the dues and

the liabilities of You No. 1 to my Client.

7. My Clients state that as you failed to honour the commitment of

repayment of dues as per the terms of sanction, your account has

been classified as Non-Performing Asset in books of my Client with

effect from xx/xx/xxxx

8. My clients state that as on xx/xxx/xxxx a sum of Rs. xx,xx,xxx is

due and payable by you to my Clients in respect of the said Cash

Credit Facility plus further interest on the above outstanding dues at

contractual rate, presently @ xx.xx% p.a. plus penal interest at x%

p.a. with monthly rests w.e.f xx/xx/xxxx with monthly rests.

9. Under the aforesaid circumstances as instructed by my Clients, I do

hereby call upon You No. 1 your capacity as the principal borrowers

and You Nos. 2, 3 & 4 as the guarantors to the said credit facilities,

whose valid and subsisting guarantees are here by invoked, to pay

to my Clients the outstanding amount of Rs. xx,xx,xxxx which is due

and payable by you to my Clients in respect of the said cash credit

facility plus further interest on the above outstanding dues on

contractual rate, presently @ xx.xx% p.a. plus penal interest @ x.xx%

p.a. with monthly rest w.e.f. xx/xx/xxxx with monthly rests within 7

days of the receipt of this Notice, failing which my Clients wil be

constrained to take such legal action and proceedings against each

of you, as my Clients may be advised, including proceeding for

recovery, injunction, attachment, seizure and sale of your assets,

encumbered or otherwise, as to the cost and consequences thereof,

which you may please note.

Yours Faithfully

(Advocate Mr. P)

Advocates for Bank of India

PRACTICAL ASPECTS OF INSOLVENCY LAW

67

ANNEXURE II: No operational Debt

ANNEXURE III: WRITTEN COMMUNICATION DATED **/**/**** BY

PROPOSED INTERIM RESOLUTION PROFESSIONAL

FORM 2

[See sub-rule (1) of rule 9]

[ Under rule 9 of the Insolvency and Bankruptcy (Application to

Adjudicating Authority) Rules, 2016]

WRITTEN COMMUNICATION BY PROPOSED INTERIM RESOLUTION

PROFESSIONAL

Dated: xx/xx/xxxx

To

The National Company Law Tribunal

6TH Floor, Fountain Telecom,

Building 1, Mahatma Gandhi Road,

Fort, Mumbai, Maharashtra 400001.

From,

Mr. P

Office No. xx, ABC Complex,

Mumbai, 400002

In the matter of M/s ABC Pvt. Ltd.

Subject : Written communication in connection with an application to

initiate corporate insolvency resolution process in respect of M/s ABC

Pvt. Ltd.

Madam/Sir,

I, Mr. P, an insolvency professional registered with ICSI Insolvency

Professionals Agency having registration number IBBI/IPA-00x/IP-0xxxx/

2017-18/xxxx have been proposed as the interim resolution professional by

Mr. A in connection with the proposed corporate insolvency resolution process

of M/s ABC Pvt. Ltd.

In accordance with rule 9 of the Insolvency and Bankruptcy (Application to

Adjudicating Authority) Rules, 2016, I hereby:

68

PRACTICAL ASPECTS OF INSOLVENCY LAW

(i) agree to accept appointment as the interim resolution professional if

an order admitting the present application is passed;

(i ) state that the registration number al otted to me by the Board is

IBBI/IPA-xxx/IP-xxxxx/2017-18/xxxx and that I am currently qualified

to practice as an insolvency professional;

(iii) disclose that I am currently serving as an interim resolution

professional/resolution professional/liquidator in 1 proceeding;

(iv) certify that there are no disciplinary proceedings pending against me

with the Board or ICSI Insolvency Professionals Agency;

(v) affirm that I am eligible to be appointed as a resolution professional

in respect of the corporate debtor in accordance with the provisions

of the Insolvency and Bankruptcy Board of India (Insolvency

Resolution Process for Corporate persons) Regulations, 2016 ;

(vi) make the following disclosures in accordance with the code of conduct

for insolvency professionals as set out in the Insolvency and Bankruptcy

Board of India (Insolvency Professionals) Regulations, 2016.

(Signature of insolvency professional)

MR. P

(Name of insolvency professional entity, if applicable)

[Optional certification, if required by the applicant making an application

under these Rules]

I, hereby, certify that the facts averred by the applicant in the present

application are true, accurate and complete and a default has occurred in

respect of the relevant corporate debtor. I have reached this conclusion

based on the fol owing facts and/or opinion:-

[please give details]

(Signature of insolvency professional)

PQR

(Name of insolvency professional entity, if applicable)

Copy of the relevant books of account of the corporate debtor

evidencing the defualt to creditor

ANNEXURE V: Audited financial statements for the last two financial

years and provisional financial statements for the current financial year

is attached

PRACTICAL ASPECTS OF INSOLVENCY LAW

69

Annexure VI:

(a) List of Assets and Liabilities of Corporate Applicant is attached

(b) The details of the property on which charge was created is detailed

below

(c) List of financial Creditors of the Corporate Applicant is mentioned below

Annexure VII: Certified Copy of the Resolution of the Board of Directors

authorizing Mr. A, Director, to initiate Corporate Insolvency Resolution

Process against the company and to take further actions necessary to

effect the same.

[ON LETTER HEAD OF THE CORPORATE APPLICANT]

CERTIFIED TRUE COPY OF THE RESOLUTIONS PASSED BY THE

GOVERNING BOARD OF XYZ LIMITED IN THEIR 10TH MEETING HELD

ON FRIDAY, THE 30TH JUNE, 2017 AT ITS REGISTERED OFFICE

Ref No. 25

Dated 10.06.2017

Resolved that during the board meeting of XYZ Limited held on 10th June,

2017, it has been decided that the company shal approach the National

Company Law Tribunal for initiating corporate insolvency resolution process

against itself under the Insolvency and Bankruptcy Code, 2016.

In pursuance thereof, Mr. ABC, in his capacity as the Director is being

authorized to file an affidavit under the law before the National Company

Law Tribunal.

Mr. ABC is duly authorized to swear on the Affidavit supporting the application

that is to be submitted before the National Company Law Tribunal.

(stamp of XYZ Limited)

Sd/-

Director

(ABC)

ANNEXURE VIII: AFFIDAVIT OF THE AUTHORISED PERSON OF THE

CORPORATE DEBTOR

IN THE NATIONAL COMPANY LAW TRIBUNAL

APPLICATION No. XX/XXX OF 2017

IN THE MATTER OF

M/s ABC Pvt. Ltd.

70

PRACTICAL ASPECTS OF INSOLVENCY LAW

AFFIDAVIT IN SUPPORT OF APPLICATION UNDER SECTION 10 OF

INSOLVENCY AND BANKRUPTCY CODE, 2016.

I, Mr. A, Director of ABC Pvt. Ltd. having my office at (insert complete

address) do hereby solemnly affirm and states as under:

1. I say that I am working as director and being well conversant with the

facts of the Application and also duly authorized by the Board

resolution dated xx/xx/xxxx, I am competent to make this Affidavit

for the Applicant mentioned above.

2. I state that I have gone through the Application No. ** of 2017 and all

the documents attached with the same. I have also perused the

records, files and documents pertaining to the above matter available

in my office and on the information derived there form, I am making

this affidavit to support the initiation of corporate insolvency resolution

by this corporate applicant.

3. It is stated on solemn affirmation that in the knowledge of the

corporate Applicant:

(a) There is no circumstances which would give rise to possibility

of any offence being committed by the Corporate Applicant or

any officer of the Corporate Applicant under section 68, 71, 77

of the Insolvency and Bankruptcy Code, 2016.

(b) Further it is stated that no order section 44 or section 51 of the

Insolvency and Bankruptcy Code, 2016 has been made by the

adjudicating authority against the Corporate Applicant.

4. It is further stated that on solemn affirmation that the corporate

applicant is ful y competent to file this application under section 10

of the Insolvency and Bankruptcy Code, 2016 and in no manner

whatsoever is disentitled under section 11 of the Insolvency and

Bankruptcy Code, 2016.

5. In the circumstances it is prayed that the Application be allowed.

Mr. A

(Deponent)

Mr. X

Advocate for the Corporate Applicant.

PRACTICAL ASPECTS OF INSOLVENCY LAW

71

CHAPTER V

CHECKLIST FOR SCRUTINY OF PETITION/

APPEAL/REPLY

No. 25/2/2016-NCLT

Government of India

National Company

Reference NCLT Rules, 2016 notified on 21st July, 2016 by the Ministry of

Corporate Affairs.

2. A uniform check list for scrutiny of the petition/application/appeal to be

filed before al Benches of the National Company Law Tribunal as per the

NCLT Rules, 2016 is attached (Annexure ‘A’) for necessary action.

ANNEXURE ‘A’

(Order No. 25/2/2016-NCLT dated 28th July, 2016)

National Company Law Tribunal New Delhi

Diary No....

Check List for Scrutiny of Petition, Application, Appeal/Reply

Sl. To be Ascertained

Yes/No

Reference

No.

Page No.

1. Whether the petition/application appeal falls

under the territorial jurisdiction of New Delhi

Bench of NCLT?

2. Whether petition/application/appeal/reply)-

and all enclosures are legible and in English

language?

3. Whether petition/application/appeal/reply

has been printed in double spacing on one

side of standard petition paper with an inner

margin of about four centimetre width on

top and with a right margin of 2.5 cm. left

margin of 5 cm and duly pagenated, indexed

and stitched together in paper book form?

71

72

PRACTICAL ASPECTS OF INSOLVENCY LAW

4. Whether the relevant provisions of the

Companies Act, 2013/NCLT Rules, 2016

have been clearly mentioned in the petition/

application/appeal?

5. Whether petitioner/applicant/appel ant is

entitled to and have the requisite

qualification to file the petition, e.g. , under

sections 241 and 242 of the Companies

Act, 2013 in accordance with section 244

of the Act & attached documentary proof

of entitlement?

6. Whether the petition/application/appeal/

reply has been signed at the foot of each

page by all the petitioners/applicants/

appel ants/respondents and their name(s)

has also been mentioned?

7. Whether name of the petitioner/applicant

appel ant/respondent, complete address,

viz. , the name of the road street lane and

municipal division or ward, municipal door

and other number of the house; the name

of the town or village ; the post office, postal

district and PIN Code has been mentioned

in the petition/application/appeal reply?

8. Whether fax number, mobile number, valid

email address of the petitioner/applicant/

appel ant/respondent have been mentioned?

9. Whether in every interlineations, eraser

or correction or deletion in petition/

application/ appeal/ document/ reply has

been initiated by the party or his

authorised representative?

10. Whether affidavits (Form NCLT-6) verifying

the petition/application/appeal/reply from all

the petitioner/applicant/appel ant/respondent

drawn on non-judicial/stamp paper of

PRACTICAL ASPECTS OF INSOLVENCY LAW

73

requisite value duly attested by Notary

Public/Oath Commissioner have been

filed?

11. Whether full name, parentage, age,

description of each part, date, address and

in case a party sues or being sued in a

representative character, has been set out

in accordance to rule 20(5) of NCLT Rules,

2016?

12. Whether petition /application/appeal reply

has been drawn in prescribed form as per

Annexure ‘A’ of NCLT, Rules, 2016 with

stipulated fee given in the Schedule of

these rules’? The fee is to be paid by way

of demand draft/IPO drawn in favour of “The

Pay & Accounts Officer, Ministry of

Corporate Affairs, New Delhi”.

13. Whether documents accompanied to

petition/application/appeal reply have been

duly certified by the authorised

representative or advocate filing the petition

or application or appeal?

14. Whether the accompanied documents to the

petition/application/appeal/reply has been

verified from the originals and are in line with

the provisions of rule 23 NCLT, Rules, 2016?

The original should be brought before the

Deputy Registrar for verification?

15. Whether petition application/appeal/reply

has been filed in three authenticated copies

and delivered to the opposite party?

16. Whether all relevant enclosures to the

petition/application/appeal/reply have been

attached as per the Annexure ‘B’ of NCLT

Rules, 2016?

74

PRACTICAL ASPECTS OF INSOLVENCY LAW

17. Whether Annexures to the petition/

application/appeal/reply has been

numbered serial y?

18. Whether Vakalatnama (with enrolment No.)

filed, is bearing court fee stamp of Rs. 2.75

and in accordance with the Circular No.13/

Rules DHC/ dated 26th October, 2009

issued by the Registrar General, Delhi High

Court?

19. Whether documents with regard to

shareholding/paid-up capital/balance sheet

of the petitioner/applicant/appel ant have

been attached?

20. Whether notice to be given to the Central

Government along with copy of petition/

application/appeal under the relevant

provisions of the Companies Act, 2013?

21. Whether proof of service of the petition/

application/appeal/ reply on the concerned

Registrar of Companies and Regional

Director, Ministry of Corporate Affairs has

been filed?

22. Whether proof of service of the petition/

application/appeal/reply on all the

respondents as well as caveat or(s), if any

has been filed?

23. Whether brief of synopsis within two or

three pages has been filed?

24. Whether date of events within two or three

pages has been filed?

PRACTICAL ASPECTS OF INSOLVENCY LAW

75

DRESS CODE FOR NCLT

File 25/2/2016-NCLT dated 2nd August 2016, issued by NCLT

In exercise of the powers conferred on Tribunal by rule 51 of National Company

Law Tribunal Rules, 2016. It has been decided to issue following dress code

for President, Members, Authorized Representatives and for the parties in

person to be followed during the proceeding of the Tribunal.

( i) For President and Member : The dress of the President and Members

shal be white or striped or black trouser with black coat over white

shirt and band or buttoned- up black coat and band. In the case of a

female President or Member, the dress shal be black coat over a

white saree.

( ii) For Authorised Representatives : Every authorized Representative

as provided in section 432 of the Act shal appear before the Tribunal

in his-her professional dress if any, and if there is no such dress, a

male in a suit buttoned-up coat over a trouser or national dress that

is a long buttoned-up coat and a female in a coat over white or any

other sober coloured saree or in any other sober and decent dress.

( iii) For Parties in Person : Parties appearing in person before the Tribunal

shal be properly dressed.

2. The dress code shal be followed with immediate effect.

76

PRACTICAL ASPECTS OF INSOLVENCY LAW

CHAPTER VI

LOCATION AND POSTAL ADDRESS OF NCLT AND ITS

BENCHES AND NCLAT

No. A-45011/14/2016-Ad IV

Government of India

Ministry of Corporate Affairs

The National Company Law Tribunal (NCLT) and National Company Law

Appellate Tribunal (NCLAT) have been constituted w.e.f. 1st June, 2016. The

location and postal address of NCLT/NCLAT Benches are as under

SI.

Title of the Bench

Location and Postal Address

No.

1.

National Company Law

“B” Wing, 3rd Floor, Paryavaran

Appellate Tribunal New

Bhawan, CGO Complex, Lodhi Road,

Delhi.

New Delhi-110003

SI.

Title of the Bench

Location and Postal Address

No.

(1)

(2)

(3)

1.

(a) National Company Law Block No.3, GF, 5th, 6th 7th & 8th Floors,

Tribunal, Principal Bench.

CGO Complex, Lodhi Road, New Delhi

(b) National Company Law 110003

Tribunal, New Delhi Bench.

2.

National Company Law

Anand House, Ground, 1st and 2nd

Tribunal, Ahmedabad

Floors, SG Highway, Thaltej, Ahmedabad

Bench.

380054

3.

National Company Law

9th Floor, Sangam Place, Civil Lines,

Tribunal, Al ahabad Bench. Allahabad - 211001

4.

National Company Law

Corporate Bhawan, 12th Floor, Raheja

Tribunal, Bengaluru Bench. Towers, M G Road, Bengaluru - 560001

5.

National Company Law

Ground Floor, Corporate Bhawan, Sector

Tribunal, Chandigarh

- 27-B, Madhya Marg, Chandigarh -

Bench

160019.

76

PRACTICAL ASPECTS OF INSOLVENCY LAW

77

6.

National Company Law

Corporate Bhawan (UTI Building), 3rd

Tribunal, Chennai Bench.

Floor, No. 29 Rajaji Salai, Chennai -

600001

7.

National Company Law

4th Floor, Prithvi Planet, Behind Hanuman

Tribunal, Guwahati Bench. Mandir, G S Road, Guwahati - 781007.

8.

National Company Law

Corporate Bhawan, Bandlaguda,

Tribunal, Hyderabad Bench Lattiannaram Village, Hayatnagar

Mandal, Rangareddy District, Hyderabad

500068

9.

National Company Law

5, Esplanade Row (West), Town Hall

Tribunal, Kolkata Bench

Ground and First Floor, Kolkata - 700001.

10.

National Company Law

6th Floor, Fountain Telecom Building

Tribunal, Mumbai Bench

No.1, Near Central Telegraph, M G Road,

Mumbai - 400001

78

PRACTICAL ASPECTS OF INSOLVENCY LAW

CHAPTER VII

ROLE OF INTERIM RESOLUTION

PROFESSIONAL

The IRP has a very important role under the Insolvency and Bankruptcy

Code. The role of an IRP commences from the day he/she is appointed as

such by an order of the Adjudicating Authority. During his tenure, the IRP has

to deal with tasks of great responsibility and that has the potential to impact

the entire Corporate Insolvency Resolution Process.

The IRP has been empowered to manage the affairs of corporate debtor

and is required to take control of the assets of the corporate debtor. Code

casts a duty on IRP to ensure that during corporate insolvency resolution

process corporate debtor, every endeavour is made to protect and preserve

the value of property of corporate debtor and manage the operations of

corporate debtor as a going concern. Code provides that during the corporate

insolvency resolution process powers of the Board of Directors of corporate

debtor shal stand suspended and be exercised by IRP. In this regard, it is

pertinent to note that only powers of the Board are suspended and not their

duties. As regards conducting the process of corporte insolvency resolution

process, the IRP shall make a public announcement pertaining to his

appointment and invites creditors for submission of proof of claims. On

receipt of claims from various creditors, he is also entrusted with the task

of verification of the claims, on the basis of which, he prepares the list of

creditors. Once the list of creditors is prepared, the IRP shal constitute

the Committee of Creditors (“Committee”) and file a report in this behalf

with the Adjudicating Authority. Subsequently, the first meeting of the

Committee is to be convened.

With the conclusion of the first meeting of the Committee, the role of the

IRP also comes to an end. At the first meeting of the Committee, the

role of the IRP comes to an end either by change of his role into a

resolution professional, subject to approval of his appointment by a

majority of seventy five percent of the voting share of the financial

creditors in the Committee or by termination of his role as an IRP and

appointment of another resolution professional, where his appointment

is not approved by the Committee.

The role of an IRP under the Code read with Rules and Regulations made

thereunder is as follows:

78

PRACTICAL ASPECTS OF INSOLVENCY LAW

79

I. PUBLIC ANNOUNCEMENT AND REGULATORY INTIMATIONS

One of the key aspects of the Corporate Insolvency Resolution Process

(‘CIRP’) under the Code is the provision relating to Public Announcement

contained in Section 13 and Section 15 of the Code and in Chapter III of the

CIRP Regulations.

Action to be taken by IRP on initiation of CIRP

Section 13(1) of the Code lists the actions that the Adjudicating Authority

i.e. the NCLT shal take once an application for initiating the CIRP has been

initiated. The Adjudicating Authority shall:

(a) declare a moratorium in accordance with Section 14 of the Code;

(b) cause a public announcement of the initiation of the CIRP with respect

to the corporate debtor to be made and cal for claims in the manner

laid down in Section 15 of the Code; and

(c) appoint the interim resolution professional for the corporate debtor in

accordance with Section 16 of the Code.

Section 13(2) of the Code mandates that the public announcement shal be

made “immediately” after the appointment of the interim resolution

professional. The term “immediately” has been explained under Chapter III,

Regulation 6 of the CIRP Regulations whereby “immediately” means not

later than three days from the date of appointment of the interim resolution

professional.

Information to be contained in a Public Announcement

Section 15 of the Code lists the particulars that a public announcement of

the CIRP for the corporate debtor shal contain. In particular, the public

announcement shall include information relevant to the creditors such as

the last date for the submission of claims and details of the interim resolution

professional responsible for receiving claims. The details of the information

to be contained in the Public Announcement referred to in Section 13 of the

Code are elaborated herein below:

(a) name and address of the corporate debtor under the CIRP;

(b) name of the authority with which the corporate debtor is incorporated

or registered;

(c) the last date for submission of claims;

(d) details of the interim resolution professional who shal be vested

with the management of the corporate debtor and be responsible for

receiving the claims;

80

PRACTICAL ASPECTS OF INSOLVENCY LAW

(e) penalties for false or misleading claims; and

(f) the date* on which the CIRP shal close.

*the date on which the CIRP shal close shal be the 180th day from the

date of the admission of the application u/s 7, 9 or 10 of the Code, as the

case may be.

Time limit of making Public Announcement by IRP

Regulation 6 of the CIRP Regulations stipulates that public announcement

by an IRP pertaining to his/her appointment shal be made within three (3)

days of such appointment.

Modes for making Public Announcement

Regulation 6 of the CIRP Regulationss provides that Public Announcement

shal be made:

(i) in one English newspaper and one regional language newspaper with

wide circulation at the location of the registered office and principal

office, if any, of the corporate debtor and any other location where in

the opinion of the interim resolution professional, the corporate debtor

conducts material business operations;

(i ) on the website, if any, of the corporate debtor; and

(iii) on the website, if any, designated by Insolvency and Bankruptcy

Board of India for the purpose.

IBBI has, vide circular dated 23.02.2018, prescribed www.ibbi.gov.in as the

designated website for publishing forms on the designated website. As per

the circular, the IRP, RP or the liquidator, as the case may be, shal send

the forms to the Board for publishing the same on the designated website,

namely, www.ibbi.gov.in in the manner specified. For example, for making

public announcement the pdf format of same shal be sent by mail to the

Board at public.ann@ibbi.gov.in

The Public Announcement shal invite creditors for submission of proof of

claims and give them fourteen (14) days to submit the same from the date

of appointment of the interim resolution professional.

IBBI Circular relating to use of Registration Number and Registered

Address by Insolvency Professional in all his communications

including Public Announcement

Pursuant to the IBBI Circular dated 3rd January, 2018, every insolvency

PRACTICAL ASPECTS OF INSOLVENCY LAW

81

professional is under obligation to use the addressees and emails registered

with the IBBI. The circular provides that in all their communications whether

by way of public announcement or otherwise to a stakeholder or to an

authority, an insolvency professional shal prominently state: (i) his name,

address and email, as registered with the IBBI, (i ) his Registration Number

as an insolvency professional granted by the IBBI, and (iii) the capacity in

which he is communicating (Example: As Interim Resolution Professional

of XYZ Limited, As Resolution Professional of ABC Limited, etc.).

Expenses of Public Announcement

The expenses of the public announcement shal be borne by applicant and

the same may be reimbursed by the Committee of creditors to the extent it

ratifies them. It is pertinent to mention that the expenses of the public

announcement shal not form part of the insolvency resolution process costs.

Format of Public Announcement

The public announcement shall be made in the manner specified in Form A

of the Schedule to the CIRP Regulations. The prescribed format is enclosed

as Annexure VII.1.

Intimation of initiation of CIRP and appointment of IRP to concerned

authorities

The Interim Resolution Professional may intimate to al the concerned

authorities such as banks dealing with the corporate debtor; stock exchange,

if any; registrar of companies; depositories of securities; etc., that the CIRP

has been initiated against a corporate person and an IRP has been appointed.

The sample format of such intimation for reference is enclosed as Annexure

VII.2.

II. CLAIMS AND CONSTITUTION OF COMMITTEE OF CREDITORS

After Public Announcement by IRP inviting claim fol owing steps are taken

by IRP.

1. Col ation of Claims

2. Verification of Claims

3. Preparation of List of Creditors

4. Constitution of Creditors Committee

82

PRACTICAL ASPECTS OF INSOLVENCY LAW

5. Cal ing of first Meeting of Creditors Committee

6. Appointment of two Registered Valuers

In the aforesaid context, CIRP Regulations prescribe for:-

1. Manner of submission of claims

2. Classification of Claims

3. Proof of Claims

4. Last Date for submission of claims

5. Reporting requirements of Interim Resolution Professionals with

respect to verification of claims

For the purposes of col ation, verfication of claims, etc., following definitions

may be noted.

The definition of term ‘Claim’

As per section 3(6) of the Code, “claim” means –

(a) a right to payment, whether or not such right is reduced to judgment,

fixed, disputed, undisputed, legal, equitable, secured or unsecured;

(b) right to remedy for breach of contract under any law for the time

being in force, if such breach gives rise to a right to payment, whether

or not such right is reduced to judgment, fixed, matured, unmatured,

disputed, undisputed, secured or unsecured.

The definition of the term ‘Financial Creditor’

As per section 5(7) of the Code, “financial creditor” means any person to

whom a financial debt is owed and includes a person to whom such debt

has been legal y assigned or transferred to;

The definition of the term ‘Operational Creditor’

As per section 5(20) of the Code “operational creditor” means a person to

whom an operational debt is owed and includes any person to whom such

debt has been legally assigned or transferred.

The definition of the term ‘Workman’

As per section 3(36) of the Code ‘workman’ shall have the same meaning as

assigned to it in clause(s) of section 2 of the Industrial Disputes Act, 1947

(14 of 1947).

PRACTICAL ASPECTS OF INSOLVENCY LAW

83

The definition of the term ‘Financial Debt’

As per section 5(8) of the Code “financial debt” means a debt along with

interest, if any, which is disbursed against the consideration for the time

value of money and includes –

(a) money borrowed against the payment of interest;

(b) any amount raised by acceptance under any acceptance credit facility

or its de-materialised equivalent;

(c) any amount raised pursuant to any note purchase facility or the issue

of bonds, notes, debentures, loan stock or any similar instrument;

(d) the amount of any liability in respect of any lease or hire purchase

contract which is deemed as a finance or capital lease under the

Indian Accounting Standards or such other accounting standards as

may be prescribed;

(e) receivables sold or discounted other than any receivables sold on

nonrecourse basis;

(f) any amount raised under any other transaction, including any forward

sale or purchase agreement, having the commercial effect of a

borrowing;

(g) any derivative transaction entered into in connection with protection

against or benefit from fluctuation in any rate or price and for

calculating the value of any derivative transaction, only the market

value of such transaction shal be taken into account;

(h) any counter-indemnity obligation in respect of a guarantee, indemnity,

bond, documentary letter of credit or any other instrument issued by

a bank or financial institution;

(i) the amount of any liability in respect of any of the guarantee or

indemnity for any of the items referred to in sub-clauses (a) to (h) of

this clause;

The definition of the term ‘Operational Debt’

As per section 5(21) of the Code “operational debt” means a claim in respect

of the provision of goods or services including employment or a debt in

respect of the repayment of dues arising under any law for the time being in

force and payable to the Central Government, any State Government or

any local authority.

84

PRACTICAL ASPECTS OF INSOLVENCY LAW

Proof of Claims

(Chapter IV of CIRP Regulations)

Proof of Claims

Claims by Financial

Claims by Operational

Claims by workmen

Creditors

Creditors (other than

and employees

workmen and

employees)

Claims by Operational Creditors

(i) Mode and manner of submission of proof of claims

Regulation 7(1) of CIRP Regulations states that a person claiming to be an

operational creditor, other than workman or employee of the corporate debtor,

shal submit proof of claim to the interim resolution professional in person,

by post or by electronic means in Form B of the Schedule.

Format Enclosed as Annexure VII.3

(i ) All supplementary documents in support of claims to be submitted before

constitution of Committee of Creditors

Person claiming to be an operational creditor may submit supplementary

documents or clarifications in support of the claim before the constitution of

the committee.

(i i) Basis of proof of claims

As per Regulation 7(2) of the CIRP Regulations, the existence of debt due

to the operational creditor under this Regulation may be proved on the basis

of –

(a) the records available with an information utility, if any; or

(b) other relevant documents, including –

(i) a contract for the supply of goods and services with corporate

debtor;

PRACTICAL ASPECTS OF INSOLVENCY LAW

85

(ii) an invoice demanding payment for the goods and services

supplied to the corporate debtor;

(iii) an order of a court or tribunal that has adjudicated upon the

non-payment of a debt, if any; or

(iv) financial accounts.

Claims by Financial Creditors

(i) Mode and manner of submission of proof of claims

As per Regulation 8(1) of CIRP Regulations person claiming to be a financial

creditor of the corporate debtor shal submit proof of claim to the interim

resolution professional in electronic form in Form C of the Schedule.

Format enclosed as Annexure VII.4

(i ) All supplementary documents in support of claims to be submitted before

constitution of Committee of Creditors

The Financial Creditor may submit supplementary documents or clarifications

in support of the claim before the constitution of the committee.

(i i) Basis of Proof of claims

As per Regulation 8(2) of CIRP Regulations the existence of debt due to the

financial creditor may be proved on the basis of –

(a) the records available with an information utility, if any; or

(b) other relevant documents, including –

(i) a financial contract supported by financial statements as

evidence of the debt;

(ii) a record evidencing that the amounts committed by the financial

creditor to the corporate debtor under a facility has been drawn

by the corporate debtor;

(i i) financial statements showing that the debt has not been repaid; or

(iv) an order of a court or tribunal that has adjudicated upon the

non-payment of a debt, if any.

Claims by workmen and employees

(i) Mode and manner of submission of proof of claims

As per Regulation 9(1) of the CIRP Regulations, a person claiming to be a

86

PRACTICAL ASPECTS OF INSOLVENCY LAW

workman or an employee of the corporate debtor shall submit proof of claim

to the interim resolution professional in person, by post or by electronic

means in Form D of the Schedule.

As per Regulation 9(2) of CIRP Regulations where there are dues to numerous

workmen or employees of the corporate debtor, an authorised representative

may submit one proof of claim for al such dues on their behalf in Form E of

the Schedule.

Formats of the claim are enclosed as Annexure VII.5 and Annexure VII.6.

(i ) All supplementary documents in support of claims to be submitted before

constitution of Committee of Creditors

Workman or an employee may submit supplementary documents or

clarifications in support of the claim, on his own or if required by the interim

resolution professional, before the constitution of the committee.

(i i) Basis of Proof of claims

As per Regulation 9(3) of the CIRP Regulations, the existence of dues to

workmen or employees may be proved by them, individually or col ectively

on the basis of –

(a) records available with an information utility, if any; or

(b) other relevant documents, including –

(i) a proof of employment such as contract of employment for the

period for which such workman or employee is claiming dues;

(ii) evidence of notice demanding payment of unpaid dues and

any documentary or other proof that payment has not been

made; or

(iii) an order of a court or tribunal that has adjudicated upon the

non-payment of a dues, if any.

Claims by other creditors

IBBI vide notification dated 16th August, 2017 had amended the Insolvency

and Bankruptcy Board of India (Insolvency Resolution Process for Corporate

Persons) Regulations, 2016 to include claims by creditors, other than financial

and operational creditor.

(i) Mode and manner of submission of proof of claims

As per Regulation 9A(1) of the CIRP Regulations, a person claiming to be a

creditor, other than those covered under regulations 7, 8, or 9, shall submit

PRACTICAL ASPECTS OF INSOLVENCY LAW

87

proof of its claim to the interim resolution professional or resolution

professional in person, by post or by electronic means in Form F of the

Schedule.

Such creditors may submit the proof of claims in person, by post or by

electronic means.

Formats of the claim are enclosed as Annexure VII.7

(i ) Basis of Proof of claims

As per Regulation 9A(2) of Insolvency and Bankruptcy Board of India

(Insolvency Resolution Process for Corporate Persons) (Amendment)

Regulations, 2016, the existence of the claim of such creditor may be proved

on the basis of –

(a) the records available in an information utility, if any, or

(b) other relevant documents sufficient to establish the claim, including

any or al of the fol owing: -

(i) documentary evidence demanding satisfaction of the claim;

(ii) bank statements of the creditor showing non-satisfaction of

claim;

(iii) an order of court or tribunal that has adjudicated upon non-

satisfaction of claim, if any.

Interim Resolution Professional may seek further evidence for

substantiation of claims

As per regulation 10 of the CIRP Regulations, the interim resolution

professional or the resolution professional, as the case may be, may call

for such other evidence or clarification as he deems fit from a creditor for

substantiating the whole or part of its claim.

Creditor shall bear the cost of proving the claims

As per Regulation 11 of the CIRP Regulations, a creditor shall bear the cost

of proving the debt due to such creditor.

Submission of proof of claims before the last date mentioned in the

public announcement

As per Regulation 12(1) of the CIRP Regulations, a creditor shal submit

proof of claim on or before the last date mentioned in the public

announcement.

88

PRACTICAL ASPECTS OF INSOLVENCY LAW

Submission of claims by Creditors till the approval of Resolution Plan

Regulation 12(2) of the CIRP Regulations states that a creditor, who failed

to submit proof of claim within the time stipulated in the public announcement,

may submit such proof to the interim resolution professional or the resolution

professional, as the case may be, till the approval of a resolution plan by

the committee.

Financial creditor who has submitted claims after public announcement

and before approval of resolution plan shall form part of Committee of

Creditors

Regulation 12(3) of the CIRP Regulations states that where the creditor in

sub-regulation (2) is a financial creditor, it shall be included in the committee

from the date of admission of such claim. However, such inclusion shal not

affect the validity of any decision taken by the committee prior to such

inclusion.

Verification of claims by Interim Resolution Professional

As per Regulation 13(1) of the CIRP Regulations the interim resolution

professional or the resolution professional, as the case may be, shal verify

every claim, as on the insolvency commencement date (i.e. date on which

the application for Insolvency Resolution is admitted by NCLT), within seven

days from the last date of the receipt of the claims, and thereupon maintain

a list of creditors containing names of creditors along with the amount claimed

by them, the amount of their claims admitted and the security interest, if

any, in respect of such claims, and update it.

Points to be noted:

• Date for the purposes of verification of Claims – Verification of Claims

to be made as on the insolvency commencement date i.e. date on

which the CIRP application is admitted by NCLT.

• Last date of receipt of Claims - Not later than 14 days from the date

of appointment of Interim Resolution Professional (NCLT to appoint

interim professional within 14 days from insolvency commencement

date. However, in general NCLT, especially when application is made

by financial creditor or corporate debtor, appoints interim professional

along with the order admitting CIRP Application.

• Interim professional to verify claims within seven days from the last

date of receipt of claims.

PRACTICAL ASPECTS OF INSOLVENCY LAW

89

Disclosure and filing requirements with respect to list of creditors

As per Regulation 13(2) of the CIRP Regulations, the list of creditors shall

be –

(a) available for inspection by the persons who submitted proofs of claim;

(b) available for inspection by members, partners, directors and

guarantors of the corporate debtor;

(c) displayed on the website, if any, of the corporate debtor;

(d) filed with the Adjudicating Authority (i.e. NCLT); and

(e) presented at the first meeting of the committee.

A suggested format of list of creditors in compliance with Regulation 13 of

the CIRP Regulations is enclosed as Annexure VII.8.

Determination of amount of claim

Regulation 14(1) of the CIRP Regulations, states that when the amount

claimed by a creditor is not precise due to any contingency or other reason,

the interim resolution professional or the resolution professional, as the

case may be, shal make the best estimate of the amount of the claim

based on the information available with him.

Regulation 14(2) of the CIRP Regulations, states that the interim resolution

professional or the resolution professional, as the case may be, shall revise

the amounts of claims admitted, including the estimates of claims made

under sub-regulation (1), as soon as may be practicable, when he comes

across additional information warranting such revision.

Claims denominated in foreign currency

Regulation 15 of the CIRP Regulations, states that the claims denominated

in foreign currency shal be valued in Indian currency at the official exchange

rate as on the insolvency commencement date.

Explanation- “official exchange rate” is the reference rate published by the

Reserve Bank of India or derived from such reference rates.

90

PRACTICAL ASPECTS OF INSOLVENCY LAW

III. COMMITTEE OF CREDITORS

Constitution of Committee of Creditors

Committee of Creditors to contain financial Creditors

Section 21(1) of the code states that the IRP shal after collation of all

claims received against the corporate debtor and determination of the

financial position of the corporate debtor, constitute a committee of creditors.

Section 21(2) of the code states that the committee of creditors shall

comprise al financial creditors of the corporate debtor:

Related party shal not be representing the committee of creditors

A related party to whom a corporate debtor owes a financial debt shal not

have any right of representation, participation or voting in a meeting of the

committee of creditors.

Related Party is defined under Section 5(24) of the Code as under : “related

party”, in relation to a corporate debtor, means –

(a) a director or partner of the corporate debtor or a relative of a director

or partner of the corporate debtor;

(b) a key managerial personnel of the corporate debtor or a relative of a

key managerial personnel of the corporate debtor;

(c) a limited liability partnership or a partnership firm in which a director,

partner, or manager of the corporate debtor or his relative is a partner;

(d) a private company in which a director, partner or manager of the

corporate debtor is a director and holds along with his relatives, more

than two per cent of its share capital;

(e) a public company in which a director, partner or manager of the

corporate debtor is a director and holds along with relatives, more

than two per cent of its paid-up share capital;

(f) anybody corporate whose board of directors, managing director or

manager, in the ordinary course of business, acts on the advice,

directions or instructions of a director, partner or manager of the

corporate debtor;

(g) any limited liability partnership or a partnership firm whose partners

or employees in the ordinary course of business, acts on the advice,

directions or instructions of a director, partner or manager of the

corporate debtor;

PRACTICAL ASPECTS OF INSOLVENCY LAW

91

(h) any person on whose advice, directions or instructions, a director,

partner or manager of the corporate debtor is accustomed to act;

(i) a body corporate which is a holding, subsidiary or an associate

company of the corporate debtor, or a subsidiary of a holding company

to which the corporate debtor is a subsidiary;

(j) any person who controls more than twenty percent of voting rights in

the corporate debtor on account of ownership or a voting agreement;

(k) any person in whom the corporate debtor controls more than twenty

per cent of voting rights on account of ownership or a voting agreement;

(l) any person who can control the composition of the board of directors

or corresponding governing body of the corporate debtor;

(m) any person who is associated with the corporate debtor on account

of –

(i) participation in policy making processes of the corporate debtor;

or

(ii) having more than two directors in common between the corporate

debtor and such person; or

(iii) interchange of managerial personnel between the corporate

debtor and such person; or

(ii) provision of essential technical information to, or from, the

corporate debtor.

Committee with only Operational Creditors

Regulation 16(1) of the CIRP Regulations states that where the corporate

debtor has no financial debt or where al financial creditors are related parties

of the corporate debtor, the committee shal be set up in accordance with

CIRP Regulations.

(2) The committee formed under this Regulation shal consist of members

as under –

(a) eighteen largest operational creditors by value :

Provided that if the number of operational creditors is less than

eighteen, the committee shal include al such operational creditors;

(b) one representative elected by al workmen other than those workmen

included under sub-clause (a); and

92

PRACTICAL ASPECTS OF INSOLVENCY LAW

(c) one representative elected by all employees other than those

employees included under sub-clause (a).

(3) A member of the committee formed under this Regulation shall have

voting rights in proportion of the debt due to such creditor or debt represented

by such representative, as the case may be, to the total debt.

Explanation- For the purposes of this sub-regulation, ‘total debt’ is the sum

of –

(a) the amount of debt due to the creditors listed in sub-regulation 2(a);

(b) the amount of the aggregate debt due to workmen under sub-regulation

2(b); and

(c) the amount of the aggregate debt due to employees under sub-

regulation 2(c).

(4) A committee formed under this Regulation and its members shall have

the same rights, powers, duties and obligations as a committee comprising

financial creditors and its members, as the case may be.

First meeting of the committee

Regulations 17 (1) of the CIRP Regulations states that the interim resolution

professional shall file a report certifying constitution of the committee to

the Adjudicating Authority on or before the expiry of thirty days from the

date of his appointment. Regulation 17(2) of the CIRP Regulations, states

that the IRP shall convene the first meeting of the committee within seven

days of filing the report under this Regulation.

However, it is pertinent to note here that, as per section 16(5) of the Code,

the term of the IRP shall not exceed thirty days from date of his appointment

and whereas Regulation 17(1) of the CIRP Regulations provides thirty days

time for filing report certifying constitution of Committee and thereafter

convening the meeting of Committee within seven days thereafter.

Thus, the report certifying constitution of committee shal be submitted

with Adjudicating Authority in such a manner that the first meeting of

committee shal be convened within the period of thirty days from the date

of appointment of interim resolution professional i.e. before the expiry of the

office of interim resolution professional.

Points to be noted

• IRP to file a report with NCLT certifying the Constitution of Committee

of Creditors.

PRACTICAL ASPECTS OF INSOLVENCY LAW

93

• The First meeting of the Committee of Creditors is to be convened

within 7 days of filing the report with NCLT certifying the constitution

of Committee of Creditors.

• Both 1 and 2 above shall be completed within 30 days of the

appointment of Interim Resolution Professional.

Specimen Report Certifying the Constitution of Committee of Creditors is

enclosed as Annexure VII.9

IV. CONDUCT OF CIRP DURING THE TENURE OF INTERIM

RESOLUTION PROFESSIONAL

The various provisions pertaining to the conduct of the CIRP during the

tenure of the IRP are covered under Sections 17, 18, 19, 20 of the Code

read with Chapter VIII of the CIRP Regulations.

Management of Affairs of Corporate Debtor

Section 17 of the Code provides that once the Interim resolution Professional

has been appointed:

(a) The management of the affairs of the corporate debtor is to be taken

over by him/her;

(b) The powers of the Board of Directors or the partners of the Corporate

Debtor, as the case may be, are suspended and be exercised by the

IRP;

(c) The officers and managers of the corporate debtor shall report to the

IRP and co-operate with him/her in providing access to documents

and records of the corporate debtor;

(d) The financial institutions maintaining accounts of the corporate debtor

shal furnish al information relating to the corporate debtor available

with them to the IRP.

Section 17(2) of the Code lists out the various powers that an IRP shall

have, including the power to:

(a) do al acts and execute documents in the name of and on behalf of

corporate debtor;

(b) take such actions, in the manner and subject to such restrictions, as

may be specified by the Board;

94

PRACTICAL ASPECTS OF INSOLVENCY LAW

(c) access the electronic records of the corporate debtor from the

Information Utility;

(d) access the books of account, records and other relevant documents

of corporate debtor available with the Government authorities,

statutory auditors, accountants and such other persons as may be

specified.

The above powers vested with the IRP are important for effectively

discharging his/her responsibilities. A sample of the intimation to be sent by

the IRP to the employees of the corporate debtor is enclosed as Annexure

VII.10

Duties of Interim Resolution Professional

Section 18 of the Code lists out the various duties bestowed on an IRP.

These include:

(a) col ection of al the financial information relating to the corporate

debtor;

(b) receipt and col ation of debt claims submitted by creditors to the

IRP;

(c) constitution of the committee of creditors;

(d) taking over control and monitoring the assets of the corporate debtor;

(e) filing the information col ected with an information utility;

(f) take control and custody of any asset over which the corporate debtor

has ownership rights as recorded in the balance sheet of the corporate

debtor, or with the information utility or the depository of securities or

any other registry that records the ownership of assets.

The below table enlists the assets which can or cannot be taken over by an

IRP as contemplated under section 18 of the Code:

Assets which can be taken over

Assets which cannot be taken over

• Assets over which the corporate

• Assets owned by a third party in

debtor has ownership rights as

possession of the corporate debtor

recorded in the balance sheet of

held under trust or under contractual

the corporate debtor including

arrangements including bailment;

(i) Assets over which the

• Assets of any Indian or foreign

corporate debtor has

subsidiary of the corporate

ownership rights which may

debtor;

be located in a foreign

Such other assets as may be notified

country;

by the Central Government in

PRACTICAL ASPECTS OF INSOLVENCY LAW

95

(ii) Assets that may or may not

consultation with any financial sector

be in possession of the

regulator.

corporate debtor;

(iii) Tangible assets, whether

movable or immovable

(iv) Intangible assets including

intellectual property

(v) Securities including shares

held in any subsidiary of the

corporate debtor, financial

instruments, insurance

policies;

(vi) Assets subject to the

determination of ownership

by a court or authority

Obligations of the Personnel and Promoters of the Corporate Debtor

Section 19 of the Code imposes an obligation on the personnel and promoters

of the corporate debtor to extend al assistance and co-operation required

by the IRP in the management of the affairs of the corporate debtor. The

said provision is to help IRP discharge his duties effectively.

Personnel is defined under section 5 (23) of the Code to mean:

(a) employee;

(b) directors;

(c) managers;

(d) key managerial personnel and

(e) designated partners, if any of the corporate debtor.

Where the personnel of the corporate debtor or any other person required to

cooperate with the IRP (such other person may include a contractual counter

party, supplier, service provider and auditor) do not extend co-operation or

assistance to the IRP, the IRP may apply to the Adjudicating Authority for

an order. A sample application is enclosed as Annexure VII.11.

The Adjudicating Authority may by an order, direct the person to comply

with the instructions of the IRP or to provide information to the IRP.

Powers of an IRP

Section 20 of the Code lays down that the IRP has to manage the operations

96

PRACTICAL ASPECTS OF INSOLVENCY LAW

of the corporate debtor as a going concern to enable him to protect and

preserve the value of the property of the corporate debtor. These include the

power to:

(a) appoint accountants, legal counsel or such other professionals who

may provide specialist advice to the IRP. Such professionals may

include turnaround specialists and management experts.

(b) Enter into contracts on behalf of the corporate debtor or to amend or

modify the contracts or transactions which were entered into before

the commencement of the CIRP;

(c) Raise interim finance. However, any interim finance raised by providing

security of an encumbered property of the corporate debtor will require

prior permission of the concerned creditor;

(d) Issue instructions to personnel of the corporate debtor as may be

necessary for keeping the corporate debtor as a going concern;

(e) Take all such actions as are necessary to keep the corporate debtors

as a going concern.

Sale of Assets outside the ordinary course of business

Regulation 29 of CIRP Regulations stipulates that the IRP may sell

unencumbered assets of the corporate debtor, other than in the ordinary

course of business, if he is of the opinion that such a sale is necessary for

a better realisation of value under the facts and circumstances of the case.

However, the book value of al the assets sold under this sub-regulation

shal not exceed 10% of the total claims admitted by the IRP. Further, such

a sale shal require the approval of the committee.

Notwithstanding the terms of the constitutional documents of the corporate

debtor, shareholders’ agreement, joint venture agreement or other document

of a similar nature, the title of a bonafide purchaser under this regulation

shal be free and marketable.

Assistance of local district administration

Regulation 30 of the Chapter VIII of CIRP Regulations enables the IRP to

seek the assistance of the local administration in discharging his duties

under the Code or the Regulations by making an application to the Adjudicating

Authority for an order seeking such assistance. A sample application is

enclosed as Annexure VII.12.

PRACTICAL ASPECTS OF INSOLVENCY LAW

97

V. FIRST MEETING OF COMMITTEE OF CREDITORS

Cal ing of first meeting of Committee of Creditors is one of the primary and

vital role of IRP on collation and verification of claims. It involves secretarial

and regulatory aspects including preparation and despatch of notice to the

required notices, mode of service of notice, identifying necessary agenda

items, providing video conferencing facility, voting through electronic means

and so on.

First meeting to be held within seven days of the constitution of committee

of creditors.

• Section 22(1) of the Code states that the first meeting of the

Committee of Creditors shal be held within seven days from the

constitution of committee of creditors.

• Regulation 17(2) of CIRP Regulations the interim resolution

professional shal convene the first meeting of Committee of creditors

within 7 days of filing the report of constitution of committee of creditors

with National Company Law Tribunal.

Notice Period and mode of delivery

Regulation 19 (1) of CIRP Regulations states that a meeting of the

committee shal be cal ed by giving not less than seven days’ notice in

writing to every participant, at the address provided to the RP and such

notice may be sent by hand delivery, or by post but in any event, be

served on every participant by electronic means in accordance with

Regulation 20. Regulation 19(2) further states that the committee may

reduce the notice period from seven days to such other period of not less

than twenty four hours, as it deems fit.

To whom notice is to be served

As per section 24(3) of the Code, the RP shal give notice of each meeting

of the committee of creditors to -

(a) members of Committee of Creditors;

(b) members of the suspended Board of Directors or the partners of the

corporate persons, as the case may be;

(c) operational creditors or their representatives if the amount of their

aggregate dues is not less than ten per cent. of the debt.

98

PRACTICAL ASPECTS OF INSOLVENCY LAW

Service of notice by electronic means

Regulation 20 of CIRP Regulations stipulates the fol owing with respect to

service of notice by electronic means:

(1) A notice by electronic means may be sent to the participants through

email as a text or as an attachment to email or as a notification

providing electronic link or Uniform Resource Locator for accessing

such notice.

(2) The subject line in e-mail shal state the name of the corporate debtor,

the place, if any, the time and the date on which the meeting is

scheduled.

(3) If notice is sent in the form of a non-editable attachment to an e-

mail, such attachment shall be in the Portable Document Format or

in a non-editable format together with a ‘link or instructions’ for recipient

for downloading relevant version of the software.

(4) When notice or notifications of availability of notice are sent by an e-

mail, the resolution professional shal ensure that it uses a system

which produces confirmation of the total number of recipients e-mailed

and a record of each recipient to whom the notice has been sent and

copy of such record and any notices of any failed transmissions and

subsequent re-sending shal be retained as ‘ proof of sending’’.

(5) The obligation of the resolution professional shal be satisfied when

he transmits the e-mail and he shal not be held responsible for a

failure in transmission beyond its control.

(6) The notice made available on the electronic link or Uniform Resource

Locator shall be readable, and the recipient should be able to obtain

and retain copies and the resolution professional shall give the

complete Uniform Resource Locator or address of the website and

ful details of how to access the document or information.

(7) If a participant, other than a member of the committee, fails to provide

or update the relevant e-mail address to the resolution professional,

the non-receipt of such notice by such participant of any meeting

shal not invalidate the decisions taken at such meeting.

Contents of the notice for meeting

Regulation 21 of CIRP Regulations stipulates the fol owing conditions with

respect to contents of the Notice.

PRACTICAL ASPECTS OF INSOLVENCY LAW

99

(1) The notice shal inform the participants about

• the venue,

• the time,

• date of the meeting,

• the option available to them to participate through video

conferencing or other audio and visual means, and

• al the necessary information to enable participation through

video conferencing or other audio and visual means.

(2) The notice of the meeting shal provide that a participant may attend

and vote in the meeting either in person or through an authorised

representative: Provided that such participant shall inform the

resolution professional, in advance of the meeting, of the identity of

the authorised representative who wil attend and vote at the meeting

on its behalf.

(3) The notice of the meeting shall-

(a) contain an agenda of the meeting with the fol owing-

(i) a list of the matters to be discussed at the meeting;

(ii) a list of the issues to be voted upon at the meeting; and

(iii) copies of al documents relevant to the matters to be

discussed and the issues to be voted upon at the meeting;

and

(b) state that a vote of the members of the committee shal not be

taken at the meeting unless al members are present at such

meeting.

(4) The notice of the meeting shall-

(a) state the process and manner for voting by electronic means

and the time schedule, including the time period during which

the votes may be cast;

(b) provide the login ID and the details of a facility for generating

password and for keeping security and casting of vote in a

secure manner; and

(c) provide contact details of the person who wil address the queries

connected with the electronic voting.

100

PRACTICAL ASPECTS OF INSOLVENCY LAW

( A specimen format of the Notice of meeting along with suggested agenda

items for the meeting is enclosed as Annexure VII.13)

Quorum at the meeting

As per Regulation 22 of CIRP Regulations:

(1) A meeting of the committee shall be quorate if members of the

committee representing at least thirty three percent of the voting

rights are present either in person or by video conferencing or other

audio and visual means:

Provided that the committee may modify the percentage of voting

rights required for quorum in respect of any future meetings of the

committee.

(2) Where a meeting of the committee could not be held for want of

quorum, unless the committee has previously decided otherwise,

the meeting shal automatically stand adjourned at the same time

and place on the next day.

(3) In the event a meeting of the committee is adjourned in accordance

with sub-regulation (2), the adjourned meeting shal be quorate with

the members of the committee attending the meeting.

Participation through video conferencing

As per Regulation 23 of CIRP Regulations:

(1) The notice convening the meetings of the committee shal provide

the participants an option to attend the meeting through video

conferencing or other audio and visual means in accordance with

this Regulation.

(2) The resolution professional shal make necessary arrangements to

ensure uninterrupted and clear video or audio and visual connection.

(3) The resolution professional shal take due and reasonable care-

(a) to safeguard the integrity of the meeting by ensuring sufficient

security and identification procedures;

(b) to ensure availability of proper video conferencing or other audio

and visual equipment or facilities for providing transmission of

the communications for effective participation of the participants

at the meeting;

(c) to record proceedings and prepare the minutes of the meeting;

PRACTICAL ASPECTS OF INSOLVENCY LAW

101

(d) to store for safekeeping and marking the physical recording(s)

or other electronic recording mechanism as part of the records

of the corporate debtor;

(e) to ensure that no person other than the intended participants

attends or has access to the proceedings of the meeting through

video conferencing or other audio and visual means; and

(f) to ensure that participants attending the meeting through audio

and visual means are able to hear and see, if applicable, the

other participants clearly during the course of the meeting:

Provided that the persons, who are differently abled, may make

request to the resolution professional to al ow a person to accompany

him at the meeting.

(4) Where a meeting is conducted through video conferencing or other

audio and visual means, the scheduled venue of the meeting as set

forth in the notice convening the meeting, which shal be in India,

shal be deemed to be the place of the said meeting and al recordings

of the proceedings at the meeting shall be deemed to be made at

such place.

Conduct of meeting

As per Regulation 24 of CIRP Regulations:

(1) The resolution professional shall act as the chairperson of the meeting

of the committee.

(2) At the commencement of a meeting, the resolution professional shall

take a rol call when every participant attending through video

conferencing or other audio and visual means shal state, for the

record, the fol owing, -

(a) his name;

(b) whether he is attending in the capacity of a member of the

committee or any other participant;

(c) whether he is representing a member or group of members;

(d) the location from where he is participating;

(e) that he has received the agenda and al the relevant material

for the meeting; and

(f) that no one other than him is attending or has access to the

proceedings of the meeting at the location of that person.

102

PRACTICAL ASPECTS OF INSOLVENCY LAW

(3) After the roll call, the resolution professional shall inform the

participants of the names of al persons who are present for the

meeting and confirm if the required quorum is complete.

(4) The resolution professional shal ensure that the required quorum is

present throughout the meeting.

(5) From the commencement of the meeting till its conclusion, no person

other than the participants and any other person whose presence is

required by the resolution professional shal be al owed access to the

place where meeting is held or to the video conferencing or other audio

and visual facility, without the permission of the resolution professional.

(6) The resolution professional shal ensure that minutes are made in

relation to each meeting of the committee and such minutes shall

disclose the particulars of the participants who attended the meeting

in person, through video conferencing, or other audio and visual means.

(7) The resolution professional shall circulate the minutes of the meeting

to all participants by electronic means within forty eight hours of the

said meeting.

V. VOTING BY THE COMMITTEE

Voting by the committee

As per Regulation 25 of CIRP Regulations:

(1) The actions listed in section 28(1) of the Code shal be considered in

meetings of the committee.

(2) Any action other than those listed in section 28(1) of the Code requiring

approval of the committee may be considered in meetings of the

committee.

(3) Where all members are present in a meeting, the resolution

professional shal take a vote of the members of the committee on

any item listed for voting after discussion on the same.

(4) At the conclusion of a vote at the meeting, the resolution professional

shal announce the decision taken on items along with the names of

the members of the committee who voted for or against the decision,

or abstained from voting.

(5) If all members are not present at a meeting, a vote shall not be taken

at such meeting and the resolution professional shal -

PRACTICAL ASPECTS OF INSOLVENCY LAW

103

(a) circulate the minutes of the meeting by electronic means to all

members of the committee within forty eight hours of the

conclusion of the meeting; and

(b) seek a vote on the matters listed for voting in the meeting, by

electronic voting system where the voting shal be kept open

for twenty four hours from the circulation of the minutes.

Voting through electronic means

As per Regulation 26 of CIRP Regulations:

(1) The resolution professional shal provide each member of the committee

the means to exercise its vote by either electronic means or through electronic

voting system in accordance with the provisions of this Regulation.

Explanation- For the purposes of these Regulations -

(a) the expressions ‘ voting by electronic means’ or “electronic voting

system’ means a “secured system” based process of display of

electronic bal ots, recording of votes of the members of the committee

and the number of votes pol ed in favour or against, such that the

voting exercised by way of electronic means gets registered and

counted in an electronic registry in a centralized server with adequate

cyber security;

(b) the expression ‘secured system’’ means computer hardware, software,

and procedure that -

(i) are reasonably secure from unauthorized access and misuse;

(ii) provide a reasonable level of reliability and correct operation;

(iii) are reasonably suited to perform the intended functions; and

(iv) adhere to general y accepted security procedures.

(2) Once a vote on a resolution is cast by a member of the committee, such

member shal not be al owed to change it subsequently.

(3) At the end of the voting period, the voting portal shall forthwith be blocked.

(4) At the conclusion of a vote held under this Regulation, the resolution

professional shall announce and make a written record of the summary of

the decision taken on a relevant agenda item along with the names of the

members of the committee who voted for or against the decision, or abstained

from voting.

(5) The resolution professional shall circulate a copy of the record made

under sub-regulation (4) to al participants by electronic means within twenty

four hours of the conclusion of the voting.

104

PRACTICAL ASPECTS OF INSOLVENCY LAW

ANNEXURE VII.1

SCHEDULE

FORM A

PUBLIC ANNOUNCEMENT

( Under Regulation 6 of the Insolvency and Bankruptcy Board of India

(Insolvency Resolution Process for Corporate Persons) Regulations,

2016)

FOR THE ATTENTION OF THE CREDITORS OF

[ Name of Corporate Debtor]

RELEVANT PARTICULARS

1. NAME OF CORPORATE DEBTOR

2. DATE OF INCORPORATION OF

CORPORATE DEBTOR

3. AUTHORITY

UNDER

WHICH

CORPORATE

DEBTOR

IS

INCORPORATED / REGISTERED

4. CORPORATE IDENTITY NUMBER /

LIMITED LIABILITY IDENTIFICATION

NUMBER OF CORPORATE DEBTOR

5. ADDRESS OF THE REGISTERED

OFFICE AND PRINCIPAL OFFICE (IF

ANY) OF CORPORATE DEBTOR

6. INSOLVENCY COMMENCEMENT DATE

IN RESPECT OF CORPORATE DEBTOR

7. ESTIMATED DATE OF CLOSURE OF

INSOLVENCY RESOLUTION PROCESS

1[8

NAME AND REGISTRATION NUMBER

OF

THE

INSOLVENCY

1. Substituted by Notification No. IBBI/2017-18/GN/REG030, dated 27th March, 2018

(w.e.f. 01-04-2018) for entries 8 & 9.

PRACTICAL ASPECTS OF INSOLVENCY LAW

105

PROFESSIONAL ACTING AS INTERIM

RESOLUTION PROFESSIONAL

9 ADDRESS AND E-EMAIL OF THE

INTERIM

RESOLUTION

PROFESSIONAL, AS REGISTERED

WITH THE BOARD

10 ADDRESS AND E-MAIL TO BE USED

FOR CORRESPONDENCE WITH THE

INTERIM

RESOLUTION

PROFESSIONAL, IF DIFFERENT FROM

THOSE GIVEN AT SL. NO.9.

11 LAST DATE FOR SUBMISSION OF

CLAIMS]

Notice is hereby given that the National Company Law Tribunal has ordered

the commencement of a corporate insolvency resolution process against

the [ name of the corporate debtor] on [ insolvency commencement date].

The creditors of [ name of the corporate debtor], are hereby called upon to

submit a proof of their claims on or before [ insert the date falling fourteen

days from the appointment of the interim resolution professional] to the

interim resolution professional at the address mentioned against item 8.

2[The financial creditors shal submit their proof of claims by electronic

means only. Al other creditors may submit the proof of claims in person, by

post or by electronic means.]

Submission of false or misleading proofs of claim shal attract penalties.

Name and Signature of Interim Resolution Professional :

Date and Place :

2. Substituted by Notification No. IBBI/ 2017-18/ GN/ REG013, dated 16th August, 2017

(w.e.f. 16-8-2017). Prior to its substitution, it stood as under :

“The financial creditors shal submit their proof of claims by electronic means only. The

operational creditors, including workmen and employees, may submit the proof of

claims by in person, by post or electronic means.”

106

PRACTICAL ASPECTS OF INSOLVENCY LAW

ANNEXURE VII.2

SAMPLE FORMAT FOR INTIMATION OF INITIATION OF CIRP TO

REGULATORY AUTHORITIES

[ On the letterhead of the Corporate Debtor]

Date: ___________

To,

(a) National Stock Exchange of India and/or (b) Bombay Stock Exchange

Limited and/or (c) NSDL/CDSL and/or (d) MCX/NCDEX and/or (e) Registrar

of Companies and/or (f) Reserve Bank of India and/or (g) Regional Directors-

Ministry of Corporate Affairs and/or (h) Banks where the account of the

corporate debtor is maintained [as applicable in the particular case]

Dear Sir/Madam,

Subject: Intimation of initiation of Corporate Insolvency Resolution Process

(CIRP) and appointment of Interim Resolution Professional (IRP)

I/We hereby intimate your good office that CIRP has been initiated in respect

of [name of the corporate debtor] under the provisions of Insolvency and

Bankruptcy Code, 2016 (“Code”) by an order of National Company Law

Tribunal (“NCLT”) with effect from [ insolvency commencement date].

As per section 17 of the Code, the powers of the [ Board of Directors] or

[ Partners] of [ name of the corporate debtor] stands suspended and such

powers shal be vested with me, [ name of the Insolvency Resolution

Professional], having IP Registration no. [ IP Registration no. ], appointed as

the Insolvency Resolution Professional.

It may further be noted that in consonance with the stipulations contained

in Section 14 of the Code, a moratorium has been declared vide the

aforesaid order passed by NCLT, whereby, inter alia, the following shall be

prohibited:-

(a) the institution of suits or continuation of pending suits or proceedings

against the corporate debtor including execution of any judgment,

decree or order in any court of law, tribunal, arbitration panel or other

authority;

(b) transferring, encumbering, alienating or disposing of by the corporate

debtor any of its assets or any legal right or beneficial interest therein;

(c) any action to foreclose, recover or enforce any security interest

created by the corporate debtor in respect of its property including

PRACTICAL ASPECTS OF INSOLVENCY LAW

107

any action under the Securitisation and Reconstruction of Financial

Assets and Enforcement of Security Interest Act, 2002;

(d) the recovery of any property by an owner or lessor where such property

is occupied by or in the possession of the corporate debtor.

The instant intimation w.r.t initiation of CIRP and appointment of Interim

Resolution Professional is for your information and record. I/We shal keep

the statutory authorities posted on further developments in this regard.

Kindly acknowledge the receipt of this document.

Thanking you,

Yours faithful y,

[ name of the Insolvency Resolution Professional]

[ IP Registration no. ]

Enclosed :

(a) A copy of the NCLT order dated [date of order]

(b) A copy of the Public Announcement made under Regulation 6 of the

Insolvency and Bankruptcy Board of India (Insolvency Resolution

Process for Corporate Persons) Regulations, 2016.

108

PRACTICAL ASPECTS OF INSOLVENCY LAW

ANNEXURE VII.13

SCHEDULE

FORM B

PROOF OF CLAIM BY OPERATIONAL CREDITORS EXCEPT

WORKMEN AND EMPLOYEES

[ Under regulation 7 of the Insolvency and Bankruptcy Board of India

(Insolvency Resolution Process for Corporate Persons)

Regulations, 2016]

[Date]

To

The Interim Resolution Professional / Resolution Professional

[ Name of the Insolvency Resolution Professional / Resolution

Professional]

[ Address as set out in public announcement]

From

[ Name and address of the operational creditor]

Subject : Submission of proof of claim.

Madam/Sir,

[ Name of the operational creditor], hereby submits this proof of claim in

respect of the corporate insolvency resolution process in the case of [ name

of corporate debtor]. The details for the same are set out below:

PARTICULARS

1. NAME OF OPERATIONAL CREDITOR

2. IDENTIFICATION NUMBER OF OPERATIONAL

CREDITOR (IF AN INCORPORATED BODY

PROVIDE IDENTIFICATION NUMBER AND

PROOF OF INCORPORATION. IF A

PARTNERSHIP OR INDIVIDUAL PROVIDE

IDENTIFICATION RECORDS* OF ALL THE

PARTNERS OR THE INDIVIDUAL)

3. ADDRESS AND EMAIL ADDRESS OF

OPERATIONAL

CREDITOR

FOR

CORRESPONDENCE

PRACTICAL ASPECTS OF INSOLVENCY LAW

109

4. TOTAL AMOUNT OF CLAIM (INCLUDING ANY

INTEREST AS AT THE INSOLVENCY

COMMENCEMENT DATE)

5. DETAILS OF DOCUMENTS BY REFERENCE TO

WHICH THE DEBT CAN BE SUBSTANTIATED.

6. DETAILS OF ANY DISPUTE AS WELL AS THE

RECORD OF PENDENCY OR ORDER OF SUIT

OR ARBITRATION PROCEEDINGS

7. DETAILS OF HOW AND WHEN DEBT INCURRED

8. DETAILS OF ANY MUTUAL CREDIT, MUTUAL

DEBTS, OR OTHER MUTUAL DEALINGS

BETWEEN THE CORPORATE DEBTOR AND

THE CREDITOR WHICH MAY BE SET-OFF

AGAINST THE CLAIM

9. DETAILS OF ANY RETENTION OF TITLE

ARRANGEMENTS IN RESPECT OF GOODS OR

PROPERTIES TO WHICH THE CLAIM REFERS

10. DETAILS OF THE BANK ACCOUNT TO WHICH

THE AMOUNT OF THE CLAIM OR ANY PART

THEREOF CAN BE TRANSFERRED PURSUANT

TO A RESOLUTION PLAN

11. LIST OF DOCUMENTS ATTACHED TO THIS

PROOF OF CLAIM IN ORDER TO PROVE THE

EXISTENCE AND NON-PAYMENT OF CLAIM

DUE TO THE OPERATIONAL CREDITOR

Signature of operational creditor or person authorised to act on his behalf

[ Please enclose the authority if this is being submitted on behalf of an

operational creditor]

Name in BLOCK LETTERS

Position with or in relation to creditor

Address of person signing

*PAN number, passport, Aadhaar Card or the identity card issued by the

Election Commission of India

110

PRACTICAL ASPECTS OF INSOLVENCY LAW

1[DECLARATION

I, [ Name of claimant], currently residing at [ insert address], hereby declare

and state as fol ows :

1. [ Name of corporate debtor], the corporate debtor was, at the

insolvency commencement date, being the…………..day

of………………20….., actually indebted to me in the sum of Rs. [ insert

amount of claim].

2. In respect of my claim of the said sum or any part thereof, I have

relied on the documents specified below: [ Please list the documents

relied on as evidence of claim].

3. The said documents are true, valid and genuine to the best of my

knowledge, information and belief and no material facts have been

concealed therefrom.

4. In respect of the said sum or any part thereof, neither I nor any

person, by my order, to my knowledge or belief, for my use, had or

received any manner of satisfaction or security whatsoever, save

and except the fol owing:

[ Please state details of any mutual credit, mutual debts, or other mutual

dealings between the corporate debtor and the creditor which may be set- off

against the claim].

Date:

Place:

( Signature of the claimant)

VERIFICATION

I, [Name] the claimant hereinabove, do hereby verify that the contents of

this proof of claim are true and correct to my knowledge and belief and no

material fact has been concealed therefrom.

Verified at … on this …… day of ………., 20…

( Signature of the claimant)

[ Note: In the case of company or limited liability partnership, the declaration

and verification shall be made by the director/manager/secretary and in the

case of other entities, an officer authorised for the purpose by the entity]. ]

1. Substituted by Notification No. IBBI/2017-18/GN/REG030, dated 27th March, 2018

(w.e.f. 01-04-2018) for Affidavit and Verification.

PRACTICAL ASPECTS OF INSOLVENCY LAW

111

ANNEXURE VII.4

SCHEDULE

FORM C

PROOF OF CLAIM BY FINANCIAL CREDITORS

[ Under Regulation 8 of the Insolvency and Bankruptcy Board of India

(Insolvency Resolution Process for CorporatePersons) Regulations, 2016]

[ Date]

To

The Interim Resolution Professional / Resolution Professional,

[ Name of the Insolvency Resolution Professional /

Resolution Professional] [ Address as set out in public announcement]

From

[ Name and address of the registered office and principal office of the financial

creditor]

Subject: Submission of proof of claim.

Madam/Sir,

[ Name of the financial creditor], hereby submits this proof of claim in respect

of the corporate insolvency resolution process in the case of [ name of

corporate debtor]. The details for the same are set out below:

PARTICULARS

1. NAME OF FINANCIAL CREDITOR

2. IDENTIFICATION NUMBER OF

FINANCIAL

CREDITOR(IF

AN

INCORPORATED BODY PROVIDE

IDENTIFICATIONNUMBER AND PROOF

OF

INCORPORATION.

IF

A

PARTNERSHIP OR INDIVIDUAL

PROVIDE IDENTIFICATION RECORDS*

OF ALL THE PARTNERS OR THE

INDIVIDUAL)

3. ADDRESS AND EMAIL ADDRESS OF

112

PRACTICAL ASPECTS OF INSOLVENCY LAW

FINANCIALCREDITOR

FOR

CORRESPONDENCE.

4. TOTAL AMOUNT OF CLAIM(INCLUDING

ANY INTEREST AS AT THE

INSOLVENCYCOMMENCEMENT DATE)

5. DETAILS OF DOCUMENTS BY

REFERENCE TO WHICH THE DEBT

CAN BE SUBSTANTIATED

6. DETAILS OF HOW AND WHEN DEBT

INCURRED

7. DETAILS OF ANY MUTUAL CREDIT,

MUTUAL DEBTS, OR OTHER MUTUAL

DEALINGS

BETWEEN

THE

CORPORATE DEBTOR AND THE

CREDITOR WHICH MAY BE SET-OFF

AGAINST THE CLAIM

8. DETAILS OF ANY SECURITY HELD,

THE VALUE OF THE SECURITY, AND

THE DATE IT WAS GIVEN

9. DETAILS OF THE BANK ACCOUNT TO

WHICH THEAMOUNT OF THE CLAIM

OR ANY PART THEREOF CAN BE

TRANSFERRED PURSUANT TO A

RESOLUTION PLAN

10. LIST OF DOCUMENTS ATTACHED TO

THIS PROOF OFCLAIM IN ORDER TO

PROVE THE EXISTENCE AND NON-

PAYMENT OF CLAIM DUE TO THE

[FINANCIAL CREDITOR]1

Signature of financial creditor or person authorised to act on his behalf

[ Please enclose the authority if this is being submitted on behalf of an

operational creditor]

Name in BLOCK LETTERS

Position with or in relation to creditor

Address of person signing

1. Substituted by Notification No. IBBI/ 2017-18/ GN/ REG030, dated 27th March, 2018

(w.e.f. 01-04-2018). Item 10, before substitution, stood as under :

“OPERATIONAL CREDITOR”

PRACTICAL ASPECTS OF INSOLVENCY LAW

113

*PAN number, passport, AADHAAR Card or the identity card issued by the

Election Commission of India.

1[DECLARATION

I, [ Name of claimant], currently residing at [ insert address], do hereby

declare and state as follows :

1. [ Name of corporate debtor], the corporate debtor was, at the

insolvency commencement date, being the……………..day

of…………..20……., actually indebted to me in the sum of Rs. [ insert

amount of claim].

2. In respect of my claim of the said sum or any part thereof, I have

relied on the documents specified below: [ Please list the documents

relied on as evidence of claim].

3. The said documents are true, valid and genuine to the best of my

knowledge, information and belief and no material facts have been

concealed therefrom.

4. In respect of the said sum or any part thereof, neither I, nor any

person, by my order, to my knowledge or belief, for my use, had or

received any manner of satisfaction or security whatsoever, save

and except the fol owing:

[ Please state details of any mutual credit, mutual debts, or other

mutual dealings between the corporate debtor and the creditor which

may be set- off against the claim].

5. I am / I am not a related party in relation to the corporate debtor, as

defined under section 5(24) of the Code.

Date:

Place:

( Signature of the claimant)

VERIFICATION

I, [Name] the claimant hereinabove, do hereby verify that the contents of

this proof of claim are true and correct to my knowledge and belief and no

material fact has been concealed therefrom.

1. Substituted by Notification No. IBBI/ 2017-18/ GN/ REG030, dated 27th March 2018

(w.e.f. 01-04-2018) for Affidavit and Verification.

114

PRACTICAL ASPECTS OF INSOLVENCY LAW

Verified at … on this …… day of ………., 20…

( Signature of claimant)

[ Note: In the case of company or limited liability partnership, the declaration

and verification shall be made by the director/manager/secretary and in the

case of other entities, an officer authorised for the purpose by the entity]. ]

PRACTICAL ASPECTS OF INSOLVENCY LAW

115

ANNEXURE VII.5

SCHEDULE

FORM D

PROOF OF CLAIM BY A WORKMAN OR AN EMPLOYEE

[ Under Regulation 9 of the Insolvency and Bankruptcy (Insolvency

Resolution Process for Corporate Persons) Regulations, 2016]

[Date]

To

The Interim Resolution Professional / Resolution Professional

[ Name of the Insolvency Resolution Professional / Resolution

Professional]

[ Address as set out in public announcement]

From

[ Name and address of the workman / employee]

Subject: Submission of proof of claim.

Madam/Sir,

[ Name of the workman / employee], hereby submits this proof of claim in

respect of the corporate insolvency resolution process in the case of [ name

of corporate debtor]. The details for the same are set out below:

PARTICULARS

1. NAME OF WORKMAN / EMPLOYEE

2. PAN NUMBER, PASSPORT, THE

IDENTITY CARD ISSUED BY THE

ELECTION COMMISSION OF INDIA OR

AADHAAR CARD OF WORKMAN /

EMPLOYEE

3. ADDRESS AND EMAIL ADDRESS (IF

ANY) OF WORKMAN/EMPLOYEE FOR

CORRESPONDENCE

4. TOTAL AMOUNT OF CLAIM (INCLUDING

ANY INTEREST AS AT THE

INSOLVENCY COMMENCEMENT DATE)

116

PRACTICAL ASPECTS OF INSOLVENCY LAW

5. DETAILS OF DOCUMENTS BY

REFERENCE TO WHICH THE CLAIM

CAN BE SUBSTANTIATED.

6. DETAILS OF ANY DISPUTE AS WELL

AS THE RECORD OF PENDENCY OR

ORDER OF SUIT OR ARBITRATION

PROCEEDINGS

7. DETAILS OF HOW AND WHEN CLAIM

AROSE

8. DETAILS OF ANY MUTUAL CREDIT,

MUTUAL DEBTS, OR OTHER MUTUAL

DEALINGS

BETWEEN

THE

CORPORATE DEBTOR AND THE

CREDITOR WHICH MAY BE SET-OFF

AGAINST THE CLAIM

9. DETAILS OF THE BANK ACCOUNT TO

WHICH THE AMOUNT OF THE CLAIM

OR ANY PART THEREOF CAN BE

TRANSFERRED PURSUANT TO A

RESOLUTION PLAN

10. LIST OF DOCUMENTS ATTACHED TO

THIS PROOF OF CLAIM IN ORDER TO

PROVE THE EXISTENCE AND NON-

PAYMENT OF CLAIM DUE TO THE

OPERATIONAL CREDITOR

Signature of workman / employee or person authorised to act on his

behalf

[ Please enclose the authority if this is being submitted on behalf of an

operational creditor]

Name in block letters

Position with or in relation to creditor

Address of person signing

1. Substituted by Notification No. IBBI/ 2017-18/ GN/ REG030, dated 27th March 2018

(w.e.f. 01-04-2018) for Affidavit and Verification.

PRACTICAL ASPECTS OF INSOLVENCY LAW

117

1[DECLARATION

I, [ Name of claimant], currently residing at [ insert address], do hereby declare

and state as fol ows: -

1. [ Name of corporate debtor], the corporate debtor was, at the

insolvency commencement date, being the……………..day

of…………..20……., actually indebted to me in the sum of Rs. [ insert

amount of claim].

2. In respect of my claim of the said sum or any part thereof, I have

relied on the documents specified below: [ Please list the documents

relied on as evidence of claim].

3. The said documents are true, valid and genuine to the best of my

knowledge, information and belief and no material facts have been

concealed therefrom.

4. In respect of the said sum or any part thereof, neither I, nor any

person, by my order, to my knowledge or belief, for my use, had or

received any manner of satisfaction or security whatsoever, save

and except the fol owing:

[ Please state details of any mutual credit, mutual debts, or other mutual

dealings between the corporate debtor and the creditor which may be set- off

against the claim].

Date:

Place:

( Signature of the claimant)

VERIFICATION

I, [Name] the claimant hereinabove, do hereby verify that the contents of

this proof of claim are true and correct to my knowledge and belief and no

material fact has been concealed therefrom.

Verified at … on this …… day of ………., 20…

( Signature of claimant). ]

1. Substituted by Notification No. IBBI/ 2017-18/ GN/ REG030, dated 27th March 2018

(w.e.f. 01-04-2018) for Affidavit and Verification.

118

PRACTICAL ASPECTS OF INSOLVENCY LAW

ANNEXURE VII.6

SCHEDULE

FORM E

PROOF OF CLAIM SUBMITTED BY AUTHORISED REPRESENTATIVE

OF WORKMEN AND EMPLOYEES

( Under Regulation 9 of the Insolvency and Bankruptcy (Insolvency

Resolution Process for Corporate Persons) Regulations, 2016)

[ Date]

To

The Interim Resolution Professional / Resolution Professional,

[ Name of the Insolvency Resolution Professional / Resolution

Professional]

[ Address as set out in public announcement]

From

[ Name and address of the duly authorised representative of the workmen /

employees]

Subject : Submission of proofs of claim.

Madam/Sir,

I, [ name of authorised representative of the workmen / employees], currently

residing at [ address of authorised representative of the workmen / employees],

on behalf of the workmen and employees employed by the above named

corporate debtor and listed in Annexure A, solemnly affirm and say:

1. That the above named corporate debtor was, at the insolvency

commencement date, being the ________ day of ______ 20 ___,

justly truly indebted to the several persons whose names, addresses,

and descriptions appear in the Annexure A below in amounts severally

set against their names in such Annexure A for wages, remuneration

and other amounts due to them respectively as workmen or/ and

employees in the employment of the corporate debtor in respect of

services rendered by them respectively to the corporate debtor during

such periods as are set out against their respective names in the

said Annexure A.

2. That for which said sums or any part thereof, they have not, nor has

PRACTICAL ASPECTS OF INSOLVENCY LAW

119

any of them, had or received any manner of satisfaction or security

whatsoever, save and except the fol owing:

[ Please state details of any mutual credit, mutual debts, or other

mutual dealings between the corporate debtor and the creditor which

may be set-off against the claim. ]

Deponent

ANNEXURE

1. Details of Employees/Workmen

Sl.

Name of

Identification

Total

Period over

No.

Employee/

number (pan

amount

which amount

workman

number,

due (Rs.)

due

passport or

aadhaar card)

1.

2.

3.

4.

2. Particulars of how debt was incurred by the corporate debtor, including

particulars of any dispute as well as the record of pendency of suit or

arbitration proceedings (if any).

3. Particulars of any mutual credit, mutual debts, or other mutual dealings

between the corporate debtor and the creditor which may be set-off

against the claim.

Attachments:

1[Documents relied as evidence as proof of debt and as proofs of non-

payment of debt.]

1. Substituted by Notification No. IBBI/ 2017-18/ GN/ REG030, dated 27th March, 2018

(w.e.f. 01-04-2018).

120

PRACTICAL ASPECTS OF INSOLVENCY LAW

2[DECLARATION

I, [ Name of claimant], currently residing at [ insert address], do hereby

declare and state as fol ows: -

1. [ Name of corporate debtor], the corporate debtor was, at the

insolvency commencement date, being the……………..day

of…………..20……., actually indebted to me in the sum of Rs. [ insert

amount of claim].

2. In respect of my claim of the said sum or any part thereof, I have

relied on the documents specified below: [ Please list the documents

relied on as evidence of claim].

3. The said documents are true, valid and genuine to the best of my

knowledge, information and belief and no material facts have been

concealed therefrom.

4. In respect of the said sum or any part thereof, neither I, nor any

person, by my order, to my knowledge or belief, for my use, had or

received any manner of satisfaction or security whatsoever, save

and except the fol owing:

[ Please state details of any mutual credit, mutual debts, or other mutual

dealings between the corporate debtor and the creditor which may be set- off

against the claim].

Date:

Place:

( Signature of the claimant)

VERIFICATION

I, [Name] the claimant hereinabove, do hereby verify that the contents of

this proof of claim are true and correct to my knowledge and belief and no

material fact has been concealed therefrom.

Verified at … on this …… day of ………., 20…

( Signature of the claimant)]

2. Substituted by Notification No. IBBI/ 2017-18/ GN/ REG030, dated 27th March, 2018

(w.e.f. 01-04-2018) for Affidavit and Verification.

PRACTICAL ASPECTS OF INSOLVENCY LAW

121

ANNEXURE VII.7

1[FORM F]

PROOF OF CLAIM BY CREDITORS (OTHER THAN FINANCIAL

CREDITORS AND OPERATIONAL CREDITORS)

[ Under Regulation 9A of the Insolvency and Bankruptcy Board of India

(Insolvency Resolution Process for Corporate Persons) Regulations,

2016]

Date ………..

To

The Interim Resolution Professional / Resolution Professional

[ Name of the Insolvency Resolution Professional / Resolution Professional]

[ Address as set out in public announcement]

From

[ Name and address of the creditor]

Subject : Submission of proof of claim.

Madam / Sir,

I, [ Name of the creditor], hereby submit the fol owing proof of claim in respect

of the corporate insolvency resolution process in the case of [ name of

corporate debtor]. The details of the same are set out below:

PARTICULARS

1. NAME OF THE CREDITOR

2. IDENTIFICATION NUMBER OF THE CREDITOR

(IF AN INCORPORATED BODY CORPORATE,

PROVIDE IDENTIFICATION NUMBER AND

PROOF OF INCORPORATION. IF A

PARTNERSHIP OR INDIVIDUAL, PROVIDE

IDENTIFICATION RECORD* OF ALL PARTNERS

OR THE INDIVIDUALS)

3. ADDRESS AND EMAIL ADDRESS OF THE

CREDITOR FOR CORRESPONDENCE

4. DESCRIPTION OF THE CLAIM (INCLUDING THE

1. Inserted by Notification No. IBBI/2017-18/ GN/REG013, dated 16th August, 2017 (w.e.f.

16-8-2017).

122

PRACTICAL ASPECTS OF INSOLVENCY LAW

AMOUNT OF THE CLAIM AS AT THE

INSOLVENCY COMMENCEMENT DATE)

5. DETAILS OF DOCUMENTS BY REFERENCE TO

WHICH CLAIM CAN BE SUBSTANTIATED

6. DETAILS OF HOW AND WHEN THE CLAIM

AROSE

7. DETAILS OF ANY MUTUAL CREDIT, MUTUAL

DEBTS, OR OTHER MUTUAL DEALINGS

BETWEEN THE CORPORATE DEBTOR AND THE

CREDITOR WHICH MAY BE SET-OFF AGAINST

THE CLAIM

8. DETAILS OF :

A. ANY SECURITY HELD, THE VALUE OF

SECURITY AND ITS DATE, OR

B. RETENTION TITLE ARRANGEMENT IN

RESPECT OF GOODS OR PROPERTIES TO

WHICH THE CLAIM REFERS

9. DETAILS OF BANK ACCOUNT TO WHICH THE

AMOUNT OF THE CLAIM OR ANY PART

THEREOF CAN BE TRANSFERRED PURSUANT

TO A RESOLUTION PLAN

10. LIST OF DOCUMENTS ATTACHED TO THIS

CLAIM IN ORDER TO PROVE THE EXISTENCE

AND NON-SATISFACTION OF CLAIM DUE TO THE

CREDITOR

Signature of the creditor or any person authorised to act on his behalf

( Please enclose the authority if this is being submitted signed on behalf

of the creditor)

Name in BLOCK LETTERS

Position with or in relation to the creditor

Address of the person signing

* PAN, Passport, AADHAAR or the identity card issued by the Election

Commission of India.

PRACTICAL ASPECTS OF INSOLVENCY LAW

123

1[DECLARATION

I, [ Name of claimant], currently residing at [ insert address], do hereby

declare and state as fol ows: -

1. [ Name of corporate debtor], the corporate debtor was, at the

insolvency commencement date, being the ……….. day of…..20…….,

actual y indebted to me in the sum of Rs. [ insert amount of claim].

2. In respect of my claim of the said sum or any part thereof, I have

relied on the documents specified below: [ Please list the documents

relied on as evidence of claim].

3. The said documents are true, valid and genuine to the best of my

knowledge, information and belief and no material facts have been

concealed therefrom.

4. In respect of the said sum or any part thereof, neither I, nor any

person, by my order, to my knowledge or belief, for my use, had or

received any manner of satisfaction or security whatsoever, save

and except the fol owing:

[ Please state details of any mutual credit, mutual debts, or other mutual

dealings between the corporate debtor and the creditor which may be set- off

against the claim].

Date:

Place:

( Signature of the claimant)

VERIFICATION

I, [Name] the claimant hereinabove, do hereby verify that the contents of

this proof of claim are true and correct to my knowledge and belief and no

material fact has been concealed therefrom.

Verified at … on this …… day of ………., 20…

( Signature of the claimant)

[Note: In the case of company or limited liability partnership, the declaration

and verification shall be made by the director/manager/secretary and in the

case of other entities, an officer authorised for the purpose by the entity]. ]

1. Substituted by Notification No. IBBI/ 2017-18/ GN/ REG030, dated 27th March, 2018

(w.e.f. 01-04-2018) for Affidavit and Verification.

124

PRACTICAL ASPECTS OF INSOLVENCY LAW

ANNEXURE VII.8

SUGGESTED FORMAT OF LIST OF CREDITORS

BEFORE THE HON’BLE NATIONAL COMPANY LAW TRIBUNAL

........................BENCH

Case No........................................

In the Matter of

M/s.........................................Limited (name of Corporate Debtor)

...Financial Creditor/Operational Creditor or the Corporate

Debtor (to fil the name of applicant of CIRP)

List of Creditors under Regulation 13(2)(d) of IBBI (Insolvency Resolution

Process for Corporate Persons) Regulations by ....................................

(name of interim Professional) under the Insolvency and Bankruptcy Code

2016.

1. The application for Corporate Insolvency Resolution Process filed

by .............................. (please fill the name of applicant)

..................... ( Corporate Debtor/Financial Creditor or operational

debtor as the case may be) under .................. (Section 7, section 9

or section 10 as the case may be) of the Insolvency and Bankruptcy

Code read with .................. (please fill Rule 4, Rule 6 or Rule 7 as

the case may be) of Insolvency and Bankruptcy (Application to

Adjudicating Authority) Rules 2016 was admitted by

............................... (please fill the details of NCLT Bench) vide

order no.................. dated ...................... wherein ......................,

the undersigned (Please fil in the name of the Interim Professional)

was appointed as Interim Resolution Professional who is directed to

take necessary actions in accordance with the relevant provisions of

the Insolvency and Bankruptcy Board of India.

2. In Compliance with Regulation 13(2)(d) of Insolvency and Bankruptcy

Board of India (Insolvency Resolution Process for Corporate Persons)

Regulation 2016, a list of creditors along with amount claimed, claims

admitted, security interest in respect of claims is enclosed at Annexure

A in quadruplicate

INTERIM RESOLUTION PROFESSIONAL

In the matter of .............................(Name of the Corporate Debtor)

PRACTICAL ASPECTS OF INSOLVENCY LAW

125

(Name of Interim Professional)

Registration Number

Place

Date

ANNEXURE A

(Name of the debtor)

List of creditors

as on ______________ (date of Insolvency Commencement Date)

S.

Name of

Address

Amount

Amount

Security

No.

Creditors

claimed by

admitted

interest, if

the Creditors

(in Rs.

any, in

(in Rs. Crore)

Crore)

respect of

such claim

(in

Rupees)

1.

2.

3.

TOTAL

Note :

Specific details relating to assignment of debt may be specified.

126

PRACTICAL ASPECTS OF INSOLVENCY LAW

ANNEXURE VII.9

SUGGESTED FORMAT OF REPORT CONSTITUTING

COMMITTEE OF CREDITORS

BEFORE THE HON’BLE NATIONAL COMPANY LAW TRIBUNAL

........................BENCH

Case No........................................

In the Matter of

M/s.........................................Limited (name of Corporate Debtor)

...Financial Creditor/Operational Creditor or

the Corporate Debtor (to fill the name of applicant of CIRP)

List of Creditors under Regulation 13(2)(d) of IBBI (Insolvency Resolution

Process for Corporate Persons) Regulations by .......................(name of

interim Professional) under the Insolvency and Bankruptcy Code 2016

The application for Corporate Insolvency Resolution Process filed by

.......................... (please fill the name of applicant) .....................( Corporate

Debtor/Financial Creditor or operational debtor as the case may be) under

.................. (Section 7, section 9 or section 10 as the case may be) of the

Insolvency and Bankruptcy Code read with ..................(please fil Rule 4,

Rule 6 or Rule 7 as the case may be) of Insolvency and Bankruptcy

(Application to Adjudicating Authority) Rules 2016 was admitted by

...............................(please fil the details of NCLT Bench) vide order

no..................dated......................wherein......................, the undersigned

(Please fill in the name of the Interim Professional) was appointed as Interim

Resolution Professional who is directed to take necessary actions in

accordance with the relevant provisions of the Insolvency and Bankruptcy

Board of India.

In Compliance with Regulation 17(1) of Insolvency and Bankruptcy Board

of India (Insolvency Resolution Process for Corporate Persons) Regulations

2016 a report certifying the Constitution of Creditors is enclosed at Annexure

A in quadruplicate.

INTERIM RESOLUTION PROFESSIONAL

In the matter of .................. (Name of the Corporate Debtor)

(Name of Interim Professional)

Registration Number

Place :

Date :

PRACTICAL ASPECTS OF INSOLVENCY LAW

127

ANNEXURE A

REPORT CERTIFYING THE CONSTITUTION OF

COMMITTEE OF CREDITORS

1. The application for Corporate Insolvency Resolution Process filed

by.............................. (please fill the name of applicant).....................

(Corporate Debtor/Financial Creditor or operational debtor as the case may

be) under .................. (Section 7, section 9 or section 10 as the case may

be) of the Insolvency and Bankruptcy Code read with ..................(please

fill Rule 4, Rule 6 or Rule 7 as the case may be) of Insolvency and

Bankruptcy (Application to Adjudicating Authority) Rules 2016 was admitted

by ...............................(please fill the details of NCLT Bench) vide order

no..................dated......................wherein......................, the undersigned

(Please fill in the name of the Interim Professional) was appointed as Interim

Resolution Professional who is directed to take necessary actions in

accordance with the relevant provisions of the Insolvency and Bankruptcy

Board of India.

2. The registered office of the ...................(corporate Debtor) is situated at

............................... (address of the Registered Office)

3. In Compliance with Section 13, Section 15 and other applicable sections

of the Code read with Regulation 6 of Insolvency and Bankruptcy Board of

India (Insolvency Resolution Process for Corporate Persons) Regulations

2016 (here in after cal ed ‘Regulations’), a public announcement

a. intimating the commencement of Corporate insolvency Resolution

Process against...................... (insert the name of Corporate Debtor)

and

b. calling the creditors to submit the proof of claims was made on

......................(date) in...................... (name of the national and

details of edition...) and on .........................(name of the vernacular

newspaper where the registered office of the corporate Debtor is

situated).

4. The last date of submission of claims was...................(fill in the last date

of submission of claims as stated in the public announcement and should not

be later than 14 days from the date of insolvency commencement date)

5. The public notice sought proof of claims from financial creditors in form C

as stipulated in Regulation 8. Til the last date of claim (i.e..............) the

undersigned interim professional has received claims from the following

financial creditors

128

PRACTICAL ASPECTS OF INSOLVENCY LAW

Sl No. Name of the Creditor

Amount of claim

Details of Security

interest

6. The public notice sought proof of claims from operational creditors in

form B as stipulated in Regulation 7. Till the last date of claim (i.e..............)

the undersigned interim professional has received claims from the following

operational creditors

Sl. No. Name of the Creditor

Amount of claim

7. The public notice sought proof of claims from operational creditors in form

D/Form E as stipulated in Regulation 9. Till the last date of claim (i.e..............)

the undersigned interim professional has received claims from the fol owing

workman /employee/Authorised representative of workmen and employees

Sl. No. Name of the Creditor

Amount of claim

8. The undersigned interim Resolution professional has duly verified the

claims of the aforesaid creditors.

9. The list of creditors was filed with Hon’ble National Company Law Tribunal

(Bench) in compliance with Regulation 13 (2)(d)

10. In compliance with Section 21(1) of the Code the undersigned interim

resolution professional certifies the constitution of the Committee of Creditors

which consists of the fol owing creditors.

a ........................

b ........................

c ........................

PRACTICAL ASPECTS OF INSOLVENCY LAW

129

ANNEXURE VII.10

Intimation to the Employees of the Corporate Debtor

Date: ___________

To,

The employees of [ name of the corporate debtor]

Dear Sir/Madam,

Subject: Intimation to the Employee(s)/ Officer(s)/ Manager(s) of

initiation of Corporate Insolvency Resolution Process (CIRP) against

[name of the corporate debtor] and appointment of Interim Resolution

Professional

I/We hereby intimate you that CIRP has been initiated in respect of [ name

of the corporate debtor] under the provisions of Insolvency and Bankruptcy

Code, 2016 (“Code”) by an order of National Company Law Tribunal (“NCLT”)

with effect from [ insolvency commencement date].

As per section 17 of the Code, the powers of the [ Board of Directors] or

[ Partners] of [ name of the corporate debtor] stands suspended, and such

powers shall be vested with me/us, [ name of the Interim Resolution

Professional], having IP Registration no. [ IP Registration no. ], appointed as

the Insolvency Resolution Professional.

It may further be noted that as per the stipulations contained in Section 17

of the Code, once the Interim resolution Professional has been appointed:

(a) The management of the affairs of the corporate debtor is taken over

by him/her;

(b) The powers of the Board of Directors or the partners of the Corporate

Debtor, as the case may be, are suspended and be exercised by the

IRP;

(c) The officers and managers of the corporate debtor shall report to the

IRP and co-operate with him/her in providing access to documents

and records of the corporate debtor;

(d) The financial institutions maintaining accounts of the corporate debtor

shal furnish al information relating to the corporate debtor available

with them to the IRP.

In accordance with the above mentioned provision you are advised to co-

operate with me/us in providing access to documents and records pertaining

130

PRACTICAL ASPECTS OF INSOLVENCY LAW

to [ corporate debtor] as and when requisitioned by me/us for the smooth

conduct of the corporate insolvency resolution process.

The instant intimation w.r.t initiation of CIRP and appointment of Interim

Resolution Professional is for your information.

Thanking you,

Yours faithful y,

[ name of the Insolvency Resolution Professional]

[ IP Registration no.]

Enclosed:

(a) A copy of the NCLT order dated [date of the order]

(b) A copy of the Public Announcement made under Regulation 6 of the

Insolvency and Bankruptcy Board of India (Insolvency Resolution

Process for Corporate Persons) Regulations, 2016.

PRACTICAL ASPECTS OF INSOLVENCY LAW

131

ANNEXURE VII.11

Application to the Adjudicating Authority for non-cooperation by

Personnel

Before the National Company Law Tribunal

Bench

IN THE MATTER OF:

[Name of the Financial Creditor/Operational Creditor/Corporate Applicant]

.....Petitioner

AND

[Name of the Interim Resolution Professional]

.....Applicant

VERSUS

[Name of the Corporate Debtor]

.....Respondent

APPLICATION U/S 19(2) AND 19(3) OF THE INSOLVENCY AND

BANKRUPTCY CODE, 2016 (“CODE”) FOR ISSUANCE OF NECESSARY

DIRECTIONS TO THE PERSONNEL OF THE RESPONDENT TO COMPLY

WITH THE INSTRUCTIONS OF THE APPLICANT AND/OR TO PROVIDE

THE REQUISITE INFORMATION TO THE APPLICANT IN DISCHARGING

HIS DUTIES AS AN INTERIM RESOLUTION PROFESSIONAL UNDER

THE CODE

Most Respectfully Showeth:

1. That the instant petition has been filed by [ name of the Financial Creditor/

Operational Creditor/Corporate Applicant] hereinafter referred to as the

[“Financial Creditor/Operational Creditor/Corporate Applicant”, as the case

may be] u/s [7 of the Code read with rule 4 of the Insolvency and Bankruptcy

Board of India (Application to Adjudicating Authority) Rules, 2016 / 8 of the

Code read with rule 6 of the Insolvency and Bankruptcy Board of India

(Application to Adjudicating Authority) Rules, 2016 / 9 of the Code read with

rule 7 of the Insolvency and Bankruptcy Board of India (Application to

Adjudicating Authority) Rules, 2016, as the case may be] for initiating

Corporate Insolvency resolution Process (“CIRP”) against [ name of the

Corporate Debtor] hereinafter referred to as the “Corporate Debtor”, claiming

132

PRACTICAL ASPECTS OF INSOLVENCY LAW

the dues amounting to Rs. [ amount of financial debt/operational debt, as

the case may be]/- owed to [ Name of the Financial Creditor/ Operational

Creditor/Corporate Applicant, as the case may be] by the [ Name of the

Corporate Debtor].

2. That the aforesaid petition was heard on [ date of hearing] by the Hon’ble

National Company Law Tribunal, [ name of the relevant Bench] Bench

(hereinafter referred to as the “Hon’ble Bench”) and upon the said hearing,

the Hon’ble Bench was pleased to pass an order on [ date of order] appointing

the Applicant as the Interim Resolution professional to carry out the functions

mentioned under the Code. A copy of the order dated [date of order] is

enclosed herewith as Annexure-1.

3. That pursuant to the receipt of the aforesaid order on [ date of receipt of

order], the Applicant made a Public Announcement in accordance with

Section 15 of the Code read with Regulation 6 of Chapter III of the Insolvency

and Bankruptcy Board of India (Insolvency Resolution Process for Corporate

Persons) Regulations, 2016 in the newspapers viz. [ name of the newspapers]

and also on the website of the Corporate Debtor and the Insolvency and

Bankruptcy Board of India. A copy of the aforesaid Public Announcement is

enclosed herewith as Annexure-2.

4. That the Applicant also intimated the Employee(s)/ Officer(s)/ Manager(s)

of the [ name of the corporate debtor] about the initiation of Corporate

Insolvency Resolution Process (CIRP) against [ name of the corporate debtor]

and appointment of the Applicant as the Interim Resolution Professional.

The copy of the aforesaid intimation is enclosed herewith as Annexure-3.

5. That the Applicant submits that the Personnel of the [ name of the corporate

debtor] are not extending assistance and co-operation to the Applicant which

is imperative for the Applicant to manage the affairs of the Corporate Debtor.

The Applicant further submits that under the circumstances the Applicant

is not able to carry out his duties and responsibilities as Interim Insolvency

Professional as mandated under the law.

6. The Applicant further submits that the present application is made bonafide

and in the ends of justice.

PRAYER

In the aforesaid facts and circumstances, it is most humbly and respectfully

prayed that this Hon’ble Bench may graciously be pleased to:

(a) issue necessary directions to the Personnel of the Corporate Debtor

[name of the corporate debtor] to extend assistance and co-operation

PRACTICAL ASPECTS OF INSOLVENCY LAW

133

to the Applicant which is imperative for the Applicant to manage the

affairs of the Corporate Debtor and to carry out his duties and

responsibilities as Interim Insolvency Professional as mandated under

the law;

(b) pass such other order/directions as this Hon’ble Bench may deem fit

and proper in the facts and circumstances of the case.

AND FOR THIS ACT OF KINDNESS, THE APPLICANT AS IN DUTY

BOUND, SHALL EVER PRAY.

APPLICANT

[ Name of the Interim Resolution Professional]

[ Address of the Applicant]

Place:

Date:

134

PRACTICAL ASPECTS OF INSOLVENCY LAW

ANNEXURE VII.12

APPLICATION FOR TO THE ADJUDICATING AUTHORITY FOR

SEEKING ASSISTANCE OF LOCAL DISTRICT ADMINISTRATION

Before the National Company Law Tribunal

Bench

IN THE MATTER OF:

[ Name of the Financial Creditor/Operational Creditor/Corporate Applicant]

.....Petitioner

AND

[ Name of the Interim Resolution Professional]

.....Applicant

VERSUS

[ Name of the Corporate Debtor]

.....Respondent

APPLICATION UNDER REGULATION 30 OF THE INSOLVENCY AND

BANKRUPTCY BOARD OF INDIA (INSOLVENCY RESOLUTION

PROCESS FOR CORPORATE PERSONS) REGULATIONS, 2016 FOR

ISSUANCE OF NECESSARY DIRECTIONS TO THE LOCAL DISTRICT

ADMINISTRATION TO EXTEND ASSISTANCE TO THE APPLICANT IN

DISCHARGING HIS DUTIES AS AN INTERIM RESOLUTION

PROFESSIONAL UNDER THE INSOLVENCY AND BANKRUPTCY CODE,

2016 (“CODE”)

Most Respectfully Showeth:

1. That the instant petition has been filed by [ name of the Financial Creditor/

Operational Creditor/Corporate Applicant] hereinafter referred to as the

[“Financial Creditor/Operational Creditor/Corporate Applicant”, as the case

may be] u/s [7 of the Code read with rule 4 of the Insolvency and Bankruptcy

Board of India (Application to Adjudicating Authority) Rules, 2016 / 8 of the

Code read with rule 6 of the Insolvency and Bankruptcy Board of India

(Application to Adjudicating Authority) Rules, 2016 / 9 of the Code read with

rule 7 of the Insolvency and Bankruptcy Board of India (Application to

Adjudicating Authority) Rules, 2016, as the case may be] for initiating

Corporate Insolvency resolution Process (“CIRP”) against [name of the

PRACTICAL ASPECTS OF INSOLVENCY LAW

135

Corporate Debtor] hereinafter referred to as the “Corporate Debtor”, claiming

the dues amounting to Rs. [ amount of financial debt/operational debt, as

the case may be]/- owed to [ Name of the Financial Creditor/ Operational

Creditor/Corporate Applicant, as the case may be] by the [Name of the

Corporate Debtor].

2. That the aforesaid petition was heard on [date of hearing] by the Hon’ble

National Company Law Tribunal, [ name of the relevant Bench] Bench

( hereinafter referred to as the “Hon’ble Bench” ) and upon the said hearing,

the Hon’ble Bench was pleased to pass an order on [ date of order] appointing

the Applicant as the Interim Resolution professional to carry out the functions

mentioned under the Code. A copy of the order dated [date of order] is

enclosed herewith as Annexure-1.

3. That pursuant to the receipt of the aforesaid order on [ date of receipt of

order], the Applicant made a Public Announcement in accordance with

Section 15 of the Code read with Regulation 6 of Chapter III of the Insolvency

and Bankruptcy Board of India (Insolvency Resolution Process for Corporate

Persons) Regulations, 2016 in the newspapers viz. [ name of the newspapers]

and also on the website of the Corporate Debtor and the Insolvency and

Bankruptcy Board of India. A copy of the aforesaid Public Announcement is

enclosed herewith as Annexure-2.

4. That the Applicant submits that the Local District Administration is not

extending assistance and co-operation to the Applicant in discharging his

duties as an Interim Resolution Professional under the Code. The Applicant

further submits that under the circumstances the Applicant is not able to

carry out his duties and responsibilities as Interim Insolvency Professional

as mandated under the law.

5. The Applicant further submits that the present application is made bonafide

and in the ends of justice.

PRAYER

In the aforesaid facts and circumstances, it is most humbly and respectfully

prayed that this Hon’ble Bench may graciously be pleased to:

(a) issue necessary directions to the local district administration to extend

assistance and co-operation to the Applicant which is imperative for

the Applicant to carry out its duties and responsibilities as Interim

Insolvency Professional as mandated under the law;

(b) pass such other order/directions as this Hon’ble Bench may deem fit

and proper in the facts and circumstances of the case.

136

PRACTICAL ASPECTS OF INSOLVENCY LAW

AND FOR THIS ACT OF KINDNESS, THE APPLICANT AS IN DUTY

BOUND, SHALL EVER PRAY.

APPLICANT

[ Name of the Interim Resolution Professional]

[ Address of the Applicant]

Place:

Date:

PRACTICAL ASPECTS OF INSOLVENCY LAW

137

ANNEXURE VII.13

SPECIMEN NOTICE OF FIRST MEETING OF THE COMMITTEE OF

CREDITORS Notice

Notice is hereby given that the 1st Meeting of the Committee of Creditors of

(Name of the Corporate Debtor) will be held on at at to transact the following

business:

1. Chairman (Interim Professional) to preside over the Meeting.

2. To ascertain quorum for the meeting.

3. To consider and take note of the list of Creditors.

4. To discuss and deliberate on the statement of claim submitted by

interim Resolution Professional.

5. To discuss and deliberate on the Information Memorandum.

6. To ratify the expenses incurred by the interim professional.

7. To ratify the expenses incurred by Applicant of CIRP.

8. To ratify the remuneration paid to interim professional.

9. To appoint Resolution Professional (either interim professional or other

resolution professional as the case may be).

10. To approve any following agenda (as applicable)

(a) raise any interim finance in excess of the amount as may be

decided by the committee of creditors in their meeting;

(b) create any security interest over the assets of the corporate

debtor;

(c) change the capital structure of the corporate debtor, including

by way of issuance of additional securities, creating a new

class of securities or buying back or redemption of issued

securities in case the corporate debtor is a company;

(d) record any change in the ownership interest of the corporate

debtor;

(e) give instructions to financial institutions maintaining accounts

of the corporate debtor for a debit transaction from any such

accounts in excess of the amount as may be decided by the

committee of creditors in their meeting;

138

PRACTICAL ASPECTS OF INSOLVENCY LAW

(f) undertake any related party transaction;

(g) amend any constitutional documents of the corporate debtor;

(h) delegate its authority to any other person;

(i) dispose of or permit the disposal of shares of any shareholder

of the corporate debtor or their nominees to third parties;

(j) make any change in the management of the corporate debtor

or its subsidiary;

(k) transfer rights or financial debts or operational debts under

material contracts otherwise than in the ordinary course of

business;

(l) make changes in the appointment or terms of contract of such

personnel as specified by the committee of creditors; or

(m) make changes in the appointment or terms of contract of

statutory auditors or internal auditors of the corporate debtor.

11. To discuss on the Information Memorandum.

12. To discuss such other matters with the permission of majority of

Members of the Committee of Creditors as may be deemed necessary

for the smooth functioning of the corporate insolvency resolution

process.

A statement of claim as on ........................... (please insert insolvency

commencement date) (the day of NCLT order) is enclosed for your reference.

Notes:

1. A Member of the Committee of Creditors entitled to attend and vote

at the Meeting is entitled to appoint its/his authorised representative

to attend and vote instead of itself / himself. Such member shall

inform IRP ........................... hours in advance of the meeting along

with identity of authorized representative and such authorized

representative shal carry is valid identity card.

2. The Members of suspended Board of Directors of Corporate Debtor

and operational creditors or their representatives if any are not entitled

to vote at the meeting.

3. The vote of members of the Committee shal not be taken at the

meeting unless all members are present at the meeting and are ready

for voting

PRACTICAL ASPECTS OF INSOLVENCY LAW

139

4. If al the members are not present at a meeting, a vote shall not be

taken at such meeting and the resolution professional shal circulate

the minutes of the meeting by electronic means to al members of

the committee within forty eight hours of the conclusion of the meeting;

and seek a vote on the matters listed for voting in the meeting, by

electronic voting system where the voting shall be kept open for

twenty four hours from the circulation of minutes.

5. Members of the Committee of Creditors can participate through video

conferencing and audio visual means. If so, the same may be

intimated to the interim resolution professional hours before the

meeting at the ........................... (e-mail address).

The details of electronic voting system is as under (please provide the time

duration, log in and other e-voting process).

140

PRACTICAL ASPECTS OF INSOLVENCY LAW

CHAPTER - VIII

INFORMATION MEMORANDUM

When an application for initiation of Corporate Insolvency Resolution Process

(‘CIRP’) is admitted by the NCLT and an IRP is appointed, his role starts

with issue of Public Announcement inviting claims. The major functions of

IRP include, amongst others :

(1) Col ection and verification of claims

(2) Appointment of Registered Valuer

(3) Preparation of Information Memorandum

(4) Conducting first meeting of Committee of Creditors

‘Information Memorandum’ is the basis for preparing the resolution plan and

consists of information including list of creditors and the amount of claims

admitted, debt due from related parties, number of workers and employees

and liabilities due to them, latest audited financial statements and audited

financial statements for the last two years, provisional financial statements

upto a date which is not earlier than fourteen days from the date of

application, liquidation value etc.

The objectives of Information Memorandum

Excerpts from the Report of Bankruptcy Legislative Reforms Committee in

the context of Information Memorandum in para 5.3.2.

“2. The information collected on the entity is used to compile an information

memorandum, which is signed off by the debtor and the creditors

committee, based on which solutions can be offered to resolve the

insolvency. In order for the market to provide solutions to keep the entity

as a going concern, the information memorandum must be made available

to potential financiers within a reasonable period of time from her

appointment to the IRP. If the information is not comprehensive, the RP

140

PRACTICAL ASPECTS OF INSOLVENCY LAW

141

must put out the information memorandum with a degree of completeness

of the information that she is wil ing to certify.

For example, as part of the information memorandum, the RP must clearly

state the expected shortfal in the coverage of the liabilities and assets

of the entity presented in the information memorandum. Here, the asset

and liabilities include those that the RP can ascertain and verify from the

accounts of the entity, the records in the information system, the liabilities

submitted at the start of the IRP, or any other source as may be specified

by the Regulator.

3. Once the information memorandum is created, the RP must make

sure that it is readily available to whoever is interested to bid a solution

for the IRP. She has to inform the market

(a) that she is the RP in charge of this case, (b) about a transparent

mechanism through which interested third parties can access the

information memorandum, (c) about the time frame within which possible

solutions must be presented and (d) with a channel through which solutions

can be submitted for evaluation.

The Code does not specify details of the manner or the mechanism in

which this should be done but rather emphasises that it must be done in

a time-bound manner and that it is accessible to al possible interest

parties.”

Information Memorandum - Definition

Section 5(10) “information memorandum” means a memorandum prepared

by resolution professional under sub-section (1) of section 29;

Resolution Professional to prepare Information Memorandum (Section

29)

Information Memorandum to contain certain mandatory information

(1) RP shall prepare an information memorandum in such form and manner

containing such relevant information as may be specified by the Board for

formulating a resolution plan. The mandatory contents of information

memorandum are stated in Regulation 36 of CIRP Regulations.

Sub-regulation (1) of Regulation 36 of the CIRP Regulations has been

substituted by CIRP Amendment Regulations, 2018 and the same reads

that:

142

PRACTICAL ASPECTS OF INSOLVENCY LAW

“(1) Subject to sub-regulation (4), the resolution professional shal submit

the information memorandum in electronic form to (a) each member of

the committee within two weeks of his appointment as resolution

professional; and (b) to each prospective resolution applicant latest by

the date of invitation of resolution plan under clause (h) of sub-section (2)

of section 25 of the Code.”

It is also mandated now that the information memorandum shal contain,

inter alia, description of the assets and liabilities of corporate debtor. In the

CIRP regulations, for clause (a) of sub-regulation (2) of regulation 36, the

fol owing clause has been substituted, namely: -

“(a) assets and liabilities with such description, as on the insolvency

commencement date, as are general y necessary for ascertaining

their values.

Explanation: “Description” includes the details such as date of

acquisition, cost of acquisition, remaining useful life, identification

number, depreciation charged, book value, and any other relevant

details.”

Sub-regulation (4) of Regulation 36 of the CIRP Regulations has been

substituted as under:

“(4) The resolution professional shall share the information memorandum

after receiving an undertaking from a member of the committee or a

prospective resolution applicant to the effect that such member or

resolution applicant shal maintain confidentiality of the information and

shal not use such information to cause an undue gain or undue loss to

itself or any other person and comply with the requirements under sub-

section (2) of section 29.”

Resolution Applicant is to be provided with information subject to

confidentiality agreement

(2) RP shall provide to the resolution applicant access to all relevant

information in physical and electronic form, provided such resolution applicant

undertakes –

(a) to comply with provisions of law for the time being in force relating to

confidentiality and insider trading;

(b) to protect any intel ectual property of the corporate debtor it may

have access to; and

PRACTICAL ASPECTS OF INSOLVENCY LAW

143

(c) not to share relevant information with third parties unless clauses (a)

and (b) of this sub-section are complied with.

Explanation.– For the purposes of this section, “relevant information” means

the information required by the resolution applicant to make the resolution

plan for the corporate debtor, which shall include the financial position of the

corporate debtor, all information related to disputes by or against the corporate

debtor and any other matter pertaining to the corporate debtor as may be

specified.

Resolution applicant to submit Resolution Plan on the basis of information

Memorandum

30. (1) A resolution applicant may submit a resolution plan to the resolution

professional prepared on the basis of the information memorandum.

Seciton 5(25) “resolution applicant” 1 means a person who, individually or

jointly with any other person, submits a resolution plan to the resolution

professional pursuant to the invitation made under clause (h) of sub-

section (2) of Section 25;

Section 5(26) “resolution plan” means a plan proposed by resolution

applicant2 for insolvency resolution of the corporate debtor as a going

concern in accordance with Part II of the Code.

Contents of Information Memorandum (Regulation 36 of CIRP

Regulations)

(1) Subject to sub-regulation (4), the resolution professional shall submit

the information memorandum in electronic form to-

(a) each member of the committee within two weeks of his appointment

as resolution professional; and

(b) to each prospective resolution applicant latest by the date of invitation

of resolution plan under clause (h) of sub-section (2) of section 25 of

the Code.3

1. Substituted by section 3(a) of the Insolvency and Bankruptcy Code (Amendment) Act,

2017 (w.e.f. 23-11-2017) for the definition of ‘resolution applicant’ under section 5(25) of the

Code.

2. Substituted by section 3(a) of the Insolvency and Bankruptcy Code (Amendment) Act,

2017 (w.e.f. 23-11-2017) for the words “any person”.

3. Substituted vide Insolvency and Bankruptcy Board of India (Insolvency Resolution

Process for Corporate Persons) (Amendment) Regulations, 2018

144

PRACTICAL ASPECTS OF INSOLVENCY LAW

(2) The information memorandum shal contain the fol owing details of the

corporate debtor-

(a) assets and liabilities with such description, as on the insolvency

commencement date, as are general y necessary for ascertaining

their values.

Explanation: “Description” includes the details such as date of

acquisition, cost of acquisition, remaining useful life, identification

number, depreciation charged, book value, and any other relevant

details.4

(b) the latest annual financial statements;

(c) audited financial statements of the corporate debtor for the last two

financial years and provisional financial statements for the current

financial year made up to a date not earlier than fourteen days from

the date of the application;

(d) a list of creditors containing the names of creditors, the amounts

claimed by them, the amount of their claims admitted and the security

interest, if any, in respect of such claims;

(e) particulars of a debt due from or to the corporate debtor with respect

to related parties;

(f) details of guarantees that have been given in relation to the debts of

the corporate debtor by other persons, specifying which of the

guarantors is a related party;

(g) the names and addresses of the members or partners holding at

least one per cent stake in the corporate debtor along with the size of

stake;

(h) details of all material litigation and an ongoing investigation or

proceeding initiated by Government and statutory authorities;

(i) the number of workers and employees and liabilities of the corporate

debtor towards them; and

4. Substituted vide Insolvency and Bankruptcy Board of India (Insolvency Resolution

Process for Corporate Persons) (Amendment) Regulations, 2018

PRACTICAL ASPECTS OF INSOLVENCY LAW

145

(j) other information, which the resolution professional deems relevant

to the committee.5

(3) A member of the committee may request the resolution professional for

further information of the nature described in this Regulation and the

resolution professional shal provide such information to all members within

reasonable time if such information has a bearing on the resolution plan.

(4) The resolution professional shal share the information memorandum

after receiving an undertaking from a member of the committee or a

prospective resolution applicant to the effect that such member or resolution

applicant shal maintain confidentiality of the information and shal not use

such information to cause an undue gain or undue loss to itself or any other

person and comply with the requirements under sub-section (2) of section

29.6

Sources of information for preparation of information memorandum

1. Publicly available sources such as Ministry of Corporate Affairs, Stock

exchanges where the securities of the Company if any listed.

2. Companies Financial Statements and internal Sources

5. Information regarding the liquidation value and the liquidation value due to operation

creditors have been omitted by the Insolvency and Bankruptcy Board of India (Insolvency

Resolution Process for Corporate Persons) (Fourth Amendment) Regulations, 2017,

Regulation 4 (w.e.f. 31-12-2017). Prior to its omission, it read as fol ows:

“(j) the liquidation value;

(k) the liquidation value due to operational creditors;

6. Substituted vide Insolvency and Bankruptcy Board of India (Insolvency Resolution

Process for Corporate Persons) (Amendment) Regulations, 2018

146

PRACTICAL ASPECTS OF INSOLVENCY LAW

MODEL INFORMATION MEMORANDUM

Specimen application form for receiving Information Memorandum

(Name and address of the Corporate Debtor)

(Phone No. of the Corporate Debtor)

(Contact details of the resolution professional)

1. Name of the person seeking information memorandum :

................................................................................................

....................................

2. Status of the person:

Individual

Company

Partnership firms/LLP

Any other entity

3. Correspondence address of the person seeking information

memorandum:

................................................................................................

....................................

................................................................................................

....................................

4. PAN of the person seeking information memorandum (please enclose

a copy):

................................................................................................

....................................

5. E-mail ID of the person seeking information memorandum:

................................................................................................

....................................

6. Phone No.:

................................................................................................

....................................

7. Relationship of the person with the Corporate Debtor, if any:

................................................................................................

....................................

PRACTICAL ASPECTS OF INSOLVENCY LAW

147

UNDERTAKING

I/We ............................................ , resident of/having principal place of

business at/having registered office at ................................................

........................................................................................ hereby

solemnly declare that the information provided herein is true and correct to

the best of my knowledge. I/we have read and understood all the terms and

conditions relating to information memorandum under the provisions of the

Insolvency and Bankruptcy Code, 2016 read with regulations there under

and hereby express our interest in the receiving the information memorandum

for the said Company.

I/We also hereby solemnly affirm, declare and undertake that I/we shall

maintain the confidentiality of the information of the Corporate Debtor and

shall not use such information to cause an undue gain or undue loss to itself

or any other person and comply with the requirements under Section 29(2)

of the Insolvency and Bankruptcy Code, 2016, viz.,

(a) to comply with provisions of law for the time being in force relating to

confidentiality and insider trading;

(b) to protect any intel ectual property of the corporate debtor it may

have access to; and

(c) not to share relevant information with third parties unless clauses (a)

to (b) of this sub-section are complied with.

............................................

(Signature of the person)

(Name & address of the person)

Date:

Place:

148

PRACTICAL ASPECTS OF INSOLVENCY LAW

MODEL INFORMATION MEMORANDUM

[ Pursuant to Section 29 of Insolvency and Bankruptcy Code, 2016 read

with Regulation 36(1) of the Insolvency and Bankruptcy Board of India

(Insolvency Resolution Process for Corporate Persons)

Regulations, 2016]

IN THE MATTER OF............................................ (NAME OF THE

CORPORATE DEBTOR)

Vide Case No:

...........................................................................................................

(ADDRESS OF THE CORPORATE DEBTOR)

(PHONE NO. OF THE CORPORATE DEBTOR)

(CONTACT DETAILS OF THE INSOLVENCY RESOLUTION

PROFESSIONAL/RESOLUTION PROFESSIONAL)

INDEX

S.

Particulars

Annexure

No.

No.

1.

About the Corporate Debtor

A

2.

About the Promoters & Board of Directors

B

3.

Shareholding Pattern

C

4.

Assets and liabilities Statement as on

D

................ (insolvency commencement date)

5.

Latest annual financial statements

E

6.

Audited financial statements of the Corporate

F

Debtor for the last two financial years &

provisional financial statements for the current

financial year made up to ................... (date

not earlier than fourteen days from the date of

application)

7.

List of creditors

G

8.

Particulars of debt due from or due to corporate

H

debtor with respect to related parties

9.

Details of guarantees that have been given in

I

PRACTICAL ASPECTS OF INSOLVENCY LAW

149

relation to debts of the corporate debtor by

other persons

10.

Names and addresses of members or partners

J

holding at least one per cent stake in the

corporate debtor

11.

Details of al material litigations and ongoing

K

investigations or proceedings initiated by

Government and statutory authorities

12.

Details of number of workers and employees

L

and liabilities of the corporate debtor towards

them

13.

Copy of the Order passed by National Company

M

Law Tribunal (NCLT) admitting the application of

the Corporate Debtor

14.

Any other information relevant to the

N

Committee of Creditors

IN THE MATTER OF ....................................................... (NAME OF

THE CORPORATE DEBTOR)

(ADDRESS OF THE CORPORATE DEBTOR)

(PHONE NO. OF THE CORPORATE DEBTOR)

(CONTACT DETAILS OF THE INSOLVENCY RESOLUTION

PROFESSIONAL/RESOLUTION PROFESSIONAL)

ANNEXURE–A

1. About the Corporate Debtor

1.1 Incorporation details

1.2 Detail about the business and activities of the corporate debtor

1.3 Detail of its past performance and recent developments

1.4 Detail of any change in the status of the company (e.g.- from private

to public, merger, demerger etc.)

1.5 Details of its products/services and the aspects of competitiveness

therein

1.6 Details of al offices, branches and factories along with the names,

150

PRACTICAL ASPECTS OF INSOLVENCY LAW

addresses and contact numbers of Directors, Principal Officers and

Key Management Personnel of the Organisation

1.7 Detail of its key suppliers

1.8 Detail of its key customers

1.9 Details of its marketing strategy

1.10 Comparison of information col ected from the officers of the Corporate

Debtor with the information col ected from public sources. Also state

the reasons of deviation, if any.

ANNEXURE–B

2. About the Promoters & Board of Directors

2.1 Details of promoters (specify detail of each promoter on an individual

basis)

2.2 Details of directors/partners

S.

Name & address

Designation

Director

Date of

No. of the Directors/

Identification appointment

Designated

Number

Partners/

(DIN)

Partners

1.

2.

2.3 Details of Key Managerial Personnel (please specify details of each

KMP on an individual basis)

2.4 Details of transfer of shares from/to the promoters or KMPs (during

the current financial year and last two financial years)

ANNEXURE–C

3. Shareholding Pattern

3.1 Shareholding pattern as on 31st March, 20_____

S.

Name of

Type of

Number

Amount

Percentage

No. the

shares

of shares of share

of

shareholder

held

held

capital

share-

held (Rs.) holding

PRACTICAL ASPECTS OF INSOLVENCY LAW

151

3.2 Details of companies or firms in which the Corporate Debtor is a

member

S.

Name of the

No. of shares

Percentage

No.

company/firm

of shareholding

ANNEXURE - D

4. Assets and Liabilities Statement as on .................. (insolvency

commencement date)

LIABILITIES

Notes

As on

__________

(Rs.)

Shareholders’ funds:

(a) Share Capital

(b) Reserve and surplus

(c) Money received against warrants

Share application money pending allotment

Non-current liabilities:

(a) Long term borrowings

(b) Deferred tax liabilities (net)

(c) Other Long term liabilities

(d) Long-term provisions

Current Liabilities:

(a) Short-term borrowings

(b) Trade payables

(c) Other current liabilities

(d) Short-term provisions

TOTAL

152

PRACTICAL ASPECTS OF INSOLVENCY LAW

ASSETS

Notes

As on

__________

(Rs.)

Non-current assets:

(a) Fixed assets:

(i) Tangible assets

(ii) Intangible assets

(iii) Capital work-in-progress

(iv) Intangible assets under development

(b) Non-current investments

(c) Deferred tax assets (net)

(d) Long term loans and advances

(e) Other non-current assets

Current Assets:

(a) Current Investments

(b) Inventories

(c) Trade receivables

(d) Cash and cash equivalents

(e) Short term loans and advances

(f) Other current assets

TOTAL

*Kindly specify description of each asset such as date of acquisition, cost of acquisition,

remaining useful life, identification number, depreciation charged, book value, and any

other relevant details.

PRACTICAL ASPECTS OF INSOLVENCY LAW

153

ANNEXURE-E

5. Latest Annual Financial Statements

Annual Financial Statements for the year ended 31st March, ....................

(Please attach the latest annual financial statement of the Corporate Debtor)

ANNEXURE - F

6. Audited financial statements of the Corporate Debtor for the last

two financial years and provisional financial statements for the current

financial year made up to .................... (date not earlier than fourteen

days from the date of application)

6.1. Audited financial statements of the Corporate Debtor for the year

ended .................... & ....................

6.2 Provisional financial statements for the current financial year made

up to .................... (date not earlier than fourteen days from the

date of application)

(Please attach the audited financial statements of the Corporate

Debtor for the last two financial years and Provisional financial

statements for the current financial year up to a date not earlier than

fourteen days from the date of application, either jointly or individually)

ANNEXURE-G

7. List of creditors

S.

Name of

Nature of

Amount of

Amount

Particulars

No. the Creditor creditor

claim (Rs.)

admitted

of security

(Financial/

(Rs.)

interest, if

Operational/

any

Other)

1.

2.

ANNEXURE - H

8. Particulars of debt due from or due to corporate debtor with respect

to related parties

154

PRACTICAL ASPECTS OF INSOLVENCY LAW

S.

Name

Nature

Detail

Amount of debt involved

Amount

No. and

of

of

(Rs.)

due to/due

address relation- transa-

from

of the

ship

ction

Corporate

related

Debtor

party

Principal Interest Total

1.

2.

ANNEXURE - I

9. Details of guarantees that have been given in relation to debts of the

corporate debtor by other persons

S.

Name of the

Nature and detail

Name of the Amount

No. financial creditor

relating to

party

guaranteed

to whom guarantee transaction of

extending

by the party

has been issued

the debt in respect guarantee

(Rs.)

of which guarantee

has been given

1.

2.

ANNEXURE - J

10. Names and addresses of members or partners holding at least

one per cent stake in the corporate debtor

Sl.

Name of the Address of

Number

Amount

Percentage

No. member/

the member/ of shares

of share

of

partner

partner

held

capital

shareholding

held (Rs.) (%)

PRACTICAL ASPECTS OF INSOLVENCY LAW

155

ANNEXURE-K

11. Details of all material litigations and ongoing investigations or

proceedings initiated by Government and statutory authorities

S.

Name of the

Period

Amount involved (Rs.)

Details

No.

Government

involved

of the

or statutory

material

authority

litigation/

which has

investigation/

initiated the

proceeding

material

litigation/

investigation/

proceedings

Penalty Interest Total

1.

2.

ANNEXURE-L

12. Details on number of workers and employees and liabilities of the

corporate debtor towards them

S.

Name of the Designation

Address

Amount of

Amount

No. worker/

of the worker/

of the

dues

admitted

employee

employee

worker/

subsisting

(Rs.)

employee

as on

_____(Rs.)

1.

2.

ANNEXURE-M

13. Copy of the Order passed by National Company Law Tribunal

(NCLT) admitting the application of the Corporate Debtor

The copy of Order passed by NCLT admitting the application of the Corporate

Debtor must be attached.

156

PRACTICAL ASPECTS OF INSOLVENCY LAW

ANNEXURE - N

14. Any other information relevant to the Committee of Creditors

Any other information that is considered relevant by the interim resolution

professional/resolution professional to be furnished to the Committee of

Creditors to facilitate them in the preparation and better understanding of

the resolution plan must be provided herein.

.......................................................

(Signature of the IRP/RP)

(Name & address of the IRP/RP)

(IP Registration No. with IBBI: .......................................)

Date:

Place:

PRACTICAL ASPECTS OF INSOLVENCY LAW

157

CHAPTER - IX

CONTENTS OF RESOLUTION PLAN AND MODEL

RESOLUTION PLAN

Introduction

The entire paradigm of CIRP rests on the foundation of an effective resolution

plan. Resolution plan form an integral part of an insolvency resolution process

which lists down detailed strategies for quick and efficient resolution of

corporate debtor.

Section 5(26) of the Code defines ‘Resolution Plan’ as a plan proposed by

resolution applicant1 for insolvency resolution of the corporate debtor as a

going concern in accordance with Part II of the Code. Part II of the Code, in

turn, lays down the provisions relating to CIRP of companies and limited

liability partnership firms. In the absence or non-approval of a workable

resolution plan, the entire CIRP crumbles and liquidation process sets in for

the corporate debtor.

Deemed Resolution Plans

The Ministry of Corporate Affairs vide Order dated 24th May, 2017 provided

that any Scheme sanctioned under sub-section (4) or any Scheme under

implementation under sub-section (12) of Section 18 of the Sick Industrial

Companies (Special Provisions) Act, 1985 shal be deemed to be an approved

resolution plan under Section 31(1) of the Code and the same shall be dealt

with, in accordance with the provisions of Part II of the Code.

In brevity, the schemes sanctioned or implemented under the Sick Industrial

Companies (Special Provisions) Act, 1985 shal be deemed as resolution

plans under the Code and be dealt with accordingly under the provisions of

the Code.

1. Substituted by section 3(b) of the Insolvency and Bankruptcy Code (Amendment) Act,

2017 (w.e.f. 23-11-2017)

157

158

PRACTICAL ASPECTS OF INSOLVENCY LAW

Who can submit a Resolution Plan?

Section 5(25)2 of the Code defines ‘resolution applicant’ as a person who,

individually or jointly with any other person, submits a resolution plan to the

resolution professional pursuant to the invitation made under clause (h) of

sub-section (2) of Section 25.

Thereby, a resolution plan may be submitted by any member(s) of the

Committee of Creditors, prospective lender(s), investor(s) or any other person

pursuant to the invitation made by the RP.

Identification of Resolution Applicant

Newly inserted Regulation 35A of the CIRP regulations provides that the

Resolution Professional shal identify the prospective resolution applicants

on or before the 105th day from the insolvency commencement date.

Regulation 36A has been inserted in the CIRP Regulations which provides

for invitation of resolution plans. This regulation mandates, inter alia, that

the RP shall issue an invitation, including evaluation matrix to the prospective

resolution applicants, to submit resolution plan at least thirty days before

the last date of submission of resolution plans.

Regulation 36A of the CIRP Regulations states as under:

“36A. Invitation of resolution plans. – (1) The resolution professional shall

issue an invitation, including evaluation matrix, to the prospective

resolution applicants in accordance with clause (h) of sub-section (2) of

section 25, to submit resolution plans at least thirty days before the last

date of submission of resolution plans.

(2) Where the invitation does not contain the evaluation matrix, the

resolution professional shal issue, with the approval of the committee,

the evaluation matrix to the prospective resolution applicants at least

fifteen days before the last date for submission of resolution plans.

(3) The resolution professional may modify the invitation, the evaluation

matrix or both with the approval of the committee within the timelines

given under sub-regulation (1) or sub-regulation (2), as the case may be.

(4) The timelines specified under this regulation shal not apply to an

ongoing corporate insolvency resolution process-

(a) where a period of less than thirty-seven days is left for submission

of resolution plans under sub-regulation (1);

(b) where a period of less than eighteen days is left for submission of

resolution plans under sub-regulation (2).

2. Substituted by section 3(a) of the Insolvency and Bankruptcy Code (Amendment) Act,

2017 (w.e.f. 23-11-2017)

PRACTICAL ASPECTS OF INSOLVENCY LAW

159

(5) The resolution professional shall publish brief particulars of the invitation

in Form G of the Schedule:

(a) on the website, if any, of the corporate debtor; and

(b) on the website, if any, designated by the Board for the purpose.”

‘Evaluation matrix’ has been inserted as clause (ga) in sub-regulation (1)

of regulation 2 of CIRP Regulations, 2018 to mean as ‘such parameters

to be applied and the manner of applying such parameters, as approved

by the committee, for consideration of resolution plans for its approval.’

Similar to the amendments made in CIRP Regulations, 2016, IBBI has also

amended the Insolvency and Bankruptcy Board of India (Fast Track

Insolvency Resolution Process for Corporate Persons) Regulations, 2016

(“Fast Track Regulations” ) by way of Insolvency and Bankruptcy Board of

India (Fast Track Insolvency Resolution Process for Corporate Persons)

(Amendment) Regulations, 2018 (“Fast Track Amendment Regulations” )

dated 7th February, 2018. The amendments introduced by way of Fast Track

Amendment Regulations are in line with the amendments brought out by

CIRP Amendment Regulations, 2018.

Mandatory contents of the Resolution Plan

Regulation 38 of the CIRP Regulations lists down the mandatory contents

of the resolution plan as follows :

(1) A resolution plan shal identify specific sources of funds that wil be

used to pay the –

(a) insolvency resolution process costs and provide that the insolvency

resolution process costs will be paid in priority to any other creditor;

(b) liquidation value due to operational creditors and provide for such

payment in priority to any financial creditor which shal in any event

be made before the expiry of thirty days after the approval of a

resolution plan by the Adjudicating Authority; and

(c) liquidation value due to dissenting financial creditors and provide

that such payment is made before any recoveries are made by the

financial creditors who voted in favour of the resolution plan.

(1A) A resolution plan shal include a statement as to how it has dealt with

the interests of al stakeholders, including financial creditors and operational

creditors, of the corporate debtor. 3

(2) A resolution plan shal provide:

3. Inserted by the Insolvency and Bankruptcy Board of India (Insolvency Resolution

Process for Corporate Persons) (Second Amendment) Regulations, 2017, Regulation 2

(w.e.f. 5-10-2017)

160

PRACTICAL ASPECTS OF INSOLVENCY LAW

(a) the term of the plan and its implementation schedule;

(b) the management and control of the business of the corporate debtor

during its term; and

(c) adequate means for supervising its implementation.

[(3) A resolution plan shal contain details of the resolution applicant and

other connected persons to enable the committee to assess the credibility

of such applicant and other connected persons to take a prudent decision

while considering the resolution plan for its approval.

Explanation : For the purposes of this sub-regulation, –

(i) ‘details’ shall include the following in respect of the resolution applicant

and other connected person, namely:-

(a) identity;

(b) conviction for any offence , if any, during the preceding five

years;

(c) criminal proceedings pending, if any;

(d) disqualification, if any, under Companies Act, 2013, to act as a

director;

(e) identification as a wil ful defaulter, if any, by any bank or financial

institution or consortium thereof in accordance with the

guidelines of the Reserve Bank of India;

(f) debarment, if any, from accessing to, or trading in, securities

markets under any order or directions of the Securities and

Exchange Board of India; and

(g) transactions, if any, with the corporate debtor in the preceding

two years.

(i ) the expression ‘connected persons’ means-

(a) persons who are promoters or in the management or control of

the resolution applicant;

(b) persons who wil be promoters or in management or control of

the business the corporate debtor during the implementation of

the resolution plan;

(c) holding company, subsidiary company, associate company and

related party of the persons referred to in items (a) and (b).]4

4. Inserted by the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process

for Corporate Persons) (Third Amendment) Regulations, 2017, Regulation 2 (w.e.f.

7.11.2017)

PRACTICAL ASPECTS OF INSOLVENCY LAW

161

Measures required for the implementation of the Resolution Plan

Regulation 37(1) of CIRP Regulations provides that a resolution plan may

also provide for measures required for its implementation.

The measures required for implementing a resolution plan may include but

not limited to the fol owing –

(a) transfer of al or part of the assets of the corporate debtor to one or

more persons;

(b) sale of al or part of the assets whether subject to any security interest

or not;

(c) the substantial acquisition of shares of the corporate debtor, or the

merger or consolidation of the corporate debtor with one or more

persons;

(d) satisfaction or modification of any security interest;

(e) curing or waiving of any breach of the terms of any debt due from the

corporate debtor;

(f) reduction in the amount payable to the creditors;

(g) extension of a maturity date or a change in interest rate or other

terms of a debt due from the corporate debtor;

(h) amendment of the constitutional documents of the corporate debtor;

(i) issuance of securities of the corporate debtor, for cash, property,

securities, or in exchange for claims or interests, or other appropriate

purpose; and

(j) obtaining necessary approvals from the Central and State

Governments and other authorities.

Marketability of Resolution Plans

Asset is more valuable when taken over on going concern basis and generates

adequate cash flow as compared to an asset under liquidation. Essence of

the Code is to prevent liquidation of assets that are capable of generating

economies of scale. IBBI has come out with request for proposal (RFP) in

relation to invitation of Resolution Plans from prospective resolution

applicants who wish to bid for business of a corporate debtor undergoing

CIRP. RFP provides relevant information, excluding those prescribed in law,

to help market participant make informed bids and clearly articulate the

process evaluation criteria and timelines to bring transparency and efficiency

to the process.

162

PRACTICAL ASPECTS OF INSOLVENCY LAW

In this context, it is relevant to quote the fol owing paragraphs from the

Report of Bankruptcy Legislative Reforms Committee (BLRC Report).

Assessing viability Para 3.2.1 of the BLRC Report relating to “Assessing

viability” states that an enterprise that is facing financial failure is considered

a viable enterprise: there is a possible financial rearrangement that can earn

the creditors a higher economic value than shutting down the enterprise. On

the other hand, where the cost of the financial arrangement required to keep

the enterprise going wil be higher than the NPV of future expected cash

flows. In this case, the enterprise is considered unviable or bankrupt and is

better shut down as soon as possible. However, the assessment of viability

is difficult. There is no fixed or unique approach to answer this question. In

an ideal environment, the assessment will be the outcome of a col ective

decision. Here, creditors and debtor wil negotiate a potential new financial

arrangement. Each of them wil balance al available information, including

al future possibilities of the economic environment under which the enterprise

wil operate, as wel as al alternative investment opportunities available to

the creditors as wel as the debtor.”

Para 3.2.3 of the BLRC Report relating to “what can a sound bankruptcy law

achieve” provides “Avoid destruction of Value” which states that a sound

legal process also provides flexibility for parties to arrive at the most efficient

solution to maximize value during negotiations. If the enterprise is insolvent,

the payment failure implies a loss which must be borne by some of the

parties involved. From the viewpoint of the economy, some firms undoubtedly

need to be closed down. But many firms possess useful organizational

capital. Across a restructuring of liabilities, and in the hands of a new

management team and a new set of owners, some of this organizational

capital can be protected. The objective of the bankruptcy process is to

create a platform for negotiation between creditors and external financiers

which can create the possibility of such rearrangements.

That said, it may be noted that during the negotiations, the debtor is likely to

request that creditors restructure their liabilities so as to ease the liquidity

stress of future repayments. The proposal may contain the need for fresh

financing, either from existing creditors or from new financiers. In exchange,

the debtor may offer to reorganize the operations of the enterprise by giving

up some rights in management or to change the size of operations. Creditors

wil evaluate the proposal and offer modifications on their own. If both sides

see the possibility of value in the enterprise, these negotiations wil settle on

a new financial arrangement. On the other hand, if they cannot agree on a

solution, it wil be optimal for the creditors to sel the assets available and

shut down the enterprise.

PRACTICAL ASPECTS OF INSOLVENCY LAW

163

Resolution plans must be made with an aim to run the business prudently,

proactively manage risks and must strive to exceed the standards regulators

have set for the industry.

Strategies that may be adopted as a part of Resolution Plan

RP invites resolution plan from resolution applicant which may have the

fol owing as part of resolution plan.

1. Compromise/arrangement

2. Financial Restructuring

3. Takeover

4. Merger

5. Demerger

6. Sale of an Undertaking

7. Issue of Corporate Bonds

8. Sale of Brands

9. Government Subsidies

The formal procedure for restructuring encompasses, within its ambit,

schemes of reconstruction, takeovers, mergers, demergers, transfer of

undertakings and restructuring of debts as provided in Section 230–240 of

the Companies Act, 2013 by way of which the liabilities of the distressed

companies can be restructured.

The resolution plan is subject to the compliance of the conditions as laid

down under Section 30(2) of the Code read with Regulation 38 of CIRP

Regulations. The indicative strategies for resolution plan are also listed in

Regulation 37 of CIRP Regulations which includes transfer/sale of part of

assets, satisfaction/modification of security interest, extension of maturity

dates, issue of securities etc.,

Debt-for-equity swaps as a tool for restructuring in Resolution Plan

Debt-for-equity swaps can be used as a tool for restructuring and the same

is duly recognised/provided for in restructurings undertaken under sections

230–231 of the Companies Act, 2013 as well as the resolution plans that

may be submitted by the Resolution Applicants to the RP for approval by

Committee of Creditors and thereafter the approval of the Adjudicating

Authority. Debt for equity swaps is done to bring the debt to a sustainable

164

PRACTICAL ASPECTS OF INSOLVENCY LAW

level either by waiver of excess debt or conversion into equity, or a

combination of both.

As per BLRC Report “the natural financing strategy in all countries is for

large companies (e.g. the top 500 firms) to obtain al their debt financing

from the bond market. This channel has been choked off in India, partly

owing to the fact that corporate bond holders obtain particularly bad recovery

rates under the present arrangements. Bankruptcy reform would yield higher

recovery rates for corporate bond holders, and remove one barrier that

impedes the corporate bond market. It is important to emphasise, however,

that this is not the only barrier which holds back the corporate bond market.”

Role of Asset Reconstruction Companies (ARCs)

Apart from the above, the ARCs set up under the statutory provisions of

SARFAESI Act, may also acquire the debts of the corporate debtor from

the lending Banks/Financial Institutions (FIs) and subsequently restructure

the same in post discussions and arrangement with the debtor. ARCs have

been allowed to use a part of their funds raised from Qualified Institutional

Buyers (‘QIBs’) to restructure financial assets. The provisions of SARFAESI

Act also empower the lenders/ARCs to effect a change in management as

a restructuring mechanism.

Facilitations by Regulators supporting the Code

To create a market for stressed assets, the market regulator (SEBI) has

made the fol owing relaxations.

• SEBI has directed listed companies to inform stock exchanges about

loan default, if any, within one working day (the implantation of this

order was deferred by SEBI until further order).

• Open offer being part of Resolution plan has relaxation norms under

SEBI (Substantial Acquisition of Shares and Takeovers) Regulations,

2011

• Relaxations from preferential issue requirements under SEBI (Issue

of Capital and Disclosure Requirements) Regulations, 2009

• Banking Regulation (Amendment) Act, 2017 facilitates RBI to direct

banks to initiate action under the Code in case of larger defaults as

specified.

• SEBI (Substantial Acquisition of Shares and Takeovers) Regulations,

2011 has made relaxations for acquisitions pursuant to resolution

plans approved by NCLT under the Insolvency and Bankruptcy Code,

2016.

PRACTICAL ASPECTS OF INSOLVENCY LAW

165

Duties and responsibilities of a Resolution Professional under the Code

with respect to Resolution Plans

The Code has enshrined the following duties and responsibilities upon a RP

with respect to resolution plans:

• appointing two registered valuers to determine the fair value and

liquidation value of corporate debtor

• inviting prospective resolution applicants, who fulfill such criteria as

may be laid down by him with the approval of committee of creditors,

having regard to the complexity and scale of operations of the business

of the corporate debtor and such other conditions as may be specified

by the Board, to submit a resolution plan or plans. [Section 25(2)(h)]

• preparing an Information Memorandum in such form and manner

containing such relevant information as may be specified by the Board

for formulating a resolution plan [Section 29(1)]

• providing information of the nature described in Regulation 36 with regard

to Information Memorandum as sought by the members of the

Committee of Creditors within reasonable time if such information has

bearing on the resolution plan [Regulation 36(3) of CIRP Regulations]

• sharing Information Memorandum after receiving undertaking from a

member of the committee or a prospective resolution applicant to the

effect that such member or resolution applicant shall maintain

confidentiality of the information and shal not use such information

to cause an undue gain or undue loss to itself [Regulation 36(4) of the

CIRP Regulations]

• issue invitation including evaluation matrix, to the prospective

resolution applicants to submit resolution plan at least thirty days

before the last date of submission of resolution plans [Regulation

36A(1) of CIRP Regulations]

• examination of each resolution plan received by him to confirm that

the resolution plan:

(a) provides for the payment of insolvency resolution process costs

in priority to the repayment of other debts of the corporate debtor;

(b) provides for the repayment of the debts of operational creditors

which shall not be less than the amount to be paid to the

operational creditors in the event of a liquidation of the corporate

debtor under Section 53;

166

PRACTICAL ASPECTS OF INSOLVENCY LAW

(c) provides for the management of the affairs of the Corporate

debtor after approval of the resolution plan;

(d) the implementation and supervision of the resolution plan;

(e) does not contravene any of the provisions of the law for the

time being in force;

(f) conforms to such other requirements as may be specified by

the Board. [Section 30(2)]

• submitting to the committee of creditors al resolution plans which

comply with the requirements of the Code and regulations made

thereunder along with the details of following, if any, observed, found

or determined by him:-

(a) preferential transactions under section 43;

(b) undervalued transactions under section 45;

(c) extortionate credit transactions under section 50; and

(d) fraudulent transactions under section 66, and

(e) the orders, if any, of the Adjudicating Authority in respect of

such transactions [Section 25(2)(i) and 30(3) of the Code read

with Regulation 39(2) of the CIRP Regulations, 2017]5

• submission of the resolution plan as approved by the Committee of

Creditors to the Adjudicating Authority atleast 15 days before the

expiry of the maximum period permitted under section 12 of the Code6,

with the certification that :

(a) The contents of the resolution plan meet all the requirements of

the Code and the Regulations; and

(b) The resolution plan has been approved by the Committee of

Creditors. [Section 30(6) of the Code read with Regulation 39(4)

of the CIRP Regulations]

• sending a copy of the order of the Adjudicating Authority approving

5. Substituted by the Insolvency and Bankruptcy Board of India (Insolvency Resolution

Process for Corporate Persons) (Third Amendment) Regulations, 2017, Regulation 3

(w.e.f. 7-11-2017). Prior to this substitution, Regulation 39(2) read as under: -

“39(2) The resolution professional shall present all resolution plans that meet the

requirements of the Code and these Regulations to the committee for its consideration”

6. Inserted by Insolvency and Bankruptcy Board of India (Insolvency Resolution Process

for Corproate Persons) (Amendment) Regulations, 2018, Regulation 11 (w.e.f 06.02.2018)

PRACTICAL ASPECTS OF INSOLVENCY LAW

167

or rejecting a resolution plan to the participants and the resolution

applicant. [Regulation 39(5) of the CIRP Regulations]

• forwarding al records relating to the conduct of the corporate

insolvency resolution process and the resolution plan, after the order

of approval, to the Board to be recorded on its database[Section

31(3)(b)]

• complying with IBBI circulars from time to time such as, an

Insolvency Professional shall not outsource any of his duties and

responsibilities under the Code. Further, an Insolvency Professional

shall not require any certificate from another person certifying

eligibility of a resolution applicant [Clarification by IBBI dated

January 3, 2018]

Eligibility of resolution applicants

Section 29A7 of the Code prescribes the eligibility criteria of resolution

applicants. As per the provision, a person shal not be eligible to submit a

resolution plan, if such person or any other person acting jointly or in concert

with such person –

(a) is an undischarged insolvent;

(b) is a wil ful defaulter in accordance with the guidelines of the Reserve

Bank of India issued under the Banking Regulation Act, 1949;

(c) has an account, or an account of a corporate debtor under the

management or control of such person or of whom such person is a

promoter, classified as non-performing asset in accordance with the

guidelines of the Reserve Bank of India issued under the Banking

Regulation Act, 1949 and at least a period of one year has lapsed

from the date of such classification till the date of commencement of

the corporate insolvency resolution process of the corporate debtor:

Provided that the person shal be eligible to submit a resolution plan

if such person makes payment of al overdue amounts with interest

thereon and charges relating to non-performing asset accounts before

submission of resolution plan;

(d) has been convicted for any offence punishable with imprisonment

for two years or more;

(e) is disqualified to act as a director under the Companies Act, 2013;

7. Inserted by section 5 of the Insolvency and Bankruptcy Code (Amendment) Act, 2017

(w.e.f. 23-11-2017).

168

PRACTICAL ASPECTS OF INSOLVENCY LAW

(f) is prohibited by the Securities and Exchange Board of India from

trading in securities or accessing the securities markets;

(g) has been a promoter or in the management or control of a corporate

debtor in which a preferential transaction, undervalued transaction,

extortionate credit transaction or fraudulent transaction has taken

place and in respect of which an order has been made by the

Adjudicating Authority under this Code;

(h) has executed an enforceable guarantee in favour of a creditor in respect

of a corporate debtor against which an application for insolvency

resolution made by such creditor has been admitted under this Code;

(i) has been subject to any disability, corresponding to clauses (a) to

(h), under any law in a jurisdiction outside India; or

(j) has a connected person not eligible under clauses (a) to (i).

Explanation – For the purposes of this clause, the expression “connected

person” means:

(i) any person who is the promoter or in the management or control of

the resolution applicant; or

(i ) any person who shall be the promoter or in management or control of

the business of the corporate debtor during the implementation of the

resolution plan; or

(iii) the holding company, subsidiary company, associate company or

related party of a person referred to in clauses (i) and (i ) :

Provided that nothing in clause (iii) of this Explanation shal apply to –

(A) a scheduled bank; or

(B) an asset reconstruction company registered with the Reserve Bank

of India under section 3 of the Securitization and Reconstruction of

Financial Assets and Enforcement of Security Interest Act, 2002; or

(C) an Alternate Investment Fund registered with the Securities and

Exchange Board of India.”

Expression of interest (EOI) issued by Resolution Professionals

Pursuant to Section 25(1)(h) of the Code, RP shall invite prospective lenders,

investors and any other persons to put forward resolution plans by issuing

Expression Of Interest (EOI) to invite prospective resolution applicants to submit

viable resolution plans for the insolvency resolution of the Corporate Debtor.

PRACTICAL ASPECTS OF INSOLVENCY LAW

169

In common parlance, EOI is a document describing requirements or

specifications and seeking information from potential investors/bidders

that demonstrate their ability to meet those requirements. In the field of

insolvency and bankruptcy, EOIs are invited from investors or consortium

of investors (also known as bidders) meeting the specified eligibility criteria

in terms of financial and technical capabilities to submit resolution plans

for the Corporate Debtor undergoing corporate insolvency resolution

process or fast track insolvency resolution process under the provisions

of the Code.

The EOI is issued by the RP on behalf of the Committee of Creditors in the

form of a public advertisement. The document prescribes the last date for

receipt of EOI from potential investors or bidders. Subsequently, the

Committee of Creditors shal discuss and finalize the best resolution plan

that shall lead to a favourable outcome for all the stakeholders of the

Corporate Debtor.

A specimen EOI has been annexed as Annexure IX.1

Time-frame for submission of Resolution Plan by an applicant

A prospective resolution applicant shal submit resolution plan(s) prepared

in accordance with the Code and regulations there under to the resolution

professional atleast 30 days before the last date of submission of resolution

plan.8

Disclosure of fair value and liquidation value

The newly inserted Regulation 35 of the CIRP Regulations, reads as under:

“35. Fair value and Liquidation value. – (1) Fair value and liquidation value

shall be determined in the following manner:-

(a) the two registered valuers appointed under regulation 27 shal submit

to the resolution professional an estimate of the fair value and of the

liquidation value computed in accordance with internationally accepted

valuation standards, after physical verification of the inventory and

fixed assets of the corporate debtor;

(b) if in the opinion of the resolution professional, the two estimates of a

value are significantly different, he may appoint another registered

valuer who shal submit an estimate of the value computed in the

8. Inserted by Insolvency and Bankruptcy Board of India (Insolvency Resolution Process

for Corproate Persons) (Amendment) Regulations, 2018, Regulation 8 (w.e.f 06.02.2018)

170

PRACTICAL ASPECTS OF INSOLVENCY LAW

same manner; and (c) the average of the two closest estimates of a

value shal be considered the fair value or the liquidation value, as

the case may be.

(2) After the receipt of resolution plans in accordance with the Code and

these regulations, the resolution professional shall provide the fair value

and the liquidation value to every member of the committee in electronic

form, on receiving an undertaking from the member to the effect that such

member shall maintain confidentiality of the fair value and the liquidation

value and shal not use such values to cause an undue gain or undue loss

to itself or any other person and comply with the requirements under sub-

section (2) of section 29:

(3) The resolution professional and registered valuers shal maintain

confidentiality of the fair value and the liquidation value.”

Approval of Resolution Plan by Committee of Creditors

Section 30(4) of the Code stipulates that the committee of creditors may

approve a resolution plan by a vote of not less than seventy-five per cent of

voting share of the financial creditors, after considering its feasibility and

viability, and such other requirements as may be specified by the Board:

Provided that the committee of creditors shall not approve a resolution plan,

submitted before the commencement of the Insolvency and Bankruptcy Code

(Amendment) Ordinance, 2017, where the resolution applicant is ineligible

under section 29A and may require the resolution professional to invite a fresh

resolution plan where no other resolution plan is available with it :

Provided further that where the resolution applicant referred to in the first

proviso is ineligible under clause (c) of section 29A, the resolution applicant

shal be al owed by the committee of creditors such period, not exceeding

thirty days, to make payment of overdue amounts in accordance with the

proviso to clause (c) of section 29A:

Provided also that nothing in the second proviso shal be construed as

extension of period for the purposes of the proviso to sub-section (3) of

section 12, and the corporate insolvency resolution process shal be

completed within the period specified in that sub-section. 9

9. Substituted by the Insolvency and Bankruptcy Code (Amendment) Act, 2017 (w.e.f. 23-

11-2017).

PRACTICAL ASPECTS OF INSOLVENCY LAW

171

Effect of any provision in the Resolution Plan requiring the consent of

the members or partners of corporate debtor

A resolution plan may contain a provision requiring the consent of the

members or partner of the corporate debtor under the terms of the

constitutional documents of the corporate debtor, shareholders’ agreement,

joint venture agreement or any other document of similar nature. In such a

case, such provisions shal take effect notwithstanding that such consent

has not been obtained.

A clarification was also sought by stakeholders regarding approval of

resolution plans under Section 30 and 31 of the Code that whether approval

of shareholders/members of the corporate debtor is required for a resolution

plan at any stage during the process for its consideration, approval and

implementation. It was clarified vide general Circular No. IBC/01/2017by the

Ministry of Corporate Affairs that there is no requirement for obtaining approval

of shareholders/members of the corporate debtor during this process. Further,

it was also clarified that the approval of shareholders/members of the

corporate debtor for a particular action required in the resolution plan for its

implementation, which would have been required under the Companies Act,

2013 or any other law if the resolution plan of the company was not being

considered under the Code, is deemed to have been given on its approval

by the Adjudicating Authority.

Assistance of local district administration in implementing the terms

of a Resolution Plan

As per Regulation 39(8) of the CIRP Regulations, a person in charge of the

management or control of the business and operations of the corporate

debtor may make an application to the Adjudicating Authority for an order

seeking the assistance of the local district administration in implementing

the terms of a resolution plan post its approval.

Appeal against an order approving a Resolution Plan

Forum for appeal: The forum for filing of appeals, in case of corporate

insolvency resolution process, is NCLAT.

Grounds of appeal: An appeal may be filed against an order by

the Adjudicating Authority approving a resolution plan on the fol owing

grounds:

(i) the approved resolution plan is in contravention of the provisions of

any law for the time being in force;

172

PRACTICAL ASPECTS OF INSOLVENCY LAW

(i ) there has been material irregularity in exercise of the powers by the

resolution professional during the corporate insolvency resolution period;

(iii) the debts owed to operational creditors of the corporate debtor have

not been provided for in the resolution plan in the manner specified by

the Board;

(iv) the insolvency resolution process costs have not been provided for

repayment in priority to al other debts; or

(v) the resolution plan does not comply with any other criteria specified

by the Board.

Provisions relating to contravention of any terms of Resolution Plan

Where the corporate debtor, any of its officers or creditors or any person on

whom the approved resolution plan is binding under section 31, knowingly

and wilfully contravenes any of the terms of such resolution plan or abets

such contravention, such corporate debtor, officer, creditor or person shall

be punishable with imprisonment of not less than one year, but may extend

to five years, or with fine which shall not be less than one lakh rupees, but

may extend to one crore rupees, or with both.

International practices with respect to Resolution Plans

There are number of different strategies that companies may consider while

formulating resolution plans. The resolution strategies may range from

relatively simple to more complex mechanisms.

The Milliman Research Report on ‘Recover and Resolution Plans: Dealing

with financial distress’ provides various factors that must be considered

when deciding on the most appropriate course of action that would be taken

in a resolution situation. The key considerations are as fol ows:

PRACTICAL ASPECTS OF INSOLVENCY LAW

173

Liquidity or

• Will the plan improve the company's liquidity

Solvency

or solveny position?

• Is the company facing a recovery or a resolution

Recovery or

scenario?

Resolution

• Will the plan help restore the company's financial

position or is it a resolution strategy?

• Has the company time to implement the plan and

Time

for its benefits to materialise?

Availability

• Is the plan available to the company i.e. are

the thrid parties willing to facilitate it?

Cost

• Can the company afford the cost of the plan and

is it the most cost-efficient approach?

Complexity, ease

• Has the company access to the necessary skills,

of

expertise and resources in order to implement the plan

implementation

and carry out any ongoing maintenance required in

& ongoing

terms of its complexity and ease of implementation?

maintenance

The above considerations must be kept in mind while preparing a robust

resolution plan and to ensure that al necessary aspects have been analyzed

to revive the insolvent organizations.

However, preparation and approval of a resolution plan is just half the battle

won in the corporate insolvency resolution process. The main hurdle comes

in the implementation of the resolution plan which is critical for the absolute

success of the resolution process. Thus, proper measures must be taken

by the related stakeholders to ensure that all requirements under the

resolution plan are complied with.

174

PRACTICAL ASPECTS OF INSOLVENCY LAW

Applying FSB’s Key Attributes Paper in the Indian context, resolution plans

should strive to include the following for its faster and effective

implementation:

• a resolution strategy and operational plan that is agreed by top

officials of the Corporate Debtor

• the strategic analysis that underlies the resolution strategies

• details of any potential material impediments to an effective and

timely implementation of the plan

• responsibilities for executing and implementing the plan and actual

measures.

A well drafted and thought-out resolution plan helps in maximizing the value

of al stakeholders and eventually results in the success of the insolvency

resolution process.

Specimen application form for submission of resolution plan along with a

model resolution plan has been annexed as Annexure IX.2

PRACTICAL ASPECTS OF INSOLVENCY LAW

175

ANNEXURE IX.1

Form G

Invitation of Resolution Plans

(Under sub-regulation (5) of regulation 36A of the Insolvency and

Bankruptcy Board of India (Insolvency Resolution Process for Corporate

Persons) Regulations, 2016)

FOR THE ATTENTION OF THE PROSPECTIVE RESOLUTION

APPLICANTS OF (Name of Corporate Debtor)

Sl.

Particulars

No.

1

NAME OF CORPORATE DEBTOR

2

DATE OF INCORPORATION OF CORPORATE DEBTOR

3

AUTHORITY UNDER WHICH CORPORATE DEBTOR IS

INCORPORATED / REGISTERED

5

CORPORATE IDENTITY NUMBER / LIMITED LIABILITY

IDENTIFICATION NUMBER OF CORPORATE DEBTOR

5

ADDRESS OF THE REGISTERED OFFICE AND PRINCIPAL

OFFICE (IF ANY) OF CORPORATE DEBTOR

6

INSOLVENCY COMMENCEMENT DATE IN RESPECT OF

CORPORATE DEBTOR

7

ESTIMATED DATE OF CLOSURE OF INSOLVENCY

RESOLUTION PROCESS

8

DATE OF ISSUE OF INFORMATION MEMORANDUM

9

MANNER OF OBTAINING THE INFORMATION MEMORANDUM

BY THE PROSPECTIVE RESOLUTION APPLICANTS

10

DATE OF ISSUE OF INVITATION FOR RESOLUTION PLANS

11

MANNER OF OBTAINING THE INVITATION BY THE

PROSPECTIVE RESOLUTION APPLICANTS

12

DATE OF ISSUE OF EVALUATION MATRIX

13

MANNER OF OBTAINING THE EVALUATION MATRIX BY THE

PROSPECTIVE RESOLUTION APPLICANTS

14

LAST DATE FOR SUBMISSION OF RESOLUTION PLANS

176

PRACTICAL ASPECTS OF INSOLVENCY LAW

15

MANNER OF SUBMITTING RESOLUTION PLANS BY A

PROSPECTIVE RESOLUTION APPLICANT

16

NAME, ADDRESS AND EMAIL OF THE RESOLUTION

PROFESSIONAL, AS REGISTERED WITH THE BOARD

17

ADDRESS AND EMAIL, IF ANY, OTHER THAN GIVEN AT SL.

NO. 16 TO BE USED FOR CORRESPONDENCE WITH THE

RESOLUTION PROFESSIONAL

18

REGISTRATION NUMBER OF RESOLUTION PROFESSIONAL,

AS GRANTED BY THE BOARD

Signature of Resolution Professional

For …………….(Name of Corporate Debtor)

Date and Place………………..

Specimen Request for Proposal for inviting resolution plans

INVITATION FOR SUBMISSION OF RESOLUTION PLANS FOR _________

__________________ (Name of the Corporate Debtor undergoing CIRP)

Issued on behalf of ___________________________________ (Name of

the Corporate Debtor undergoing CIRP) and the Committee of Creditors

of ___________________________ (Name of the Corporate Debtor

undergoing CIRP) by _____________________, Resolution Professional

Dated:

Table of contents

Sl.

Details

Page No.

No.

1.

Details of the Corporate Debtor

2.

Details of ongoing Corporate Insolvency

Resolution Process

3.

Bid process

4.

Compliance requirements

5.

Information dissemination

6.

Apportioning of cost

7.

Credentials of Resolution Applicant

8.

Evaluation Matrix

9.

Miscellaneous

PRACTICAL ASPECTS OF INSOLVENCY LAW

177

1. DETAILS OF THE CORPORATE DEBTOR

( If Information Memorandum is not provided with RFP or does not capture

such information, then the fol owing information may be provided)

i. Name of legal entity (CD)

ii. Office address – Corporate office, Registered Office – (if different,

primary location for correspondence)

i i. Key locations (with segregation of geographic locations/ activities/

no. of employees/ subsidiary operations)

iv. Group structure with ownership (Shareholding) – Holding Company,

Operating Company, Subsidiaries etc.

v. Promoters – Names, Board Positions – (Any relevant detail to help

ascertain related party relationships)

vi. Details of principal business activities

vi . Details of its main products/services and aspects of its

competitiveness

vii . Last publicly available financial details if any (with comments that

current and othernon-public financial position wil be provided through

data room after confidentiality undertaking)

A. Details of ongoing CIRP

( If Information Memorandum is not provided with RFP or does not capture

such information, then the fol owing information may be provided)

i. Date of Admission of CIRP Application in NCLT

ii. Amount & number of Claims (Segregated by categories of claims)

i i. Details of material litigation by or against the Corporate Debtor

iv. Last Date (180th/ 270th Day)

v. Name of RP, Address of RP,Email of RP

vi. Members of CoC (Represented Institutions/ Key Individuals)

vi . Tentative Location (City) for due-diligence/ meetings/ presentations

B. Bid Process

i. Last date for receipt of proposals with cut-off time in IST

ii. Communication protocol in case of revised timelines/ RFP with

reference to regulation 36A

178

PRACTICAL ASPECTS OF INSOLVENCY LAW

i i. Communication protocol for evaluation matrix (if to be issued

separately)

iv. Process for responding to queries raised by CoC

v. Process, if any, for revising bids/ reverse bidding/ open bidding

vi. Process for opening of bids &due-diligence by CoC

vi . Protocol for sharing bid details, including amounts among bidders – if

at all.

vii . Process for raising query by CoC to potential bidders

ix. Communication modus operandi to selected bidders with reference

to regulation 36A

x. Statement on right to revise RFP with reference to regulation 36A, if

intended

C. Compliance Requirements

i. Confidentiality undertakings for non-disclosure of information

ii. Legally binding undertaking from authorised person/s to ascertain

mandate to participate in the bidding process. For example – Board

Resolution, PoA, authorized signatories.

i i. Credentials of individuals/ entities representing RAs such as – PAN/

TAN/ DIN

iv. Ernest money deposit/ guarantee for protection against withdrawal

during and after the process

v. Bank guarantee for payment obligations, if required

D. Information Dissemination

i. Access to data room – conditions precedent

ii. Process for raising queries/ asking for additional information from

RP/ CoC/ CD

i i. Response timelines/ process to respond to queries raised by RAs

iv. Process for 101 between Management of CD & RAs

v. Schedule and modus-operandi of any pre-bid conference

vi. Protocol for scheduling and conduct of site visits, if proposed

vi . Obligations of the RP towards requests of RAs with/ without consent

of CoC

PRACTICAL ASPECTS OF INSOLVENCY LAW

179

E. Apportioning of Cost

i. Cost to be apportioned to resolution cost

ii. Cost to be borne by Resolution Applicant

F. Credentials of Resolution Applicant

i. Financial health of the RA - Last 3 Years Annual Report, TTM financials,

Auditors Report

ii. Promoters’/ significant stakeholders’ credentials (Individuals) –

Directorship/ Ownership in other companies to ascertain fit and proper

and credibility

i i. Promoters’ Credentials (Group Companies – Hold Co. OpCos.

Subsidiaries), Last 3 Year Annual Reports of HoldCo, TTM Financials,

Auditor Reports

iv. Debt of the Group - Guarantees and crossobligations relevant to

assess group’s financial leverage and obligations

v. Relevant Experience –A brief description on industry knowhow,

investing credentials, turnaround/ M&A experience, if any

vi. Key Management Personnel

vi . Synergies from Product, geography, technology, supply chain, cross-

selling, diversification, integration etc.

vii . Details of material litigations against the resolution applicant with

respect to payment of debts, if any

G. Evaluation Matrix

The CoC may use the fol owing criteria to specify suitable matrix for evaluation

of resolution plan:

i. Confirmation with IBC and CIRP regulations (Mandatory):

a. IBC Section 29A

b. IBC Section 30(2)

c. IBBI Regulation 36(4)

d. IBBI Regulation 38

ii. Projections for sources of cash:

a. Internal business operations –cash generation from continuing

business of resolved entity

b. Upfront cash infusion proposed by the prospective RA

180

PRACTICAL ASPECTS OF INSOLVENCY LAW

c. Future/ periodic cash infusion proposed by the prospective RA

d. Asset sale/ Business divestiture of the resolved entity envisaged

as part of resolution plan and amount of cash generated

e. PV of cash infusion @ x% discount rate

CoC may prescribe differentiated discount factors to incentivize

upfront cash infusion. For example, cash pay-out in year 2 can be

discounted @ 10% or PLR+x%, while pay-out in year 5 can be

discounted @ 18% or PLR + Y%.

i i. Credibility of projection for business operations of resolved entity:

a. Show drivers for revenues and costs for x years (assumptions

behind projections). For example – a telecom operator wil show

revenue growth driven by addition to subscribers’ base and

average revenue per user (ARPU).

b. Show projected cash flows and balance sheet for x years

c. Projection of capital structure leading to target capital structure

and sustainable debt

For example: A resolution plan may peg sustainable leverage of

2:1 and sustainable coverage of 1.5x for the resolved entity

after completion of resolution plan period, say 5 years.

d. Planned sources and usage of cash for x years

For example: A resolution plan should segregate future usage of

cash for agreed repayments to claimants, ongoing financial and

operational obligations, capex with segregationfor maintenance

capex. This information is important to protect potential diversion

of cash during resolution period.

iv. Projectedpay-out to claimants:

a. Distinguish pay-out in cash &through financial instruments (e.g.

equity/ debt instruments)

b. Distinguish upfront and deferred cash payments

c. Disclose PV of deferred cash payments with x% discount factor

d. Disclose intrinsic value/ PV of financial instruments issued in

lieu of cash/ claims on maturity/ conversion date along with

underlying assumptions

e. Present PVof pay-out as % of admitted claims across categories

@ x% discount rate

PRACTICAL ASPECTS OF INSOLVENCY LAW

181

Annexure – A

Expression of Interest

Date:

To,

……………………………………….

………………………………………

………………………………………

( Name of the Resolution Professional & address of the Corporate Debtor)

Subject: Expression of Interest for submission of Resolution Plan for

…………………………………………. (Name of the Corporate Debtor)

Dear Sir,

This is in regard to the advertisement published in ………………………………

(Name of the newspaper or website) dated …………………… inviting

Expression of Interest (EOI) for submission of resolution plan for

………………………………….

…………………………………………………. (Name of the Corporate Debtor)

undergoing corporate insolvency resolution process under the provisions of

the Insolvency and Bankruptcy Code, 2016 including the rules and regulations

made thereunder.

We set out the fol owing details ascertaining our eligibility for the submission

of resolution plan:

1. ................................................................................................

................................................................................................

................................................

2. ................................................................................................

................................................................................................

................................................

3. ................................................................................................

................................................................................................

................................................

(provide affirmation to the eligibility conditions as mentioned in the

advertisement)

182

PRACTICAL ASPECTS OF INSOLVENCY LAW

We also provide the fol owing additional information that may be necessary

to evaluate and determine our bid for the purpose of short listing:

1. Name of the Company/Firm/Any other corporate body:

................................................................................................

................................................

2. Address of the Registered Office/principal place of business:

................................................................................................

................................................

3. CIN/LLPIN: ................................................

PAN: ................................................

4. E-mail ID:

................................................................................................

5. Date of incorporation/establishment: ................................................

6. Details of contact person:

................................................................................................

................................................

7. Background of the Company/Firm/any other Corporation (in terms of

its status – whether private, public, listed etc., persons who have

incorporated it, history and its present standing):

8. Details of activities undertaken along with its core competencies:

PRACTICAL ASPECTS OF INSOLVENCY LAW

183

9. Details of its key suppliers and lenders:

10. Financial Statements of preceding 3 financial years to be attached.

11. Any other details as may be relevant to evaluate and determine the

bid for the purpose of shortlisting by the Resolution Professional.

Place:

Sd/-

Date:

(Name of the person making the bid on behalf of

the company/firm)

(Designation of such person)

9. The expression ‘connected persons’ means –

( a) persons who are promoters or in the management or control of the resolution

applicant;

( b) persons who will be promoters or in management or control of the business of the

corporate debtor during the implementation of the resolution plan;

( c) holding company, subsidiary company, associate company and related party of

the persons referred to in items (a) and (b).

184

PRACTICAL ASPECTS OF INSOLVENCY LAW

Annexure IX.2

Specimen application form for submission of Resolution Plan

(Name and address of the Corporate Debtor)

(Phone No. of the Corporate Debtor)

(Contact details of the resolution professional)

1. Name of the resolution applicant : ................................................

2. Status of the applicant:

Individual

Company

Partnership firms/LLP

Any other entity

3. Correspondence address of the resolution applicant:

................................................................................................

................................................................................................

................................................................................................

4. PAN of the resolution applicant (please enclose a copy) :

................................................................................................

5. E-mail ID of the resolution applicant:

................................................................................................

6. Phone No.:

................................................................................................

7. Relationship of the resolution applicant with the Corporate Debtor, if

any:

................................................................................................

8. Details of connected persons9

9. Details of conviction for any offence , if any, during the preceding five

years:

PRACTICAL ASPECTS OF INSOLVENCY LAW

185

10. Details of criminal proceedings pending, if any:

11. Details of disqualification, if any, under Companies Act, 2013, to act

as a director:

12. Identification as a wil ful defaulter, if any, by any bank or financial

institution or consortium thereof in accordance with the guidelines of

the Reserve Bank of India:

13. Details of debarment, if any, from accessing to, or trading in, securities

markets under any order or directions of the Securities and Exchange

Board of India:

14. Details of transactions, if any, with the corporate debtor in the

preceding two years:

186

PRACTICAL ASPECTS OF INSOLVENCY LAW

15. Date of submission of Resolution Plan : .......................................

DECLARATION

I/We hereby declare that we have read and understood al the terms and

conditions relating to the formulation of resolution plan and hereby express

our interest in the submission of resolution plan for the said Company. We

further declare that we do not fal under the category of persons listed under

Section 29A of the Code and thereby eligible to provide a resolution plan.

We also hereby declare that any confidential information of the Corporate

Debtor that has come to our knowledge or might come to our knowledge

during the insolvency resolution process shal not be divulged by us.

..................................

(Signature of the resolution applicant)

Model Resolution Plan

(Pursuant to Section 31 of the Insolvency and Bankruptcy Code, 2016 read

with Regulation 37, 38 & 39 of the Insolvency and Bankruptcy Board of

India (Insolvency Resolution Process for Corporate Persons) Regulations,

2016)

IN THE MATTER OF .................................. (name of the Corporate Debtor)

Pursuant to an advertisement/letter/notice issued by ..................................

(name of the issuing person/agency) on .................................. (date of

issue) inviting resolution plan from potential resolution applicants for

..................................................... (name of the Corporate Debtor), I/we,

.................................. (name of the resolution applicant), hereby present

a resolution plan based on the information memorandum and documents

available in the public domain. The resolution plan complies with the

provisions of Section 31 of the Insolvency and Bankruptcy Code, 2016 read

with Regulation 37, 38 & 39 of the Insolvency and Bankruptcy Board of

India (Insolvency Resolution Process for Corporate Persons) Regulations,

2016.

The Resolution Plan broadly covers the following aspects:

1. Specify the main strategy proposed: compromise or arrangement/

financial restructuring/takeover/merger/demerger/sale of an

undertaking/issue of corporate bonds/sale of brands/government

subsidies etc.

2. Specify the procedure of payment with respect to:

PRACTICAL ASPECTS OF INSOLVENCY LAW

187

• Insolvency resolution process costs in priority to al other debts

• Payment to financial creditors

• Payment to operational creditors

• Payment of Statutory dues

3. Any other material provision that is covered in the Resolution Plan.

Details of the resolution plan:

1. Background of the Resolution Applicant

(Brief background of the resolution applicant must be provided)

1.1 Incorporation details (in case of Company/LLP/any other entity)

1.2 Details of directors/ partners (in case of Company/LLP/any other

entity)

S. No.

Name of the directors/partners

Designation

1.3 Details of Key Managerial Personnel (in case of Company)

1.4 Details of companies or firms in which the applicant is a director

or KMP (in case of individuals):

S. No.

Name of the company/firm

Designation

1.5 Details of relationship with the Corporate Debtor, if any

1.6 Shareholding Pattern as on 31st March, 20....... (in case of

Company/LLP/any other entity)

Sl. Name of the

Type

Number

Amount Percent-

No. shareholder

of

of

of share age of

shares shares

capital

share-

held

held

held

holding

(Rs.)

1.7 Details of its main activity and recent developments (in case of

Companies/LLPs/any other entities)

188

PRACTICAL ASPECTS OF INSOLVENCY LAW

1.8 Details of its key suppliers (in case of Companies/LLPs/any

other entities)

1.9 Details of its key customers (in case of Companies/LLPs/any

other entities)

1.10 Details of its marketing strategy (in case of Companies/LLPs/

any other entities)

1.11 Details of its products/services and the aspects of

competitiveness therein (in case of Companies/LLPs/any other

entities)

1.12 Details of its manufacturing facilities and operating plants (in

case of Companies/LLPs/any other entities)

1.13 Past Performance (in case of Companies/LLPs/any other

entities)

Performance of the company in the last three financial years

must be provided (including the balance sheet and profit and

loss statements of the company)

2. Background of the Corporate Debtor

(Brief background of the Corporate Debtor must be provided)

2.1 Brief facts of the Corporate Debtor

2.2 Details of litigations (prior to commencement of IBC) by or

against the Corporate Debtor with respect to payment of debts

2.3 Details of application filed with National Company Law Tribunal

for insolvency resolution process

2.4 Details of the creditors and the amount of credit therein

3. Details of past performance of the Corporate Debtor

Performance of the Corporate Debtor in the last three financial years

must be provided (including the balance sheet and profit and loss

statements of the company). Any remarks by the resolution applicant

on the same may also be provided.

4. Resolution Plan

On the basis of information memorandum, documents available in

the public domain and additional information provided by the resolution

professional, I/we hereby submit the fol owing resolution plan.

PRACTICAL ASPECTS OF INSOLVENCY LAW

189

• Proposal for capital and financial restructuring such as

recapitalization, reorganization, leveraged buyout etc.

• Proposal for operational restructuring such as joint venture,

divestiture, merger etc.

• Proposal for payment of insolvency resolution process

• Proposal for payment of financial creditors

• Proposal for payment of operational creditors after al the financial

creditors are paid off

• Proposal for payment of statutory dues

• Proposal relating to infusion of capital by promoters,

management, employees, subsidiaries etc.

• Proposal relating to concessional payment

• Any other proposal

4.1 Proposal for capital and financial restructuring

4.1.1. Details of the creditors along with details of suchdebt

and amount of debt.

4.1.2. The strategy that may be adopted to restructure the

financial and capital requirements of the Corporate

Debtor.

4.1.3. The structure and method of payment to each of the

creditor.

4.1.4. Provision, if any, for making repayment to dissenting

minority creditors.

4.2 Proposal for operating restructuring

4.2.1 The operating restructuring strategy that may be

adopted by the Corporate Debtor.

4.2.2 The benefits of adoption of such strategy to various

stakeholders.

4.3 Proposal for payment of insolvency resolution process

4.3.1 The amount of insolvency resolution process cost along

with the means of financing such costs and

identification of sources of funds.

190

PRACTICAL ASPECTS OF INSOLVENCY LAW

4.4 Proposal for payment of financial creditors

4.4.1 The sources of financing the financial creditors.

4.4.2 Provisions relating to payment of dues equivalent to

the liquidation value of dissenting financial creditors

in priority to consenting financial creditors.

4.4.3 Waiver, if any, to be sought from the financial creditors.

4.4.4 Payment schedule of the financial creditors.

4.5 Proposal for payment of operational creditors after al the financial

creditors are paid off

4.5.1 The sources of financing the operational creditors.

4.5.2 Provisions relating to payment of dues equivalent to

the liquidation value of operational creditors in priority

to any financial creditor.

4.5.3 Waiver, if any, to be sought from the operational

creditors.

4.5.4 Payment schedule of the operational creditors.

4.6 Proposal for payment of statutory dues

4.6.1 The amount of outstanding statutory dues.

4.6.2 The sources of financing the statutory dues.

4.6.3 Waiver, if any, to be sought from the statutory dues.

4.6.4 Payment schedule of statutory dues.

4.7 Proposal relating to infusion of capital by promoters,

management, employees, subsidiaries etc.

4.7.1 Details of parties that have infused the capital

4.7.2 Details of the amount of capital infused

4.7.3 Utilization of such capital

4.8 Proposal relating to concessional payment

4.8.1 Details of concessions or reliefs to be sought by the

Corporate Debtor from various parties

4.8.2 Obligation of parties

4.8.3 Any other terms

PRACTICAL ASPECTS OF INSOLVENCY LAW

191

4.9 Statement as to how the interests of al stakeholders, including

financial creditors and operational creditors, of the corporate

debtor have been dealt:

Stakeholders

Name of the

Amount

Resolution

Outcome of the

party

(Rs.)

provided

resolution

involved

Financial

1. XYZ

Creditors

2. ABC

3. TUV Ltd.

Operational

1. XYZ

Creditors

2. ABC

3. TUV Ltd.

Other

1. XYZ (Deposit

creditors

holder)

2. ABC (Home

buyer)

Equity

1. Mr. A

shareholders

2. XYZ Ltd.

Preference

1. Mr. A

shareholders

2. XYZ Ltd.

4.10 Proposal relating to term of the resolution plan and its

implementation schedule

4.11 Proposal relating to the management and control of the business

of the corporate debtor during its term

4.12 Proposal relating to adequate means for supervising its

implementation

4.13 Any other proposal

4.14 Conclusion

*Annexures to the Resolution Plan may be attached separately.

** The Model Resolution Plan provided herein is illustrative and indicative in

nature and not exhaustive.

192

PRACTICAL ASPECTS OF INSOLVENCY LAW

CHAPTER – X

CRITICAL ISSUES SETTLED THROUGH LANDMARK

JUDGEMENTS

A. MEANING OF ‘DISPUTE’

(I) M/s One Coat Plaster vs. M/s Ambience Private

Limited[01.03.2017], NCLT, Principal Bench held that:

i. Use of the expression ‘includes’ in section 5(6) of the Code

which defines the term ‘dispute’ shows that the definition

of term ‘dispute’ is an inclusive one.

ii. In this case, the debtor, in reply to a notice issued under

section 8 of the Code, had disputed the satisfactory

execution of the work.

[Annexure – X.1]

(II) Philips India Ltd vs. Goodwill Hospital & Research Centre

Ltd. [02.03.2017], NCLT, Principal Bench held that:

i. Use of the expression ‘includes’ in section 5(6) of the Code

which defines the term ‘dispute’ shows that the definition

of term ‘dispute’ is an inclusive one.

ii. In this case, the debtor, in reply to a notice issued under

section 8 of the Code, had disputed the satisfactory

execution of the work.

(III) M/s DF Deutsche Forfait AG and Anr. vs. M/s Uttam Galva

[10.04.2017], NCLT, Mumbai Bench held that:

i. The definition of the term ‘dispute’ is exclusive and the

term ‘includes’ should be read as ‘means’.

ii. If reply is given denying the claim despite default

occurrence is clear, does it mean that no application can

be filed by any operational creditor even though the

operational creditor makes the case of default occurrence?

192

PRACTICAL ASPECTS OF INSOLVENCY LAW

193

If that is so, it wil virtually ousting operation creditor filing

any case under section 9

i i. ‘Existence of dispute’ would mean pendency of either suit

or arbitration proceedings before receipt of section 8 notice

from the operational creditor

[Annexure - X.2]

(IV) Kirusu Software Private Ltd. vs. Mobilox Innovations Private

Ltd. [24.05.2017], NCLAT held that:

i. The word ‘dispute’, as defined in section 5(6) of the Code

cannot be limited to a pending proceeding or ‘lis’, within

the limited ambit of suit or arbitration proceedings

ii. The word ‘includes’ ought to be read as ‘means and includes’

including proceedings initiated or pending before consumer

court, tribunal, labour court or mediation, conciliation etc.

i i. However, merely raising a dispute for the sake of raising

it, unrelated or related to clause (a) to (c) of section 5(6)

i.e. relating to existence of amount of debt, quality of goods

or service, breach of representation or warranty, if not raised

prior to application and not pending before any competent

court of law or authority cannot be relied upon to hold that

there is a ‘dispute’ raised by corporate debtor.

[Annexure - X.3]

(V) Philips India Ltd. vs. Goodwill Hospital & Research Centre

Ltd. [31.05.2017]

i. NCLAT noted that the question as to what constitutes

‘dispute’ fell for consideration before it in the case of “Kirusa

Software (P) Ltd. versus Mobilox Innovations Pvt. Ltd. –

Company Appeal (AT)(Insol.) 06/2017.

ii. It was observed that the corporate debtor in the present

case, much prior to issuance of notice under section 8 of

I & B Code, 2016 had raised disputes relating to quality of

service/maintenance pursuant to notice under section

433(e) and section 434(1)(a) of Companies Act, 2013 issued

by Philips.

i i. NCLAT was of the opinion that the objection raised by

corporate debtor, which was not raised for the first time

194

PRACTICAL ASPECTS OF INSOLVENCY LAW

while replying to notice issued under section 8 by Philips,

cannot be termed to be mere objection raised for sake of

‘dispute’ and/or unrelated to clause (a) or (b) or (c) of sub-

section (6) of section 5 of I & B Code, 2016.

iv. Accordingly, the Appellate Authority dismissed the appeal

and upheld the order of the Adjudicating Authority.

[Annexure - X.4]

(VI) M/s MCL Global Steel Pvt. Ltd. vs. M/s Essar Projects India

Ltd. & Anr. [31.05.2017]

i. In this case, corporate debtor had appointed the operational

creditor to carry out civil work, structural fabrication and

erection of building and sheds as wel as the erection of

technological equipment as part of construction of 0.2

MTPA Steel Melt Shop Complex at Pithampur, Madhya

Pradesh.

ii. Operational creditor raised invoices for the work

successfully completed, however, the corporate debtor

failed to make the payment. Operational creditor issued

statutory notice under the Code to which the corporate

debtor disputed satisfactory completion of the work

regarding quality of construction, timeline of construction

etc. NCLT admitted the application.

i i. The appeal before NCLAT was preferred on two grounds

viz.,

a. violation of principles of natural justice and

b. existence of dispute raised by debtor

First Issue (would be dealt at appropriate place)

Second Issue

a. NCLAT, relying upon its judgment in Kirusa Software

Pvt. Ltd. vs. Mobilox Innovations Pvt. Ltd. observed

that the corporate debtor had in fact disputed the

claim filed by operational creditor by raising disputed

claims by way of various emails and reply to section

8 notice. These documents proved that there was ‘a

dispute in existence’ in terms of section 8 of the

Code.

PRACTICAL ASPECTS OF INSOLVENCY LAW

195

b. The second issue was also decided in favour of the

corporate debtor

iv. Accordingly, NCLAT allowed the appeal, set aside the order

of the NCLT. The order of Moratorium, freezing bank

accounts, appointment of IRP was also set aside.

[Annexure –X.5]

(VII) M/s Annapurna Infrastructure Pvt. Ltd. & Anrs. vs. M/s SORIL

Infa Resources Ltd. [29.08.2017]

i. The NCLAT was considering a question, inter alia, that, in

case where award has been passed by Arbitrator/Arbitral

Tribunal and even application under section 34 of the

Arbitration and Conciliation Act, 1996 had been disposed

of, whether a dispute could be said to be existing between

the parties?

ii. It was held that Section 36 of the Arbitration Act makes

arbitral award executable as decree but it can be enforced

only after the time for filing application under section 34 of

the Act has expired and no application has been made or

such application having been made, has been rejected.

Thus, arbitral award reaches finality after expiry of

enforceable time under section 34 and/or if application under

section 34 is filed and rejected. Accordingly, for the purpose

of ‘dispute’ as ‘existence of dispute’, only pendency of

arbitral proceedings has been accepted as one of the ground

of dispute whereas, as can be seen from Form 5 of the

Rules, Arbitral Award has been held to be a document of

debt and non-payment of awarded amount amounts to

‘default’ debt. Thus, NCLAT held that dispute was not

pending and the decision of Adjudicating Authority holding

that dispute was existing was against the provisions of

law as well as against the decision in Kirusa Software Pvt.

Ltd.

[Annexure - X.6]

(VIII) Mobilox Innovations Private Limited vs. Kirusa Software

Private Limited [21.09.2017]

i. The Hon’ble Supreme Court, after going into the history of

the Code and the evolution of the provisions therein, noted

196

PRACTICAL ASPECTS OF INSOLVENCY LAW

that in the first Insolvency and Bankruptcy Bill, 2015 that

was annexed to the Bankruptcy Law Reforms Committee

Report, section 5(4) defined ‘dispute’ as meaning a ‘bona

fide suit or arbitration proceedings...’. In the present avatar,

section 5(6) excludes the expression ‘bona fide’ which is

of significance. It held that the definition of dispute has

thus become an inclusive one, after the phrase “bona fide”

has been deleted after the phrase “suit or arbitration

proceedings”.

ii. Further, the Bench held that, keeping in mind the legislative

intent, the word “and” in Section 8(2) must be read as “or”.

It was observed that “...if read as “and”, disputes would

only stave off the bankruptcy process if they are already

pending in a suit or arbitration proceedings and not

otherwise. This would lead to great hardship; in that a dispute

may arise a few days before triggering of the insolvency

process, in which case, though a dispute may exist, there

is no time to approach either an arbitral tribunal or a court.

Further, given the fact that long limitation periods are

al owed, where disputes may arise and do not reach an

arbitral tribunal or a court for upto three years, such persons

would be outside the purview of Section 8(2) leading to

bankruptcy proceedings commencing against them. Such

an anomaly cannot possibly have been intended by the

legislature nor has it so been intended...”

i i. Coming to its interpretation of the term “existence of

dispute”, the Court held that once the same has been

brought to the notice of the operational creditor, “…all that

the adjudicating authority is to see at this stage is whether

there is a plausible contention which requires further

investigation and that the “dispute” is not a patently feeble

legal argument or an assertion of fact unsupported by

evidence… The Court does not at this stage examine the

merits of the dispute except to the extent indicated above.

So long as a dispute truly exists in fact and is not spurious,

hypothetical.”

iv. Applying this to the facts of the present case, the Supreme

Court agreed with the submissions of appel ant i.e., the

corporate debtor that a dispute between the parties clearly

PRACTICAL ASPECTS OF INSOLVENCY LAW

197

existed, and that the application ought to have been

dismissed by the NCLT.

v. Thus, the Hon’ble Supreme Court al owed the appeal and

set aside the ruling of the NCLAT.

[Annexure - X. 7]

B. PRINCIPLES OF NATURAL JUSTICE

(I) Sree Metaliks Ltd. vs. UOI[07.04.2017], Hon’ble High Court of

Calcutta held that:

i. NCLT is obliged to afford a reasonable opportunity of

hearing to the corporate debtor prior to admitting the

application under section 7 of the Code’.

ii. However, at the same time, the High Court held that NCLT

is not required to hear the debtor every time

[Annexure - X.8]

(II) M/s Innoventive Industries vs. ICICI Bank & Anr. [15.05.2017],

NCLAT held that:

i. NCLT is bound to issue a limited notice to the corporate

debtor before admitting a case for ascertainment of existence

of default based on material submitted by corporate debtor

and to find out whether the application is complete or there

is any other defect required to be removed.

ii. However, adherence to principles of natural justice would

not mean that in every situation NCLT is required to afford

reasonable opportunity of hearing to the corporate debtor

before passing its order.

i i. In the present case, since the debtor had already appeared

before the admission of the application and was heard at

length, there was no violation of the principles of natural

justice.

[Annexure - X.9]

(III) M/s Starlog Enterprises Limited vs. ICICI Bank

Limited[24.05.2017], NCLAT held that

i. Before admitting an application under section 9 of the Code,

it is mandatory for the NCLT to issue notice to the corporate

debtor.

198

PRACTICAL ASPECTS OF INSOLVENCY LAW

[Annexure - X.10]

(IV) MCL Global Steel Pvt. Ltd. (supra)

Of the two issues raised in this Case, one pertained to non-

observance of Principles of Natural Justice. NCLAT held that

i. The operational creditor contended that corporate debtor

has no right to be heard before the stage of admission of

application under the Code.

ii. NCLAT noticed that the issue whether prior notice before

admission of an application for corporate insolvency

resolution process is required or not was considered in M/

s Innoventive Industries Ltd. wherein it was held that NCLT

is bound to issue limited notice before admission of

application.

i i. NCLAT accordingly decided the first issue in favour of the

corporate debtor holding that there was violation of

principles of natural justice as no notice was issued to

corporate debtor before admission of application.

C. MANDATORY OR DIRECTORY TIME PERIOD UNDER CODE

(I) J K Jute Mills Company Limited vs. M/s Surendra Trading

Company [01.05.2017], NCLAT held that:

i. The time period of 14 days under section 7, 9 and 10 of

the Code which is to be counted from the ‘date of receipt

of application’ means ‘date on which the application is listed

for admission / order’

ii. The nature of provisions, contained in section 7, 9 and 10

with regard to time limit for admission/rejection of an

application by NCLT, being procedural in nature, cannot be

treated to be a mandate of law and the object behind these

provisions is only to prevent delay in hearing and disposal

of cases.

i i. However, the period of 7 days granted to an applicant to

remove defects is mandatory and on failure to observe

this, application is fitted to be rejected.

iv. The time limit of 180 days + 90 days (extension) for

completion of insolvency resolution process under section

12 is mandatory.

PRACTICAL ASPECTS OF INSOLVENCY LAW

199

v. Since a regular Insolvency Professional starts functioning

on completion of period of interim resolution professional,

the performance of duties of IRP cannot be held to be

mandatory though the period is required to be counted for

completion of resolution process i.e. 180 days + 90 days

(extension)

vi. It is not mandatory for ‘operational creditors’ to propose

the resolution professional to act as an interim resolution

professional.

[Annexure - X.11]

(II) M/s Surendra Trading Company vs. M/s Juggilal Kamlapat

Jute Mills Company Limited & Ors. [19.09.2017], the issue

before the Hon’ble Supreme Court was whether the time period

of 7 days, as held by NCLAT above, is mandatory? The Hon’ble

Supreme Court observed as under:

i. Time is the essence of the Code. Despite that, NCLAT

held that fourteen days time period is not mandatory. Even

though\ said part of the order (i.e. with regard to fourteen

days period) was not under chal enge, the Hon’ble Supreme

Court observed that it was apposite to see the reasoning

for holding such by NCLAT.

ii. It was observed that right after analysing the provisions of

fourteen days time within which NCLT is to pass the order,

NCLAT jumped to another conclusion viz., the period of

seven days and there was no discussion on this aspect.

Hon’ble Supreme Court observed that there was no valid

reason given by NCLAT to come to such conclusion. The

period of 180 days starts from admission of application.

Period prior to that is not to be counted. Thus, no purpose

is served by treating the period of seven days as

mandatory.

i i. Looked at from another angle, Hon’ble Supreme Court

observed that it has to be seen whether the rejection would

be treated as rejection of application on merits thereby

debarring filing of fresh application or the same is merely

an administrative order. In the former case, it would lead

to travesty of justice as even though the case may have

merits, the applicant would be shown the door without

200

PRACTICAL ASPECTS OF INSOLVENCY LAW

adjudication. If it is the latter case, then rejection of

application in the first instance is not going to serve any

purpose as applicant would be entitled to file fresh

application which would have to be entertained. Thus, in

either case, no purpose is served by treating the aforesaid

provision as mandatory.

iv. However, Hon’ble Supreme Court also put a rider. It noted

that many frivolous applicants would file the application

but would not cure the defects. In such case, a caveat

has been put and that is, that if objections are not removed

within seven days, the applicant, while refilling the

application after removing objections, would be required

to file an application in writing showing sufficient case as

to why the applicant could not remove the objections within

seven days. When such an application comes, Adjudicating

Authority is to decide whether sufficient cause is shown

or not.

[Annexure - X.12]

D. Certificate from Financial Institution – whether Mandatory or

Directory

(I) Smart Timing Steel Ltd. vs. National Seed and Agro

Industries Ltd. [19.05.2017], NCLAT held that:

i. The word ‘shal ’ used in sub-section (3) of section 9 of

Code is mandatory. To determine whether a provision is

mandatory or directory, one must look into the subject

matter and consider the importance of the provision, the

relation of that provision to the general object intended to

be secured. The determination of the question whether a

provision is mandatory or directory would, in the ultimate

analysis, depend upon the intent of the law-maker and

that has to be gathered not only from the phraseology of

the provision but also by considering its nature, its design

and the consequences which would fol ow from construing

it in one way or the other.

ii. In this case, NCLT, Mumbai Bench had dismissed an

application because the appel ant, a foreign company of

Hong-Kong having no office or bank account in India, did

not file any certificate from a financial institution, certifying

PRACTICAL ASPECTS OF INSOLVENCY LAW

201

that no payment of unpaid operational debt had been made.

[Annexure - X.13]

(II) In Uttam Galva Steels Limited vs. DF Deutsche Forfait AG

& Anr., [28.07.2017], NCLAT, while relying upon Smart Timing

(supra) reaffirmed that certificate from Financial Institution is

mandatory. In Uttam Galva, the certificate was issued by a

foreign bankand is not recognised as a ‘financial institution’.

The said Certificate has been issued by ‘collecting agency’ as

distinct from ‘Financial Institution” and genuity of the same

cannot be verified by the Adjudicating Authority.

[Annexure - X.14]

(III) In Macquarie Bank Limited vs. Shilpi Cable Technologies

Ltd. [15.12.2017], Hon’ble Supreme Court has settled the law

and held that a certificate under 9(3)(c) of the Code is

certainly not a “condition precedent” and the expression

“confirming” in section 9(3)(c) makes it clear that it is only a

piece of evidence, which “confirms” that there is no payment of

an unpaid operational debt. It was held that the words ”if

available” shows that filing of certificate is not a pre-condition.

It was observed that there may be situations where a foreign

supplier may have a foreign banker who is not within section

3(14) of the Code. The fact that such foreign supplier is an

operational creditor is established from reading of definition of

“person” contained in section 3 (23), as including person resident

outside India, together with definition of ‘operational creditor’ in

section 5(20). The Code cannot be construed in a discriminatory

fashion so as to include only those operational creditors who

are residents outside India who happen to bank with financial

institutions which may be included under section 3(14) of the

Code.

[Annexure - X.15]

E. Prior consent of Joint Lender Forum by Financial Creditor –

whether required before filing application

(I) Innoventive Industries (supra), NCLAT held that:

i. Beyond the fact regarding existence of dispute and ensuring

that the application is complete, the adjudicating authority

was not required to look into any other factor, including the

202

PRACTICAL ASPECTS OF INSOLVENCY LAW

question whether permission or consent has been obtained

from one or other authority, including JLF.

ii. Therefore, the contention that prior to filing of an application

under the Code, an applicant is required to obtain permission

or consent of JLF as it wil adversely affect loan of other

members was rejected.

F. Applicability Of Limitation Act To Proceedings Under Code

(I) Neelkanth Township and Construction Pvt. Ltd. vs. Urban

Infrastructure Trustees Ltd., [11.08.2017], NCLAT has observed

that “there is nothing on the record that Limitation Act, 2013 is

applicable to the Code. Moreover, the Code is not an Act for

recovery of money claim, it relates to initiation of corporate

insolvency resolution process hence default in payment of debt

with continuous course of action cannot be barred by limitation. ”

[Annexure - X.16]

Neelkanth Township and Construction Pvt. Ltd. chal enged

the above judgment of Appellate Authority before the Hon’ble

Supreme Court of India. The Hon’ble Supreme Court dismissed

the appeal filed by corporate debtor. However, it observed that

the question of law viz. whether limitation act is applicable to

Insolvency proceedings is left open.

(II) M/s Speculum Plast Pvt. Ltd. vs. PTC Techno Pvt. Ltd.,

[07.11.2017], NCLAT looked at the legislative intent of the Code

and noted that that a completely different time frame has been

provided under the Code for various stages and held that

Limitation Act was not applicable for initiation of corporate

insolvency resolution process. However, at the same time,

NCLAT held that the Doctrine of Limitation and Prescription is

necessary to be looked into for determining the question whether

the application under section 7 or section 9 can be entertained

after long delay, amounting to laches, and thereby the person

forfeited his claim. The NCLAT accordingly, remanded the case

back to NCLT.In the above case, two more appeals were clubbed

and heard together including an appeal filed against one B. K.

Educational Services Pvt. Ltd.

[Annexure – X.17]

Subsequent Development

PRACTICAL ASPECTS OF INSOLVENCY LAW

203

(III) B. K. International Services Pvt. Ltd. filed an appeal before the

Hon’ble Supreme Court and the Hon’ble Supreme Court, in an

interim order dated 10.01.2018 has stayed the above judgment

passed by NCLAT.

[Annexure – X.18]

G. Whether Notice under section 8 of the Code is mandatory to be

given

(I) Era Infra Engineering Ltd. [03.05.2017], NCLAT held that:

i. Issuance of notice under section 8 of the Code is mandatory

and the contention that earlier notice issued to the debtor

under section 271 of the Companies Act, 2013 for winding

up should be treated to be a notice for purpose of section

8 of the Code was rejected.

ii. The issuance of notice under section 8 of the code is

mandatory and is not a curable defect.

[Annexure - X.19]

H. Whether Buyers can approach NCLT in case of default in “assured

returns”

(I) Nikhil Mehta and Sons V/s AMR Infrastructure Ltd.

[21.07.2017],

i. NCLAT was considering an issue “Whether the buyers who

entered into agreements/Memorandum of Understandings

with Builder for the purchase of three units being a

residential flat, shop and office space in the projects

developed, promoted and marketed by the Builder come

within the meaning of ‘Financial Creditor’ as defined under

the provisions of sub-section (5) of Section 7 of the Code?”

ii. NCLAT held that the buyers (in that case) were “investors”

and had chosen the “committed return plan”. The Builder

in their turn agreed upon to pay monthly committed return

to the investors. Thus, the amount due to the buyers came

within the meaning of “debt” defined under section 3(11) of

the Code. Furthermore, NCLAT noted from the Annual

Return and Form 16-A of the Builder that they had treated

the buyers as “investors” and borrowed amount pursuant

to sale purchase agreement for their commercial purpose

204

PRACTICAL ASPECTS OF INSOLVENCY LAW

treating at par with loan in their return. Thus, NCLAT held

that the amount invested by buyers came within the

meaning of ‘Financial Debt’ as defined under section 5(8)(f)

of the Code, subject to satisfaction of as to whether such

disbursement against consideration is for “time value of

money”.

[Annexure - X.20]

I. Whether a joint application by two or more ‘operational creditors’

under Section 9 of the IBC is maintainable

(I) In Uttam Galva Steels Limited (supra), NCLAT held that filing

of joint application by two or more operational creditors under

section 9 is not permissible. The language of section 7 of IBC

provides that application for initiation of insolvency resolution

process may be filed by Financial Creditor either by itself or

jointly with other Financial Creditors, whereas, such language

is not used in section 9 of IBC. Otherwise also, it is not practical

for more than one ‘operational creditor’ to file a joint petition.

Individual ‘operational creditors’ will have to issue their individual

claim notice under section 8. The claim will vary which wil be

different in each case. The notice under section 8 wil have to

be issued in format. Separate Form-3 or Form-4 wil be filed.

J. Whether the demand notice with invoice under Section 8 of IBC

can be issued by any lawyer on behalf of an Operational Creditor?

(I) In Uttam Galva Steels Limited (supra), NCLAT held that notice

under section 8 of the Code cannot be given by an Advocate/

CA/CS.

i. From a plain reading of sub-section (1) of Section 8, it is

clear that on occurrence of default, the operational creditor

is required to deliver the demand notice of unpaid

Operational Debt and copy of the invoice demanding

payment of the amount involved in the default to the

corporate debtor in such form and manner as is prescribed.

ii. Sub-Rule (1) of Rule 5 of Adjudicating Authority Rules

mandates ‘operational creditor’ to deliver to the ‘corporate

debtor’ the demand notice in Form-3 or invoice attached

with notice in Form-4.

i i. Rule 5(1) (a) & (b) lists out person (s) who are authorised

PRACTICAL ASPECTS OF INSOLVENCY LAW

205

to act on behalf of operational creditor. From bare perusal

of Form-3 and Form-4, read with sub-rule (1) of Rule 5 and

Section 8 of the I&B Code, it is clear that an operational

creditor can apply himself or through a person authorised

to act on behalf of operational creditor. The person who

is authorised to act on behalf of operational creditor

is also required to state “his position with or in relation

to the operational creditor”, meaning thereby the

person authorised by operational creditor must hold

position with or in relation to the operational creditor

and only such person can apply.

(II) However, the Hon’ble Supreme Court, in Macquarie Bank

Limited (supra), settled the law and held that a lawyer can

issue a demand notice under section 8 of the Code on behalf of

the operational creditor. It was observed that the language used

in section 8 of the Code speaks of an operational creditor

“delivering” the demand notice and not “issuing” it. Delivery,

therefore, would postulate that such notice could be made by

an authorized agent. It was observed that the word “practice” in

Section 30 of the Advocates Act is an expression of extremely

wide import that would include al preparatory steps leading to

the filing of an application before a Tribunal, including NCLT and

NCLAT. To remove any doubts, the Hon’ble Supreme Court ruled

that the non-obstant e provision in Section 238 of the Code will

not override the Advocates Act since there is no inconsistency

between the Adjudicating Authority Rules and Advocates Act.

The Supreme Court therefore observed that “Therefore, a

conjoint reading of Section 30 of the Advocates Act and

Sections 8 and 9 of the Code together with the Adjudicatory

Authority Rules and Forms thereunder would yield the result

that a notice sent on behalf of an operational creditor by a

lawyer would be in order. ”

K. Whether NCLAT has power to order withdrawal of an application

that has been admitted, upon settlement between the parties?

(I) Lokhandwala Kataria Construction Private Limited vs. Nisus

Finance & Investment Manager LLP [13.07.2017], a prayer

was made before the NCLAT to order withdrawal of application

as the matter was settled between the parties.

i. The NCLAT noted the provisions of Rule 8 of IBBI (Application

206

PRACTICAL ASPECTS OF INSOLVENCY LAW

to Adjudicating Authority) Rules, 2016 (“Adjudicating

Authority Rules”) which empowers the Adjudicating

Authority to permit withdrawal of the application on a

request of the applicant before its admission. Thus, it was

held that an application made under Section 7 can be

withdrawn only before its admission by the Adjudicating

Authority but once the application is admitted, it cannot

be withdrawn and the procedures laid down under Sections

13 to 17 of the Code need to be fol owed.

ii. A submission was made that NCLAT can exercise inherent

power under Rule 11 of the National Company Law

Appel ate Tribunal Rules, 2016 (“NCLAT Rules”) which

empowers the NCLAT to make such orders or give such

directions as may be necessary for meeting the ends of

justice or to prevent abuse of the process of law.

i i. NCLAT noted that Rule 11 of the NCLAT Rules, which talk

of inherent powers of NCLAT, have not been adopted for

the purposes of Insolvency and Bankruptcy Code and only

Rule 20 to 26 of the National Company Law Tribunal Rules,

2016 have been adopted. In absence of any specific

inherent power and where there is not merit the question

of exercising inherent power does not arise.

[Annexure – X.21]

iv. The appel ant filed statutory appeal before the Hon’ble

Supreme Court of India vide Civil Appeal No. 9279/2017

[Annexure - X.22] wherein, the Hon’ble Supreme Court,

even though observed that prima facie it seems that NCLAT

does not have inherent powers (while exercising powers

under the Code), however, since both the parties were

before the Hon’ble Supreme Court, the Apex Court,

exercising its power to do complete justice under Article

142 of the Constitution of India, recorded the consent terms

and put a quietus to the matter.

(II) Recently, the Hon’ble Supreme Court in Uttara Foods and

Feeds Private Limited vs. Mona Pharmachem (13.11.2017)

observed that in view of Rule 8 of the Adjudicating Authority

Rules, NCLAT prima facie could not avail of the inherent powers

recognised by Rule 11 of the National Law Appel ate Tribunal

Rules, 2016 to allow a compromise to take effect after admission

PRACTICAL ASPECTS OF INSOLVENCY LAW

207

of the insolvency petition. Accordingly, the Hon’ble Supreme

Court was of the view that instead of al such orders coming to

the Supreme Court as only the Supreme Court may utilise its

powers under Article 142 of the Constitution of India, the relevant

Rules be amended by the competent authority so as to include

such inherent powers. The court was of the view that this would

obviate unnecessary appeals being filed before the Supreme

Court in matters where such agreement has been reached.

[Annexure - X. 23]

L. Whether the Insolvency and Bankruptcy Code, 2016 would prevail

over the State Laws

(I) In a landmark judgment delivered by Hon’ble Supreme Court in

M/s Innoventive Industries Ltd. vs. ICICI Bank & Anr.,

[31.08.2017], Hon’ble Supreme Court held that the Code would

prevail over the Maharashtra Relief Undertakings (Special

Provisions) Act, 1958.

The Hon’ble Supreme Court observed that once an insolvency

professional is appointed to manage the company, the erstwhile

directors who are no longer in management, cannot maintain

an appeal on behalf of the company.

On the issue of repugnancy between the State law and the

subsequently enacted Central Act i.e. the Code, observed that

the earlier State Law is repugnant to the Code as, under the

State Law, the State Government may take over the

management of the relief undertaking, after which a temporary

moratorium comes into effect in much the same manner as

contained in section 13 and 14 of the Code. Thus, by giving

effect to the State law, the plan or scheme which is adopted

under the Code, wil directly be hindered and/or obstructed to

that extent in that the management of relief undertaking, which,

if taken over by the State Government, would directly impede

or come in way of taking over the management of corporate

body by IRP. Further, the moratorium declared under the State

Act would directly clash with the moratorium under the Code.

Thus, it was held that the Central Act would prevail over State

Act.

[Annexure – X. 24]

208

PRACTICAL ASPECTS OF INSOLVENCY LAW

M. Whether a ‘Corporate Debtor’ can prefer an appeal under

section 61 of the Code through the Board of Directors, which

stands suspended after admission of an application by

Adjudicating Authority?

NCLAT in Steel Konnect (India) Pvt. Ltd. vs. M/s Hero Fincorp

Limited (29.08.2017) held that

i. A perusal of section 17(1) (a) of the Code, makes it clear that

the Management of affairs of the ‘corporate debtor’ stands vested

with the ‘Interim Resolution Professional’ & such vesting is

limited and restricted to the extent of power vested under section

17(1) of the Code which empowers the IRP to act and execute

in the name of corporate debtor al deeds, receipts and other

documents, if any, to take such action in the manner and subject

to such restrictions, as may be specified by Board. However,

the IRP has not been vested with any specific power to sue

any person on behalf of the corporate debtor.

ii. When an application under section 7 or 9 of the Code is admitted,

corporate debtor is a party to such proceedings. It is only after

hearing the corporate debtor, the Adjudicating Authority can

pass an order under section 7 or 9, admitting or rejecting an

application.

i i. Once the application under section 7 or 9 is admitted, CIRP

starts. In such case, one of the aggrieved party, being corporate

debtor, has a right to prefer an appeal under section 61 of the

Code, apart from any other aggrieved person like Director(s) of

the company or members, who do not cease to be Director(s)

or member(s), as they are not suspended but their function as

‘Board of Director(s)’ is suspended. They continue to remain as

Directors and members of the Board of Directors for al purpose

in the records of Registrar of Companies under the Companies

Act, 2013.

[Annexure - X.25]

N. Whether resolution plan can be approved for a particular unit of

a Corporate Debtor?

(I) In the matter of Roofit Industries Limited (22.01.2018), NCLT,

Mumbai Bench, an application was filed by Resolution

Professional for liquidation of the Roofit Industries Ltd. (Corporate

Debtor). The Corporate Debtor had filed an application under

PRACTICAL ASPECTS OF INSOLVENCY LAW

209

section 10 of the Code for initiating CIRP against itself which

was admitted on 28.06.2017. The period of 180 days expired on

26.12.2017 and no expansion of CIRP period was sought for.

Corporate Debtor had nine (9) immoveable properties. No

resolution plan was received except for one of the units of

Corporate Debtor viz., B-42 Gummidipoondi Factory, which was

submitted by Gummidipoondi Roofit Employees’ Association

on the last day of completion of CIRP.

Since the CIRP period of 180 days ended on 26.12.2017 and

no resolution plan for Corporate Debtor was received except for

one property, resolution professional filed application for

liquidation under section 33 of the Code.

Considering the fact that resolution plan was submitted only in

respect of one property, NCLT was of the view that the resolution

plan could not be considered as a resolution plan under the

Code and accordingly, NCLT ordered liquidation of Corporate

Debtor.

[Annexure - X.26]

210

PRACTICAL ASPECTS OF INSOLVENCY LAW

ANNEXURE X.1

BEFORE THE NATIONAL COMPANY LAW TRIBUNAL,

PRINCIPAL BENCH NEW DELHI

Company Application No. (I.B.)07/PB/2017

Company Application No (I.B.)08/PB/2017

Present: CHIEF JUSTICE (Retd.) SHRI M.M. KUMAR, HON’BLE

PRESIDENT & SHRI R. VARADHARAJAN, MEMBER (JUDICIAL)

In the matter of:

Section 9 and other applicable provisions of the Insolvency and Bankruptcy

Code, 2016 read with the Rule 6 of the Insolvency and Bankruptcy (Application

to Adjudicating Authority) Rules, 2016.

In the matter of:

1. M/s.One Coat Plaster

182/183, Indra Bhawan,

V.P.O. Sikhrali, Sector-17a,

Gurgaon-122 001

Operational Creditor/Applicant

2. M/s.Ambience Private Limited

Company registered under the Companies Act, 1956

Having Registered Office at:

L-4, Green Park Extension,

New Delhi-110016

CIN: U51503DL1986PTC023886

Corporate Debtor

AND

In the matter of:

1. M/s.Shivam Construction Company

Plot No.SO-110, Khasra No.1965

Iqbal Colony, Garima Garden,

Ghaziabad-201 005

Operational Creditor/Applicant

2. M/s.Ambience Private Limited

Company registered under the Companies Act, 1956

Having Registered Office at:

L-4, Green Park Extension,

New Delhi-110016

CIN: U51503DL1986PTC023886

Corporate Debtor

PRACTICAL ASPECTS OF INSOLVENCY LAW

211

Counsel for the Petitioners:

(i) Shri Dushyant K. Mahant, Advocate

(i ) Shri Gaurav Dubey, Advocate

Counsel for the Respondent:

Shri Sushant Kumar, Advocate

COMMON ORDER

The above petitions have been filed by the petitioners seeking to set in

motion the corporate insolvency resolution process (‘IRP’) as contemplated

under section 9 of the Insolvency and Bankruptcy Code, 2016 in relation to

one M/s. Ambience (P.) Ltd. (for brevity herein referred to as the 'company')

however described in the petition as “corporate debtor”. Brief facts as can

be discerned from the petition filed by the petitioners describing themselves

as an “operational creditor” against the company giving rise to the filing of

the petition are as fol ows :

In relation to CA No. (IB)07(PB)/2017.

(a) That the company is engaged in real estate business including real

estate development and in pursuance of its business had initially issued

a work order dated 1st October, 2015 bearing No. Ambience/15-16/363

for a specified sum of Rs.204,000 in favour of the operational creditor

which happens to be a partnership firm carrying its business under the

name and style of One Coat Plaster. Subsequently it is averred that

two more work orders dated 13th October, 2015 and 13th November,

2015 were also placed on the operational creditor by the company as

works contract for Gypsum Plaster for the Wal s/Ceiling at their site at

Noida and the payment in relation to the same was to be made as per

actual work measurement at site. Further, the payments to be released

against bills. Al the work orders placed by the company on the

operational creditor, have been annexed. (Annexure B, colly).

(b) It is claimed that the operational creditor pursuant to the work orders

had executed the work subsequent to which bil s were raised. It is

contended that in relation to the work carried out at a site named

‘Pushpanjali’ out of the total billing of Rs.2,69,507.44 a sum of Rs.

1,00,085 has been paid thereby leaving a balance of Rs.1,69,422.44

and that in relation to the site at Noida where the work had been

carried out and as against the bil ed amount of Rs.55,60,242.74 the

company has paid only Rs.24,68,832 leaving a balance of

Rs.30,91,410.74. Thus, in aggregate the company owes the

operational creditor a sum of Rs.32,60,833.18 it is claimed and despite

reminders have failed to pay the balance outstanding.

212

PRACTICAL ASPECTS OF INSOLVENCY LAW

(c) That the non-payment of the balance outstanding since July 2016

forced the operational creditor to serve a notice of demand as

contemplated under section 8 of the Code through its counsel on

25th January, 2017 at the registered office of the company as well as

through e-mail and til the date of filing of the above petition on 8th

February, 2017, no reply has been received despite service nor any

payment has been made. This has given rise to the above petition

being filed under the Code for unleashing the corporate insolvency

resolution process as against the company.

In relation to Company Application No. (IB)08/PB/2017, the following

fact emerges :

(d) That the company engaged in real estate business including real

estate development and in pursuance of its business had initially

issued a work order dated 25th November, 2015 bearing No. Ambience/

15-16/480-A for a specified sum in favour of the operational creditor

which happens to be a sole proprietary concern carrying business

under the name and style M/s. Shivam Construction Company.

Subsequently, it is averred that one more work order dated 25th

November, 2015 bearing No. Ambience/15-16/480-B was also placed

on the operational creditor by the company as work contract for

Gypsum Plaster for the Wal s/Ceiling without supply of material at

their site at Noida and the payment in relation to the same to be

made as per actual work measurement at site and payments to be

released against bills. All the work orders placed by the company on

the operational creditor it is averred by the counsel for the operational

creditor has been annexed as Annexure B (col y).

(e) That the operational creditor pursuant to the work orders had executed

the work subsequent to which bills were raised. It is contended that

in relation to the work carried out at Noida, out of the total billing of

Rs.16,79,646.66 a sum of Rs.7,83,746 has been paid thereby leaving

a balance of Rs.8,95,900. Thus, in aggregate the company owes the

operational creditor a sum of Rs.8,95,900. It is claimed that despite

reminders the company has failed to pay the balance outstanding.

(f) That the non-payment of the balance outstanding since 10th June,

2016 forced the operational creditor to serve a notice of demand as

contemplated under section 8 of the Code through its counsel on

25th January, 2017 at the registered office of the company as well as

through e-mail and til the date of filing of the above petition on 9th

February, 2017, despite service no reply has been received nor any

PRACTICAL ASPECTS OF INSOLVENCY LAW

213

payment has been made. This has given rise to the above petition

being filed under the Code for unleashing the corporate insolvency

resolution process against the company.

The above petitions came to be listed before us on 17th February, 2017 on

which date the counsel for the company entered appearance and sought

time for response and the hearing was deferred to 20th February, 2017. On

20th February, 2017 when the petitions were taken up, the counsel for the

company submitted that the company had sent a reply to the notice of

demand sent by the counsel for the operational creditor dated 4th February,

2017. The company has taken the stand that due to defective and poor

quality of work on the part of the petitioners no payment has been made

and have completely denied the claim of the operational creditor. In view of

the representation of the counsel for the company that a reply had been

sent to the legal notice of the operational creditor, the parties were directed

to file the reply as sent by the company through its counsel and the petitions

were fixed for hearing on 22nd February, 2017 for compliance.

Since the issues involved in both the company petitions are similar and

concerning the company named as “Corporate Debtor’, the matter is taken

up together and disposed off as fol ows :

On 22nd February, 2017 we heard learned counsel for both the parties. The

counsel for the operational creditors/petitioners took us through the typed

set of documents filed along with the petitions. A perusal of the record

shows that the work order placed by the company primarily relates to works

contract predominantly concerning labour contract and the rate for the

execution of the works contract seems to be fixed on square feet basis.

Further it is seen that the bil s/invoices raised by the petitioners annexed

as Annexure C ‘Colly’ is computed on sq. ft. basis for ascertaining the

quantum of work done and the amount payable for carrying out the work.

However, when the counsel for the petitioners was asked as to whether the

company or its authorized representative or architect had certified the

quantum of work done by the petitioners in relation to the works contract

awarded to them, no such document was produced wherein the quantum of

work might have been certified or in relation to quality. This is the norm

adopted in building contracts of considerable value which ordinarily constitute

the basis for raising the bil s. The engagement of the petitioners to execute

the work cannot be denied in view of the work order placed by the company

which is further reinforced by payment in a sum of Rs.25,68,917 to the

petitioner in CA No.07/PB/2017 and Rs. 7,83,746. However, in relation to

the balance amount claimed by the petitioners as due from the company,

214

PRACTICAL ASPECTS OF INSOLVENCY LAW

we are unable to agree in view of lack of materials submitted before us by

the petitioners and also taking into consideration the fact that the debt

sought to be fastened on the company has been vehemently disputed as is

evident from the reply to the notice sent by the company, which is dated 4th

February, 2017 but dispatched on 8th February, 2017 to the counsel for the

petitioners.

Reference to the provisions of the Code, more particularly section 9 thereof

clearly discloses that this Tribunal has the power, inter alia, also to reject

the application of the operational creditor under section 9(5)(d) in case of

notice of dispute has been received by the operational creditors or there is

record of dispute with the information utility. In the absence of information

utility, we are perforce to rely on the notice of dispute as sent by the company

to the petitioners denying the liability based on which the entire edifice of

the petitioner’s claim crumbles which constitutes basis of the present

application. It is pertinent to note that the expression dispute’ has been

defined and it seems to be an inclusive definition as seen from section 5(6)

of the Code which reads as fol ows :

“dispute” includes a suit or arbitration proceedings relating to –

(a) The existence of the amount of debt;

(b) The quality of goods or services; or

(c) The breach of a representation or warranty;

A bare perusal of section 5(6) of the Code show that a dispute could be

proved by showing that a suit has been filed or arbitration are pending. It

further elaborates that suit or arbitration should be in respect of the existence

of the amount debt, quality of goods or services; or a breach of a

representation or a warranty. It is not an exhaustive definition but an illustrative

one. It becomes evident from the expression ‘includes’ which immediately

succeeds the word ‘dispute’. Moreover, under section 8(1) of the Code

adequate room has been provided for the ‘NCLT’ to ascertain the existence

of a dispute. A demand notice by an “operational creditor” to an “operational

debtor” must be sent who has not paid operational dues and has committed

default. Section 8(2) further clarifies that the corporate debtor is obliged to

bring to the notice of the “operational creditor” within 10 days of the receipt

of notice, the existence of a dispute and record of the pendency of the suit

or arbitration proceeding filed before the receipt of such notice or invoice in

relation to such dispute. The other option is to pay the demanded amount. In

the instant case the petitioner sent a demand notice which was duly received

by the ‘company’ but the reply was also filed which has been delayed by

PRACTICAL ASPECTS OF INSOLVENCY LAW

215

four days where dispute has been raised. As such on a perusal of documents

submitted before us by the petitioners, we are unable to fathom any material

on record to dislodge the same as already discussed in paragraph supra.

Hence we are inclined to reject the above petitions.

Hence, the remedy of the petitioners above named lies elsewhere and not

under the provisions of the Code. Before parting we make it clear that any

observations made in this order shal not be construed as an expression of

opinion on the merit of controversy as we have refrained from entertaining

the application at the initial stage itself. Therefore, the right of the applicants

before any other forum shal not be prejudiced on account of dismissal of

instant applications.

For the reasons afore stated we reject the applications/petitions filed by the

petitioners/operational creditors without any costs.

Sd/-

(CHIEF JUSTICE M.M.KUMAR)

PRESIDENT

Sd/-

(R. VARADHARAJAN)

MEMBER (JUDICIAL)

March 1st, 2017

216

PRACTICAL ASPECTS OF INSOLVENCY LAW

ANNEXURE X.2

BEFORE THE NATIONAL COMPANY LAW TRIBUNAL

MUMBAI BENCH, MUMBAI

C.P. NO. 45/I&BP/NCLT/MAH/2017

Coram: B. S.V. Prakash Kumar, Member (Judicial) &

V. Nallasenapathy, Member (Technical)

In the matter of under Section 9 of the Insolvency and Bankruptcy Code,

2016 and Rule 6 of the Insolvency and Bankruptcy (Application to Adjudicating

Authority), Rules 2016.

Between

M/s. DF Deutsche Forfait AG and Anr.

... Applicant/ Operational

Creditor

V/s.

M/s. Uttam Galva Steel Ltd.

... Corporate Debtor

For Applicants: Mr. Shyam Kapadia i/b. Mr. Sonu Tandon, Advocates for

the Applicant/operational Creditor.

For Corporate Debtor: Shri. Janak Dwarkadas, Sr. Counsel, Shri. Ravi

Kadam, Sr. Counsel, a/w. Mr. Dhiraj Mhetre, Ms. Smiti Tewari, Advocates for

the Respondent/ Corporate Debtor.

ORDER

(Pronounced on 10.04.2017)

Per B.S.V. Prakash Kumar

It is a company petition filed u/s 9 of Insolvency and Bankruptcy Code 2016

(IB Code) by operational creditors viz. DF Deutsche Forfait AG (cal ed as

Deutsche) & Misr Bank Europe GmbH (called as Misr Bank) against a

corporate debtor company viz. Uttam Galva Steels Limited (referred as Uttam

- whose financial statements have already slipped into brackets) stating

that Uttam defaulted in making payment of USD 16,542,886.33 (inclusive

of interest till 28-02-2017) equivalent to Rs. 110,40,30,876.44 towards 20,000

tons of prime steel bil ets supplied by a Germany Company namely AIC

Handels GmbH (called as AIC). This debt was initially assigned to Deutsche

by entering into a discount agreement by AIC, thereafter Deutsche, in turn,

PRACTICAL ASPECTS OF INSOLVENCY LAW

217

subsequently assigned part of this debt to Misr Bank by Deutsche. When

Uttam failed to pay off the amount despite statutory notice u/s 8 of IB Code

has been received by it on 03.03.2017, after completion of 10 days from the

date of receipt of notice by Uttam, Deutsche and Misr Bank, on 14th March

2017, filed this company petition u/s 9 of IB Code for initiation of Insolvency

Resolution Process by declaring Moratorium with consequential directions

as set out under sections 13, 14, 15 and 16 of IB Code.

Brief background of this litigation:

2. The corporate debtor (Uttam) is in steel rolls manufacturing dealing with

export and import business in relation to steel, in furtherance of it, on 16th

August 2013, Uttam entered into a Sales Contract (Annexure-4) with AIC

for purchase of 20,000 metric tons of Prime Steel Bil ets at the rate of $540

per MT, which would come to $10,800,000 (+/- 10% depending on the exact

quantity supplied) agreeing that shipment of the goods be in the month of

September 2013 and the agreed money should be payable in 180 days from

the Bil of Lading(Annexure-6) date. It is further agreed that payment to be

made in effective USD by two Bills of Exchange each with face value of

USD 5,400,000 (+/- 10%) to the order of sel er i.e., AIC drawn on and accepted

by Uttam, maturing on the payment date, payable at a payment domicile

acceptable to AIC in Mumbai, it is also said that it would be governed and

construed in accordance with English Law and if any dispute in between, it

is by arbitration in accordance with Swiss Rules of International Arbitration

of the Swiss chambers of commerce by further saying that AIC is entitled

to pursue payment obligation of Uttam in the form of inter alia bills of

exchange before any competent court where a specially abbreviated form

of legal procedure exists.

3. As per the sale contract, AIC on 16th September 2013 shipped 19,976

MT of Prime Steel Bil ets. A Bil of Lading dated 16th September 2013

came to be issued, then on 18th September 2013, AIC issued an invoice

(Annexure-5) for a sum of USD 10,787,040 for the bil ets in quantity of 19,

976, 40 MT supplied to Uttam at a rate of USD 540 per MT. A reference was

made to two Bills of Exchange dated 18.9.2013 drawn by AIC on Uttam,

one (Annexure-7) for USD 5,387,040 and another (Annexure-8) for USD

5,400,000 to pay on 15th March 2014 (maturity date after 180 days) against

these two Bills of Exchange and Uttam unconditionally accepted the Bills.

4. Besides this, Uttam sent confirmation (Annexure-13) stating that the

shipment to Chttagong Port Bangladesh has been duly executed by AIC

under the sale contract dated 16.8.2013 and received al documents under

the contract, therefore buyer (Uttam referred to itself as buyer) accepted

218

PRACTICAL ASPECTS OF INSOLVENCY LAW

AIC (sel er) faultless performance without any reservation by confirming

that there exists no further obligation or liabilities of sel er (AIC), Uttam

further confirmed that the amount set out in the invoice represents 100% of

the purchase price, therefore buyer (Uttam) irrevocably and unconditionally

has undertaken to pay AIC as set out in the invoice waiving al rights of

objection and defence and buyer would effect the payment at maturity without

any deduction for and free of any taxes, charges, impost, levies or duties

present or future of any nature whatsoever in effective USD. It further stated

that this confirmation should form an integral part of the contract governed

by English Law and Arbitration as mentioned in the sale contract.

5. In the process of risk management, AIC entered into a discount ( forfaiting)

agreement which means, financing used by exporters that enables them to

receive cash immediately by selling their receivables (the amount an importer

owes the exporter) at a discount, and eliminate risk by making the sale

without recourse, meaning the exporter has no liability regarding possible

default by the importer on paying the receivables. The forfaiter is the individual

or entity that purchases the receivables, so the importer is then obligated to

pay the receivables amount to the forfaiter. A forfaiter is typically a bank or

a financial firm that specializes in export financing.

6. On 7th October 2013, AIC issued a letter of notification (Annexure -11) to

Uttam informing that AIC had entered into forfeiting agreement (Annexure-

10 dated 9/10th of October 2013) with Deutsche stating that it had assigned

the entire debt with present and future rights, claims and demands to it by

endorsing the bills of Exchanges, as against that notification, Uttam

acknowledged and confirmed the agreement between AIC and Operational

Creditor.

7. On 27th December 2013, Deutsche sent a notification (Annexure 14) to

Uttam notifying that part of receivables due to it under the sales Contract

and Bills of Exchange which were to mature on 15th March 2014 has been

unconditional y assigned to Misr Bank through another Forfating Agreement

(Annexure - 12) dated 27.12.2013. It is pertinent to say that this further

forfaiting to Misr Bank has not been confirmed by Uttam.

8. When Uttam failed to make payment even after maturity date 15.3.2014

had been passed by, a protest was recorded on 19.4.2014 as required under

law.

9. As Uttam failed to make payment of the above debt even after maturity

date, Deutsche and Misr Bank were constrained to issue notice dated 8th

December 2016 u/s 433 and 434 of the Companies Act, 1956, to which,

Uttam replied raising various al egations such as goods delivered to third

PRACTICAL ASPECTS OF INSOLVENCY LAW

219

party i.e., Aartee Commodities Ltd, subsequent assignment to Misr Bank

by Deutsch is not valid, but this Uttam had not raised any law suit on any of

the issues until statutory notice u/s 8 of the Code issued by them.

10. In the meanwhile, having IB Code come into force, Deutsch and Misr

Bank issued statutory notice (Annexure - 2) of demand u/s 8 of IB Code on

28th February 2017 calling upon Uttam to pay a sum of USD 16,542,886.33

i.e., a principal sum of USD 10,787,040 and interest of USD 5,755,846.33.

On 3rd March 2017, a reply (Annexure - 3) came from Uttam denying all

claims with a caveat that advocates were in the process of obtaining detailed

instructions from the corporate debtor and would reply in due course. Another

reply notice dated 11th March has been sent by Uttam to the Deutsch and

Misr Bank through e-mail (Annexure - Al in additional affidavit) stating that

its obligations under the sales contract were dependent on payment by

Aartee Commodities Ltd. and Uttam already filed a suit before Hon'ble High

Court of Bombay on 10th March 2017. But this Bench has not noticed any

such averment of payment by Uttam is dependent upon payment by Aartee

in any of the correspondence with either AIC or Deutsch or Misr Bank until

Uttam wrote reply to the notice given by present operational creditors.

11. Since Deutsche & Misr Bank, on receipt of reply from Uttam on 3.3.2017

and second reply on 11.3.2017 informing the operational creditors that Uttam

filed suit in respect of this claim against the creditors before Hon'ble Bombay

High Court subsequent to receipt of the notice u/s 8 of the Code, noticed

that no suit or Arbitration proceedings filed before receipt of notice u/s 8,

they have filed this company petition u/s 9 of IB Code for initiation of

insolvency resolution process by declaring Moratorium with consequential

directions as set out under sections 13, 14, 15 and 16 of IB Code.

Objections of Uttam:

12. On the date of hearing, Senior Counsel Sri Janak Dwarak Das appearing

on behalf of Uttam raised objection to admitting this petition arguing, one -

this petition is not maintainable for the debtor company timely raised notice

of dispute within 10 days after receipt of the notice u/s 8, two - an affidavit

has not been filed as enunciated u/s 9(3)(b) stating that there is no notice

has been given by Corporate debtor (Uttam) relating to the dispute of unpaid

operational debt, hence petition is incomplete (when reply has been given

there could not be any occasion to the operational Creditor to file an affidavit

saying that no reply has been given), three - that Deutsche & Misr Bank are

not operational creditors of Uttam, four - the petition is bound to be rejected

u/s 9(5)(i )(d) once notice of dispute has been received by Deutsche & Misr

Bank, here notice was received by the petitioners within 10 days from the

220

PRACTICAL ASPECTS OF INSOLVENCY LAW

date of receipt of notice u/s 8, five - since Deutsche & Misr Bank never

initiated any recovery proceedings though the alleged debt is payable since

March 15, 2014 until this petition u/s 9 has been filed, six - since disputed

questions on fact are involved in respect to Deutsche further assigning to

Misr Bank has not been confirmed by Uttam and it has to be tried by Trial

Court not as summary proceeding u/s 9, moreover since sales contract is

governed by English Law, it has to be tried before court of law, if any

modification is made to the contract, under clause 18 of the Sales Contract,

it has to be with the consent of Uttam only, seven - interest on the principal

amount is not admitted by Uttam, therefore claim including 18% interest is

arbitrary figure which is not substantiated by any document, eight - the

counsel argued that since Power of Attorney given to file this case has not

specifically authorized to initiate proceedings under IB Code, it has to be

dismissed basing on the order dated 30.3.2017 passed by special Bench

on reference; lastly - the counsel says Uttam is listed company providing

employment to 1,400 people and it has impeccable track record, hence this

Insolvency Resolution Process cannot be thrust upon a company like this.

Discussion:

13. As to 14 days' time, we must say that this case has come for hearing

within 14 days but whereas the corporate debtor itself argued several times,

of course petitioners side also argued and filed written submissions, not

once, twice, indeed first time written submissions from Uttam came before

this Bench on 1st April 2017, second time submissions came on 5th April

2017, later, for there being several issues to be addressed, this Bench also

took three four days' time for passing orders. This Bench cannot simply

pass it on to some other forum saying there are many issues to be addressed

when answers to al factual aspects are available in the material placed by

the petitioners and as to legal issues, when no evidence is required to

decide those issues, we firmly believe that onus lies upon this Bench to

decide al these issues.

14. Before going into merits of the petition, two three issues one must bear

in mind, one - as such there cannot be any pleadings part in the Forms to

be filed to initiate action u/ss 7, 9 & 10, except giving information column

wise; two - no pleading or defending party, the terminology like petitioner/

respondent or plaintiff/defendant is not present under this Code, most of the

procedure is inbuilt in the Code itself, therefore this has been named as

Code, not as Act; three - by reading the Code, it wil not give an impression

that it is an adversarial proceeding and no such law is existing in India

saying that court proceedings in India shall be adversarial only, therefore

PRACTICAL ASPECTS OF INSOLVENCY LAW

221

we have to go by what law says, we can't read into something that is not

present; four - we cannot hang on to conventional approach which has become

inherent in us that a legal proceeding shal be adversarial only, we are

governed by a democratic system, henceforth we have to go by the mandate

given by legislature. There are countries where legal system is inquisitorial.

Of course a system can be something different from the existing systems

like adversarial or inquisitorial, may be, if something other than these two

systems is good, then if legislature says it is good for the country, then we

have to fol ow. We have to grow along with changing times to come out of

bottlenecks suffocating the system.

Owing to the time constraint, since issues are overlapping, instead of point

wise, we have dealt with them together, which is as fol ows:

By now everybody is by heart with the provisions of sections 7, 8, 9 and 10

of the Code, therefore it is needless to say that reply has to be given to the

notice under section 8 of the code within 10 days of receipt of the notice, no

doubt Uttam gave reply on the very next day of receipt of the notice denying

the averments of the notice u/s 8, but without any averment of any suit or

arbitration pending since before receipt of notice u/s 8.

15. According to the definition of "dispute" in section 5(6) of the Code,

which is as fol ows:

'Section 2: In this Part the context otherwise requires, —

(6) "dispute" includes a suit or arbitration proceedings relating to —

(a) the existence of the amount of debt;

(b) the quality of goods; or

(c) the breach of representation or warranty;'

16. On perusal of this definition, it is evident dispute includes a suit or

arbitration proceeding, now the point for determination is as to whether the

word "includes" is extensive as generally understood or in any other way. If

we go through sections 7, 8, 9 and 10 of this code, this word "dispute"

nowhere appears except in sections 8 and 9, therefore this definition primarily

meant for application when notice is issued by the operational creditor u/s 8

and when case is filed by an operational creditor u/s 9 of the Code, therefore

the definition has to be understood in a meaningful way to cater the intent

and purpose behind sections 8 & 9, not otherwise.

17. To know how it is to be understood, we must also read part of section 8

and section 9, which goes as fol ows:

222

PRACTICAL ASPECTS OF INSOLVENCY LAW

"8. 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 shal , 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;

.........."

"9. Application for initiation of corporate insolvency resolution process by

operational creditor—

(1) After the expiry of the period of ten days from the date of delivery of

the notice or invoice demanding payment under sub-section (1) of section

8, if the operational creditor does not receive payment from the corporate

debtor or notice of the dispute under sub-section (2) of section 8, the

operational creditor may file an application before the Adjudicating Authority

for initiating a corporate insolvency resolution process.

2................................

3................................

4................................

5................................

6................................ ”

18. The corporate debtor counsel says the word dispute has to be understood

as mere denial to the claim as dispute. The definition to dispute is inclusive

definition enlarging the scope to the extent it can travel, therefore inclusion

of pendency of suit or arbitration wil not curtail the inclusivity of the definition.

19. Now the test is how to understand this definition, is it to be said that

wherever denial to assertion is present in the reply within ten days, it is to

be construed as dispute? Or, is it to be understood that dispute is qualified

and restricted as dispute only when suit or arbitration is pending since before

receipt of notice u/s 8?

20. In the definition, at the beginning of section 2 itself, it is mentioned that

PRACTICAL ASPECTS OF INSOLVENCY LAW

223

definition has to be taken in the way it is defined as long as the context

otherwise does not require, suppose context demands to take it otherwise,

this definition wil become sub-silentio in the said context, of course this

definition, it is nowhere explicitly looking that this definition is exhaustive.

The word 'etc' is also not added to apply ejusdem generis rule.

21. If we see section 8, which is precursor to invoke section 9, it is evident

that upon notice u/s 8 from the operational creditor to the debtor on the

ground of default occurrence, if the debtor fails to reply to the notice within

10 days stating dispute is in existence on the footing of suit or arbitration

pending or if the debtor fails to repay the unpaid debt within 10 days, then if

the notice of the dispute as stated under sub-section (2) of section 8 of the

code is given to the creditor and other compliances, the operational creditor

gets cause of action to file application u/s 9.

22. The argument of the debtor counsel is since the debtor disputed the

debt within 10 days by giving reply within 10 days to the creditors, it has to

be construed as dispute on two grounds, one - the definition for dispute is

inclusive, two - the word "and" in sub-section 2 (a) of section 8, has to be

read as "or" so as to harmonize with the inclusive definition to the word

"dispute".

23. We respectfully disagree with this view; definition has always to be

harmonized with the context in which it is said in the substantive section,

not otherwise. This caution is very much implicit in section 2 itself saying it

has to be understood as defined unless context otherwise, therefore two

things are clear, one - defining section will not govern the substantive section,

two - definition has to be construed in the context of substantive section,

not otherwise. When a word is defined, it has to be understood meaningful y,

if definition is only to say dispute includes suit or arbitration, no definition

needs to be given, because pendency of suit or arbitration always connotes

dispute, this need not be said separately, indeed dispute is genesis, pendency

of suit or arbitration is species. No doubt it is true that word "includes" is

normally considered as extensive, but there are situations to read "includes"

as "means" to enable the courts to achieve the purpose of legislation. If

reply is given denying the claim despite default occurrence is clear,

does it mean that no application can be filed by any operational creditor

even though the operational creditor makes the case of default

occurrence? If that is so, it will be virtually ousting operational creditor

filing any case under section 9. If this scenario emerges, then it wil be

nothing but throwing this law into dust bin. We al know how much time is

taking for logical end to winding up proceedings, by the time company

224

PRACTICAL ASPECTS OF INSOLVENCY LAW

liquidation happens, not even bones remain to creditors. Al this exercise

under new Code is to maximization of value of assets in a time bound

manner to promote entrepreneurship and availability of credit, to balance

the interests of all the stake holders.

24. If we start looking at this as draconian law gobbling the companies and

branding orders under this law as harsh, then we remain where we are,

perhaps wil go down further, yes, one can understand to get conversed to

new law and to see fruits of it, it will take time, but just for the sake of this

reason, we cannot wish away the mandate of this nation come through

Parliament.

25. In this situation, we cannot resist ourselves from giving an il ustration

that is aptly similar to the present controversy. It is like a snake charmer

playing out a cobra without fangs for entertaining people, tomorrow, if a

claim under section 8 is considered as "dispute" by looking at bare denial,

sections 8 and 9 will become exactly like a cobra without fangs in the

basket of a snake charmer. But I strongly believe, it is not the idea of

Parliament to make this law to mere show up, had it been so, the Parliament

would not have wasted its valuable time in including sections 2 (6), 8 and 9

in the statute book.

26. Though there are many decisions of the Hon'ble Supreme Court holding

that the word "includes" is extensive in nature, there are equal y many

number of cases saying that this word has to be understood in the context

it is applied.

27. In this line, in South Gujarat Roofing Tiles Manufacturers Association

v. State of Gujarat [1976] 4 SCC 601, it has been held that there could not

be any inflexible rule that the word "includes" should be read always as a

word of extension without reference to the context, in the said case the

word includes has been used in the sense of "means", this is only

construction that the word can bear in the context. In that sense, "include"

is not a word of extension, but limitation, it is exhaustive of the meaning

which must be given to potteries industry for the purpose of Entry.

28. The use of word "includes" in the restrictive sense is not unknown. So,

the manufacturer of Mangalore Pattern Roofing Tiles is outside the purview

of Entry 22.

29. Likewise, in N.D.P. Namboodripad v. Union of India [2007] 4 SCC

502, it has been held that the word "includes" has different meanings in

different contexts. It can be used in interpretation clauses either generally

in order to enlarge the meaning of any word or phrase occurring in the body

PRACTICAL ASPECTS OF INSOLVENCY LAW

225

of a Statute, or in the normal stand sense to mean "comprises" or "consists

of" or "means and includes depending on the context".

30. In another case in between Karnataka Power Transmission Corporation

v. Ashok Iron Works (P.) Ltd. [2009] 3 SCC 240 in para 17, it has been

held as fol ows: —

'It goes without saying that interpretation of a word expression must depend

on the text and the context. The resort to the word "includes" by the

legislature often shows the intention of the legislature that it wanted to

give extensive and enlarged meaning to such expression. Sometimes,

however, the context may suggest that the word "includes" may have

been designed to mean "means". The setting context and object of an

enactment may provide sufficient guidance for interpretation of word

"includes" for the purpose of such enactment.'

31. If we see definition to "a person" in General Clauses Act, it says "person"

shal include any company or association or body of individuals whether

incorporated or not.

32. The normal meaning of a "person" is a living person, whereas if the

statute feels necessary to include some other categories which on their

own do not fal under a particular category, then an inclusive definition will

be given to include other categories, the same is the thing happened to the

definition of "a person". Likewise, if any dispute that normal y does not fall

within the definition of "dispute", then such items not falling within the

definition dispute will be shown as included so as to enlarge the meaning of

dispute. A dispute pending in a suit or arbitration can never be said as

different from the general word "dispute". The dispute in a suit or arbitration

is inherently included in the definition of the word "dispute ". Therefore, if at

al the suits and arbitration proceedings pending to be said as included in a

dispute, it need not be shown as included, because the category of the

dispute in a suit and arbitration wil automatically fal within the ambit of

dispute. Henceforth, the only meaning that could be drawn out from the

word "includes" is that the dispute means the dispute pending in a suit or

arbitration proceeding, whereby in the light of the ratio given by Hon'ble

Supreme Court, here the word "includes" in the definition of "dispute" has to

be read as "means" not as "includes". So, the word dispute is qualified as

the dispute in a suit or arbitration pending not otherwise.

33. In the above discussion we have noticed what is meant by a dispute,

now let us see what is meant by the existence of dispute in sub-section (2)

of section 8 of the Code. In section 8 it has been said when notice is given

u/s 8(1) of the Code, the corporate debtor shall, within a period of 10 days of

226

PRACTICAL ASPECTS OF INSOLVENCY LAW

the receipt of demand notice, bring it to the notice of the operational creditor

that dispute is in existence by way of suit or arbitration proceeding before

the receipt of notice under sub-section (1) of Section 8 of the Code. If we go

by this section, existence of dispute means pendency of either suit or

arbitration proceeding before the receipt of section 8 notice from the

operational creditor, it has to be understood that pending of suit or arbitration

proceeding alone will amount to existence of dispute. In Clause (a) of Sub-

Section (2) of Section 8, it has been said that the corporate debtor must

bring two things to the notice of the operational creditor, one -existence of

dispute "and" record of pendency of the suit or arbitration proceeding before

receipt of section 8 notice. In point no. 1 "existence of dispute" has to be

understood as dispute pending in a suit or arbitration proceeding as mentioned

in definition to "dispute", in point No.2 "it has been said what dispute will

become considered as "existence of dispute". It can be "existence of dispute"

only when pendency of suit or arbitration proceeding in existence before

receipt of notice, it does not matter to invoke section 9 if the suit or arbitration

proceeding filed subsequent to receipt of section 8 notice. Indeed, section 8

is a cause of action section to section 9, if cause of action does not arise

under section 8, no grievance could be invoked under section 9, section 9

is an application to file a case if at al the information that is required under

section 9 is given, thereby any provision in section 9 of the Code cannot be

considered as a governing provision to find out as to any cause of action

arose for filing a case under section 9. For that reason only, in sub-section

(1) of section 9, a provision is made to file an application, in sub-section (2)

a provision is made to file an application in such form and manner as

prescribed, in sub-section (3), a provision is made to guide as to what

documentation is to be filed along with the form under sub-section (1) of

section 9, when it comes to sub-section (4), it is a provision enunciating to

propose a resolution professional, it has been further said when an application

is to be admitted and when an application is to be rejected, lastly in sub-

section (6) it has been said that insolvency resolution process wil be

commenced once application is admitted under sub-section (5) of section

9. Thereby whether case is made out to file application u/s 8 is to be seen

going back to section 8 but not under section 9, whereby if at all any provision

appears inconsistent with cause of action section that is section 8, that

provision has to be read in harmony with cause of action section. Cause of

action section will never be harmonized to a procedural aspect mentioned

in section 9.

34. In the given situation, this debtor company figures have gone into minus,

P &L statement as on 31st March 2016 of the company reflects profit after

PRACTICAL ASPECTS OF INSOLVENCY LAW

227

tax has gone down to -1551.51crores. This company has not paid single

rupee to these creditors in the last three years, it is admitted on record

mil ions of dol ars' worth goods purchased from them in the year 2013 by

this company showing itself up as purchaser giving all kinds of undertakings

waiving right of defence. Now, it says that these goods were delivered to

some third party, not to it. It is in between the debtor and that third party,

what business these creditors have with that third party, it does not appear

in any documentation and that third party is privy to any transaction.

35. These are the figures showing on the website of Uttam signed by Managing

Director of the company on 9th February 2017.

Reconciliation of profit between

Quarter

9 months

Year

Ind-AS and previous IGAAP for

Ended

Ended

Ended

earlier periods and as at

31.03.2016

Name of Adjustments

31.12.2015 31.12.2015 31.03.2016

Net Profit as per IGAAP

(424.50)

(418.56)

(1551.51)

Capital Incentive from

12.63

42.91

58.61

Government of Maharashtra

Other Comprehensive Income

(2.33)

(73.64)

489.40

Total Comprehensive Income

(414.20)

(449.29)

(1003.50)

as per Ind-AS

36. Nowadays, corporate world is running on credit facility, if we ask to

ourselves, how many companies are doing business with their own money,

then surely it will be negligible in number, daily many startups coming,

some doing, some failing, the reasons may be myriad. If companies are

funded by creditors and mostly run on their money, can it be said that

shareholders of the company are real owners, or creditors? Don't creditors

have a right at least to realize their money before company is fully sunk

into? It is not that, every case coming to NCLT has been al owed or every

case dismissed; NCLT has been applying its judicial discretion to find as to

whether company is solvent enough to discharge its obligations towards

creditors, some admitted, some dismissed, because every situation is fact

sensitive, therefore adjudication is subject to the facts of the case.

37. In view of this, the principles and doctrines relevant in service

jurisprudence and courts dealing purely with law in issue cannot be bul dozed

upon fact finding courts, every decision turns on its facts. In Service Tribunals,

228

PRACTICAL ASPECTS OF INSOLVENCY LAW

mostly cases are dealt with basing on flouting some government order of

memorandum, therefore cases filed on a particular order will logically end in

the same manner, there, this rule of fol owing coordinate Bench order is

applicable. Here it can't be seen as strait-jacket formula to pass same order

which other coordinate Bench has passed, may be facts looking alike, but

when gone into those facts some difference wil be there which changes the

fate of the case. As to court of record, mostly they decide cases either at

second appel ate stage or on writ side, where facts wil not have any role to

play in such situations, law can't be changed from case to case, obviously

outcome may be the same.

38. The objection of the corporate debtor is that so many complexities are

existing in this dispute, for which since they have filed a suit before Hon'ble

High Court of Bombay after receipt of notice, therefore taking pendency of

the suit filed subsequent to receipt of section 8 notice, this IB petition is to

be dismissed. But the argument of the corporate debtor counsel not being in

consonance with the mandate of the statute u/s 8, this petition can't be

dismissed going by the argument of the counsel of Uttam because filing of

a suit or arbitration proceedings subsequent to receipt of notice u/s 8 will

not amount to existence of dispute as stated u/s 8 of IB Code.

39. Under any stretch of imagination, the argument of the corporate debtor

counsel does not make out any case to construe the corporate debtor filing

a suit over this claim subsequent to receipt of notice as dispute in existence,

henceforth this point is decided against the corporate debtor.

40. The corporate debtor counsel made a thumping argument saying that

since this very Bench dismissed an operational creditor case Kirusa Software

(P.) Ltd v. Mobilox Innovations (P.) Ltd dated 27, January 2017) on the

ground the claim is disputed in the reply, it is right, it happened in the

formative days when this Code has come into existence, moreover this

point that dispute means pendency of suit or arbitration, to our remembrance,

had not been argued by the counsel of operational creditor, frankly speaking

that was not noticed by us. It does not mean a miss out in one case can

become a ratio to repeat the same mistake again and defeat the object of

enactment. For this reason, is it that this case has to be sent to Larger

Bench? In corporate cases, time is money; this Tribunal must render justice

one way or other as expeditiously as possible so that money stuck in

unyielding asset can be released to fund it meaningful y. To effectuate the

objects of this code, larger picture is to be visualized.

41. The corporate debtor counsel referred an order dated March 1st 2017

passed by NCLT Principal Bench, New Delhi in One Coat Plaster v.

PRACTICAL ASPECTS OF INSOLVENCY LAW

229

Ambience (P.) Ltd. and Shivam Construction Company v. Ambience

Pvt. Ltd. and Philips India Limited v. Goodwill Hospital & Research

Centre Limited to say that if at al notice of dispute has been received by

the operational creditor or there is a record of dispute in the information

utility the petition shal be rejected by reading the definition of dispute as

inclusive and the word "and" in clause (a) of sub-section (2) of section 8 as

"or" in the light of section 9(5)(i )(d).

42. With al humility, we cannot agree with the submission of the corporate

debtor counsel to rely on the Coordinate Bench order because the reasoning

given in this case is based on the ratio legis enunciated in sections 8 and 9.

43. Moreover, we have noticed that enough material is there to say that

purchase order is present, invoices are present, bill of lading is present, bill

of exchanges are present, on the top of al these, confirmation of forfaiting

in favour of Deutsche is present, and acknowledging further assignment of

part of the debt to Misr Bank is also present. Moreover, the debtor has not

denied any of these documents except saying English law alone is applicable.

The alarming situation in this case is, this company is consistently in losses,

in fact profit after tax is showing to the loss of 1557 crores by 31st March

2016. If any delay is made in passing this order, it wil become nothing but

defeating the purpose and object of this Code.

44. The corporate debtor counsel argued that Special Bench at Guwahati

passed order dated 30.3.2017 stating that attorney holder exceeded his

power by filing case under section 7 of the Code basing on a power of

attorney given two years before, by the time Insolvency and Bankruptcy

Code was not even contemplated.

45. At eleventh hour, the corporate debtor counsel placed an order dated 30-

03-2017 passed by Special Bench of NCLT at Guwahati on a direction given

by the Hon'ble President of NCLT to decide the matter regarding passing of

different orders in a CP 37/2017 u/s of Insolvency and Bankruptcy Code

2016 by Division Bench, NCLT at Kolkata in relation to an issue as to whether

Power of Attorney in question had specifical y empowered Shri Srinjoy

Bhattacharjeet to do variety of acts which included the power to initiate

resolution process under IB Code, 2016 as well.

46. Since this point goes to the root of maintainability, this point has also

been elaborately discussed.

47. Before going into the above decision of NCLT Guwahati, we mention

that Deutsche & Misr Bank, separately and independently have given power

of attorney to one Pankaj Sachdeva and Vandana S. Saxena on 20th

230

PRACTICAL ASPECTS OF INSOLVENCY LAW

September, 2016 and 11th October,2016 to ask or demand the outstanding

amount from the present corporate debtor i.e. Uttam Galva Steels Limited

along with overdue interest and costs thereon and also to file and/or

defend suits, to sign and verify all the plaints including winding up

petitions, pleadings, written statements, affidavits, petitions, objections to

file execution applications to undertake proceedings, appeals, review,

revisions, writ petitions and to furnish evidence and to make statements

and to file al sorts of applications and to prosecute all legal proceedings,

memorandums of appeal, petitions and to do all other legal matters in all the

courts/tribunals including the board for Industrial and Financial

Reconstructions (BIFR) and the Appellate Authority for Industrial and

Financial Reconstruction (AAIFR), from the lowest to the highest concerning

any matter in respect of the said outstanding amount and the said petitions/

appeals, to engage advocates and technical counsel for the conduct of the

proceedings for recovery, except to settle compromise, compound or

withdraw the said petition, suits, appeals, reviews, revisions, petitions without

obtaining a written consent from the operational creditors, and to appeal in

the courts, file civil or criminal review or revisions or appeals or originals.

48. Since the corporate debtor counsel raised an objection that power of

attorney is invalid since the power of attorney has not been reflecting to

initiate this insolvency proceeding under IB Code. To find out as to whether

such argument stands in the light of the coordinate bench, the purport of

the power of attorney has been depicted to look into as to whether the

power of attorney fal ing within the definition given in Section 1-A of The

Powers of Attorney Act, 1882 and also the ratio laid down in the order given

by the coordinate Bench. The discussion below is purely to consider as to

whether the power of attorney in the present case is valid or not.

49. By looking at the aforesaid order passed by our learned brother sitting at

Guwahati, it appears that in Kolkata Bench, one Member has stated that

General Power of Attorney was given on 20-10-2014 to initiate proceedings

before any court of law including NCLT, but this power of attorney cannot be

treated as a specific power of attorney to initiate corporate insolvency

resolution process under IB Code 2016. Since the power of attorney must

be strictly construed, the rationale behind the principle being that the powers

given are not abused by the agent and its actions are restricted within and

only to the extent the power indicated or given.

50. As against the aforesaid observation, another member of the same

Bench held that the power of attorney mentioned above clearly mentions

that the legal manager is empowered to initiate proceedings under NCLT

PRACTICAL ASPECTS OF INSOLVENCY LAW

231

which automatically includes its role as an adjudicating authority under IBC.

In case, this is insistent upon in every petition under IBC, involving a financial

creditor that the petition be filed on the basis of a specific power of attorney

on a board's resolution, it will defeat the very purpose of IBC, which is for

speedy resolution of insolvency cases. He also further held that the facts of

the outstanding loan and the defaults have been established by the

operational creditor and the same has not been denied by the corporate

debtor henceforth the same deserved to be admitted.

51. To say that the power of attorney in the case supra cannot be said to

have authorized the attorney to initiate a corporate insolvency resolution

proceeding u/s 7 of the Code, Guwahati Bench holds that since it is a new

act coming to existence in the year 2016 with enormous changes with a

complete new regime, therefore it can't be said that the power of attorney

holder can go beyond the covenants under power of attorney by relying

upon PM Dasappa Nayanim Varu v. Ramabhaktulal Ramaiah AIR 1952

Mad. 559 and Coramandel International Ltd. v. Cheamcel Biotech Ltd.

[2011] 110 SCL 580 (AP.).

52. When this Bench has gone through PM Dasappa supra it is evident

that the donors themselves filed OS 314/1943 on the file of District Munsif

of Tirupati against Ramabhaktula, thereafter due to their inconvenience,

the donors had appointed a donee to conduct on their behalf the entire

proceedings which had to be taken in the said suit on the file of the court

of the District Munsif of Tirupati, to give effect the special power of

attorney executed and delivered by them as of consent. When District

Munsif returned the plaint on the ground said suit was beyond the

pecuniary jurisdiction of that court, the plaint so returned was represented

in the subordinate judge's court, then on the contention raised by the

defendants that no power was conferred on the donee to engage an

advocate or conduct a suit in the subordinate judge's court, the said

subordinate judge dismissed the suit on which an appeal was filed wherein

Hon'ble High Court dismissed his plea stating that the document having

conferred on the donee to conduct a particular suit in a particular court,

because it does not expressly engage the attorney for the purpose of

conducting the litigation generally in respect of the plaint schedule. As

there was no either explicit or implicit power to the attorney to file before

the subordinate court, if the contention raised by the appellant was

accepted, it would be nothing but court introducing new words into the

power of attorney and confer a new power upon him. Since the plaintiff

expressly authorized the attorney to conduct particular suit in a particular

court, the Hon'ble High Court held that it could not hold that it intended

232

PRACTICAL ASPECTS OF INSOLVENCY LAW

to empower the attorney to conduct that suit in any other court. In view

of this reason, the appeal was dismissed.

53. As to other judgment passed by the Hon'ble High Court of Andhra Pradesh

in Coramandel International Ltd. (supra) the reasoning given for not

considering power of attorney to file winding of proceedings is that the power

of attorney was authorized to sign and verify plaints written statements

petitions, vakalats, claims and objections and the memorandums of all kind

in any court in India but not included to file winding-up proceedings, thereby

the Hon'ble High Court has not al owed that power of attorney to use for

filing winding up proceedings on the ground that the proceedings under section

433 of the Act 1956 cannot be equated to suits or for that matter suits for

recovery of money because lis in winding up proceedings is not merely

between the petitioning party and the company sought to be wound up,

once the winding petition is admitted the creditors contributories, shareholders

etc. to seek redress in the proceedings and even oppose the winding up. It

was further held that the proceedings under Companies Act for winding up

are entirely different, a special remedy and a proceeding not to the parties

alone, their range is wide and al steps taken on winding up proceedings are

in public interest.

54. The rationale behind the finding by Guwahati is, power of attorney must

be strictly construed and that the powers given are not to be abused by the

agent and his actions are restricted within and only to the extent the power

is indicated are given.

55. In the two cases relied on by Guwahati Bench, as to Madras case, the

principals had given power to the attorney to proceed with the suit already

initiated by them, they had not said to him to proceed any further beyond

the said suit already filed by them. It is purely a special power limited to a

special action, therefore, that special power could not be equated or

generalized to say that the person authorized is also empowered to file

before another court of law where proceedings would be different, therefore

the special power cannot be construed as a generalized power. It is an

exclusive power given not to include any other power. The ratio to the facts

of it is correct, because the power given to the attorney was to continue

with suit initiated by the principals, not beyond it, henceforth, the governing

ratio where anybody transgresses the special power given to them, it will be

undoubtedly abuse of power. If we come to the ratio decided in Coramandel

International Ltd. (supra) there the principle endowed upon the attorney is

the power to institute suits but not to winding proceedings, since the winding

up proceedings are by nature different with far implications, the Hon'ble

High Court has held that the power given to file suits cannot be elongated to

PRACTICAL ASPECTS OF INSOLVENCY LAW

233

initiate winding up proceedings because it is not a lis between two parties,

it involves other creditors, contributors and many other stake holders

including public interest.

56. In the case given to us, the creditors authorized the attorney to ask or

demand the outstanding amount from Uttam and also to initiate proceedings

including winding up proceedings before the courts/tribunals, the only power

that is kept to themselves is in the event of compromise, it has to happen

with the written consent of the creditors.

57. Now let us come to see what the definition given in The Powers of

Attorney Act says: —

“In this Act, "power-of-attorney" includes any instrument empowering

a specified person to act for and in the name of the person executing

it.”

58. On reading this section, it appears that four elements are important in a

power of attorney to know as to whether any action of attorney is in excess

to the power given to him or not.

1. There shal be an instrument.

2. There shall be an empowerment to the attorney to do an act or acts.

3. Attorney shal be a specified person.

4. Such action must be for and in the name of the person executing it.

59. Al these elements are present in the two powers of attorney, the only

rationale to be seen is any excess power has been exercised in moving a

case under section 9 of this code, which we have not seen anywhere.

60. Here the creditor companies, simultaneously on 20th September 2016

and 11th October 2016, empowered Mr. Pankaj & Mrs. Vandana to demand

the dues outstanding from the corporate debtor i.e. Uttam Galva Steels

Limited and to initiate legal proceedings including winding up proceedings

before the courts/tribunals, therefore the intention of the creditors is clear

and their authorization is very clear that the attorneys can initiate winding

up proceedings as wel . The point for consideration is to see whether the

attorneys proceeding beyond the power given to him or not. When power

was given to the attorneys to initiate proceedings for liquidation by filing

winding up petition in the months of September and October 2016, an action

under 1956 Act for winding up proceedings was very much available, for

that reason alone notice was given under section 434 of the Act 1956, but

by the time the attorneys to initiate proceedings of winding up, winding up

234

PRACTICAL ASPECTS OF INSOLVENCY LAW

jurisdiction in respect to section 433(e) of the Act 1956 were metamorphosed

into insolvency proceedings under IB Code. In a situation like this, can the

application filed under section 8 be simply rejected on the ground since

winding up proceedings have become insolvency proceeding and the

authority given to winding up proceedings cannot be considered as authority

to initiate insolvency proceedings? In fact, this insolvency proceeding against

companies had originated from 271-(l)(a) of 2013, therefore, when company

is unable to pay, the party has either to proceed under sections 433 & 439

of the old Act, or under new provision come in the place of section 433(e) of

the Act 1956. It is not said in the power of attorney that the attorney holders

shal proceed under the Companies Act, 2013 alone or under 1956 Act, in

fact the creditors categorically mentioned to initiate winding up proceedings

when the parties unable to repay the debts. It is not said by the creditors

that the attorneys shal directly file winding up proceedings, before filing

winding up proceedings, the creditors authorized the attorneys to ask or/

demand the repayment of the outstanding amount by Corporate debtor, if

the corporate debtor fails to repay, then only the creditors can initiate

proceedings under winding up. It is not that power of attorney was given

years before. It is hardly given two months before initiating this proceeding,

since it is a foreign company it will take its own time to reach this power of

attorney to the attorney holders thereafter to ask the debtor for repayment,

if the debtor has failed to repay, then to make a demand and then to give a

statutory notice as envisaged u/s 8 thereafter to initiate proceedings u/s 9

of the IB Code. All these steps wil take about 1 to 2 months to initiate

proceedings under this Code. By navigating through all these documentation,

we have not seen anywhere that the attorneys transgressed their power to

initiate insolvency proceedings. A change of name wil not become change

of game. This relief under section 9 of the Code was available to the

operational creditors under section 433(e) of the Act 1956. Indeed, the

proceedings pending under section 433 (e) of the Act 1956 have been

transferred to NCLT to treat them as IB petitions. Therefore, it is not pragmatic,

especially in commercial proceedings to go back to square one and then

again initiate proceedings from the beginning. Here the debtor company is

already in losses and if at al any further delay happens, if the creditors are

not in a position to realize their dues or at least to make out something from

the residue, this process of restarting the proceedings in the name of want

of authority wil become hindrance forever in realizing its debt.

61. In winding up proceedings once enquiry is done liquidator wil directly be

appointed for liquidation, the better part in IB Code is there will be a resolution

process to find out as to whether a distressed company can survive if

PRACTICAL ASPECTS OF INSOLVENCY LAW

235

further funds are infused, if at that juncture also, the company fails, then

only the action for liquidation will trigger. Therefore, the nature of insolvency

proceedings under IB Code cannot be seen as something different from the

winding up proceedings. Maybe it is looking new to us but the outcome is

one and the same, the main object behind insolvency proceedings for

reorganization and insolvency resolution of the companies and individuals

in a time bound manner for maximization of value of the assets of the said

companies or said persons to promote entrepreneurship availability of credit

and balance of interest of al the stakeholders. In a scenario like this, if we

narrow down our perception that company wil be closed, business wil go

down if at al insolvency proceedings are initiated, then it wil become nothing

but diluting the force of the Code. Assuming that workers wil suffer if it

goes to IRP, what ultimately happens is the company will die on its own, by

that time nothing wil come even to workers also, therefore we have not

seen any logic in the argument that company shal not go to IRP.

62. When we read either the statute or a covenant between the parties,

courts will normally discover what the law or covenant is rather than to

make the law or to make the covenant, the courts wil only read what a

statute actual y states and will not read into the words which are not in the

statute. One must not be lost sight of that ratio legis is as important as ratio

decidendi, ratio legis is rather more important than ratio decidendi. When

sovereign law was not in existence, common law was prevalent, in those

timings, destiny and direction to English Country was the ratio decided by

the courts to give certainty and predictability to the society to run, but when

law is promulgated, the bottom line for certainty and predictability is ratio

legis, when any ambiguity is there in law, if law is interpreted in such a way

so as to carry the object of the litigation, then it will become purposive

interpretation. The purposive approach is to promote the general legislative

purpose underlying the provision, but not to crucify the statutory provision

by label ing reliefs in the Code as harsh remedy.

63. In Haryana Financial Corporation v. Jagadamba Oil Mills [2002] 3

SCC 496, it has been held as fol ows:

"Courts should not place reliance on decisions without discussing as to

how the factual situation fits into with the fact situation of the decision on

which reliance is placed. Observations of courts are not to be read as

Euclid Theorems nor as provisions of the statute. These observations

must be read in the context in which they appear. Judgments of courts

are not to be construed as statues. To interpret words, phrases and

provisions of statute, it may become necessary for judges to embark

236

PRACTICAL ASPECTS OF INSOLVENCY LAW

upon lengthy discussions but the discussion is meant to explain and not

to define. Judges interprets statutes they do not interpret judgments. They

interpret words of statues; their words are not to be interpreted as statues.

In London Graving Dock Co. Ltd. vs. Horton (1951) to All ER 1(HL),

Lord MacDermot observed:

"The matter cannot, of course, be settled merely by treating ipsissimaverba

of Willes, J., as though they were part of an Act of Parliament and applying

the rules of interpretation appropriate thereto. This is not to detract from

the great weight to be given to the language actually used by that most

distinguished judge".

64. Al that is said in the above finding is the words in a judgment is not to

be treated as if it were a statutory definition, it wil require qualification in

new circumstances. There is always a peril in treating the words of a speech

or a judgment as if they were words in a legislative enactment and it is to be

remembered that judicial utterances are made in the setting of the facts of

a particular case, if any deviation to the statute is ex facie apparent in any

judgment, law governing a particular situation is to be taken abreast. A ratio

in a judgment cannot be torn out of context and apply it in a situation where

it is not fitting.

65. Here in the present case, the power of attorney was given only two months

before filing this case mentioning what are the actions the attorney holders to

take up, against whom it is to be taken up, therefore it can't be said that since

it is not a winding up proceeding, this power of attorney cannot be used to file

insolvency proceeding IB Code. The nature of proceedings under winding up

as well as insolvency is more or less same. The procedure is slightly different;

the object is to liquidate the assets that are owed to the creditors, as we said

earlier; in insolvency proceedings one more step taken into consideration is

restructuring which was earlier considered by SICA. If Debtor Company is

unable to make payment, what is wrong in notifying it to the public? Here the

corporate debtor has not come forward making any payment to the creditors

in 180 days 'maturity time given. Thereafter, almost three years are over. Still

this company has not made any payment to the creditors, now has come

forward making allegations that power of attorney is not valid, bill of exchange

is not valid, forfaiting to the second creditor is not valid but it is nowhere said

that the AIC has not sent the goods to the destination ordered by this debtor

in the purchase order. It is also not the case of the debtor that goods were not

reached to the destination; in fact, he accepted bil of exchanges and thereafter

confirmed the forfaiting agreement in between the first creditor and the AIC.

66. The Counsel for the Corporate Debtor relied upon S. I. Rooplal v. Lt.

PRACTICAL ASPECTS OF INSOLVENCY LAW

237

Governor through Chief Secretary Delhi [2000] 1 SCC 644 that if the

earlier judgment of another coordinate bench of the same tribunal is to be

held as incorrect by subsequent Bench of the same tribunal, then it ought to

have been referred to a larger bench so that the difference of opinion between

the two coordinate benches on the same point could have been avoided.

This is a fundamental principle which every presiding officer of a judicial

forum ought to know, for consistency in interpretation of law alone can lead

to public confidence in our judicial system. This point has already been

answered in the above paras.

67. The Corporate Debtor Counsel submits that Deutsche and Misr Bank do

not have any locus to maintain this petition as claim purportedly payable by

the Debtor separately is based on two separate claims by two separate

claimants, thereby this claim is defective in so much as it seems to claim

two complete distinct unconnected debts, and there is no privity of contract

between Uttam and Deutsche as much as in between Uttam and Misr Bank,

besides this, the assignment by Deutsche to Misr Bank has not been

confirmed by Uttam therefore, these two petitioners cannot be recognized

as Operational Creditors within the meaning of the Code.

68. The argument of the Corporate Debtor counsel does not stand good for

two reasons (1) the debt has been properly assigned to Deutsche and

thereafter Deutsche assigned part of the debt to Misr Bank, since the

assignment of debt in our country need not be confirmed by the Corporate

Debtor, it cannot be said that this Petition is defective, it is two Operational

Creditors, who shared debt in between, filed this Company Petition against

the debt raised out of one transaction, apart from that since it is only to

initiate the insolvency resolutions process, for no prejudice being caused

to the Corporate Debtor, this Petition in any sense cannot be treated as

defective. As to doctrine of privity of contract, there need not be any

separate contract in between the Petitioners and Corporate Debtor, once

that debt is assigned to somebody else, then that third party will

automatically come into the shoes of the original operational creditor as

stated in the definition to operational creditor. Therefore, this argument of

absence privity of contract between Deutsche, Misr Bank and Uttam has

no merit.

69. The Corporate Debtor Counsel has developed an argument saying that a

Petition under section 9(5)(i) of the Code could be admitted only when, inter

alia, no notice of dispute has been received by the Operational Creditor or

there is no record of dispute in the information was received. He further

says Corporate Debtor having sent a notice of dispute on 3.3.2017 itself

238

PRACTICAL ASPECTS OF INSOLVENCY LAW

that is within 10 days from the date of receipt of notice, as envisaged under

section 9(5)(i )(d), the Company Petition by an order shal be rejected.

70. This argument wil remain looking plausible, if the word "dispute" is

meant as a dispute arising out of assertion and denial, but if the definition of

the word "dispute" is taken as pendency of suit or arbitration proceeding in

respect to the debt claim mentioned in the Petition, then there would not be

any argument to the Debtor Counsel to justify his arguments.

71. If we read the sections 5(6), 8 and 9 together, we can visualize the

consistency. When the word "dispute" means pendency of suit or arbitration,

then "dispute in existence" in section 8 means suit or arbitration proceedings

pending since before the receipt of notice under section 8, on this logic, the

receipt of notice of dispute under section 9(5)(ii)(d) will obviously become a

notice of dispute reflecting pending of suit or arbitration proceedings in respect

to the debt claim since before receipt of notice under section 8 of the code.

Then next point to be seen is as to whether this understanding is advancing

the purpose and object of the Code or not. A provision has been envisaged

for an Operation Creditor to initiate Insolvency Resolution process. If section

8 mandate is understood by reading dispute as mere assertion and denial,

then no Operational Creditor can file a petition once the Corporate Debtor

sends a reply notice saying that he is denying the claim raised by the

Operational Creditor. The outcome of such situation is the doors of IB Code

wil remain closed for ever to any Operational Creditor. It is quite natural as

and when operational creditor sends notice, the Corporate Debtor, whether

he is in a position to pay or not, unless col uded, wil simply send a reply

saying that it is disputing the claim raised by the operational creditor. This

eventuality raises a dispute without any support of pending suit or arbitration

proceedings, which wil become detrimental for enforcing the mandate of

this Code. As we already said, one should not start looking at the IB

proceedings as harsh. Here in this case, the Debtor company failed to pay

for three years since now, after three years, it is saying that Operational

Creditor cannot file this case as it remained silent from March 15, 2014.

Can it be an argument to say that since the Operational Creditors did not

initiate any proceedings until before filing this Insolvency Petition, they are

not supposed to pursue the remedies available to them before the case is

hit by limitation? It can't be like that. Therefore, this Bench has not found

any reason in the argument of the Corporate Debtor Counsel.

72. The Corporate Debtor Counsel raises another argument saying that since

this sales contract in between the Sel er (AIC) and the Corporate debtor is

governed by English Law, the Petitioner cannot proceed without dealing

PRACTICAL ASPECTS OF INSOLVENCY LAW

239

with English law, to which he relied upon Hari Shanker Jain v. Sonia Gandhi

AIR 2001 SC 3689, which is not relevant to the present case.

73. In a reply to the same, the Counsel for the Operational Creditors has

relied upon Malaysian International Trading Corpn. v. Megha Safe

Deposit Vault (P.) Ltd. [2006] 68 SCL 52 (Bom.); Aksh Optifibre Ltd. v.

Evonik Degussa GmbH [MANU/MH/1361/2014]; The Bank of New York

Mellon v. Zenith Infotech Ltd. to say that if any party says that English

Law is differing from Indian Law, it is their bounden duty to prove foreign law

is contrary to Indian Law, if they failed to prove it, it has to be presumed that

Indian Law is applicable. Therefore, it is not open to the Corporate Debtor to

say that as to confirmation in relation to assignment requires the

acknowledgement of the Corporate Debtor cannot be construed as law

governing this case. Henceforth we have not noticed any merit in the argument

of Corporate Debtor. However, since Deutsche Bank is party to the

proceeding, and confirmation in respect to that assignment has been agreed

upon by Uttam, without prejudice, Deutsche can very well proceed, but this

case need not go to that extent, because the counsel of the debtor has not

shown that confirmation of assignment is a requisite under Indian law.

74. The Corporate Debtor Counsel vehemently argued that these petitioners

cannot claim interest over the operational debt by showing two Bills of

Exchange given as col aterals, he says, if it is claimed basing on Bills of

Exchange along with interest, then it would become a financial debt, not an

operational debt.

75. If we go through the definition of "financial debt", it means that a debt

along with interest is disbursed against the consideration for the time value

of money and with an inclusive list specifying as to what category of debts

wil become financial debt. When it comes to operational debt, it is a claim

made against the goods supplied or services rendered. There are two types

of debts, one operational debt another financial debt, so debt has to fall

either under financial debt or operational debt, there cannot be a debt other

than these two types. If it is a debt against the company, it has to invariably

fal either under financial debt or operational debt and it has to be read as

either financial debt or operational debt, it can't be said that a debt against

company for a, b, c reasons can't be either financial debt or operational

debt. The bottom line in respect to obligation is, a man should repay the

value, either in cash or kind, to what he has taken, for this; we have to apply

law in such a way that claimant is provided remedy. The premise for claim is

whether "A" has taken something from "B" with a promise to pay back the

value or not, if it is prima facie evident that claim has to be paid, then to see

240

PRACTICAL ASPECTS OF INSOLVENCY LAW

what law is applicable to ensure that it is repaid, but not to dismiss the

claim on the ground it is not in accordance with law. Legal proposition is to

be searched and applied to promote the cause not to negate the cause. We

need not say that procedural justice is always subservient to substantial

justice.

76. When we see the basic difference to financial debt and operational debt,

it is clear that financial debt is money borrowed to repay on future date

along with interest, here the money is lent for value addition to the money

as agreed between the parties, whereas operational debt is normally based

on an agreement to pay to goods or services, it does not mean that interest

cannot be claimed in the times to come, it is a normal practice that trade

payables are payments deferred for a fixed time, if the party fails to repay

within the fixed time, then interest wil be claimed over operational debt as

wel , the same happened over here as wel . The corporate debtor himself

said in the written submissions that there is email dated April 10,2014 from

the corporate debtor in respect to payment of interest, since col aterals are

Bills of exchange, even otherwise also, basing on collaterals entitled to

interest at the rate of 18% u/s 80 of the Negotiable Instruments Act. The

difference in these two transactions is one given to get interest over the

money; second transaction happens in business operations, in both the

cases money is involved, as days go by after transaction, the time value of

money wil be there. For that reason, it is nowhere said that the operational

creditor is barred from claiming interest. Suppose goods are supplied three

years before, the debtor is supposed to return in 6 months, if it is not paid in

6 months maturity period, does it mean that since it is operational debt, the

creditor cannot claim interest when the payment is delayed beyond the time

given to him? On commercial side, the creditor claiming interest is quite

normal and justifying, after al , business always runs keeping in mind the

time value of money, transaction wil be operation if payment is to goods or

services, transaction is financial if money is lent in contemplation of returns

in the form of interest. Therefore, goods or services supplied can't be seen

as not valued in terms of money, one is in kind another is in cash, that does

not mean only cash has value of money and kind has no value of money.

77. Time value of money definition relates to the value of money in time.

How much will a rupee owned today be worth one year from now, i.e. If

Rs.100 affords a person to purchase say X amount of goods today, how

many goods will he be able to purchase with the same ?100, one year from

now. Historically it has been found that the value of money has depreciated

over the years, i.e. in one year from now he wil be able to purchase less

number of goods than X - that he was able to purchase a year back. So this

PRACTICAL ASPECTS OF INSOLVENCY LAW

241

is the proposition that has to be taken into consideration for claiming interest

on the value of goods supplied. In this case, credit has been given free of

interest for 180 days, the debtor has not paid, from the date of maturity,

almost three years over, still no payment has come to the operational

creditors.

78. Let us test how far this argument is right, one - it is admittedly true

Uttam accepted two bills of exchange promising to pay the value of goods

within 180 days, thereafter Uttam has not made any payment, by now more

than three years and six months are over.

79. For the reasons above and the material available on record showing

compliance under section 9 of the code, this petition is hereby admitted and

Registry is hereby directed to refer it to the Insolvency and Bankruptcy

Board to recommend the name of an IRP to appoint him in this case.

V. NALLASENAPATHY

B. S.V. PRAKASH KUMAR

Member (Technical)

Member (Judicial)

242

PRACTICAL ASPECTS OF INSOLVENCY LAW

ANNEXURE X.3

IN THE NATIONAL COMPANY LAW APPELLATE TRIBUNAL

COMPANY APPELLATE JURISDICTION

Company Appeal (AT) (Insolvency) 6 of 2017

(arising out of order dated 27.01.2017 passed by the National Company

Law Tribunal, Mumbai Bench in Company Petition 02/I&BP/NCLT/MAHI20

17)

IN THE MATTER OF:

Kirusa Software Private Ltd.

Appellant

Vs

Mobilox Innovations Private Ltd.

Respondent

Present:

Mr Amar Gupta, Mr. Sanjeev Jam, Ms Apoorva Agrawal,

Mr Alok Dhir, Ms Varsha Banerjee, Mr. Milan Negi and Mr.

Kunal Godhwani, Advocates for the appellant.

Mr. Devansh Mohta, Mr. Shyam Pandya, Mr. Puneet Singh

Bindra and Mr. Rohan Kaushal, Advocates for the

respondent.

JUDGEMENT

SUDHANSU JYOTI MUKHOPADHAYA, J.

1. The appel ant-operational creditor filed petition under section 9 of the

Insolvency and Bankruptcy Code 2016 (hereinafter referred to as 'I&B Code')

which was rejected by the “Adjudicating Authority”. Mumbai Bench by the

impugned order dated 27th January 2017, with following observations :

“When this Bench has directed the petitioner to furnish the requisite

documents as described under section 9 of the Insolvency and Bankruptcy

Code, the petitioner filed the Notice of dispute raised by the corporate debtor

disclosing the corporate debtor disputing the claim made by the petitioner.

Though the petitioner filed al the invoices raised on the debtor company

aggregating debt to Rs. 20,08,202, details of transaction on account of

which debt fel due, default thereof and demand notice served upon the

debtor, for this Bench having noticed that notice of dispute raised by

respondent side has not been annexed to the CP, this Bench hereby

PRACTICAL ASPECTS OF INSOLVENCY LAW

243

directed to furnish the documents as prescribed under section 9 of the

I&B Code. In compliance of it, the petitioner filed the notice of dispute

issued by the corporate debtor disclosing the corporate debtor disputing

the claim made by the petitioner. On perusal of this sub-section (5) of

section 9 of this Code, it is evident that notice of dispute has been received

by the operational creditor.

On perusal of this notice dated 27th December, 2016 disputing the debt

al egedly owed to the petitioner, this Bench, looking at the corporate debtor

disputing the claim raised by the petitioner in this CP, hereby holds that

the default payment being disputed by the corporate debtor, for the

petitioner has admitted that the notice of dispute dated 27th December,

2016 has been received by the operational creditor, the claim made by

the petitioner is hit by section (9)(5)(ii)(d) of The Insolvency and Bankruptcy

Code, hence, this petition is hereby rejected.”

3. The plea taken by the appel ant is that mere disputing a claim of default

of debt cannot be a ground to reject the application under section 9 of I&B

Code, til the corporate debtor refer any dispute pending.

4. The only question arises for consideration in this appeal is what does

“dispute” and “existence of dispute” means for the purpose of determination

of a petition under section 9 of the I&B Code?

5. Unlike section 7 of the Code, before making an application to the

Adjudicating Authority under section 9 of the Code, the requirements under

section 8 of the Code are required to be complied with, which reads as

under :

‘8. 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 shal , 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

244

PRACTICAL ASPECTS OF INSOLVENCY LAW

of the unpaid amount from the bank account of the corporate

debtor; or

(i ) by sending an attested copy of record that the operational

creditor has encashed a cheque issued by the corporate debtor.

Explanation : For the purposes of this section, a “demand notice” means

a notice served by an operational creditor to the corporate debtor demanding

repayment of the operational debt in respect of which the default has

occurred.’

6. In sub-section (1) of section 8 of the I&B Code, though the word “may”

has been used, but in the context of section 8 and section 9 reading as a

whole, an “operational creditor”, on occurrence of a default, is required to

deliver a notice of demand of unpaid debt or get copy of the invoice demanding

payment of the defaulted amount served on the corporate debtor. This is the

condition precedent under sections 8 and 9 of the I&B Code, before making

an application to the Adjudicating Authority.

7. Under sub-section (2) of section 8 of the I&B Code, once the demand

notice is served on the corporate debtor by the “operational creditor”, the

corporate debtor has to bring to the notice of the operational creditor the

payment of debt or dispute if any, with respect to such operational debt

within 10 days of the receipt of demand notice/invoice.

8. Under section 9 of the Code, as quoted below, a right to file an application

accrues after expiry of ten days from the date of delivery of the demand

notice or copy of invoice as the case may be, demanding payment under

sub-section (1) of section 8 of the I&B Code. The “operational creditor” would

receive either the payment or a ‘notice of dispute’ in terms of sub-section (2)

of section 8 of the I&B Code :

“9. Application for initiation of corporate insolvency resolution

process by operational creditor. – (1) After the expiry of the period of

ten days from the date of delivery of the notice or invoice demanding

payment under sub-section (1) of section 8, if the operational creditor

does not receive payment from the corporate debtor or notice of the dispute

under sub-section (2) of section 8, the operational creditor may file an

application before the Adjudicating Authority for initiating a corporate

insolvency resolution process.

(2) The application under sub-section (1) shall be filed in such form and

manner and accompanied with such fee as may be prescribed.

(3) The operational creditor shall, along with the application furnish –

PRACTICAL ASPECTS OF INSOLVENCY LAW

245

(a) a copy of the invoice demanding payment or demand notice delivered

by the operational creditor to the corporate debtor;

(b) an affidavit to the effect that there is no notice given by the corporate

debtor relating to a dispute of the unpaid operational debt;

(c) a copy of the certificate from the financial institutions maintaining

accounts of the operational creditor confirming that there is no

payment of an unpaid operational debt by the corporate debtor; and

(d) such other information as may be specified.

(4) An operational creditor initiating a corporate insolvency resolution

process under this section, may propose a resolution professional to act

as an interim resolution professional.

(5) The Adjudicating Authority shall, within fourteen days of the receipt of

the application under sub-section (2), by an order –

(i) admit the application and communicate such decision to the

operational creditor and the corporate debtor if, –

(a) the application made under sub-section (2) is complete;

(b) there is no repayment of the unpaid operational debt;

(c) the invoice or notice for payment to the corporate debtor has

been delivered by the operational creditor;

(d) no notice of dispute has been received by the operational creditor

or there is no record of dispute in the information utility; and

(e) there is no disciplinary proceeding pending against any resolution

professional proposed under sub-section (4), if any;

(i ) reject the application and communicate such decision to the

operational creditor and the corporate debtor, if –

(a) the application made under sub-section (2) is incomplete;

(b) there has been repayment of the unpaid operational debt;

(c) the creditor has not delivered the invoice or notice for payment

to the corporate debtor;

(d) notice of dispute has been received by the operational creditor

or there is a record of dispute in the information utility; or

(e) any disciplinary proceeding is pending against any proposed

resolution professional :

246

PRACTICAL ASPECTS OF INSOLVENCY LAW

Provided that Adjudicating Authority, shall before rejecting an application

under sub-clause (a) of clause (i ) give a notice to the applicant to rectify

the defect in his application within seven days of the date of receipt of

such notice from the adjudicating Authority.

(6) The corporate insolvency resolution process shal commence from

the date of admission of the application under sub-section (5) of this

section.”

9. Thus, it is evident from section 9 of the I&B Code that the Adjudicating

Authority has to, within fourteen days of the receipt of the application under

sub-section (2), either admit or reject the application.

10. Section 9 has two-fold situations insofar as notice of dispute is concerned.

As per sub-section (5)(i)(d) of section 9, the Adjudicating Authority can

admit the application in case no notice raising the dispute is received by the

operational creditor (as verified by the operational creditor on affidavit) and

there is no record of a dispute is with the information utility.

12. On the other hand, sub-section (5)(ii) of section 9 mandates the

Adjudicating Authority to reject the application if the operational creditor

has received notice of dispute from the corporate debtor. Section 9, thus,

makes it distinct from section 7. While in section 7, occurrence of default

has to be ascertained and satisfaction recorded by the Adjudicating Authority,

there no similar provision under section 9. The use of language in sub-

section (2) of section 8 of the I&B Code provides that 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... the existence of a dispute....”

13. Under section 7 neither notice of demand nor a notice of dispute is

relevant whereas under sections 8 and 9 notice of demand and notice of

dispute become relevant both for the purposes of admission as well as for

and rejection.

14. It may be helpful to interpret sections 8 and 9 and the jurisdiction of the

Adjudicating Authority being akin to that of a judicial authority under section

8 of the Arbitration and Conciliation Act, 1996 amended up to date, which

mandates that the judicial authority must refer the parties to arbitration if

the matter before it is subject to an arbitration agreement section 8 as

amended in 2015 contemplates the judicial authority to form a prima facie

view in relation to existence of a valid arbitration agreement, thereby

conferring limited jurisdiction.

15. Though the words “prima facie” are missing in sections 8 and 9 of the

PRACTICAL ASPECTS OF INSOLVENCY LAW

247

Code, yet the Adjudicating Authority would examine whether notice of dispute

in fact raises the dispute and that too within the parameters of two definitions

– ‘debt’ and ‘default’ and then it has to reject the application if it apparently

finds that the notice of dispute does really raise a dispute and no other

factual ascertainment is required. On the other hand, if the Adjudicating

Authority finds that the notice of dispute lacks in particulars or does not

raise a dispute, it may admit the application but in either case, there is

neither an ascertainment of the dispute, nor satisfaction of the Adjudicating

Authority.

The role of Adjudicating Authority may become easier once the information

utility starts functioning for it is a record of dispute that would then be

sufficient to reject the application of the operational creditor.

16. The terms ‘claim’, ‘debt’ and ‘default’ are defined under Part I of the

Code.

Section 3(6) of the Code defines “claim” to mean a right to payment and

included within its ambit disputed and undisputed, legal, equitable, secured,

including arising out of breach of contract. Therefore, “right to payment” is

the foundation for making a claim under the Code.

Section 3(11) defines ‘debt’ to mean, the liability or obligation in respect of a

claim which is due from any person. Thus, claim transforms into a debt,

financial and operational, once liability or obligation to pay gets attached to

the claim.

Section 3(12) defines ‘default’ to mean “non-payment of the debt” once it

has become due and payable and the same is not repaid by the debtor.

‘Default’ occurs on fulfilment of twin conditions :

(a) debt becoming due and payable, and

(b) non-payment thereof.

17. For the purposes of Part II only of the Code, some terms/words have

been defined.

Sub-section (6) of section 5 defines ‘dispute’, to include, unless the context

otherwise requires, a dispute pending in any suit or arbitration proceedings

relating to :

(a) existence of amount of the debt;

(b) quality of good or service;

(c) breach of a representation or warranty.

248

PRACTICAL ASPECTS OF INSOLVENCY LAW

The definition of ‘dispute’ is ‘inclusive’ and not ‘exhaustive’. The same has to

be given wide meaning provided it is relatable to the existence of the amount

of the debt, quality of good or service or breach of a representation or

warranty.

18. Once the term ‘dispute’ is given its natural and ordinary meaning, upon

reading of the Code as a whole, the width of ‘dispute’ should cover all disputes

on debt, default, etc., and not be limited to only two ways of disputing a

demand made by the operational creditor, i.e., either by showing a record of

pending suit or by showing a record of a pending arbitration.

The intent of the Legislature, as evident from the definition of the term

‘dispute’, is that it wanted the same to be il ustrative (and not exhaustive). If

the intent of the Legislature was that a demand by an operational creditor

can be disputed only by showing a record of a suit or arbitration proceeding,

the definition of dispute would have simply said dispute means a dispute

pending in arbitration or a suit.

20. The hon’ble Supreme Court in P Kasilingam v. PSB College of Technology

1995 Supp (2) SCC 348 was dealing with the question what expression

‘Col ege’ includes as used in the relevant rule. The hon’ble Supreme Court

observed what is the intent of the of the Legislature when the expression

used in the definition is ‘means’ and when the expression used is ‘includes’.

At page 356 para 19 it observed as under :

‘a particular expression is often defined by the Legislature by using the

word “means”, or the word “includes”. Sometimes the words “means and

includes” are used. The use of the word “means” indicates that “definition

is a hard-and-fast definition, and no other meaning can be assigned to the

expression than is put down in definition [see Gough v. Gough : Punjab

Land Development & Reclamation Corpn. Ltd. v. Presiding Officer, Labour

Court]. The word “includes” when used, enlarges the meaning of the

expression defined so as to comprehend not only such things as they

signify according to their natural import but also those things which the

clause declares that they shal include.’

21. Admittedly in sub-section (6) of section 5 of the I&B Code, the Legislature

used the words “dispute includes a suit or arbitration proceedings”. If this is

harmoniously read with sub-section (2) of section 8 of the I&B Code, where

words used are “existence of a dispute, if any, and record of the pendency

of the suit or arbitration proceedings,” the result is disputes, if any, applies

to all kinds of disputes, in relation to debt and default. The expression used

in sub-section (2) of section 8 of the I&B Code “existence of a dispute, if

any,” is disjunctive from the expression “record of the pendency of the suit

PRACTICAL ASPECTS OF INSOLVENCY LAW

249

or arbitration proceedings”. Otherwise, the words “dispute, if any”, in sub-

section (2) of section 8 would become surplus usage.

22. Sub-section (2) of section 8 of the I&B Code cannot be read to mean

that a dispute must be pending between the parties prior to the notice of

demand and that too in arbitration or a civil court. Once parties are already

before any judicial forum/authority for adjudication of disputes, notice

becomes irrelevant and such an interpretation renders the expression

‘ existence of a dispute, if any,” in sub-section (2) of section 8 itiose.

23. The Hon’ble Supreme Court in Mithlesh Singh Vs. Union of India (2003)

3 SCC 309 observed that the Legislature is deemed not to waste its words

or to say anything in vain. If the intent of the Legislature was to limit the

dispute to only a pending suit or arbitration proceedings, sub-section (2) of

section 8(a) would have required a notice of dispute to only refer to a record

of pendency of the suit or arbitration proceedings and not to “existence of a

dispute, if any”. In the said case, the hon’ble Supreme Court at page 316

para 8 observed as under :

“It is not a sound principle of construction to brush aside word(s) in a

statute as being inapposite surplusage : if they can have appropriate

application in circumstances conceivably within the contemplation of the

statute. In the interpretation of statutes the courts always presume that

the Legislature inserted every part of the statute for a purpose and the

legislative intention is that every part of the statute should have effect.

The Legislature is deemed not to waste its words or to say anything in

vain.”

24. The statutory requirement in sub-section (2) of section 8 of the I&B

Code is that the dispute has to be brought to the notice of the operational

creditor. The two comes post the word ‘dispute’ (if any) have been added as

a matter of convenience and/or to give meaningfulness to sub-section (2) of

section 8 of the I&B Code. Without going into the grammar and punctuation

being hapless victim of pace of life, if one discovers the true meaning of

sub-section (2)(a) of section 8 of the I&B Code, having regard to the context

of sections 8 and 9 of the Code, it emerges both from the object and purpose

of the I&B Code and the context in which the expression is used, that

disputes raised in the notice sent by the corporate debtor to the operational

creditor would get covered within sub-section (2) of section 8 of the I&B

Code.

25. The true meaning of sub-section (2)(a) of section 8 read with sub-section

(6) of section 5 of the I&B Code clearly brings out the intent of the Code,

namely the corporate debtor must raise a dispute with sufficient particulars.

250

PRACTICAL ASPECTS OF INSOLVENCY LAW

And in case a dispute is being raised by simply showing a record of dispute

in a pending arbitration or suit, the dispute must also be relatable to the

three conditions provided under sub-section (6) of section 5 (a)-(c) only. The

words ‘and record of the pendency of the suit or arbitration proceedings’

under sub-section (2)(a) of section 8 also make the intent of the Legislature

clear that disputes in a pending suit or arbitration proceeding are such

disputes which satisfy the test of sub-section (6) of section 5 of the I&B

Code and that such disputes are within the ambit of the expression, “dispute,

if any”. The record of suit or arbitration proceeding is required to demonstrate

the same, being pending prior to the notice of demand under section 8 of

the I&B Code.

26. It is a fundamental principle of law that multiplicity of proceedings is

required to be avoided. Therefore, if disputes under sub-section (2)(a) of

section 8 read with sub-section (6) of section 5 of the I&B Code are confined

to a dispute in a pending suit and arbitration in relation to the three classes

under sub-section (6) of section 5 of the I&B Code, it would violate the

definition of operational debt under sub-section (21) of section 3 of the I&B

Code and would become inconsistent thereto, and would bar operational

creditor from invoking sections 8 and 9 of the Code.

27. Sub-section (6) of section 5 read with sub-section (2)(a) of section 8

also cannot be confined to pending arbitration or a civil suit. It must include

disputes pending before every judicial authority including mediation,

conciliation, etc., as long there are disputes as to existence of debt or

default, etc., it would satisfy sub-section (2) of section 8 of the I&B Code.

28. Therefore, as per sub-section (2) of the I&B Code, there are two ways in

which a demand of an operational creditor can be disputed :

(i) By bringing to the notice of an operational creditor, “existence of a

dispute”. In this case, the notice of dispute will bring to the notice of

the creditor, an “existence of a dispute” under the Code. This would

mean disputes as to existence of debt or default, etc,; or

(i ) By simply bringing to the notice of an operational creditor, record of

the pendency of a suit or arbitral proceedings in relation to a dispute. In

this case, the dispute in the suit/arbitral proceeding should relate to

matters (a)-(c) in sub-section (6) of section 5 and in this case, showing

a record of pendency of a suit or arbitral proceedings on a dispute is

enough and to intent of the Legislature is clear, i.e., once the dispute

(on matters relating to 3 classes in sub-section (6) of section 5 of the

I&B Code) is pending adjudication, that in itself would bring it within

the ambit of sub-section (6) of section 5 of the I&B Code.

PRACTICAL ASPECTS OF INSOLVENCY LAW

251

29. The definition of ‘dispute’ for the purpose of section 9 must be read along

with expression operational debt as defined in section 5(21) of I&B Code,

2016 means :

‘(21) “operational debt” means a claim in respect of the provision of goods

or services including employment or a debt in respect of the repayment

of dues arising under any law for the time being in force and payable to

the Central Government, any State Government or any local authority;’

Thus, the definition of ‘dispute’, ‘operational debt’ is read together for the

purpose of section 9 is clear that the intention of Legislature to lay down the

nature of ‘dispute’ has not been limited to suit or arbitration proceedings

pending but includes other proceedings “if any”.

30. Therefore, it is clear that for the purpose of sub-section (2) of section 8

and section 9 a ‘dispute’ must be capable of being discerned from notice of

corporate debtor and the meaning of ‘existence’ a “dispute, if any”, must be

understood in the context.

31. The dispute under I&B Code, 2016 must relate to specified nature in clause

(a), (b) or (c), i.e., existence of amount of debt or quality of goods or service

or breach of representation or warranty. However, it is capable of being

discerned not only from in a suit or arbitration from any document related to

it. For example, the “operational creditor” has issued notice under Code of

Civil Procedure, 1908 prior to initiation of the suit against the operational

creditor which is disputed by “corporate debtor”. Similarly notice under section

59 of the Sales and Goods Act if issued by one of the party, a labourer/

employee who may claim to be operational creditor for the purpose of section

9 of I&B Code, 2016 may have raised the dispute with the State Government

concerning the subject-matter, i.e., existence of amount of debit and pending

consideration before the competent Government. Similarly, a dispute may

be pending in a Labour Court about existence of amount of debt. A party

can move before a High Court under writ jurisdictions against Government,

corporate debtor (public sector undertaking). There may be cases where

one of the party has moved before the High Court under section 433 of the

Companies Act, 1956 for initiation of liquidation proceedings against the

corporate debtor and dispute is pending. Similarly, with regard to quality of

foods, if the “corporate debtor” has raised a dispute, and brought to the

notice of the “operational creditor” to take appropriate step, prior to receipt

of notice under sub-section (1) of section 8 of the I&B Code, one can say

that a dispute is pending about the debt. Mere raising a dispute for the sake

of dispute, unrelated or related to clause (a) or (b) or (c) of sub-section (6) of

section 5, if not raised prior to application and not pending before any

252

PRACTICAL ASPECTS OF INSOLVENCY LAW

competent court of law or authority cannot be relied upon to hold that there

is a ‘dispute’ raised by the corporate debtor. The scope of existence of

‘dispute’, if any, which includes pending suits and arbitration proceedings

cannot be limited and confined to suit and arbitration proceedings only. It

includes any other dispute raised prior to section 8 in this in relation to

clause (a) or (b) or (c) of sub-section (6) of section 5. It must be raised in a

court of law or authority and proposed to be moved before the court of law

or authority and not any got up or malafide dispute just to stal the insolvency

resolution process.

32. There may be other cases such as a suit relating to existence of amount

of debt stands decided and decree is pending for execution. Similarly,

existence of amount of debt or quality of goods or service for which a suit

have been filed and decreed; an award has been passed by Arbitral Panel,

though petition under section 34 of Arbitration and Reconciliation Act, 1996

may be pending. In such case the question wil arise whether a petition

under section 9 wil be maintainable particularly when it was a suit or arbitration

proceeding is not pending, but stand decided? Though one may argue that

insolvency resolution process cannot be misused for execution of a judgment

and decree passed in a suit or award passed by an arbitral tribunal, but

such submission cannot be accepted in view of Form 5 of Insolvency and

Bankruptcy (Application to Adjudicating Authority) Rules, 2016 wherein a

decree in suit and award has been shown to be a debt for the purpose of

default on non-payment.

33. Thus, it is clear that while sub-section (2) of section 8 deals with

“existence of a dispute”, sub-section (5) of section 9 does not confer any

discretion on adjudicating authority to verify adequacy of the dispute. It

prohibits the adjudicating authority from proceeding further if there is a

genuine dispute raised before any court of law or authority or pending in a

court of law or authority including suit and arbitration proceedings. Mere a

dispute giving a colour of genuine dispute or illusory, raised for the first time

while replying to the notice under section 8 cannot be a tool to reject an

application under section 9 if the operational creditor otherwise satisfies the

adjudicating authority that there is a debt and there is a default on the part

of the corporate debtor.

34. The onus to prove that there is no default or debt or that there is a

dispute pending consideration before a court of law or adjudicating authority

shift from creditor to debtor and operational creditor to corporate debtor.

35. In view of the aforesaid discussions we hold that the dispute as defined

in sub-section (6) of section 5 cannot be limited to a pending proceedings or

PRACTICAL ASPECTS OF INSOLVENCY LAW

253

lis, within the limited ambit of suit or arbitration proceedings, the word

‘includes’ ought to be read as “means and includes” including the proceedings

initiated or pending before consumer court, tribunal, labour court or mediation,

conciliation, etc. If any action is taken by corporate debtor under any act or

law including while replying to a notice under section 80 of Code of Civil

Procedure, 1908 or to a notice issued under section 433 of the Companies

Act or section 59 of the Sales and Goods Act or regarding quality of goods

or services provided by “operational creditor” wil come within the ambit of

dispute, raised and pending within the meaning of sub-section (6) of section

5 read with sub-section (2) of section 8 of I&B Code.

36. In the present case we find that the notice in Form ‘D’ under the I&B

(Application to Adjudicating Authority) Rules, 2016, was given by appellant-

operational creditor on 23rd December, 2016 under the said rules was also

forwarded. One Desai & Diwanji, Advocates, Solicitors and Notaries vide

letter dated 27th December, 2016 replied to the same on behalf of

respondent-corporate debtor – M/s. Mobilox Innovations (P.) Ltd., relevant

of which reads as fol ows :

‘1. At the outset, we say that you on behalf of your client have engaged

yourselves into a protracted correspondence with our client on the

issues raised in the notices. Our client disputes and denies each of

the statements and al egations made in the said Notices as being

absolutely false, frivolous, misconceived, devoid of merits and

erroneous. Nothing stated in the said Notices should be deemed to

have been admitted by our Client, unless specifically admitted herein,

and the same be treated as specifically set out herein and denied.

Each of the contentions hereinafter contained, are in the alternative

and/or without prejudice to one another.

2. At the further outset, it is respectfully submitted that the Notices are

liable to be disregarded at the threshold and does not deserve to be

entertained as the same are not maintainable in law.

3. It is stated that the claim on behalf of your client as stated in the

Notices are not contractually due and payable to your client, as there

exist serious and bona fide dispute between your client and our client;

and neither a winding up notice is maintainable nor any application

before the Adjudicating Authority (as defined in the Code) for initiating

a corporate insolvency resolution process under the Code.

4. The Notices are not only misconceived but also mala fide in nature

and has been colourable issued as a “pressure-inducing tactic” to

254

PRACTICAL ASPECTS OF INSOLVENCY LAW

realise a purported debt which is not due and payable to your client

by our client. The purported debt is seriously and bona fide disputed

by our client and the same is not liable to be paid for reasons more

specifically mentioned herein. It is wel settled that neither winding

up notice nor any insolvency resolution process is a legitimate means

of seeking to enforce payment of an amount that is bona fide disputed

by a party. A disputed sum can neither be termed as “inability to pay”

the same so as to incur the liability under section 271(2)(e) read with

section 271(1)(a) of the Companies Act, 2013 nor can it be termed as

a “default” as defined under section 3(12) of the Code read with other

applicable provisions of the Code.

Xxx

(e) In and around 30th January, 2015, it had come to the knowledge

of our client that your client in flagrant breach of the terms and

conditions of the NDA, had divulged our client’s Confidential

Information and approached certain clients of our client; further,

your client had indulged in breach of trust and breach of the

NDA by displaying our client’s confidential client information

and client campaign information on a public platform, i.e., at

http://kirusal.pairserver.com/?page_id=34 and https://

in.linkedin.com/pub/vikram-agarwal/7/3al/83b.

Your client should note that any client information of any party

carries intrinsic confidentiality obligations (including under the

NDA) and your client’s breach of the NDA violated the basic

keystone of a business relationship.”

Xxx

(g) With respect to paragraph 8 of the 12th December, 2016 Notice,

it is denied that an amount of Rs.20,08,202.55 is an admitted

debt on the part of our client based on the contracts in the form

of POs placed by our Client and the corresponding Invoices

raised by your client for effecting the required services for the

campaign under the POs. Our client deny that it had failed to

discharge its admitted liability; therefore, it is evident that it is

not unable to pay its debt. It is pertinent to highlight that our

client has, at no point of time, confirmed or admitted its liability

towards your client to pay an amount of Rs.20,08,202.55. In

this regard, our client repeats and reiterates the contents of

paragraph number 6 of this reply.’

PRACTICAL ASPECTS OF INSOLVENCY LAW

255

37. Apart from the quoted portion, if reply dated 27th December, 2016 is

read in totality, we find that the respondent-corporate debtor has not raised

any dispute within the meaning of sub-section (6) of section 5 or sub-section

(2) of section 8 of I&B Code, 2016 and in that view of the matter, merely on

some or other account the respondent has disputed to pay the amount,

cannot be termed to be dispute to reject the application under section 9 of

the I&B Code as was preferred by appel ant-operational creditor.

38. The requirement under sub-section (3)(c) of section 9 while independent

operational creditor to submit a certificate from the financial institution as

defined in sub-section (4) of section 3 including Schedule Bank and public

financial institution and like which is a safeguard prevent the operational

creditor to bring a non-existence or baseless claim, similarly the adjudicating

authority is required to examine before admitting or rejecting an application

under section 9 whether the ‘dispute’ raised by corporate debtor qualify as a

‘dispute’ as defined under sub-section (6) of section 5 and whether notice of

dispute given by the corporate debtor fulfilling the conditions stipulated in

sub-section (2) of section 8 of I&B Code, 2016.

39. In the present case the adjudicating authority has acted mechanically

and rejected the application under sub-section (5)(i )(d) of section 9 without

examining and discussing the aforesaid issue. If the adjudicating authority

would have noticed the provisions as discussed above and what constitute

and as to what constitute ‘dispute’ in relation to services provided by

operational creditor then would have come to a conclusion that condition of

demand notice under sub-section (2) of section 8 has not been fulfilled by

the corporate debtor and the defence claiming dispute was not only vague,

got up and motivated to evade the liability.

40. For the reasons aforesaid we set aside the impugned order dated 27th

January, 2017 passed by adjudicating authority in CP No.01/I &BP/NCLT/

MAH/2017 and remit the case to adjudicating authority for consideration of

the application of the appel ant for admission if the application is otherwise

complete.

41. The appeal is allowed with the aforesaid observations. However, in the

facts and circumstances there shall be no order as to cost.

(Mr. Balvinder Singh)

(Justice S.J. Mukhopadhaya)

Member (Technical)

Chairperson

New Delhi

24th May, 2017

256

PRACTICAL ASPECTS OF INSOLVENCY LAW

ANNEXURE X.4

NATIONAL COMPANY LAW APPELLATE TRIBUNAL, NEW DELHI

COMPANY APPELLATE JURISDICTION

Company Appeal (AT) (Insolvency) No. 14 of 2017

(arising out of Order dated 02.03.2017 passed by the National Company

Law Tribunal, Principal Bench, New Delhi in CP (IB) No. 03(PB)/ 2017)

IN THE MATTER OF:

Philips India Limited

Appellant

Vs

Goodwill Hospital & Research Centre Ltd.

Respondent

Along with Company Appeal (AT) (Insolvency) No. 15 of 2017

Philips India Limited

Appellant

Vs.

Karma Healthcare Private Limited

Respondent

Present:

For Appellant: - Mr. N.Mahabir and Mr. P.C.Arya, Advocates

For Respondent: - Mr. S.N.Jha, Sr. Counsel, Mr. Atul T.N.

and Mr. Harsh Raghuvanshi, Advocates.

JUDGEMENT

SUDHANSU JYOTI MUKHOPADHAYA, J

1. As both the appeals have been preferred against common order dated

2nd March, 2017 passed by “Adjudicating Authority” (National Company

Law Tribunal), Principal Bench, New Delhi, the appel ant is common and

common question of law is involved, they were heard together and disposed

of by this common judgment.

2. Appel ant, Philips India Ltd. (‘operational creditor’) had preferred two

separate applications for initiation of Corporate Insolvency Resolution

Process invoking provisions of section 9 of Insolvency and Bankruptcy

Code, 2016 (‘I&B Code’) against one respondent-corporate debtor “Goodwill

Hospital & Research Centre Ltd.” and another corporate debtor, “Karina

Healthcare (P.) Ltd.”. Both the applications under section 9 were rejected by

PRACTICAL ASPECTS OF INSOLVENCY LAW

257

impugned common judgment passed by “Adjudicating Authority” with

observations that the remedy of the appel ant/applicant lies elsewhere and

not under the provisions of ‘I&B Code’.

3. The brief fact of the case are as fol ows :

The appellant entered into a Comprehensive Annual Maintenance Contract

with respondent “Goodwil Hospitals & Research Centre” on 2nd August,

2011 and 11th May, 2012 for the period from 1st September, 2011 to 31st

August, 2012 and 1st September, 2012 to 31st August, 2013, respectively

in respect of maintenance of Al um FD 20C.

4. Another Comprehensive Annual Maintenance Contract was reached

between appel ant and the respondent ‘Karina Healthcare (P.) Ltd.’ on 14th

March, 2010 for maintenance of instal ed machine Brilliance 64 without MRC

tube coverage but with UPS, battery, injector for the period from 15th March,

2010 to 14th March, 2013.

5. In both the cases the grievance of the appel ant is that the respondent-

corporate debtor defaulted to make payment of debts giving rise to filing of

the petitions under section 9 of ‘I&B Code’.

6. A perusal of the impugned order would show that the “Adjudicating

Authority” noticed the work order placed by the “corporate debtor” primarily

related to maintenance of equipments. A bare perusal of invoices would

show that it has included the charges of material and labour apart from

CST, service tax, operational cess, small and secondary and higher

education cess. The learned Adjudicating Authority also noticed that there

was no document placed on record certified by the “corporate debtor” or its

authorised representative or a medical technician that the work has been

done satisfactorily in accordance with the standard of norms/quality stipulated

in the agreement. The Adjudicating Authority noticed the aforesaid factors

and in view of the objections raised by both the “corporate debtors”, pursuant

to a notice issued by appel ant – “financial creditor” under sections 433 and

434 of the Companies Act, 1956, rejected the applications with following

observations :

‘The reliance of the applicant on the provisions of section 9 of IBC is not

meritorious. The applicant has claimed and has classified itself as

“operational creditor” and has prayed for triggering of the Insolvency

Process. A bare perusal of section 9 of IBC would, inter alia, reveal that

this Tribunal is vested with the powers to reject the application of the

operational creditor under section 9(5)(d) of IBC in case it is found that

notice of dispute has been received by such an operational creditor, or

258

PRACTICAL ASPECTS OF INSOLVENCY LAW

there is a record of dispute with the information utility. We have been

informed that no “Information Utility” has so far been set up and we are

per force to rely on the notice of dispute as sent by the respondent-

operational debtor to the applicant in the notice of dispute, the liability to

pay has been completely denied.’

7. The “corporate debtors” have taken plea that there was an existence of

dispute which they brought to the notice of the “operational creditor” in reply

to notice under section 8 of the ‘I&B Code’ read with section 9 of ‘I&B Code’.

8. At this stage it is desirable to state that the appel ant-operational creditor

issues a notice under section 433(e) read with section 434(1)(a) of the

Companies Act on 9th March, 2016 to the respondent-“Goodwill Hospital &

Research Centre Ltd.”. Referring to earlier notice it was pointed out that

“operational creditor” wil be left with no alternative but to cal upon the said

“corporate debtor” to forthwith and without any further delay make the

outstanding payment or otherwise the “operational creditor” have been

constrained to initiate appropriate proceedings, both under civil and criminal

law, including winding up. Similar notice under section 433(e) read with

section 434(1)(a) dated 9th March, 2016 was issued on respondent-Karina

Healthcare (P.) Ltd.

9. Learned Adjudicating Authority to appreciate the nature of the dispute

while noticed the aforesaid facts, also noticed the reply dated 30th March,

2016 filed by both “corporate debtors” with similar plea, as apparent from

impugned order and quoted below :

“To appreciate the nature of dispute, it would be profitable to read the

fol owing part of the reply dated 30th March, 2016 :

At the outset the al egations level ed under your notice dated 9th March,

2016 are being denied in its entirety for being false and concocted. It

appears from the tone and tenor of your notice that your client had not

apprised you with the correct facts and circumstances of the matter at

hand, leading to the issuance of the misconceived and il -founded notice

dated 9th March, 2016. It is brought to your kind notice that dues as

claimed by your notice were never outstanding against my clients and

the demand notice for the same is hopelessly barred by laws of limitation

and, hence, untenable under law.

It is brought to your notice that our clients entered into a Comprehensive

Annual Maintenance Contract with your client for the maintenance of

instal ed Allura Xper FD 20C at its hospital to keep the same in a good

and proper working condition. It was agreed under the clause 2 of the

PRACTICAL ASPECTS OF INSOLVENCY LAW

259

contract that the service will be provided by your clients for the upkeep of

the above mentioned medical equipment at the site of my client but your

client in the most unprofessional manner failed to keep up with the

contractual obligation taken by it vide contract dated 11th May, 2012. It is

further important to mention herein that the officials of your client had

failed to visit the premises of my client in a periodic manner for the upkeep

of the medical equipment due to which the functioning of the equipment

was majorly effected.

It is further important to mention herein that the Al ura Xper FD 20C

instal ed at the hospital of my client was left unattended at the hospital of

my client for several days due to minor problems which were to be repaired

by your client but were never repaired in time causing severe financial

loss due to non-activity of the machine of my client. The unprofessional

approach by the officials of your client has caused major loss of reputation

for my client and caused severe inconvenience to the patient awaiting

their treatment at the Hospital of my client due to which the payment was

deducted by my client and the same was informed to the officials of your

client.”

10. The Adjudicating Authority then proceeded to discuss the provisions

of law including the expression ‘dispute’ as defined and inclusive definition

as could be seen from sub-section (6) of section 5 of the I&B Code and

observed :

‘“dispute” includes a suit or arbitration proceedings relating to –

(a) the existence of the amount of debt;

(b) the quality of goods or service; or

(c) the breach of a representation or warranty.

A bare perusal of the above provision of the IBC shows that a dispute

could be proved by showing that a suit has been filed or arbitration

proceedings are pending. It further elaborates that the suit or arbitration

should be in respect of the existence of the amount of debt, quality of

goods or services, or for a breach of a representation or a warranty.

Obviously, it is not an exhaustive definition but an illustrative one. It

becomes evident from the expression “includes” which immediately

succeeds the word ‘dispute’. Moreover, under section 8(1) of the Code

adequate room has been provided for the “NCLT” to ascertain the existence

of a dispute. A demand notice by “operational creditor” to an “operational

debtor’ must be sent who has not paid operational dues and has committed

default. Sub-section (2) of section 8 further clarifies that the corporate

260

PRACTICAL ASPECTS OF INSOLVENCY LAW

debtor is obliged to bring to the notice of the “operational creditor, within

10 days of the receipt of notice, the existence of a dispute and show the

record of the pendency of the suit or arbitration proceeding filed before

the receipt of such notice or invoice in relation to such dispute. The other

option is to pay the demanded amount. In the instant case, the applicant

sent a demand notice which was duly received by the respondent. A reply

has also been duly filed where serious dispute has been raised.’

11. On perusal of the documents submitted before the Adjudicating Authority

and in view of the discussions, part of which were noticed above, the

Adjudicating Authority held that it was unable to fathom any material on

record to dislodge the stand of the respondents that there is existence of

dispute between the parties.

12. Learned counsel for the appellant – operational creditor referred to sub-

section (6) of section 5 and sub-section (2) of section 8 of I&B Code made

the following submissions :

Section 5(6)

12.1 Dispute under section 5(6) is limited to a ‘proceeding’ or ‘lis’. The

word proceeding has been qualified to be a suit or arbitration

proceeding.

12.2 The word ‘dispute’ has to be read in conjunction with suit or arbitration.

The word ‘include’ is a limitation to ‘dispute’. The word ‘include’ connotes

‘comprise’ or ‘consist’. The word ‘includes’ ought to be read as ‘means

and includes’.

12.3 The word ‘include’ is used because the proceedings could be of various

other nomenclature and cannot be listed by an exhaustive definition.

Proceedings could include a writ petition, consumer court, rent

tribunal, labour court, mediation, conciliation, etc.

12.4 ‘Dispute’, connotes a claim made and denied by the other party. A

suit or arbitration would ordinarily be covered by ‘dispute’. Therefore,

construing ‘dispute’ to situations other than a proceedings/lis would

render the words ‘suit’ or ‘arbitration’ in section 5(6) otiose.

Section 8(2);

12.5 Use of the word ‘and’ envisages a lis/proceeding regarding the dispute.

12.6 It would not be an appropriate construction that there are two parts in

section 8(2) with the first part bring “existence of a dispute” and the

second part being “record of the pendency of suit or arbitration...” by

PRACTICAL ASPECTS OF INSOLVENCY LAW

261

reading the conjunctive ‘and’ as disjunctive ‘or’. Such a reading would

render the second part otiose for the fol owing reasons :

(i) There is no limitation of time for the first part, i.e., to notify

“existence of a dispute”. Whereas a limitation is prescribed for

the second part, i.e., to notify “record of suit or arbitration”, by

the words “filed before the receipt of notice”.

(i ) The second part “suit or arbitration” is ordinarily covered by the

first part ‘dispute’ rendering the second part surplus age.

(iii) It creates this discrimination without any reasonable basis.

13. Reliance was also placed on meaning of ‘dispute’ as per Oxford English

Dictionary means a disagreement or argument.

14. Learned counsel for the appel ant made much stress on the word ‘includes’

and placed reliance on decision of hon’ble Supreme Court in N D P

Namboodripad v. Union of India [2007] 4 SCC 502; Godfray Phillips Ltd. v.

State of UP [2005] 2 SCC 515; South Gujarat Roofing Tiles Manufacturers

Association v. State of Gujarat [1976] 4 SCC 601 wherein the hon’ble Supreme

Court held that there could not be inflexible rule that the word ‘include’ should

be read always as a word of extension without reference to the context.

15. It was further contended that general word ‘dispute’ has to be restricted

to a lis/proceedings by applying the principles of noscuntur a sociis and

ejusdem generis. When a general word is qualified by specific words of

narrower construction, the legislative intent is clear that the general word

should be read and limited to characteristics of the specific words. Therefore,

according to learned counsel for the appel ant the specific words “suit or

arbitration” is ordinarily understood and covered by the general word ‘dispute’.

16. Per contra, according to learned senior counsel for the respondents the

definition provided under sub-section (6) of section 5 of the I&B Code is

il ustrative in nature and it enumerates three types of disputes that the

operational creditor can have with the corporate debtor but it does not rest

here. It was submitted that there could be various other types of disputes

which have not been mentioned in the present definition so as such the list

in the body of the definition is not exhaustive and the term ‘includes’ used

by the Legislature cannot be read down to include only these three types of

dispute and has to be assigned a wider meaning by this hon’ble Tribunal.

The conjoint meaning of the definition with the section 8(2)(a) of the I&B

Code enlarges the scope of the definition as provided in the section 5(6) of

the I&B Code and gives illustration of a pending suit or arbitration. It was

submitted that after the rendering of defective services by operational

262

PRACTICAL ASPECTS OF INSOLVENCY LAW

creditor, to avoid the rigors of section 9 of the Code, the corporate debtor

would, if the term dispute has to give a narrow meaning of a suit or arbitration

proceeding be constraint to approach the court seeking a negative declaration

of non-payment which is prohibited under the Specific Relief Act. Hence, as

per the submission of the respondent herein, a dispute would mean

communication of a denial or repudiation of the claim of the operational

creditor at first instance either when the invoice has been raised and duly

communicated to the corporate debtor, a recovery notice has been received

by a corporate debtor or a statutory notice under section 8(2)(a) has been

received by a corporate debtor. Further as per submission of the respondent,

no negative burden of filing a suit or arbitration could be casted upon

operational creditor in view of the above submission. The word ‘includes’ is

a very wide term and creates extensive meaning to the word and covers

within its ambit all other aspects as wel apart from the ones mentioned in

the section 5(6) of the I&B Code 2016.

17. The question as to what does ‘dispute’ and “existence of dispute” means

for the purpose of determination of an application under section 9 of the I&B

Code fel for consideration before this Appel ate Tribunal in Kirusa Software

(P.) Ltd. v. Mobilox Innovations (P.) Ltd. Company Appeal (AT) (Insol.) 06/

2017". By judgment dated 24th May 2017, the Appel ate Tribunal observed

and held as follows :

’25. The true meaning of sub-section (2)(a) of section 8 read with sub-

section (6) of section 5 of the I&B Code clearly brings out the intent of the

Code, namely the corporate debtor must raise a dispute with sufficient

particulars. And in case a dispute is being raised by simply showing a

record of dispute in a pending arbitration or suit, the dispute must also be

relatable to the three conditions provided under sub-section (6)(a)-(c) of

section 5 only. The words “and record of the pendency of the suit or

arbitration proceedings” under sub-section (2)(a) of section 8 also make

the intent of the Legislature clear that disputes in a pending suit or

arbitration proceeding are such disputes which satisfy the test of sub-

section (6) of section 5 of the I&B Code and that such disputes are within

the ambit of the expression, “dispute, if any”. The record of suit or arbitration

proceeding is required to demonstrate the same, being pending prior to

the notice of demand under sub-section 8 of the I&B Code.

26. It is a fundamental principle of law that multiplicity of proceedings is

required to be avoided. Therefore, if disputes under sub-section (2)(a) of

section 8 read with sub-section (6) of section 5 of the I&B Code are

confined to a dispute in a pending suit and arbitration in relation to the

PRACTICAL ASPECTS OF INSOLVENCY LAW

263

three classes under sub-section (6) of section 5 of the I&B Code, it would

violate the definition of operational debt under sub-section (21) of section

3 of the “I&B Code” and would become inconsistent thereto, and would

bar operational creditor from invoking sections 8 and 9 of the Code.

27. Sub-section (6) of section 5 read with sub-section (2)(a) of section 8

also cannot be confined to pending arbitration or a civil suit. It must include

disputes pending before every judicial authority including mediation,

conciliation etc. as long there are disputes as to existence of debt or

default, etc., it would satisfy sub-section (2) of section 8 of the I&B Code.

28. Therefore, as per sub-section (2) of the “I&B Code”, there are two

ways in which a demand of an operational creditor can be disputed :

(i) by bringing to the notice of an operational creditor, “existence of a

dispute”. In this case, the notice of dispute will bring to the notice of

the creditor, an “existence of a dispute” under the Code. This would

mean disputes as to existence of debt or default, etc.,; or

(i ) by simply bringing to the notice of an operational creditor, record of

the pendency of a suit or arbitral proceedings in relation to a dispute.

In this case, the dispute in the suit/arbitral proceeding should relate

to matters (a)-(c) in sub-section (6) of section 5 and in this case,

showing a record of pendency of a suit or arbitral proceedings on a

dispute is enough and to intent of the Legislature is clear,, i.e., once

the dispute (on matters relating to 3 classes in sub-section (6) of

section 5 of the I&B Code) is pending adjudication, that in itself would

bring it within the ambit of sub-section (6) of section 5 of the I&B

Code.

29. The definition of “dispute” for the purpose of section 9 must be read

along with expression operational debt as defined in section 5(21) of I&B

Code means :

(21) “operational debt” means a claim in respect of the provision of goods

or services including employment or a debt in respect of the repayment

of dues arising under any law for the time being in force and payable to

the Central Government, any State Government or any local authority.”

Thus, the definition of “dispute”, “operational debt’ is read together for the

purpose of section 9 is clear that the intention of Legislature to lay down

the nature of “dispute” has not been limited to suit or arbitration proceedings

pending but includes other proceedings “if any”.

30. Therefore, it is clear that for the purpose of sub-section (2) of section

264

PRACTICAL ASPECTS OF INSOLVENCY LAW

8 and section 9 a “dispute” must be capable of being discerned from

notice of corporate debtor and the meaning of “existence” a “dispute, if

any”, must be understood in the context.

31. The dispute under I&B Code, 2016 must relate to specified nature in

clause (a), (b) or (c), i.e., existence of amount of debt or quality of goods

or service or breach of representation or warranty. However, it is capable

of being discerned not only from in a suit or arbitration from any document

related to it. For example, the “operational creditor” has issued notice

under Code of Civil Procedure Code, 1908 prior to initiation of the suit

against the operational creditor which is disputed by corporate debtor.

Similarly notice under section 59 of the Sales and Goods Act if issued by

one of the party, a labourer/employee who may claim to be operation

creditor for the purpose of section 9 of I&B Code may have raised the

dispute with the State Government concerning the subject matter, i.e.,

existence of amount of debt and pending consideration before the

competent Government. Similarly, a dispute may be pending in a Labour

Court about existence of amount of debt. A party can move before a High

Court under writ jurisdictions against Government, corporate debtor (public

sector undertaking). There may be cases where one of the parties has

moved before the High Court under section 433 of the Companies Act,

1956 for initiation of liquidation proceedings against the corporate debtor

and dispute is pending. Similarly, with regard to quality of foods, if the

“corporate debtor” has raised a dispute, and brought to the notice of the

“operational creditor” to take appropriate step, prior to receipt of notice

under sub-section (1) of section 8 of the I&B Code, one can say that a

dispute is pending about the debt. Mere raising a dispute for the sake of

dispute, unrelated or related to clause (a) or (b) or (c) of sub-section (6) of

section 5, if not raised prior to application and not pending before any

competent court of law or authority cannot be relied upon to hold that

there is a “dispute” raised by the corporate debtor. The scope of existence

of “dispute”, if any, which includes pending suits and arbitration proceedings

cannot be limited and confined to suit and arbitration proceedings only. It

includes any other dispute raised prior to section 8 in this in relation to

clause (a) or (b) or (c) of sub-section (6) of section 5. It must be raised in

a court of law or authority and proposed to be moved before the court of

law or authority and not any got up or mala fide dispute just to stal the

insolvency resolution process.’

18. In the present case the respondent-corporate debtor much prior to

issuance of notice under section 8 of I&B Code, raised a dispute relating to

quality of service/maintenance pursuant to notice under section 433(e) and

PRACTICAL ASPECTS OF INSOLVENCY LAW

265

434(1)(a) of the Companies Act, 2013 to the notice of the “operational creditor”.

In that view of the matter, it can be safely being stated that there is

“existence of dispute” about the claim of debt.

19. Objection raised by respondent-corporate debtor, not raised for the first

time while replying to the notice issued by “operational creditor” under section

8 of the I&B Code. The objection cannot be cal ed to be mere objection

raising a dispute for the sake of ‘dispute’ and/or unrelated to clause (a) or (b)

or (c) of sub-section (6) of section 5 of I&B Code. For the said reason if the

Adjudicating Authority has refused to entertain the application under section

9 of I&B Code, no ground is made out to interfere with such orders.

20. We find no merit in both the appeals. They are accordingly dismissed.

However, there shall be no order as to cost.

(Mr. Balvinder Singh)

(Justice S.J. Mukhopadhaya)

Member (Technical)

Chairperson

NEW DELHI

31st May, 2017

266

PRACTICAL ASPECTS OF INSOLVENCY LAW

ANNEXURE X.5

IN THE NATIONAL COMPANY LAW APPELLATE TRIBUNAL

COMPANY APPELLATE JURISDICTION

Company Appeal (AT) (Insolvency) No. 29 of 2017

(arising out of Order dated 6th March 2017 passed by NCLT, Mumbai Bench

in C.P.No. 20/I & BP/NCLT/MAH/2017)

M/s MCL Global Steel Pvt. Ltd. & Anr.

Appellants

Vs.

M/s Essar Projects India Ltd. & Anr.

Respondents

Present:

For Appel ants: Mr. Alok Dhir, Ms. Versha Banerjee, Mr. Milan

Singh Negi with Mr. Kunal G.Advoates for the appel ants

For Respondents: Mr. Ankoosh Mehta with Mr. V. Tandon and

Mr. Karan Khanna, Advocates

JUDGEMENT

SUDHANSU JYOTI MUKHOPADHAYA, J

1. This appeal has been preferred by appellant-MCL Global Steel (P.) Ltd.

and Another (hereinafter referred to as 'corporate debtor') against order

dated 6th March, 2017 passed by “Adjudicating Authority” (National

Company Law Tribunal), Mumbai Bench in CP No. 20/I&BP/NCLT/MAH/

2017, whereby the application preferred by respondents-M/s. Essar

Projects India Ltd. and Another (hereinafter referred to as 'operational

creditor') under sections 8 and 9 of the Insolvency and Bankruptcy Code,

2016 (‘I&B Code’) read with rule 6 of the Insolvency and Bankruptcy

(Application to Adjudicating Authority) Rules, 2016 (‘hereinafter referred

to as 'Adjudicating Authority') for initiation of corporate insolvency

resolution process has been admitted. The Adjudicating Authority while

declaring moratorium also passed certain directions, ordered to issue

public announcement of the corporate insolvency resolution process and

appointed an Interim Resolution Professional to carry the function of the

company in terms of I&B Code.

2. Learned counsel for the appel ant while assailing the impugned order

taken fol owing plea and grounds :

(i) The impugned ex parte order was passed by Adjudicating Authority

PRACTICAL ASPECTS OF INSOLVENCY LAW

267

without prior notice or intimation of hearing to the appellant-corporate

debtors against the principles of rules of natural justice.

(i ) Learned Adjudicating Authority has failed to notice that existence of

dispute between the parties which operational creditor did not brought

to the notice of the Adjudicating Authority while getting an ex parte

order. If notice would have been served on corporate debtor this fact

would have been highlighted.

(iii) The respondent-operational creditors concealed the material fact that

it issued a winding up notice under section 433 of Companies Act,

1956 which was duly replied by appellant-corporate debtor vide reply

dated 21st November, 2016 disputing the entire claim. Even before

issuance of notice under section 8 of I&B Code, the appel ant-corporate

debtor by its email dated 5th March, 2014, 20th August, 2013, 27th

October, 2014, 29th October, 2014, 15th November, 2014, 16th

November, 2014 and 30th November, 2014 had specifically raised its

concern with regard to quality of construction work and non-completion

of the work within time frame. The aforesaid correspondences clearly

demonstrate the existence of dispute between the parties.

3. Learned counsel appearing on behalf of the appellant submitted that the

word ‘includes’ as mentioned in sub-section (6) of section 5 of I&B Code

though is not exhaustive but an illustrative one. The word “includes” connote

other dispute, if any, raised apart from the dispute mentioned in section 8 of

the I&B Code.

4. It was further contended that under sub-section 5(2)(d) of section 9, the

Adjudicating Authority is independent to reject an application if notice of

dispute has been replied by the corporate debtor and the same is not brought

to the notice of the Adjudicating Authority. The Adjudicating Authority on

wrong assumption of non-pendency of suit for arbitration proceedings

accepted the plea taken by the operational creditor.

It was also contended that the dispute raised by appellant is bona fide and fall

within the meaning of ‘dispute’ under sub-section (6) of section 5 of I&B Code.

5. Learned counsel appearing on behalf of the respondent-operational creditor

while contended that the appeal is not maintainable at the instance of 1st

appellant and that the 2nd appel ant has no legal authority whatsoever to

initiate a proceeding on behalf of the corporate debtor after appointment of

interim resolution professional, further contended that the appellants

themselves have concealed material facts by making false and baseless

submissions. It was submitted that the e-mails as referred to above, were

268

PRACTICAL ASPECTS OF INSOLVENCY LAW

addressed in the year 2014, however, based on the instructions of the

directors, one Mr. Arvind Pujari an officer working in the accounts department

of corporate debtor by e-mail dated 21st November, 2015 intimated the

“operational creditor” that he will be paid its dues for its services. Moreover,

no such payment was made. The corporate debtor had agreed to make part

payment by 1st December, 2015 which again it failed to pay and all the time

the corporate debtor neglected to repay the unpaid amount to the “operational

creditor”.

6. Learned counsel for the respondent while submitted that demand notice

under sub-section (1) of section 8 was sent in Form 3/Form 4 of the Rules on

28th December, 2016, as per the rule, the corporate debtor failed to provide a

record of the pendency of legal proceedings with regard to al eged dispute.

On the other hand, upon receipt of demand notice, the corporate debtor

addressed a letter dated 3rd January, 2017 and, inter alia, admitted that the

corporate debtor is presently under distress and seeking its rehabilitation and

restructuring of loans given by the banks and financial institutions.

7. It was contended that as per the scheme of the Code particularly sub-

section (2) of section 8, there should be an “existence of a dispute, if any,”

and a record of pendency of the suit or arbitration proceedings filed before

receipt of such notice or invoice in relation to such dispute the corporate

debtor has to meet the dual threshold of :

(a) identifying the existence of a dispute; and

(b) providing a record of the pendency of a suit or arbitration proceedings

in relation to such dispute.

It was further submitted that the aforesaid scheme of the Code and Rules

are reinforced twice, i.e., at the time of sending the demand notice and at

the time of receipt of the reply from a corporate debtor. The notice of dispute

has to disclose pendency of the proceedings which the appellant-corporate

debtor failed to bring on record. Learned counsel referred to the “notice of

dispute” as mentioned in section 9 and submitted that the same necessarily

be read as a notice under sub-section (1) of section 8.

8. It was contended that as per rule 24 of the National Company Law Tribunal

Rules, a copy of the application was provided to the corporate debtor and a

copy of the same was served by letters dated 16th February, 2017 and 28th

February, 2017, respectively. The Code does not envisage any other notice

to be provided to the corporate debtor except for service of the application

at the time of filing. Therefore, it was contended that under the I&B Code the

corporate debtor has no right of hearing at the stage of admission of an

PRACTICAL ASPECTS OF INSOLVENCY LAW

269

application filed under the Code. The detailed arguments were advanced on

the question but as such issues have already been decided by this Appel ate

Tribunal, we are not reproducing the detailed arguments.

9. It was further contended that there is no adverse civil consequences for

the corporate debtor at the stage of admission which may attract the principles

of natural justice.

10. From the impugned order passed by the Adjudicating Authority it is clear

that the corporate debtor was not heard before the admission of the application.

The respondent-operational creditor has also not disputed the aforesaid

facts.

11. The Adjudicating Authority in impugned order, noticed the submission

made on behalf of the respondent-operational creditor and observed as

follows :

‘6. The petitioner counsel submits, to say that dispute is in existence,

mere mentioning in the notice that dispute is in existence in relation to

impugned debt is not sufficient, the corporate debtor has to prove that

the company already raised such dispute either in court proceeding or

arbitration before receipt of notice under section 8 of the Code, here no

such proceeding being pending before any court of law or in arbitration

proceeding before receipt of the notice supra, the debtor company merely

mentioning dispute in the reply to the notice under section 8 will not

amount to dispute in existence, hence, the counsel for the petitioner

prays this Bench to admit the petition by construing no dispute is in

existence against the debtor as on the date of receipt of notice under

section 8 of the Code.

7. Since the corporate debtor, as stated by the petitioner, admitted issuing

invoices in relation to the amount mentioned, the grievance remained in

the reply would be regarding quality of construction, the timeline of

construction, loss due to delay in construction, etc. Since the same is

not disputed before any court of law before receipt of notice issued under

section. 8 of the Code, the dispute raised in the corporate debtor reply to

the notice under section 8 of the Code cannot be treated as dispute in

existence at the time of receipt of the notice under section 8 for two

reasons, one – due to admission of raising invoices and two – due to

raising it as dispute in the reply only after notice under section 8 has been

issued.

8. On perusal of definition of dispute under section 5(6) and on perusal of

section 8(2)(a), it is evident that “dispute in existence” means and includes

270

PRACTICAL ASPECTS OF INSOLVENCY LAW

raising dispute in court of law or arbitral tribunal before receipt of notice

under section 8 of the Code.’

12. The question as to whether a prior notice before admission of an application

for corporate insolvency resolution process is required or not was considered

by this Appel ate Tribunal in “Innoventive Industries Ltd., Company Appeal

(AT) (Insolvency) Nos. 1 and 2 of 2017” decided on 15th May, 2017.

13. In the said case the Appel ate Tribunal after detailed deliberations with

regard to the provisions of the Act particularly amended section 424 of the

Companies Act, as amended vide XIth Schedule of article 32 of section

255 of the I&B Code and held as fol ows :

“49. As amended section 424 of the Companies Act, 2013 is applicable to

the proceeding under the I&B Code, 2016, it is mandatory for the

adjudicating authority to fol ow the principles of rules of natural justice

while passing an order under I&B Code, 2016. Further, as section 424

mandates the Tribunal and Appellate Tribunal, to dispose of cases or appeal

before it subject to other provisions of the Companies Act, 2013 or I&B

Code, 2016 such as, section 420 of the Companies Act, 2013 was

applicable and to be fol owed by the Adjudicating Authority.

50. One Sree Metaliks Ltd. and Anr. moved before the hon’ble Calcutta

High Court in WP No.7144(W) of 2017 assailing the vires of section 7 of

the Code, 2016 and the relevant rules under the Insolvency and Bankruptcy

(Application to the Adjudicating Authority) Rules, 2016 (‘I&B Rules, 2016’).

The chal enge was premise upon the contention that the Code, 2016 does

not afford any opportunity of hearing to a corporate debtor in a petition

under section 7 of I&B Code, 2016. The Hon’ble High Court noticed relevant

provision of section 7 of the I&B Code, 2016, the definition of Adjudicating

Authority as defined under section 5(1), section 61 of the I&B Code, 2016

relating to appeal and amended section 424 of the Companies Act, 2013

and by judgment dated 7th April, 2017 held as follows :

“........... However, it is to apply the principles of natural justice in the

proceedings before it. It can regulate its own procedure, however, subject

to the other provisions of the Act of 2013 or the Insolvency and Bankruptcy

Code of 2016 and any Rules made thereunder. The Code of 2016 read

with the Rules 2016 is silent on the procedure to be adopted at the hearing

of an application under section 7 presented before the NCLT, that is to

say, it is silent whether a party respondent has a right of hearing before

the adjudicating authority or not.

Section 424 of the Companies Act, 2013 requires the NCLT and NCLAT to

PRACTICAL ASPECTS OF INSOLVENCY LAW

271

adhere to the principles of the natural justice above anything else. It also

al ows the NCLT and NCLAT the power to regulate their own procedure.

Fetters of the Code of Civil Procedure, 1908 does not bind it. However, it

is required to apply its principles. Principles of natural justice require an

authority to hear the other party. In an application under section 7 of the

Code of 2016, the financial creditor is the applicant while the corporate

debtor is the respondent. A proceeding for declaration of insolvency of a

company has drastic consequences for a company. Such proceeding may

end up in its liquidation. A person cannot be condemned unheard. Where

a statute is silent on the right of hearing and it does not in express terms,

oust the principles of natural justice, the same can and should be read

into in. When the NCLT receives an application under section 7 of the

Code of 2016, therefore, it must afford a reasonable opportunity of hearing

to the corporate debtor as section 424 of the Companies Act, 2013

mandates it to ascertain the existence of default as claimed by the financial

creditor in the application. The NCLT is, therefore, obliged to afford a

reasonable opportunity to the financial debtor to contest such claim of

default by filing a written objection or any other written document as the

NCLT may direct and provide a reasonable opportunity of hearing to the

corporate debtor prior to admitting the petition filed under section 7 of the

Code of 2016. Section 7(4) of the Code of 2016 requires the NCLT to

ascertain the default of the corporate debtor. Such ascertainment of default

must necessarily involve the consideration of the documentary claim of

the financial creditor. This statutory requirement of ascertainment of default

brings within its wake the extension of a reasonable opportunity to the

corporate debtor to substantiate by document or otherwise, that there

does not exist a default as claimed against it. The proceedings before the

NCLT are adversarial in nature. Both the sides are, therefore, entitled to a

reasonable opportunity of hearing.

The requirement of NCLT and NCLAT to adhere to the principles of natural

justice and the fact that, the principles of natural justice are not ousted by

the Code of 2016 can be found from section 7(4) of the Code of 2016 and

rule 4 of the Insolvency and Bankruptcy (Application to Adjudicating

Authority) Rules, 2016. Rule 4 deals with an application made by a financial

creditor under section 7 of the Code of 2016. Sub-rule (3) of rule 4 requires

such financial creditor to despatch a copy of the application filed with the

adjudicating authority, by registered post or speed post to the registered

office of the corporate debtor.

Rule 10 of the Rules of 2016 states that, till such time the rules of procedure

for conduct of proceedings under the Code of 2016 are notified, an

272

PRACTICAL ASPECTS OF INSOLVENCY LAW

application made under sub-section (1) of section 7 of the Code of 2017

is required to be filed before the adjudicating authority in accordance with

rules 20, 21, 22, 23, 24 and 26 or Part-Il of the National Company Law

Tribunal Rules, 2016.

Adherence to the principles of natural justice by NCLT or NCLAT would

not mean that in every situation, NCLT or NCLAT is required to afford a

reasonable opportunity of hearing to the respondent before passing its

order.

In a given case, a situation may arise which may require NCLT to pass an

ex parte ad interim order against a respondent. Therefore, in such situation

NCLT, it may proceed to pass an ex parte ad interim order, however, after

recording the reasons for grant of such an order and why it has chosen

not to adhere to the principles of natural justice at that stage. It must,

thereafter proceed to afford the party respondent an opportunity of hearing

before confirming such ex parte ad interim order.

In the facts of the present case, the learned senior advocate for the

petitioner submits that, orders have been passed by the NCLT without

adherence to the principles of natural justice. The respondent was not

heard by the NCLT before passing the order.

It would be open to the parties to agitate their respective grievances with

regard to any order of NCLT or NCLAT as the case may be in accordance

with law. It is also open to the parties to point out that the NCLT and the

NCLAT are bound to fol ow the principles of natural justice while disposing

of proceedings before them.

In such circumstances, the chal enge to the vires to section 7 of the

Code of 2016 fails.”

14. The Appel ate Tribunal in the said case of M/s. Innoventive Industries

Ltd. also noticed sub-rule (3) of rule 4 of Insolvency and Bankruptcy

(Application to Adjudicating Authority), Rules, 2016 and observed :

‘51. As per sub-rule (3) of rule 4 of Insolvency and Bankruptcy (Application

to Adjudicating Authority) Rules, 2016, the financial creditor is required to

despatch forthwith a copy of the application filed with the Adjudicating

Authority to the corporate debtor as quoted below :

“4. (3) The applicant shal despatch forthwith, a copy of the application

filed with the Adjudicating Authority, by registered post or speed post to

the registered office of the corporate debtor.”

PRACTICAL ASPECTS OF INSOLVENCY LAW

273

Thus, it is clear that sub-rule (3) of rule 4 of I&B (Application to Adjudicating

Authority) Rules, 2016, mandates the applicant to despatch forthwith, a

copy of the application “filed with the Adjudicating Authority”. Thereby a

post-filing notice required to be issued and not as notice before filing of

application. The purpose for the same being to put corporate debtor to

adequate impound notice so that the corporate debtor may bring to the

notice of Adjudicating Officer “mitigating factor/ records before the

application is accepted even before formal notice is received”.

52. The insolvency resolution process under section 7 or section 9 of I&B

Code, 2016 have serious civil consequences not only on the corporate

debtor – company but also on its directors and shareholders in view of

the fact that once the application under section 7 or 9 of the I&B Code,

2016 is admitted it is fol owed by appointment of an “interim resolution

professional” to manage the affairs of the corporate debtor, instant removal

of the Board of directors and moratorium for a period of 180 days. For the

said reason also the Adjudicating Authority is bound to issue limited notice

to the corporate debtor before admitting a case under sections 7 and 9 of

the I&B Code, 2016.

53. In view of the discussion above, we are of the view and hold that the

Adjudicating Authority is bound to issue a limited notice to the corporate

debtor before admitting a case for ascertainment of existence of default

based on material submitted by the financial creditor and to find out

whether the application is complete and or there is any other defect

required to be removed. Adherence to principles of natural justice would

not mean that in every situation the adjudicating authority is required to

afford reasonable opportunity of hearing to the corporate debtor before

passing its order.’

15. In the aforesaid case of M/s. Innoventive Industries Ltd., the Appel ate

Tribunal also noticed the purpose of issuance of notice and held :

‘55. Process of initiation of insolvency resolution process by a financial

creditor is provided in section 7 of the I&B Code. As per sub-section (1) of

section 7 of the I&B Code, the trigger for filing of an application by a

financial creditor before the Adjudicating Authority is when a default in

respect of any financial debt has occurred. Sub-section (2) of section 7

provides that the financial creditor shal make an application in prescribed

form and manner and with prescribed documents, including :

(i) “record of the default” recorded with the information utility or such

other record or evidence of default as may be specified;

274

PRACTICAL ASPECTS OF INSOLVENCY LAW

(i ) the name of the resolution professional proposed to act as an interim

resolution professional; and

(i i ) any other information as may be specified by the Board.’

16. In view of the decision of Appel ate Tribunal in M/s. Innoventive Industries

Ltd., while we accept the submissions made on behalf of the appel ant that

the principle of rules of natural justice was violated, also reject the contention

made by learned counsel for the respondents that no such notice is required

or that there is no civil consequences, if any such application for initiation

of corporate insolvency resolution process is initiated.

17. The next question arises for consideration is what does “dispute” and

“existence of dispute” means for the purpose of initiation of insolvency

resolution process pursuant to application under section 9 of the I&B Code.

The aforesaid issue was considered by this Appel ate Tribunal in “Kirusa

Software (P.) Ltd. v. Mobilox Innovations (P.) Ltd. Company Appeal (AT)

(Insolvency) No. 06 of 2017”. Having noticed different provisions of the I&B

Code including meaning of “dispute” as defined under sub-section (6) of

section 5, the expression “existence of dispute, if any”, used in sub-section

(2) of section 8 of I&B Code. This Appel ate Tribunal observed and held as

follows :

‘17. For the purposes of Part II only of the Code, some terms/words have

been defined.

Sub-section (6) of section 5 defines “dispute”, to include, unless the context

otherwise requires, a dispute pending in any suit or arbitration proceedings

relating to :

(a) existence of amount of the debt;

(b) quality of good or service;

(c) breach of a representation or warranty.

The definition of “dispute” is “inclusive” and not “exhaustive”. The same

has to be given wide meaning provided it is relatable to the existence of

the amount of the debt, quality of goods or service or breach of a

representation or warranty.

18. Once the term “dispute” is given its natural and ordinary meaning,

upon reading of the Code as a whole, the width of “dispute” should cover

al disputes on debt, default, etc., and not be limited to only two ways of

disputing a demand made by the operational creditor, i.e., either by showing

a record of pending suit or by showing a record of a pending arbitration.

PRACTICAL ASPECTS OF INSOLVENCY LAW

275

The intent of the Legislature, as evident from the definition of the term

“dispute”, is that it wanted the same to be illustrative (and not exhaustive).

If the intent of the Legislature was that a demand by an operational creditor

can be disputed only by showing a record of a suit or arbitration proceeding,

the definition of dispute would have simply said dispute means a dispute

pending in arbitration or a suit.

21. Admittedly in sub-section (6) of section 5 of the I&B Code, the

Legislature used the words “dispute includes a suit or arbitration

proceedings”. If this is harmoniously read with sub-section (2) of section

8 of the I&B Code, where words used are “existence of a dispute, if any,

and record of the pendency of the suit or arbitration proceedings,” the

result is disputes, if any, applies to all kinds of disputes, in relation to

debt and default. The expression used in sub-section (2) of section 8 of

the I&B Code “existence of a dispute, if any,” is disjunctive from the

expression “record of the pendency of the suit or arbitration proceedings”.

Otherwise, the words “dispute, if any”, in sub-section (2) of section 8

would become surplus usage.

22. Sub-section (2) of section 8 of the I&B Code cannot be read to mean

that a dispute must be pending between the parties prior to the notice of

demand and that too in arbitration or a civil court. Once parties are already

before any judicial forum/authority for adjudication of disputes, notice

becomes irrelevant and such an interpretation renders the expression

“existence of a dispute, if any,” in sub-section (2) of section 8 itiose.

25. The true meaning of sub-section (2)(a) of section 8 read with sub-

section (6) of section 5 of the I&B Code clearly brings out the intent of the

Code, namely, the corporate debtor must raise a dispute with sufficient

particulars. And in case a dispute is being raised by simply showing a

record of dispute in a pending arbitration or suit, the dispute must also be

relatable to the three conditions provided under sub-section (6) of section

5(a)-(c) only. The words “and record of the pendency of the suit or arbitration

proceedings” under sub-section (2)(a) of section 8 also make the intent of

the Legislature clear that disputes in a pending suit or arbitration proceeding

are such disputes which satisfy the test of sub-section (6) of section 5 of

the I&B Code and that such disputes are within the ambit of the expression,

“dispute, if any”. The record of suit or arbitration proceeding is required to

demonstrate the same, being pending prior to the notice of demand under

section 8 of the I&B Code.

26. It is a fundamental principle of law that multiplicity of proceedings is

required to be avoided. Therefore, if disputes under sub-section (2)(a) of

276

PRACTICAL ASPECTS OF INSOLVENCY LAW

section 8 read with sub-section (6) of section 5 of the I&B Code are

confined to a dispute in a pending suit and arbitration in relation to the

three classes under sub-section (6) of section 5 of the I&B Code, it would

violate the definition of operational debt under sub-section (21) of section

3 of the I&B Code and would become inconsistent thereto, and would bar

operational creditor from invoking sections 8 and 9 of the Code.

27. Sub-section (6) of section 5 read with sub-section (2)(a) of section 8

also cannot be confined to pending arbitration or a civil suit. It must include

disputes pending before every judicial authority including mediation,

conciliation, etc., as long there are disputes as to existence of debt or

default etc., it would satisfy sub-section (2) of section 8 of the I&B Code.’

18. The Appel ate Tribunal also noticed various natures of “existence of

dispute in Kirusa Software Private Limited Vs. Mobilox Innovations Private

Limited and held :

‘31. The dispute under I&B Code, 2016 must relate to specified nature in

clauses (a), (b) or (c), i.e., existence of amount of debt or quality of goods

or service or breach of representation or warranty. However, it is capable

of being discerned not only from in a suit or arbitration from any document

related to it. For example, the “operational creditor” has issued notice

under Code of Civil Procedure, 1908 prior to initiation of the suit against

the operational creditor which is disputed by “corporate debtor”. Similarly

notice under section 59 of the Sales and Goods Act if issued by one of

the party, a labourer/employee who may claim to be operational creditor

for the purpose of section 9 of I&B Code, 2016 may have raised the

dispute with the State Government concerning the subject-matter, i.e.,

existence of amount of debt and pending consideration before the

competent Government. Similarly, a dispute may be pending in a Labour

Court about existence of amount of debt. A party can move before a High

Court under writ jurisdictions against Government, corporate debtor (public

sector undertaking). There may be cases where one of the party has

moved before the High Court under section 433 of the Companies Act,

1956 for initiation of liquidation proceedings against the corporate debtor

and dispute is pending. Similarly, with regard to quality of foods, if the

“corporate debtor” has raised a dispute, and brought to the notice of the

“operational creditor” to take appropriate step, prior to receipt of notice

under sub-section (1) of section 8 of the I&B Code one can say that a

dispute is pending about the debt. Mere raising a dispute for the sake of

dispute, unrelated or related to clause (a) or (b) or (c) of sub-section (6) of

section 5, if not raised prior to application and not pending before any

PRACTICAL ASPECTS OF INSOLVENCY LAW

277

competent court of law or authority cannot be relied upon to hold that

there is a “dispute” raised by the corporate debtor. The scope of existence

of “dispute if any”, which includes pending suits and arbitration proceedings

cannot be limited and confined to suit and arbitration proceedings only. It

includes any other dispute raised prior to section 8 in this in relation to

clause (a) or (b) or (c) of sub-section (6) of section 5. It must be raised in

a court of law or authority and proposed to be moved before the court of

law or authority and not any got up or mala fide dispute just to stal the

insolvency resolution process.

33. Thus, it is clear that while sub-section (2) of section 8 deals with

“existence of a dispute”, sub-section (5) of section 9 does not confer any

discretion on adjudicating authority to verify adequacy of the dispute. It

prohibits the adjudicating authority from proceeding further if there is a

genuine dispute raised before any court of law or authority or pending in a

court of law or authority including suit and arbitration proceedings. Mere a

dispute giving a colour of genuine dispute or il usory, raised for the first

time while replying to the notice under section 8 cannot be a tool to reject

an application under section 9 if the operational creditor otherwise satisfies

the adjudicating authority that there is a debt and there is a default on the

part of the corporate debtor.”

19. What appears from the present case is that much before enactment of the

Insolvency and Bankruptcy Code, 2016, in or around 2013, the appel ant-

corporate debtor entered with respondent Essar Projects India Ltd. and another

memorandum of understanding for construction of work at 0.2MTPA Steel

Melt Shop Complex at Pithampur, Dist. Dhar, Madhya Pradesh. For one or

other reason the outstanding dues in connection with construction work were

al eged to have not been paid by appel ant to the respondent-operational

creditor. The respondent by a notice dated 26th October, 2016 while referred

to a memorandum of understanding dated 27th June, 2013 mentioned :

‘7. We state that the work orders issue by MCL in connection with the

Project were duly completed by our client as per the work set out in each

of such Work Orders. It is extremely pertinent to note that our client has

successfully completed the project within the contractual period, i.e., on

30th November, 2014 as per the terms of the Work Orders and has handed

over possession of the plant to MCL by 31st December, 2014. As MCL is

aware, after the completion of certain additional work, i.e., by January

2015, the plant has been in operation. We further state that our client has

also removed its machinery and other objects from the project premises

in furtherance of the completion of the project as per the work orders.

278

PRACTICAL ASPECTS OF INSOLVENCY LAW

8. The aforesaid clearly evinces that our client has performed its entire

obligation in accordance with the terms and conditions agreed upon with

MCL and completed the project within the defined time period.

9. As per the terms of the MoU and the work order, our client regularly

raised the requisite invoices with respect to work carried out and the

invoices were received and accepted by MCL (the “invoices”). We state

that a substantial portion of the invoices currently remain outstanding

(the “unpaid invoices”). We further state that an amount aggregating to

INR 6,83,06,077 along with interest at the rate of 18 (eighteen) percent

per annum is due and payable to our client under such unpaid invoice

(col ectively referred to as, the “Debt”).’

20. In the light of the above, the appellants were called upon by respondent-

operational creditor to repay the dues of Rs. 6,83,06,077 along with interest

at the rate 18 per cent. It was mentioned that the said notice issue under

section 433(e) read with section 434 of the Companies Act 1956.

21. Referring to the aforesaid notice dated 26th October, 2016 (received on

29th October, 2016) by letter dated 21st December, 2016 the corporate

debtor opposed the contentions and disputed the claim, relevant to which

are quoted below :

“1. At the outset contents of notice under reply are incorrect, misleading,

therefore denied. Contents of notice are not to be deemed to have

been admitted unless admitted specifical y.

2. Provisions contained in section 434 of Companies Act, 1956 are not

available to your client to institute a proceeding for winding up of

company for the fol owing reasons :

(i) My client seriously dispute the amount sought to be recovered

by your client under the terms of MoU dated 27th June, 2013.

(i ) There are very serious disputes between your client and my

client about the outstanding amount sought to be recovered by

your client.

(iii) There are serious disputes between your client and my client

regarding quality of construction and timeline within which

construction was to be completed.

(iv) My client has made huge payments in-between 30th October,

2012 to 3rd November, 2014. Accounts of your client have not

been reconciled with my client.

PRACTICAL ASPECTS OF INSOLVENCY LAW

279

(v) Due to delayed construction, my client has suffered losses. No

completion certificate is issued. Outstanding bil s are not verified

and certified.

(vi) There are very serious disputes about enforceability of the

contract between my client and your client.

(vi ) Amount sought to be recovered is not admitted by my client as

al eged by you.

3. In addition to above issues there are various other issues which are

involved in the matter which are seriously opposed by my client. My

client opposes the endeavour/effort on the part of your client to recover

money from my client.

4. It is submitted that the issue-area of dispute between your client and

my client is of recovery of contract amount and those issues and

area of disputes are yet to be final y settled.

5. It is submitted that by issuing the notice under reply your client is

misusing the provisions contained in Companies Act, 1956. Winding

up notice in the aforementioned back ground of the facts and

circumstances is nothing but arms twisting which is not permissible

in law.

8. Without prejudice to above, please note that recovery of contract

amount sought by your client is under dispute and said dispute cannot

be resolved by the company court. The dispute between your client

and my client can be resolved by alternative dispute resolution

mechanism.

10. Please note that dispute raised by your client is in persona and is

covered by arbitration clause. Dispute raised by your client is not in

rem, therefore, not required to be adjudicated by courts and public

tribunals.”

22. From the aforesaid notice dated 26th October, 2016 issued by respondent-

operational creditor under sections 433(e) and 434 of the Companies Act,

1956 and the reply thereto given by appellant-corporate debtor by this letter

dated 21st November, 2016 it is clear that there is an “existence of a dispute”

between the parties regarding :

(i) Quality of construction

(i ) Tying timeline within its construction was to be completed, but not

completed

280

PRACTICAL ASPECTS OF INSOLVENCY LAW

(iii) a huge amount has been paid by corporate debtor to the operational

creditor in between 30th December, 2012 to 3rd November, 2014.

23. This fact was also highlighted by the appel ant-corporate debtor while it

filed a reply to the notice issued by the operational creditor under sub-

section (2) of section 8 of the I&B Code.

24. The e-mail issued by appel ant-corporate debtor as referred to above

and not disputed by the respondent-operational creditor also relates to the

quality of work and non-completion of work within time.

25. In Kirusa Software (P.) Ltd., this Appel ate Tribunal held that for the

purpose of sub-section (2) of section 8 and section 9 “dispute” can be of

being discerned from notice of corporate debtor and meaning of “existence

of a dispute”, if any, must be understood in the context of the dispute of I&B

Code must relate to satisfy nature of clause (a), (b) or (c) of sub-section (6)

of section 5, i.e., existence of amount of debt or quality of goods or services

or breach of representation or warranty. It can be of being discerned not only

from a suit or arbitration from documents related to it but from other factors

like notice issued under section 8 of Code of Civil Procedure, 1908 prior to

initiation of suit against “operational creditor” which is disputed by corporate

creditor, etc.

26. In the present case as admittedly a notice was issued by respondent-

operational creditor under sections 433(e) and 434 of the Companies Act,

1956 in 28th October, 2016 which was disputed by appellant-corporate debtor

objecting quality of service and non-completion of the work within time which

is much prior to enactment of I&B Code, 2016, and notice under section 8

of the I&B Code, we hold that there is an “existence of dispute” for which the

petition under section 9 preferred by respondent-operational creditor was

not maintainable.

27. Further, as the impugned order dated 6th March, 2017 was passed by

Adjudicating Authority without notice to the appel ant-corporate debtor in

violation of principle of natural justice and the Adjudicating Authority failed

to notice the relevant facts that there was a dispute raised and replied by

the corporate debtor, the impugned order passed by Adjudicating Authority

cannot be upheld.

28. We, accordingly, set aside the impugned order dated 6th March 2017

passed by the Adjudicating Authority, Mumbai Bench in CP No. 20(1)I&BP/

NCLT/MAH/2017 and make the appellant-corporate debtor free from all rigour

of corporate insolvency resolution process.

PRACTICAL ASPECTS OF INSOLVENCY LAW

281

29. In the result the order of moratorium, freezing of bank accounts,

appointment of interim resolution professional, advertisement issued notice

to the persons about initiation of “corporate insolvency resolution process”,

etc., al stand set aside.

30. It wil be open to the Board of directors to take over the possession and

function of the appel ant-company with immediate effect. The Tribunal is

directed to close the proceedings and dismiss the application in view of the

order passed by Appel ate Tribunal and determine the fees of interim resolution

professional to which he will be entitled for the period he has performed the

duty to be borne by the respondent-operational creditor.

31. The appeal is al owed with the aforesaid observations and directions.

However, in the facts and circumstances, there shal be no order as to cost.

(Mr. Balvinder Singh)

(Justice S.J. Mukhopadhaya)

Member (Technical)

Chairperson

New Delhi

31st May, 2017

282

PRACTICAL ASPECTS OF INSOLVENCY LAW

ANNEXURE X.6

IN THE NATIONAL COMPANY LAW APPELLATE TRIBUNAL

Company Appeal (AT) (Insolvency) No. 32 of 2017

[arising out of Order dated 24th March, 2017 by NCLT, Principal Bench,

New Delhi in C.P. No. (IB)-22(PB)/2017]

M/s. Annapurna Infrastructure Pvt. Ltd. and anr.

Appellants

Vs.

M/s. SORIL Infra Resources Ltd.

Respondent

Present:

For Appellants -

Shri Vijay Nair, Shri Prashant Jam, Ms. Aparna

Malhotra and Ms. Sanyogita Jam, Advocates.

For Respondent-

Shri Chetan Sharma, Shri Abhishek Swaroop and

Shri Rudreshwar Singh, Advocates.

JUDGMENT

SUDHANSU JYOTI MUKHOPADHAYA, J

This appeal has been preferred by the appel ants against order dated 24th

March, 2017 passed by the Learned Adjudicating Authority (National Company

Law Tribunal), Principal Bench, New Delhi whereby the application preferred

by the appellant under Section 9 of Insolvency and Bankruptcy Code, 2016

(hereinafter referred to as ‘I & B Code’) for initiation the Corporate Insolvency

Resolution Process against the ‘Corporate Debtor’ has been rejected on the

ground that there is an existence of dispute pending adjudication between

the parties.

2. In order to decide the controversy in its proper perspective, it wil be

necessary to notice the material facts.

3. Appel ants rented the premises, rent of which was payable by respondent

- Corporate Debtor pursuant to Lease Deed dated 23rd November, 2005 but

having not paid, the parties invoked arbitration clause. Pursuant to the order

passed by the Hon’ble High Court of Delhi, Hon’ble Justice (Dr.) Mukundakam

Sharma (Retired) was appointed as a Sole Arbitrator to adjudicate al disputes

PRACTICAL ASPECTS OF INSOLVENCY LAW

283

arising out of Lease Deed dated 23rd November, 2005 between the appel ants

and the respondent.

4. The Arbitrator passed an award on 9th September, 2016 in favour of the

appel ants granting the fol owing relief:-

“a. Rs.2,67,52,283/- on account of rend from 1.4.2008 upto 22.3.2010

along with interest @ 12% per annum w.e.f. 23.3.2010 upto the date

of the Award.

b. Rs. 1,11,56,145/- on account of damages equivalent to rend for a

period of 6 months from 22.3.2010

c. Future interest @12% per annum on the amounts, as calculated

above, from the date of the award til the date of realization.”

5. The respondent then chal enged the award under Sec. 34 of the Arbitration

and Conciliation Act, 1996 (hereinafter referred to as ‘Arbitration Act’) with

the prayer to set aside the award. The application preferred by respondent

under Sec. 34 was dismissed on 19th December, 2016 affirming the award.

6. As a consequence, the appel ants issued a demand notice dated 13th

January, 2017 under Sec. 8 of the I & B Code. In response to the demand

notice, respondent filed a reply on 27th January, 2017 raising objection on

the ground that there is an existence of dispute about ‘Operational Debt’. It

was also stated that the appeal bearing No. FA(OS)(COMM) 20 of 2017 has

been filed under section 37 of the Arbitration Act against the order dated

19th December, 2016 before the Ld. Single Judge. It was also pointed out

that an execution proceedings to recover the amount due under the award

dated 9th September, 2016 have also been initiated and are pending

consideration before the Hon’ble Delhi High Court.

7. Learned counsel for the appellants submitted that the 1st appel ant is to

be regarded as an “operational creditor” within the meaning of Sec. 9 r/w

sub-sections (20) and (21) of Section 5 of the I&B Code. A reference has

also been invited to the definition of the words ‘debt’ and ‘default’ as defined

in Section 3(11) and Section 3(12) of the I&B Code. .

8. According to learned counsel for the appel ants the award passed by the

learned Arbitrator had attained finality as the application under Section 34

of the Arbitration Act has been dismissed on 19th December, 2016. It was

further contended that expression “arbitration proceedings” used in Sec.

8(2)(a) of the I&B Code cannot be deemed to be pending because under

Sec. 21 of the Arbitration Act, arbitration proceedings commenced on the

date on which request for referring such a dispute to arbitration was received

284

PRACTICAL ASPECTS OF INSOLVENCY LAW

by the respondent. The said proceeding came to an end in terms of Sec. 32

on the date of announcing the final award or by an order of the Arbitral

Tribunal in accordance with sub-section (2) of Sec. 32 of the Arbitration Act.

According to the learned counsel for the appel ants, there is no arbitral

proceeding pending and it reached finality and come to an end on 9th

September, 2016.

9. Similar argument was advanced by the learned counsel for the appellant

before the learned Adjudicating Authority wherein reliance was placed on

decision of one or other High Court’s order.

10. According to the learned counsel for the respondent the petition under

Sec. 9 of the I&B Code is not maintainable because the appel ants do not

owe any ‘operational debts’ to the Corporate Debtor and thereby the 1st

appellant is not an ‘operational creditor’. Referring to the definition of

‘operational debts’ as defined under Section 5(21) of the I&B Code, learned

counsel for the respondent contended that ipsofacto claim arising out of

‘supply of goods’ and providing ‘services’, which may include employment

wil not amount to operation debt.

Therefore, ipsofacto the 1st appel ant does not and cannot qualify to be an

‘operational creditors’, as there is no ‘operational debt’. “Debt” is not arising

under the law for the time being inforce as is mandate of sub-section (21) of

Sec. 5 of the I&B Code and it would be attracted only when the said debt is

payable as per said provision.

11. It was further contended that Sections 8, 9, 5(20) and 5(21) must be

construed in accordance with the object of the court as outlined in the long

title.

12. Similar arguments was advanced by the learned counsel for the

respondent before the learned Adjudicating Authority wherein a number of

decisions of other Courts and Tribunal were also relied upon.

13. Learned Tribunal at the beginning before deciding the dispute observed

that “it is a classical case where a dispute between the parties has

already been subjected to the arbitration proceedings which are yet to

attain finality”. Thereby, we find that learned Adjudicating Authority before

deciding the issue made up their mind that ‘a dispute is pending and not

attained finality’.

We do not appreciate such observation, as before discussing the case and

claim of the parties and the provision of law, the Adjudicating Authority

cannot express and open its mind. Learned Adjudicating Authority while

decided the question as to whether the appellants come within the meaning

PRACTICAL ASPECTS OF INSOLVENCY LAW

285

of ‘operational creditor’, rejected the submission that the ‘arbitration

proceedings’ stand concluded by virtue of Section 32 of the Arbitration Act.

14. Learned Adjudicating Authority while held that the application is not

maintainable, observed as fol ows:

“27. We are further of the view that already proceedings for execution of

the award have been initiated. An effective remedy has been availed by

the applicant. We have not been able to accept that a party can invoke

more than one remedy simultaneously. It is in fact against the fundamental

principles of Judicial administration to al ow a party to avail more than

one remedies. Ordinarily only one remedy at one time could be availed as

is evident from the fundamental principles laid down in section 10 CPC. It

would promote forum shopping which is wholly impermissible in law.......”

15. We have heard learned counsel for the parties and perused the record.

16. The questions arise for determination in this appeal are:-

(i) Whether there is an ‘existence of dispute’ between the parties, the

award passed by Arbitral Tribunal having affirmed by the Court under

Sec. 34 of the Arbitration Act?

(i ) Whether pendency of a proceeding for execution of an award or a

judgment and decree bar an operational creditor to prefer any petition

under the I & B Code?

(iii) Whether the 1st appellant is an ‘operational creditor’ within the meaning

of Sec. 5(20) r/w Sec. 5(21) of the I & B Code?

17. Before deciding the first and second issue, it is desirable to refer the

observations of the Adjudicating Authority to understand the reasons for

not entertaining the application under Sec. ,9- The Tribunal proceeded on

presumption that a dispute is pending in view of the pendency of a case

under Sec. 37 of the Arbitration Act as is apparent from the observation and

finding quoted below:

“22. In the instant case an arbitral award has been announced on 9.9.2016

and the application for setting aside the award filed under section 34 of

the Arbitration Act has been rejected on 19.12.2016. It has been mentioned

by the respondent in its reply dated 27.01.2017 sent under section 8(2) of

the Code to the notice issued under section 8(1) of the Code by the applicant

that the debt is disputed and appeal under section 37 of the Arbitration

Act is pending. The reply dated 27.1.2017 reads as under:-

“1. At the outset, kindly note that our client is disputing the existence of

286

PRACTICAL ASPECTS OF INSOLVENCY LAW

the ‘operational debt’ al egedly payable to you by our client. Our client

is vigorously contesting the Award dated 9.9.2016 (Award) passed

by Mr. Justice Mukundakam Sharma (Retd.), Sole Arbitrator, in

Arbitration Case No.3 of 2013, before the Hon’ble Delhi High Court.

2. As you are aware, our client had filed a petition under section 34 of

the Arbitration and Conciliation Act, 1996 (Act) bearing No. % OMP

(Comm.) No.570 of 2016, before the Hon’ble Delhi High Court vide

order dated 19.12.2016. Please note that our client has filed an appeal

against the said order under section 37 of the Act, bearing No.

FAO(OS)(COMM) 20 of 2017, for setting aside the order dated

1912.206, and the same is presently pending adjudication before the

Hon‘ble Court.

3. In view of the above, please note that no default has occurred in

terms of section 8(1) of the Code and, therefore, no process for

Corporate Insolvency Resolution can be initiated at this stage. Any

action in this regard would be at your own cost, risk and consequences.

Kindly note that this reply is without prejudice to any other rights or

remedies available to our client under contract and in law. “

23. A close examination of the aforesaid reply would show that the

respondents have disputed the existence of ‘Operational Debt’ by

disclosing that its application under section 34 of the Arbitration Act was

dismissed and the appeal under section 37 of the Arbitration Act bearing

No. FAO (OS)(COMM) 20 of 2017 was pending adjudication. It is also

pertinent to mention that the applicant has filed a caveat for issuance of

notice to it before passing any order. Therefore the applicants are contesting

the litigation tooth nail before this forum. In this backdrop respondent has

claimed no default within the meaning section 8(1) read with section 3(12)

of the Code is deemed to have occurred. It is also pertinent to notice that

execution proceedings for enforcement of the award have also been

initiated and are pending for consideration of the Hon’ble Delhi High Court

on 12.5.2017.

24. In the face of the aforesaid facts we find that there is complete answer

to the claim made by the applicant in terms of section 8(2)(a) read with

section 9(1) of the ‘Code’ which bars initiation of insolvency process. It

cannot be said that arbitration proceedings have come to an end merely

on the dismissal of application under section 34 of the Arbitration Act as

sought to be canvassed on behalf of the applicant. The proceedings are

yet to attain finality as appeal under section 37 of the Arbitration Act is

PRACTICAL ASPECTS OF INSOLVENCY LAW

287

pending. On behalf of the respondents reliance has rightly been placed on

the judgement of the Bombay High Court rendered in the cases of DSL

Enterprises Private Ltd. (DB) and Rajendra (SB) (Supra).

25. We have not been able to persuade ourselves to accept the submission

advanced on behalf of the applicant that ‘arbitration proceedings’ stand

concluded by virtue of section 32 of the Arbitration Act. The argument is

wholly unsustainable once we take into account the provisions of section

33 of the Arbitration Act itself It provides for corrections and interpretation

of award and even for additional award after the award has been announced.

As already observed section 34 and section 37 of the Arbitration Act

provide for setting aside of the award and the remedy of appeal. The

appeal under section 37 of the Arbitration Act is still pending. The

judgements of Bombay High Court has been rightly relied upon by the

learned counsel for respondents.”

18. The Adjudicating Authority further proceeded to observe :

“27. We are further of the view that already proceedings for execution of

the award have been initiated. An effective remedy has been availed by

the applicant. We have not been able to accept that a party can invoke

more than one remedy simultaneously. It is in fact against the fundamental

principles of judicial administration to allow a party to avail more than one

remedies. Ordinarily only one remedy at one time could be availed as is

evident from the fundamental principles laid down in section 10 CPC. It

would promote forum shopping which is whol y impermissible in law. “

19. To decide the question as to whether the pendency of case under Section

37 of the Arbitration Act amounts to pendency of a dispute before a court of

law, it is desirable to refer the relevant provisions of the I & B Code.

20. Sub-section (6) of Section 5 of the I & B Code defines ‘dispute’ as

fol ows:

“5. In this Part, unless the context otherwise requires, –

(6) “dispute” includes a suit or arbitration proceedings relating to –

(a) the existence of the amount of debt;

(b) the quality of goods or service; or

(c) the breach of a representation or warranty;”

21. Clause (a) of sub-section (2) of Sec. 8 relates to an existence of dispute,

as quoted herein:

288

PRACTICAL ASPECTS OF INSOLVENCY LAW

“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;

(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

(i ) by sending an attested copy of record that the operational creditor

has encashed a cheque issued by the corporate debtor.

Explanation.— For the purposes of this section, a “demand notice” means

a notice served by an operational creditor to the corporate debtor demanding

repayment of the operational debt in respect of which the default has

occurred.”

22. From clause (a) of sub-section (2) of Sec. 8, we find that pendency of

an arbitration proceedings has been termed to be an ‘existence of dispute’

and not the pendency of an application under Sec. 34 or Sec. 37 of the

Arbitration Act.

23. Form 5 of the Insolvency and Bankruptcy (Application to Adjudicating

Authority) Rules, 2016 (hereinafter referred to as the ‘Rules, 2016’) is the

form required to be filled to apply under Sec. 9 of the I&B Code, wherein the

order passed by Arbitral Panel has been cited as one of the document,

record and evidence of default. This is apparent from Part V of Form 5, as

quoted below:

“FORM 5

Part-V

PARTICULARS OF OPERATIONAL DEBT [DOCUMENTS, RECORDS

AND EVIDENCE OF DEFAULT]

1. PARTICULARS OF SECURITY HELD, IF ANY, THE DATE OF ITS

CREATION, ITS ESTIMATED VALUE AS PER THE CREDITOR.

ATTACH A COPY OF A CERTIFICATE OF REGISTRATION OF

CHARGE ISSUED BY THE REGISTRAR OF COMPANIES (IF THE

CORPORATE DEBTOR IS A COMPANY)

2. DETAILS OF RESERVATION / RETENTION OF TITLE

PRACTICAL ASPECTS OF INSOLVENCY LAW

289

ARRANGEMENTS (IF ANY) IN RESPECT OF GOODS TO WHICH

THE OPERATIONAL DEBT REFERS

3. PARTICULARS OF AN ORDER OF A COURT, TRIBUNAL OR

ARBITRAL PANEL ADJUDICATING ON THE DEFAULT, IF ANY

(ATTACH A COPY OF THE ORDER)

4. RECORD OF DEFAULT WITH THE INFORMATION UTILITY, IF ANY

(ATTACH A COPY OF SUCH RECORD)

5. DETAILS OF SUCCESSION CERTIFICATE, OR PROBATE OF A

WILL, OR LETTER OF ADMINISTRATION, OR COURT DECREE

(AS MAY BE APPLICABLE), UNDER THE INDIAN SUCCESSION

ACT, 1925 (10 OF 1925) (ATTACH A COPY)

6. PROVISION OF LAW, CONTRACT OR OTHER DOCUMENT UNDER

WHICH OPERATIONAL DEBT HAS BECOME DUE

7. A STATEMENT OF BANK ACCOUNT WHERE DEPOSITS ARE

MADE OR CREDITS RECEIVED NORMALLY BY THE

OPERATIONAL CREDITOR IN RESPECT OF THE DEBT OF THE

CORPORATE DEBTOR (ATTACH A COPY)

8. LIST OF OTHER DOCUMENTS ATTACHED TO THIS APPLICATION

IN ORDER TO PROVE THE EXISTENCE OF OPERATIONAL DEBT

AND THE AMOUNT IN DEFAULT

24. The aforesaid provisions and format of application makes it clear that

while pendency of the suit or arbitration proceeding has been termed as

existence of dispute, apart from other disputes decree and award of Tribunal

has been shown as record of default.

25. In Kirusa Software Private Ltd. Vs. Mobilox Innovations Private

Limited - Company Appeal (AT) (Insolvency) 6 of 2017, this Appel ate

Tribunal by judgment dated 24th May, 2017 while deciding the meaning of

‘dispute’ and “existence of dispute’ held: .

“32. There may he other cases such as a suit relating to existence of

amount of debt stands decided and decree is pending for execution.

Similarly, existence of amount of debt or quality of goods or service for

which a suit have been filed and decreed;

an award has been passed by Arbitral Panel, though petition under Section

34 of Arbitration and Reconciliation Act, 1996 may be pending. In such

case the question wil arise whether a petition under Section 9 wil be

maintainable particularly when it was a suit or arbitration proceeding is

not pending, but stand decided?

290

PRACTICAL ASPECTS OF INSOLVENCY LAW

Though one may argue that Insolvency resolution process cannot be

misused for execution of a judgement and decree passed in a suit or

award passed by an arbitration Tribunal, but such submission cannot be

accepted in view of Form 5 of Insolvency & Bankruptcy (Application to

Adjudicating Authority) Rules 2016 wherein a decree in suit and award

has been shown to be a debt for the purpose of default on non-payment.”

26. Under Sec. 36 of the Arbitration Act, an arbitral award is executable as

decree but it can be enforced only after the time for filing the application

under Sec. 34 has expired and no application is made or such application

having been made has been rejected. That means, the arbitral award reaches

finality after expiry of enforceable time under Sec. 34 and/or if application

under Section 34 is filed and rejected.

27. In Vipul Agarwal vs. Atul Kanodia & Co. and anr. - [AIR 2004 All

205], the Hon’ble Al ahabad High Court observed :

“4. The language of the section clearly indicates that the award can be

executed in two situations - one when the time for filing an application for

setting aside the award has expired and no application % has been filed

or where the application has been filed and it has been refused. It is not in

dispute that an award can be executed as a decree in view of the

provisions of Section 36 of the Act. The only question for consideration in

this case is whether the word %refused’ used in Section 36 of the Act

means a final refusal after al the proceedings of appeal etc. up to the

Supreme Court are over or a refusal by the District Judge is sufficient to

make the award executable. If the legislature intended that it is only after

the application under Section 34 has been rejected at the appellate stage

would the award be enforceable it could have used such words as ‘finally

refused’ in the section. As stated above the first situation referred to in

the section when an award becomes executable is where the limitation

for filing an application under Section 34 has run out and no application

has been filed. The application for setting aside the award in the context

necessarily means the application filed before the District Judge as it is

the running out of the limitation for such an application which would make

the award executable. It is clear, that the opening part of the section does

not refer to the running out of the period of limitation of filing an appeal.

Now the second situation when the award becomes executable is when

‘such application having been made’ has been refused. The words “such

application having been made” are significant. The words ‘such application’

refer to the application contemplated in the first situation which is clear

from the use of the expression ‘such’ which in the context is used to

PRACTICAL ASPECTS OF INSOLVENCY LAW

291

describe something which has been referred to earlier. On the plain language

the refusal contemplated in the section is the refusal by the Court where

the application is filed and not by the appel ate Court. Section 37(l)(b) of

the Act provides for appeal against an order ‘setting aside or refusing to

set aside an arbitral award under Section 34’. The reference in the

expression ‘refusing to set aside an arbitral award’ is obviously to the

order of refusal of the application under Section 34 by the Court of first

instance because Section 34 refers to an application made before the

Court of first instance. From the scheme of Sections 34, 36 and 37 it is

clear that the refusal of the application referred to in Section 36 for setting

aside the award is the application filed under Section 34. An interpretation

that Section 36 refers to the refusal of the application at the stage of the

appeal is not possible without straining the language of Section 36 and

adding the word ‘final y’ as qualifying ‘refused’. Such an interpretation also

does not promote any purpose, which the legislature may have had in

mind. The purpose of arbitration is to provide a speedy remedy. If the

award cannot be executed until it has successful y borne al challenges

even up to the Apex Court it cannot be conceived of as a speedy remedy.

While the legislature has used the word ‘final’ in respect of an award in

Section 35 the finality being subject to an appeal under Section 37, no

such expression of finality to the decision of an application under Section

34 has been used in Section 36. “

28. Russel on Arbitration (22nd edition) paragraph 6.001 defines an award

to mean: “in principle an award is a final determination of a particular

issue or claim in the arbitration......”

29. The Hon’ble Supreme Court in Centrotrade Minerals & Metals Inc. vs.

Hindustan Copper Limited [ (2017) 2 SCC 228] while dealing with the

finality of award under Arbitration and Conciliation Act, 1996 observed and

held :

“9. The general principle that we have accepted is supported by two

passages in Comparative International Commercial Arbitration. In Para

24-3 thereof reference is made to Article 31(1) of the United Nations

Commission on International Trade Law (or UNCITRAL) Rules to suggest

that while al awards are decisions of the Arbitral Tribunal, al decisions of

the Arbitral Tribunal are not awards. Similarly, while a decision is generic,

an award is a more specific decision that affects the rights of the parties,

has important consequences and can be enforced. The distinction between

an award and a decision of an Arbitral Tribunal is summarised in Para 24-

13. It is observed that an award: .

292

PRACTICAL ASPECTS OF INSOLVENCY LAW

(i) concludes the dispute as to the specific issue determined in the

award so that it has res judicata effect between the parties; if it is a

final award, it terminates the tribunal’s jurisdiction;

(i ) disposes of parties’ respective claims;

(iii) may be confirmed by recognition and enforcement;

(iv) may be chal enged in the courts of the place of arbitration.

10. In International Arbitration a similar distinction is drawn between an

award and decisions such as procedural orders and directions. It is

observed that an award has finality attached to a decision on a substantive

issue. Para 9.08 in this context reads as fol ows:

“9.08. The term “award” should generally be reserved for decisions that

finally determine the substantive issues with which they deal. This

involves distinguishing between awards, which are concerned with

substantive issues, and procedural orders and directions, which are

concerned with the conduct of the arbitration. Procedural orders and

directions help to move the arbitration forward; they deal with such matters

as the exchange of written evidence, the production of documents, and

the arrangements for the conduct of the hearing. They do not have the

status of awards and they may perhaps be called into question after the

final award has been made (for example as evidence of ‘bias’, or ‘lack of

due process’).”

11. In International Commercial Arbitration the general characteristics of

an award are stated. In Para 1353 it is stated as fol ows:

“1353.—An arbitral award can be defined as a final decision by the

arbitrators on all or part of the dispute submitted to them, whether it

concerns the merits of the dispute, jurisdiction, or a procedural issue

leading them to end the proceedings. “

This is subsequently elucidated through four aspects of an award, namely:

(i) an award is made by the arbitrators;

(i ) an award resolves a dispute;

(iii) an award is a binding decision; and

(iv) an award may be partial.

12. The arbitration result in the present case has all the elements and

ingredients of an arbitration award. Taking also into consideration the view

expressed by the above authors, we have no hesitation in concluding

PRACTICAL ASPECTS OF INSOLVENCY LAW

293

that the “arbitration result” in the first part of Clause 14 of the contract

must mean an arbitration award given by the arbitral panel of the Indian

Council of Arbitration. To this extent we disagree with the learned counsel

for Centrotrade but agree with the learned counsel for Hindustan Copper

Ltd. (hereafter referred to as “HCL”).”

30. Learned counsel appearing on behalf of the respondent referred to the

decision of the Hon’ble Supreme Court in Paramjeet Singh Patheja Vs.

ICDS Limited - [2006 (13) SCC 322] wherein interpreting Section 9(2)(a)

and (b) of the Presidency Towns Insolvency Act, 1909, the Apex Court held

an arbitral award is “decree” or “order” for the purpose of insolvency notice

under Section 9(2) of the Presidency Towns Insolvency Act, 1909.

31. The aforesaid decision is not applicable in the present context, the

Presidency Town Insolvency Act, 1909 having superseded by Insolvency

and Bankruptcy Code, 2016 and for the purpose of ‘dispute’ as ‘existence of

dispute’, only the pendency of arbitral proceeding has been accepted as

one of the ground of dispute. On the other hand, as apparent from Form 5 of

Rules, 2016 for the purpose of I&B Code, and Arbitral Award has been held

to be a document of debt and non-payment of awarded amount amounts to

‘default’ debt. Therefore, the aforesaid decision referred by learned counsel

for the respondent is of no help to the respondent.

32. What has been held by the learned Adjudicating Authority that a dispute

has been pending is not only against the provision of law and rules framed

thereunder, as noticed above, but is also against the decision of this Appellate

Tribunal in Kirusa Software Pvt. Ltd. as noticed above. In this background,

the finding of the Adjudicating Authority that a dispute pending is being

against the law cannot be upheld.

33. ‘Insolvency and Bankruptcy is an act to consolidate and amend the laws

relating to reorganisation and insolvency resolution of corporate persons in

a time bound manner for maximisation of the value of assets of such person

and to promote the entrepreneurship, availability of credit and balance the

interests of all the stakeholders including alteration in the order of priority of

payment of the Government dues.’ Insolvency resolution process is not a

money suit for recovery nor a suit for execution for any decree or award as

distinct from Section 35 of the Arbitration Act, which relates to execution of

an award. For the reasons aforesaid, while we hold that Corporate Insolvency

Resolution Process can be initiated for default of debt, as awarded under

the Arbitration Act, we further hold that the finding of the learned Adjudicating

Authority that it is an executable matter is against the essence of the I & B

Code. The question of availing any effective remedy or alternative remedy,

294

PRACTICAL ASPECTS OF INSOLVENCY LAW

in case of default of debt for an ‘operational creditor’, as held by the learned

Adjudicatory Authority, is not based on any sound principle of law. For the

reasons aforesaid, the impugned order passed by the learned Adjudicating

Authority cannot be sustained.

34. The issues Nos. 1 and 2 as framed and noticed above are, thereby

answered in the negative in favour of the appel ant - ‘Operational Creditor’

and against the respondent - ‘Corporate Debtor’.

35. Sub-section (20) of Sec. 5 defines ‘Operational Creditor’, as follows :

“5. In this Part, unless the context otherwise requires,—

xxx

xxx

xxx

(20) “operational creditor” means a person to whom an operational debt is

owed and includes any person to whom such debt has been legally

assigned or transferred;”

36. Operational Debt is defined in sub-section (21) of Sec. 5 as fol ows:

“(21) “operational debt” means a claim in respect of the provision of goods

or services including employment or a debt in respect of the repayment

of dues arising under any law for the time being in force and payable to

the Central Government, any State Government or any local authority;”

37. From the record, it appears that the 1st appel ant claimed to be an

‘operational creditor’ on the basis of lease deed. The respondent in its reply

has taken a plea that the Adjudicating Authority has confined its finding to

point as dealt with in the impugned order and al other points, though urged

and argued, have not been considered.

38. From the impugned order dated 24th March, 2017, we find that the learned

Adjudicating Authority noticed the aforesaid plea at paragraph 6 of the

impugned judgment, as quoted below:

“6. In order to buttress his stand that applicant is an ‘Operational Creditor

’ learned counsel has placed reliance on a portion of para 3.2.2 of the

report of the Bankruptcy Law Reforms Committee Volume I: Rationale

and Design and has argued that the report clearly brings out that the

obligation to pay rent is certainly cover by the definition of expression

‘Operational Creditors ’. According to the learned counsel the expression

‘Operational Creditor’ used in section 5(20) and 5(21) of the Code must

be construed to include the obligation to pay rent to the applicant as an

‘Operational Creditor’. According to the learned counsel the definition of

‘Operational Creditor ’ as adopted in section 5(20) of the Code is not

PRACTICAL ASPECTS OF INSOLVENCY LAW

295

exhaustive but it is illustrative as it is evident from the use of word

‘include ’. Mr. Nair has submitted that it is well settled principle of law

that wherever the expression ‘include ’ is used to define an expression

then it has room to imply many other things as the definition is not

exclusive. “

39. However, we find that the aforesaid issue has not been decided by the

learned Adjudicating Authority, having not entertained the application under

Sec. 9, on other ground of ‘existence of dispute’.

40. For the reason aforesaid, while we hold that the finding of the learned

Adjudicating Authority insofar as it relates to ‘award’, ‘default of debt’ and

the ‘alternative remedy’, are not based on sound principle and against the

provisions of law, we refrain to decide the question as to whether the 1st

appellant is an ‘operational creditor’ or not which is first required to be decided

by learned Adjudicating Authority.

41. For the aforesaid reasons, we set aside the impugned order dated 24th

March, 2017 and remit the case to the learned Adjudicating Authority, Principal

Bench, New Delhi to decide as to whether the 1st appel ant is an ‘operational

creditor’ and if so, whether the application under Sec. 9 preferred by the

appel ants is complete for admitting and initiation of corporate insolvency

resolution process. If the first question relating to status of appel ant as

‘operational creditor’ is decided in affirmative, in favour of the appel ant,

then learned Adjudicating Authority wil decide the issue whether the

application is ‘complete or not’ and if not complete may grant seven days’

time to the appellants to complete the record as per the proviso to Sec. 9 of

the I&B Code.

42. The appeal is allowed with aforesaid observations. We make it clear that

we have not expressed any opinion in regard to other questions such as

whether the 1st appel ant is an operational creditor and whether the application

preferred under Sec. 9 is complete or not, which is to be decided by the

Adjudicating Authority after notice to the parties uninfluenced by any

observation made in the impugned order.

43. In the facts and circumstances, however, there shal be no order as to

costs.

[Balvinder Singh]

[Justice S.J. Mukhopadhaya]

Member (Technical)

Chairperson

NEW DELHI

29th August, 2017

296

PRACTICAL ASPECTS OF INSOLVENCY LAW

ANNEXURE X.7

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 9405 OF 2017

Mobilox Innovations (P.) Ltd.

Appellant

Versus

Kirusa Software (P.) Ltd.

Respondent

JUDGMENT

R.F. Nariman, J

1. The present appeal raises questions as to the triggering of the Insolvency

and Bankruptcy Code, 2016 when it comes to operational debts owed to

operational creditors. The appellant was engaged by Star TV for conducting

tele-voting for the "Nach Baliye" program on Star TV. The appel ant in turn

sub contracted the work to the respondent and issued purchase orders

between October and December, 2013 in favour of the respondent. In the

"Nach Baliye" program, the successful dancer was to be selected on various

bases, including viewers' votes. For this purpose, the respondent was to

provide tol free telephone numbers across India, through which the viewers

of the program could cast their votes in favour of one or more participants.

For this purpose, a software was customized by the respondent, who then

coordinated the results and provided them to the appellant. Since the

respondent obtained toll free numbers from telephone operators in terms of

the purchase orders, the appel ant was liable to make payment of rentals

for the tol free numbers, as wel as primary rate interface rental to the

telecom operators. The respondent provided the requisite services and raised

monthly invoices between December, 2013 and November, 2014 – the

invoices were payable within 30 days from the date on which they were

received. The respondent fol owed up with the appel ant for payment of

pending invoices through e-mails sent between April and October, 2014. It

is also important to note that a non-disclosure agreement (hereinafter

referred to as the NDA) was executed between the parties on 26th December,

2014 with effect from 1st November, 2013.

PRACTICAL ASPECTS OF INSOLVENCY LAW

297

2. More than a month after execution of the aforesaid agreement, the

appellant, on 30th January, 2015, wrote to the respondent that they were

withholding payments against invoices raised by the respondent, as the

respondent had disclosed on their webpage that they had worked for the

"Nach Baliye" program run by Star TV, and had thus breached the NDA. The

correspondence between the parties final y culminated in a notice dated

12th December, 2016 sent under Section 271 of the Companies Act, 2013.

Presumably because winding up on the ground of being unable to pay one's

debts was no longer a ground to wind up a company under the said Act, a

demand notice dated 23rd December, 2016 was sent for a total of

Rs.20,08,202.55 under Section 8 of the new Insolvency and Bankruptcy

Code, 2016 (hereinafter referred to as the Code). By an e-mail dated 27th

December, 2016, the appel ant responded to the aforesaid notice stating

that there exists serious and bona fide disputes between the parties, that

the notice issued was a pressure tactic, and that nothing was payable

inasmuch as the respondent had been told way back on 30th January, 2015

that no amount will be paid to the respondent since it had breached the

NDA.

3. An application was then filed on 30th December, 2016 before the National

Company Law Tribunal under Sections 8 and 9 of the new Code stating that

an operational debt of Rs.20,08,202.55 was owed to the respondent.

4. On 19th January, 2017, the respondent was orally intimated to remove a

defect in the application, in that it did not contain the appel ant's notice of

dispute. This was rectified by an affidavit in compliance dated 24th January,

2017, by which various other documents were also supplied by the respondent

to the Tribunal. On 27th January, 2017, the Tribunal dismissed the aforesaid

application in the following terms:

"On perusal of this notice dated 27.12.2016 disputing the debt al egedly

owed to the petitioner, this Bench, looking at the Corporate Debtor disputing

the claim raised by the Petitioner in this CP, hereby holds that the default

payment being disputed by the Corporate Debtor, for the petitioner has

admitted that the notice of dispute dated 27th December 2016 has been

received by the operational creditor, the claim made by the Petitioner is

hit by Section (9)(5)(ii)(d) of The Insolvency and Bankruptcy Code, hence

this Petition is hereby rejected."

5. An appeal was then filed before the National Company Law Appel ate

Tribunal which was decided on 24th May, 2017. This appeal was al owed in

the following terms:

298

PRACTICAL ASPECTS OF INSOLVENCY LAW

"39. In the present case the adjudicating authority has acted mechanically

and rejected the application under sub-section (5)(ii)(d) of Section 9 without

examining and discussing the aforesaid issue. If the adjudicating authority

would have noticed the provisions as discussed above and what

constitutes 'dispute' in relation to services provided by operational creditors

then it would have come to a conclusion that condition of demand notice

under sub-section (2) of Section 8 has not been fulfil ed by the corporate

debtor and the defence claiming dispute was not only vague, got up and

motivated to evade the liability.

40. For the reasons aforesaid we set aside the impugned order dated

27.1.2017 passed by adjudicating authority in CP No.01/I &BP/NCLT/

MAH/2017 and remit the case to adjudicating authority for consideration

of the application of the appellant for admission if the application is

otherwise complete.

41. The appeal is allowed with the aforesaid observations. However, in the

facts and circumstances there shal be no order as to cost."

6. Shri Mohta, learned counsel on behalf of the appellant, raised various

contentions before us. According to learned counsel, the application should

have been dismissed on the ground that the operational creditor did not

furnish a copy of the certificate from a financial institution, viz. IDBI in the

present case, that maintained accounts of the operational creditor, which

confirmed that there is no payment of any unpaid operational debt by the

corporate debtor under Section 9(3)(c) of the Code. This being so, the

application ought to have been dismissed at the very threshold. Apart from

this, the learned counsel took us through various committee reports and

the provisions of the Code and argued that under Section 8 of the Code, the

moment a corporate debtor, within 10 days of the receipt of a demand notice

or copy of invoice, brings to the notice of the operational creditor the existence

of a dispute between the parties, the Tribunal is obliged to dismiss the

application. According to him, under Section (8)(2)(a), the expression

"existence of a dispute, if any, and record of the pendency of the suit or

arbitration proceedings filed …" must be read as existence of a dispute "or"

record of the pendency of the suit or arbitration proceedings filed, i.e.

disjunctively. According to the learned counsel, the definition of "dispute"

under Section 5(6) of the Code is an inclusive one and the original draft bill

not only had the word "means" instead of the word "includes", but also the

word "bona fide" before the words "suit or arbitral proceedings", which is

missing in the present Code. Therefore, learned counsel argued that the

moment there is existence of a dispute, meaning thereby that there is a real

PRACTICAL ASPECTS OF INSOLVENCY LAW

299

dispute to be tried, and not a sham, frivolous or vexatious dispute, the

Tribunal is bound to dismiss the application. Learned counsel went on to

argue that there is a fundamental difference between applications filed by

financial creditors and operational creditors. A financial creditor's application

is dealt with under Section 7 of the Code, in which the adjudicating authority

has to ascertain the existence of a default on the basis of the records of an

information utility or other evidence furnished by the financial creditor. In

contrast to this scheme, al that a corporate debtor needs to do is to file a

reply within a period of 10 days of the receipt of demand notice or copy of

invoice from an operational creditor, showing the existence of a dispute,

which then does not need to be "ascertained" by the adjudicating authority.

He was at pains to point out that the application itself must contain al the

documents that are required by the statute and that the timelines indicated

in the statute are mandatory. For this purpose, he referred us to Sections

61, 62 and 64 in addition to Sections 7 to 9 of the Code. Finally, on facts,

according to learned counsel, the Tribunal was wholly incorrect in remanding

the matter on both counts – first, to find out whether the application is

otherwise complete and, second, because the Tribunal found that the dispute

in the present case was vague, got up and motivated to evade the liability,

which, according to learned counsel, was a perverse conclusion reached on

the facts of this case.

7. Shri Jawaharlal, learned counsel appearing on behalf of the respondent,

has argued in reply that the only notice given to rectify the defects by the

Tribunal was an oral notice of 19th January, 2017 and that too only to supply

the notice of dispute by the appel ant. This was done within time and the

Tribunal, therefore, dismissed the application only on non-fulfillment of the

conditions laid down in Section 9. No plea was ever taken before the Tribunal

that the IDBI certificate was not furnished. This plea was taken for the first

time only in appeal, and since the Tribunal did not think it fit to dismiss the

application on a technical ground, this ground does not avail the appellants.

The counsel then submitted that the expression "dispute" under Section

5(6) covers only three things, namely, existence of the amount of debt,

quality of goods or services or breach of a representation or warranty and

since what was sought to be brought as a defense was that the NDA was

breached, it would not come within the definition of "dispute" under Section

5(6). He further went on to state that, at best, the breach of the NDA is a

claim for unliquidated damages which does not become crystal ized until

legal proceedings are filed, and none have been filed so far. Therefore, there

is no real dispute on the facts of the present case and the Tribunal was

correct in its finding that the dispute was a sham one.

300

PRACTICAL ASPECTS OF INSOLVENCY LAW

8. Before going into the contentions of fact and law argued by both counsel,

it is a little important to trace the background of this path-breaking legislation

viz. the Insolvency and Bankruptcy Code, 2016. The starting point is a

Resolution of the UN General Assembly, Resolution No.59/40, passed on

2nd December, 2004, by which it was stated:

"Legislative Guide on Insolvency Law of the United Nations

Commission on International Trade Law

The General Assembly,

Recognizing the importance to all countries of strong, effective and

efficient insolvency regimes as a means of encouraging economic

development and investment,

Noting the growing realization that reorganization regimes are critical to

corporate and economic recovery, the development of entrepreneurial

activity, the preservation 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 with satisfaction the completion and adoption of the Legislative

Guide on Insolvency Law of the United Nations Commission on

International Trade Law by the Commission at its thirty-seventh session,

on 25 June 2004,

Believing that the Legislative Guide, which includes the text of the Model

Law on Cross-Border Insolvency and Guide to Enactment recommended

by the General Assembly in its resolution 52/158 of 15 December 1997,

contributes significantly to the establishment of a harmonized legal

framework for insolvency and will be useful both to 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,

Recognizing the need for cooperation and coordination between

international organizations active in the field of insolvency law reform to

ensure consistency and alignment 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 and extensive consultations with Governments and

international intergovernmental and non-governmental organizations active

in the field of insolvency law reform,

PRACTICAL ASPECTS OF INSOLVENCY LAW

301

1. Expresses its appreciation to the United Nations Commission on

International Trade Law for the completion and adoption of its

Legislative Guide on Insolvency Law;

2. Requests the Secretary-General to publish the Legislative Guide and

to make al efforts to ensure that it becomes generally known and

available;

3. Recommends that al States give due consideration to the Legislative

Guide when assessing the economic efficiency of their insolvency

regimes and when revising or adopting legislation relevant to

insolvency;

4. Recommends also that all States continue to consider implementation

of the Model Law on Cross-Border Insolvency of the United Nations

Commission on International Trade Law."

9. The purpose of the Legislative Guide for various nations was stated as

fol ows:

"The purpose of the Legislative Guide on Insolvency Law is to assist the

establishment of an efficient and effective legal framework to address

the financial difficulty of debtors. It is intended to be used as a reference

by national authorities and legislative bodies when preparing new laws

and regulations or reviewing the adequacy of existing laws and regulations.

The advice provided in the Guide 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 parties directly concerned

with that financial difficulty, principally creditors and other parties with a

stake in the debtor's business, as wel as with public policy concerns.

The Guide discusses issues central to the design of an effective and

efficient insolvency 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 emphasis on reorganization,

against a debtor, whether a legal or natural person, that is engaged in

economic activity. Issues specific to the insolvency of individuals not so

engaged, such as consumers, are not addressed."

In stating some of the key objectives of effective and efficient insolvency

law, the Legislative Guide goes on to state:

"When a debtor is unable to pay its debts and other liabilities as they

become due, most legal systems provide a legal mechanism to address

302

PRACTICAL ASPECTS OF INSOLVENCY LAW

the collective satisfaction of the outstanding claims from assets

(whether tangible or intangible) of the debtor. A range of interests needs

to be accommodated by that legal mechanism: those of the parties

affected by the proceedings including the debtor, the owners and

management of the debtor, the creditors who may be secured to varying

degrees (including tax agencies and other government creditors),

employees, guarantors of debt and suppliers of goods and services,

as well as the legal, commercial and social institutions and practices

that are relevant to the design of the insolvency law and required for

its operation. General y, the mechanism must strike a balance not only

between the different interests of these stakeholders, but also between

these interests and the relevant social, political and other policy

considerations that have an impact on the economic and legal goals

of insolvency proceedings.

XXX

An insolvency law should be transparent and predictable. This will enable

potential lenders and creditors to understand how insolvency proceedings

operate and to assess the risk associated with their position as a creditor

in the event of insolvency. This wil promote stability in commercial

relations and foster lending and investment at lower risk premiums.

Transparency and predictability will also enable creditors to clarify priorities,

prevent disputes by providing a backdrop against which relative rights

and risks can be assessed and help define the limits of any discretion.

Unpredictable application of the insolvency law has the potential to

undermine not only the confidence of all participants in insolvency

proceedings, but also their willingness to make credit and other investment

decisions prior to insolvency. As far as possible, an insolvency law should

clearly indicate al provisions of other laws that may affect the conduct of

the insolvency proceedings (e.g. labour law; commercial and contract law;

tax law; laws affecting foreign exchange, netting and set-off and debt for

equity swaps; and even family and matrimonial law).

An insolvency law should ensure that adequate information is available in

respect of the debtor's situation, providing incentives to encourage the

debtor to reveal its positions and, where appropriate, sanctions for failure

to do so. The availability of this information wil enable those responsible

for administering and supervising insolvency proceedings (courts or

administrative agencies, the insolvency representative) and creditors to

assess the financial situation of the debtor and determine the most

appropriate solution."

PRACTICAL ASPECTS OF INSOLVENCY LAW

303

While referring to the commencement of insolvency proceedings, the

Legislative Guide states:

"The standard to be met for commencement of insolvency proceedings is

central to the design of an insolvency law. As the basis upon which insolvency

proceedings can be commenced, this standard is instrumental to identifying

the debtors that can be brought within the protective and disciplinary

mechanisms of the insolvency law and determining who may make an

application for commencement, whether the debtor, creditors or other parties.

As a general principle it is desirable that the commencement standard be

transparent and certain, facilitating access to insolvency proceedings

conveniently, cost-effectively and quickly to encourage financially

distressed or insolvent businesses to voluntarily commence proceedings.

It is also desirable that access be flexible in terms of the types of

insolvency proceedings available (reorganization and liquidation), and the

ease with which the proceedings most relevant to a particular debtor can

be accessed, and that conversion between the different types of

proceeding can be achieved. Restrictive access can deter both debtors

and creditors from commencing proceedings, while the effects of delay

can be harmful to the value of assets and the successful completion of

insolvency proceedings, in particular in cases of reorganization. Ease of

access needs to be balanced with proper and adequate safeguards to

prevent improper use of proceedings. Examples of improper use may

include application by a debtor that is not in financial difficulty in order to

take advantage of the protections provided by the insolvency law, such

as the automatic stay, or to avoid or delay payment to creditors and

application by creditors who are competitors of the debtor, where the

purpose of the application is to take advantage of insolvency proceedings

to disrupt the debtor's business and thus gain a competitive edge."

10. On the fixation of time limits and denial of an application to commence

proceedings, the Legislative Guide states:

"Where a court is required to make a decision as to commencement, it is

desirable that that decision be made in a timely manner to ensure both

certainty and predictability of the decision-making and the efficient conduct

of the proceedings without delay. This will be particularly important in the

case of reorganization to avoid further diminution of the value of assets

and to improve the chances of a successful reorganization. Some insolvency

laws prescribe set time periods after the application within which the decision

to commence must be made. These laws often distinguish between

applications by debtors and by creditors, with applications by debtors tending

304

PRACTICAL ASPECTS OF INSOLVENCY LAW

to be determined more quickly. Any additional period for creditor applications

is designed to allow prompt notice to be given to the debtor and provide the

debtor with an opportunity to respond to the application.

Although the approach of fixing time limits may serve the objectives of

providing certainty and transparency for both the debtor and creditors,

the achievement of those objectives may need to be balanced against

possible disadvantages. For example, a fixed time period may be

insufficiently flexible to take account of the circumstances of the particular

case. More general y, such time periods may be set without regard to the

resources available to the body responsible for supervising insolvency

proceedings or of the local priorities of that body (especially where

insolvency is only one of the matters for which it has responsibility). It

may also prove difficult to ensure that the decision-making body adheres

to the established limit and to provide appropriate consequences where

there is no compliance. The time period between application and the

decision to commence proceedings should also reflect the type of

proceeding applied for, the application procedure and the consequences

of commencement in any particular regime. For example, the extent to

which notification of parties in interest and information gathering must be

completed prior to commencement wil vary between regimes, requiring

different periods of time. For these reasons, it is desirable that an

insolvency law adopt a flexible approach that emphasizes the advantages

of quick decision-making and provides guidance as to what is reasonable,

but at the same time also recognizes local constraints and priorities.

(d) Denial of an application to commence proceedings

The preceding paragraphs refer to a number of instances where it will be

desirable, in those cases where the court is required to make the

commencement decision, for the court to have the power to deny the

application for commencement, either because of questions of improper

use of the insolvency law or for technical reasons relating to satisfaction

of the commencement standard. The cases referred to include examples

of both debtor and creditor applications. Principal among the grounds for

denial of the application for technical reasons might be those cases where

the debtor is found not to satisfy the commencement standard; where the

debt is subject to a legitimate dispute or off-set in an amount equal to or

greater than the amount of the debt; where the proceedings will serve no

purpose because, for example, secured debt exceeds the value of assets;

and where the debtor has insufficient assets to pay for the insolvency

administration and the law makes no other provision for funding the

administration of such estates.

PRACTICAL ASPECTS OF INSOLVENCY LAW

305

Examples of improper use might include those cases where the debtor

uses an application for insolvency as a means of prevaricating and

unjustifiably depriving creditors of prompt payment of debts or of obtaining

relief from onerous obligations, such as labour contracts. In the case of a

creditor application, it might include those cases where a creditor uses

insolvency as an inappropriate substitute for debt enforcement procedures

(which may not be wel developed); to attempt to force a viable business

out of the market place; or to attempt to obtain preferential payments by

coercing the debtor (where such preferential payments have been made

and the debtor is insolvent, investigation would be a key function of

insolvency proceedings).

As noted above, where there is evidence of improper use of the insolvency

proceedings by either the debtor or creditors, the insolvency law may

provide, in addition to denial of the application, that sanctions can be

imposed on the party improperly using the proceedings or that that party

should pay costs and possibly damages to the other party for any harm

caused. Remedies may also be available under non-insolvency law. Where

an application is denied, any provisional measures of relief ordered by

the court after the time of the application for commencement should

terminate (see chap. II, para. 53)." (Emphasis supplied)

Ultimately, recommendation 19 of the Legislative Guide reads as under:

"Commencement on creditor application (paras.57 and 67)

19. The law general y should specify that, where a creditor makes the

application for commencement:

(a) Notice of the application promptly is given to the debtor;

(b) The debtor be given the opportunity to respond to the application, by

contesting the application, consenting to the application or, where

the application seeks liquidation, requesting the commencement of

reorganization proceedings; and

(c) The court will promptly determine its jurisdiction and whether the

debtor is eligible and the commencement standard has been met

and, if so, commence insolvency proceedings.1"

11. The legislative history of legislation relating to indebtedness goes back

1 A determination that the commencement standard has been met may involve consideration

of whether the debt is subject to a legitimate dispute or offset in an amount equal to or

greater than the amount of the debt. The existence of such a set-off may be a ground for

dismissal of the application (see above, paras. 61-63).application (see above, paras. 61-

63).

306

PRACTICAL ASPECTS OF INSOLVENCY LAW

to the year 1964 when the 24th Law Commission recommended amendments

to the Provincial Insolvency Act of 1920. This was fol owed by the Tiwari

Committee of 1981, which introduced the Sick Industrial Companies Act,

1985. Following economic liberalization in 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

Companies 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 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 Committee and recommended an overhaul of the liquidation

procedure under the Companies Act.

12. It was for the first time, in 2001, that the L.N. Mitra Committee of the

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 in India is costly, inordinately lengthy and results in

almost complete erosion of asset value. The Committee also noted that the

insolvency framework did not balance stakeholders' interests adequately. It

proposed a number of changes including changes for increased protection

of creditors' rights, maximization of asset value and better management of

the company in liquidation. In 2008, the Raghuram Rajan Committee of the

Planning Commission proposed improvement to the credit infrastructure in

the country, and final y a Committee of Financial Sector Legislative Reforms

in 2013 submitted a draft Indian Financial Code, which included a "resolution

corporation" for resolving distressed financial firms.

13. Al this then led to the Bankruptcy Law Reforms Committee, set up by

the Department of Economic Affairs, Ministry of Finance, under the

Chairmanship of Shri T.K. Viswanathan. This Committee submitted 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.

14. The interim report went into the existing law on indebtedness in some

detail and discussed the tests laid down in Madhusudan Gordhandas v.

Madhu Woollen Industries Pvt. Ltd [1972] 2 SCR 201, by which a petition

presented under the Companies Act on the ground that the company is

"unable to pay its debts" can only be dismissed if the debt is bona fide

disputed, i.e. that the defense of the debtor is genuine, substantial and is

PRACTICAL ASPECTS OF INSOLVENCY LAW

307

likely to succeed on a point of law. The interim report also adverted to an

amendment made in the Companies Act, 2003, by which the threshold

requirement of Rs.500 was replaced by Rs.1 lakh.

15. The interim report found:

"Once the petitioning creditor has proved the inability of the debtor company

to pay debts, van Zwieten states that courts in India have recognised a

wide discretion that enabled it to give time to the debtor to make payment

or even dismiss the petition. This is in stark contrast with the position in

the UK (from where the law was transplanted) where once the company's

inability to pay debts has been proven, the petitioning creditor is ordinarily

held to be entitled to a winding up order (although it should be noted that

there is an alternative corporate rescue procedure, 'administration', which

a debtor may be entitled to enter).

The effect of these abovementioned judicial developments has been to

add significant delays in the liquidation process under CA 1956 and to

add uncertainty regarding the rights of the creditors in the event of the

company's insolvency. Consequently, this has made creditor recourse to

the liquidation procedure as a means of debt enforcement rather difficult,

and secondly, rendered the liquidation procedure ineffective as a

disciplinary mechanism for creditors against insolvent debtors."

The interim report then recommended:

"Recommendations:

• In order to re-instate the debt enforcement function of the statutory

demand test for winding up, if a company fails to pay an undisputed

debt of a prescribed value as per Section 271(2) (a), the creditor

should be entitled to a winding up order irrespective of whether it is

insolvent (in commercial or balance sheet terms) or not. Further, the

NCLT should have the discretion to refer the company for rehabilitation

under Chapter XIX before making a winding up order on such ground,

if the company appears to be prima facie viable. Further, in order to

prevent abuse of the provision by creditors and ensure that it is not

used to force debtor companies to settle disputed debts, the provision

should specify the factors that the NCLT may take into account to

determine whether the debt under consideration is disputed or not.

As laid down by the courts, a petition may be dismissed if the debt in

question is bona fide disputed, i.e., where the fol owing conditions

are satisfied: (i) the defence of the debtor company is genuine,

substantial and in good faith; (i ) the defence is likely to succeed on

308

PRACTICAL ASPECTS OF INSOLVENCY LAW

a point of law; and (iii) the debtor company adduces prima facie proof

of the facts on which the defence depends. Further, as with initiation

of rescue proceedings, the NCLT should also have the power to impose

sanctions/costs/damages on a petitioning creditor and disallow

reapplications on the same grounds if it finds that a petition has been

filed to abuse the process of law.

• The Government may also consider revising the present value for

triggering the statutory demand test under Section 271 (2) (a) from

'one lakh rupees' to a higher amount or revise the provision to state

'one lakh rupees or such amount as may be prescribed'.

• 'Balance sheet insolvency' and 'commercial insolvency' should be

identified as separate grounds indicating a company's 'inability to

pay debt' in order to avoid conflicts/confusion with the statutory

demand test (as is the case of the IA 1986 where the statutory

demand test, the commercial insolvency test and the balance sheet

insolvency test are alternate grounds for determining a company's

inability to pay debts under Sections 123(1) (a),123 (1) (e) and 123(2),

respectively)."

16. By the final report dated November 2015, the recommendation of the

interim report was shelved. The Committee made a distinction between

financial contracts and operational contracts. It stated:

"4.3.3 Information about the liabilities of a solvent entity

Operational contracts typical y involve an exchange of goods and services

for cash. For an enterprise, the latter includes payables for purchase of

raw-materials, other inputs or services, taxation and statutory liabilities,

and wages and benefits to employees.

xxxx

The Code specifies that if the Adjudicator is able to locate the record of

the liability and of default with the registered IUs, a financial creditor

needs no other proof to establish that a default has taken place.

xxxx

The second set of liabilities are operational liabilities, which are more

difficult to centrally capture given that the counterparties are a wide and

heterogeneous set. In the state of insolvency, the record of all liabilities in

the IUs become critical to creditors in assessing the complexity of the

resolution required. Various private players, including potential strategic

acquirers or distressed asset funds, would constantly monitor entities

PRACTICAL ASPECTS OF INSOLVENCY LAW

309

that are facing stress, and prepare to make proposals to the committee

of creditors in the event that an insolvency is triggered. Easy access to

this information is vital in ensuring that there is adequate interest by

various kinds of financial firms in coming up to the committee of creditors

with proposals. It is not easy to set up mandates for the holders of

operational liabilities to file the records of their liabilities, unlike the case

of financial creditors. However, their incentives to file liabilities are even

stronger when the entity approaches insolvency.

4.3.4 Information about operational creditors

Once the invoice or notice is served, the debtor should be given a certain

period of time in which to respond either by disputing it in a court, or pay

up the amount of the invoice or notice. The debtor will have the responsibility

to file the information about the court case, or the repayment record in

response to the invoice or notice within the specified amount of time. If

the debtor does not file either response within the specified period, and

the creditor files for insolvency resolution, the debtor may be charged a

monetary penalty by the Adjudicator. However, if the debtor disputes the

claim in court, until the outcome of this case is decided, the creditor may

not be able to trigger insolvency on the entity. This process wil act as a

deterrent for frivolous claims from creditors, as wel as act as a barrier for

some types of creditors to initiate insolvency resolution."

The Committee then went on to consider as to who can trigger the insolvency

process. In paragraph 5.2.1 the Committee stated:

"Box 5.2 – Trigger for IRP

1. The IRP can be triggered by either the debtor or the creditors by

submitting documentation specified in the Code to the adjudicating

authority.

2. For the debtor to trigger the IRP, she must be able to submit al the

documentation that is defined in the Code, and may be specified by the

Regulator above this.

3. The Code differentiates two categories of creditors: financial creditors

where the liability to the debtor arises from a solely financial transaction,

and operational creditors where the liability to the debtor arises in the

form of future payments in exchange for goods or services already

delivered. In cases where a creditor has both a solely financial transaction

as wel as an operational transaction with the entity, the creditor wil be

considered a financial creditor to the extent of the financial debt and an

310

PRACTICAL ASPECTS OF INSOLVENCY LAW

operational creditor to the extent of the operational debt is more than half

the ful liability it has with the debtor.

4. The Code wil require different documentation for a debtor, a financial

creditor, and an operational creditor to trigger the IRP. These are listed in

Box 5.3 under what the Adjudicator will accept as requirements to trigger

the IRP.

5.2.1 Who can trigger the IRP?

Here, the Code differentiates between financial creditors and operational

creditors. Financial creditors are those whose relationship with the entity

is a pure financial contract, such as a loan or a debt security. Operational

creditors are those whose liability from the entity comes from a transaction

on operations. Thus, the wholesale vendor of spare parts whose spark

plugs are kept in inventory by the car mechanic and who gets paid only

after the spark plugs are sold is an operational creditor. Similarly, the

lessor that the entity rents out space from is an operational creditor to

whom the entity owes monthly rent on a three-year lease. The Code also

provides for cases where a creditor has both a solely financial transaction

as wel as an operational transaction with the entity. In such a case, the

creditor can be considered a financial creditor to the extent of the financial

debt and an operational creditor to the extent of the operational debt.

5.2.2 How can the IRP be triggered?

An application from a creditor must have a record of the liability and

evidence of the entity having defaulted on payments. The Committee

recommends different documentation requirements depending upon the

type of creditor, either financial or operational. A financial creditor must

submit a record of default by the entity as recorded in a registered

Information Utility (referred to as the IU) as described in Section 4.3 (or

on the basis of other evidence). The default can be to any financial creditor

to the entity, and not restricted to the creditor who triggers the IRP. The

Code requires that the financial creditor propose a registered Insolvency

Professional to manage the IRP. Operational creditors must present an

"undisputed bil " which may be filed at a registered information utility as

requirement to trigger the IRP. The Code does not require the operational

creditor to propose a registered Insolvency Professional to manage the

IRP. If a professional is not proposed by the operational creditor, and the

IRP is successfully triggered, the Code requires the Adjudicator to

approach the Regulator for a registered Insolvency Professional for the

case.

PRACTICAL ASPECTS OF INSOLVENCY LAW

311

When the Adjudicator receives the application, she confirms the validity

of the documents before the case can be registered by confirming the

documentation in the information utility if applicable. In case the debtor

triggers the IRP, the list of documentation provided by the debtor is checked

against the required list. The proposal for the RP is forwarded to the

Regulator for validation. If both the documentation and the proposed RP

checks out as required within the time specified in regulations, the

Adjudicator registers the IRP.

In case the financial creditor triggers the IRP, the Adjudicator verifies the

default from the information utility (if the default has been filed with an

information utility, it shal be incontrovertible evidence of the existence of

a default) or otherwise confirms the existence of default through the

additional evidence adduced by the financial creditor, and puts forward

the proposal for the RP to the Regulator for validation. In case the

operational creditor triggers the IRP, the Adjudicator verifies the

documentation. Simultaneously, the Adjudicator requests the Regulator

for an RP. If either step cannot be verified, or the process verification

exceeds the specified amount of time, then the Adjudicator rejects the

application, with a reasoned order for the rejection. The order rejecting the

application cannot be appealed against. Instead, application has to be

made afresh. Once the documents are verified within a specified amount

of time, the Adjudicator will trigger the IRP and register the IRP by issuing

an order. The order will contain a unique ID that will be issued for the case

by which al reports and records that are generated during the IRP will be

stored, and accessed."

17. Annexed to this Committee Report is the Insolvency and Bankruptcy

Bil , 2015. Interestingly, Section 5(4) defined "dispute" as:

"5. Definitions

In this Part, unless the context otherwise requires-

(4) "dispute" means a bona fide suit or arbitration proceeding regarding

(a) the existence or the amount of a debt; (b) the quality of a good or

service; or (c) the breach of a representation or warranty;"

Sections 8 and 9 in the said Bil read as under:

"8. Insolvency resolution by operational creditor.

(1) An operational creditor shal , on the occurrence of a default, deliver a

demand notice or copy of an invoice demanding payment of the amount

involved in the default to the corporate debtor in such form as may be

312

PRACTICAL ASPECTS OF INSOLVENCY LAW

prescribed, through an information utility, wherever applicable, or by

registered post or courier or by any electronic communication.

(2) The corporate debtor shal , 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) the existence of a dispute, if any, and record of the pendency of the

suit or arbitration proceedings filed at least sixty days prior to the

receipt of such invoice or notice in relation to such dispute through

an information utility or by registered post or courier or by any

electronic communication;

(b) the repayment of unpaid operational debt- (i) by sending an attested

copy of electronic transfer of the unpaid amount from the bank account

of the corporate debtor; or (i ) by sending an attested copy of proof

that the operational creditor having encashed a cheque issued by the

corporate debtor.

Explanation. – For the purpose of this section a "demand notice" means

a notice served by an operational creditor to the corporate debtor demanding

repayment of the debt in respect of which the default has occurred.

9. Application for initiation of corporate insolvency resolution process

by operational creditor.

(1) After the expiry of the period of ten days from the date of delivery of the

invoice or notice demanding payment under sub-section (1) of section 8, if

the operational creditor does not receive payment from the corporate debtor

or notice of the dispute under sub-section (2) of section 8, the operational

creditor may file an application with the Adjudicating Authority in the

prescribed form for initiating a corporate insolvency resolution process.

(2) The application under sub-section (1) shal be filed in such form and

manner and accompanied with such fee as may be prescribed.

(3) The operational creditor shal , along with the application furnish-

(a) the invoice demanding payment or notice delivered by the operational

creditor to the corporate debtor;

(b) affidavit to the effect that there is no notice given by the corporate

debtor relating to a dispute of the unpaid operational debt;

(c) a confirmation from the financial institutions maintaining accounts of

the operational creditor that there is no payment of an unpaid

operational debt by the corporate debtor; and

PRACTICAL ASPECTS OF INSOLVENCY LAW

313

(d) such other information or as may be specified.

(4) The Adjudicating Authority shal , within two days of the receipt of the

application under sub-section (2), admit the application and communicate

such decision to the operational creditor and the corporate debtor if, -

(a) the application is complete;

(b) there is no repayment of the unpaid operational debt;

(c) the invoice or notice for payment to the corporate debtor has been

delivered by the operational creditor; and

(d) no notice of dispute has been received by the operational creditor or

there is no record of dispute in the information utility.

(5) The Adjudicating Authority shall reject the application and communicate

such decision to the operational creditor and the corporate debtor if –

(a) the application made under this section is incomplete;

(b) there has been repayment of the unpaid operational debt;

(c) the creditor has not delivered the invoice or notice for payment to the

corporate debtor; and

(d) notice of dispute has been received by the operational creditor and

there is no record of dispute in the information utility.

(6) Without prejudice to the conditions mentioned in sub-section (3), an

operational creditor initiating a corporate insolvency resolution process

under this section, may also propose a resolution professional to act as

an interim resolution professional.

(7) The corporate insolvency resolution process shal commence from

the date of admission of the application under sub-section (4) of this

section."

18. Meanwhile, the Insolvency and Bankruptcy Bill that was annexed to the

Bankruptcy Law Reforms Committee Report underwent a further change

before it was submitted to a Joint Committee of the Lok Sabha. In this Bill,

the definition of "dispute" now read as fol ows:

"5. Definitions.

In this Part unless the context otherwise requires,-

(6) "dispute" includes a suit or arbitration proceedings relating to—

(a) the existence or the amount of debt;

314

PRACTICAL ASPECTS OF INSOLVENCY LAW

(b) the quality of goods or service; or

(c) the breach of a representation or warranty;"

Sections 8 and 9 read as fol ows:

"8. Insolvency resolution by operational creditor.

(1) An operational creditor may, on the occurrence of a default, deliver a

demand notice of unpaid operational debt or copy of an invoice demanding

payment of the amount involved in the default to the corporate debtor in

such form as may be prescribed, through an information utility, wherever

applicable, or by registered post or courier or by such electronic mode of

communication, as may be specified.

(2) The corporate debtor shal , 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) the existence of a dispute, if any, and record of the pendency of the

suit or arbitration proceedings filed prior to the receipt of such notice

or invoice in relation to such dispute through an information utility or

by registered post or courier or by such electronic mode of

communication as may be specified;

(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

(i ) by sending an attested copy of record that the operational

creditor has encashed a cheque issued by the corporate debtor.

Explanation.— For the purposes of this section, a "demand notice" means

a notice served by an operational creditor to the corporate debtor demanding

repayment of the operational debt in respect of which the default has

occurred.

9. Application for initiation of corporate insolvency resolution process

by operational creditor.

(1) After the expiry of the period of ten days from the date of delivery of

the notice or invoice demanding payment under sub-section (1) of section

8, if the operational creditor does not receive payment from the corporate

debtor or notice of the dispute under sub-section (2) of section 8, the

operational creditor may file an application before the Adjudicating Authority

for initiating a corporate insolvency resolution process.

PRACTICAL ASPECTS OF INSOLVENCY LAW

315

(2) The application under sub-section (1) shal be filed in such form and

manner and accompanied with such fee as may be prescribed.

(3) The operational creditor shal , along with the application furnish—

(a) a copy of the invoice demanding payment or demand notice delivered

by the operational creditor to the corporate debtor;

(b) an affidavit to the effect that there is no notice given by the corporate

debtor relating to a dispute of the unpaid operational debt;

(c) a copy of the certificate from the financial institutions maintaining

accounts of the operational creditor confirming that there is no

payment of an unpaid operational debt by the corporate debtor; and

(d) such other information or as may be specified.

(4) An operational creditor initiating a corporate insolvency resolution

process under this section, may propose a resolution professional to act

as an interim resolution professional.

(5) The Adjudicating Authority shall, within fourteen days of the receipt of

the application under sub-section (2), by an order—

(i) admit the application and communicate such decision to the

operational creditor and the corporate debtor if,—

(a) the application made under sub-section (2) is complete;

(b) there is no repayment of the unpaid operational debt;

(c) the invoice or notice for payment to the corporate debtor has

been delivered by the operational creditor;

(d) no notice of dispute has been received by the operational creditor

or there is no record of dispute in the information utility; and

(e) there is no disciplinary proceeding pending against any resolution

professional proposed under sub-section (4), if any.

(i ) reject the application and communicate such decision to the

operational creditor and the corporate debtor, if—

(a) the application made under sub-section (2) is incomplete;

(b) there has been repayment of the unpaid operational debt;

(c) the creditor has not delivered the invoice or notice for payment

to the corporate debtor;

316

PRACTICAL ASPECTS OF INSOLVENCY LAW

(d) notice of dispute has been received by the operational creditor

or there is a record of dispute in the information utility; or

(e) any disciplinary proceeding is pending against any proposed

resolution professional:

Provided that Adjudicating Authority, prior to rejecting an application under

sub-clause (a) of clause (i ) of this sub-section, shal give a notice to the

applicant to rectify the defect in his application within three days of the

date of receipt of such notice from the Adjudicating Authority.

(6) The corporate insolvency resolution process shal commence from

the date of admission of the application under sub-section (5)."

19. The notes on clauses annexed to the Bil are extremely important and

read as fol ows:

"Notes on Clauses

Clause 6 provides that where a corporate debtor has defaulted in paying

a debt that has become due and payable but not repaid, the corporate

insolvency resolution process under Part II may be initiated in respect of

such corporate debtor by a financial creditor, an operational creditor or

the corporate debtor itself.

Early recognition of financial distress is very important for timely resolution

of insolvency. A default based test for entry into the insolvency resolution

process permits early intervention such that insolvency resolution

proceedings can be initiated at an early stage when the corporate debtor

shows early signs of financial distress rather than at the point where it

would be difficult to revive it effectively. It also provides a simple test to

initiate resolution process.

This clause permits any financial creditor to initiate the corporate insolvency

resolution process where the corporate debtor has defaulted in paying a

debt that has become due and payable but not repaid. Financial creditors

are those creditors to whom a financial debt (i.e., a debt where the creditor

is compensated for the time value of the money lent) is owed.

Further, the Code also permits the corporate debtor itself to initiate the

insolvency resolution process once it has defaulted on a debt. Additional y,

operational creditors (i.e., creditors to whom a sum of money is owed for

the provision of goods or services or the Central/State Government or

local authorities in respect of payments due to them) are also permitted

to initiate the insolvency resolution process. This wil bring the law in line

with international practices, which permit unsecured creditors (including

PRACTICAL ASPECTS OF INSOLVENCY LAW

317

employees, suppliers etc. who fal under the definition of operational

creditors) to file for the initiation of insolvency resolution proceedings.

Clause 7 lays down the procedure for the initiation of the corporate

insolvency resolution process by a financial creditor or two or more financial

creditors jointly. The financial creditor can file an application before the

National Company Law Tribunal along with proof of default and the name

of a resolution professional proposed to act as the interim resolution

professional in respect of the corporate debtor. The requirement to provide

proof of default ensures that financial creditors do not file frivolous

applications or applications which prematurely put the corporate debtor

into insolvency resolution proceedings for extraneous considerations. The

adjudicating authority/ Tribunal can, within fourteen days from the date of

receipt of the application, ascertain the existence of a default from the

records of a regulated information utility. A default may also be proved in

such manner as may be specified by the Insolvency and Bankruptcy

Board of India.

Once the adjudicating authority/Tribunal is satisfied as to the existence

of the default and has ensured that the application is complete and no

disciplinary proceedings are pending against the proposed resolution

professional, it shal admit the application. The adjudicating authority/

Tribunal is not required to look into any other criteria for admission of the

application. It is important that parties are not al owed to abuse the legal

process by using delaying tactics at the admissions stage.

Clause 8 lays down the procedure for the initiation of the corporate

insolvency resolution process by an operational creditor. This procedure

differs from the procedure applicable to financial creditors as operational

debts (such as trade debts, salary or wage claims) tend to be small

amounts (in comparison to financial debts) or are recurring in nature and

may not be accurately reflected on the records of information utilities at

all times. The possibility of disputed debts in relation to operational creditors

is also higher in comparison to financial creditors such as banks and

financial institutions. Accordingly, the process for initiation of the insolvency

resolution process differs for an operational creditor.

Once a default has occurred, the operational creditor has to deliver a

demand notice or a copy of an invoice demanding payment of the debt in

default to the corporate debtor. The corporate debtor has a period of ten

days from the receipt of the demand notice or invoice to inform the

operational creditor of the existence of a dispute regarding the debt claim

or of the repayment of the debt. This ensures that operational creditors,

318

PRACTICAL ASPECTS OF INSOLVENCY LAW

whose debt claims are usually smal er, are not able to put the corporate

debtor into the insolvency resolution process prematurely or initiate the

process for extraneous considerations. It may also facilitate informal

negotiations between such creditors and the corporate debtor, which may

result in a restructuring of the debt outside the formal proceedings.

Clause 9 On the expiry of the period of ten days from the date of receipt

of the invoice or demand notice under Clause 8, if the operational creditor

does not receive either the payment of the debt or a notice of existence

of dispute in relation to the debt claim from the corporate debtor, he can

file an application with the adjudicating authority for initiating the insolvency

resolution process in respect of such debtor. He also has to furnish proof

of default and proof of non-payment of the debt along with an affidavit

verifying that there has been no notice regarding the existence of a dispute

in relation to the debt claim. Within fourteen days from the receipt of the

application, if the adjudicating authority/Tribunal is satisfied as to (a) the

existence of a default, and (b) the other criteria laid down in clause 9(5)

being met, it shal admit the application. The adjudicating authority/Tribunal

is not required to look into any other criteria for admission of the application.

It is important that parties are not allowed to abuse the legal process by

using delaying tactics at the admissions stage." (Emphasis supplied)

20. The Joint Committee in April, 2016 made certain smal changes in the

said Bill, by which the Committee stated:

"17. Mode of delivery of demand notice of unpaid operational debt –

Clause 8

The Committee find that clause 8(1) of the Code provides that an operational

creditor may, on the occurrence of a default, deliver a demand notice of

unpaid operational debt or copy of an invoice demanding payment of the

amount involved in the default to the corporate debtor in such form as

may be prescribed, through an information utility, wherever applicable, or

by registered post or courier or by such electronic mode of communication,

as may be specified.

The Committee are of the view that the details of the mode of delivery of

demand notice can be provided in the rules. The Committee, therefore,

decide to substitute words "in such form as may be prescribed, through

an information utility, wherever applicable, or by registered post or courier

or by such electronic mode of communication, as may be specified" as

appearing in clause 8(1) with the words "in such form and manner, as

may be prescribed". Besides as a consequential amendment words

"through an information utility or by registered post or courier or by such

PRACTICAL ASPECTS OF INSOLVENCY LAW

319

electronic mode of communication as may be specified" as appearing in

clause 8(2) may also be omitted."

The Committee also revised the time limits set out in various sections of

the Code from 2, 3 and 5 days to a longer uniform period of 7 days.

21. The stage is now set for setting out the relevant provisions of the Code

insofar as operational creditors and their corporate debtors are concerned.

"3. Definitions.

In this Code, unless the context otherwise requires,—

xxxx

(12) "default" means non-payment of debt when whole or any part or

instalment of the amount of debt has become due and payable and is not

repaid by the debtor or the corporate debtor, as the case may be;

5. Definitions.

In this Part, unless the context otherwise requires,—

(6) "dispute" includes a suit or arbitration proceedings relating to—

(a) the existence of the amount of debt;

(b) the quality of goods or service; or

(c) the breach of a representation or warranty;

xxxx

(20) "operational creditor" means a person to whom an operational debt is

owed and includes any person to whom such debt has been legally

assigned or transferred;

(21) "operational debt" means a claim in respect of the provision of

goods or services including employment or a debt in respect of the

repayment of dues arising under any law for the time being in force and

payable to the Central Government, any State Government or any local

authority;

8. Insolvency resolution by operational creditor.

(1) An operational creditor may, on the occurrence of a default, deliver a

demand notice of unpaid operational debt or 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 shal , within a period of ten days of the receipt of

320

PRACTICAL ASPECTS OF INSOLVENCY LAW

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

(i ) by sending an attested copy of record that the operational

creditor has encashed a cheque issued by the corporate debtor.

Explanation.—For the purposes of this section, a "demand notice" means

a notice served by an operational creditor to the corporate debtor demanding

repayment of the operational debt in respect of which the default has

occurred.

9. Application for initiation of corporate insolvency resolution process

by operational creditor.

(1) After the expiry of the period of ten days from the date of delivery of

the notice or invoice demanding payment under sub-section (1) of section

8, if the operational creditor does not receive payment from the corporate

debtor or notice of the dispute under sub-section (2) of section 8, the

operational creditor may file an application before the Adjudicating Authority

for initiating a corporate insolvency resolution process.

(2) The application under sub-section (1) shal be filed in such form and

manner and accompanied with such fee as may be prescribed.

(3) The operational creditor shal , along with the application furnish—

(a) a copy of the invoice demanding payment or demand notice delivered

by the operational creditor to the corporate debtor;

(b) an affidavit to the effect that there is no notice given by the corporate

debtor relating to a dispute of the unpaid operational debt;

(c) a copy of the certificate from the financial institutions maintaining

accounts of the operational creditor confirming that there is no

payment of an unpaid operational debt by the corporate debtor; and

(d) such other information as may be specified.

PRACTICAL ASPECTS OF INSOLVENCY LAW

321

(4) An operational creditor initiating a corporate insolvency resolution

process under this section, may propose a resolution professional to act

as an interim resolution professional.

(5) The Adjudicating Authority shall, within fourteen days of the receipt of

the application under sub-section (2), by an order—

(i) admit the application and communicate such decision to the

operational creditor and the corporate debtor if,—

(a) the application made under sub-section (2) is complete;

(b) there is no repayment of the unpaid operational debt;

(c) the invoice or notice for payment to the corporate debtor has

been delivered by the operational creditor;

(d) no notice of dispute has been received by the operational creditor

or there is no record of dispute in the information utility; and

(e) there is no disciplinary proceeding pending against any resolution

professional proposed under sub-section (4), if any.

(i ) reject the application and communicate such decision to the

operational creditor and the corporate debtor, if—

(a) the application made under sub-section (2) is incomplete;

(b) there has been repayment of the unpaid operational debt;

(c) the creditor has not delivered the invoice or notice for payment

to the corporate debtor;

(d) notice of dispute has been received by the operational creditor

or there is a record of dispute in the information utility; or

(e) any disciplinary proceeding is pending against any proposed

resolution professional:

Provided that Adjudicating Authority, shal before rejecting an

application under sub-clause (a) of clause (i ) give a notice to

the applicant to rectify the defect in his application within seven

days of the date of receipt of such notice from the Adjudicating

Authority.

(6) The corporate insolvency resolution process shal commence from the

date of admission of the application under sub-section (5) of this section."

22. Together with Section 8(1), the Insolvency and Bankruptcy (Application

to Adjudicating Authority) Rules, 2016, speak of demand notices by the

322

PRACTICAL ASPECTS OF INSOLVENCY LAW

operational creditor and applications by the operational creditor in the fol owing

terms:

"5. Demand notice by operational creditor.

(1) An operational creditor shal deliver to the corporate debtor, the following

documents, namely.-

(a) a demand notice in Form 3; or

(b) a copy of an invoice attached with a notice in Form 4.

(2) The demand notice or the copy of the invoice demanding payment

referred to in sub-section (2) of section 8 of the Code, may be delivered to

the corporate debtor,

(a) at the registered office by hand, registered post or speed post with

acknowledgement due; or

(b) by electronic mail service to a whole time director or designated

partner or key managerial personnel, if any, of the corporate debtor.

(3) A copy of demand notice or invoice demanding payment served under

this rule by an operational creditor shall also be filed with an information

utility, if any.

6. Application by operational creditor.

(1) An operational creditor, shal make an application for initiating the

corporate insolvency resolution process against a corporate debtor under

section 9 of the Code in Form 5, accompanied with documents and records

required therein and as specified in the Insolvency and Bankruptcy Board

of India (Insolvency Resolution Process for Corporate Persons)

Regulations, 2016.

(2) The applicant under sub-rule (1) shall dispatch forthwith, a copy of the

application filed with the Adjudicating Authority, by registered post or speed

post to the registered office of the corporate debtor.

FORM 3

(See clause (a) of sub-rule (1) of rule 5)

FORM OF DEMAND NOTICE/INVOICE DEMANDING PAYMENT

UNDER THE INSOLVENCY AND BANKRUPTCY CODE, 2016

(Under rule 5 of the Insolvency and Bankruptcy (Application to

Adjudicating Authority) Rules, 2016)

[Date]

PRACTICAL ASPECTS OF INSOLVENCY LAW

323

To,

[Name and address of the registered office of the corporate debtor]

From,

[Name and address of the registered office of the operational creditor]

Subject: Demand notice/invoice demanding payment in respect of

unpaid operational debt due from [corporate debtor] under the Code.

Madam/Sir,

1. This letter is a demand notice/invoice demanding payment of an unpaid

operational debt due from [name of corporate debtor].

2. Please find particulars of the unpaid operational debt below:

PARTICULARS OF OPERATIONAL DEBT

1 TOTAL AMOUNT OF DEBT, DETAILS

OF TRANSACTIONS ON ACCOUNT

OF WHICH DEBT FELL DUE, AND

THE DATE FROM WHICH SUCH

DEBT FELL DUE

2 AMOUNT CLAIMED TO BE IN

DEFAULT AND THE DATE ON

WHICH THE DEFAULT OCCURRED

(ATTACH THE WORKINGS FOR

COMPUTATION OF DEFAULT IN

TABULAR FORM)

3 PARTICULARS OF SECURITY

HELD, IF ANY, THE DATE OF ITS

CREATION, ITS ESTIMATED VALUE

AS PER THE CREDITOR. ATTACH A

COPY OF A CERTIFICATE OF

REGISTRATION OF CHARGE

ISSUED BY THE REGISTRAR OF

COMPANIES (IF THE CORPORATE

DEBTOR IS A COMPANY)

4 DETAILS OF RETENTION OF TITLE

ARRANGEMENTS (IF ANY) IN

RESPECT OF GOODS TO WHICH

THE OPERATIONAL DEBT REFERS

324

PRACTICAL ASPECTS OF INSOLVENCY LAW

5. REFERS RECORD OF DEFAULT

WITH THE INFORMATION UTILITY (IF

ANY)

6. PROVISION OF LAW, CONTRACT OR

OTHER DOCUMENT UNDER

WHICH DEBT HAS BECOME DUE

7. LIST OF DOCUMENTS ATTACHED

TO THIS APPLICATION IN ORDER TO

PROVE THE EXISTENCE OF

OPERATIONAL DEBT AND THE

AMOUNT IN DEFAULT

3. If you dispute the existence or amount of unpaid operational debt (in

default) please provide the undersigned, within ten days of the receipt of

this letter, of the pendency of the suit or arbitration proceedings in relation

to such dispute filed before the receipt of this letter/notice.

4. If you believe that the debt has been repaid before the receipt of this

letter, please demonstrate such repayment by sending to us, within ten

days of receipt of this letter, the fol owing:

(a) an attested copy of the record of electronic transfer of the unpaid

amount from the bank account of the corporate debtor; or

(b) an attested copy of any record that [ name of the operational creditor]

has received the payment.

5. The undersigned, hereby, attaches a certificate from an information

utility confirming that no record of a dispute raised in relation to the relevant

operational debt has been filed by any person at any information utility, (if

applicable)

6. The undersigned request you to unconditional y repay the unpaid

operational debt (in default) in full within ten days from the receipt of this

letter failing which we shal initiate a corporate insolvency resolution

process in respect of [c].

Yours sincerely,

Signature of person authorised to act on behalf of the operational creditor

Name in block letters

Position with or in relation to the operational creditor

Address of person signing

PRACTICAL ASPECTS OF INSOLVENCY LAW

325

Instructions

1. Please serve a copy of this form on the corporate debtor, ten days in

advance of filing an application under section 9 of the Code.

2. Please append a copy of such served notice to the application made

by the operational creditor to the Adjudicating Authority.

Form 4

(See clause (b) of sub-rule (1) of rule 5)

FORM OF NOTICE WITH WHICH INVOICE DEMANDING PAYMENT IS

TO BE ATTACHED

(Under Rule 5 of the Insolvency and Bankruptcy (Application to

Adjudicating Authority) Rules, 2016)

[Date]

To,

[Name and address of registered office of the corporate debtor]

From,

[Name and address of the operational creditor]

Subject: Notice attached to invoice demanding payment

Madam/Sir,

[Name of operational creditor], hereby provides notice for repayment of

the unpaid amount of INR [insert amount] that is in default as reflected in

the invoice attached to this notice.

In the event you do not repay the debt due to us within ten days of receipt

of this notice, we may file an application before the Adjudicating Authority

for initiating a corporate insolvency resolution process under section 9 of

the Code.

Yours sincerely,

Signature of person authorised to act on behalf of the operational creditor

Name in block letters

Position with or in relation to the operational creditor

Address of person signing

326

PRACTICAL ASPECTS OF INSOLVENCY LAW

Form 5

(See sub-rule (1) of rule 6)

APPLICATION BY OPERATIONAL CREDITOR TO INITIATE

CORPORATE INSOLVENCY RESOLUTION PROCESS UNDER THE

CODE.

(Under rule 6 of the Insolvency and Bankruptcy (Application to

Adjudicating Authority) Rules, 2016)

[Date]

To,

The National Company Law Tribunal

[Address]

From,

[Name and address for correspondence of the operational creditor]

In the matter of [name of the corporate debtor]

Subject: Application to initiate corporate insolvency resolution

process in respect of [name of the corporate debtor] under the

Insolvency and Bankruptcy Code, 2016.

Madam/Sir,

[Name of the operational creditor], hereby submits this application to

initiate a corporate insolvency resolution process in the case of [name

of corporate debtor]. The details for the purpose of this application are

set out below:

Part – I

PARTICULARS OF APPLICANT

1. NAME

OF

OPERATIONAL

CREDITOR

2. IDENTIFICATION NUMBER OF

OPERATIONAL CREDITOR (IF ANY)

3. ADDRESS

FOR

CORRESPONDENCE OF THE

OPERATIONAL CREDITOR

PRACTICAL ASPECTS OF INSOLVENCY LAW

327

Part - II

PARTICULARS OF CORPORATE

DEBTOR

1. NAME OF THE CORPORATE

DEBTOR

2. IDENTIFICATION NUMBER OF

CORPORATE DEBTOR

3. DATE OF INCORPORATION OF

CORPORATE DEBTOR

4. NOMINAL SHARE CAPITAL AND

THE PAID-UP SHARE CAPITAL

OF THE CORPORATE DEBTOR

AND/OR

DETAILS

OF

GUARANTEE CLAUSE AS PER

MEMORANDUM

OF

ASSOCIATION (AS APPLICABLE)

5. ADDRESS OF THE REGISTERED

OFFICE OF THE CORPORATE

DEBTOR

6. NAME,

ADDRESS

AND

AUTHORITY

OF

PERSON

SUBMITTING APPLICATION ON

BEHALF OF OPERATIONAL

CREDITOR

(ENCLOSE

AUTHORISATION)

7. NAME AND ADDRESS OF

PERSON RESIDENT IN INDIA

AUTHORISED TO ACCEPT THE

SERVICE OF PROCESS ON ITS

BEHALF

(ENCLOSE

AUTHORISATION)

328

PRACTICAL ASPECTS OF INSOLVENCY LAW

Part-III

PARTICULARS

OF

THE

PROPOSED

INTERIM

RESOLUTION PROFESSIONAL

[IF PROPOSED]

1. NAME,

ADDRESS,

EMAIL

ADDRESS

AND

THE

REGISTRATION NUMBER OF

THE PROPOSED INSOLVENCY

PROFESSIONAL

Part-IV

PARTICULARS

OF

OPERATIONAL DEBT

1. TOTAL AMOUNT OF DEBT,

DETAILS OF TRANSACTIONS ON

ACCOUNT OF WHICH DEBT FELL

DUE, AND THE DATE FROM

WHICH SUCH DEBT FELL DUE

2. AMOUNT CLAIMED TO BE IN

DEFAULT AND THE DATE ON

WHICH

THE

DEFAULT

OCCURRED (ATTACH THE

WORKINGS FOR COMPUTATION

OF AMOUNT AND DATES OF

DEFAULT IN TABULAR FORM)

Part-V

PARTICULARS OF OPERATIONAL

DEBT [DOCUMENTS, RECORDS

AND EVIDENCE OF DEFAULT]

1. PARTICULARS OF SECURITY

HELD, IF ANY, THE DATE OF ITS

CREATION, ITS ESTIMATED

VALUE AS PER THE CREDITOR.

ATTACH A COPY OF A

PRACTICAL ASPECTS OF INSOLVENCY LAW

329

CERTIFICATE

OF

REGISTRATION OF CHARGE

ISSUED BY THE REGISTRAR OF

COMPANIES

(IF

THE

CORPORATE DEBTOR IS A

COMPANY)

2. DETAILS OF RESERVATION/

RETENTION

OF

TITLE

ARRANGEMENTS (IF ANY) IN

RESPECT OF GOODS TO WHICH

THE OPERATIONAL DEBT

REFERS

3. PARTICULARS OF AN ORDER OF

A COURT, TRIBUNAL OR

ARBITRAL

PANEL

ADJUDICATING

ON

THE

DEFAULT, IF ANY (ATTACH A

COPY OF THE ORDER)

4. RECORD OF DEFAULT WITH THE

INFORMATION UTILITY, IF ANY

(ATTACH A COPY OF SUCH

RECORD)

5. DETAILS OF SUCCESSION

CERTIFICATE, OR PROBATE OF

A WILL, OR LETTER OF

ADMINISTRATION, OR COURT

DECREE

(AS

MAY

BE

APPLICABLE), UNDER THE

INDIAN SUCCESSION ACT, 1925

(10 OF 1925) (ATTACH A COPY)

6. PROVISION OF LAW, CONTRACT

OR OTHER DOCUMENT UNDER

WHICH OPERATIONAL DEBT

HAS BECOME DUE

7. A STATEMENT OF BANK

ACCOUNT WHERE DEPOSITS

330

PRACTICAL ASPECTS OF INSOLVENCY LAW

ARE MADE OR CREDITS

RECEIVED NORMALLY BY THE

OPERATIONAL CREDITOR IN

RESPECT OF THE DEBT OF THE

CORPORATE DEBTOR (ATTACH A

COPY)

8. LIST OF OTHER DOCUMENTS

ATTACHED TO THIS APPLICATION

IN ORDER TO PROVE THE

EXISTENCE OF OPERATIONAL

DEBT AND THE AMOUNT IN

DEFAULT

I, [ Name of the operational creditor / person authorised to act on behalf of

the operational creditor] hereby certify that, to the best of my knowledge,

[ name of proposed insolvency professional], is fully qualified and permitted

to act as an insolvency professional in accordance with the Code and the

rules and regulations made thereunder. [ WHERE APPLICABLE]

[Name of the operational creditor] has paid the requisite fee for this

application through [state means of payment] on [date].

Yours sincerely,

Signature of person authorised to act on behalf of the operational creditor

Name in block letters

Position with or in relation to the operational creditor

Address of person signing

Instructions -

Please attach the following to this application:

Annex I Copy of the invoice / demand notice as in Form 3 of the Insolvency

and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 served

on the corporate debtor.

Annex II Copies of all documents referred to in this application.

Annex III Copy of the relevant accounts from the banks/financial

institutions maintaining accounts of the operational creditor confirming

that there is no payment of the relevant unpaid operational debt by the

operational debtor, if available.

PRACTICAL ASPECTS OF INSOLVENCY LAW

331

Annex IV Affidavit in support of the application in accordance with the

Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules,

2016.

Annex V Written communication by the proposed interim resolution

professional as set out in Form 2 of the Insolvency and Bankruptcy

(Application to Adjudicating Authority) Rules, 2016. [WHERE

APPLICABLE]

Annex VI Proof that the specified application fee has been paid.

Note: Where workmen/employees are operational creditors, the application

may be made either in an individual capacity or in a joint capacity by one

of them who is duly authorised for the purpose.

Regulation 7 of the Insolvency and Bankruptcy Board of India (Insolvency

Resolution Process for Corporate Persons) Regulations, 2016 is also relevant

and reads as under:

"7. Claims by operational creditors.

(1) A person claiming to be an operational creditor, other than workman or

employee of the corporate debtor, shal submit proof of claim to the interim

resolution professional in person, by post or by electronic means in Form

B of the Schedule:

Provided that such person may submit supplementary documents or

clarifications in support of the claim before the constitution of the

committee.

(2) The existence of debt due to the operational creditor under this

Regulation may be proved on the basis of-

(a) the records available with an information utility, if any; or

(b) other relevant documents, including—

(i) a contract for the supply of goods and services with corporate

debtor;

(i ) an invoice demanding payment for the goods and services

supplied to the corporate debtor;

(iii) an order of a court or tribunal that has adjudicated upon the

non-payment of a debt, if any; or

(iv) financial accounts.

332

PRACTICAL ASPECTS OF INSOLVENCY LAW

FORM B

PROOF OF CLAIM BY OPERATIONAL CREDITORS EXCEPT

WORKMEN AND EMPLOYEES

[ Under Regulation 7 of the Insolvency and Bankruptcy Board of India

(Insolvency Resolution Process for Corporate Persons) Regulations,

2016]

[Date]

To

The Interim Resolution Professional / Resolution Professional

[Name of the Insolvency Resolution Professional / Resolution

Professional]

[Address as set out in public announcement]

From

[Name and address of the operational creditor]

Subject: Submission of proof of claim.

Madam/Sir,

[Name of the operational creditor], hereby submits this proof of claim in

respect of the corporate insolvency resolution process in the case of

[name of corporate debtor]. The details for the same are set out below:

PARTICULARS

1. NAME

OF

OPERATIONAL

CREDITOR

2. IDENTIFICATION NUMBER OF

OPERATIONAL CREDITOR (IF AN

INCORPORATED BODY PROVIDE

IDENTIFICATION NUMBER AND

PROOF OF INCORPORATION. IF A

PARTNERSHIP OR INDIVIDUAL

PROVIDE

IDENTIFICATION

RECORDS* OF ALL THE PARTNERS

OR THE INDIVIDUAL)

3. ADDRESS AND EMAIL ADDRESS

OF OPERATIONAL CREDITOR FOR

CORRESPONDENCE

PRACTICAL ASPECTS OF INSOLVENCY LAW

333

4. TOTAL AMOUNT OF CLAIM

(INCLUDING ANY INTEREST AS AT

THE

INSOLVENCY

COMMENCEMENT DATE)

5. DETAILS OF DOCUMENTS BY

REFERENCE TO WHICH THE DEBT

CAN BE SUBSTANTIATED.

6. DETAILS OF ANY DISPUTE AS WELL

AS THE RECORD OF PENDENCY

OR ORDER OF SUIT OR

ARBITRATION PROCEEDINGS

7. DETAILS OF HOW AND WHEN DEBT

INCURRED

8. DETAILS OF ANY MUTUAL CREDIT,

MUTUAL DEBTS, OR OTHER

MUTUAL DEALINGS BETWEEN THE

CORPORATE DEBTOR AND THE

CREDITOR WHICH MAY BE SET-OFF

AGAINST THE CLAIM

9. DETAILS OF ANY RETENTION OF

TITLE

ARRANGEMENTS

IN

RESPECT OF GOODS OR

PROPERTIES TO WHICH THE CLAIM

REFERS

10. DETAILS OF THE BANK ACCOUNT

TO WHICH THE AMOUNT OF THE

CLAIM OR ANY PART THEREOF

CAN

BE

TRANSFERRED

PURSUANT TO A RESOLUTION

PLAN

11. LIST OF DOCUMENTS ATTACHED

TO THIS PROOF OF CLAIM IN

ORDER TO PROVE THE EXISTENCE

AND NONPAYMENT OF CLAIM DUE

TO THE OPERATIONAL CREDITOR

334

PRACTICAL ASPECTS OF INSOLVENCY LAW

Signature of operational creditor or person authorised to act on his behalf

[Please enclose the authority if this is being submitted on behalf of an

operational creditor]

Name in BLOCK LETTERS

Position with or in relation to creditor

Address of person signing

*PAN number, passport, AADHAAR Card or the identity card issued by

the Election Commission of India." (Emphasis supplied)

23. In the passage of the Bills which ultimately became the Code, various

important changes have taken place. The original definition of "dispute" has

now become an inclusive definition, the word "bona fide" before "suit or

arbitration proceedings" being deleted. In Section 8(1), the words "through

an information utility, wherever applicable, or by registered post or courier or

by any electronic communication" have been deleted. Likewise, in Section

8(2), the period of "at least 60 days … through an information utility or by

registered post or courier or by any electronic communication" has also

been deleted. In Section 9(5), the absence of a proviso similar to the proviso

occurring in Section 7(5) was also rectified. Further, the time periods of 2

and 3 days were uniformly substituted, as has been seen above, by 7 days,

so that a sufficiently long period is given to do the needful.

24. The scheme under Sections 8 and 9 of the Code, appears to be that an

operational creditor, as defined, may, on the occurrence of a default (i.e., on

non-payment of a debt, any part whereof has become due and payable and

has not been repaid), deliver a demand notice of such unpaid operational

debt or deliver the copy of an invoice demanding payment of such amount

to the corporate debtor in the form set out in Rule 5 of the Insolvency and

Bankruptcy (Application to Adjudicating Authority) Rules, 2016 read with

Form 3 or 4, as the case may be (Section 8(1)). Within a period of 10 days

of the receipt of such demand notice or copy of invoice, the corporate debtor

must bring to the notice of the operational creditor the existence of a dispute

and/or the record of the pendency of a suit or arbitration proceeding filed

before the receipt of such notice or invoice in relation to such dispute (Section

8(2)(a)). What is important is that the existence of the dispute and/or the

suit or arbitration proceeding must be pre-existing – i.e. it must exist before

the receipt of the demand notice or invoice, as the case may be. In case the

unpaid operational debt has been repaid, the corporate debtor shall within a

period of the self-same 10 days send an attested copy of the record of the

PRACTICAL ASPECTS OF INSOLVENCY LAW

335

electronic transfer of the unpaid amount from the bank account of the

corporate debtor or send an attested copy of the record that the operational

creditor has encashed a cheque or otherwise received payment from the

corporate debtor (Section 8(2)(b)). It is only if, after the expiry of the period

of the said 10 days, the operational creditor does not either receive payment

from the corporate debtor or notice of dispute, that the operational creditor

may trigger the insolvency process by filing an application before the

adjudicating authority under Sections 9(1) and 9(2). This application is to be

filed under Rule 6 of the Insolvency and Bankruptcy (Application to

Adjudicating Authority) Rules, 2016 in Form 5, accompanied with documents

and records that are required under the said form. Under Rule 6(2), the

applicant is to dispatch by registered post or speed post, a copy of the

application to the registered office of the corporate debtor. Under Section

9(3), along with the application, the statutory requirement is to furnish a

copy of the invoice or demand notice, an affidavit to the effect that there is

no notice given by the corporate debtor relating to a dispute of the unpaid

operational debt and a copy of the certificate from the financial institution

maintaining accounts of the operational creditor confirming that there is no

payment of an unpaid operational debt by the corporate debtor. Apart from

this information, the other information required under Form 5 is also to be

given. Once this is done, the adjudicating authority may either admit the

application or reject it. If the application made under sub-section (2) is

incomplete, the adjudicating authority, under the proviso to sub-section 5,

may give a notice to the applicant to rectify defects within 7 days of the

receipt of the notice from the adjudicating authority to make the application

complete. Once this is done, and the adjudicating authority finds that either

there is no repayment of the unpaid operational debt after the invoice (Section

9(5)(i)(b)) or the invoice or notice of payment to the corporate debtor has

been delivered by the operational creditor (Section 9(5)(i)(c)), or that no

notice of dispute has been received by the operational creditor from the

corporate debtor or that there is no record of such dispute in the information

utility (Section 9(5)(i)(d)), or that there is no disciplinary proceeding pending

against any resolution professional proposed by the operational creditor

(Section 9(5)(i)(e)), it shal admit the application within 14 days of the receipt

of the application, after which the corporate insolvency resolution process

gets triggered. On the other hand, the adjudicating authority shal , within 14

days of the receipt of an application by the operational creditor, reject such

application if the application is incomplete and has not been completed

within the period of 7 days granted by the proviso (Section 9(5)(i )(a)). It may

also reject the application where there has been repayment of the operational

debt (Section 9(5)(i )(b)), or the creditor has not delivered the invoice or

336

PRACTICAL ASPECTS OF INSOLVENCY LAW

notice for payment to the corporate debtor (Section 9(5)(i )(c)). It may also

reject the application if the notice of dispute has been received by the

operational creditor or there is a record of dispute in the information utility

(Section 9(5)(i )(d)). Section 9(5)(i )(d) refers to the notice of an existing

dispute that has so been received, as it must be read with Section 8(2)(a).

Also, if any disciplinary proceeding is pending against any proposed resolution

professional, the application may be rejected (Section 9(5)(ii)(e)).

25. Therefore, the adjudicating authority, when examining an application

under Section 9 of the Act wil have to determine:

(i) Whether there is an "operational debt" as defined exceeding Rs.1

lakh? (See Section 4 of the Act)

(i ) Whether the documentary evidence furnished with the application

shows that the aforesaid debt is due and payable and has not yet

been paid? and

(iii) Whether there is existence of a dispute between the parties or the

record of the pendency of a suit or arbitration proceeding filed before

the receipt of the demand notice of the unpaid operational debt in

relation to such dispute?

If any one of the aforesaid conditions is lacking, the application would have

to be rejected.

Apart from the above, the adjudicating authority must fol ow the mandate of

Section 9, as outlined above, and in particular the mandate of Section 9(5)

of the Act, and admit or reject the application, as the case may be, depending

upon the factors mentioned in Section 9(5) of the Act.

26. Another thing of importance is the timelines within which the insolvency

resolution process is to be triggered. The corporate debtor is given 10 days

from the date of receipt of demand notice or copy of invoice to either point

out that a dispute exists between the parties or that he has since repaid the

unpaid operational debt. If neither exists, then an application once filed has

to be disposed of by the adjudicating authority within 14 days of its receipt,

either by admitting it or rejecting it. An appeal can then be filed to the

Appel ate Tribunal under Section 61 of the Act within 30 days of the order of

the Adjudicating Authority with an extension of 15 further days and no more.

27. Section 64 of the Code mandates that where these timelines are not

adhered to, either by the Tribunal or by the Appellate Tribunal, they shall

record reasons for not doing so within the period so specified and extend

the period so specified for another period not exceeding 10 days. Even in

PRACTICAL ASPECTS OF INSOLVENCY LAW

337

appeals to the Supreme Court from the Appel ate Tribunal under Section 62,

45 days time is given from the date of receipt of the order of the Appel ate

Tribunal in which an appeal to the Supreme Court is to be made, with a

further grace period not exceeding 15 days. The strict adherence of these

timelines is of essence to both the triggering process and the insolvency

resolution process. As we have seen, one of the principal reasons why the

Code was enacted was because liquidation proceedings went on interminably,

thereby damaging the interests of all stakeholders, except a recalcitrant

management which would continue to hold on to the company without paying

its debts. Both the Tribunal and the Appel ate Tribunal wil do wel to keep in

mind this principal objective sought to be achieved by the Code and will

strictly adhere to the time frame within which they are to decide matters

under the Code.

28. It is now important to construe Section 8 of the Code. The operational

creditors are those creditors to whom an operational debt is owed, and an

operational debt, in turn, means a claim in respect of the provision of goods

or services, including employment, or a debt in respect of repayment of

dues arising under any law for the time being in force and payable to the

Government or to a local authority. This has to be contrasted with financial

debts that may be owed to financial creditors, which was the subject matter

of the judgment delivered by this Court on 31.8.2017 in Innoventive

Industries Ltd. v. ICICI Bank & Anr. (Civil Appeal Nos.8337-8338 of 2017).

In this judgment, we had held that the adjudicating authority under Section

7 of the Code has to ascertain the existence of a default from the records of

the information utility or on the basis of evidence furnished by the financial

creditor within 14 days. The corporate debtor is entitled to point out to the

adjudicating authority that a default has not occurred; in the sense that a

debt, which may also include a disputed claim, is not due i.e. it is not

payable in law or in fact. This Court then went on to state:

"29. The scheme of Section 7 stands in contrast with the scheme under

Section 8 where an operational creditor is, on the occurrence of a default,

to first deliver a demand notice of the unpaid debt to the operational debtor

in the manner provided in Section 8(1) of the Code. Under Section 8(2),

the corporate debtor can, within a period of 10 days of receipt of the

demand notice or copy of the invoice mentioned in sub-section (1), bring

to the notice of the operational creditor the existence of a dispute or the

record of the pendency of a suit or arbitration proceedings, which is pre-

existing – i.e. before such notice or invoice was received by the corporate

debtor. The moment there is existence of such a dispute, the operational

creditor gets out of the clutches of the Code.

338

PRACTICAL ASPECTS OF INSOLVENCY LAW

30. On the other hand, as we have seen, in the case of a corporate debtor

who commits a default of a financial debt, the adjudicating authority has

merely to see the records of the information utility or other evidence

produced by the financial creditor to satisfy itself that a default has

occurred. It is of no matter that the debt is disputed so long as the debt is

"due" i.e. payable unless interdicted by some law or has not yet become

due in the sense that it is payable at some future date. It is only when this

is proved to the satisfaction of the adjudicating authority that the

adjudicating authority may reject an application and not otherwise."

29. It is, thus, clear that so far as an operational creditor is concerned, a

demand notice of an unpaid operational debt or copy of an invoice demanding

payment of the amount involved must be delivered in the prescribed form.

The corporate debtor is then given a period of 10 days from the receipt of

the demand notice or copy of the invoice to bring to the notice of the

operational creditor the existence of a dispute, if any. We have also seen

the notes on clauses annexed to the Insolvency and Bankruptcy Bil of

2015, in which "the existence of a dispute" alone is mentioned. Even

otherwise, the word "and" occurring in Section 8(2)(a) must be read as "or"

keeping in mind the legislative intent and the fact that an anomalous situation

would arise if it is not read as "or". If read as "and", disputes would only

stave off the bankruptcy process if they are already pending in a suit or

arbitration proceedings and not otherwise. This would lead to great hardship;

in that a dispute may arise a few days before triggering of the insolvency

process, in which case, though a dispute may exist, there is no time to

approach either an arbitral tribunal or a court. Further, given the fact that

long limitation periods are al owed, where disputes may arise and do not

reach an arbitral tribunal or a court for upto three years, such persons would

be outside the purview of Section 8(2) leading to bankruptcy proceedings

commencing against them. Such an anomaly cannot possibly have been

intended by the legislature nor has it so been intended. We have also seen

that one of the objects of the Code qua operational debts is to ensure that

the amount of such debts, which is usual y smal er than that of financial

debts, does not enable operational creditors to put the corporate debtor into

the insolvency resolution process prematurely or initiate the process for

extraneous considerations. It is for this reason that it is enough that a dispute

exists between the parties.

30. It is settled law that the expression "and" may be read as "or" in order to further the object of the statute and/or to avoid an anomalous situation.

Thus, in Samee Khan v. Bindu Khan [1998] 7 SCC 59 at 64, this Court

held:

PRACTICAL ASPECTS OF INSOLVENCY LAW

339

"14. Since the word "also" can have meanings such as "as well" or

"likewise", cannot those meanings be used for understanding the scope

of the trio words "and may also"? Those words cannot altogether be

detached from the other words in the sub-rule. Here again the word "and"

need not necessarily be understood as denoting a conjunctive sense. In

Stroud's Judicial Dictionary, it is stated that the word "and" has generally

a cumulative sense, but sometimes it is by force of a context read as

"or". Maxwel on Interpretation of Statutes has recognised the above use

to carry out the interpretation of the legislature. This has been approved

by this Court in Ishwar Singh Bindra v. State of U.P. [AIR 1968 SC 1450 :

1969 Cri LJ 19]. The principle of noscitur a sociis can profitably be used

to construct the words "and may also" in the sub-rule."

31. In Gujarat Urja Vikas Nigam Ltd. v. Essar Power Ltd. [2008] 4 SCC

755 at 765, this Court held:

"26. It may be noted that Section 86(1)(f) of the Act of 2003 is a special

provision for adjudication of disputes between the licensee and the

generating companies. Such disputes can be adjudicated upon either by

the State Commission or the person or persons to whom it is referred for

arbitration. In our opinion the word "and" in Section 86(1)(f) between the

words "generating companies" and "to refer any dispute for arbitration"

means "or". It is wel settled that sometimes "and" can mean "or" and

sometimes "or" can mean "and" (vide G.P. Singh's Principles of Statutory

Interpretation, 9th Edn., 2004, p. 404).

27. In our opinion in Section 86(1)(f) of the Electricity Act, 2003 the word

"and" between the words "generating companies" and the words "refer

any dispute" means "or", otherwise it will lead to an anomalous situation

because obviously the State Commission cannot both decide a dispute

itself and also refer it to some arbitrator. Hence the word "and" in Section

86(1)(f) means "or"."

32. In a recent judgment in Maharishi Mahesh Yogi Vedic Vishwavidyalaya

v. State of M.P. [2013] 15 SCC 677 at 718, this Court held:

"93. Besides the above two decisions, which discuss about the

methodology of interpretation of a statute, we also refer to the following

decisions rendered by this Court in Ishwar Singh Bindra [Ishwar Singh

Bindra v. State of U.P., AIR 1968 SC 1450 : 1969 Cri LJ 19], wherein in

para 11 it has been held as under: (AIR p. 1454)

"11. … It would be much more appropriate in the context to read it

disconjunctively. In Stroud's Judicial Dictionary, 3rd Edn., it is stated at p.

340

PRACTICAL ASPECTS OF INSOLVENCY LAW

135 that 'and' has generally a cumulative sense, requiring the fulfilment of

al the conditions that it joins together, and herein it is the antithesis of or.

Sometimes, however, even in such a connection, it is, by force of a

context, read as 'or'. Similarly in Maxwel on Interpretation of Statutes,

11th Edn., it has been accepted that 'to carry out the intention of the

legislature it is occasional y found necessary to read the conjunctions

"or" and "and" one for the other'."

94. We may also refer to para 4 of the decision rendered by this Court in

Director of Mines Safety v. Tandur and Nayandgi Stone Quarries (P) Ltd.

[(1987) 3 SCC 208] : (SCC p. 211, para 4)

"4. According to the plain meaning, the exclusionary clause in sub-section

(1) of Section 3 of the Act read with the two provisos beneath clauses (a)

and (b), the word 'and' at the end of para (b) of sub-clause (i ) of the

proviso to clause (a) of Section 3(1) must in the context in which it

appears, be construed as 'or'; and if so construed, the existence of any

one of the three conditions stipulated in paras (a), (b) and (c) would at

once attract the proviso to clauses (a) and (b) of sub-section (1) of Section

3 and thereby make the mine subject to the provisions of the Act. The

High Court overlooked the fact that the use of the negative language in

each of the three clauses implied that the word 'and' used at the end of

clause (b) had to be read disjunctively. That construction of ours is in

keeping with the legislative intent manifested by the scheme of the Act

which is primarily meant for ensuring the safety of workmen employed in

the mines."

33. This being the case, is it not open to the adjudicating authority to then

go into whether a dispute does or does not exist?

34. It is important to notice that Section 255 read with the Eleventh Schedule

of the Code has amended Section 271 of the Companies Act, 2013 so that

a company being unable to pay its debts is no longer a ground for winding

up a company. The old law contained in Madhusudan (supra) has, therefore,

disappeared with the disappearance of this ground in Section 271 of the

Companies Act.

35. We have already noticed that in the first Insolvency and Bankruptcy Bill,

2015 that was annexed to the Bankruptcy Law Reforms Committee Report,

Section 5(4) defined "dispute" as meaning a "bona fide suit or arbitration

proceedings…". In its present avatar, Section 5(6) excludes the expression

"bona fide" which is of significance. Therefore, it is difficult to import the

expression "bona fide" into Section 8(2)(a) in order to judge whether a dispute

exists or not.

PRACTICAL ASPECTS OF INSOLVENCY LAW

341

36. The expression "existence" has been understood as fol ows:

"The Shorter Oxford English Dictionary gives the fol owing meaning of

the word "existence":

(a) Reality, as opp to appearance.

(b) The fact or state of existing; actual possession of being. Continued

being as a living creature, life, esp. under adverse conditions.

Something that exists; an entity, a being. All that exists. (Page 894 –

Oxford English Dictionary)"

37. Two extremely instructive judgments, one of the Australian High Court,

and the other of the Chancery Division in the UK, throw a great deal of light on

the expression "existence of a dispute" contained in Section 8(2)(a) of the

Code. The Australian judgment is reported as Spencer Constructions Pty

Ltd v. G & M Aldridge Pty Ltd. [1997] FCA 681. The Australian High Court

had to construe Section 459H of the Corporations Law, which read as under:

"(1) ..............

(a) that there is a genuine dispute between the company and the

respondent about the existence or amount of a debt to which the

demand relates;

(b) ..............

The expression "genuine dispute" was then held to mean the fol owing:

Finn J was content to adopt the explanation of "genuine dispute" given by

McLelland CJ in Eq in Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR

785 at 787 where his Honour said:

"In my opinion [the] expression connotes a plausible contention requiring

investigation, and raises much the same sort of considerations as the

'serious question to be tried' criterion which arises on an application for an

interlocutory injunction or for the extension or removal of a caveat. This

does not mean that the court must accept uncritically as giving rise to a

genuine dispute, every statement in an affidavit 'however equivocal, lacking

in precision, inconsistent with undisputed contemporary documents or

other statements by the same deponent, or inherently and probable in

itself, it may be not having 'sufficient prima facie plausibility to merit

further investigation as to [its] truth' (cf Eng Mee Yong v Letchumanan

[1980] AC 331 at 341), or 'a patently feeble legal argument or an assertion

of facts unsupported by evidence': cf South Australia v Wal (1980) 24

SASR 189 at 194."

342

PRACTICAL ASPECTS OF INSOLVENCY LAW

His Honour also referred to the judgment of Lindgren J in Rohala

Pharmaceutical Pty Ltd (supra) where, at 353, his Honour said:

"The provisions [of s 459H(1) and (5)] assume that the dispute and

offsetting claim have an 'objective' existence the genuineness of which is

capable of being assessed. The word 'genuine' is included [in 'genuine

dispute'] to sound a note of warning that the propounding of serious disputes

and claims is to be expected but must be excluded from consideration".

There have been numerous decisions of single judges in this Court and in

State Supreme Courts which have analysed, in different ways, the

approach a court should take in determining whether there is "a genuine

dispute" for the purposes of s 459H of the Corporations Law. What is clear

is that in considering applications to set aside a statutory demand, a

court wil not determine contested issues of fact or law which have a

significant or substantial basis. One finds formulations such as:

"... at least in most cases, it is not expected that the court wil embark

upon any extended enquiry in order to determine whether there is a genuine

dispute between the parties and certainly wil not attempt to weigh the

merits of that dispute. Al that the legislation requires is that the court

conclude that there is a dispute and that it is a genuine dispute".

See Mibor Investments Pty Ltd v Commonwealth Bank of Australia (1993)

11 ACSR 362 at 366-7, followed by Ryan J in Moyal Investments Services

Pty Ltd v White (1993) 12 ACSR 320 at 324.

Another formulation has been expressed as fol ows:

"It is clear that what is required in al cases is something between mere

assertion and the proof that would be necessary in a court of law.

Something more than mere assertion is required because if that were not

so then anyone could merely say it did not owe a debt ..."

See John Hol and Construction and Engineering Pty Ltd v Kilpatrick Green

Pty Ltd (1994) 12 ACLC 716 at 718, fol owed by Northrop J in Aquatown

Pty Ltd v Holder Stroud Pty Ltd (Federal Court of Australia, 25 June

1996, unreported).

In Re Morris Catering (Australia) Pty Ltd (1993) 11 ACSR 601 at 605,

Thomas J said:

"There is little doubt that Div 3 is intended to be a complete code which

prescribes a formula that requires the court to assess the position between

the parties, and preserve demands where it can be seen that there is no

genuine dispute and no sufficient genuine offsetting claim. That is not to

PRACTICAL ASPECTS OF INSOLVENCY LAW

343

say that the court will examine the merits or settle the dispute. The specified

limits of the court's examination are the ascertainment of whether there

is a 'genuine dispute' and whether there is a 'genuine claim'.

It is often possible to discern the spurious, and to identify mere bluster or

assertion. But beyond a perception of genuineness (or the lack of it) the

court has no function. It is not helpful to perceive that one party is more

likely than the other to succeed, or that the eventual state of the account

between the parties is more likely to be one result than another.

The essential task is relatively simple - to identify the genuine level of a

claim (not the likely result of it) and to identify the genuine level of an

offsetting claim (not the likely result of it)."

In Scanhill Pty Ltd v Century 21 Australasia Pty Ltd (1993) 12 ACSR 341

at 357 Beazley J said:

"... the test to be applied for the purposes of s 459H is whether the court

is satisfied that there is a serious question to be tried that the applicant

has an offsetting claim".

In Chadwick Industries (South Coast) Pty Ltd v Condensing Vaporisers

Pty Ltd (1994) 13 ACSR 37 at 39, Lockhart J said:

"... what appears clearly enough from al the judgments is that a standard

of satisfaction which a court requires is not a particularly high one. I am

for present purposes content to adopt any of the standards that are referred

to in the cases ... The highest of the thresholds is probably the test

enunciated by Beazley J, though for myself I discern no inconsistency

between that test and the statements in the other cases to which I have

referred. However, the application of Beazley J's test wil vary according

to the circumstances of the case.

Certainly the court will not examine the merits of the dispute other than to

see if there is in fact a genuine dispute. The notion of a 'genuine dispute'

in this context suggests to me that the court must be satisfied that there

is a dispute that is not plainly vexatious or frivolous. It must be satisfied

that there is a claim that may have some substance".

In Greenwood Manor Pty Ltd v Woodlock (1994) 48 FCR 229 Northrop J

referred to the formulations of Thomas J in Re Morris Catering (Australia)

Pty Ltd (1993) 11 ACLC 919, 922 and Hayne J in Mibor Investments Pty

Ltd v Commonwealth Bank of Australia (supra), where he noted the

dictionary definition of "genuine" as being in this context "not spurious ...

real or true" and concluded (at 234):

344

PRACTICAL ASPECTS OF INSOLVENCY LAW

"Although it is true that the Court, on an application under ss 459G and

459H is not entitled to decide a question as to whether a claim will succeed

or not, it must be satisfied that there is a genuine dispute between the

company and the respondent about the existence of the debt. If it can be

shown that the argument in support of the existence of a genuine dispute

can have no possible basis whatsoever, in my view, it cannot be said that

there is a genuine dispute. This does not involve, in itself, a determination

of whether the claim will succeed or not, but it does go to the reality of the

dispute, to show that it is real or true and not merely spurious".

In our view a "genuine" dispute requires that:

• the dispute be bona fide and truly exist in fact;

• the grounds for al eging the existence of a dispute are real and not

spurious, hypothetical, il usory or misconceived.

We consider that the various formulations referred to above can be helpful

in determining whether there is a genuine dispute in a particular case, so

long as the formulation used does not become a substitute for the words

of the statute."

38. To similar effect is the judgment of the Chancery Division in Hayes v.

Hayes [2014] EWHC 2694 (Ch) under the U.K. Insolvency Rules. The

Chancery Division held:

"I do not think it necessary, for the purposes of this appeal, to embark on

a survey of the authorities as to precisely what is involved in a genuine

and substantial cross-claim. It is clear that on the one hand, the court

does not need to be satisfied that there is a good claim or even that it is

a claim which is prima facie likely to succeed. In In re Bayoil SA [1999] 1

WLR 147 itself, Nourse LJ referred, at p 153, to what Harman LJ had said

in In re LHF Wools Ltd [1970] Ch 27, 36 where Harman LJ, having referred

to a previous case, said:

"The majority decided in that case that, shadowy as the cross-claim was

and improbable as the events said to support it seemed to be, there was

just enough to make the principle work, namely, that it was right to have

the matter tried out before the axe fel ."

On the other hand, the court should be alert to detect whol y spurious

claims merely being put forward by an unwilling debtor to raise what has

been cal ed "a cloud of objections" as I referred to earlier."

39. Interestingly enough in In Re: Portman Provincial Cinemas Ltd.[1999]

1 WLR 157, a sharply divided Court of Appeal had to decide whether a

PRACTICAL ASPECTS OF INSOLVENCY LAW

345

winding up petition should be dismissed on the ground that a cross-claim

had to be tried. Lord Denning, the minority Judge put it thus:

"It comes to this: Mr. Hymanson has put forward a most astonishing claim

for an indemnity against losses in perpetuity—based on an oral agreement

eight years ago—in a railway carriage or a solicitor's office—with nothing

to support it at al : against a man now dead. If there was substance in it fit

for the court to consider, he should have condescended to a great deal

more particularity. At al events, he should have done so if he wished to

convince me. I do not think this cross-claim has any substance at al . I

would reject it as an answer to this creditor's debt and I would al ow the

appeal accordingly."

On the other hand, Justice Harman in agreeing with the Chancery Division

judgment, held:

"I do not think that on this proceeding we are entitled to adjudicate upon

that matter. I do not think we ought to reject out of hand statements on

oath by Mr. Hymanson and Mr. Wal er which, unsatisfactory as they may

be, do yet set up affirmatively this story. There is nobody, of course, to

contradict them. I think we must take it that there is at least a chance that

the judge will believe that story and wil agree that there was such a

bargain made, and, moreover, that it was an inherent part of the sale

agreement.

xxxx

Therefore, I have had grave doubts about this matter but I have come to

the conclusion on the whole that it cannot be said that the story was so

vague and the likelihood of success so slight that we can say there was

no substance in the cross-claim. I think the judge was right to say that

the matter ought to go to trial, and therefore according to the modern

practice the petition should be dismissed, and I would so hold."

Similarly, Russel L.J. held:

"Lord Denning M.R. has taken the view that the deponents of the company

real y have made up this story, so strong are the circumstances which

seem to point in the opposite direction. As I have said, I agree it is a most

extraordinary story, but I am not prepared, merely on the basis of affidavits

and circumstances appearing in the Companies Court, to hold that really

not only is their story strange, but palpably untrue."

40. It is clear, therefore, that once the operational creditor has filed an

application, which is otherwise complete, the adjudicating authority must

346

PRACTICAL ASPECTS OF INSOLVENCY LAW

reject the application under Section 9(5)(2)(d) if notice of dispute has been

received by the operational creditor or there is a record of dispute in the

information utility. It is clear that such notice must bring to the notice of the

operational creditor the "existence" of a dispute or the fact that a suit or

arbitration proceeding relating to a dispute is pending between the parties.

Therefore, al that the adjudicating authority is to see at this stage is whether

there is a plausible contention which requires further investigation and that

the "dispute" is not a patently feeble legal argument or an assertion of fact

unsupported by evidence. It is important to separate the grain from the

chaff and to reject a spurious defence which is mere bluster. However, in

doing so, the Court does not need to be satisfied that the defence is likely

to succeed. The Court does not at this stage examine the merits of the

dispute except to the extent indicated above. So long as a dispute truly

exists in fact and is not spurious, hypothetical or illusory, the adjudicating

authority has to reject the application.

41. Coming to the facts of the present case, it is clear that the argument of

Shri Mohta that the requisite certificate by IDBI was not given in time will

have to be rejected, inasmuch as neither the appel ant nor the Tribunal

raised any objection to the application on this score. The confirmation from

a financial institution that there is no payment of an unpaid operational debt

by the corporate debtor is an important piece of information that needs to

be placed before the adjudicating authority, under Section 9 of the Code,

but given the fact that the adjudicating authority has not dismissed the

application on this ground and that the appel ant has raised this ground only

at the appellate stage, we are of the view that the application cannot be

dismissed at the threshold for want of this certificate alone.

42. On the other hand, Shri Mohta is on firmer ground when he argues that

a dispute certainly exists on the facts of the present case and that, therefore,

the application ought to have been dismissed on this ground.

43. According to learned counsel for the respondent, the definition of

"dispute" would indicate that since the NDA does not fall within any of the

three sub-clauses of Section 5(6), no "dispute" is there on the facts of this

case. We are afraid that we cannot accede to such a contention. First and

foremost, the definition is an inclusive one, and we have seen that the

word "includes" substituted the word "means" which occurred in the first

Insolvency and Bankruptcy Bill. Secondly, the present is not a case of a

suit or arbitration proceeding filed before receipt of notice – Section 5(6)

only deals with suits or arbitration proceedings which must "relate to" one

of the three sub-clauses, either directly or indirectly. We have seen that a

PRACTICAL ASPECTS OF INSOLVENCY LAW

347

"dispute" is said to exist, so long as there is a real dispute as to payment

between the parties that would fall within the inclusive definition contained

in Section 5(6). The correspondence between the parties would show that

on 30th January, 2015, the appellant clearly informed the respondent that

they had displayed the appel ant's confidential client information and client

campaign information on a public platform which constituted a breach of

trust and a breach of the NDA between the parties. They were further told

that all amounts that were due to them were withheld till the time the

matter is resolved. On 10th February, 2015, the respondent referred to the

NDA of 26th December, 2014 and denied that there was a breach of the

NDA. The respondent went on to state that the appellant's claim is

unfounded and untenable, and that the appellant is trying to avoid its

financial obligations, and that a sum of Rs.19,08,202.57 should be paid

within one week, failing which the respondent would be forced to explore

legal options and initiate legal process for recovery of the said amount.

This e mail was refuted by the appellant by an e-mail dated 26th February,

2015 and the appel ant went on to state that it had lost business from

various clients as a result of the respondent's breaches. Curiously, after

this date, the respondent remained silent, and thereafter, by an e-mail

dated 20th June, 2016, the respondent wished to revive business relations

and stated that it would like to follow up for payments which are long

stuck up. This was fol owed by an e-mail dated 25th June, 2016 to finalize

the time and place for a meeting. On 28th June, 2016, the appellant wrote

to the respondent again to finalize the time and place. Apparently, nothing

came of the aforesaid e-mails and the appellant then fired the last shot on

19th September, 2016, reiterating that no payments are due as the NDA

was breached.

44. The demand notice sent by the respondent was disputed in detail by the

appellant in its reply dated 27th December, 2016, which set out the e-mail of

30th January, 2015. The appel ant then went on to state:

"Sometime during June and September 2016, an officer of your Client,

one Mr. Jasmeet Singh wrote to our Client that he wanted to meet and

revive business relationship and exploring common interest points to

work together. In fact, in his email, he admits that there should be

resolution to the impending payments thereby implying that there was

(a) a dispute (as defined under the Code) and (b) there was a breach of

the NDA which needed to be resolved. Mr. Singh's emails to our client

were sent after 1 year and 6 months had elapsed from the date of our

Client's email of 30 January 2015. This clearly shows that your Client

was silent during this period and had not bothered to answer the

348

PRACTICAL ASPECTS OF INSOLVENCY LAW

questions raised by our Client. Hence, once again in September, our

Client called upon your Client to explain its breach of the NDA. Your

Client instead of explaining its breach of the NDA remained silent for

about 3 months and thereafter chooses to issue the Notice as a form

of pressure tactic and extort monies from our Client for your Client's

breach of the NDA. All the conduct of your Client explicitly shows

laches on its part.

Your Clients should note that under the NDA, it has agreed that a breach

of the NDA wil cause irreparable damage to our Client and our Client is

entitled to al remedies under law or equity against your Client for the

enforcement of the NDA. Accordingly, given the severity of the breaches

of the NDA committed by your Client, the delay and laches committed by

your Client and the conduct of your Client, our Client is not liable to make

payments to your Client against the breaches of the NDA and the delay

and laches committed by your Client. In fact, at this stage, our Client is

contemplating initiating necessary legal actions against your Client and

its parent company for the breach of the NDA to seek further

compensations and damages and other legal and equitable remedies

against your Client and its parent company."

45. Going by the aforesaid test of "existence of a dispute", it is clear that

without going into the merits of the dispute, the appellant has raised a

plausible contention requiring further investigation which is not a patently

feeble legal argument or an assertion of facts unsupported by evidence.

The defense is not spurious, mere bluster, plainly frivolous or vexatious.

A dispute does truly exist in fact between the parties, which may or may

not ultimately succeed, and the Appellate Tribunal was wholly incorrect

in characterizing the defense as vague, got-up and motivated to evade

liability.

46. Learned counsel for the respondent, however, argued that the breach

of the NDA is a claim for unliquidated damages which does not become

crystallized until legal proceedings are filed, and none have been filed

so far. The period of limitation for filing such proceedings has admittedly

not yet elapsed. Further, the appellant has withheld amounts that were

due to the respondent under the NDA til the matter is resolved. Admittedly,

the matter has never been resolved. Also, the respondent itself has not

commenced any legal proceedings after the e-mail dated 30th January,

2015 except for the present insolvency application, which was filed almost

2 years after the said e-mail. All these circumstances go to show that it

is right to have the matter tried out in the present case before the axe

falls.

PRACTICAL ASPECTS OF INSOLVENCY LAW

349

47. We, therefore, allow the present appeal and set aside the judgment of

the Appel ate Tribunal. There shal , however, be no order as to costs.

…………………………......J.

(R.F. Nariman)

..……………………...........J.

(Sanjay Kishan Kaul)

New Delhi;

September 21, 2017.

350

PRACTICAL ASPECTS OF INSOLVENCY LAW

ANNEXURE X.8

W.P 7144 (W) of 2017

Metaliks Limited v. Union of India

2017 SCC OnLine Cal 2749

In the High Court of Calcutta Constitutional

Writ Jurisdiction Appellate Side

(BEFORE DEBANGSU BASAK, J.)

Sree Metaliks Limited and another

v.

Union of India and anr.

W.P 7144 (W) of 2017

Decided on April 7, 2017

For the Petitioners: Mr. P.C Sen, Sr. Advocate

Mr. Anirban Roy, Advocate

Mr. Sanjib Dawn, Advocate

Mr. Nupur Jalan, Advocate

For the Respondent No. 2: Mr. A. Malhotra, Advocate

Mr. Soumya Majumder, Advocate

Ms. Neelina Chatterjee, Advocate

Ms. Mukta Rani Singha, Advocate

For the Union of India A.S.G: Mr. Kausik Chandra, Ld.

Mr. Asit Kumar De, Advocate

The Judgment of the Court was delivered by

Debangsu Basak, J. : The petitioner assails the vires of section 7 of the

Insolvency and Bankruptcy Code, 2016 (‘Code of 2016’) and the relevant

rules under the Insolvency and Bankruptcy (Application to the Adjudicating

Authority) Rules, 2016 (‘Rules of 2016’). The chal enge is premised upon

and revolves around the contention that the Code of 2016 does not afford

any opportunity of hearing to a corporate debtor in a petition filed under

section 7 of the Code of 2016.

2. The learned senior advocate appearing for the petitioner submits that,

the first petitioner had received a notice from a firm of company secretaries

PRACTICAL ASPECTS OF INSOLVENCY LAW

351

dated 21st January, 2017 intimating that, an application under section 7 of

the Code of 2016 read with rule 4 of the Rules of 2016 had been filed

before the National Company Law Tribunal (‘NCLT’), Kolkata Bench. He

submits that, the letter does not inform the petitioners about the date

when such application would be taken up for consideration by the NCLT.

He submits that, the NCLT had registered such application as Company

Petition No. 16 of 2017. An order dated 30th January, 2017 was passed on

a hearing conducted on such company petition on 25th January, 2017.

The order was passed ex parte. The petitioner was not informed of the

date of hearing. The petitioner was not afforded an opportunity of hearing

by the NCLT prior to the passing of such order of administration of the

petitioner and appointment of interim resolution professional. The petitioner

had preferred an appeal from such order. Such appeal being Company

Appeals (AT) (Insolvency) No. 3 of 2017 was disposed of by an order

dated 21st February, 2017. He submits that, pursuant to the disposal of

the appeal, proceedings have taken place in the company petition. At no

stage has the petitioner been heard by the NCLT. He submits that, the

petitioner is entitled to a right of hearing under the principles of natural

justice. He submits that, the Code of 2016 is silent as to the grant of

hearing by the NCLT. In such circumstances, the right of hearing, on the

principles of natural justice, has to be read into such statute. He submits

that, the claim of the respondent under the company petition is not such

that the Bankruptcy Code of 2016 can be invoked. The NCLT has assumed

jurisdiction under the Code of 2016 where none exists.

3. The learned advocate appearing for the respondent No. 2 submits that,

the respondent No.2 is an award holder. The award remains unsatisfied. The

respondent No. 2 was advised to invoke the provisions of Code of 2016. The

respondent No. 2 had filed a petition being Company Petition No. 16/2017

under the provisions of section 7 of the Code of 2016 read with rule 4 of the

Rules of 2016. An order dated 30th January, 2017 was passed by the NCLT.

The petitioner being aggrieved had preferred an appeal therefrom before the

National Company Law Appel ate Tribunal (‘NCLAT’). In such appeal the first

petitioner had submitted that, the first petitioner had no objection to the

admission of the insolvency petition but objects to the appointment of the

interim resolution professional (‘IRP’) under the Code of 2016. The first

petitioner, therefore, cannot canvass, breach of principles of natural justice

by NCLT. Such appeal was disposed of by replacing the IRP appointed by

the order dated 30th January, 2017. He submits that, the chal enge to the

vires of the Code of 2016 and the Rules of 2016 are misplaced as the

application under section 7 of the Code of 2016 is required to be heard by

the NCLT established under the provisions of the Companies Act, 2013

352

PRACTICAL ASPECTS OF INSOLVENCY LAW

(‘Act of 2013’). He refers to section 424 of the Act of 2013 and submits that,

NCLT is required to fol ow the principles of natural justice in deciding an

application taken up for consideration by it. Therefore, the chal enge to the

vires must fail. In the factual matrix of the present case, in spite of notice,

the first petitioner did not appear before the NCLT. The first petitioner had

preferred an appeal against the order dated 30th January, 2017 before the

NCLAT. Such appeal has since been disposed of. It did not press such point

in the appeal. Therefore, it cannot be said that there is a breach of principles

of natural justice.

4. The learned Additional Solicitor General appears in terms of the notice

issued to the learned Attorney General in view of the challenge to the vires

to the Code of 2016 and the Rules, 2016. He refers to the Rules, 2016,

particularly rule 4 thereof which contemplates a service of notice of the

application by the financial creditor on the financial debtor. He refers to rule

10 of the Rules of 2016 and submits that, such Rules contemplate that, the

provisions of rules 20 to 24 and 26 of Part III of the National Company Law

Tribunal Rules, 2016 wil be applicable. He refers to rule 24 of the National

Company Law Tribunal Rules, 2016 which contemplates service of notice of

the application upon the respondent. He submits that, the proceedings before

the NCLT are to be conducted keeping in view the provisions of section 424

of the Act of 2013. Section 424 of the Act of 2013 contemplates the NCLT

applying the principles of natural justice in the proceedings. He submits

that, the NCLT is not bound by the Code of Civil Procedure, 1908 and that,

it can regulate its own procedure subject to the provisions of the Act of

2013 and the Code of 2016. He submits that, the Code of 2016 does not

debar the applicability of the principles of natural justice in proceedings

under consideration by the NCLT when it is considering an application under

section 7 of the Code of 2016. Therefore, the challenge to the vires to the

provisions of section 7 of the Code of 2016 and rule 4 of the Rules 2016

should fail.

5. I have considered the rival contentions of the petitioner and the materials

made available on record.

6. The respondent No. 2 had filed an application under section 7 of the Code

of 2016 against the first petitioner, before the NCLT, Kolkata Bench, which

was registered as Company Petition No. 16 of 2017. The first petitioner is

the respondent therein. The first petitioner claims to have received a notice

from a firm of practising company secretaries with regard to the filing of

such company petition by the second respondent before the NCLT against

the first petitioner. Such notice does not contain any information as to the

date of hearing of the company petition.

PRACTICAL ASPECTS OF INSOLVENCY LAW

353

7. NCLT had passed an order dated 30th January, 2017 in such company

petition filed by the respondent No. 2. The first petitioner was not heard by

the NCLT before passing such order. NCLT had proceeded to admit the

company petition. It had done so without affording any opportunity of hearing

to the first petitioner. It had acted in breach of the principles of natural

justice in do so. NCLT had proceeded to appoint an IRP by such order. Such

order was assailed by the first petitioner before the NCLAT. In such appeal,

the first petitioner did not press the point of breach of the principles of

natural justice. Rather, it had stated that, it had no objection to the admission

of the company petition. The NCLAT records in its order that, the first petitioner

has no objection to the admission of the insolvency petition. Such appeal

was disposed of by the order dated 21st February, 2017. The personnel of

the IRP appointed by the order dated 30th January, 2017 was replaced.

8. In the facts of the present case, section 7 of the Code of 2016 is relevant.

Section 7 is as fol ows :

“7. Initiation of corporate insolvency resolution process by financial

creditor

(1) A financial creditor either by itself or jointly with other financial creditors

may file an application for initiating corporate insolvency resolution process

against a corporate debtor before the Adjudicating Authority when a default

has occurred.

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 shal 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).

354

PRACTICAL ASPECTS OF INSOLVENCY LAW

(5) Where the Adjudicating Authority is satisfied that –

(a) a default has occurred and the application under sub-section (2) is

complete, and there is 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 shal commence from

the date of admission of the application under sub-section (5).

(7) The Adjudicating Authority shal 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.”

9. Section 7 of the Code of 2016 contemplates filing of an application by a

financial creditor before an adjudicating authority. An adjudicating authority

is defined in section 5(1) of the Code of 2016. It is as follows :

5. Definitions

In this Part, unless the context otherwise requires, –

(1) “Adjudicating Authority”, for the purpose of this Part, means

National Company Law Tribunal constituted under section 408

of the Companies Act, 2013.

10. Section 7 of the Code of 2016 allows a financial creditor either by itself or

jointly with other financial creditors to file an application to initiate corporate

insolvency resolution process against a corporate debtor before the adjudicating

authority when a default has occurred. Sub-section (2) of section 7 states that,

an application under sub-section (1) wil be made in such form and manner and

accompanied with such fee as may be prescribed. Sub-section (3) of section 7

PRACTICAL ASPECTS OF INSOLVENCY LAW

355

requires the financial creditor to furnish the details as specified therein. Sub-

section (4) of section 7 mandates the adjudicating authority to ascertain an

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) within

14 days from the receipt of the application under sub-section (2). Sub-section

(5) of section 7 al ows the adjudicating authority to admit an application under

sub-section (2) where a default has occurred and the application is complete

and there is no disciplinary proceedings pending against the proposed resolution

professional. It also al ows the adjudicating authority to reject such an application

if no default has occurred or the application under sub-section (2) is incomplete

or where any disciplinary proceedings is pending against the proposed resolution

professional. However, if the adjudicating authority is proceeding to dismiss an

application, on the ground of defect in the application, then the adjudicating

authority will give a notice of such defect to the applicant to rectify such defect

within 7 days from the date of receipt of the notice. Sub-section (6) of section 7

stipulates that, the corporate insolvency resolution process shall commence

from the date of admission of the application under sub-section (5). Sub-section

(7) of section 7 mandates the adjudicating authority to communicate its orders

within 7 days of admission or rejection of the application, as the case may be,

to the financial creditor and the corporate debtor.

11. Section 61 of the Code of 2016 al ows an appeal to be filed before the

Appel ate Authority. It is as fol ows :

“61. Appeals and Appellate Authority

(1) Notwithstanding anything to the contrary contained under the

Companies Act, 2013, any person aggrieved by the order of the

Adjudicating Authority under this part may prefer an appeal to the

National Company Law Appellate Tribunal.

(2) Every appeal under sub-section (1) shal be filed within thirty days

before the National Company Law Appel ate Tribunal :

Provided that the National Company Law Appellate Tribunal may allow

an appeal to be filed after the expiry of the said period of thirty days

if it is satisfied that there was sufficient cause for not filing the appeal

but such period shal not exceed fifteen days.

(3) An appeal against an order approving a resolution plan under section

31 may be filed on the fol owing grounds, namely :

(i) the approved resolution plan is in contravention of the provisions

of any law for the time being in force;

356

PRACTICAL ASPECTS OF INSOLVENCY LAW

(i ) there has been material irregularity in exercise of the powers by

the resolution professional during the corporate insolvency

resolution period;

(iii) the debts owed to operational creditors of the corporate debtor

have not been provided for in the resolution plan in the manner

specified by the Board;

(iv) the insolvency resolution process costs have not been provided

for repayment in priority to al other debts; or

(v) the resolution plan does not comply with any other criteria

specified by the Board.

(4) An appeal against a liquidation order passed under section 33 may

be filed on grounds of material irregularity or fraud committed in relation

to such a liquidation order.”

12. Any person aggrieved by an order passed by the adjudicating authority

under the Code of 2016 in respect of an application under section 7 of the

Code of 2016 is entitled to prefer an appeal to the NCLAT. Sub-section (2) of

section 61 al ows such an appeal to be filed within 30 days with the provision

that, an appeal may be filed later, if the appel ants show sufficient cause for

not filing the appeal but such period of extension shal not exceed 15 days.

Sub-section (3) of section 61 recognises some of the grounds on which an

appeal may be filed. Sub-section (4) of section 61 recognises that, an appeal

against an order of liquidation passed under section 33 may be filed on the

grounds of material irregularity or fraud committed in relation to an order of

liquidation.

13. In the scheme of the Code of 2016, therefore, an application under

section 7 of the Code of 2016 is to be first made before the NCLT. An appeal

of the order of NCLT will lie before the NCLAT. NCLT and NCLAT are

constituted under the provisions of the Companies Act, 2013. The procedure

before the NCLT and the NCLAT is guided by section 424 of the Companies

Act, 2013. It is as fol ows :

“424. Procedure before Tribunal and Appel ate Tribunal. – (1) The Tribunal

and the Appel ate Tribunal shal not, while disposing of any proceeding

before it or, as the case may be, an appeal before it, be bound by the

procedure laid down in the Code of Civil Procedure, 1908 (5 of 1908), but

shal be guided by the principles of natural justice, and, subject to the

other provisions of the Act or of the Insolvency and Bankruptcy Code,

2016 and of any rules made thereunder, the Tribunal and the Appel ate

Tribunal shall have power to regulate their own procedure.

PRACTICAL ASPECTS OF INSOLVENCY LAW

357

(2) The Tribunal and the Appel ate Tribunal shal have, for the purposes of

discharging their functions under this Act or under the Insolvency and

Bankruptcy Code, 2016 the same powers as are vested in a civil court

under the Code of Civil Procedure, 1908 (5 of 1908) while trying a suit in

respect of the fol owing matters, namely :

(a) summoning and enforcing the attendance of any person examining

him on oath;

(b) requiring the discovery and production of documents;

(c) receiving evidence on affidavits;

(d) subject to the provisions of sections 123 and 124 of the Indian

Evidence Act, 1872 (1 of 1872), requisitioning any public record or

document or a copy of such record or document from any office;

(e) issuing commissions for the examination of witnesses or documents;

(f) dismissing a representation for default or deciding it ex parte;

(g) setting aside any order of dismissal of any representation for default

or any other passed by it ex parte; and

(h) any other matter which may be prescribed.

(3) Any order made by the Tribunal or the Appel ate Tribunal may be enforced

by that Tribunal in the same manner as if it were a decree made by a court

in a suit pending therein, and it shal be lawful for the Tribunal or the

Appellate Tribunal to send for execution of its orders to the court within

the local limits of whose jurisdiction, –

(a) in the case of an order against a company, the registered office of

the company is situate; or

(b) in the case of an order against any other person, the person concerned

voluntarily resides or carries on business or personally works for

gain.

(4) All proceedings before the Tribunal or the Appel ate Tribunal shal be

deemed to be judicial proceedings within the meaning of sections 193

and 228, and for the purposes of section 196 of the Indian Penal Code (45

of 1860), and the Tribunal and the Appel ate Tribunal shal be deemed to

be civil court for the purposes of section 195 and Chapter XXVI of the

Code of Criminal Procedure, 1973 (2 of 1974).”

14. NCLT acting under the provisions of the Act of 2013 while disposing of

any proceedings before it, is not to bound by the procedure laid down under

358

PRACTICAL ASPECTS OF INSOLVENCY LAW

the Code of Civil Procedure, 1908. However, it is to apply the principles of

natural justice in the proceedings before it. It can regulate it own procedure,

however, subject to the other provisions of the Act of 2013 or the Code of

2016 and any Rules made thereunder. The Code of 2016 read with the Rules

2016 is silent on the procedure to be adopted at the hearing of an application

under section 7 presented before the NCLT, that is to say, it is silent whether

a party respondent has a right of hearing before the adjudicating authority or

not.

15. Section 424 of the Companies Act, 2013 requires the NCLT and NCLAT

to adhere to the principles of the natural justice above anything else. It also

al ows the NCLT and NCLAT the power to regulate their own procedure.

Fretters of the Code of Civil Procedure, 1908 does not bind it. However, it is

required to apply its principles. Principles of natural justice require an authority

to hear the other party. In an application under section 7 of the Code of

2016, the financial creditor is the applicant while the corporate debtor is the

respondent. A proceeding for declaration of insolvency of a company has

drastic consequences for a company. Such proceeding may end up in its

liquidation. A person cannot be condemned unheard. Where a statute is

silent on the right of hearing and it does not in express terms, oust the

principles of natural justice, the same can and should be read into in. When

the NCLT receives an application under section 7 of the Code of 2016,

therefore, it must afford a reasonable opportunity of hearing to the corporate

debtor as section 424 of the Companies Act, 2013 mandates it to ascertain

the existence of default as claimed by the financial creditor in the application.

The NCLT is, therefore, obliged to afford a reasonable opportunity to the

financial debtor to contest such claim of default by filing a written objection

or any other written document as the NCLT may direct and provide a

reasonable opportunity of hearing to the corporate debtor prior to admitting

the petition filed under section 7 of the Code of 2016. Section 7(4) of the

Code of 2016 requires the NCLT to ascertain the default of the corporate

debtor. Such ascertainment of default must necessarily involve the

consideration of the documentary claim of the financial creditor. This statutory

requirement of ascertainment of default brings within its wake the extension

of a reasonable opportunity to the corporate debtor to substantiate by

document or otherwise, that there does not exist a default as claimed against

it. The proceedings before the NCLT are adversarial in nature. Both the

sides are, therefore, entitled to a reasonable opportunity of hearing.

16. The requirement of NCLT and NCLAT to adhere to the principles of natural

justice and the fact that, the principles of natural justice are not ousted by

the Code of 2016 can be found from section 7(4) of the Code of 2016 and

PRACTICAL ASPECTS OF INSOLVENCY LAW

359

rule 4 of the Rules of 2016. Rule 4 deals with an application made by a

financial creditor under section 7 of the Code of 2016. Sub-rule (3) of rule 4

requires such financial creditor to despatch a copy of the application filed

with the adjudicating authority, by registered post or speed post to the

registered office of the corporate debtor. Rule 10 of the Rules of 2016 states

that, til such time the Rules of procedure for conduct of proceedings under

the Code of 2016 are notified, an application made under sub-section (1) of

section 7 of the Code of 2016 is required to be filed before the adjudicating

authority in accordance with rules 20, 21, 22, 23, 24 and 26 or Part-III of the

National Company Law Tribunal Rules, 2016.

17. Adherence to the principles of natural justice by NCLT or NCLAT would

not mean that in every situation, NCLT or NCLAT is required to afford a

reasonable opportunity of hearing to the respondent before passing its order.

18. In a given case, a situation may arise which may require NCLT to pass

an ex parte ad interim order against a respondent. Therefore, in such situation

NCLT, it may proceed to pass an ex parte ad interim order, however, after

recording the reasons for grant of such an order and why it has chosen not

to adhere to the principles of natural justice at that stage. It must, thereafter

proceed to afford the party respondent an opportunity of hearing before

confirming such ex parte ad interim order.

19. In the facts of the present case, the learned senior advocate for the

petitioner submits that, orders have been passed by the NCLT without

adherence to the principles of natural justice. The respondent was not heard

by the NCLT before passing the order.

20. It would be open to the parties to agitate their respective grievances

with regard to any order of NCLT or NCLAT as the case may be in accordance

with law. It is also open to the parties to point out that the NCLT and the

NCLAT are bound to fol ow the principles of natural justice while disposing

of proceedings before them.

21. In such circumstances, the chal enge to the vires to section 7 of the

Code of 2016 fails.

22. WP 7144 (W) of 2017 is disposed of without any order as to costs.

23. Urgent certified website copies of this order, if applied for, be made

available to the parties upon compliance of the requisite formalities.

360

PRACTICAL ASPECTS OF INSOLVENCY LAW

ANNEXURE X.9

IN THE NATIONAL COMPANY LAW APPELLATE TRIBUNAL

COMPANY APPELLATE JURISDICTION

Company Appeal (AT) (Insolvency) No. 1 & 2 of 2017

(arising out of Order dated 17th January, 2017 and Order dated 23rdJanuary,

2017 passed by National Company Law Tribunal, Mumbai Bench, Mumbai

in C.P. No. 1/I&BP/NCLT/MB/MAH/2016)

IN THE MATTER OF:

M/s. Innoventive Industries Ltd.

...Appel ant

Vs

ICICI Bank & Anr.

...Respondents

Present:

For the Appel ants:- Mr. Amarendra Saran, Senior Advocate,

Mr. Makarand D. Adkar, Mr. Braj K. Mishra, Mr. Vijay Kumar,

Mr. Amit Tamhankar, Ms Resham Sayyad, Advocates.

For Respondent No.1:- Mr. Ramji Srinivasan, Sr. Advocate,

Mr. L. Vishwanathan, Mr. Indranil Deshmukh, Mr. Animesh

Bsht, Mr. Karan Khanna, Ms Aditi Tambi, and Mr. Vivek

O’riel, Advocates.

For Respondent No.2:- Mr. Jaswinder Singh and Ms Shipra Shukia,

Advocates.

JUDGEMENT

SUDHANSU JYOTI MUKHOPADHAYA, J.

1. These appeals have been preferred by the appel ant-corporate debtor-

Innoventive Industries Ltd. against order(s) dated 17th January, 2017 and

23rd January, 2017 passed by the ‘Adjudicating Authority’ (National Company

Law Tribunal), Mumbai Bench, Mumbai (‘Adjudicating Authority’) under section

7 of the Insolvency and Bankruptcy Code, 2016 (‘I&B Code, 2016’) in CP

No. 1/I&BP/NCLT/MB/MAH/2016.

2. By the impugned order dated 17th January, 2017, the adjudicating authority

rejected al the contentions raised by the appellant/corporate debtor and

held that the application preferred by the financial creditor-ICICI Bank-

(respondent herein) is complete under sub-section (2) of section 7 of the

PRACTICAL ASPECTS OF INSOLVENCY LAW

361

I&B Code, 2016 and admitted the application declaring ‘moratorium’ in regard

to the affairs of the company; appointed “interim resolution professional”

and passed interim order(s) in terms of section 7 of the I&B Code, 2016.

3. In the other impugned order dated 23rd January, 2017 the adjudicating

authority while admitted that there was a rush of work, in deciding the IA No.

6/2017 which inadvertently based on the argument of the learned counsel

for the corporate debtor, observed that delay in passing the order owing to

the application filed by the corporate debtor in raising plea of no default,

having raised in earlier CA, the matter stands adjudicated.

4. The impugned judgment has been chal enged by appellant on the fol owing

grounds.

First contention raised on behalf of the appel ant is that the impugned order

has been passed by the Tribunal without notice to the appel ant against the

principle of rules of natural justice, as stipulated under section 424 of the

Companies Act, 2013.

5. Mr. Amarendra Saran, learned senior counsel for the appellant submitted

that serious civil consequences ensue due to public announcement of the

initiation of corporate insolvency resolution process and appointment of an

interim resolution professional to manage the affairs of the corporate debtor

removing the Board of directors. In such a case, notice prior to admission of

a petition under section 7 of I&B Code, 2016 is required to be given. If

notice is given prior to admission of a petition, it will be open to the corporate

debtor to bring to the notice of the Tribunal that there is no default or that the

application filed by the financial creditor is incomplete and deserves to be

dismissed.

Reliance was placed on hon’ble Supreme Court’s decision in S L Kapoor v.

Jagmohan (1980) 4 SCC 379 and Sahara India (Firm) v. CIT (2008) 4 SCC

151.

6. It was also contended that the Tribunal being a creation of the Companies

Act, 2013 (‘Act 2013’) is bound by section 420 of the Act 2013 which

stipulates “reasonable opportunity of being heard” to be given to the ‘parties’

before passing an order. Further, section 424 of the Act 2013, which grants

liberty to the Tribunal to regulate its own procedure mandate to fol ow the

principles of natural justice. Therefore, the aforesaid sections cast duty

upon the Tribunal to issue notice to and hear a party before passing any

order affecting the rights of the party.

7. The next contention was that (Maharashtra Relief Undertaking (Special

Provisions) Act (Bombay Act XCVI of 1958) (‘MRU Act, 1958’), being a

362

PRACTICAL ASPECTS OF INSOLVENCY LAW

piece of legislation intended to give relief to industrial undertakings will

prevail over I&B Code, 2016.

8. Learned senior counsel submitted that MRU Act, 1958 being a legislation

referable to Entry 24 of List II of Schedule 7 of the Constitution of India

operates in different fields overriding the provisions of I&B Code, 2016.

9. It was also submitted that MRU Act being a beneficial piece of legislation

and the State Legislature having competent to enact it and the field being

exclusively reserved for State Legislature, wil prevail over the I&B Code,

2016, even if it may incidentally encroach upon field occupied by some

other enactment.

He placed reliance on hon’ble Supreme Court decision in Vishal N Kalsaria

v. Bank of India (2016) 134 SCL 268; Gram Panchayat v. Maiwinder Singh

(1985) 3 SCC 661; Ishwari Khetan Sugar Mills (P.) Ltd. v. State of UP (1980)

4 SCC 136.

10. It was further contended that there was complete non-application of

mind by the learned Tribunal. According to him, sub-sections (4) and (5) of

section 7 of I&B Code, 2016 casts duty on the Tribunal to first ascertain

default and satisfy itself of default. The ascertaining of the fact that whether

there is default or not can be satisfactorily reached only on perusal of

documents produced by both the parties. A bare perusal of the impugned

orders shows no such exercise has been undertaken by the learned Tribunal

based on documents, materials, etc.

11. It was further contended that though so-called default on the part of the

appel ant has been dealt with by Tribunal holding that the respondent No. 1

has placed the information utility, however, a perusal of the application filed

by respondent No. 1 would show that the respondent has not produced any

such material. In the column prescribed for details of Information Utility,

only ‘Not applicable’ has been mentioned by respondent No. 1. Without any

further discussion the Tribunal has held that the default has occurred. Thus,

there is no ascertainment of default by the learned Tribunal as per sub-

section (3)(a) of section 7 of the I&B Code, 2016 which requires consideration

of the record of default recorded with information utility or only such other

record or evidence “as may be prescribed”. No such ‘specified’ evidence

was produced by the respondent No. 1 before the learned Tribunal.

12. Subsequently, upon mentioning, another order dated 23rd January, 2017

was passed by the learned Tribunal purporting to clarify its earlier order. By

this impugned order the Tribunal, quite contrary to its earlier order, held that

there was no requirement of hearing the opposite party under the I&B Code,

PRACTICAL ASPECTS OF INSOLVENCY LAW

363

2016. Further, the impugned order refers to the record of Credit Information

Bureau of India Ltd. (‘CIBIL’), not “information utility” which was relied upon

though earlier order clearly spoke about record of “information utility”.

13. It was further contended that al the parties are bound by the master

restructuring agreement (‘MRA’) dated 8th September, 2014. After MRA a

fresh agreement came into existence and the previous debts came to an

end. Under MRA both creditors and debtors had reciprocal obligations.

Respondent No. 1 failed to fulfil its obligation under MRA. On the other hand

appellant has performed his obligations under MRA. This would be evident

from the certificate issued by the auditor appointed by the bank consortium

itself. The fact that respondent No. 1 has not performed any of its obligation

would also be evident from the reply of R2 (the lead consortium bank) at

para 7(g), (k), (l), (m) and (o) of the reply filed by respondent No. 2 before the

Tribunal.

14. According to appellant, respondent No. 1 has attempted to manufacture

a default by its own conduct/default. A party which has defaulted its obligation

cannot complaint about other’s al eged default. Respondent No. 1 has not

performed its obligation on the one hand and on the other hand has wrongly

adjusted the amounts due to the appel ant, in other accounts.

15. learned senior counsel for the appellant further contended that respondent

No. 1 has not obtained permission/consent from joint lender forum (‘JLF’) to

initiate the present proceedings even though their application would adversely

affect the loans of other members of JLF. In fact, respondent No. 1 had

applied for such permission but it was not granted. Against the total loan of

Rs. 90 crore given by other members to JLF, respondent No. 1 has not given

anything and the appellant has already paid about thrice the amount. The

other members of JLF have, therefore, no such grievance against the

appellant.

16. Mr. Ramji Srinivasan, learned senior counsel for the 1st respondent

submitted that there was no provision for ‘hearing’ specified under the I&B

Code, 2016. According to him the law prescribe that the adjudicating authority

is only required to ascertain the existence of default and pass necessary

orders for admission only on the basis of these specified documents. The

time bound process for ascertaining the existence of default is recognised

as key object of the I&B Code, 2016 in order to ensure maximisation of

value of assets of such persons.

17. However, it was accepted by the learned senior counsel for the financial

creditor that in view of the application of section 424 of the Act 2013 read

with section 60(5) of the I&B Code, 2016 and rule 4(3) of the Insolvency and

364

PRACTICAL ASPECTS OF INSOLVENCY LAW

Bankruptcy (Application to the Adjudicating Authority) Rules, 2016, the

adjudicating authority is within its powers to issue the limited notice for a

hearing, should the “adjudicating authority” consider that a hearing is required

to be given to the corporate debtor for ascertainment of existence of default

based on the material submitted by the corporate debtor.

18. Learned senior counsel for the financial creditor further submitted that

there was no adverse civil consequences for the corporate debtor at the

stage of admission which may attract the principles of natural justice.

According to him, the application of section 424 of the Companies Act to

proceedings under the Code does not necessarily require or call for a hearing

at the admission stage or for that matter at any subsequent stage. It was

submitted that the consequences of the admission of the resolution process

are in no manner prejudicial or against the interest of the corporate debtor.

On the contrary, the aforementioned provisions only seek to (i) preserve

and protect the value of the corporate debtor; (ii) ensure the corporate debtor’s

smooth functioning as a going concern under professional management;

and (iii) facilitate insolvency resolution. Thus, upon the admission of the

application, the corporate debtor and its assets are in fact protected by the

operation of the Code against, inter alia, any action for recovery or claims

by any third party, including the financial creditors themselves. He referred

to sections 13, 14, 15, 16 and 17 of the I&B Code, 2016 to highlight the

scheme of resolution process.

19. It was further contended that only notice of filing of application is required

to be provided as specified under sub-rule (3) of rule 4 of the Rules. No other

notice is required to be provided by the adjudicating authority. Further,

according to learned senior counsel for the financial creditor, section 424 of

the Act 2013 does not extend to create an absolute right of hearing under

the scheme of the Code. Reliance was placed on different Supreme Court

decisions, which will be discussed at appropriate stage.

20. According to learned senior counsel for the respondent, the protection

granted under the Notification issued under section 4 of the MRU Act is

limited to the enactments as specified in the Schedule to the MRU Act. The

MRU Act specifies only certain acts to which the restriction applies and the

same cannot be extended to any other legislation. Further, according to

him, the I&B Code, 2016 has a clear non-obstante clause (section 238)

which overrides operation of MRU Act. He placed reliance on certain other

Supreme Court decisions.

21. He further submitted that the order of the adjudicating authority considers

the submissions made by the appel ant and provide reasoned grounds for

PRACTICAL ASPECTS OF INSOLVENCY LAW

365

rejection of the First Interim Application as wel as the Second Interim

Application. He further submitted that the admission of the respondent No.

1’s application was done with due application of mind by the adjudicating

authority after ascertaining the clear and unambiguous existence of default

from the records placed by the respondent No. 1, including the records of

the credit information company.

22. The question(s) involved in this appeal are :

(i) Whether a notice is required to be given to the corporate debtor for

initiation of corporate insolvency resolution process under I&B Code,

2016 and if so, at what stage and for what purpose ?

(i ) Whether Maharashtra Relief Undertaking (Special Provisions) Act

(Bombay Act XCVI of 1958) (‘MRU Act 1958’) shal prevail over I&B

Code, 2016. In other words, whether a corporate debtor who is enjoying

the benefit of MRU Act, can be subjected to I&B Code, 2016 ? and

(iii) Whether in a case where joint lender forum (‘JLF’) have reached

agreement and granted permission to the corporate debtor prior

consent of JLF is required by financial creditor, before filing of an

application under section 7 of the I&B Code, 2016 ?

23. For determination of first issue, it is desirable to notice different decisions

of hon’ble Apex Court on the question as to how far rules of natural justice

is an essential element.

24. In Maneka Gandhi v. UOI (1978) 1 SCC 248, the Apex Court while

posing the question as to how far natural justice is an essential element of

“procedure established by law” held as fol ows :

….There are certain well recognised exceptions to the audi alteram partem

rule established by judicial decisions and they are summarised by S A de

Smith in Judicial Review of Administrative Action, 2nd ed., at p. 168 to

179. If we analyse tlese exceptions a little closely, it will be apparent that

they do not in any way militate against the principle which requires fair

play in administrative action. The word “exception” is really a misnomer

because in these exclusionary cases the audi alteram partem rule is held

inapplicable not by way of an exception to “fair play in action”, but because

nothing unfair can be inferred by not affording an opportunity to present or

meet a case. The audi alteram partem rule is intended to inject justice

into the law and it cannot be applied to defeat the ends of justice, or to

make the law “lifeless, absurd, stultifying, self-defeating or plainly contrary

to the common sense of the situation”. Since the life of the law is not

logic but experience and every legal proposition must, in the ultimate

366

PRACTICAL ASPECTS OF INSOLVENCY LAW

analysis, be tested on the touchstone of pragmatic realism, the audi

alteram partem rule would, by the experiential test, be excluded, if importing

the right to be heard has the effect of paralysing the administrative process

or the need for promptitude or the urgency of the situation so demands.

But at the same time it must be remembered that this is a rule of vital

importance in the field of administrative law and it must not be jettisoned

save in very exceptional circumstances where compulsive necessity so

demands.

It is a wholesome rule designed to secure the rule of law and the court

should not be too ready to eschew it in its application to a given case.

True rue it is that in questions of this kind a fanatical or doctrinaire approach

should be avoided, but that does not mean that merely because the

traditional methodology of a formalised hearing may have the effect of

stultifying the exercise of the statutory power, the audi alteram partem

should be whol y excluded. The court must make every effort to salvage

this cardinal rule to the maximum extent permissible in a given case. It

must not be forgotten that “natural justice is pragmatically flexible and is

amenable to capsulation under the compulsive pressure of circumstances”.

The audi alteram partem rule is not cast in a rigid mould and judicial

decisions establish that it may suffer situational modifications. The core

of it must, however, remain, namely, that the person affected must have

a reasonable opportunity of being heard and the hearing must be a genuine

hearing and not an empty public relations exercise. That is why Tucker,

LJ, emphasised in Russel v. Duke of Norfolk (1949) 1 All ER 109 that

“whatever standard of natural justice is adopted, one essential is that the

person concerned should have a reasonable opportunity of presenting

his case”.

25. In the said case, Kailasam, J, while dealing with the concept of

applicability of natural justice referred to the decision of hon’ble Supreme

Court in Union of India v. J N Sinha (1970) 2 SCC 458 and held as fol ows :

“Rules of natural justice cannot be equated with the fundamental rights”.

As held by the Supreme Court in Union of India v. J N Sinha (1970) 1 SCR

791, that “Rules of natural justice are not embodied rules nor can they be

elevated to the position of Fundamental Rights. Their aim is to secure

justice and to prevent miscarriage of justice. They do not supplant the law

but supplement it. If a statutory provision can be read consistently with

the principles of natural justice the court should do so but if a statutory

provision that specifically or by necessary implication excludes the

application of any rules of natural justice this court cannot ignore the

PRACTICAL ASPECTS OF INSOLVENCY LAW

367

mandate of the Legislature or the statutory authority and read into the

concerned provision the principles of natural justice”. So also the right to

be heard cannot be presumed when in the circumstances of the case,

there is paramount need for secrecy or when a decision will have to be

taken in emergency or when promptness of action is called for where

delay would defeat the very purpose or where it is expected that the

person affected would take an obstructive attitude. To a limited extent it

may be necessary to revoke or to impound a passport without notice if

there is real apprehension that the holder of the passport may leave the

country if he becomes aware of any intention on the part of the Passport

Authority or the Government to revoke or impound the passport. But that

itself would not justify denial of an opportunity to the holder of the passport

to state his case before the final order is passed. It cannot be disputed

that the Legislature has not by express provision excluded the right to be

heard….’

26. In Swadeshi Cotton Mil s v. Union of India (1981) 1 SCC 664, Sarkaria,

J, speaking for the majority noticed the concept of basic facets of natural

justice, the twin principles, namely, audi alteram partem and nemojudex in

re sua, the decisions rendered in Maneka Gandhi (supra), State of Orissa v.

Dr. Bina Pani Dei AIR 1967 SC 1269 and A K Kraipak v. Union of India

(1969) 2 SCC 262 and held –

“31. The rules of natural justice can operate only in areas not covered by

any law validly made. They can supplement the law but cannot supplant it

(Per Hegde, J, in A K Kraipak, 2 SCC 262). If a statutory provision either

specifically or by inevitable implication excludes the application of the

rules of natural justice, then the court cannot ignore the mandate of the

Legislature. Whether or not the application of the principles of natural

justice in a given case has been excluded, wholly or in part, in the exercise

of statutory power, depends upon the language and basic scheme of the

provision conferring the power, the nature of the power, the purpose for

which it is conferred and the effect of the exercise of that power – see

Union of India v. Col. J N Sinha (1970) 2 SCC 458.

33. The next general aspect to be considered is : Are there any exceptions to

the application of the principles of natural justice, particularly the audi alteram

partem rule ? We have already noticed that the statute conferring the power,

can by express language exclude its application. Such cases do not present

any difficulty. However, difficulties arise when the statute conferring the power

does not expressly exclude this rule but its exclusion is sought by implication

due to the presence of certain factors : such as, urgency, where the obligation

368

PRACTICAL ASPECTS OF INSOLVENCY LAW

to give notice and opportunity to be heard would obstruct the taking of prompt

action of a preventive or remedial nature….”

27. In Liberty Oil Mil s v. Union of India (1984) 3 SCC 465, larger Bench of

the Apex Court has held a …. We do not think that it is permissible to interpret

any statutory instruments so as to exclude natural justice, unless the

language of the instrument leaves no option to the court.

28. In Union of India v. Tulsiram Patel (1985) 3 SCC 398 the Apex Court has

expressed, thus :

“100. In Swadeshi Cotton Mills v. UoI, (1981) 1 SCC 664 Chinnappa Reddy,

J, in his dissenting judgment summarised the position in law on this point

as fol ows (at page 591): (SCC p. 712, para 106).

The principles of natural justice have taken deep root in the judicial

conscience of our people, nurtured by Binapani, Kraipak, Mohinder Singh

Gil , Maneka Gandhi, etc., etc. They are now considered as fundamental

to the “implicit in the concept of ordered liberty” and, therefore, implicit in

every decision-making function, call it judicial, quasi-judicial or

administrative. Where authority functions under a statute and the statute

provides for the observance of the principles of natural justice in a particular

manner, natural justice wil have to be observed in that manner and in no

other. No wider right than that provided by statute can be claimed nor can

the right be narrowed. Where the statute is silent about the observance of

the principles of natural justice, such statutory silence is taken to imply

compliance with the principles of natural justice. The implication of natural

justice being presumptive it may be excluded by express words of statute

or by necessary intendment. Where the conflict is between the public

interest and the private interest, the presumption must necessarily be

weak and may, therefore, be readily displaced.”

29. In Union of India v. W N Chadha (1993) Supp (4) SCC 260 their lordships,

while adverting to the issue of applicability of the doctrine of natural justice,

have ruled as follows :

‘79. The rule of audi alteram partem is a rule of justice and its application

is excluded where the rule wil itself lead to injustice. In A S de Smith’s

Judicial Review of Administrative Action, 4th Ed. at page 184, it is stated

that in administrative law, a prima facie right to prior notice and opportunity

to be heard may be held to be excluded by implication in the presence of

some factors, singly or in combination with another. Those special factors

are mentioned under items (1) to (10) under the heading “Exclusion of the

audi alteram partem rule”.

PRACTICAL ASPECTS OF INSOLVENCY LAW

369

80. Thus, there is exclusion of the application of audi alteram partem rule

to cases where nothing unfair can be inferred by not affording an

opportunity to present and meet a case. This rule cannot be applied to

defeat the ends of justice or to make the law “lifeless, absurd, stultifying

and self-defeating or plainly contrary to the common sense of the situation”

and this rule may be jettisoned in very exceptional circumstances where

compulsive necessity so demands.

81. Bhagwati, J, (as the learned Chief Justice then was) in Maneka Gandhi

speaking for himself, Untawalia and Murtaza Fazal Ali, JJ, has stated,

thus :

…. Now, it is true that since the right to prior notice and opportunity of

hearing arises only by implication from the duty to act fairly, or to use the

words of Lord Morris of Borth-y-Gest, from fair play in action, it may

equal y be excluded where, having regard to the nature of the action to be

taken, its object and purpose and the scheme of the relevant statutory

provision, fairness in action does not demand its implication and even

warrants its exclusion….

82. Thus, it is seen from the decision in Maneka Gandhi that there are

certain exceptional circumstances and situations where under the

application of the rule of audi alteram partem is not attracted….”

After so stating, their lordships referred to a passage from Paul Jackson

in Natural Justice and various other decisions.

88. Applying the above principle, it may be held that when the investigating

officer is not deciding any matter except col ecting the materials for

ascertaining whether a prima facie case is made out or not and a full

enquiry in case of filing a report under section 173(2) fol ows in a trial

before the Court or Tribunal pursuant to the filing of the report, it cannot

be said that at that stage rule of audi alteram partem superimposes an

obligation to issue a prior notice and hear the accused which the statute

does not expressly recognise. The question is not whether audi alteram

partem is implicit, but whether the occasion for its attraction exists at al .’

30. In D K Yadav v. J M A Industries Ltd. (1993) 3 SCC 259, the hon’ble

Supreme Court has held as follows :

“7…. Particular statute or statutory rules or orders having statutory flavour

may also exclude the application of the principles of natural justice

expressly or by necessary implication. In other respects the principles of

natural justice would apply unless the employer should justice its exclusion

on given special and exceptional exigencies.”

370

PRACTICAL ASPECTS OF INSOLVENCY LAW

31. In Dr. Rash Lal Yadav v. State of Bihar (1994) 5 SCC 267, the Apex Court,

after referring to the decisions in A K Kraipak (supra), Dr. Bina Pani Dei (supra),

J N Sinha (supra), Swadeshi Cotton Mills (supra) and Mohinder Singh Gil v.

Chief Election Commissioner (1978) 1 SCC 405, held as fol ows :

“9. What emerges from the above discussion is that unless the law

expressly or by necessary implication excludes the application of the

rule of natural justice, courts will read the said requirement in enactments

that are silent and insist on its application even in cases of administrative

action having civil consequences. However, in this case, the High Court

has, having regard to the legislative history, concluded that the deliberate

omission of the proviso that existed in sub-section (7) of section 10 of the

Ordinance (1980) while re-enacting the said sub-section in the Act,

unmistakably reveals the Legislature’s intendment to exclude the rule of

giving an opportunity to be heard before the exercise of power of removal.

The legislative history leaves nothing to doubt that the Legislature did not

expect the State Government to seek the incumbent’s explanation before

exercising the power of removal under the said provision. We are in

complete agreement with the High Court’s view in this behalf….”

32. In Mangilal v. State of M P (2004) 2 SCC 447, while dealing with the

principle of applicability of natural justice in awarding compensation under

section 357(4) of the Code of Criminal Procedure, 1973, their lordships

have observed, thus :

“10…. It has always been a cherished principle. Where the statute is silent

about the observance of the principles of natural justice, such statutory

silence is taken to imply compliance with the principles of natural justice

where substantial rights of parties are considerably affected. The

application of natural justice becomes presumptive, unless found excluded

by express words of statute or necessary intendment.”

33. In Union of India v. Tulsiram Patel AIR 1985 SC 1416, hon’ble Supreme

court observed :

“The right of opportunity to be heard can be excluded where the nature of

action taken, its objects and purpose and the scheme of the relevant

statutory provision warrant its exclusion….”

34. In Dharampal Satyapal v. Dy. CCE (2015) 8 SCC 519, hon’ble Apex

Court was of the view :

• If it is felt that a hearing would not change the ultimate conclusion

reached by the decision maker, then no legal duty to supply a hearing

arises.

PRACTICAL ASPECTS OF INSOLVENCY LAW

371

35. In W N Chaddha (supra), hon’ble Apex Court observed that :

The question is not whether audi alteram partem is implicit, but whether

the occasion for its attraction exists at al ….

36. In State of Maharashtra v. Jalgaon Municipal Council (2003) 9 SCC 731,

the hon’ble Supreme Court observed as :

“Some of the relevant factors which enter the judicial process of thinking

for determining the extent of moulding the nature and scope of fair hearing

and may reach to the extent of right to hearing being excluded are : (i) the

nature of the subject-matter, and (ii) exceptional situations. Such

exceptionality may be spel ed out by (i) need to take urgent action for

safeguarding public health or safety or public interest, (i ) the absence of

legitimate exceptions, (i i) by refusal of remedies in discretion, (iv) doctrine

of pleasure such as the power to dismiss an employee at pleasure, (v)

express legislation.”

37. In A K Kraipak (supra), hon’ble Supreme Court observed that :

…. The aim of the rules of natural justice is to secure justice or to put it

negatively to prevent miscarriage of justice. These rules can operate only

in areas not covered by any law validly made. In other words they do not

supplant the law of the land but supplement it….

38. In C B Gautam v. Union of India (1993) 1 SCC 78, hon’ble Apex Court

was of the view :

“It is true that if a statutory provision can be read consistently with the

principles of natural justice, the courts should do so because it must be

presumed that the Legislatures and the statutory authorities intend to act in

accordance with the principles of natural justice. But If, on the other hand,

a statutory provision either specifical y or by necessary implication excludes

the application of any or al the principles of natural justice then the court

cannot ignore the mandate of the Legislature or the statutory authority and

read into the concerned provision the principles of natural justice….”

39. In M P Industries Ltd. v. Union of India AIR 1966 SC 671, it was observed

by hon’ble Supreme Court that :

“The said opportunity need not necessarily be by personal hearing. It can

be by written representation. Whether the said opportunity should be by

written representation or by personal hearing depends upon the facts of

each case and ordinarily it is in the discretion of the tribunal. The facts of

the present case disclose that a written representation would effectively

meet the requirements of the principles of natural justice.”

372

PRACTICAL ASPECTS OF INSOLVENCY LAW

40. In S L Kapoor (supra) the hon’ble Supreme Court was of the view :

“Where on the admitted or undisputed facts only one conclusion is possible

and under the law only one penalty is permissible, the court may not

insist on the observance of the principles of natural justice.”

41. The aforesaid observation has been highlighted by hon’ble Supreme

Court, in a different way, observing that “useless formality” is another

exception to the ratio of natural justice. Where on the admitted or undisputed

facts only one conclusion is possible and under the law only one penalty is

permissible, the Court may not insist on the observance of the principles of

natural justice because it would be futile to order its observance. Therefore,

where the result would not be different, and it is demonstrable beyond doubt,

order of compliance with the principles of natural justice will not be justified.

42. From the aforesaid decisions of hon’ble Supreme Court, the exception

on the principle of rules of natural justice can be summarised as fol ows :

(i) Exclusion in case of emergency,

(i ) Express statutory exclusion

(iii) Where discloser would be prejudicial to public interests

(iv) Where prompt action is needed

(v) Where it is impracticable to hold hearing or appeal

(vi) Exclusion in case of purely administrative matters

(vi ) Where no right of person is infringed

(vii ) The procedural defect would have made no difference to the outcome

(ix) Exclusion on the ground of “no fault” decision maker, etc.

(x) Where on the admitted or undisputed fact only one conclusion is

possible – it wil be useless formality.

43. There is no specific provision under the I&B Code, 2016 to provide

hearing to corporate debtor in a petition under section 7 or 9 of the I&B

Code, 2016.

44. Sub-section (1) of section 5 defines “adjudicating authority” for the purpose

of that part means “National Company Law Tribunal”, (NCLT) constituted

under section 408 of the Companies Act, 2013 (18 of 2013).

45. Section 420 of the Companies Act, 2013 relate to “orders of Tribunal”.

Sub-section (1) of section 420 mandates the Tribunal to provide the parties

before it, the reasonable opportunity of being heard before passing orders

PRACTICAL ASPECTS OF INSOLVENCY LAW

373

as it thinks fit, as quoted below :

“420. Orders of Tribunal. – (1) The Tribunal may, after giving the parties to

any proceeding before it, a reasonable opportunity of being heard, pass

such orders thereon as it thinks fit.”

46. I&B Code, 2016 empowers adjudicating authority to pass orders under

sections 7, 9 and 10 of the I&B Code, 2016 and not the National Company

Law Tribunal. It is by virtue of the definition under sub-section (1) of section

5 read with section 60 of the I&B Code, 2016, the National Company Law

Tribunal plays role of an adjudicating authority.

47. Section 60 of the I&B Code, 2016 which relate to adjudicating authority

for corporate persons which empowers the National Company Law Tribunal

to entertain and dispose of the petition as stipulated under sub-section (5)

of section 60 reads as follows : –

“ADJUDICATING AUTHORITY FOR CORPORATE PERSONS 60. (1)

The Adjudicating Authority, in relation to insolvency resolution and

liquidation for corporate persons including corporate debtors and personal

guarantors thereof shal be the National Company Law Tribunal having

territorial jurisdiction over the place where the registered office of the

corporate person is located.

(5) Notwithstanding anything to the contrary contained in any other law

for the time being in force, the National Company Law Tribunal shal have

jurisdiction to entertain or dispose of – (a) any application or proceeding

by or against the corporate debtor or corporate person; (b) any claim made

by or against the corporate debtor or corporate person, including claims

by or against any of its subsidiaries situated in India; and (c) any question

of priorities or any question of law or facts, arising out of or in relation to

the insolvency resolution or liquidation proceedings of the corporate debtor

or corporate person under this Code.”

48. By section 255 of the I&B Code, 2016 certain provisions of the Companies

Act, 2013 has been amended in the manner as specified in the XIth Schedule.

By virtue of article 32 of XIth Schedule, the section 424 of the Companies

Act, 2013 stands amended as fol ows :

’32. In section 424, - Commencement of winding up by Tribunal. (i) in sub-

section (1), after the words, “other provisions of this Act”, the words “or of

the Insolvency and Bankruptcy Code, 2016” shal be inserted; (i ) in sub-

section (2), after the words, “under this Act”, the words “or under the

Insolvency and Bankruptcy Code, 2016” shal be inserted.’

374

PRACTICAL ASPECTS OF INSOLVENCY LAW

On such amendment, section 424 of the Companies Act, 2013 reads as

follows :

“424. Procedure before Tribunal and Appel ate Tribunal. – (1) The Tribunal

and the Appel ate Tribunal shal not, while disposing of any proceeding

before it or, as the case may be, an appeal before it, be bound by the

procedure laid down in the Code of Civil Procedure, 1908, but shal be

guided by the principles of natural justice, and, subject to the other

provisions of this Act [or of Insolvency and Bankruptcy Code, 2016] and

of any rules made thereunder, the Tribunal and the Appel ate Tribunal shall

have power to regulate their own procedure.

(2) The Tribunal and the Appel ate Tribunal shal have, for the purposes of

discharging their functions under this Act [or under the Insolvency and

Bankruptcy Code, 2016,] the same powers as are vested in a civil court

under the Code of Civil Procedure, 1908 while trying a suit in respect of

the fol owing matters, namely :

(a) summoning and enforcing the attendance of any person and examining

him on oath;

(b) requiring the discovery and production of documents;

(c) receiving evidence on affidavits;

(d) subject to the provisions of sections 123 and 124 of the Indian

Evidence Act, 1872, requisitioning any public record or document or

a copy of such record or document from any office;

(e) issuing commissions for the examination of witnesses or documents;

(f) dismissing a representation for default or deciding it ex parte;

(g) setting aside any order of dismissal of any representation for default

or any order passed by it ex parte; and

(h) any other matter which may be prescribed.

(3) Any order made by the Tribunal or the Appel ate Tribunal may be enforced

by that Tribunal in the same manner as if it were a decree made by a court

in a suit pending therein, and it shal be lawful for the Tribunal or the

Appellate Tribunal to send for execution of its orders to the court within

the local limits of whose jurisdiction, –

(a) in the case of an order against a company, the registered office of

the company is situate; or

(b) in the case of an order against any other person, the person concerned

PRACTICAL ASPECTS OF INSOLVENCY LAW

375

voluntarily resides or carries on business or personally works for

gain.

(4) All proceedings before the Tribunal or the Appel ate Tribunal shal be

deemed to be judicial proceedings within the meaning of sections 193

and 228, and for the purposes of section 196 of the Indian Penal Code,

and the Tribunal and the Appel ate Tribunal shal be deemed to be civil

court for the purposes of section 195 and Chapter XXVI of the Code of

Criminal Procedure, 1973.”

49. As amended section 424 of the Act 2013 is applicable to the proceeding

under the I&B Code, 2016, it is mandatory for the adjudicating authority to

fol ow the Principles of rules of natural justice while passing an order under

I&B Code, 2016. Further, as section 424 mandates the ‘Tribunal’ and Appellate

Tribunal, to dispose of cases or/appeal before it subject to other provisions

of the Act 2013 or I&B Code, 2016 such as, section 420 of the Act 2013

was applicable and to be fol owed by the Adjudicating Authority.

50. One “Sree Metaliks Ltd. and Anr.” moved before the hon’ble Calcutta

High Court in WP No. 7144(W) of 2017 assailing the vires of section 7 of the

I&B Code, 2016 and the relevant rules under the Insolvency and Bankruptcy

(Application to the Adjudicating Authority) Rules, 2016 (‘I&B Rules, 2016’).

The chal enge was premise upon the contention that the I&B Code, 2016

does not afford any opportunity of hearing to a corporate debtor in a petition

under section 7 of I&B Code, 2016. The hon’ble High Court noticed relevant

provision of section 7 of the I&B Code, 2016, the definition of “adjudicating

authority” as defined under section 5(1), section 61 of the I&B Code, 2016

relating to appeal and amended section 424 of the Companies Act, 2013

and by judgment dated 7th April, 2017 held as follows :

…. However, it is to apply the principles of natural justice in the proceedings

before it. It can regulate it own procedure, however, subject to the other

provisions of the Act of 2013 or the Insolvency and Bankruptcy Code of

2016 and any Rules made thereunder. The Code of 2016 read with the

Rules, 2016 is silent on the procedure to be adopted at the hearing of an

application under section 7 presented before the NCLT, that is to say, it is

silent whether a party respondent has a right of hearing before the

adjudicating authority or not.

Section 424 of the Companies Act, 2013 requires the NCLT and NCLAT to

adhere to the principles of the natural justice above anything else. It also

al ows the NCLT and NCLAT the power to regulate their own procedure.

Fetters of the Code of Civil Procedure, 1908 does not bind it. However, it

is required to apply its principles. Principles of natural justice require an

376

PRACTICAL ASPECTS OF INSOLVENCY LAW

authority to hear the other party. In an application under section 7 of the

Code of 2016, the financial creditor is the applicant while the corporate

debtor is the respondent. A proceeding for declaration of insolvency of a

company has drastic consequences for a company. Such proceeding may

end up in its liquidation. A person cannot be condemned unheard. Where

a statute is silent on the right of hearing and it does not in express terms,

oust the principles of natural justice, the same can and should be read

into in. When the NCLT receives an application under section 7 of the

Code of 2016, therefore, it must afford a reasonable opportunity of hearing

to the corporate debtor as section 424 of the Companies Act, 2013

mandates it to ascertain the existence of default as claimed by the financial

creditor in the application. The NCLT is, therefore, obliged to afford a

reasonable opportunity to the financial debtor to contest such claim of

default by filing a written objection or any other written document as the

NCLT may direct and provide a reasonable opportunity of hearing to the

corporate debtor prior to admitting the petition filed under section 7 of the

Code of 2016. Section 7(4) of the Code of 2016 requires the NCLT to

ascertain the default of the corporate debtor. Such ascertainment of default

must necessarily involve the consideration of the documentary claim of

the financial creditor. This statutory requirement of ascertainment of default

brings within its wake the extension of a reasonable opportunity to the

corporate debtor to substantiate by document or otherwise, that there

does not exist a default as claimed against it. The proceedings before the

NCLT are adversarial in nature. Both the sides are, therefore, entitled to a

reasonable opportunity of hearing.

The requirement of NCLT and NCLAT to adhere to the principles of natural

justice and the fact that, the principles of natural justice are not ousted by

the Code of 2016 can be found from section 7(4) of the Code of 2016 and

rule 4 of the Insolvency and Bankruptcy (Application to Adjudicating

Authority) Rules, 2016. Rule 4 deals with an application made by a financial

creditor under section 7 of the Code of 2016. Sub-rule (3) of rule 4 requires

such financial creditor to despatch a copy of the application filed with the

adjudicating authority, by registered post or speed post to the registered

office of the corporate debtor. Rule 10 of the Rules of 2016 states that, till

such time the Rules of procedure for conduct of proceedings under the

Code of 2016 are notified, an application made under sub-section (1) of

section 7 of the Code of 2017 is required to be filed before the adjudicating

authority in accordance with rules 20, 21, 22, 23, 24 and 26 or Part-III of

the National Company Law Tribunal Rules, 2016.

Adherence to the principles of natural justice by NCLT or NCLAT would

PRACTICAL ASPECTS OF INSOLVENCY LAW

377

not mean that in every situation, NCLT or NCLAT is required to afford a

reasonable opportunity of hearing to the respondent before passing its

order.

In a given case, a situation may arise which may require NCLT to pass an

ex parte ad interim order against a respondent. Therefore, in such situation

NCLT, it may proceed to pass an ex parte ad interim order, however, after

recording the reasons for grant of such an order and why it has chosen

not to adhere to the principles of natural justice at that stage. It must,

thereafter proceed to afford the party respondent an opportunity of hearing

before confirming such ex parte ad interim order.

In the facts of the present case, the learned senior advocate for the

petitioner submits that, orders have been passed by the NCLT without

adherence to the principles of natural justice. The respondent was not

heard by the NCLT before passing the order.

It would be open to the parties to agitate their respective grievances with

regard to any order of NCLT or NCLAT as the case may be in accordance

with law. It is also open to the parties to point out that the NCLT and the

NCLAT are bound to fol ow the principles of natural justice while disposing

of proceedings before them.

In such circumstances, the chal enge to the vires to section 7 of the

Code of 2016 fails.”

51. As per sub-rule (3) of rule 4 of Rules of 2016, the financial creditor is

required to despatch forthwith a copy of the application filed with the

adjudicating authority to the corporate debtor as quoted below :

“4. (3) The applicant shal despatch forthwith, a copy of the application

filed with the Adjudicating Authority, by registered post or speed post to

the registered office of the corporate debtor.”

Thus it is clear that sub-rule (3) of rule 4 of I&B (Application to Adjudicating

Authority) Rules, 2016, mandates the applicant to dispatch forthwith, a

copy of the application “filed with the Adjudicating Authority”. Thereby a

post-filing notice required to be issued and not as notice before filing of an

application. The purpose for the same being to put corporate debtor to

adequate impound notice so that the corporate debtor may bring to the

notice of Adjudicating Officer “mitigating factor/records before the application

is accepted even before formal notice is received”.

52. The insolvency resolution process under section 7 or section 9 of I&B

Code, 2016 have serious civil consequences not only on the corporate debtor-

378

PRACTICAL ASPECTS OF INSOLVENCY LAW

company but also on its directors and shareholders in view of the fact that

once the application under section 7 or 9 of the I&B Code, 2016 is admitted

it is fol owed by appointment of an interim resolution professional to manage

the affairs of the corporate debtor, instant removal of the Board of directors

and moratorium for a period of 180 days. For the said reason also the

Adjudicating Authority is bound to issue limited notice to the corporate debtor

before admitting a case under sections 7 and 9 of the I&B Code, 2016.

53. In view of the discussion above, we are of the view and hold that the

Adjudicating Authority is bound to issue a limited notice to the corporate

debtor before admitting a case for ascertainment of existence of default

based on material submitted by the corporate debtor and to find out whether

the application is complete and or there is any other defect required to be

removed. Adherence to principles of natural justice would not mean that in

every situation the adjudicating authority is required to afford reasonable

opportunity of hearing to the corporate debtor before passing its order.

Purpose of issuance of notice

54. Section 7 of the Code provides for process of initiation of corporate

insolvency resolution process by a financial creditor, section 8 and 9 provide

for process of initiation of insolvency resolution process by an operational

creditor and section 10 of the Code provides for process of initiation of

insolvency resolution process by the corporate debtor itself.

55. Process of initiation of insolvency resolution process by a financial

creditor is provided in section 7 of the I&B Code, 2016. As per sub-section

(1) of section 7 of the I&B Code, 2016, the trigger for filing of an application

by a financial creditor before the Adjudicating Authority is when a default in

respect of any financial debt has occurred. Sub-section (2) of section 7

provides that the financial creditor shall make an application in prescribed

form and manner and with prescribed documents, including :

(i) “record of the default” recorded with the information utility or such

other record or evidence of default as may be specified;

(i ) the name of the resolution professional proposed to act as an interim

resolution professional; and

(iii) any other information as may be specified by the Board

56. The procedure once an application is filed by the financial creditor with

the Adjudicating Authority is specified in sub-section (4) of section 7 to sub-

section (7) of section 7 of the Code. As per sub-section (4) of section 7 of

the I&B Code, 2016 :

PRACTICAL ASPECTS OF INSOLVENCY LAW

379

“(4) The Adjudicating Authority shal , 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).”

57. Sub-section (5) of section 7 of the I&B Code provides for admission or

rejection of application of a financial creditor. Where the adjudicating authority

is satisfied that – ....“ the documents are complete or incomplete”.

58. The Adjudicating Authority post-ascertaining and being satisfied that

such a default has occurred may admit the application of the financial creditor.

In other words, the statute mandates the Adjudicating Authority to ascertain

and record satisfaction as to the occurrence of default before admitting the

application. Mere claim by the financial creditor that the default has occurred

is not sufficient. The same is subject to the Adjudicating Authority’s summary

adjudication, though limited to ‘ascertainment’ and ‘satisfaction’.

59. Unlike section 7 of the I&B Code, 2016 before making an application to

the Adjudicating Authority under section 9 of the I&B Code, 2016 the

requirements under section 8 of the I&B Code, 2016 are required to be

complied with.

60. Under sub-section (1) of section 8 of the Code, 2016 an operational

creditor, on occurrence of a default, is required to deliver a notice of demand

of unpaid debt or get copy of the invoice demanding payment of the defaulted

amount served on the corporate debtor. This is the condition precedent under

sections 8 and 9 of the I&B Code, 2016 unlike in section 7, before making

an application to the adjudicating authority.

61. Under section 9 of the I&B Code, 2016 a right to file an application

accrues after expiry of ten days from the date of delivery of the demand

notice or copy of invoice as the case may be, demanding payment under

sub-section (1) of section 8 of the I&B Code, 2016. The operational creditor

would receive either the payment or a notice of dispute in terms of sub-

section (2) of section 8 of the I&B Code, 2016.

62. Thus, it is evident from section 9 of the I&B Code, 2016 that the

Adjudicating Authority has to, within fourteen days of the receipt of the

application under sub-section (2), either admit or reject the application.

Section 9 has two-fold situations insofar as notice of dispute is concerned.

As per sub-section (5)(1) of section 9, the Adjudicating Authority can admit

the application in case no notice raising the dispute is received by the

operational creditor (as verified by the operational creditor on affidavit) and

there is no record of a dispute is with the information utility.

380

PRACTICAL ASPECTS OF INSOLVENCY LAW

On the other hand, sub-section (5) of section 9 mandates the Adjudicating

Authority to reject the application if the operational creditor has received

notice of dispute from the corporate debtor. Section 9, thus, makes it distinct

from section 7. While in section 7, occurrence of default has to be ascertained

and satisfaction recorded by the Adjudicating Authority, there no similar

provision under section 9. The use of language in sub-section (2) of section

8 of the I&B Code, 2016 provides that the “corporate debtor shal , 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...

the existence of a dispute“. Under section 7 neither notice of demand nor a

notice of dispute is relevant whereas under sections 8 and 9 notice of demand

and notice of dispute become relevant both for the purposes of admission

as wel as for and rejection.

63. While ascertaining the ‘Adjudicating Authority’ to comes to a conclusion

whether there is an existence of default for the purpose of section 7 or there

is a dispute raised by the corporate debtor and all other purpose whether an

application is complete or incomplete, it is not only necessary to hear the

financial creditor/operational creditor but also the corporate debtor.

64. The different decisions of the hon’ble Supreme Court, as referred to

above and exception of principles of natural justice as noticed and

summarised in the preceding paragraphs is not applicable to the insolvency

resolution process as it is not a case of emergency declared or prejudicial

to public interest or that there is a statutory exclusion of rules of natural

justice or it is impracticable to hold hearing. It is not the case that no right

of any person has been affected, as immediately on appointment of an

interim resolution professional, the Board of directors stand superseded.

There are other persons who are also affected due to order of moratorium.

Therefore, the adjudicating authority is duty bound to give a notice to the

corporate debtor before admission of a petition under section 7 or section

9.

65. In the present case though no notice was given to the appel ant before

admission of the case but we find that the appel ant intervened before the

admission of the case and al the objections raised by appellant has been

noticed, discussed and considered by the adjudicating authority while passing

the impugned order dated 17th January, 2017. Thereby, merely on the ground

that the appel ant was not given any notice before admission of the case

cannot render the impugned order illegal as the appellant has already been

heard. If the impugned order is set aside and the case is remitted back to

the adjudicating authority, it would be “useless formality” and would be futile

PRACTICAL ASPECTS OF INSOLVENCY LAW

381

to order its observance as the result would not be different. Therefore, order

to fol ow the principles of natural justice in the present case does not arise.

66. However, in some of the cases initiation of insolvency resolution process

may have adverse consequences on the welfare of the company. Therefore,

it will be imperative for the adjudicating authority to adopt a cautious approach

in admitting Insolvency Application by ensuring adherence to the principle

of natural justice.

67. The next question is whether the appel ant can claim any protection

having granted benefit under MRU Act.

The protection granted by notification issued under section 4 of the MRU

Act is limited to the enactments as specified in the Schedule to the MRU

Act, as apparent from section 4(1)(a) (1) of the MRU Act and provides as

follows :

“4. (1) Notwithstanding any law, usage, custom, contract, instrument,

decree, order, award, submission, settlement, standing order or other

provision whatsoever, the State Government may, by notification in the

Official Gazette, direct that –

(a) in relation to any relief undertaking and in respect of the period for

which the relief undertaking continues as such under sub-section (2)

of section 3 –

(i) al or any of the laws in the Schedule to this Act or any provisions

thereof shall not apply (and such relief undertaking shal be

exempt therefrom), or shall, if so directed by the State

Government, be applied with such modifications (which do not,

however, affect the policy of the said laws) as may be specified

in the notification;...

(i ) al or any of the agreements, settlements, awards or standing

orders made under any of the laws in the Schedule to this Act,

which may be applicable to the undertaking immediately before

it was acquired or taken over by the State Government; it or

before any loan, guarantee or other financial assistance was

provided to it by, or with the approval of, the State Government,

for being run as a relief undertaking, shal be suspended in

operation or shall, if so directed by the State Government, be

applied with such modifications as may be specified in the

notification;

(iii) rights, privileges, obligations and liabilities shall be determined

382

PRACTICAL ASPECTS OF INSOLVENCY LAW

and be enforceable in accordance with clauses (i) and (ii) and

the notification;

(iv) any right, privilege, obligation or liability accrued or incurred

before the undertaking was declared a relief undertaking and

any remedy for the enforcement thereof shal be suspended

and al proceedings relative thereto pending before any court,

tribunal, officer or authority shal be stayed” (emphasis supplied”)

68. The Schedule to the MRU Act specifies only certain acts to which the

restriction applies. Accordingly, the application of the MRU Act can only be

extended to such acts as specified in the schedule and no other legislation.

The legislations referred to in the ‘schedule’ to the MRU Act are employment

welfare related which is in consonance with the objects and purpose of the

MRU Act, i.e., “employment and unemployment”. The protection under the

MRU Act, therefore, cannot be extended to other legislations especially to

union legislation which is subsequent to the MRU Act and related to

insolvency resolution i.e. I&B Code, 2016

69. Section 4 of the MRU Act, including section 4(iv), therefore, is limited in

scope to the acts listed in the schedule thereto.

70. Section 238 of the I&B Code, 2016 is non-obstante clause which overrides

the operation of the MRU Act. As per section 238 of the I&B Code, 2016 the

provisions of the Code are to are to be given effect to notwithstanding

anything contrary contained any other law or any instrument having effect

under such law. Section 238 states as follows :

“238. The provisions of this Code shall have effect, notwithstanding anything

inconsistent therewith contained in any other law for the time being in

force or any instrument having effect by virtue of any such law.”

71. In light of the aforementioned non-obstante provision (which is a

subsequent Union Law), the provisions of the I&B Code, 2016 shal prevail

over the provisions of the MRU Act and any instrument issued under the

MRU Act including the Notification.

72. It was submitted on behalf of the appel ant that by virtue of the provisions

of sections 3 and 4 of the MRU Act read with the notification issued

thereunder, a creditor is restrained from exercising its statutory rights under

the provisions of the Code. But such submission cannot be accepted as

section 238 of the I&B Code, 2016 clearly mandates that the provisions of

the I&B Code, 2016 shall have effect, notwithstanding anything inconsistent

therewith contained in any other law for the time being in force or any

instrument having effect by virtue of any such law. This being the position

PRACTICAL ASPECTS OF INSOLVENCY LAW

383

and considering the mandate laid down in section 238, which is a subsequent

law enacted by Parliament, the provisions of the section 238 would have

effect notwithstanding the provisions of the MRU Act and any notification

issued thereunder, insofar as it restrains the creditor from enforcing its

security interest against the relief undertaking in whose favour a notification

has been issued.

73. The MRU Act operates in a different field from the I&B Code, 2016. MRU

Act is an Act to make temporary provisions for industrial relations and other

matters to enable the State Government to conduct or to provide a loan,

guarantee or financial assistance for the conduct of certain industrial

undertakings as a measure of preventing unemployment or of unemployment

relief.

74. On the other hand the I&B Code, 2016 is an Act enacted to consolidate

and amend the laws relating to reorganization and insolvency resolution of

corporate persons, partnership firms and individuals in a time bound manner

for maximisation of value of assets of such persons, to promote

entrepreneurship, availability of credit and balance the interest of al the

stakeholders including alteration in the order of priority of payments of

Government dues. The I&B Code, 2016, which is later Act of greater

specificity, seeks to balance the interests of al stake holders.

75. In view of the aforesaid objects of the two enactments it is apparent that

the two enactments operate in entirely different fields. This is further made

clear by the fact that the MRU Act is enacted under Entry 23 of List III while

the Code has been enacted under Entry 9 of the List III. The stand taken by

the learned counsel for the appel ant that the MRU Act has been enacted

under Entry 24 of List II cannot be accepted as the MRU Act has received

Presidential assent under article 254(2) of the Constitution of India, which

is only required for statutes enacted by the State Government in exercise

of its legislative competence under the Concurrent List.

76. In Yogender Kumar Jaiswal v. State of Bihar (2016) 3 SCC 183, the

hon’ble Supreme Court, while dealing with article 254, noticed the decision

in Hoechst Pharmaceuticals Ltd. v. State of Bihar (1983) 4 SCC 45 and

observed as fol ows : –

’55. Thereafter, the court proceeded to state that {Hoechst Pharmaceuticals

Ltd. case Hoechst Pharmaceuticals Ltd. v. State of Bihar (1983) 4 SCC

45/1983 SCC (Tax) 248/AIR 1983 SC 1019}, SCC pp. 89-90, para 69) :

“69.... The question of repugnancy under article 254(1) between a law

made by Parliament and a law made by the State Legislature arises only

384

PRACTICAL ASPECTS OF INSOLVENCY LAW

in case both the legislations occupy the same field with respect to one of

the matters enumerated in the Concurrent List, and there is direct conflict

between the two laws. It is only when both these requirements are fulfil ed

that the State law will, to the extent of repugnancy, become void. Article

254(1) has no application to cases of repugnancy due to overlapping found

between List U on the one hand and List land List III on the other. If such

overlapping exists in any particular case, the State law wil be ultra vires

because of the non-obstante clause in article 246(1) read with the opening

words “subject to” in article 246(3). In such a case, the State law wil fail

not because of repugnance to the Union law but due to want of legislative

competence. It is no doubt true that the expression “a law made by

Parliament which Parliament is competent to enact” in article 254(1) is

susceptible of a construction that repugnance between a State law and a

law made by Parliament may take place outside the concurrent sphere

because Parliament is competent to enact law with respect to subjects

included in List HI as wel as List F. But if article 254(1) is read as a

whole, it wil be seen that it is expressly made subject to clause (2) which

makes reference to repugnancy in the field of Concurrent List – in other

words, if clause (2) is to be the guide in the determination of scope of

clause (1), the repugnancy between Union and State law must be taken

to refer only to the Concurrent field. Article 254(1) speaks of a State law

being repugnant to (a) a law made by Parliament, or (b) an existing law.”....

62. Having stated the proposition where and in which circumstances the

principle of repugnancy would be attracted and the legislation can be

saved or not saved, it is necessary to focus on clause (2) of article 254 of

the Constitution. In Hindustan Times v. State of UP {Hindustan Times v.

State of UP (2003) 1 SCC 591}, after referring to the earlier judgments, it

has been held that article 254(2) carves out an exception and, that is, if

the Presidential assent to a State law which has been reserved for his

consideration is obtained under article 200, it wil prevail notwithstanding

the repugnancy to an earlier law of the Union. The relevant passage of the

said authority is extracted below : (SCC pp. 599-600, para 19)

“19. As noticed hereinbefore, the State of Uttar Pradesh intended to make

a legislation covering the same field but even if the same was to be

made, it would have been subject to the parliamentary legislation unless

assent of the President of India was obtained in that behalf. The State

executive was, thus, denuded of any power in respect of a matter with

respect whereto Parliament has power to make laws, as its competence

was limited only to the matters with respect to which the Legislature of

the State has the requisite legislative competence. Even assuming that

PRACTICAL ASPECTS OF INSOLVENCY LAW

385

the matter relating to the welfare of the working journalists is a field which

falls within Entry 24 of the Concurrent List, unless and until a legislation

is made and assent of the President is obtained, the provisions of the

1955 Act and the Working Journalists (Fixation of Rates and Wages) Act,

1958 would have prevailed over the State enactment.”’

77. In Madras Petrochem Ltd. v. BIFR (2016) 34 SCL 193 (SC), the hon’ble

Supreme Court was considering the question whether pendency of reference

before BIFR bar enforcement of secured assets under SARFAESI Act, 2002.

In the said case, the hon’ble Supreme Court having noticed the earlier

decisions observed :

’29. On the other hand, in Solidaire India Ltd. v. Fairgrowth Financial

Services Ltd. {Solidaire India Ltd. v. Fairgrowth Financial Services Ltd.

(2001) 3 SCC 71}, it was the Special Courts (Trial of Offences Relating to

Transactions in Securities) Act, 1992 which came up for consideration

vis-a-vis the Sick Industrial Companies (Special Provisions) Act, 1985.

In paras 9 and 10 of this court’s judgment, this court noted that both Acts

were special Acts. In a significant extract from a special court judgment,

which was approved by this court, it was stated that the Special Courts

Act, 1992, being a later enactment and also containing a non-obstante

clause, would prevail over the Sick Industrial Companies (Special

Provisions) Act, 1985. Had the Legislature wanted to exclude the

provisions of the Sick Industrial Companies (Special Provisions) Act,

1985, from the ambit of the said Act, the Legislature would specifically

have so provided. The fact that the Legislature did not specifically so

provide necessarily means that the Legislature intended that the provisions

of the said Act were to prevail over the provisions of the Sick Industrial

Companies (Special Provisions) Act, 1985. In short, when property of

notified persons under the Special Courts Act, 1992 stands attached, it

is only the special court which can give directions to the custodian under

the said Act as to disposal of such property of a notified party. The

Legislature expressly overrode section 22 of the Sick Industrial Companies

(Special Provisions) Act, 1985 and permitted the custodian to give

directions under section 11 of the Special Courts Act, 1979,

notwithstanding section 22 of the Sick Industrial Companies (Special

Provisions) Act, 1985.

36. A conspectus of the aforesaid decisions shows that the Sick Industrial

Companies (Special Provisions) Act, 1985 prevails in all situations where

there are earlier enactments with non-obstante clauses similar to the Sick

Industrial Companies (Special Provisions) Act, 1985. Where there are

386

PRACTICAL ASPECTS OF INSOLVENCY LAW

later enactments with similar non-obstante clauses, the Sick Industrial

Companies (Special Provisions) Act, 1985 has been held to prevail only

in a situation where the reach of the non-obstante clause in the later Act

is limited – such as in the case of the Arbitration and Conciliation Act,

1996 – or in the case of the later Act expressly yielding to the Sick Industrial

Companies (Special Provisions) Act, 1985, as in the case of the Recovery

of Debts Due to Banks and Financial Institutions Act, 1993. Where such

is not the case, as in the case of Special Courts Act, 1992, it is the

Special Courts Act, 1992 which was held to prevail over the Sick Industrial

Companies (Special Provisions) Act, 1985.

39. This is what then brings us to the doctrine of harmonious construction,

which is one of the paramount doctrines that is applied in interpreting all

statutes. Since neither section 35 nor section 37 of the Securitisation and

Reconstruction of Financial Assets and Enforcement of Security Interest

Act, 2002 is subject to the other, we think it is necessary to interpret the

expression “or any other law for the time being in force” in section 37. If a

literal meaning is given to the said expression, section 35 wil become

completely otiose as al other laws will then be in addition to and not in

derogation of the Securitisation and Reconstruction of Financial Assets

and Enforcement of Security Interest Act, 2002. Obviously this could not

have been the parliamentary intendment, after providing in section 35

that the Securitisation and Reconstruction of Financial Assets and

Enforcement of Security Interest Act, 2002 wil prevail over al other laws

that are inconsistent therewith. A middle ground has, therefore, necessarily

to be taken. According to us, the two apparently conflicting sections can

best be harmonised by giving meaning to both. This can only be done by

limiting the scope of the expression “or any other law for the time being in

force” contained in section 37. This expression will, therefore, have to be

held to mean other laws having relation to the securities market only, as

the Recovery of Debts Due to Banks and Financial Institutions Act, 1993

is the only other special law, apart from the Securitisation and

Reconstruction of Financial Assets and Enforcement of Security Interest

Act, 2002, dealing with recovery of debts due to banks and financial

institutions. On this interpretation also, the Sick Industrial Companies

(Special Provisions) Act, 1985 wil not be included for the obvious reason

that its primary objective is to rehabilitate sick industrial companies and

not to deal with the securities market.’

78. Following the law laid down by hon’ble Supreme Court in Yogendra Krishnan

Jaiswal and Madras Petrochem Ltd. (supra) we hold that there is no

repugnancy between I&B Code, 2016 and the MRU Act as they both operate

PRACTICAL ASPECTS OF INSOLVENCY LAW

387

in different fields. The Parliament has expressly stated that the provisions

of the I&B Code, 2016 (which is a later enactment to the MRU Act) shall

have effect notwithstanding the provisions of any other law for the time

being in force. This stipulation does not mean that the provisions of MRU

Act or for that matter any other law are repugnant to the provisions of the

Code.

79. In view of the finding as recorded above, we hold that the appel ant is

not entitled to derive any advantage from MRU Act, 1956 to stall the

insolvency resolution process under section 7 of the I&B Code, 2016.

80. Insofar as MRA dated 8th September 2014 is concerned; the appel ant

cannot take advantage of the same. Even if it is presumed that fresh

agreement came into existence, it does not absolve the appel ant from

paying the previous debts which are due to the financial creditor.

81. The Tribunal has noticed that there is a failure on the part of appel ant to

pay debts. The financial creditor has attached different records in support of

default of payment. Apart from that it is not supposed to go beyond the

question to see whether there is a failure on fulfilment of obligation by the

financial creditor under one or other agreement, including the MRA. In that

view of the matter, the appel ant cannot derive any advantage of the MRA

dated 8th September, 2014.

82. As discussed in the previous paragraphs, for initiation of corporate

resolution process by financial creditor under sub-section (4) of section 7 of

the I&B Code, 2016, the adjudicating authority on receipt of application

under sub-section (2) is required to ascertain existence of default from the

records of Information Utility or on the basis of other evidence furnished by

the financial creditor under sub-section (3). Under section 5 of section 7, the

adjudicating authority is required to satisfy –

(a) Whether a default has occurred;

(b) Whether an application is complete; and

(c) Whether any disciplinary proceeding is against the proposed

Insolvency Resolution Professional.

83. Once it is satisfied it is required to admit the case but in case the

application is incomplete application, the financial creditor is to be granted

seven days’ time to complete the application. However, in a case where

there is no default or defects cannot be rectified, or the record enclosed is

misleading, the application has to be rejected.

84. Beyond the aforesaid practice, the adjudicating authority is not required

388

PRACTICAL ASPECTS OF INSOLVENCY LAW

to look into any other factor, including the question whether permission or

consent has been obtained from one or other authority, including the JLF.

Therefore, the contention of the petition that the respondent has not obtained

permission or consent of JLF to the present proceeding which will be adversely

affect loan of other members cannot be accepted and fit to be rejected.

85. In the aforesaid circumstances the adjudicating authority having satisfied

on all counts, including default and that the application is complete and that

there is no disciplinary proceeding pending against the insolvency resolution

professional, no interference is cal ed for against the impugned judgment.

86. We find no merit in this appeal. It is accordingly dismissed. However, in

the facts and circumstances, there shal be no order as to cost.

(Mr. Balvinder Singh)

(Justice S.J. Mukhopadhaya)

Member (Technical)

Chairperson

NEW DELHI

15 May, 2017

PRACTICAL ASPECTS OF INSOLVENCY LAW

389

ANNEXURE X.10

IN THE NATIONAL COMPANY LAW APPELLATE TRIBUNAL

COMPANY APPELLATE JURISDICTION

Company Appeal (AT) (Insolvency) No. 5 of 2017

(arising out of Order dated 17th February, 2017 passed by National

Company Law Tribunal, Mumbai Bench, in C.P. No. 12/I&B/NCLT/MAH/

2017)

IN THE MATTER OF:

M/s. Starlog Enterprises Limited

... Appellant

Vs

ICICI Bank Limited

... Respondent

Present:

For Appel ant :

Mr R.S. Majumdar, Senior Advocate

alongwith Mr Darshan Mehta, Mr Raghav Dwivedi,

Ms Nirali Sanghavi and Mr Vaibhav Modi,

Advocates

For Respondents: Mr Ramji Srinivasan, Senior Advocate with

Mr Aslam Ahmed, Mr Sharad Kharra,

Ms Srivardhani and Mr Babit Singh Jamwal,

Advocates.

JUDGMENT

SUDHANSU JYOTI MUKHOPADHAYA, J

1. This application under section 61 of Insolvency and Bankruptcy Code,

2016 (‘I&B Code’) has been preferred by appellant-corporate debtor against

ex parte order dated 17th February, 2017 passed by Adjudicating Authority,

Mumbai Bench, under section 7 of the I&B Code whereby the “adjudicating

authority” was pleased to admit the petition preferred by respondent-financial

creditor.

2. The appel ant has chal enged the impugned order on one of the grounds

that in absence of notice given to the appellant before admitting the case

under section 7 of the I&B Code, the impugned order is violative of rules of

natural justice.

390

PRACTICAL ASPECTS OF INSOLVENCY LAW

3. The other ground taken by the appel ant is that the application preferred

by respondent/financial creditor under section 7 is incomplete, misleading

and being not bona fide was fit to be rejected.

4. Learned counsel for the appellant submitted that the appellant could have

brought the aforesaid facts to the notice of the “adjudicating authority” had it

been given notice prior to admission. Detailed argument has been made by

learned senior counsel for the appel ant on the question of issuance of

notice prior to admission, in adherence to principle of rules of natural justice.

5. The aforesaid issue now stands decided by decision of the Appel ate

Tribunal in Innoventive Industries Ltd. v. ICICI Bank in CA (AT) (Insolvency)

Nos. 1 and 2 of 2017 wherein the Appel ate Tribunal observed and held :

“43. There is no specific provision under the I&B Code, 2016 to provide

hearing to corporate debtor in a petition under section 7 or 9 of the I&B

Code, 2016.”

“53. In view of the discussion above, we are of the view and hold that the

Adjudicating Authority is bound to issue a limited notice to the corporate

debtor before admitting a case for ascertainment of existence of default

based on material submitted by the corporate debtor and to find out whether

the application is complete and or there is any other defect required to be

removed. Adherence to principles of natural justice would not mean that

in every situation the adjudicating authority is required to afford reasonable

opportunity of hearing to the corporate debtor before passing its order.”

In this connection we may state that the vires of section 7 of I&B Code was

considered by hon’ble Calcutta High Court in “Sree Metaliks Ltd. and Anr.” in

Writ Petition 7144(W) of 2017, wherein hon’ble High Court by its judgment

dated 7th April, 2017 held as fol ows :

“…. However, it is to apply the principles of natural justice in the proceedings

before it. It can regulate if own procedure, however, subject to the other

provisions of the Act of 2013 or the Insolvency and Bankruptcy Code of

2016 and any rules made thereunder. The Code of 2016 read with the

Rules, 2016 is silent on the procedure to be adopted at the hearing of an

application under section 7 presented before the NCLT, that is to say, it is

silent whether a party respondent has a right of hearing before the

adjudicating authority or not.

Section 424 of the Companies Act, 2013 requires the NCLT and NCLAT to

adhere to the principles of the natural justice above anything else. It also

al ows the NCLT and NCLAT the power to regulate their own procedure.

Fetters of the Code of Civil Procedure, 1908 does not bind it. However, it

PRACTICAL ASPECTS OF INSOLVENCY LAW

391

is required to apply its principles. Principles of natural justice require an

authority to hear the other party. In an application under section 7 of the

Code of 2016, the financial creditor is the applicant while the corporate

debtor is the respondent. A proceeding for declaration of insolvency of a

company has drastic consequences for a company. Such proceeding may

end up in its liquidation. A person cannot be condemned unheard. Where

a statute is silent on the right of hearing and it does not in express terms,

oust the principles of natural justice, the same can and should be read

into in. When the NCLT receives an application under section 7 of the

Code of 2016, therefore, it must afford a reasonable opportunity of hearing

to the corporate debtor as section 424 of the Companies Act, 2013

mandates it to ascertain the existence of default as claimed by the financial

creditor in the application. The NCLT is, therefore, obliged to afford a

reasonable opportunity to the financial debtor to contest such claim of

default by filing a written objection or any other written document as the

NCLT may direct and provide a reasonable opportunity of hearing to the

corporate debtor prior to admitting the petition filed under section 7 of the

Code of 2016. Section 7(4) of the Code of 2016 requires the NCLT to

ascertain the default of the corporate debtor. Such ascertainment of default

must necessarily involve the consideration of the documentary claim of

the financial creditor. This statutory requirement of ascertainment of default

brings within its wake the extension of a reasonable opportunity to the

corporate debtor to substantiate by document or otherwise, that there

does not exist a default as claimed against it. The proceedings before the

NCLT are adversarial in nature. Both the sides are, therefore, entitled to a

reasonable opportunity of hearing.

The requirement of NCLT and NCLAT to adhere to the principles of natural

justice and the fact that, the principles of natural justice are not ousted by

the Code of 2016 can be found from section 7(4) of the Code of 2016 and

rule 4 of the Insolvency and Bankruptcy (Application to Adjudicating

Authority) Rules, 2016. Rule 4 deals with an application made by a financial

creditor under section 7 of the Code of 2016. Sub-rule (3) of rule 4 requires

such financial creditor to despatch a copy of the application filed with the

adjudicating authority, by registered post or speed post to the registered

office of the corporate debtor. Rule 10 of the Rules of 2016 states that, till

such time the rules of procedure for conduct of proceedings under the

Code of 2016 are notified, an application made under sub-section (1) of

section 7 of the Code of 2017 is required to be filed before the adjudicating

authority in accordance with rules 20, 21, 22, 23, 24 and 26 or Part-III of

the National Company Law Tribunal Rules, 2016.

392

PRACTICAL ASPECTS OF INSOLVENCY LAW

Adherence to the principles of natural justice by NCLT or NCLAT would not

mean that in every situation, NCLT or NCLAT is required to afford a

reasonable opportunity of hearing to the respondent before passing its order.

In a given case, a situation may arise which may require NCLT to pass an

ex parte ad interim order against a respondent. Therefore, in such situation

NCLT, it may proceed to pass an ex parte ad interim order, however, after

recording the reasons for grant of such an order and why it has chosen

not to adhere to the principles of natural justice at that stage. It must,

thereafter proceed to afford the party respondent an opportunity of hearing

before confirming such ex parte ad interim order.

In the facts of the present case, the learned senior advocate for the

petitioner submits that, orders have been passed by the NCLT without

adherence to the principles of natural justice. The respondent was not

heard by the NCLT before passing the order.

It would be open to the parties to agitate their respective grievances with

regard to any order of NCLT or NCLAT as the case may be in accordance

with law. It is also open to the parties to point out that the NCLT and the

NCLAT are bound to fol ow the principles of natural justice while disposing

of proceedings before them.

In such circumstances, the chal enge to the vires to section 7 of the

Code of 2016 fails.”

6. Therefore, it is clear that before admitting an application under section 9

of the I&B Code it is mandatory duty of the adjudicating authority to issue

notice.

7. In the present case admittedly no notice was issued by the adjudicating

authority to the corporate debtor, before admitting the application filed under

section 9 of the I&B Code. For the said reason the judgment order cannot

be upheld having passed in violation of principle of natural justice.

8. Next contention of learned senior counsel for the appel ant was that the

financial creditor misrepresented material facts before the adjudicating

authority in order to obtain order of admission of the application. He

highlighted the conduct of the financial creditor by highlighting the following

facts.

9. On 6th February, 2017, the financial creditor addressed a notice to the

appel ant calling upon to pay a sum of Rs. 10,02,28,271.60 which was overdue

as on 6th February, 2017. The notice dated 6th February, 2017 was received

by the appellant only on 8th February, 2017.

PRACTICAL ASPECTS OF INSOLVENCY LAW

393

10. Before the appel ant could have replied or taken any necessary action in

respect of the said notice on 8th February, 2017 the appel ant received a

letter from the counsel for the financial creditor serving a copy of the present

application, relevant portion of which reads as follows :

“We send herewith a copy of the captioned company application on behalf

of our client under section 7 of the I&B Code, as and by way of service

upon you,”

without directly or indirectly specifying whether the said application has

been filed or clarifying whether the said application would be mentioned or

heard on any particular date/time, as is the prevalent practice.

11. Learned senior counsel for the appel ant also submitted that the application

filed by the financial creditor before the adjudicating authority they inflated

the default amount to be Rs.29,81,02,395.62. Even Annexure 2 to the said

application reflected “principal unmatured” arrived in the computing the “default

amount”.

12. Learned senior counsel for the appel ant further submits that as per the

repayment schedule under the loan agreements, the entire aforementioned

amount had not become due and payable as on 6th February, 2017. Neither

the financial creditor, by his own admission, recal ed the entire loan amount.

13. In view of the same, it was submitted that the computation of the default

amount of Rs.29,81,02,395.62 is grossly incorrect and contrary to the

provisions of law.

14. It was further submitted that for the said misstatement, the financial

creditor ought to be adequately penalised under the provisions of the I&B

Code particularly under section 75.

15. The learned counsel also highlighted the conduct of the respondent-

ICICI Bank – and pleaded as fol ows :

(a) The respondent herein is a part of the joint lenders’ forum (‘JLF’)

constituted by the appel ant pursuant to the guidelines of the Reserve

Bank of India (‘RBI’). The JLF for the appel ant was formed at the

instance of the respondent vide the meeting held on 14th June, 2014.

Thereafter, from 14th June 2014 till 2nd February, 2017, the respondent

along with the other lenders of the appellant and the appel ant itself,

have been participating in the periodical y held meetings of the JLF,

in all of which meetings the JLF had unanimously agreed to adopt

‘rectification’ as the corrective action plan (‘CAP’) for the appellant. It

is pertinent to note that the respondent itself had requested the lead

394

PRACTICAL ASPECTS OF INSOLVENCY LAW

lender of the appel ant (L&T Infrastructure Finance Co.) to convene

the JLF meetings as the lead lender from February 2016 onwards.

(b) As per the minutes of the meeting held on 2nd February, 2017

circulated by the lead lender, the effect of the JLF meeting is that the

JLF has decided to continue with rectification as CAP for the appellant

and members of JLF have been requested “not to proceed with any

individual asset level action”. The respondent, however, chose to

dispute these minutes vide their email dated 16th February, 2017 as

circulated by respondent No. 33. As per the purported minutes of the

meeting, the JLF lenders had resolved that rectification as the CAP

has failed and the JLF members have decided to explore their options

for regularising the account.

(c) By the time the correct minutes of the meeting dated 2nd February,

2017 were circulated by the lead lender on 16th February, 2017, the

respondent had already filed its application on 8th February, 2017

itself with the adjudicating authority against the appellant without the

knowledge/consent of the other members of the JLF. It is pertinent to

note that the respondent while disputing the said minutes does not

even mention about the said application filed by the respondent

against the appellant before the adjudicating authority and their

reliance on the purported minutes of meeting in the said application.

(d) Arguendo the purported minutes of the meeting are correct, that still

does not justify the filing of the said application by the respondent

before the adjudicating authority de hors the structure of JLF. The

JLF members as per respondent’s own version had agreed to “explore

their action for resolving.... ” And not to resort to filing of application

under section 7 of the I&B Code. Possibly the notice of demand

served by the respondent to the appellant on 6th February, 2017 was

in furtherance of “exploration of its action for resolving....”. However,

the filing of the application under section 7 of the I&B Code

independently by the respondent, totally disregarding the other

members of the Forum was a mischief played by the respondent

upon the appel ant for reasons best known to them, which mischief

is apparent from the aforesaid conduct of the respondent.

(e) The respondent has acted contrary to the guidelines of the RBI in

relating to JLF, particularly the guideline issued on 24th September,

2015 which at para 5.2 of the guidelines stipulates that in case of

disagreement between the members of the JLF on deciding the CAP

for borrower, the dissenting lender shal have an option to exit their

PRACTICAL ASPECTS OF INSOLVENCY LAW

395

exposure by completely sel ing their exposure to a new or existing

lender. Therefore, clearly the object of the RBI is clearly that the

lenders act through the JLF structure and do not go beyond the JLF

structure or in other words lenders do not act independent of JLF

especially when an exit option exists for an individual lender. In this

regard, it is pertinent to refer to the recent judgment of the hon’ble

Bombay High Court in the cases of IDFC Bank Ltd. v. Ruchi Soya

Industries Ltd., inter alia, laying down two propositions – firstly,

circulars issued by the RBI pertaining to JLF are statutory in nature

and binding upon the banks and secondly, that member of JLF cannot

independently resort to/adopt any proceedings during the on-going

process of rectification through the JLF.

16. Similar argument was raised in Innoventive Industries Ltd. v. ICICI Bank.

Having noticed such argument, the Appel ate Tribunal in Innoventive

Industries Ltd. v. ICICI Bank held that :

“82. As discussed in the previous paragraphs, for initiation of corporate

resolution process by financial creditor under sub-section (4) of section 7

of the Code, 2016, the Adjudicating Authority on receipt of application

under sub-section (2) is required to ascertain existence of default from

the records of information utility or on the basis of other evidence furnished

by the financial creditor under sub-section (3). Under section 5 of section

7, the Adjudicating Authority is required to satisfy –

(a) Whether a default has occurred;

(b) Whether an application is complete; and

(c) Whether any disciplinary proceeding is against the proposed

insolvency resolution professional.

83. Once it is satisfied it is required to admit the case but in case the

application is incomplete application, the financial creditor is to be granted

seven days’ time to complete the application. However, in a case where

there is no default or defects cannot be rectified, or the record enclosed

is misleading, the application has to be rejected.

84. Beyond the aforesaid practice, the adjudicating authority is not required

to look into any other factor, including the question whether permission or

consent has been obtained from one or other authority, including the JLF.

Therefore, the contention of the petition that the respondent has not

obtained permission or consent of JLF to the present proceeding which

will be adversely affect loan of other members cannot be accepted and fit

to be rejected.”

396

PRACTICAL ASPECTS OF INSOLVENCY LAW

17. The impact of the insolvency resolution professional (‘IRP’) on the business

and management of the appel ant, al eged to be as follows :

The interim IRP has been appointed by the adjudicating authority by the

impugned order. On 1st March, 2017 the IRP issued a public notice in

Economic Times therein calling upon the creditors of the company to submit

their claims. From 2nd March, 2017 onwards the IRP has been attending

office from the appellant’s premises and has taken over the management of

affairs of the appel ant.

18. Learned counsel highlighted the events that occurred pursuant to IRP

taking over the management of the affairs of the appel ant.

18.1 G.E Industrial India (P.) Ltd. (‘GE’) has been a crucial and important

client of the appellant. GE had placed several orders in October

2016 and January 2017 for commission of the appellant’s cranes

at its project sites at Lalpur, Kadapa, Jamnagar, etc. The nature of

appellant’s contracts with its clients are such that the appellant is

required to regularly and in a very prompt, timely manner, meet

the requirements raised by its clients such as release of funds for

the day-to-day functioning of the cranes as well as management

of the staff handling the cranes, hiring and dispatching the

necessary contractors, engineers to the project sites as may be

required, etc.

18.2 GE addressed several e-mails dated 6th March and 7th March 2017

and so on to the appel ant in respect of the appellant’s cranes

commissioned at GE’s Kadappa site. GE, inter alia, required the

appellant to urgently release funds for the crane’s diesel, send a

safety engineer at the project site and take necessary action in respect

of replacement of cotter pin in one of the ancil ary equipments.

18.3 The appel ant’s project manager forwarded each of these e-mails to

the IRP along with an explanation regarding the nature of the service

and the timelines for the same, wherever required.

18.4 Despite the lengthy trail of correspondence and constant service

requests, IRP failed to do much as satisfactorily reply to GE’s

concerns, much less release the necessary funds and take actions.

As a result of IRP’s failure to release necessary funds and act on the

service requests in a timely manner, the appellant was unable to

perform its contractual obligations qua GE.

18.5 Ultimately vide an email dated 18th March, 2017, GE has terminated

the contract with the appel ant resulting in a financial loss of at least

PRACTICAL ASPECTS OF INSOLVENCY LAW

397

Rs.2,70,00,000 as wel as loss of goodwil that the appellant has

painstakingly built in this business over the last 30 years.

18.6 It came to the knowledge of one of appel ant’s director Mr. Saket

Agarwal that the IRP had contrary to the powers granted to him under

the I&B Code, instruct some of the employees of the respondent to

disclose the bank account details of the fol owing companies which

are subsidiaries of the appellant –

(i) Starport Logistics Ltd.;

(i ) ABG Turnkey (P.) Ltd.;

(iii) Kandla Container Terminal (P.) Ltd.; and

(iv) ABG Projects & Services Ltd., UK.

18.7 It appears that the IRP had directed employees of the appel ant to

change the mandate of authorised signatories in the bank accounts

of the aforesaid subsidiaries and had also addressed correspondence

to the banks requesting a change in the authorised signatories.

18.8 The I&B Code does not in any manner empower an IRP to interfere

with the affairs of the subsidiaries of the corporate debtor. In fact, the

Explanation to section 18 of the I&B Code explicitly provides that the

assets of the corporate debtor shal not include the assets of its

Indian or foreign subsidiaries. In that view of the matter, the aforesaid

act of the IRP is ex facie il egal and unsustainable in law.

18.9 As a result of the absolute mismanagement and dis-interest in the

management of the affairs of the appel ant, the appel ant has suffered

loss of several valuable human resources, namely, Mr. R C Swamy,

project manager who has been with the employment of the appellant

since 26 years, submitted his resignation therein citing “the working

atmosphere” at the appellant’s office as “severe stress” as the reasons

for his resignation. Mr. Meet Shay, deputy manager e-mailed his

resignation on 28th March, 2017. Mr. Arup Kumar Ghosh, who was

directed by the IRP to take charge of the head office activities of the

appel ant e-mailed his resignation on 29th March, 2017 citing inability

to “bear the stress to do so”. Mr. Varun Kaka, Legal Associate of the

appel ant also resigned on 29th March, 2017.

19. Sub-section (12) of section 3 of I&B Code defined “default” to mean “a

liability or obligation in respect of claim which is due from an person....” The

principal (unmatured) amount, never having become due and payable to the

financial creditor could not have been claimed as the default amount.

398

PRACTICAL ASPECTS OF INSOLVENCY LAW

20. Impugned order herein suffers from the vice of non-application of mind

by the adjudicating authority on the fol owing counts :

20.1 The ascertainment of existence of default by the adjudicating authority

which under the provisions of sub-section (4) of section 7 of the I&B

Code has to be based on the application/other evidence submitted

by the financial creditor, suffers from non-application of mind given

the apparent and conspicuous mismatch between the amount

demanded by the respondent from the appel ant in its demand notice

dated 6th February, 2017 and the amount stated to be in default in

the said application.

20.2 Secondly, the Adjudicating Authority in paragraph 8 of the impugned

order has recorded that proof of service showing service of notice

upon the corporate debtor before filing the petition has been filed by

the financial creditor, without considering the true nature and purport

of the so-cal ed notice dated 8th February, 2017 which did not even

mention the essential details which were to be mentioned, such as :

(a) whether the application has been filed;

(b) if the application is filed, what is the filing number; and

(c) date of listing, if notified.

20.3 The notice has been given without considering the provisions of sub-

rule (3) of rule 4 of Insolvency & Bankruptcy (Application to

Adjudicating Authority) Rules, 2016 which mandates that an application

shal “dispatch forthwith”, a copy of the application “filed with the

Adjudicating Authority”. Thereby meaning a post-filing notice and

not “before filing”, the obvious purpose for the same being to put the

corporate debtor to adequate and informed notice. The adjudicating

authority ought to have realised these deviations from the prescribed

procedure and either rejected the application or directed the respondent

to fol ow the provisions of sub-rule (3) of rule 4 of Insolvency and

Bankruptcy (Application to Adjudicating Authority) Rules, 2016 and

rule 21 of the National Company Law Tribunal Rules.

20.4 Lastly, the adjudicating authority has reached a conclusion at

paragraph 9 of the impugned order that it is satisfied that the appel ant

has committed a default of Rs.27.77 crore, which finding is not only

perverse, but also is contrary to the very application of the financial

creditor itself in complete disregard to the apparent and conspicuous

mismatch between the amount demanded by the financial creditor

from the appel ant-corporate debtor in its demand notice dated 6th

PRACTICAL ASPECTS OF INSOLVENCY LAW

399

February, 2017 and the amount stated to be in default in the said

application.

21. Showing an incorrect claim, moving the application in a hasty manner

and obtaining an ex parte order from the adjudicating authority which admitted

such an incorrect claim, the financial creditor cannot disprove its mala fide

intention by stating that the claim submitted is correct amount. The I&B

Code does not provide for any such mechanism where post-admission, the

applicant financial creditor can modify their claim amount.

22. In some of the cases, an insolvency resolution process can and may

have adverse consequences on the welfare of the company. This makes it

imperative for the Adjudicating Authority to adopt a cautious approach in

admitting insolvency applications and also ensuring adherence to the

principles of natural justice.

23. Admittedly the impugned order is ex facie il egal and ought to be set

aside by the Appel ate Tribunal. For the reasons aforesaid, we set aside the

ex parte impugned order dated 17th February, 2017 passed by adjudicating

authority, Mumbai Bench in CP No. 12/I&BP/NCLT/MAH/2017 and al ow the

appeal.

24. In effect the appointment of IRP, order declaring moratorium, freezing of

account and al other order passed by adjudicating authority pursuant to

impugned order and action taken by the interim resolution professional,

including the advertisement published in the newspaper calling for

applications are declared il egal. The adjudicating authority is directed to

close the proceeding. The appellant-company is released from the rigour of

law and al ow the appel ant-company to function independently through its

Board of directors from immediate effect.

25. In the facts and circumstances, we impose a cost of Rs. 50,000 on

respondent-financial creditor, ICICI Bank – to be paid in favour of Registrar,

National Company Law Appellate Tribunal, New Delhi by demand draft within

one month towards development of its Library. The appeal is al owed with

aforesaid observations and directions.

(Mr. Balvinder Singh)

(Justice S.J.Mukhopadhaya)

Member (Technical)

Chairperson

NEW DELHI

24th May, 2017

400

PRACTICAL ASPECTS OF INSOLVENCY LAW

ANNEXURE X.11

IN THE NATIONAL COMPANY LAW APPELLATE TRIBUNAL

COMPANY APPELLATE JURISDICTION

Company Appeal (AT) No. 09 of 2017

(arising out of Order dated 9th March 2017 passed by NCLT, Allahabad

Bench in C.P.No. 19/Ald/2017)

JK Jute Mills Company Limited

Appellant

Vs.

M/s Surendra Trading Company

Respondent

Present:

For Appellants: Mr. Virendra Ganda, Senior Advocate

with Mr. Arvind Kumar and Mr. Abhijeet Sinha,

Advocates

For Respondent: Mr. Krishnendu Dutta with Ms. Bhawna

Chopra Rustogi, Ms. Prachi Ohri, Advocates for R-l

Mr. Ashok Kumar Jain with Mr. Sahil Dhawan, Advocates

for R-2

For other Respondents: Mr. Shakti Ahmed and Mr. Atanu

Mukherjee, Advocates.

JUDGEMENT

SUDHANSU JYOTI MUKHOPADHAYA.J.

1. This appeal has been preferred by appel ant-J K Jute Mills Company

Limited against Order dated 9th March, 2017 passed by Adjudicating Authority

(National Company Law Tribunal), Allahabad Bench in CP No. 10/Ald/2017.

2. By the impugned order the Adjudicating Authority overruled the objection

of the appel ant-corporate Debtor and directed the appel ant to maintain

status quo on immovable properties.

3. The question involved in this case is :

Whether the time limit prescribed in Insolvency and Bankruptcy Code,

2016 (hereinafter referred to as 'Code 2016') for admitting or rejecting a

petition or initiation of insolvency resolution process is mandatory?

PRACTICAL ASPECTS OF INSOLVENCY LAW

401

4. The brief fact of the case are as follows :

The respondent/‘operational creditor’ - Surendra Trading Co. issued a demand

notice under section 8 of the ‘Code’ on 6th January, 2017 to the appel ant/

‘corporate debtor’ raising claim of dues pertaining to the year 2001-02.

5. The appel ant/‘corporate debtor’ by letter dated 25th January, 2017 objected

the claim as ‘time barred’. Thereafter, the respondent/‘operational creditor’

filed a petition under section 9 of the ‘Code’, before the Adjudicating Authority,

Al ahabad on 10th February, 2017. In the said application the adjudicating

authority passed the interim order.

6. According to appel ant, the petition under section 9 was filed without

fol owing the mandatory provision of sub-rule (2) of rule 6 of “Insolvency and

Bankruptcy (Application to Adjudicating Authority) Rules, 2016” (hereinafter

referred to as 'Adjudicating Authority Rules').

7. The case was listed before Adjudicating Authority on 16th February, 2016

but there being defects, learned counsel for the operational creditor sought

time to rectify the defects as also to receive instructions about the stage of

proceedings pending before Board for Industrial and Financial Reconstruction

(‘BIFR’) though such proceeding stood abated by virtue of Companies Act,

2013.

8. The ‘Adjudicating Authority’ noticed that the debt due for payment was

defaulted in the year 2004. The ‘operational creditor’ was asked to clarify

whether the claim is barred by law of limitation and whether any recovery

proceedings were earlier initiated by the operational creditor before any

competent court of law or was deferred or stayed under the provisions of

‘Sick Companies Rehabilitation Act, 1985’. The matter was ordered to be

listed on 28th February, 2017 for removal of objection and procedural defects.

9. On 28th February, 2017, counsel for the operational creditor sought more

time for filing formal memo by providing/furnishing of the latest order passed

by BIFR. The appel ant-corporate debtor was instructed to clarify about the

position of prescribed limitation for making recovery of his debt through its

memo. The case was ordered to be listed for further hearing on 3rd March,

2017.

10. On 9th March, 2017, a third party, J K Jute Mill Majdur Sabha filed a

miscel aneous application for intervention. The Adjudicating Authority after

going through the petition for intervention observed that its ‘locus standi’ is

to be decided first. Therefore, parties were granted time to file reply on

maintainability of the third party application/claims. Further, the operational

creditor was also granted liberty to file rejoinder to objection of the corporate

402

PRACTICAL ASPECTS OF INSOLVENCY LAW

debtor. Leaned counsel for the “operational creditor” as also the workers

union requested the Adjudicating Authority to grant order of status quo, as

the corporate debtor may alienate its assets. When it was objected by learned

counsel for the appel ant/corporate debtor, the Adjudicating Authority held

that under rule 11 of NCLT Rules, 2016, it is conferred with the powers to

provide substantial justice to the party concerned.

11. Learned counsel for the appel ant submitted that the Adjudicating Authority

became “functus officio” after the time period specified under section 9 of

the ‘Code’ and, therefore, it has no power to grant stay of sale of assets or

“status quo” in regard to any assets.

12. It was further contended that no prayer having been made by the

“operational creditor” to grant stay, it was not open to the Adjudicating

Authority to pass interim order of status quo.

13. It was further contended that the Adjudicating Authority has no inherent

jurisdiction under the Code to pass any ad interim order.

14. Learned counsel for the appellant highlighted the defects in the demand

notice dated 6th January, 2017 as was sent by respondent/‘operational

creditor’. It was also contended that the petition under section 9 is barred by

law of limitation.

15. On the other hand according to learned counsel for the respondent/

’operational creditor’ 14 days’ time limit prescribed under section 9 of the

‘Code’ for passing orders of admission or rejection of application is directory;

it is not mandatory. It was also contended that the court should avoid any

construction of an enactment which wil lead to an unworkable, inconsistent

or impracticable results. Reliance was placed on Hon’ble Supreme Court’s

decision in H S Vankani v. State of Gujarat AIR 2010 SC 1714.

16. Referring to different situation, learned counsel for the respondent/

‘operational creditor’ further submitted that if 14 days’ period prescribed

under sub-section (5) of section 9 is considered as mandatory, it will result

in numerous anomalous situations which is not the intention of the legislature

in drafting the Code.

17. Further, according to learned counsel for respondent/’operational creditor’

7 days’ period for curing of defects is independent of the 14 days’ period for

prescribed under sub-section (5) of section 9 before admission or rejection

of the application.

18. The case was heard on merit and judgment was reserved on 28th March,

2017. The Adjudicating Authority in the meantime was given liberty to decide

PRACTICAL ASPECTS OF INSOLVENCY LAW

403

the question of maintainability of the petition and the contentions as raised

in this appeal.

19. In the written submissions, it has been brought to the notice of this

court that the Adjudicating Authority fixed 5th April, 2017 as the date for

hearing the petition on the question of maintainability as raised in this appeal.

Therefore, the respondent requested the Appel ate Tribunal to al ow the

Adjudicating Authority to pass the order of maintainability as raised in this

appeal with further prayer “not to deny” the right of appeal after final decision

rendered by the Adjudicating Authority. It is informed that subsequently the

Tribunal taken up the matter on 10th April, 2017, but on certain ground

adjourned the case.

20. We have also noticed that the Adjudicating Authority, Mumbai Bench in

other cases under section 9 of the Code rejected some of the applications

in view of mandatory time limit prescribed under section 9 of the Code.

21. As important question of law is involved and even after three weeks of

reserved judgment, Adjudicating Authority has but passed any final order of

admission or rejection on the petition under section 9 and now more than 60

days have passed after filing of the petition and as important question of

law are involved, we decided to proceed with the matter.

22. To decide the question whether the time limit prescribed for initiation and

completion of insolvency resolution process is mandatory, it is desirable to

notice different time limit prescribed under the Insolvency and Bankruptcy

Code, 2016.

23. “Corporate insolvency resolution process” can be initiated under different

provisions of the Code, such as under section 7 by “financial creditor”,

under section 9 by “operational creditor” and under section 10 by the “corporate

applicant”. Though procedures after ‘admission’ of insolvency resolution

process is almost common, the legislature prescribed different time limit for

admission or rejection of the petitions.

24. For initiation of insolvency resolution process by “financial creditors”

under section 7, the Adjudicating Authority is al owed 14 days of the receipt

of the application to ascertain the existence of a default from the records

with information utility or on the basis of other evidence furnished by the

financial creditors; under sub-section (5) of section 7 before or after 14

days, if Adjudicating Authority is satisfied that a default has occurred and

the application under sub-section (2) of section 7 is complete and there is

no disciplinary proceedings pending against the proposed resolution

professional, the Adjudicating Authority is required to admit the application.

404

PRACTICAL ASPECTS OF INSOLVENCY LAW

On the contrary, if the default has not occurred or the application is not

complete then the Adjudicating Authority is required to dismiss the petition.

However, in case of incomplete application the Adjudicating Authority is

required to grant seven days’ time to the applicant/financial creditor to rectify

the defect. The section 7 reads as fol ows :

“Section 7. Initiation of corporate insolvency resolution process by

financial creditor –

(1) A financial creditor either by itself or jointly with other financial creditors

may file an application for initiating corporate insolvency resolution process

against a corporate debtor before the Adjudicating Authority when a default

has occurred.

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 shal 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 is 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 :

PRACTICAL ASPECTS OF INSOLVENCY LAW

405

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 shal commence from

the date of admission of the application under sub-section (5).

(7) The Adjudicating Authority shal 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.”

25. On the contrary in the case of “operational creditors” under sub-section

(5) of section 9, within 14 days of the receipt of the application the

“adjudicating authority” is required to either admit the application, if complete

or reject the application, if not complete or may grant 7 days’ time from the

date of receipt of notice to the operational creditor to rectify the defect, as

evident from section 9 and reads as follows :

“Section 9. Application for initiation of corporate insolvency

resolution process by operational creditor –

(1) After the expiry of the period of ten days from the date of delivery of

the notice or invoice demanding payment under sub-section (1) of section

8, if the operational creditor does not receive payment from the corporate

debtor or notice of the dispute under sub-section (2) of section 8, the

operational creditor may file an application before the Adjudicating Authority

for initiating a corporate insolvency resolution process.

(2) The application under sub-section (1) shal be filed in such form and

manner and accompanied with such fee as may be prescribed.

(3) The operational creditor shal , along with the application furnish –

(a) a copy of the invoice demanding payment or demand notice delivered

by the operational creditor to the corporate debtor;

(b) an affidavit to the effect that there is no notice given by the corporate

debtor relating to a dispute of the unpaid operational debt;

(c) a copy of the certificate from the financial institutions maintaining

accounts of the operational creditor confirming that there is no

406

PRACTICAL ASPECTS OF INSOLVENCY LAW

payment of an unpaid operational debt by the corporate debtor;

and

(d) such other information as may be specified.

(4) An operational creditor initiating a corporate insolvency resolution

process under this section, may propose a resolution professional to act

as an interim resolution professional.

(5) The Adjudicating Authority shall, within fourteen days of the receipt of

the application under sub-section (2), by an order –

(i) admit the application and communicate such decision to the

operational creditor and the corporate debtor if, –

(a) the application made under sub-section (2) is complete;

(b) there is no repayment of the unpaid operational debt;

(c) the invoice or notice for payment to the corporate debtor has

been delivered by the operational creditor;

(d) no notice of dispute has been received by the operational creditor

or there is no record of dispute in the information utility; and

(e) there is no disciplinary proceeding pending against any resolution

professional proposed under sub-section (4), if any;

(i ) reject the application and communicate such decision to the

operational creditor and the corporate debtor, if –

(a) the application made under sub-section (2) is incomplete;

(b) there has been repayment of the unpaid operational debt;

(c) the creditor has not delivered the invoice or notice for payment

to the corporate debtor;

(d) notice of dispute has been received by the operational creditor

or there is a record of dispute in the information utility; or

(e) any disciplinary proceeding is pending against any proposed

resolution professional :

Provided that Adjudicating Authority, shal before rejecting an application

under sub-clause (a) of clause (i ) give a notice to the applicant to rectify

the defect in his application within seven days of the date of receipt of

such notice from the Adjudicating Authority.

(6) The corporate insolvency resolution process shal commence from

PRACTICAL ASPECTS OF INSOLVENCY LAW

407

the date of admission of the application under sub-section (5) of this

section.”

26. Similarly in the case of initiation of corporate insolvency resolution process

by “corporate applicant”, like sub-section (5) of section 9, the Adjudicating

Authority, within a period of 14 days of the receipt of the application, by an

order required to admit the application, if it is complete or reject the application

if it is incomplete.

However, before rejecting the application it is required to give notice and

“corporate applicant” can be allowed 7 days’ period to rectify the defects.

This is evident from sub-section (4) of section 10, as quoted below :

“Section 10. Initiation of corporate insolvency resolution process

by corporate applicant –

(1) Where a corporate debtor has committed a default, a corporate applicant

thereof may file an application for initiating corporate insolvency resolution

process with the Adjudicating Authority.

(2) The application under sub-section (1) shal be filed in such form,

containing such particulars and in such manner and accompanied with

such fee as may be prescribed.

(3) The corporate applicant shal , along with the application furnish the

information relating to –

(a) its books of account and such other documents relating to such

period as may be specified; and

(b) the resolution professional proposed to be appointed as an interim

resolution professional.

(4) The Adjudicating Authority shal , within a period of fourteen days of

the receipt of the application, by an order –

(a) admit the application, if it is complete; or

(b) reject the application, if it is incomplete :

Provided that Adjudicating Authority shall, before rejecting an application,

give a notice to the applicant to rectify the defects in his application

within seven days from the date of receipt of such notice from the

Adjudicating Authority.

(5) The corporate insolvency resolution process shal commence from

the date of admission of the application under sub-section (4) of this

section.”

408

PRACTICAL ASPECTS OF INSOLVENCY LAW

27. Where an application is not disposed of or an order is not passed within

a period specified in the Code, in such case the Adjudicating Authority may

record the reasons for not doing so within the period so specified and may

request the hon’ble President of National Company Law Tribunal for extension

of time, who may after taking into account the reasons so recorded can

extend the period specified in the Act but not exceeding 10 days, as apparent

from sub-section (1) of section 64, as quoted below :

“64. (1) Where an application is not disposed of or an order is not passed

within the period specified in this Code, the National Company Law Tribunal

or the National Company Law Appel ate Tribunal, as the case may be,

shal record the reasons for not doing so within the period so specified;

and the President of the National Company Law Tribunal or the Chairperson

of the National Company Law Appel ate Tribunal, as the case may be,

may, after taking into account the reasons so recorded, extend the period

specified in the Act but not exceeding ten days.”

28. There are other time limit prescribed under the Code such as section

16(1) in terms of which the Adjudicating Authority is required to appoint an

interim resolution professional within 14 days from the insolvency

commencement date (admission of the case). Under sub-section (5) of

section 16, the term of the interim resolution professional cannot exceed 30

days from the date of appointment, as evident from relevant provisions,

which reads as fol ows :

“Section 16. Appointment and tenure of interim resolution

professional.

(1) The Adjudicating Authority shall appoint an interim resolution

professional within fourteen days from the insolvency commencement

date.

(2) Where the application for corporate insolvency resolution process is

made by a financial creditor or the corporate debtor, as the case may be,

the resolution professional, as proposed respectively in the application

under section 7 or section 10, shall be appointed as the interim resolution

professional, if no disciplinary proceedings are pending against him.

(3) Where the application for corporate insolvency resolution process is

made by an operational creditor and –

(a) no proposal for an interim resolution professional is made, the

Adjudicating Authority shal make a reference to the Board for the

recommendation of an insolvency professional who may act as an

interim resolution professional;

PRACTICAL ASPECTS OF INSOLVENCY LAW

409

(b) a proposal for an interim resolution professional is made under sub-

section (4) of section 9, the resolution professional as proposed,

shall be appointed as the interim resolution professional, if no

disciplinary proceedings are pending against him.

(4) The Board shal , within ten days of the receipt of a reference from the

Adjudicating Authority under sub-section (3), recommend the name of an

insolvency professional to the Adjudicating Authority against whom no

disciplinary proceedings are pending.

(5) The term of the interim resolution professional shal not exceed thirty

days from date of his appointment.”

29. Time limit for completion of insolvency resolution process is prescribed

under section 12 as per which the corporate insolvency resolution process

required to be completed within a period of 180 days from the date of

admission of the application. If resolution professional for any reason not in

a position to complete this job within 180 days may file an application under

sub-section (2) of section 12 before the Adjudicating Authority to extend the

period. Under sub-section (3) of section 12, the Adjudicating Authority may

extend the period, but not exceeding 90 days, i.e., total 270 days has been

al owed for insolvency resolution process. This is evidence from section 12

as quoted below :

“Section 12. Time-limit for completion of insolvency resolution

process.

(1) Subject to sub-section (2), the corporate insolvency resolution process

shal be completed within a period of one hundred and eighty days from

the date of admission of the application to initiate such process.

(2) The resolution professional shall file an application to the Adjudicating

Authority to extend the period of the corporate insolvency resolution

process beyond one hundred and eighty days, if instructed to do so by a

resolution passed at a meeting of the committee of creditors by a vote of

seventy-five per cent, of the voting shares.

(3) On receipt of an application under sub-section (2), if the Adjudicating

Authority is satisfied that the subject-matter of the case is such that

corporate insolvency resolution process cannot be completed within one

hundred and eighty days, it may by order extend the duration of such

process beyond one hundred and eighty days by such further period as it

thinks fit, but not exceeding ninety days :

Provided that any extension of the period of corporate insolvency resolution

process under this section shal not be granted more than once.”

410

PRACTICAL ASPECTS OF INSOLVENCY LAW

30. Before expiry of the insolvency resolution process of the maximum

period permitted for completion under section 12 if the Adjudicating Authority

does not receive a resolution plan, under section 33 the Adjudicating Authority

is required to pass an order requiring the corporate debtor to be liquidated in

the manner as laid down in the said chapter. For proper appreciation, section

33 of the Code is quoted below :

“33. Initiation of liquidation – (1) Where the Adjudicating Authority, –

(a) before the expiry of the insolvency resolution process period or the

maximum period permitted for completion of the corporate insolvency

resolution process under section 12 or the fast track corporate

insolvency resolution process under section 56, as the case may be,

does not receive a resolution plan under sub-section (6) of section

30; or

(b) rejects the resolution plan under section 31 for the non-compliance

of the requirements specified therein,

it shal –

(i) pass an order requiring the corporate debtor to be liquidated in the

manner as laid down in this Chapter;

(i ) issue a public announcement stating that the corporate debtor is in

liquidation; and

(iii) require such order to be sent to the authority with which the corporate

debtor is registered.”

31. From the aforesaid provisions we find that time is the essence of the

Insolvency and Bankruptcy Code, 2016, but it is to be seen whether on

failure to do so, the Adjudicating Authority is competent to pass appropriate

order. Further in case resolution process is not completed within the time

prescribed as per section 33 it wil lead to initiation of liquidation proceedings,

which may affect the corporate debtor, which otherwise was not required to

be initiated.

32. In P T Rajan v. T P M Sahir [2003] 8 SCC 498, the Hon’ble Supreme

Court observed that where Adjudicating Authority has to perform a statutory

function like admitting or rejecting an application within a time period

prescribed, the time period would have to held to be directory and not

mandatory. In the said case, Hon’ble Apex Court observed :

‘48. It is wel -settled principle of law that where a statutory functionary is

asked to perform a statutory duty within the time prescribed therefor, the

PRACTICAL ASPECTS OF INSOLVENCY LAW

411

same would be directory and not mandatory – see Shiveshwar Prasad

Sinha v. District Magistrate of Monghur AIR 1966 Patna 144; Nomita

Chowdhury v. State of West Bengal [1999] Comp LJ 21 and Garbari Union

Co-operative Agricultural Credit Society Ltd. v. Swapan Kumar Jana [1997]

1 CHN 189.

49. Furthermore, a provision in a statute which is procedural in nature

although employs the word “shall” may not be held to be mandatory if

thereby no prejudice is caused.’

33. That the Hon’ble Apex Court has on numerous occasions interpreted the

word ‘shall’ to mean ‘may’. An analogous position can be found in the context

of the time period prescribed for filing written statements by defendants to a

suit, wherein, the hon’ble Apex Court was faced with the question of a

court’s power to take on record Written Statements that were filed beyond

the period of 90 days, as prescribed under order VIII, Rule 1 of the Code of

Civil Procedure, 1908. In this regard, the Hon’ble Supreme Court in Kailash

v. Nanhku [2005] 4 SCC 480 held as under :

“27. Three things are clear. Firstly, a careful reading of the language in

which order 8, rule 1 has been drafted, shows that it casts an obligation

on the defendant to file the written statement within 30 days from the date

of service of summons on him and within the extended time falling within

90 days. The provision does not deal with the power of the court and also

does not specifical y take away the power of the court to take the written

statement on record though filed beyond the time as provided for. Secondly,

the nature of the provision contained in order 8, rule 1 is procedural. It is

not a part of the substantive law. Thirdly, the object behind substituting

order 8, rule 1 in the present shape is to curb the mischief of unscrupulous

defendants adopting dilatory tactics, delaying the disposal of cases much

to the chagrin of the plaintiffs and petitioners approaching the court for

quick relief and also to the serious inconvenience of the court faced with

frequent prayers for adjournments. The object is to expedite the hearing

and not to scuttle the same. The process of justice may be speeded up

and hurried but the fairness which is a basic element of justice cannot be

permitted to be buried.”

34. Further, Supreme Court in the matter of Smt. Rani Kusum v. Smt.

Kanchan Devi and Others (2005) 6 SCC 705, concurring with the ratio laid

down in Kailash V. Nanhku (supra) held that :

“10. Al the rules of procedure are the handmaid of justice. The language

employed by the draftsman of processual law may be liberal or stringent,

but the fact remains that the object of prescribing procedure is to advance

412

PRACTICAL ASPECTS OF INSOLVENCY LAW

the cause of justice. In an adversarial system, no party should ordinarily

be denied the opportunity of participating in the process of justice

dispensation. Unless compel ed by express and specific language of the

statute, the provisions of CPC or any other procedural enactment ought

not to be construed in a manner which would leave the court helpless to

meet extraordinary situations in the ends of justice.

11. The mortality of justice at the hands of law troubles a judge’s conscience

and points an angry interrogation at the law reformer.

12. The processual law so dominates in certain systems as to overpower

substantive rights and substantial justice. The humanist rule that

procedure should be the handmaid, not the mistress, of legal justice

compels consideration of vesting a residuary power in the judges to act

ex debito justitiae where the tragic sequel otherwise would be wholly

inequitable. Justice is the goal of jurisprudence, processual, as much

as substantive – see Sushil Kumar Sen v. State of Bihar [1975] 1 SCC

774.

13. No person has a vested right in any course of procedure. He has only

the right of prosecution or defence in the manner for the time being by or

for the court in which the case is pending, and if, by an Act of Parliament

the mode of procedure is altered, he has no other right than to proceed

according to the altered mode – see Blyth v. Blyth [1966] 1 Al ER 524/

1966 AC 643/[1966] 2 WLR 634 (HL). A procedural law should not ordinarily

be construed as mandatory; the procedural law is always subservient to

and is in aid to justice. Any interpretation which eludes or frustrates the

recipient of justice is not to be fol owed – see Shreenath v. Rajesh [1998]

4 SCC 543/AIR 1998 SC 1827.

14. Processual law is not to be a tyrant but a servant, not an obstruction

but an aid to justice. Procedural prescriptions are the handmaid and not

the mistress, a lubricant, not a resistant in the administration of justice.”

35. Sub-section (2) of section 7, sub-section (2) of section 9 and sub-section

(2) of section 10 deals with the form and manner in which respective

applications under sections 7, 9 and 10 ought to be filed along with such

process fee as may be prescribed. This is a procedural matter to be verified

by the Registry of the NCLT.

36. Sub-section (1) of section 5 defines “adjudicating authority” for the purpose

of that part means “National Company Law Tribunal”, (NCLT) constituted

under section 408 of the Companies Act, 2013.

PRACTICAL ASPECTS OF INSOLVENCY LAW

413

37. We have noticed that Code, empowers “adjudicating authority” to pass

orders under sections 7, 9 and 10 of the Code, 2016 and not the NCLT. It is

by virtue of the definition under sub-section (1) of section 5 of the Code, the

NCLT plays its role as “adjudicating authority” and not that a Company Law

Tribunal. Therefore, in strict sense, mandate under section 420 of the

Companies Act, 2013 cannot be transpose in Code, 2016 by reading “orders

of Tribunal”, as “Order of Adjudicating Authority”.

38. The Adjudicating Authority has different roles to play at different stages.

The one of such role is somewhat administrative in nature when under sub-

section (4) of section 7 or sub-section (5) of section 9 and sub-section (4) of

section 10, the Adjudicating Authority is required to find out whether (i) the

case is complete in terms of the provisions of sub-section (2) of section 7

or sub-section (2) of section 9 or sub-section (2) of section 10, as the case

may be, or (i ) whether there is a defect, i.e., application is nor in order and

incomplete. Otherwise role of Adjudicating Authority is judicial in nature

particularly when it decides as to whether the “insolvency resolution process”

to be initiated by admitting of the application or to reject the application. As

a judicial authority, in case the application is incomplete, it is also empowered

to decide whether to grant 7 days’ time to rectify the defects. In case the

applications are admitted and resolution process starts, the Adjudicating

Authority is required to pass judicial order under sections 13 and 14 of the

Code and may order for public announcement in terms section 15 and then

to oversee the resolution process and final y, if so required, to pass order

for liquidation.

39. The time period of 14 days prescribed under sub-section (4) of section

7, sub-section (5) of section 9 and sub-section (4) of section 10 are to be

counted from the date of receipt of application. The word “date of receipt of

application” cannot be treated to be “date of filing of the application”. We

have noticed that the Registry is required to find out whether the application

is in proper form and accompanied with such fees as may be prescribed.

So, the Registry will take certain time and during such period, the applications

are not brought to the notice of the “Adjudicating Authority”. Therefore, 14

days’ period granted to the Adjudicating Authority under the provisions of

the Code cannot be counted from the “date of filing of the application” but

from the date when such application is presented before the Adjudicating

Authority, i.e., “the date on which it is listed for admission/order”.

40. In the present scenario, the Insolvency and Bankruptcy Code do not bar

or render the Adjudicating Authority powerless to admit an application or

rejecting the application.

414

PRACTICAL ASPECTS OF INSOLVENCY LAW

41. Further, nature of the provisions contained in sub-section (5) of section

7 or sub-section (5) of section 9 and sub-section (4) of section 10 of the

Code like order VIII, Rule 1 being procedural in nature cannot be treated to

be a mandate of law.

42. The object behind the time period prescribed under sub-section (5) of

section 7, sub-section (5) of section 9 and sub-section (4) of section 10,

like order VIII, Rule 1 of CPC is to prevent the delay in hearing the disposal

of the cases. The Adjudicating Authority cannot ignore the provisions. But

in appropriate cases, for the reasons to be recorded in writing, it can admit

or reject the petition after the period prescribed under section 7 or section 9

or section 10.

43. Thus, in view of the aforementioned unambiguous position of law laid

down by the hon’ble Apex Court and discussion as made above, we hold

that the mandate of sub-section (5) of section 7 or sub-section (5) of section

9 or sub-section (4) of section 10 procedural in nature, a tool of aid in

expeditious dispensation of justice and is directory.

44. However, the 7 days’ period for the rectification of defects as stipulated

under proviso to the relevant provisions as noticed above is required to be

complied with by the corporate debtor whose application, otherwise, being

incomplete is fit to be rejected. In this background we hold that the proviso

to sub-section (5) of section 7 or proviso to sub-section (5) of section 9 or

proviso to sub-section (4) of section 10 to remove the defect within 7 days

are mandatory, and on failure applications are fit to be rejected.

45. Section 12 is a “time limit for completion of insolvency resolution process”

which is to be completed within 180 days from the date of admission of the

application. An extension of the period of corporate insolvency resolution

process can be granted by the Adjudicating Authority but it cannot exceed

90 days and cannot be granted more than once.

46. The resultant effect of non-completion of insolvency resolution process

within the time limit of 180 days + extended period of 90 days, i.e., total 270

days wil result in to initiation of liquidation proceedings under section 33.

As the end result of resolution process is approval of resolution plan or

initiation of liquidation of proceedings, we hold the time granted under section

12 of the “Code” is mandatory.

Similarly, term allowed to “Interim resolution professional” is 30 days. Thereby

“Interim resolution professional” cannot exceed 30 days from the date of his

appointment as per sub-section (5) of section 16. However, as the regular

resolution professional starts functioning on completion of period of interim

PRACTICAL ASPECTS OF INSOLVENCY LAW

415

resolution professional the performance of the duties of Interim resolution

professional cannot be held to be mandatory though the period is required

to be counted for completion of the interim resolution process, i.e., 180

days and in appropriate case another 90 days can be granted, i.e., maximum

270 days which is mandatory.

47. It is not mandatory for “operational creditors” to propose the resolution

professional to act as an interim resolution professional. It may or may not

propose. In such case, the Adjudicating Authority wil nominate insolvency

resolution professional as recommended by the Board on reference from

the Adjudicating Authority. This process also may take some time after

admission of the case and, therefore, it is clear that the procedural part of

section 7 or section 9 or section 10 are directory in nature.

48. We have noticed the decision of Hon’ble Supreme Court in Union of

India v. Popular Construction Co. [2001] 8 SCC 470. In the said case, hon’ble

Supreme Court was deciding the question regarding extension of time period

beyond the time prescribed in the statutes and held when the legislatures

prescribed a special limitation for the purpose of the appeal, the court cannot

entertain an application beyond the extended period, if prescribed therein.

49. The aforesaid decision of the Hon’ble Supreme Court in Popular

Construction Co. (supra) cannot be said to be applicable to procedural part

of section 7 or section 9 or section 10, though it is applicable to section 64

which mandates extension of period not beyond 10 days as also to sub-

sections (3) and (4) of section 12 which relates to time limit prescribed for

completion of insolvency resolution process.

50. In these cases, we are not happy with the manner by the Adjudicating

Authority has passed one or other order. The Adjudicating Authority, in spite

of time frame scheme has taken the matter very leisurely and lightly. The

time is the essence of the Code and al the stakeholders, including the

Adjudicating Authority are required to perform its job within time prescribed

under the Code except in exceptional circumstances if the adjudicating

authority for one or other good reason fail to do so. In the case in hand we

find that the Adjudicating Authority has unnecessarily adjourned the case

from time-to-time which is against the essence of the Code.

51. Further, we find that the application was defective, and for the said

reason the application was not admitted within the specified time. Even if it

is presumed that 7 days additional days time was to be granted to the

operational creditor, the defects having pointed out on 16th February, 2017

and having not taken care within time, we hold that the petition under section

416

PRACTICAL ASPECTS OF INSOLVENCY LAW

9 filed by respondent/operational creditor being incomplete was fit to be

rejected.

52. For the reasons aforesaid, we direct the Adjudicating Authority to reject

and close the petition preferred by respondents. After we reserved the

judgment if any order has been passed by the Adjudicating Authority, except

order of dismissal, if any, are also declared illegal.

53. The appeal is al owed. However, there shal be no order as to cost.

(Mr. Balvinder Singh)

(Justice S.J.Mukhopadhaya)

Member (Technical)

Chairperson

NEW DELHI

1st May, 2017

PRACTICAL ASPECTS OF INSOLVENCY LAW

417

ANNEXURE X.12

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 8400 of 2017

M/S. SURENDRA TRADING COMPANY

.....APPELLANT(S)

VERSUS

M/S. JUGGILAL KAMLAPAT JUTE MILLS COMPANY

LIMITED AND OTHERS

.....RESPONDENT(S)

WITH

CIVIL APPEAL NOS.15091-15091 OF 2017

(ARISING OUT OF DIARY NO. 22835 OF 2017)

JUDGMENT

A.K. SIKRI, J.

Permission to file the appeal is granted and delay condoned in Diary No.

22835 of 2017.

2. Though this case has a past history as wel , in the instant appeal, we are

concerned with the correctness of the order dated May 01, 2017 passed by

the National Company Law Appellate Tribunal (hereinafter referred to as, the

‘NCLAT’) whereby it is held that the time of seven days prescribed in proviso

to sub-section (5) of Section 9 of the Insolvency and Bankruptcy Code,

2016 (for short, the ‘Code’) is mandatory in nature and if the defects contained

in the application filed by the ‘operational creditor’ for initiating corporate

insolvency resolution against a corporate debtor are not removed within

seven days of the receipt of notice given by the adjudicating authority for

removal of such objections, then such an application filed under Section 9

of the Code is liable to be rejected. The precise question of law which was

framed by the NCLAT for its decision is to the fol owing effect:

“Whether the time limit prescribed in Insolvency & Bankruptcy Code, 2016

(hereinafter referred to as Code 2016) for admitting or rejecting a petition

or initiation of insolvency resolution process is mandatory?”

418

PRACTICAL ASPECTS OF INSOLVENCY LAW

3. Chapter II of Part II of the Code deals with corporate insolvency resolution

process. Under Section 7 of the Code, financial creditor (as per the definition

contained in Section 5(7)) can initiate corporate insolvency resolution

process. Section 8, on the other hand, deals with insolvency resolution by

operational creditor. Operational creditor is defined in Section 5(2) of the

Code to mean a person to whom an operational debt is owed and includes

any person to whom such debt has been legally assigned or transferred.

This Section provides that if ‘default’ has occurred in payment of the said

debt within the meaning of Section 2(12), such an operational creditor may

send a demand notice to the corporate debtor demanding payment of the

amount involved in the default, in the prescribed manner, giving ten days

notice in this behalf. The corporate debtor is given ten days time to bring to

the notice of the operational creditor about the existence of a dispute, if

any, however, send requisite proof for repayment of unpaid operational debt.

However, in case the payment is not received or notice of dispute is not

received, operational creditor can file an application under Section 9 for

initiation of corporate insolvency resolution process. Since we are concerned

with this provision, the same is reproduced below in its entirety:

“9. Application for initiation of corporate insolvency resolution

process by operational creditor. – (1) After the expiry of the period of

ten days from the date of delivery of the notice or invoice demanding

payment under sub-section (1) of section 8, if the operational creditor

does not receive payment from the corporate debtor or notice of the dispute

under sub-section (2) of section 8, the operational creditor may file an

application before the Adjudicating Authority for initiating a corporate

insolvency resolution process.

(2) The application under sub-section (1) shal be filed in such form and

manner and accompanied with such fee as may be prescribed.

(3) The operational creditor shal , along with the application furnish —

“(a) a copy of the invoice demanding payment or demand notice delivered

by the operational creditor to the corporate debtor;

(b) an affidavit to the effect that there is no notice given by the corporate

debtor relating to a dispute of the unpaid operational debt;

(c) a copy of the certificate from the financial institutions maintaining

accounts of the operational creditor confirming that there is no

payment of an unpaid operational debt by the corporate debtor; and

(d) such other information as may be specified.

PRACTICAL ASPECTS OF INSOLVENCY LAW

419

(4) An operational creditor initiating a corporate insolvency resolution

process under this section, may propose a resolution professional to act

as an interim resolution professional.

(5) The Adjudicating Authority shall, within fourteen days of the receipt of

the application under sub-section (2), by an order—

(i) admit the application and communicate such decision to the

operational creditor and the corporate debtor if,—

“(a) the application made under sub-section (2) is complete;

(b) there is no repayment of the unpaid operational debt;

(c) the invoice or notice for payment to the corporate debtor has

been delivered by the operational creditor;

(d) no notice of dispute has been received by the operational creditor

or there is no record of dispute in the information utility; and

(e) there is no disciplinary proceeding pending against any resolution

professional proposed under sub-section (4), if any.

(i ) reject the application and communicate such decision to the

operational creditor and the corporate debtor, if—

“(a) the application made under sub-section (2) is incomplete;

(b) there has been repayment of the unpaid operational debt;

(c) the creditor has not delivered the invoice or notice for payment

to the corporate debtor;

(d) notice of dispute has been received by the operational creditor

or there is a record of dispute in the information utility; or

(e) any disciplinary proceeding is pending against any proposed

resolution professional:

Provided that Adjudicating Authority, shal before rejecting an application

under sub-clause (a) of clause (i ) give a notice to the applicant to rectify

the defect in his application within seven days of the date of receipt of

such notice from the adjudicating Authority.

(6) The corporate insolvency resolution process shal commence from

the date of admission of the application under sub-section (5) of this

section.”

4. A reading of the aforesaid provision would reflect that time limits for

taking certain actions by either the operational creditor or adjudicating

420

PRACTICAL ASPECTS OF INSOLVENCY LAW

authority are mentioned therein. As per sub-section (1) of Section 9,

application can be filed after the expiry of period of ten days from the delivery

of notice or invoice demanding payment, which is in tune with the provisions

contained in Section 8 that gives ten days time to the corporate debtor to

take any of the steps mentioned in sub-section (2) of Section 8. As per sub-

section (2) of Section 9, the operational creditor is supposed to file an

application in the prescribed form and manner which needs to be accompanied

by requisite/prescribed fee as wel . Sub-section (3) puts an obligation on the

part of the operational creditor to furnish the information stipulated therein.

Once such an application is filed and received by the adjudicating authority,

fourteen days time is granted to the adjudicating authority to ascertain from

the records of an information utility or on the basis of other evidence furnished

by the operational creditor, whether default on the part of corporate debtor

exists or not. This exercise, as per sub-section (5), is to be accomplished

by the adjudicating authority within fourteen days. Sub-section (5) provides

two alternatives to the adjudicating authority while dealing with such an

application. In case it is satisfied that conditions mentioned in clause (i) of

Section 9(5) are satisfied, the adjudicating authority may pass an order

admitting such an application. On the other hand, if the adjudicating authority

finds existence of any eventuality stated in sub-section (2), it may order

rejection of such an application.

5. One of the conditions, with which we are concerned, is that application

under sub-section (2) has to be complete in all respects. In other words, the

adjudicating authority has to satisfy that it is not defective. In case the

adjudicating authority, after the scrutiny of the application, finds that there

are certain defects therein and it is not complete as per the provisions of

sub-section (2), in that eventuality, the proviso to sub-section (5) mandates

that before rejecting the application, the adjudicating authority has to give a

notice to the applicant to rectify the defect in his application within seven

days of receipt of such notice.

6. Sub-section (5) of Section 9, thus, stipulates two time periods. Insofar as

the adjudicating authority is concerned, it has to take a decision to either

admit or reject the application with the period of fourteen days. Insofar as

defects in the application are concerned, the adjudicating authority has to

give a notice to the applicant to rectify the defects before rejecting the

application on that ground and seven days period is given to the applicant

to remove the defects.

7. The question before the NCLAT was as to whether time of fourteen days

given to the adjudicating authority for ascertaining the existence of default

PRACTICAL ASPECTS OF INSOLVENCY LAW

421

and admitting or rejecting the application is mandatory or directory. Further

question (with which this Court is concerned) was as to whether the period

of seven days for rectifying the defects is mandatory or directory.

8. The NCLAT has held that period of fourteen days prescribed for the

adjudicating authority to pass such an order is directory in nature, whereas

period of seven days given to the applicant/operational creditor for rectifying

the defects is mandatory in nature. Conclusion in this behalf is stated in

paragraphs 43 and 4 of the impugned order and these paragraphs read as

under:

“43. Thus, in view of the aforementioned unambiguous position of law laid

down by the Hon’ble Apex Court and discussion as made above, we hold

that the mandate of sub-section (5) of section 7 or sub-section (5) of

section 9 or sub-section (4) of section 10 is procedural in nature, a tool of

aid in expeditious dispensation of justice and is directory.

44. However, the 7 days’ period for the rectification of defects as stipulated

under proviso to the relevant provisions as noticed above is required to

be complied with by the corporate debtor whose application, otherwise,

being incomplete is fit to be rejected. In this background we hold that the

proviso to sub-section (5) of section 7 or proviso to sub-section (5) of

section 9 or proviso to sub-section (4) of section 10 to remove the defect

within 7 days are mandatory, and on failure applications are fit to be

rejected.”

On the basis of the aforesaid findings, the NCLAT directed rejection of the

application filed by the operational creditor in the fol owing manner:

“51. Further, we find that the application was defective, and for the said

reason the application was not admitted within the specified time. Even if

it is presumed that 7 additional days time was to be granted to the

operational creditor, the defects having pointed out on 16th February 2017

and having not taken care within time, we hold that the petition under

section 9 filed by respondent/operational creditor being incomplete was

fit to be rejected.

52. For the reasons aforesaid, we direct the Adjudicating Authority to

reject and close the Petition preferred by Respondents. After we reserved

the judgment if any order has been passed by the Adjudicating Authority,

except order of dismissal, if any, are also declared il egal.”

9. Before we pronounce as to whether the aforesaid rendition by the NCLAT

is justified or not, it would be apposite to take stock of certain essential

facts.

422

PRACTICAL ASPECTS OF INSOLVENCY LAW

10. Before the enactment of the Code, the relevant legislation dealing with

such subject matters was the Sick Industrial Companies (Special Provisions)

Act, 1985 (hereinafter referred to as ‘SICA’). Under this Act, an industrial

undertaking, on becoming sick (i.e. where its net worth got eroded), could

file a reference under Section 15(1) of SICA, before the Board for Industrial

and Financial Reconstruction (for short, ‘BIFR’) constituted under SICA.

BIFR, on admitting such a reference, was supposed to undertake the exercise

whether such a sick company can be revived or not. For this purpose, BIFR

would appoint an Operating Agency (OA) which was supposed to explore

the possibility of revival plan in consultation with the other stakeholders,

particularly the creditors. If such reconstruction/revival scheme prepared

by the OA was found to be feasible by the BIFR, after ascertaining the

views/objections of the concerned parties, BIFR would sanction such a

scheme. If that was not possible, BIFR would recommend winding up of

sick company by making reference in this behalf to the jurisdictional High

Court. There was a provision of appeal before the Appel ate Authority for

Industrial and Financial Reconstruction (AAIFR). This scheme is stated in

brief for the purposes of clarity of the matter though we are not concerned

with any of the provisions of SICA. Another aspect which needs to be

mentioned is that on admitting the reference, all other legal proceedings by

creditors or other persons initiated against the said sick industrial company

had to be put on hold by virtue of the protection granted under Section 22(1)

of SICA.

11. Respondent No.1 herein, namely, Juggilal Kamlapat Jute Mills Company

Limited, became a sick industrial company in the year 1994 and because of

this reason it filed its reference under Section 15(1) of SICA. It was declared

as a sick industrial company by the BIFR on December 16, 1994 as a result

whereof it came under the protective umbrel a of Section 22(1) of SICA.

According to the appellant (who is the operational creditor in this case),

which is a jute trader, it had supplied raw jute to respondent No.1 (the corporate

debtor) in the years 2001, 2002 and 2003 in respect of which the corporate

debtor owned a sum of Rs.17,06,766.95 p. Further, according to the

operational creditor, the corporate debtor had issued Certificate dated October

24, 2004 acknowledging the aforesaid debt. However, it was not in a position

to recover this debt because of the pendency of proceedings which resulted

in stay of proceedings in view of Section 22(1) of SICA. In the year 2007,

one Kolkata based company, known as Rainey Park Suppliers Private

Limited (hereinafter referred to as ‘Rainey Park’), invested in corporate debtor

and took over its management from its erstwhile promoters, i.e. J.K. Singhania

Group. The operational creditor had sent notices to Rainey Park to pay the

PRACTICAL ASPECTS OF INSOLVENCY LAW

423

aforesaid amount. However, it was not paid. Legal notices were also sent

and applications were also filed before the BIFR in this behalf. It led to

various events which are not required to be mentioned for the sake of brevity.

Fact remains that the aforesaid debt was not honoured or liquidated by the

corporate debtor or Rainey Park. While the matter was pending with BIFR,

Sick Industrial Companies Repeal Act was passed on the enactment of the

Code with effect from May 28, 2016. Resultantly, al proceedings before

BIFR and AAIFR stood abated. With this embargo, Section 22(1) of SICA

also vanished.

12. In these changed circumstances, the operational creditor served another

demand notice dated January 06, 2017, in the statutory format prescribed

under the Code, upon the corporate debtor calling up it to pay the outstanding

dues. As it was not paid, the operational creditor filed application for initiation

of corporate insolvency resolution process under Section 9 of the Act. The

chronology of events which took place from the date of filing of the said

application till the passing of the impugned order by the NCLAT are mentioned

herein below:

10.02.2017

ª The appel ant filed the application under Section 9(2)

of the Code, being CP No. 10/ALD/2017, before the

adjudicating authority under the Code.

14.02.2017

ª The registry of the adjudicating authority pointed out

some procedural defects on the basis of the check

list prepared for scrutiny of the petition/application/

appeal/reply as per Order No. 25/2/2016-NCLT dated

28.07.2016 and listed the application for hearing

before the adjudicating authority on 16.02.2017.

16.02.2017

ª The adjudicating authority granted time to the

appellant for removal of the said procedural defects

on 28.02.2017 and also wanted to know about the

stage of the proceedings before BIFR when the

proceedings stood abated.

28.02.2017

ª The appel ant removed the procedural defects. As

inquired by the adjudicating authority, the appel ant’s

counsel sought for some more time for filing formal

memo by providing/furnishing the latest order passed

by BIFR before the Code came into force.

03.03.2017

ª The appellant filed its formal memo/additional

documents/orders arising in/out of the pending BIFR’s

424

PRACTICAL ASPECTS OF INSOLVENCY LAW

proceedings which stood abated. On 03.03.2017, the

respondent No. 1 debtor appeared before the

Adjudicating Authority and sought liberty to raise its

objections qua the maintainability of the application.

09.03.2017

ª The Corporate debtor/respondent No.1 company filed

its written objections before the Adjudicating Authority

disputing the maintainability of the application filed

on various grounds like time barred debt; the defective

demand notice; civil suit filed against the appel ant

being Civil Suit No. 225 of 2017 before the District

Court and embargo created by Section 252 of the IB

Code, 2016 the proceedings cannot be initiated for a

period of six months after abatement of SICA.

One JK Jute Mill Mazdoor Morcha, Kanpur i.e.

respondent No. 2 herein moved an application seeking

intervention in the mater and brought on record various

orders including the judgment dated 13.11.2014 passed

by this Court in the matter of Ghanshyam Sarda v.

Shiv Shankar Trading Company & Ors. , reported in

(2015) 1 SCC 298 wherein this Court has found that

the sale of assets without BIFR’s permission as

questionable before the BIFR and also an order dated

18.11.2016 passed by this Court in the case of

Ghanshyam Sarda v. Sashikant Jha (i.e. contempt

petition (civil) No. 338 of 2014), wherein the Director(s)

of the corporate debtor i.e. respondent No. 1 have been

held guilty of contempt. It is also said that the corporate

debtor i.e. respondent No. 1 also failed to clear the

legitimate dues of the workmen of jute mil which are

worth more than 100 crores in rupees.

09.03.2017

ª In light of the foregoing scenario, the Adjudicating

Authority for providing substantial justice inter alia

directed the respondent No. 1/Corporate Debtor to

maintain status quo in respect of its immovable

property until further orders.

21.03.2017

ª The interim order passed by the Adjudicating

Authority, Allahabad Bench on 09.03.2017 was

challenged by the respondent No. 1/Corporate Debtor

under Section 61 of the IB Code, 2016 before the

PRACTICAL ASPECTS OF INSOLVENCY LAW

425

National Company Law Appel ate Tribunal (NCLAT)

being Company Appeal No. 9 of 2017. The NCLAT on

21.03.2017 issued notice in the said appeal inter alia

observing that question of law is involved in this case

and directing the Adjudicating Authority not to admit

the application filed under the IB Code, 2016 by the

appellant.

01.05.2017

ª The NCLAT has al owed the AT No. 09/2017 on the

ground that the application and Section 9 petition

filed by appel ant herein was incomplete, defected

and was fit to be rejected. Hence, the NCLAT was

pleased to direct NCLT to reject and close the

application filed by the appel ant under Section 9 of

the IB Code, 2016 passed in the impugned order inter

alia rejecting the application filed by the appel ant

under Section 9 of the IB Code, 2016 read with IB

(Application to Adjudicating Authority) Rules, 2016

being CP No. (IB)10/ALD/ 2017.

13. We may point out at the outset that the learned senior counsel appearing

for the appel ant had submitted that in the instant case the defects which

were pointed out were not of the nature mentioned in the Code but were in

terms of the Companies Act, 2013. For this purpose, he had referred to the

Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules,

2016 (hereinafter referred to as ‘Rules 2016’) and on that basis it was argued

that Section 9(5) of the Code did not apply in the instant case inasmuch as

there has to be difference between ‘defective’ application and ‘incomplete’

application. He also submitted that the respondent had been violating interim

orders passed by BIFR in the proceedings pending before it under SICA.

However, we make it clear at the outset that since we are dealing with the

substantial issue as to whether seven days period provided for removing

the defects is mandatory or not, it is not necessary to touch upon these

mundane aspects. Instead, it would be better to concentrate on the

substance of the matter.

14. As mentioned above, insofar as prescription of fourteen days within

which the adjudicating authority has to pass an order under sub-section (5)

of Section 9 for admitting or rejecting the application is concerned, the

NCLAT has held that the same cannot be treated as mandatory. Though this

view is not under challenge (and rightly so), discussion in the impugned

order on this aspect has definite bearing on the other question, with which

426

PRACTICAL ASPECTS OF INSOLVENCY LAW

this Court is concerned. Therefore, we deem it apposite to discuss the

rationale which is provided by the NCLAT itself in arriving at the aforesaid

conclusion insofar as first aspect is concerned.

15. It is pointed out by the NCLAT that where an application is not disposed

of or an order is not passed within a period specified in the Code, in such

cases the adjudicating authority may record the reasons for not doing so

within the period so specified and may request the President of the NCLAT

for extension of time, who may, after taking into account the reasons so

recorded, extend the period specified in the Code, but not exceeding ten

days, as provided in Section 64(1) of the Code. The NCLAT has thereafter

scanned through the scheme of the Code by pointing out various steps of

the insolvency resolution process and the time limits prescribed therefor. It

is of relevance to mention here that the corporate insolvency resolution

process can be initiated by the financial creditor under Section 7 of the

Code, by the operational creditor under Section 9 of the Code and by a

corporate applicant under Section 10 of the Code. There is a slight difference

in these provisions insofar as criteria for admission or rejection of the

applications filed under respective provisions is concerned. However, it is

pertinent to note that after the admission of the insolvency resolution

process, the procedure to deal with these applications, whether filed by the

financial creditor or operational creditor or corporate applicant, is the same.

It would be relevant to glance through this procedure.

16. On admission of the application, the adjudicating authority is required to

appoint an Interim Resolution Professional (for short, ‘IRP’) in terms of

Section 16(1) of the Code. This exercise is to be done by the adjudicating

authority within fourteen days from the commencement of the insolvency

date. This commencement date is to reckon from the date of the admission

of the application. Under sub-section (5) of Section 16, the term of IRP

cannot exceed thirty days. Certain functions which are to be performed by

the IRP are mentioned in subsequent provisions of the Code, including

management of affairs of corporate debtor by IRP as wel as duties of IRP

so appointed. One of the important functions of the IRP is to invite all

claims against the corporate debtor, col ate al those claims and determine

the financial position of the corporate debtor. After doing that, IRP is to

constitute a committee of creditors which shall comprise of financial creditors

of the corporate debtor. The first meeting of such a committee of creditors is

to be held within seven days of the constitution of the said committee, as

provided in Section 22 of the Code. In the said first meeting, the committee

of creditors has to take a decision to either appoint IRP as Resolution

Professional (RP) or to replace the IRP by another RP. Since term of IRP is

PRACTICAL ASPECTS OF INSOLVENCY LAW

427

thirty days, al the aforesaid steps are to be accomplished within this thirty

days period. Thereafter, when RP is appointed, he is to conduct the entire

corporate insolvency resolution process and manage the operations of the

corporate debtor during the said period. It is not necessary to state the

further steps which are to be taken by the RP in this behalf. What is important

is that the entire corporate insolvency resolution process is to be completed

within the period of 180 days from the date of admission of the applicant.

This time limit is provided in Section 12 of the Act. This period of 180 days

can be extended, but such extension is capped as extension cannot exceed

90 days. Even such an extension would be given by the adjudicating authority

only after recording a satisfaction that the corporate insolvency resolution

process cannot be completed within the original stipulated period of 180

days. If the resolution process does not get completed within the aforesaid

time limit, serious consequences thereof are provided under Section 33 of

the Code. As per that provision, in such a situation, the adjudicating authority

is required to pass an order requiring the corporate debtor to be liquidated in

the manner as laid down in the said Chapter.

17. The aforesaid statutory scheme laying down time limits sends a clear

message, as rightly held by the NCLAT also, that time is the essence of the

Code. Notwithstanding this salutary theme and spirit behind the Code, the

NCLAT has concluded that as far as fourteen days time provided to the

adjudicating authority for admitting or rejecting the application for initiation

of insolvency resolution process is concerned, this period is not mandatory.

For arriving at such a conclusion, the NCLAT has discussed the law laid

down by this Court in some judgments. Therefore, we deem it proper to

reproduce the discussion of the NCLAT itself in this behalf:

“32. In P.T. Rajan v. T.P.M. Sahir and Ors. [2003] 8 SCC 498, the

Hon’ble Supreme Court observed that where Adjudicating Authority has

to perform a statutory function like admitting or rejecting an application

within a time period prescribed, the time period would have to held to be

directory and not mandatory. In the said case, Hon’ble Apex Court

observed:

“48. It is wel -settled principle of law that where a statutory functionary is

asked to perform a statutory duty within the time prescribed therefor, the

same would be directory and not mandatory. ( See Shiveshwar Prasad

Sinha v. The District Magistrate of Monghur & Anr. AIR (1966) Patna 144,

Nomita Chowdhury v. The State of West Bengal & Ors. [1999] CLJ 21 and

Garbari Union Co-operative Agricultural Credit Society Limited & Anr. v..

Swapan Kumar Jana & Ors. [1997] 1 CHN 189).

428

PRACTICAL ASPECTS OF INSOLVENCY LAW

49. Furthermore, a provision in a statute which is procedural in nature

although employs the word “shall” may not be held to be mandatory if

thereby no prejudice is caused.”

33. That the Hon’ble Apex Court has on numerous occasions interpreted

the word ‘shal ’ to mean ‘may’. An analogous position can be found in the

context of the time prescribed for filing Written Statements by Defendants

to a suit, wherein the Hon’ble Apex Court was faced with the question of

a Court’s power to take on record Written Statements that were filed beyond

the period of 90 days, as prescribed under Order VIII Rule 1 of the Code

of Civil Procedure, 1908. In this regard, the Hon’ble Supreme Court in

Kailash v. Nanhku and Ors [2005] 4 SCC 480 held as under:

“27. Three things are clear. Firstly, a careful reading of the language in

which Order 8 Rule 1 has been drafted, shows that it casts an obligation

on the defendant to file the written statement within 30 days from the date

of service of summons on him and within the extended time falling within

90 days. The provision does not deal with the power of the court and also

does not specifical y take away the power of the court to take the written

statement on record though filed beyond the time as provided for. Secondly,

the nature of the provision contained in Order 8 Rule 1 is procedural. It is

not a part of the substantive law. Thirdly, the object behind substituting

Order 8 Rule 1 in the present shape is to curb the mischief of unscrupulous

defendants adopting dilatory tactics, delaying the disposal of cases much

to the chagrin of the plaintiffs and petitioners approaching the court for

quick relief and also to the serious inconvenience of the court faced with

frequent prayers for adjournments. The object is to expedite the hearing

and not to scuttle the same. The process of justice may be speeded up

and hurried but the fairness which is a basic element of justice cannot be

permitted to be buried.”

34. Further, Hon’ble Supreme Court in the matter of Smt. Rani Kusum v.

Smt. Kanchan Devi [2005] 6 SCC 705, concurring with the ratio laid

down in Kailash v. Nanhku (supra) held that:

“10. Al the rules of procedure are the handmaid of justice. The language

employed by the draftsman of processual law may be liberal or stringent,

but the fact remains that the object of prescribing procedure is to advance

the cause of justice. In an adversarial system, no party should ordinarily

be denied the opportunity of participating in the process of justice

dispensation. Unless compel ed by express and specific language of the

statute, the provisions of CPC or any other procedural enactment ought

not to be construed in a manner which would leave the court helpless to

meet extraordinary situations in the ends of justice.

PRACTICAL ASPECTS OF INSOLVENCY LAW

429

11. The mortality of justice at the hands of law troubles a judge’s

conscience and points an angry interrogation at the law reformer.

12. The processual law so dominates in certain systems as to overpower

substantive rights and substantial justice. The humanist rule that procedure

should be the handmaid, not the mistress, of legal justice compels

consideration of vesting a residuary power in the judges to act ex debito

justitiae where the tragic sequel otherwise would be wholly inequitable.

Justice is the goal of jurisprudence, processual, as much as substantive.

(See Sushil Kumar Sen v. State of Bihar [(1975) 1 SCC 774] .)

13. No person has a vested right in any course of procedure. He has only

the right of prosecution or defence in the manner for the time being by or

for the court in which the case is pending, and if, by an Act of Parliament

the mode of procedure is altered, he has no other right than to proceed

according to the altered mode. (See Blyth v. Blyth [(1966) 1 Al ER 524 :

1966 AC 643 : (1966) 2 WLR 634 (HL)] .) A procedural law should not

ordinarily be construed as mandatory; the procedural law is always

subservient to and is in aid to justice. Any interpretation which eludes or

frustrates the recipient of justice is not to be fol owed. (See Shreenath v.

Rajesh [(1998) 4 SCC 543 : AIR 1998 SC 1827] .)

14. Processual law is not to be a tyrant but a servant, not an obstruction

but an aid to justice. Procedural prescriptions are the handmaid and not

the mistress, a lubricant, not a resistant in the administration of justice.”

xxx

xxx

xxx

41. Further, nature of the provisions contained in sub-section (5) of section

7 or sub-section (5) of section 9 and sub-section (4) of section 10 of the

‘Code’ like Order VIII Rule 1 being procedural in nature cannot be treated

to be a mandate of law.

42. The object behind the time period prescribed under sub-section (5) of

section 7, sub-section (5) of section 9 and sub-section (4) of section 10,

like Order VIII, Rule 1 of CPC is to prevent the delay in hearing the disposal

of the cases. The Adjudicating Authority cannot ignore the provisions.

But in appropriate cases, for the reasons to be recorded in writing, it can

admit or reject the petition after the period prescribed under section 7 or

section 9 or section 10.

43. Thus, in view of the aforementioned unambiguous position of law laid

down by the Hon’ble Apex Court and discussion as made above, we hold

that the mandate of sub-section (5) of section 7 or sub-section (5) of

430

PRACTICAL ASPECTS OF INSOLVENCY LAW

section 9 or sub-section (4) of section 10 is procedural in nature, a tool of

aid in expeditious dispensation of justice and is directory.”

18. The NCLAT has also held that fourteen days period is to be calculated

‘from the date of receipt of application’. The NCLAT has clarified that date of

receipt of application cannot be treated to be the date of filing of the

application. Since the Registry is required to find out whether the application

is in proper form and accompanied with such fee as may be prescribed, it

wil take some time in examining the application and, therefore, fourteen

days period granted to the adjudicating authority under the aforesaid

provisions would be from the date when such an application is presented

before the adjudicating authority, i.e. the date on which it is listed for

admission/order.

19. After analysing the provision of fourteen days time within which the

adjudicating authority is to pass the order, the NCLAT immediately jumped

to another conclusion, viz. the period of seven days mentioned in proviso to

sub-section (5) of Section 9 for removing the defect is mandatory, with the

following discussion:

“44. However, the 7 days’ period for the rectification of defects as stipulated

under proviso to the relevant provisions as noticed above is required to

be complied with by the corporate debtor whose application, otherwise,

being incomplete is fit to be rejected. In this background we hold that the

proviso to sub-section (5) of section 7 or proviso to sub-section (5) of

section 9 or proviso to sub-section (4) of section 10 to remove the defect

within 7 days are mandatory, and on failure applications are fit to be

rejected.”

There is no further discussion on this aspect.

20. We are not able to decipher any valid reason given while coming to the

conclusion that the period mentioned in proviso is mandatory. The order of

the NCLAT, thereafter, proceeds to take note of the provisions of Section 12

of the Code and points out the time limit for completion of insolvency

resolution process is 180 days, which period can be extended by another

90 days. However, that can hardly provide any justification to construe the

provisions of proviso to sub-section (5) of Section 9 in the manner in which

it is done. It is to be borne in mind that limit of 180 days mentioned in

Section 12 also starts from the date of admission of the application. Period

prior thereto which is consumed, after the filing of the application under

Section 9 (or for that matter under Section 7 or Section 10), whether by the

Registry of the adjudicating authority in scrutinising the application or by

PRACTICAL ASPECTS OF INSOLVENCY LAW

431

the applicant in removing the defects or by the adjudicating authority in

admitting the application is not to be taken into account. In fact, till the

objections are removed it is not to be treated as application validly filed

inasmuch as only after the application is complete in every respect it is

required to be entertained. In this scenario, making the period of seven

days contained in the proviso as mandatory does not commend to us. No

purpose is going to be served by treating this period as mandatory. In a

given case there may be weighty, valid and justifiable reasons for not able

to remove the defects within seven days. Notwithstanding the same, the

effect would be to reject the application.

21. Let us examine the question from another lens. The moot question would

be as to whether such a rejection would be treated as rejecting the application

on merits thereby debarring the application from filing fresh application or it

is to be treated as an administrative order since the rejection was because

of the reason that defects were not removed and application was not

examined on merits. In the former case it would be travesty of justice that

even if the case of the applicant on merits is very strong, the applicant is

shown the door without adjudication of his application on merits. If the latter

alternative is accepted, then rejection of the application in the first instance

is not going to serve any purpose as the applicant would be permitted to file

fresh application, complete in all aspects, which would have to be entertained.

Thus, in either case, no purpose is served by treating the aforesaid provision

as mandatory.

22. Various provisions of the Code would indicate that there are three stages:

(i) First stage is the filing of the application. When the application is

filed, the Registry of the adjudicating authority is supposed to

scrutinise the same to find out as to whether it is complete in all

respects or there are certain defects. If it is complete, the same

shal be posted for preliminary hearing before the adjudicating authority.

If there are defects, the applicant would be notified about those defects

so that these are removed. For this purpose, seven days time is

given. Once the defects are removed then the application would be

posted before the adjudicating authority.

(i ) When the application is listed before the adjudicating authority, it

has to take a decision to either admit or reject the application. For

this purpose, fourteen days time is granted to the adjudicating

authority. If the application is rejected, the matter is given a quietus

at that level itself. However, if it is admitted, we enter the third stage.

432

PRACTICAL ASPECTS OF INSOLVENCY LAW

(iii) After admission of the application, insolvency resolution process

commences. Relevant provisions thereof have been mentioned above.

This resolution process is to be completed within 180 days, which is

extendable, in certain cases, up to 90 days. Insofar as the first stage

is concerned, it has no bearing on the insolvency resolution process

at all, inasmuch as, unless the application is complete in every

respect, the adjudicating authority is not supposed to deal with the

same. It is at the second stage that the adjudicating authority is to

apply its mind and decide as to whether the application should be

admitted or rejected. Here adjudication process starts. However, in

spite thereof, when this period of fourteen days given by the statute

to the adjudicating authority to take a decision to admit or reject the

application is directory, there is no reason to make it mandatory in

respect of the first stage, which is pre-adjudication stage.

23. Further, we are of the view that the judgments cited by the NCLAT and

the principle contained therein applied while deciding that period of fourteen

days within which the adjudicating authority has to pass the order is not

mandatory but directory in nature would equally apply while interpreting

proviso to sub-section (5) of Section 7, Section 9 or sub-section (4) of

Section 10 as well. After al , the applicant does not gain anything by not

removing the objections inasmuch as til the objections are removed, such

an application would not be entertained. Therefore, it is in the interest of the

applicant to remove the defects as early as possible.

24. Thus, we hold that the aforesaid provision of removing the defects within

seven days is directory and not mandatory in nature. However, we would

like to enter a caveat.

25. We are also conscious of the fact that sometimes applicants or their

counsel may show laxity by not removing the objections within the time

given and make take it for granted that they would be given unlimited time

for such a purpose. There may also be cases where such applications are

frivolous in nature which would be filed for some oblique motives and the

applicants may want those applications to remain pending and, therefore,

would not remove the defects. In order to take care of such cases, a balanced

approach is needed. Thus, while interpreting the provisions to be directory

in nature, at the same time, it can be laid down that if the objections are not

removed within seven days, the applicant while refilling the application after

removing the objections, file an application in writing showing sufficient

case as to why the applicant could not remove the objections within seven

days. When such an application comes up for admission/order before the

PRACTICAL ASPECTS OF INSOLVENCY LAW

433

adjudicating authority, it would be for the adjudicating authority to decide as

to whether sufficient cause is shown in not removing the defects beyond

the period of seven days. Once the adjudicating authority is satisfied that

such a case is shown, only then it would entertain the application on merits,

otherwise it will have right to dismiss the application. The aforesaid process

indicated by us can find support from the judgment of this Court in Kailash

v. Nanhku & Ors., [2005] 4 SCC 480, wherein the Court held as under:

“46. (iv) The purpose of providing the time schedule for filing the written

statement under Order 8 Rule 1 CPC is to expedite and not to scuttle the

hearing. The provision spells out a disability on the defendant. It does not

impose an embargo on the power of the court to extend the time. Though

the language of the proviso to Rule 1 Order 8 CPC is couched in negative

form, it does not specify any penal consequences flowing from the non-

compliance. The provision being in the domain of the procedural law, it

has to be held directory and not mandatory. The power of the court to

extend time for filing the written statement beyond the time schedule

provided by Order 8 Rule 1 CPC is not completely taken away.

(v) Though Order 8 Rule 1 CPC is a part of procedural law and hence

directory, keeping in view the need for expeditious trial of civil causes

which persuaded Parliament to enact the provision in its present form, it

is held that ordinarily the time schedule contained in the provision is to be

followed as a rule and departure therefrom would be by way of exception.

A prayer for extension of time made by the defendant shall not be granted

just as a matter of routine and merely for the asking, more so when the

period of 90 days has expired. Extension of time may be al owed by way

of an exception, for reasons to be assigned by the defendant and also be

placed on record in writing, howsoever briefly, by the court on its being

satisfied. Extension of time may be al owed if it is needed to be given for

circumstances which are exceptional, occasioned by reasons beyond

the control of the defendant and grave injustice would be occasioned if

the time was not extended. Costs may be imposed and affidavit or

documents in support of the grounds pleaded by the defendant for

extension of time may be demanded, depending on the facts and

circumstances of a given case.”

26. In fine, these appeals are allowed and that part of the impugned judgment

of NCLAT which holds proviso to sub-section (5) of Section 7 or proviso to

sub-section (5) of Section 9 or proviso to sub-section (4) of Section 10 to

remove the defects within seven days as mandatory and on failure

applications to be rejected, is set aside. No costs.

434

PRACTICAL ASPECTS OF INSOLVENCY LAW

Hon’ble Mr. Justice A.K. Sikri pronounced the judgment of the Bench

comprising His Lordship and Hon’ble Mr.Justice A.K. Sikri.

The appeals are al owed in terms of the signed reportable judgment.

.............................................J.

(A.K. SIKRI)

.............................................J.

(ASHOK BHUSHAN)

NEW DELHI;

SEPTEMBER 19, 2017.

ITEM NO.1501

COURT NO.6

SECTION XVII

SUPREME COURT OF INDIA RECORD OF PROCEEDINGS

Civil Appeal No(s).8400/2017

SURENDRA TRADING COMPANY

Appel ant(s)

VERSUS

JUGGILAL KAMLAPAT JUTE MILLS COMPANY LTD & ORS.

Respondent(s)

WITH

Diary No(s). 22835/2017 (XVII)

Date : 19-09-2017 These appeals were cal ed on for pronouncement of

judgment today.

For Appellant(s)

Mr. Sunil Fernandes, AOR

Mr. Gaurav Kejriwal, AOR

Mr. Sujit Keshri, Adv.

For Respondent(s)

Mr. Kailash Chand, AOR

Mr. Satish Vig, AOR

Ms. Kanika Singh, Adv.

Ms. R.K. Mohit Gupta, Adv.

Ms. Sangram Singh Hooda, Adv.

M/s. Coac, AOR

Mr. Akshat Kumar, AOR

PRACTICAL ASPECTS OF INSOLVENCY LAW

435

Hon’ble Mr. Justice A.K. Sikri pronounced the judgment of the Bench

comprising His Lordship and Hon’ble Mr.Justice A.K. Sikri.

The appeals are al owed in terms of the signed reportable judgment.

(B.PARVATHI)

(MALA KUMARI SHARMA)

COURT MASTER

COURT MASTER

(Signed reportable judgment is placed on the file)

436

PRACTICAL ASPECTS OF INSOLVENCY LAW

ANNEXURE X.13

IN THE NATIONAL COMPANY LAW APPELLATE TRIBUNAL

COMPANY APPELLATE JURISDICTION

Company Appeal (AT) (Insolvency) No. 28 of 2017

(arising out of Order dated 31st January 2017 passed by NCLT, Mumbai

Bench in C.P.No. 06/1 & BP/NCLT/MAH/2017)

Smart Timing Steel Ltd.

...Operational

Creditor

Vs.

National Steel and Agro Industries Ltd.

....Corporate Debtor

Present:

For Appellants: Mr. Sanjay Grover, Advocate

For Respondents: Mr. Sandeep S.Deshmukha, Advocate

JUDGEMENT

SUDHANSU JYOTI MUKHOPADHAYA, J

1. This appeal under section 61 of Insolvency and Bankruptcy Code (‘I&B

Code’) has been preferred by appel ant against order dated 31st January,

2017 passed by “Adjudicating Authority” in Mumbai Bench in CP No. 06/1 &

BP/NCLT/MAH/2017, which reads as follows :

“The petitioner/operational creditor filed this creditor petition under section

9 of Insolvency and Bankruptcy Code without filing certificate from the

financial institution maintaining accounts of the operational creditor

confirming that there is no payment of this unpaid operational debt by the

corporate debtor as set out in (c) of sub-section (2) of section 9 of this

Code 2016.

Looking at non-filing of the certificate that is required to be filed along

with this petition, this Bench had already given time to furnish the said

document, but the counsel failed to furnish the said certificate. When this

Bench has put it to the petitioner counsel how this Bench could pass this

order without furnishing the certificate mandatorily to be filed along with

the petition, the counsel appearing on behalf of the operational creditor

submits that it is impossible to file copy of such certificate from the

financial institution for the bank of the operational creditor is situated

PRACTICAL ASPECTS OF INSOLVENCY LAW

437

outside India, therefore, the compliances with such requirements shall be

exempted.

On perusal of section 9 of Insolvency and Bankruptcy Code, it is evident,

that it is mandatory to file copy of the certificate from the financial

institutions reflecting non-payment of the operational debt impugned, for

the operational creditor has failed to annex copy of the said certificate as

required under section 9(3)(c) of the Code, this petition is liable to be

rejected.

Accordingly, the same is hereby rejected.”

2. The question for determination in this appeal is whether filing of “a copy of

certificate from the financial institution maintaining accounts of the

operational creditor confirming that there is no payment of unpaid operational

debt by the corporate debtor as prescribed under clause (c) of sub-section

(3) of section 9 of the I&B Code is mandatory or directory.

3. The appel ant who claimed to be operational creditor filed an application

under section 9 of I&B Code for initiation of corporate insolvency resolution

process, enclosing some of the relevant documents. However, no copy of

the certificate from the financial institution maintaining account of the

operational creditor as prescribed under clause (c) of sub-section (3) of

section 9 was enclosed. For the said reason the adjudicating authority rejected

the application.

4. For deciding the issue it is desirable to notice relevant provisions of I&B

Code and Rules framed thereunder. Sub-section (14) of section 3 defines

“Financial Institution” means –

(a) a scheduled bank;

(b) financial institution as defined in section 45-I of the Reserve Bank of

India Act, 1934 (2 of 1934); and

(c) public financial institution as defined in clause (72) of section 2 of

the Companies Act, 2013 (18 of 2013); and

(d) such other institution as the Central Government may by notification

specify as a financial institution.

5. The appel ant is a foreign company of Hong–Kong having no office or

bank account in India.

6. As the appel ant has no account in any scheduled bank or financial

institution as defined in section 45-I of the RBI Act 1934 nor having such

438

PRACTICAL ASPECTS OF INSOLVENCY LAW

account with “public financial institution” as defined in clause (72) of section

2 of the Companies Act, 2013 or with any other institution notified by Central

Government as “financial institution”, it failed to enclose any certificate

from “financial institution” maintaining account of the operational creditor.

7. Learned counsel appearing on behalf of the appellant submitted that the

foreign companies and multi-national companies having no office or having

no account in India with any of the “financial institution” will suffer to recover

the debt as due from “corporate debtors” of India. The appel ant being a

foreign based “operational creditor”, the “Adjudicating Authority” was required

to interpret the provisions of I&B Code in such a manner that section 9

would have taken in its fold al the “operational creditors” who are entitled to

recover the debt defaulted by “corporate creditors” of India. Learned counsel

for the appel ant further submitted that the word ‘shal ’ used in sub-section

(3) of section 9 for furnishing documents, etc., should be read as ‘may’, and

hold that sub-section (3) of section 9 is directory. Reliance was placed on

hon’ble Supreme Court decision in Kailash v. Nanhku [2005] 4 SCC 480.

8. In the said case the hon’ble Supreme Court while deciding the question

whether time limit of 90 days as prescribed by the proviso appended to rule

1 of order VIII of CPC is mandatory or directory in nature? The hon’ble

Supreme Court held that ordinarily the time prescribed by order VIII, rule 1

has to be honoured but it held that the provision being part of the procedural

code is directory.

9. With due respect we are of the view that aforesaid decision of hon’ble

Supreme Court in Kailash (supra) is not applicable in the present case, as

clause (c) of sub-section (3) of section 7 does not relate to prescription of

time.

10. Section 9 deals with application for initiation of corporate insolvency

resolution process by “operational creditor” which reads as follows :

“9. Application for initiation of corporate insolvency resolution

process by operational creditor. – (1) After the expiry of the period

often days from the date of delivery of the notice or invoice demanding

payment under sub-section (1) of section 8, if the operational creditor

does not receive payment from the corporate debtor or notice of the dispute

under sub-section (2) of section 8, the operational creditor may file an

application before the Adjudicating Authority for initiating a corporate

insolvency resolution process.

(2) The application under sub-section (1) shal be filed in such form and

manner and accompanied with such fee as may be prescribed.

PRACTICAL ASPECTS OF INSOLVENCY LAW

439

(3) The operational creditor shal , along with the application furnish –

(a) a copy of the invoice demanding payment or demand notice delivered

by the operational creditor to the corporate debtor;

(b) an affidavit to the effect that there is no notice given by the corporate

debtor relating to a dispute of the unpaid operational debt;

(c) a copy of the certificate from the financial institutions maintaining

accounts of the operational creditor confirming that there is no

payment of an unpaid operational debt by the corporate debtor; and

(d) such other information as may be specified.

(4) An operational creditor initiating a corporate insolvency resolution

process under this section, may propose a resolution professional to act

as an interim resolution professional.

(5) The Adjudicating Authority shall, within fourteen days of the receipt of

the application under sub-section (2), by an order –

(i) admit the application and communicate such decision to the

operational creditor and the corporate debtor. If –

(a) the application made under sub-section (2) is complete;

(b) there is no repayment of the unpaid operational debt;

(c) the invoice or notice for payment to the corporate debtor has

been delivered by the operational creditor;

(d) no notice of dispute has been received by the operational creditor

or there is no record of dispute in the information utility; and

(e) there is no disciplinary proceeding pending against any resolution

professional proposed under sub-section

(i ) reject the application and communicate such decision to the

operational creditor and the corporate debtor, if –

(a) the application made under sub-section (2) is incomplete;

(b) there has been repayment of the unpaid operational debt;

(c) the creditor has not delivered the invoice or notice for payment

to the corporate debtor;

(d) notice of dispute has been received by the operational creditor

or there is a record of dispute in the information utility; or

440

PRACTICAL ASPECTS OF INSOLVENCY LAW

(e) any disciplinary proceeding is pending against any proposed

resolution professional :

Provided that Adjudicating Authority, shal before rejecting an application

under sub-clause (a) of clause (i ) give a notice to the applicant to rectify

the defect in his application within seven days of the date of receipt of

such notice from the Adjudicating Authority.

(6) The corporate insolvency resolution process shal commence from

the date of admission of the application under sub-section (5) of this

section.”

11. On perusal of entire section (3) along with sub-sections and clauses,

inclusive of proviso, it would be crystal clear that, the entire provision of

sub-section (3) of section 9 required to be mandatorily followed and it is not

empty statutory formality.

12. Sub-section (2) stipulates filing of an application under section (1) only

in the form and manner and accompanied with such fees as may be

prescribed. The Insolvency and Bankruptcy (Application to Adjudicating

Authority) Rules, 2016 (“Adjudicating Authority Rules, 2016”) are also

enacted in exercise of the power conferred by clauses (c), (d), (e), (f), of

sub-section 239 read with sections 7, 8, 9 and 10 of the I&B Code. The rules

provide the procedure required to be fol owed by filing an application by

corporate insolvency resolution process. As per rule 6 of the Adjudicating

Authority Rules, 2016, an operational creditor shal make an application for

initiating the corporate insolvency process under section 9, in Form 5

accompanied with documents and records required therein. As per sub-rule

(2) of rule 6 it is mandatory again to despatch a copy of application filed with

the adjudicating authority, by registered post or speed post to the registered

office of the corporate debtor.

13. The provisions of sub-section (3) mandates the operational creditor to

furnish copy of invoice demanding payment or demand notice delivered by

the operational creditor to the corporate debtor, an affidavit to the effect

that, there is no notice given by the corporate debtor relating to dispute of

unpaid operational debt, a copy of the certificate from the financial institutions

maintaining accounts of the operational creditor confirming that, there is no

payment of an unpaid operational debt by the corporate debtor and such

other information as may be stipulated. Sub-section (5) of section 9 is

procedure required to be fol owed by Adjudicating Authority. One can say

that procedural part is not mandatory but is directory.

14. The provision being “directory” or “mandatory” has fallen for consideration

PRACTICAL ASPECTS OF INSOLVENCY LAW

441

before hon’ble Supreme Court on numerous occasions. In Manilal Shah v.

Sardar Sayed Ahmed [1955] 1 SCR 108, the hon’ble Apex Court held that

where statute itself provide consequences of breach or non-compliance,

normally the provision has to be regarded as having mandatory in nature.

15. One of the cardinal principles of interpretation of statute is that, the

words of statute must prima facie be given their ordinary meaning, unless

of course, such construction leads to absurdity or unless there is something

in the context or in the object of the statute to the contrary. When the words

of statute are clear, plain and unambiguous, then, the courts are bound to

give effect to that meaning, irrespective of the consequences involved.

Normally, the words used by the Legislature themselves declare the

legislative intent particularly where the words of the statute are clear, plain

and unambiguous. In such case, effort must be to give a meaning to each

and every word used by the Legislature and it is not sound principle of

construction to brush aside words in statute as being redundant or surplus,

and particularly when such words can have proper application in

circumstances conceivable within the contemplation of the statute.

16. For determination of the issue whether a provision is mandatory or not,

it will be desirable to refer to decision of hon’ble Supreme Court in State of

Mysore v. V K Kangan [1976] 2 SCC 895. In the said case, the hon’ble

Supreme Court specifical y held :

“10. In determining the question whether a provision is mandatory or

directory, one must look into the subject-matter and consider the

importance of the provision disregarded and the relation of that provision

to the general object intended to be secured. No doubt, al laws are

mandatory in the sense they impose the duty to obey on those who come

within its purview. But it does not fol ow that every departure from it shall

taint the proceedings with a fatal blemish. The determination of the question

whether a provision is mandatory or directory would, in the ultimate

analysis, depend upon the intent of the law-maker. And that has to be

gathered not only from the phraseology of the provision but also by

considering its nature, its design and the consequences which would follow

from construing it in one way or the other.”

16. Therefore, it is clear that the word ‘shal ’ used in sub-section (3) of

section 9 of I&B Code is mandatory, including clause 3 therein.

17. The appellant has enclosed a Final Award given by sole arbitrator, Hong

Kong Special Administrative Region, People’s Republic of China dated 18th

August, 2014 to suggest that the respondent-corporate debtor is liable to

442

PRACTICAL ASPECTS OF INSOLVENCY LAW

pay the amount determined by arbitrator but defaulted to pay the amount.

Even if such submission is accepted, the Adjudicating Authority cannot

assume that the amount has not been paid pursuant to the award til on the

basis of evidence on record, i.e., copy of certificate from the “financial

institution” maintaining accounts of the appellant confirming that there is no

payment of an unpaid operational debt by the corporate debtor.

18. From the record we find that the appel ant was given opportunity to

complete the record by enclosing the certificate of “financial institution” and

thereby to remove the defects within 7 days but failed to do so.

19. In J K Jute Mills Co. Ltd. v. Surendra Trading Company Company Appeal

(AT) No. 09 of 2017, the Appel ate Tribunal was considering whether the time

limit prescribed in I&B Code for admitting or rejecting the petition or initiation

of insolvency resolution process is mandatory? The Appel ate Tribunal, by

judgment dated 1st May, 2017 held that proviso to sub-section (5) of section

7 and proviso to sub-section (5) of section 9 granting “financial creditor/

operational creditor” to complete the documents, if incomplete is mandatory.

20. In view of the aforesaid findings of this Appellate Tribunal in J K Jute

Mills Co. Ltd., the appel ant having failed to complete the documents within

7 days, the Tribunal was right in dismissing the application preferred by the

appellant.

21. The argument that the foreign companies having no office in India or no

account in India with any financial institution will suffer in recovering the

debt from corporate debtor cannot be accepted as apart from the I&B Code,

there are other provisions of recovery like suit which can be preferred by

any person.

22. We find no merit in this appeal. It is accordingly dismissed. However, in

the facts and circumstances, there shal be no order as to cost.

(Mr. Balvinder Singh)

(Justice S.J. Mukhopadhaya)

Member (Technical)

Chairperson

NEW DELHI

19th May, 2017

PRACTICAL ASPECTS OF INSOLVENCY LAW

443

ANNEXURE X.14

NATIONAL COMPANY LAW APPELLATE TRIBUNAL, NEW DELHI

COMPANY APPELLATE JURISDICTION

Company Appeal (AT) (Insolvency) 39 of 2017

(arising out of order dated 10th April, 2017 passed by National Company

Law Tribunal, Mumbai Bench in CP No. 5/Mah/2017 of 2017)

IN THE MATTER OF:

Uttam Galva Steels Limited

Appellant

V.

DF Deutsche Forfait AG & Anr.

Rspondents

Present: For Appeallant : - Mr Sudip to Sarkar and Mr Virendra Ganda,

Sr. Advocates, Mr Arvind Kumar Gupta, Mr Sumesh Dhawan,

Ms Purti Marwaha Gupta, Mr Mahesh Agarwal, Mr Anuj Kumar,

Ms Vatsala Kak and Mr Rajeev Kumar, Advocate.

For Respondents: - Mr Vivek Sibal, Senior Advocate, Ms Pooja

M Saigal, Mr Akshay Gupta, Advocates and Mr Sahil Bhatia,

POA for the Respondent.

JUDGEMENT

SUDHANSU JYOTI MUKHOPADHAYA, J.

1. The respondents – both of whom claim to be operational creditor(s) filed

a joint application under section 9 of the Insolvency and Bankruptcy Code,

2016 (‘I&B Code’) for initiation of corporate insolvency resolution process

against appel ant-corporate debtor. By impugned order dated 10th April, 2017,

Learned Adjudicating Authority (National Company Law Tribunal) Mumbai

Bench while rejected the objection as were raised by the appel ant, admitted

the application and directed to refer the matter to the Insolvency and

Bankruptcy Board of India to recommend name of interim resolution

professional for his appointment.

2. Learned counsel for the appellant-corporate debtor challenged the impugned

order on different count. It was submitted that there is a pre-existing bona

fide dispute between the parties and, therefore, the insolvency application

under section 9 of the I&B Code is not maintainable. In support of aforesaid

444

PRACTICAL ASPECTS OF INSOLVENCY LAW

submission, it was contended that :

(i) there is no privity of contract with the respondents;

(i ) respondents violated the contractual terms;

(iii) appel ant disputed execution of contract;

(iv) there is dispute about quantum of default;

(v) there is a dispute as to who is the defaulter (whether the default can

at al be attributed to Uttam Steels in view of actual liability being

that of a 3rd party);

(vi) there is a dispute as to whether the respondents are operational

creditors of the appel ant, etc.

3. It was pointed out that the respondents had issued a winding up notice on

8th December, 2016 much prior to the issuance of so-cal ed notice under

section 8 of the I&B Code. Pursuant to which, the appel ant disputed the

claim by a detailed reply dated 3rd January, 2017. Apart from that, the

respondents are relying on a document dated 27th December, 2013 to fix

liability on the appellant, which has not been signed by appel ant and was

brought to the notice of the respondents in the year 2013 itself.

The learned counsel for the appel ant referred to an e-mail dated 10th April,

2014 forwarded by one of the respondent to demonstrate existence of bona

fide dispute between the parties and submitted that in view of bona fide pre-

existing dispute, in terms of sub-section (6) of section 5 of the I&B Code,

the joint insolvency application is not maintainable.

4. It was further pointed out that the notice under section 8 of I&B Code

dated 28th February, 2017 was issued jointly by two respondents, both of

whom claimed to be “operational creditors” but not by respondents themselves

but through their advocate, Ms Sonu Tandon. According to appellant the

joint petition under section 9 by two separate operational creditors is not

permissible and Demand Notice under section 8 in Form-3 or Form 4 of

Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules,

2016 (‘Adjudicating Authority Rules’) was not issued by the “authorised

persons” in accordance with law.

5. It was further submitted that the certificate of “financial institution” as

prescribed and mandatory under clause (c) of sub-section (3) of section 9

of the I&B Code was not filed by respondents in support of their claim that

there is no payment of the unpaid operational debt. Further, according to

appellant, the bank certificate dated 6th March, 2017 submitted by

PRACTICAL ASPECTS OF INSOLVENCY LAW

445

respondents is defective on multiple counts as it was not issued by a

notified “financial institution”, but has been issued by “Misr Bank” which

is not recognised as a “financial institution” in India as per sub-section

(14) of section 3 read with clause (c) of sub-section (3) of section 9 of the

I&B Code. It was further contended that the affidavit in the insolvency

application was also defective and incomplete. According to the learned

counsel for the appellant, the affidavit in support of insolvency application

should have been filed, as prescribed in Form-5 of the Adjudicating

Authority Rules.

6. On the other hand according to learned counsel for the respondents a

joint petition by “operational creditors” is maintainable. Joint petition per say

would indicate or suggest the joinder of more than one cause of action to

enable the parties/litigants to institute a proceeding jointly in the court of

law by pleading, inter alia, a commonality of interest of reliefs. He further

submitted that “AIC Handles GmbH” (supplier) who entered into sales contract

with the appel ant (Uttam Galva Steels Ltd.) for sale of steel bil ets for a

value of US$ 10,800,000 and raised an invoice for US$ 10,787,040. According

to respondents, no disputes were raised by the appel ant with regard to

delivery of the goods, either in terms of the quality or quantity. The debt,

which was secured by a col ateral security in the form of a Bill of Exchange

for US$ 5,387,040 and US$ 5,400,000 was thereafter, assigned to 1st

respondent by forfeiting agreement by supplier.

7. He also highlighted facts relating to sale of goods through sale contracts.

It was submitted that transaction was single had the same has not been

split in two cause of actions as is erroneously contended by the appel ant.

It is only the right to receive payment under the bil s of exchange that has

now been vested in the two entities i.e., 1st respondent and 2nd respondent.

Therefore, in essence, there is no joinder of cause of action but only right to

receive the payment under the bil s of exchange having been vested in two

entities and, therefore, a joint petition has been filed by two entities with

respect to single cause of action and the same is maintainable under section

9 of the I&B Code.

8. Learned counsel for the respondents submitted that in terms of rule 10 of

the “Adjudicating Authority Rules, 2016”, rules 20, 21, 22, 23, 24 and 25 of

the “NCLT Rules 2016” stands adopted. Reliance was also placed on

notification dated 20th December, 2016 whereby NCLT Rules, 2016 was

amended and rule 23A was inserted, which is as fol ows :

“23A. Presentation of joint petition. – (1) The Bench may permit more

than one person to join together and present a single petition if it is

446

PRACTICAL ASPECTS OF INSOLVENCY LAW

satisfied, having regard to the cause of action and the nature of relief

prayed for, that they have a common interest in the matter.

(2) Such permission shall be granted where the joining of the petitioners

by a single petition is specifically permitted by the Act.”

In view of rule 23A it was contended that a joint petition is maintainable.

9. It was further contended that the appel ant himself has admitted that a

suit was filed by appel ant before the hon’ble High Court of Bombay but

therein the appel ant has not disputed the transactions of sale/purchase in

terms of quality/quantity of goods supplied nor has disputed the existence

of debt. The only contention it sought to raise is that the goods were meant

for consumption of another end-user, namely, “Aartee Commodities (UK)

Ltd.” and that the said end user has not paid any amount to the appel ant

despite the notice of demand for supplies made.

10. Insofar as issuance of notice under section 8 of the I&B Code through a

lawyer is concerned, according to respondents, notice under section 8 can

also be given through a lawyer. Learned counsel for the respondents

submitted that settled position is that the procedures are hand maiden of

justice which cannot defeat the substantive rights of the parties. The matter

of procedure is within the realm of curial law and are not to be read in a

manner that defeat the very purpose and the intent of enactment or in a

manner that takes away or abridge, the substantive rights of the party.

Therefore, the format of demand notice cannot be stated to be mandatory

and that it does not suggest or mandate that it is to be issued by an operational

creditor personally.

11. Insofar as certificate by financial institutions is concerned, it was

contended that in the case of Smart Timing Steel Ltd. v. National Steel &

Agro Industries Ltd., the Appel ate Tribunal while held the requirement of

certificate is mandatory, but in that case no such certificate was filed by

the party. In the said case the creditor had no office in India and no certificate

of an financial institution was filed. On the other hand, in the present case,

the respondents along with their application to the Adjudicating Authority

has filed a certificate by a banking company which maintains its operations

to prove that no payment has been received in response to the notice for

demand issued under section 8 of the I&B Code. Since the requirement of

certificate by a financial institution which has been held to be mandatory is

only for the purpose of confirming or ascertaining through a trustworthy

source like any financial institution to find out, whether any payment has

been received in response to the demand notice or not. Learned counsel

PRACTICAL ASPECTS OF INSOLVENCY LAW

447

submitted that in the present case a certificate of bank albeit incorporated

under the law of Germany has been produced to affirm that no payment has

been received.

12. It was also submitted that the appel ant has accepted that the end

customer is “Aartee Commodities (UK) Ltd.” which has to make payment

(though this assertion is being denied by the respondents) and such end

customer has not made payment to the appel ant, therefore, non-payment

of the invoice is an admitted fact and require no further elaboration by way

of independent certificate in the manner interpreted by the Appellate Tribunal.

However, as the certificate of the foreign bank has been produced in support

of the claim that no amount has been received by the respondents any

other interpretation would frustrate the rights of a foreign entities to file an

insolvency petition as an operational creditor under the I&B Code.

13. The questions involved in this appeal are :

(i) Whether a joint application by two or more operational creditors under

section 9 of the I&B Code is maintainable?

(i ) Whether it is mandatory to file of recognised financial institution

along with an application under section 9 of the I&B Code?

(iii) Whether the demand notice with invoice under section 8 of the I&B

Code can be issued by any lawyer on behalf of an operational creditor?

and

(iv) Whether there is an existence of dispute, if any, in the present case?

14. To decide the issues, it is desirable to notice the difference between

sections 7 and 9 of I&B Code. Apart from the fact that some of the questions

already stand decided by this Appel ate Tribunal but in this appeal, we have

given main thrust on the questions not decided earlier, i.e., maintainability

of a joint application under section 9 of the I&B Code and whether a notice

under section 8, can be given through a lawyer.

15. Initiation of insolvency resolution process by ‘financial creditor’ either

by itself or jointly with other Financial Creditors is provided in section 7 of

the I&B Code. As per sub-section (1) of section 7 of the I&B Code, the

trigger of filing of an application by a financial creditor by himself or jointly

with other financial creditors before the Adjudicating Authority is when a

default in respect of any financial debt has occurred. Sub-section (2) of

section 7 of the I&B Code provides that a financial creditor to make an

application on the prescribed form and manner and with documents as

prescribed in sub-section (3) of section 7 of the I&B Code. The relevant

448

PRACTICAL ASPECTS OF INSOLVENCY LAW

provision of section 7 of the I&B Code reads as follows :

“7. Initiation of corporate insolvency resolution process by financial

creditor. – (1) A financial creditor either by itself or jointly with other

financial creditors may file an application for initiating corporate insolvency

resolution process against a corporate debtor before the Adjudicating

Authority when a default has occurred.

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.”

16. Unlike section 7 of the I&B Code, before making an application to the

Adjudicating Authority under section 9 of the I&B Code, the requirements

under section 8 of the I&B Code are required to be fulfil ed, as apparent

from the said provision, as quoted below :

‘8. 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. Persons who may initiate corporate

insolvency resolution process. Initiation of corporate insolvency resolution

process by financial creditor. Insolvency resolution by operational creditor.

(2) The corporate debtor shall, within a period often 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;

PRACTICAL ASPECTS OF INSOLVENCY LAW

449

(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

(i ) by sending an attested copy of record that the operational

creditor has encashed a cheque issued by the corporate debtor.

Explanation : For the purposes of this section, a “demand notice” means

a notice served by an operational creditor to the corporate debtor

demanding repayment of the operational debt in respect of which the

default has occurred.

17. Under sub-section (1) of section 8 of the I&B Code, an operational creditor

on occurrence of a default, is required to deliver the notice of payment of

unpaid debt or get copy of the invoice payment of the defaulted amount

served on the corporate debtor. This is the condition, precedent under sections

8 and 9 of the I&B Code, unlike section 7 before making an application to

the adjudicating authority under section 9 of the I&B Code. Under sub-section

(1) of section 9 of the Code, the right to file an application accrues after

expiry of ten days from the delivery of demand notice or copy of invoice, as

the case may be. If the operational creditor does not receive payment from

the corporate debtor or notice of dispute under sub-section (2) of section 8,

the operational creditor only thereafter may file an application before the

Adjudicating Authority for the initiation of corporate insolvency resolution

process.

18. An application under section 9 of I&B Code is required to be filed in such

format and manner and accompanied by such fee, as may be prescribed.

The operational creditor along with the application is required to furnish

documents as mentioned in clauses (a), (b), (c) and (d) of sub-section (3) of

section 9 of I&B Code, and quoted below :

“9. Application for initiation of corporate insolvency resolution

process by operational creditor. – (1) After the expiry of the period of

ten days from the date of delivery of the notice or invoice demanding

payment under sub-section (1) of section 8, if the operational creditor

does not receive payment from the corporate debtor or notice of the

dispute under sub-section (2) of section 8, the operational creditor may

file an application before the Adjudicating Authority for initiating a corporate

insolvency resolution process.

(2) The application under sub-section (1) shal be filed in such form and

manner and accompanied with such fee as may be prescribed.

450

PRACTICAL ASPECTS OF INSOLVENCY LAW

(3) The operational creditor shal , along with the application furnish –

(a) a copy of the invoice demanding payment or demand notice delivered

by the operational creditor to the corporate debtor;

(b) an affidavit to the effect that there is no notice given by the corporate

debtor relating to a dispute of the unpaid operational debt;

(c) a copy of the certificate from the financial institutions maintaining

accounts of the operational creditor confirming that there is no

payment of an unpaid operational debt by the corporate debtor; and

(d) such other information as may be specified.

(4) An operational creditor initiating a corporate insolvency resolution

process under this section, may propose a resolution professional to act

as an interim resolution professional.”

19. From the aforesaid provisions of sections 8 and 9 of I&B Code, it is

clear that unlike section 7, a notice under section 8 is to be issued by an

“operational creditor” individually and the petition under section 9 has to be

filed by operational creditor individual y and not jointly.

20. Otherwise also it is not practical for more than one operational creditor

to file a joint petition. Individual operational creditors wil have to issue their

individual claim notice under section 8 of the I&B Code. The claim will vary

which wil be different. Date of notice under section 8 of the I&B Code in

different cases will be different. It will have to be issued in format(s). Separate

Form 3 or Form 4 wil have to be filled. Petition under section 9 in the format

wil contain, separate individual data.

21. The respondents have relied on rule 23A on the NCLT Rules, 2016 but

as the said rule has not been adopted by section 10 of the I&B Code, the

rule 23A is not applicable to the application under section 9 of the I&B

Code. For the reasons aforesaid, we hold that a joint application under section

9 by one or more operational creditor is not maintainable.

22. Second question raised is, whether it is mandatory to file “certificate of

recognised financial institution” along with an application under section 9 of

the I&B Code ?

23. The aforesaid issue was considered by this Appellate Tribunal in Smart

Timing Steel Ltd. (supra). By judgment dated 19th May 2017 in Company

Appeal (AT) (Insolvency) No. 28 of 2017, Appel ate Tribunal while held that

filing of “certificate of recognised financial institution” maintaining account

of the operational creditor confirming that there is no payment of unpaid

PRACTICAL ASPECTS OF INSOLVENCY LAW

451

operational debt made by the corporate debtor is mandatory, observed as

follows :

‘11. On perusal of entire section (3) along with sub-sections and clauses,

inclusive of proviso, it would be crystal clear that, the entire provision of

sub-clause (3) of section 9 required to be mandatorily fol owed and it is

not empty statutory formality.

12. Sub-section (2) stipulates filing of an application under sub-section

(1) only in the form and manner and accompanied with such fees as may

be prescribed. The Insolvency and Bankruptcy (Application to Adjudicating

Authority) Rules, 2016 (‘Adjudicating Authority Rules, 2016’) are also

enacted in exercise of the power conferred by clauses (c), (d), (e), (f), of

sub-section (3) read with sections 7, 8, 9 and 10 of the I&B Code. The

rules provide the procedure required to be fol owed by filing an application

by corporate insolvency resolution process. As per rule 6 of the

Adjudicating Authority Rules, 2016, an operational creditor shal make

ah application for initiating the corporate insolvency process under section

9, in Form 5 accompanied with documents and records required therein.

As per sub-rule (2) of rule 6 it is mandatory again to despatch a copy of

application filed with the adjudicating authority, by registered post or speed

post to the registered office of the corporate debtor.

13. The provisions of sub-section (3) mandates the operational creditor

to furnish copy of invoice demanding payment or demand notice delivered

by the operational creditor to the corporate debtor, an affidavit to the

effect that, there is no notice given by the corporate debtor relating to

dispute of unpaid operational debt, a copy of the certificate from the

“Financial Institutions” maintaining accounts of the operational creditor

confirming that, there is no payment of an unpaid operational debt by the

corporate debtor and such other information as may be stipulated. Sub-

section (5) of section 9 is procedure required to be followed by

Adjudicating Authority. One can say that procedural part is not mandatory

but is directory.

14. The provision being “directory” or “mandatory” has fallen for

consideration before hon’ble Supreme Court on numerous occasions. In

Manilal Shah v. Sardar Sayed Ahmed [1955] 1 SCR 108, the hon’ble

Apex Court held that where statute itself provide consequences of breach

or non-compliance, normally the provision has to be regarded as having

mandatory in nature.

15. One of the cardinal principles of interpretation of statute is that, the

words of statute must prima facie be given their ordinary meaning, unless

452

PRACTICAL ASPECTS OF INSOLVENCY LAW

of course, such construction leads to absurdity or unless there is

something in the context or in the object of the statute to the contrary.

When the words of statute are clear, plain and unambiguous, then, the

courts are bound to give effect to that meaning, irrespective of the

consequences involved. Normally, the words used by the Legislature

themselves declare the legislative intent particularly where the words of

the statute are clear, plain and unambiguous. In such case, effort must

be to give a meaning to each and every word used by the Legislature and

it is not sound principle of construction to brush aside words in statute as

being redundant or surplus, and particularly when such 10 words can

have proper application in circumstances conceivable within the

contemplation of the statute.

16. For determination of the issue whether a provision is mandatory or

not, it wil be desirable to refer to decision of hon’ble Supreme Court in

State of Mysore v. V K Kangan [1976] 2 SCC 895. In the said case, the

hon’ble Supreme Court specifical y held :

“10. In determining the question whether a provision is mandatory or

directory, one must look into the subject-matter and consider the

importance of the provision disregarded and the relation of that provision

to the general object intended to be secured. No doubt, al laws are

mandatory in the sense they impose the duty to obey on those who

come within its purview. But it does not fol ow that every departure from

it shal taint the proceedings with a fatal blemish. The determination of

the question whether a provision is mandatory or directory would, in the

ultimate analysis, depend upon the intent of the law-maker. And that has

to be gathered not only from the phraseology of the provision but also by

considering its nature, its design and the consequences which would

fol ow from construing it in one way or the other.”

17. Therefore, it is clear that the word “shal ” used in sub-section (3) of

section 9 of I&B Code is mandatory, including clause (e) therein.’

24. In this case, we find that the certificate dated 6th March, 2017 attached

by respondents has not been issued by any financial institution as defined

in sub-section (14) of section 3 of the I&B Code, 2016 but has been issued

by Misr Bank which is a foreign bank and is not recognised as a financial

institution. The said Certificate has been issued by ‘col ecting agency’ as

distinct from financial institution and genuity of the same cannot be verified

by the adjudicating authority. We also find that the affidavit in support of

insolvency application, as prescribed in Form 5 of the Adjudicating Authority

Rules has not been filed, which mandates that ‘no notice of dispute received

PRACTICAL ASPECTS OF INSOLVENCY LAW

453

to be returned or it is returned when dispute was raised’, has to be enclosed

by the operational creditor. In absence of such certificate from notified

financial institution, and as Form 5 is not complete, we hold that the

application under section 9 of the I&B Code, was not maintainable.

25. Next question is whether the demand notice with invoice under section

8 of the I&B Code can be issued by any “lawyer on behalf of an the operational

creditor” ?

26. To determine the said issue it is desirable to refer to section 8 of the I&B

Code which reads as fol ows :

“8. 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. Persons who may initiate corporate

insolvency resolution process. Initiation of corporate insolvency resolution

process by financial creditor. Insolvency resolution by operational creditor.

(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

(i ) by sending an attested copy of record that the operational

creditor has encashed a cheque issued by the corporate debtor.

Explanation : For the purposes of this section, a “demand notice” means

a notice served by an operational creditor to the corporate debtor

demanding repayment of the operational debt in respect of which the

default has occurred.”

27. From a plain reading of sub-section (1) of section 8, it is clear that on

occurrence of default, the operational creditor is required to deliver the

demand notice of unpaid operational debt and copy of the invoice demanding

payment of the amount involved in the default to the corporate debtor in

454

PRACTICAL ASPECTS OF INSOLVENCY LAW

such form and manner as is prescribed.

28. Sub-rule (1) of rule 5 of the Adjudicating Authority Rules mandates the

operational creditor to deliver to the corporate debtor the demand notice in

Form 3 or invoice attached with the notice in Form 4, as quoted below :

“Rule 5. (1) An operational creditor shal deliver to the corporate debtor

the fol owing documents, namely :

(a) a demand notice in Form 3; or

(b) a copy of an invoice attached with a notice in Form 4.”

29. Clauses (a) and (b) of sub-rule (1) of Rule 5 of the Adjudicating Authority

Rules provides the format in which the demand notice/invoice demanding

payment in respect of unpaid operational debt is to be issued by operational

creditor. As per rule 5(1)(a) and (b), the following person(s) are authorised to

act on behalf of operational creditor, as apparent from the last portion of

Form 3 which reads as follows :

“6. The undersigned request you to unconditional y repay the unpaid

operational debt (in default) in full within ten days from the receipt of this

letter failing which we shal initiate a corporate insolvency resolution

process in respect of [name of corporate debtor].

Yours sincerely,

Signature of person authorised to act on behalf of the operational

creditor

Name in block letters

Position with or in relation to the operational creditor

Address of person signing.”

30. From bare perusal of Form 3 and Form 4, read with sub-rule (1) of rule 5

and section 8 of the I&B Code, it is clear that an operational creditor can

apply himself or through a person authorised to act on behalf of operational

creditor. The person who is authorised to act on behalf of operational

creditor is also required to state “his position with or in relation to the

operational creditor”, meaning thereby the person authorised by

operational creditor must hold position with or in relation to the

operational creditor and only such person can apply.

31. The demand notice/invoice demanding payment under the I&B Code is

required to be issued in Form 3 or Form 4. Through the said formats, the

corporate debtor is to be informed of, particulars of operational debt, with a

PRACTICAL ASPECTS OF INSOLVENCY LAW

455

demand of payment, with clear understanding that the operational debt (in

default) required to pay the debt, as claimed, unconditional y within ten.

days from the date of receipt of letter failing which the operational creditor

wil initiate a corporate insolvency process in respect of corporate debtor,

as apparent from last paragraph No. 6 of notice contained in Form 3, and

quoted above.

Only if such notice in Form 3 is served, the corporate debtor will understand

the serious consequences of non-payment of operational debt, otherwise

like any normal pleader notice/advocate notice, like notice under section 80

of Code of Civil Procedure, 1908 (‘CPC’) or for proceeding under section

433 of the Companies Act, 1956, the corporate debtor may decide to contest

the suit/case if filed, distinct corporate resolution process, where such claim

otherwise cannot be contested, except where there is an existence of dispute,

prior to issue of notice under section 8.

32. In view of provisions of I&B Code, read with Rules, as referred to above,

we hold that an “advocate/lawyer” or “chartered accountant” or “company

secretary” in absence of any authority of the Board of directors, and holding

no position with or in relation to the operational creditor cannot issue any

notice under section 8 of the I&B Code, which otherwise is a lawyer’s notice

as distinct from notice to be given by operational creditor in terms of section

8 of the I&B Code.

33. In the present case as an advocate/lawyer has given notice and there is

nothing on record to suggest that the lawyer has been authorised by “Board

of directors” of the respondent –“DF Deutsche Forfait AG” and there is nothing

on record to suggest that the lawyer hold any position with or in relation with

the respondents, we hold that the notice issued by the lawyer on behalf of

the respondents cannot be treated as a notice under section 8 of the I&B

Code and for that the petition under section 9 at the instance of the

respondents against the appel ant was not maintainable.

34. The other question raised is whether there is existence of dispute, if

any, in the present case ?

35. From bare perusal of record it is clear that the respondents issued a

winding up notice on the appel ant on 8th December, 2015, i.e., much prior

to issuance of lawyer’s notice purported to be under section 8 of the I&B

Code. On receipt of such notice, the appel ant disputed the claim by detailed

reply dated 3rd January, 2017. Apart from that the respondents were relying

on document dated 27th December, 2013 to fix liability on the appel ant,

which according to appel ant was not signed by the appellant such fact was

brought to the notice of the respondents as back as in the year 2013.

456

PRACTICAL ASPECTS OF INSOLVENCY LAW

36. In Kirusa Software (P.) Ltd. v. Mobilox Innovations (P.) Ltd. Company

Appeal (AT) (Insolvency) No. 6 of 2017, this Appel ate Tribunal decided as to

what is the meaning of ‘dispute’ and “existence of dispute” in terms of section

8 of the I&B Code and sub-section (5) of section 5 of I&B Code and by

judgment dated 24th May, 2017 held as follows :

‘15. For the purposes of Part II only of the Code, some terms/words have

been defined. Sub-section (6) of section 5 defines “dispute”, to include,

unless the context otherwise requires, a dispute pending in any suit or

arbitration proceedings relating to : (a) existence of amount of the debt;

(b) quality of goods or service; (c) breach of a representation or warranty.

The definition of “dispute” is “inclusive” and not “exhaustive”. The same

has to be given wide meaning provided it is relatable to the existence of

the amount of the debt, quality of good or service or breach of a

representation or warranty.

16. Once the term “dispute” is given its natural and ordinary meaning,

upon reading of the Code as a whole, the width of “dispute” should cover

al disputes on debt, default, etc., and not be limited to only two ways of

disputing a demand made by the operational creditor, i.e. either by showing

a record of pending suit or by showing a record of a pending arbitration.

The intent of the Legislature, as evident from the definition of the term

“dispute”, is that it wanted the same to be il ustrative (and not exhaustive).

If the intent of the Legislature was that a demand by an operational creditor

can be disputed only by showing a record of a suit or arbitration proceeding,

the definition of dispute would have simply said dispute means a dispute

pending in arbitration or a suit.

18. Admittedly in sub-section (6) of section 5 of the I&B Code, the

Legislature used the words “dispute includes a suit or arbitration

proceedings”. If this is harmoniously read with section (2) of section 8 of

the I&B Code, where words used are “existence of a dispute, if any, and

record of the pendency of the suit or arbitration proceedings”, the result

is disputes, if any, applies to al kinds of disputes, in relation to debt and

default. The expression used in sub-section (2) of section 8 of the I&B

Code “existence of a dispute, if any,” is disjunctive from the expression

“record of the pendency of the suit or arbitration proceedings”. Otherwise,

the words “dispute, if any”, in sub-section (2) of section 8 would become

surplus usage.

19. Sub-section (2) of section 8 of the I&B Code cannot be read to mean

that a dispute must be pending between the parties prior to the notice of

demand and that too in arbitration or a civil court. Once parties are already

PRACTICAL ASPECTS OF INSOLVENCY LAW

457

before any judicial forum/authority for adjudication of disputes, notice

becomes irrelevant and such an interpretation renders the expression

“existence of a dispute, if any, in sub-section (2) of section 8 itiose....

21. The statutory requirement in sub-section (2) of section 8 of the I&B

Code is that the dispute has to be brought to the notice of the operational

creditor. The two comes post the word “dispute” (if any) have been added

as a matter of convenience and/or to give meaningfulness to sub-section

(2) of section 8 of the I&B Code. Without going into the grammar and

punctuation being hapless victim of pace of life, if one discovers the true

meaning of sub-section (2)(a) of section 8 of the I&B Code, having regard

to the context of sections 8 and 9 of the I&B Code, it emerges both from

the object and purpose of the I&B Code and the context in which the

expression is used, that disputes raised in the notice sent by the corporate

debtor to the operational creditor would get covered within sub-section

(2) of section 8 of the I&B Code.

22. The true meaning of sub-section (2)(a) of section 8 read with sub-

section (6) of section 5 of the I&B Code clearly brings out the intent of

the Code, namely, the corporate debtor must raise a dispute with sufficient

particulars. And in case a dispute is being raised by simply showing a

record of dispute in a pending arbitration or suit, the dispute must also be

relatable to the three conditions provided under sub-section (6)(a)-(c) of

section 5 only. The words “and record of the pendency of the suit or

arbitration proceedings” under sub-section (2)(a) of section 8 also make

the intent of the Legislature clear that disputes in a pending suit or

arbitration proceeding are such disputes which satisfy the test of sub-

section (6) of section 5 of the I&B Code and that such disputes are within

the ambit of the expression, “dispute, if any”. The record of suit or arbitration

proceeding is required to demonstrate the same, being pending prior to

the notice of demand under section 8 of the I&B Code.

23. It is a fundamental principle of law that multiplicity of proceedings is

required to be avoided. Therefore, if disputes under sub-section (2)(a) of

section 8 read with sub-section (6) of section 5 of the I&B Code are

confined to a dispute in a pending suit and arbitration in relation to the

three classes under subsection (6) of section 5 of the I&B Code, it would

violate the definition of operational debt under sub-section (21) of section

3 of the I&B Code and would become inconsistent thereto, and would bar

operational creditor from invoking sections 8 and 9 of the Code.

24. Sub-section (6) of section 5 read with sub-section (2)(a) of section 8

also cannot be confined to pending arbitration or a civil suit. It must

458

PRACTICAL ASPECTS OF INSOLVENCY LAW

include disputes pending before every judicial authority including

mediation, conciliation, etc., as long there are disputes as to existence

of debt or default, etc., it would satisfy sub-section (2) of section 8 of the

I&B Code....

26. The definition of “dispute” for the purpose of section 9 must be read

along with expression operational debt as defined in section 5(21) of I&B

Code, 2016 means :

(21) “operational debt” means a claim in respect of the provision of goods

or services including employment or a debt in respect of the repayment

of dues arising under any law for the time being in force and payable to

the Central Government, any State Government or any local authority;”

Thus the definition of “dispute”, “operational debt” is read together for the

purpose of section 9 is clear that the intention of Legislature to lay down

the nature of “dispute” has not been limited to suit or arbitration proceedings

pending but includes other proceedings “if any”.

27. Therefore, it is clear that for the purpose of sub-section (2) of section

8 and section 9 a “dispute” must be capable of being discerned from

notice of corporate debtor and the meaning of “existence” a “dispute, if

any”, must be understood in the context.

28. The dispute under I&B Code must relate to specified nature in clause

(a), (b) or (c), i.e., existence of amount of debt or quality of goods or

service or breach of representation or warranty. However, it is capable of

being discerned not only from in a suit or arbitration from any document

related to it. For example, the “operational creditor” has issued notice

under Code of Civil Procedure, 1908 prior to initiation of the suit against

the operational creditor which is disputed by “corporate debtor”. Similarly

notice under section 59 of the Sales and Goods Act if issued by one of

the party, a labourer/employee who may claim to be operation creditor

for the purpose of section 9 of I&B Code may have raised the dispute

with the State Government concerning the subject-matter, i.e., existence

of amount of debit and pending consideration before the competent

Government. Similarly, a dispute may be pending in a Labour Court about

existence of amount of debt. A party can move before a High Court

under writ jurisdictions against Government, corporate debtor (public

sector undertaking). There may be cases where one of the party has

moved before the High Court under section 433 of the Companies Act,

1956 for initiation of liquidation proceedings against the “corporate debtor”

and dispute is pending. Similarly, with regard to quality of foods, if the

corporate debtor has raised a dispute, and brought to the notice of the

PRACTICAL ASPECTS OF INSOLVENCY LAW

459

“operational creditor” to take appropriate step, prior to receipt of notice

under sub-section (1) of section 8 of the I&B Code, one can say that a

dispute is pending about the debt. Mere raising a dispute for the sake of

dispute, unrelated or related to clause (a) or (b) or (c) of sub-section (6) of

section 5, if not raised prior to application and not pending before any

competent court of law or authority cannot be relied upon to hold that

there is a “dispute” raised by the corporate debtor. The scope of existence

of “dispute”, if any, which includes pending suits and arbitration

proceedings cannot be limited and confined to suit and arbitration

proceedings only. It includes any other dispute raised prior to section 8 in

this in relation to clause (a) or (b) or (c) of sub-section (6) of section 5. It

must be raised in a court of law or authority and proposed to be moved

before the court of law or authority and not any got up or mala fide dispute

just to stal the insolvency resolution process.

29. There may be other cases such as a suit relating to existence of

amount of debt stands decided and decree is pending for execution.

Similarly, existence of amount of debt or quality of goods or service for

which a suit have been filed and decreed; an award has been passed by

Arbitral Panel, though petition under section 34 of Arbitration and

Conciliation Act, 1996 may be pending. In such 20 case the question will

arise whether a petition under section 9 will be maintainable particularly

when it was a suit or arbitration proceeding is not pending, but stand

decided ? Though one may argue that insolvency resolution process

cannot be misused for execution of a judgment and decree passed in a

suit or award passed by an arbitration Tribunal, but such submission

cannot be accepted in view of Form 5 of Insolvency and Bankruptcy

(Application to Adjudicating Authority) Rules, 2016 wherein a decree in

suit and award has been shown to be a debt for the purpose of default on

non-payment.

30. Thus, it is clear that while sub-section (2) of section 8 deals with

“existence of a dispute”, sub-section (5) of section 9 does not confer any

discretion on adjudicating authority to verify adequacy of the dispute. It

prohibits the adjudicating authority from proceeding further if there is a

genuine dispute raised before any court of law or authority or pending in

a court of law or authority including suit and arbitration proceedings.

Mere a dispute giving a colour of genuine dispute or il usory, raised for

the first time while replying to the notice under section 8 cannot be a tool

to reject an application under section 9 if the operational creditor otherwise

satisfies the adjudicating authority that there is a debt and there is a

default on the part of the corporate debtor.’

460

PRACTICAL ASPECTS OF INSOLVENCY LAW

37. In view of the decision of Kirusa Software (P.) Ltd. (supra), as a notice of

winding up dated 8th December, 2016, was issued by respondents and the

claim was disputed by appel ant by detailed reply dated 3rd January, 2017,

i.e., much prior to purported notice under section 8, issued by lawyer and a

suit between the parties is pending, we hold that there is an existence of

‘dispute’, within the meaning of section 8 read with sub-section (5) of section

5 of I&B Code and, therefore, the petition under section 9 preferred by

respondents against the appel ant was not maintainable.

38. In view of detailed reasons and finding recorded above, we hold the

impugned order is illegal and set aside the impugned order dated 10th April,

2017 passed by the learned Adjudicating Authority, Mumbai Bench in

Company Petition No. 45/Mah/2017 of 2017.

39. In effect, order(s), if any, passed by learned Adjudicating Authority

appointing any “interim resolution professional” or declaring moratorium,

freezing of account and al other order(s) passed by Adjudicating Authority

pursuant to impugned order and action, if any, taken by the “interim resolution

professional”, including the advertisement, if any, published in the newspaper

cal ing for applications al such orders and actions are declared il egal and

are set aside. The joint application preferred by respondent under section 9

of the I&B Code is dismissed. Learned Adjudicating Authority will now close

the proceeding. The appel ant-company is released from all the rigour of law

and is al owed to function independently through its Board of directors from

immediate effect.

40. Learned Adjudicating Authority wil fix the fee of interim resolution

professional if appointed and the respondents wil pay the fees of the interim

resolution professional, for the period he has functioned. The appeal is al owed

with aforesaid observation and direction. However, in the facts and

circumstances of the case, there shal be no order as to cost.

Sd/-

Sd/-

(Mr. Balvinder Singh)

(Justice S.J. Multhopadhaya)

Member (Technical)

Chairperson

NEW DELHI

28th July, 2017

PRACTICAL ASPECTS OF INSOLVENCY LAW

461

ANNEXURE X.15

REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO.15135 OF 2017

MACQUARIE BANK LIMITED

…APPELLANT

VERSUS

SHILPI CABLE TECHNOLOGIES LTD.

...RESPONDENT

WITH

CIVIL APPEAL NO.15481 OF 2017

CIVIL APPEAL NO.15447 OF 2017

JUDGMENT

R.F. Nariman, J.

1. The present appeals raise two important questions which arise under the

Insolvency and Bankruptcy Code, 2016 (‘the Code’). The first question is

whether, in relation to an operational debt, the provision contained in Section

9(3)(c) of the Code is mandatory; and secondly, whether a demand notice of

an unpaid operational debt can be issued by a lawyer on behalf of the

operational creditor.

2. The facts contained in the three appeals are similar. For the purpose of

this judgment, the facts contained in Civil Appeal No.15481 of 2017 will now

be set out. Hamera International (P.) Ltd. executed an agreement with the

appellant, Macquarie Bank Ltd., Singapore, on 27th July, 2015, by which

the appel ant purchased the original supplier’s right, title and interest in a

supply agreement in favour of the respondent. The respondent entered into

an agreement dated 2nd December, 2015 for supply of goods worth

US$6,321,337.11 in accordance with the terms and conditions contained in

the said sales contract. The supplier issued two invoices dated 21st December,

2015 and 31st December, 2015. Payment terms under the said invoices

were 150 days from the date of bil of ladings dated 17th December, 2015/

19th December, 2015. Since amounts under the said bills of lading were due

for payment, the appel ant sent an email dated 3rd May, 2016 to the contesting

462

PRACTICAL ASPECTS OF INSOLVENCY LAW

respondent for payment of the outstanding amounts. Several such emails

by way of reminders were sent, and it is alleged that the contesting respondent

stated that it will sort out pending matters. Ultimately, the appel ant issued

a statutory notice under Sections 433 and 434 of the Companies Act, 1956.

A reply dated 5th October, 2016 denied the fact that there was any

outstanding amount.

3. After the enactment of the Code, the appellant issued a demand notice

under Section 8 of the Code on 14th February, 2017 at the registered office

of the contesting respondent, calling upon it to pay the outstanding amount

of US$6,321,337.11. By a reply dated 22nd February, 2017, the contesting

respondent stated that nothing was owed by them to the appel ant. They

further went on to question the validity of the purchase agreement dated

27th July, 2015 in favour of the appel ant. On 7th March, 2017, the appellant

initiated the insolvency proceedings by filing a petition under Section 9 of

the Code. On 1st June, 2017, the National Company Law Tribunal (‘NCLT’)

rejected the petition holding that Section 9(3)(c) of the Code was not complied

with, inasmuch as no certificate, as required by the said provision,

accompanied the application filed under Section 9. It, therefore, held that

there being non-compliance of the mandatory provision of Section 9(3)(c) of

the Code, the application would have to be dismissed at the threshold.

However, the NCLT also went into the question as to whether a dispute has

been raised in relation to the operational debt and found that such dispute

was in fact raised by the reply to the statutory notice sent under Sections

433 and 434 of the Companies Act, 1956 and that, therefore, under Section

9(5)(i )(d), the application would have to be dismissed.

4. By the impugned judgment dated 17th July, 2017, the National Company

Law Appel ate Tribunal(‘NCLAT’) agreed with the NCLT holding that the

application would have to be dismissed for non-compliance of the mandatory

provision contained in Section 9(3)(c) of the Code. It further went on to hold

that an advocate/lawyer cannot issue a notice under Section 8 on behalf of

the operational creditor in the fol owing terms :

“In the present case, as the notice has been given by an advocate/lawyer

and there is nothing on the record to suggest that the lawyer was authorised

by the appel ant, and as there is nothing on the record to suggest that the

said lawyer/ advocate hold any position with or in relation to the appellant-

company, we hold that the notice issued by the advocate/lawyer on behalf

of the appellant cannot be treated as notice under Section 8 of the I&B

Code. And for the said reason also the petition under Section 9 at the

instance of the appel ant against the respondent was not maintainable.”

PRACTICAL ASPECTS OF INSOLVENCY LAW

463

5. Shri Mukul Rohatgi, learned senior advocate appearing on behalf of the

appel ant, referred us to various provisions of the Code. According to learned

senior counsel, on a conjoint reading of Section 9(3)(c), rule 6 and Form 5 of

the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules,

2016 (‘Adjudicating Authority Rules’), it is clear that Section 9(3)(c) is not

mandatory, but only directory and that, in the said Section, ‘shal ’ should be

read as ‘may’. He cited a number of judgments for the proposition that when

serious general inconvenience is caused to innocent persons or the general

public without really furthering the object of the particular Act, the said

provision should not be read as mandatory, but as directory only. Further,

according to learned senior counsel, Section 9(3)(c) is a procedural Section,

which is not a condition precedent to the allowing of an application filed

under Section 9(1). This is further clear from the fact that under Section

9(5), if there is no such certificate, the application does not need to be

rejected. He also stressed the fact that at the end of Form 5, what has to be

attached to the application, by way of Annexure III, is a copy of the relevant

accounts from banks/financial institutions maintaining accounts of the

operational creditor confirming that there is no payment of the operational

debt only “if available”. Also, according to learned counsel, this is only an

additional document, which along with other documents that are mentioned

in Item 8 of Part V, would go to prove the existence of the operational debt.

The word “confirming” in Section 9(3)(c) would also show that this is only

one more document that can be relied upon by the operational creditor,

apart from other documents, which may wel prove the existence of the

operational debt. According to learned senior counsel, on the second ground

as well it is clear, on a perusal of Form 5, that a “person authorised to act on

behalf of the operational creditor” is a person who can sign Form 5 on behalf

of the operational creditor. Also, the expression “position with or in relation

to the operational creditor” shows that a lawyer, who is authorised by the

operational creditor, is certainly within the said expression. He also referred

us to Section 30 of the Advocates Act, 1961 and judgments on the effect of

the expression “practise” when it applies to lawyers, vis-a-vis Tribunals such

as the NCLT and NCLAT.

6. Shri Arvind Datar, learned senior advocate, supported the arguments of

Shri Rohatgi and went on to add that the definition of ‘person’ contained in

Section 2(23) of the Code includes a person resident outside India, and

when read with the definition of “operational creditor” in Section 5(20) of the

Code would make it clear that persons, such as the appel ant, are certainly

operational creditors within the meaning of the Code. He stressed the fact

that if a copy of the certificate under Section 9(3)(c) can only be from a

464

PRACTICAL ASPECTS OF INSOLVENCY LAW

“financial institution” as defined under Section 3(14) of the Code, and if a

non resident bank or financial institution, such as the appellant, may not be

included either as a scheduled bank under Section 3(14)(a) or as such other

institution as the Central Government may by notification specify as a

financial institution under Section 3(14)(d), it is clear that Section 9(3)(c)

cannot operate to non-suit the appel ant, as it would be impossible to get a

certificate from a financial institution as defined. This being the case, he

argued that the Court should add words into the expression “financial

institution”, as it would otherwise lead to absurdity and that if Section 9(3)(c)

is held to be mandatory, then a certificate from a foreign bank, who is not a

“financial institution” as defined under the Code, should be read into Section

9(3)(c). Otherwise, the learned senior counsel supported Shri Rohatgi’s

argument that Section 9(3)(c) is a directory provision which need not

mandatorily be complied with. A further argument was made that the definition

in Section 3(14), though exhaustive, is subject to context to the contrary

and that, therefore, it is clear that a financial institution would include a

bank outside the categories mentioned in Section 3(14) when it comes to

an operational creditor who is a resident outside India.

7. Al these arguments were countered by Dr. A M Singhvi, learned senior

counsel appearing on behalf of the respondent. First and foremost, according

to learned senior counsel, the object of the Code is not that persons may

use the Code as a means of recovering debts. The Code is an extremely

draconian piece of legislation and must, therefore, be construed strictly. If

this is kept in mind, it is clear that Section 9(3)(c) is mandatory and requires

to be complied with strictly or else the application should be dismissed at

the threshold. He stated that in the context of it being recognised by our

judgments that a financial creditor and operational creditor are completely,

differently and separately dealt with in the Code, and that so far as an

operational creditor is concerned, it is important to bear in mind that a very

low threshold is required in order that an operational creditor’s application be

rejected, namely, there being a pre-existing dispute between the parties.

According to learned senior counsel Section 9(3)(c) is a jurisdictional

condition precedent, which is clear from the expression ‘initiation’ and the

expression ‘shall’, both showing that the Section is a mandatory condition

precedent which has to be satisfied before the Adjudicating Authority can

proceed further. According to learned senior counsel, a copy of the certificate

from a financial institution is a very important document which makes it

clear, almost conclusively, that there is an unpaid operational debt. According

to him, the principle contained in Taylor v. Taylor (1875) 1 Ch.D 426, has

been fol owed by a number of judgments and is applicable inasmuch as

PRACTICAL ASPECTS OF INSOLVENCY LAW

465

when a statute requires a particular thing to be done in a particular manner,

it must be done in that manner or not at al . He also referred us to various

Sections of the Code, the Insolvency and the Adjudicating Authority Rules,

Form 5 in particular, together with the Viswanathan Committee Report and

Joint Committee Report of the Parliament. According to the learned senior

counsel, it is clear from the definition of “financial institution” contained in

Section 3(14) that certain foreign banks are included within the expression

“scheduled banks” under Section 3(14)(a) and that, under Section 3(14)(d),

the Central Government may, by notification, specify other foreign banks

as financial institutions. It is only where operational creditors have dealings

with banks which fall within Section 3(14), that they can avail the opportunity

of declaring a corporate debtor as insolvent under Sections 8 and 9 of the

Code. Persons who may be residents outside India and who bank with entities

that are not contained within the definition of Section 3(14) would, therefore,

be outside the Code.

8. According to the learned senior counsel, the consequence of not furnishing

a copy of the certificate under Section 9(3)(c) is that, under Section 9(5)(ii)(a),

the application that is made would be incomplete and, subject to the proviso,

would have to be dismissed on that score. Also, according to the learned

senior counsel, the NCLAT was right in fol owing the judgment contained in

Smart Timing Steel Ltd. v. National Steel & Agro Industries Ltd. decided

on 19th May, 2017, which, according to the learned senior counsel, has

merged in an order of this Court dismissing an appeal from the said judgment.

9. According to the learned senior counsel, a lawyer’s notice cannot be

given under Section 8, read with the Adjudicating Authority Rules and Form

5 therein. Either the operational creditor himself must send the requisite

notice, or a duly authorised agent on his behalf should do so, and such

authorised agent can only be an ‘insider’, namely, a person who is authorised

by the operational creditor, being an employee, director or other person from

within who alone can send the notice under Section 8 and sign the application

under Section 9. Dr. Singhvi also stated that it is clear, from Forms 3 and 5,

that only a person authorised to act on behalf of the operational creditor can

send the notice and/or sign the application. He stressed the word ‘position’

with or in relation to the operational creditor and stated that this would also

indicate that it is only an insider who can be so authorised by the operational

creditor and not a lawyer. According to learned senior counsel, the provisions

contained in certain statutes such as Section 434(2) of the Companies Act,

1956 and rule 4 of the Debts Recovery Tribunal (Procedure) Rules, 1993

under the Recovery of Debts Due to Banks and Financial Institutions Act,

1993 (‘Debts Recovery Rules’) would also make it clear that where a lawyer

466

PRACTICAL ASPECTS OF INSOLVENCY LAW

can do things on behalf of a party, it is expressly so mentioned unlike the

present case.

10. Having heard learned counsel for the parties, it is necessary to set out

the relevant Sections of the Code and the Adjudicating Authority Rules.

‘3. In this Code, unless the context otherwise requires, –....

(10) “creditor” means any person to whom a debt is owed and includes a

financial creditor, an operational creditor, a secured creditor, an

unsecured creditor and a decree-holder;....

(14) “financial institution” means –

(a) a scheduled bank;

(b) financial institution as defined in Section 45-I of the Reserve

Bank of India Act, 1934;

(c) public financial institution as defined in clause (72) of Section 2

of the Companies Act, 2013; and

(d) such other institution as the Central Government may by

notification specify as a financial institution;....

(23) “person” includes –

(a) an individual;

(b) a Hindu undivided family;

(c) a company;

(d) a trust;

(e) a partnership;

(f) a limited liability partnership; and

(g) any other entity established under a statute, and includes a

person resident outside India;

(25) “person resident outside India” means a person other than a person

resident in India;

****

5. In this Part, unless the context otherwise requires, –

(20) “operational creditor” means a person to whom an operational debt is

owed and includes any person to whom such debt has been legally

assigned or transferred;

PRACTICAL ASPECTS OF INSOLVENCY LAW

467

(21) “operational debt” means a claim in respect of the provision of goods

or services including employment or a debt in respect of the

repayment of dues arising under any law for the time being in force

and payable to the Central Government, any State Government or

any local authority;

****

8. 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 shal , 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

(i ) by sending an attested copy of record that the operational

creditor has encashed a cheque issued by the corporate debtor.

Explanation : For the purposes of this Section, a “demand notice” means

a notice served by an operational creditor to the corporate debtor demanding

repayment of the operational debt in respect of which the default has

occurred.

****

9. Application for initiation of corporate insolvency resolution process by

operational creditor. – (1) After the expiry of the period of ten days from

the date of delivery of the notice or invoice demanding payment under

sub-Section (1) of Section 8, if the operational creditor does not receive

payment from the corporate debtor or notice of the dispute under sub-

Section (2) of Section 8, the operational creditor may file an application

before the Adjudicating Authority for initiating a corporate insolvency

resolution process.

468

PRACTICAL ASPECTS OF INSOLVENCY LAW

(2) The application under sub-Section (1) shal be filed in such form and

manner and accompanied with such fee as may be prescribed.

(3) The operational creditor shal , along with the application furnish –

(a) a copy of the invoice demanding payment or demand notice delivered

by the operational creditor to the corporate debtor;

(b) an affidavit to the effect that there is no notice given by the corporate

debtor relating to a dispute of the unpaid operational debt;

(c) a copy of the certificate from the financial institutions maintaining

accounts of the operational creditor confirming that there is no

payment of an unpaid operational debt by the corporate debtor; and

(d) such other information as may be specified.

(4) An operational creditor initiating a corporate insolvency resolution

process under this Section, may propose a resolution professional to act

as an interim resolution professional.

(5) The Adjudicating Authority shall, within fourteen days of the receipt of

the application under sub-Section (2), by an order –

(i) admit the application and communicate such decision to the

operational creditor and the corporate debtor if,–

(a) the application made under sub-Section (2) is complete;

(b) there is no repayment of the unpaid operational debt;

(c) the invoice or notice for payment to the corporate debtor has

been delivered by the operational creditor;

(d) no notice of dispute has been received by the operational creditor

or there is no record of dispute in the information utility; and

(e) there is no disciplinary proceeding pending against any resolution

professional proposed under sub-Section (4), if any;

(i ) reject the application and communicate such decision to the

operational creditor and the corporate debtor, if –

(a) the application made under sub-Section (2) is incomplete;

(b) there has been repayment of the unpaid operational debt;

(c) the creditor has not delivered the invoice or notice for payment

to the corporate debtor;

(d) notice of dispute has been received by the operational creditor

or there is a record of dispute in the information utility; or

PRACTICAL ASPECTS OF INSOLVENCY LAW

469

(e) any disciplinary proceeding is pending against any proposed

resolution professional :

Provided that Adjudicating Authority, shal before rejecting an application

under sub-clause (a) of clause (i ) give a notice to the applicant to rectify

the defect in his application within seven days of the date of receipt of

such notice from the Adjudicating Authority.

(6) The corporate insolvency resolution process shal commence from

the date of admission of the application under sub-Section (5) of this

Section.

****

The Insolvency and Bankruptcy (Application to Adjudicating Authority)

Rules, 2016

5. Demand notice by operational creditor. – (1) An operational creditor

shal deliver to the corporate debtor, the fol owing documents, namely, –

(a) a demand notice in Form 3; or

(b) a copy of an invoice attached with a notice in Form 4.

(2) The demand notice or the copy of the invoice demanding payment

referred to in sub-Section (2) of Section 8 of the Code, may be delivered

to the corporate debtor,

(a) at the registered office by hand, registered post or speed post with

acknowledgement due; or

(b) by electronic mail service to a whole-time director or designated

partner or key managerial personnel, if any, of the corporate debtor.

(3) A copy of demand notice or invoice demanding payment served under

this rule by an operational creditor shall also be filed with an information

utility, if any.

6. Application by operational creditor. – (1) An operational creditor, shall

make an application for initiating the corporate insolvency resolution

process against a corporate debtor under Section 9 of the Code in Form

5, accompanied with documents and records required therein and as

specified in the Insolvency and Bankruptcy Board of India (Insolvency

Resolution Process for Corporate Persons) Regulations, 2016.

(2) The applicant under sub-rule (1) shal despatch forthwith, a copy of

the application filed with the Adjudicating Authority, by registered post or

speed post to the registered office of the corporate debtor.

470

PRACTICAL ASPECTS OF INSOLVENCY LAW

FORM 3

[See clause (a) of sub-rule (1) of rule 5]

Form of demand notice/invoice demanding payment under

the Insolvency and Bankruptcy Code, 2016

( Under rule 5 of the Insolvency and Bankruptcy (Application to

Adjudicating Authority) Rules, 2016)

[Date]

To,

[ Name and address of the registered office of the corporate debtor]

From,

[ Name and address of the registered office of the operational creditor]

Subject : Demand notice/invoice demanding payment in respect of

unpaid operational debt due from [corporate debtor] under the Code.

Madam/Sir,

1. This letter is a demand notice/invoice demanding payment of an

unpaid operational debt due from [name of corporate debtor].

2. Please find particulars of the unpaid operational debt below :

PARTICULARS OF OPERATIONAL DEBT

1. TOTAL AMOUNT OF DEBT, DETAILS OF

TRANSACTIONS ON ACCOUNT OF

WHICH DEBT FELL DUE, AND THE

DATE FROM WHICH SUCH DEBT FELL

DUE

2. AMOUNT CLAIMED TO BE IN DEFAULT

AND THE DATE ON WHICH THE DEFAULT

OCCURRED (ATTACH THE WORKINGS

FOR COMPUTATION OF DEFAULT IN

TABULAR FORM)

3. PARTICULARS OF SECURITY HELD, IF

ANY, THE DATE OF ITS CREATION, ITS

ESTIMATED VALUE AS PER THE

CREDITOR. ATTACH A COPY OF A

CERTIFICATE OF REGISTRATION OF

CHARGE ISSUED BY THE REGISTRAR OF

PRACTICAL ASPECTS OF INSOLVENCY LAW

471

COMPANIES (IF THE CORPORATE

DEBTOR IS A COMPANY)

4. DETAILS OF RETENTION OF TITLE

ARRANGEMENTS (IF ANY) IN RESPECT

OF GOODS TO WHICH THE OPERATIONAL

DEBT REFERS

5. RECORD OF DEFAULT WITH THE

INFORMATION UTILITY (IF ANY)

6. PROVISION OF LAW, CONTRACT OR

OTHER DOCUMENT UNDER WHICH

DEBT HAS BECOME DUE

7. LIST OF DOCUMENTS ATTACHED TO THIS

APPLICATION IN ORDER TO PROVE THE

EXISTENCE OF OPERATIONAL DEBT

AND THE AMOUNT IN DEFAULT

3. If you dispute the existence or amount of unpaid operational debt (in

default) please provide the undersigned, within ten days of the receipt

of this letter, of the pendency of the suit or arbitration proceedings in

relation to such dispute filed before the receipt of this letter/notice.

4. If you believe that the debt has been repaid before the receipt of this

letter, please demonstrate such repayment by sending to us, within

ten days of receipt of this letter, the following :

(a) an attested copy of the record of electronic transfer of the unpaid

amount from the bank account of the corporate debtor; or

(b) an attested copy of any record that [name of the operational

creditor] has received the payment.

5. The undersigned, hereby, attaches a certificate from an information

utility confirming that no record of a dispute raised in relation to the

relevant operational debt has been filed by any person at any

information utility (if applicable).

6. The undersigned request you to unconditionally repay the unpaid

operational debt (in default) in full within ten days from the receipt of

this letter failing which we shall initiate a corporate insolvency

resolution process in respect of [name of corporate debtor].

Yours sincerely,

472

PRACTICAL ASPECTS OF INSOLVENCY LAW

Signature of person authorised to act on behalf of the operational creditor

Name in block letters

Position with or in relation to the operational creditor

Address of person signing

Instructions

1. Please serve a copy of this form on the corporate debtor, ten days in

advance of filing an application under Section 9 of the Code.

2. Please append a copy of such served notice to the application made by

the operational creditor to the Adjudicating Authority.

FORM 5

[See sub-rule (1) of rule 6]

Application by operational creditor to initiate corporate insolvency

resolution process under the Code

[ Under rule 6 of the Insolvency and Bankruptcy (Application to

Adjudicating Authority) Rules, 2016]

[Date]

To,

The National Company Law Tribunal

[Address]

From,

[ Name and address for correspondence of the operational creditor]

In the matter of [ name of the corporate debtor]

Subject : Application to initiate corporate insolvency resolution process

in respect of [name of the corporate debtor] under the Insolvency and

Bankruptcy Code, 2016.

Madam/Sir,

[Name of the operational creditor], hereby submits this application to initiate

a corporate insolvency resolution process in the case of [name of corporate

debtor]. The details for the purpose of this application are set out below :

PRACTICAL ASPECTS OF INSOLVENCY LAW

473

Part - I

PARTICULARS OF APPLICANT

1. NAME OF OPERATIONAL CREDITOR

2. IDENTIFICATION NUMBER OF

OPERATIONAL CREDITOR (IF ANY)

3. ADDRESS FOR CORRESPONDENCE

OF THE OPERATIONAL CREDITOR

Part - II

PARTICULARS OF CORPORATE

DEBTOR

1. NAME OF THE CORPORATE DEBTOR

2. IDENTIFICATION NUMBER OF

CORPORATE DEBTOR

3. DATE OF INCORPORATION OF

CORPORATE DEBTOR

4. NOMINAL SHARE CAPITAL AND THE

PAID-UP SHARE CAPITAL OF THE

CORPORATE DEBTOR AND/OR

DETAILS OF GUARANTEE CLAUSE AS

PER

MEMORANDUM

OF

ASSOCIATION (AS APPLICABLE)

5. ADDRESS OF THE REGISTERED

OFFICE OF THE CORPORATE DEBTOR

6. NAME, ADDRESS AND AUTHORITY

OF

PERSON

SUBMITTING

APPLICATION ON BEHALF OF

OPERATIONAL CREDITOR (ENCLOSE

AUTHORISATION)

7. NAME AND ADDRESS OF PERSON

RESIDENT IN INDIA AUTHORISED TO

ACCEPT THE SERVICE OF PROCESS

ON ITS BEHALF (ENCLOSE

AUTHORISATION)

474

PRACTICAL ASPECTS OF INSOLVENCY LAW

Part-III

PARTICULARS OF THE PROPOSED

INTERIM

RESOLUTION

PROFESSIONAL [IF PROPOSED]

1. NAME, ADDRESS, EMAIL ADDRESS

AND THE REGISTRATION NUMBER OF

THE PROPOSED INSOLVENCY

PROFESSIONAL

Part-IV

PARTICULARS OF OPERATIONAL

DEBT

1. TOTAL AMOUNT OF DEBT,

2. DETAILS OF TRANSACTIONS ON

ACCOUNT OF WHICH DEBT FELL DUE,

AND THE DATE FROM WHICH SUCH

DEBT FELL DUE AMOUNT CLAIMED TO

BE IN DEFAULT AND THE DATE ON

WHICH THE DEFAULT OCCURRED

(ATTACH THE WORKINGS FOR

COMPUTATION OF AMOUNT AND

DATES OF DEFAULT IN TABULAR

FORM)

Part-V

PARTICULARS OF OPERATIONAL

DEBT [DOCUMENTS, RECORDS AND

EVIDENCE OF DEFAULT]

1. PARTICULARS OF SECURITY HELD, IF

ANY, THE DATE OF ITS CREATION, ITS

ESTIMATED VALUE AS PER THE

CREDITOR. ATTACH A COPY OF A

CERTIFICATE OF REGISTRATION OF

CHARGE ISSUED BY THE REGISTRAR

OF COMPANIES (IF THE CORPORATE

DEBTOR IS A COMPANY)

2. DETAILS OF RESERVATION /

RETENTION

OF

TITLE

PRACTICAL ASPECTS OF INSOLVENCY LAW

475

ARRANGEMENTS (IF ANY) IN

RESPECT OF GOODS TO WHICH THE

OPERATIONAL DEBT REFERS

3. PARTICULARS OF AN ORDER OF A

COURT, TRIBUNAL OR ARBITRAL

PANEL ADJUDICATING ON THE

DEFAULT, IF ANY (ATTACH A COPY OF

THE ORDER)

4. RECORD OF DEFAULT WITH THE

INFORMATION UTILITY, IF ANY

(ATTACH A COPY OF SUCH RECORD)

5. DETAILS

OF

SUCCESSION

CERTIFICATE, OR PROBATE OF A

WILL,

OR

LETTER

OF

ADMINISTRATION, OR COURT

DECREE (AS MAY BE APPLICABLE),

UNDER THE INDIAN SUCCESSION

ACT, 1925 (10 OF 1925) (ATTACH A

COPY)

6. PROVISION OF LAW, CONTRACT OR

OTHER DOCUMENT UNDER WHICH

OPERATIONAL DEBT HAS BECOME

DUE

7. A STATEMENT OF BANK ACCOUNT

WHERE DEPOSITS ARE MADE OR

CREDITS RECEIVED NORMALLY BY

THE OPERATIONAL CREDITOR IN

RESPECT OF THE DEBT OF THE

CORPORATE DEBTOR (ATTACH A

COPY)

8. LIST OF OTHER DOCUMENTS

ATTACHED TO THIS APPLICATION IN

ORDER TO PROVE THE EXISTENCE OF

OPERATIONAL DEBT AND THE

AMOUNT IN DEFAULT

I, [ Name of the operational creditor/person authorised to act on behalf of the

operational creditor] hereby certify that, to the best of my knowledge, [ name

476

PRACTICAL ASPECTS OF INSOLVENCY LAW

of proposed insolvency professional], is ful y qualified and permitted to act

as an insolvency professional in accordance with the Code and the rules

and regulations made thereunder. [ where applicable]

[ Name of the operational creditor] has paid the requisite fee for this application

through [ state means of payment] on [ date].

Signature of person authorised to act on behalf of the operational creditor

Name in block letters

Position with or in relation to the operational creditor

Address of person signing

Instructions –

Please attach the fol owing to this application :

Annex I – Copy of the invoice/demand notice as in Form 3 of the Insolvency

and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 served

on the corporate debtor.

Annex II – Copies of al documents referred to in this application.

Annex III – Copy of the relevant accounts from the banks/financial institutions

maintaining accounts of the operational creditor confirming that there is no

payment of the relevant unpaid operational debt by the operational debtor, if

available.

Annex IV – Affidavit in support of the application in accordance with the

Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules,

2016.

Annex V – Written communication by the proposed interim resolution

professional as set out in Form 2 of the Insolvency and Bankruptcy

(Application to Adjudicating Authority) Rules, 2016. [where applicable]

Annex VI – Proof that the specified application fee has been paid.

Note : Where workmen/employees are operational creditors, the application

may be made either in an individual capacity or in a joint capacity by one of

them who is duly authorised for the purpose.’

11. The first thing to be noticed on a conjoint reading of Sections 8 and 9 of

the Code, as explained in Mobilox Innovations (P.) Ltd. v. Kirusa Software

(P.) Ltd., Civil Appeal No. 9405 of 2017 decided on 21st September, 2017,

at paragraphs 33 to 36, is that Section 9(1) contains the conditions precedent

for triggering the Code insofar as an operational creditor is concerned. The

requisite elements necessary to trigger the Code are :

PRACTICAL ASPECTS OF INSOLVENCY LAW

477

(i) occurrence of a default;

(i ) delivery of a demand notice of an unpaid operational debt or invoice

demanding payment of the amount involved; and

(iii) the fact that the operational creditor has not received payment from

the corporate debtor within a period of 10 days of receipt of the demand

notice or copy of invoice demanding payment, or received a reply

from the corporate debtor which does not indicate the existence of a

pre-existing dispute or repayment of the unpaid operational debt.

12. It is only when these conditions are met that an application may then be

filed under Section 9(2) of the Code in the prescribed manner, accompanied

with such fee as has been prescribed. Under Section 9(3), what is clear is

that, along with the application, certain other information is also to be

furnished. Obviously, under Section 9(3)(a), a copy of the invoice demanding

payment or demand notice delivered by the operational creditor to the

corporate debtor is to be furnished. We may only indicate that under Rules

5 and 6 of the Adjudicating Authority Rules, read with Forms 3 and 5, it is

clear that, as Annexure I thereto, the application in any case must have a

copy of the invoice/demand notice attached to the application. That this is a

mandatory condition precedent to the filing of an application is clear from a

conjoint reading of Sections 8 and 9(1) of the Code.

13. When we come to Section 9(3)(b), it is obvious that an affidavit to the

effect that there is no notice given by the corporate debtor relating to a

dispute of the unpaid operational debt can only be in a situation where the

corporate debtor has not, within the period of 10 days, sent the requisite

notice by way of reply to the operational creditor. In a case where such

notice has, in fact, been sent in reply by the corporate debtor, obviously an

affidavit to that effect cannot be given.

14. When we come to clause (c) of Section 9(3), it is equally clear that a

copy of the certificate from the financial institution maintaining accounts of

the operational creditor confirming that there is no payment of an unpaid

operational debt by the corporate debtor is certainly not a condition precedent

to triggering the insolvency process under the Code. The expression

‘confirming’ makes it clear that this is only a piece of evidence, albeit a very

important piece of evidence, which only “confirms” that there is no payment

of an unpaid operational debt. This becomes clearer when we go to sub-

clause (d) of Section 9(3) which requires such other information as may be

specified has also to be furnished along with the application.

15. When Form 5 under rule 6 is perused, it becomes clear that Part V

478

PRACTICAL ASPECTS OF INSOLVENCY LAW

thereof speaks of particulars of the operational debt. There are 8 entries in

Part V dealing with documents, records and evidence of default. Item 7 of

Part V is only one of such documents and has to be read along with Item 8,

which speaks of other documents in order to prove the existence of an

operational debt and the amount in default. Further, annexure III in the Form

also speaks of copies of relevant accounts kept by banks/financial

institutions maintaining accounts of the operational creditor, confirming that

there is no payment of the unpaid operational debt, only “if available”. This

would show that such accounts are not a pre-condition to trigger the Code,

and that if such accounts are not available, a certificate based on such

accounts cannot be given, if Section 9 is to be read the Adjudicating Authority

Rules and the Forms therein, al of which set out the statutory conditions

necessary to invoke the Code.

16. In State of UP v. Babu Ram [1961] 2 SCR 679 at 701-702, this Court

dealt with the position of rules made under a statute as follows :

‘What then is the effect of the said propositions in their application to the

provisions of the Police Act and the rules made thereunder ? The Police

Act of 1861 continues to be good law under the Constitution. Para 477 of

the Police Regulations shows that the rules in Chapter XXXII thereof

have been framed under Section 7 of the Police Act. Presumably, they

were also made by the Government in exercise of its power under Section

46(2) of the Police Act. Under para 479(a) the Governor’s power of

punishment with reference to al officers is preserved; that is to say, this

provision expressly saves the power of the Governor under article 310 of

the Constitution. “Rules made under a statute must be treated for all

purposes of construction or obligation exactly as if they were in the Act

and are to be of the same effect as if contained in the Act, and are to be

judicially noticed for all purposes of construction or obligation” : see Maxwell

“On the Interpretation of Statutes”, 10th edn., pp. 50-51. The statutory

rules cannot be described as, or equated with, administrative directions.

If so, the Police Act and the rules made thereunder constitute a self-

contained code providing for the appointment of police officers and

prescribing the procedure for their removal.’

Equally, in Desh Bandhu Gupta v. Delhi Stock Exchange [1979] 4 SCC

565 at 572, this Court laid down the principle of contemporanea expositio

as under :

‘The principle of contemporanea expositio (interpreting a statute or any

other document by reference to the exposition it has received from

contemporary authority) can be invoked though the same wil not always

PRACTICAL ASPECTS OF INSOLVENCY LAW

479

be decisive of the question of construction (Maxwel 12th ed. p. 268). In

Crawford on Statutory Construction (1940 edn.) in para 219 (at pp. 393-

395) it has been stated that administrative construction (i.e.,

contemporaneous construction placed by administrative or executive

officers charged with executing a statute) generally should be clearly wrong

before it is overturned; such a construction, commonly referred to as

practical construction, although not controlling, is nevertheless entitled

to considerable weight; it is highly persuasive. In Baleshwar Bagarti v.

Bhagirathi Dass [ILR 35 Cal. 701 at 713] the principle, which was reiterated

in Mathura Mohan Saha v. Ram Kumar Saha [ILR 43 Cal. 790 : AIR 1916

Cal. 136] has been stated by Mukerjee, J, thus :

“It is a well settled principle of interpretation that Courts in construing a

statute wil give much weight to the interpretation put upon it, at the time

of its enactment and since, by those whose duty it has been to construe,

execute and apply it. I do not suggest for a moment that such interpretation

has by any means a control ing effect upon the Courts; such interpretation

may, if occasion arises, have to be disregarded for cogent and persuasive

reasons, and in a clear case of error, a Court would without hesitation

refuse to fol ow such construction.”’

However, Dr. Singhvi referred to the following three judgments for the

proposition that rules cannot override the substantive provisions of an Act :

D T U v. B B L Hajelay [1972] 2 SCC 744 (para 13); ADM (Rev.) Delhi

Admn. v. Siri Ram [2000] 5 SCC 451 (para 16) and Ispat Industries Ltd. v.

Commissioner of Customs [2006] 12 SCC 583 (para 21). The aforesaid

judgments only have application when rules are ultra vires the parent statute.

In the present case, the rules merely flesh out what is already contained in

the statute and must, therefore, be construed along with the statute. Read

with the Code, they form a self-contained code being contemporanea

expositio by the Executive which is charged with carrying out the provisions

of the Code. The true construction of Section 9(3)(c) is that it is a procedural

provision, which is directory in nature, as the Adjudicatory Authority Rules

read with the Code clearly demonstrate.

17. There may be situations of operational creditors who may have dealings

with a financial institution as defined in Section 3(14) of the Code. There

may also be situations where an operational creditor may have as his banker

a non-scheduled bank, for example, in which case, it would be impossible

for him to fulfil the aforesaid condition. A foreign supplier or assignee of

such supplier may have a foreign banker who is not within Section 3(14) of

the Code. The fact that such foreign supplier is an operational creditor is

480

PRACTICAL ASPECTS OF INSOLVENCY LAW

established from a reading of the definition of ‘person’ contained in Section

3(23), as including persons resident outside India, together with the definition

of “operational creditor” contained in Section 5(20), which in turn is defined

as “a person to whom an operational debt is owed and includes any person

to whom such debt has been legally assigned or transferred”. That such

person may have a bank/financial institution with whom it deals and which

is not contained within the definition of Section 3(14) of the Code would

show that Section 9(3)(c) in such a case would, if Dr. Singhvi is right about

the sub-Section being a condition precedent, amount to a threshold bar to

proceeding further under the Code. The Code cannot be construed in a

discriminatory fashion so as to include only those operational creditors who

are residents outside India who happen to bank with financial institutions

which may be included under Section 3(14) of the Code. It is no answer to

state that such person can approach the Central Government to include its

foreign banker under Section 3(14) of the Code, for the Central Government

may never do so. Equally, Dr. Singhvi’s other argument that such persons

ought to be left out of the triggering of the Code against their corporate

debtor, despite being operational creditors as defined, would not sound well

with article 14 of the Constitution, which applies to al persons including

foreigners. Therefore, as the facts of these cases show, a so-cal ed condition

precedent impossible of compliance cannot be put as a threshold bar to the

processing of an application under Section 9 of the Code.

18. However, it was argued that there are various other categories of creditors

who cannot file insolvency petitions, such as government authorities who

have pending tax dues. Such authorities have ample powers under taxation

statutes to coercively col ect outstanding tax arrears. Besides they form a

class, as a whole, who are kept out of the Code, unlike persons who are

resident outside India who, though being operational creditors, are artificially

divided, if we are to accept Dr. Singhvi’s argument, into two sub-classes,

namely, those who bank with an institution that is recognised by Section

3(14) of the Code and those who do not. This argument also does not

commend itself to us.

19. It is true that the expression ‘initiation’ contained in the marginal note to

Section 9 does indicate the drift of the provision, but from such drift, to build

an argument that the expression ‘initiation’ would lead to the conclusion that

Section 9(3) contains mandatory conditions precedent before which the Code

can be triggered is a long shot. Equally, the expression ‘shall’ in Section 9(3)

does not take us much further when it is clear that Section 9(3)(c) becomes

impossible of compliance in cases like the present. It would amount to a

situation wherein serious general inconvenience would be caused to innocent

PRACTICAL ASPECTS OF INSOLVENCY LAW

481

persons, such as the appel ant, without very much furthering the object of

the Act, as has been held in the State of Haryana v. Raghubir Dayal [1995]

1 SCC 133 at paragraph 5 and obviously, therefore, Section 9(3)(c) would

have to be construed as being directory in nature.

20. Even otherwise, the important condition precedent is an occurrence of a

default, which can be proved, as has been stated hereinabove, by means of

other documentary evidence. Take for example the case of an earlier letter

written by the corporate debtor to the operational creditor confirming that a

particular operational debt is due and payable. This piece of evidence would

be sufficient to demonstrate that such debt is due and that default has

taken place, as may have been admitted by the corporate debtor. If Dr.

Singhvi’s submissions were to be accepted, despite the availability of such

documentary evidence contained in the Section 9 application as other

information as may be specified, such application filed under Section 9

would yet have to be rejected because there is no copy of the requisite

certificate under Section 9(3)(c). Obviously, such an absurd result militates

against such a provision being construed as mandatory.

21. It is unnecessary to further refer to arguments made on the footing that

Section 7 qua financial creditors has a process which is different from that

of operational creditors under Sections 8 and 9 of the Code. The fact that

there is no requirement of a bank certificate under Section 7 of the Code, as

compared to Section 9, does not take us very much further. The difference

between Sections 7 and 9 has already been noticed by this Court in

Innoventive Industries Ltd. v. ICICI Bank Civil Appeal Nos. 8337-8338 of

2017 decided on 31st August, 2017, as follows :

‘29. The scheme of Section 7 stands in contrast with the scheme under

Section 8 where an operational creditor is, on the occurrence of a default,

to first deliver a demand notice of the unpaid debt to the operational debtor

in the manner provided in Section 8(1) of the Code. Under Section 8(2),

the corporate debtor can, within a period of 10 days of receipt of the

demand notice or copy of the invoice mentioned in sub-Section (1), bring

to the notice of the operational creditor the existence of a dispute or the

record of the pendency of a suit or arbitration proceedings, which is pre-

existing – i.e., before such notice or invoice was received by the corporate

debtor. The moment there is existence of such a dispute, the operational

creditor gets out of the clutches of the Code.

30. On the other hand, as we have seen, in the case of a corporate debtor

who commits a default of a financial debt, the Adjudicating Authority has

merely to see the records of the information utility or other evidence

482

PRACTICAL ASPECTS OF INSOLVENCY LAW

produced by the financial creditor to satisfy itself that a default has

occurred. It is of no matter that the debt is disputed so long as the debt is

“due”, i.e., payable unless interdicted by some law or has not yet become

due in the sense that it is payable at some future date. It is only when this

is proved to the satisfaction of the Adjudicating Authority that the

Adjudicating Authority may reject an application and not otherwise.’

The fact that these differences obtain under the Code would have no direct

bearing on whether Section 9(3)(c) ought to be construed in the manner

indicated by Dr. Singhvi.

22. It was also submitted that Sections 65 and 76 of the Code provide for

criminal prosecution against banks issuing false bank certificates and that

a foreign bank issuing such a certificate may not be amenable to the

jurisdiction of the Code. It is unnecessary to answer this submission in view

of the fact that the necessity for such a certificate has itself been held by

this judgment to be directory in nature.

23. Equal y, Dr. Singhvi’s argument that the Code leads to very drastic action

being taken once an application for insolvency is filed and admitted and

that, therefore, al conditions precedent must be strictly construed is also

not in sync with the recent trend of authorities as has been noticed by a

concurring judgment in Ms. Eera through Dr. Manjula Krippendorf v. State

(Govt. of NCT of Delhi) Criminal Appeal Nos. 1217-1219 of 2017 decided

on 21st July, 2017. In this judgment, the correct interpretation of Section

2(1)(d) of the Protection of Children from Sexual Offences Act, 2012 arose.

After referring to the celebrated Heydon’s case, 76 ER 637 [1584] and to

the judgments in which the golden rule of interpretation of statutes was set

out, the concurring judgment of R F Nariman, J, after an exhaustive survey

of the relevant case law, came to the conclusion that the modern trend of

case law is that creative interpretation is within the Lakshman Rekha of the

Judiciary. Creative interpretation is when the Court looks at both the literal

language as wel as the purpose or object of the statute, in order to better

determine what the words used by the draftsman of the legislation mean.

The concurring judgment then concluded :

‘It is, thus, clear on a reading of English, U.S., Australian and our own

Supreme Court judgments that the “Lakshman Rekha” has in fact been

extended to move away from the strictly literal rule of interpretation back

to the rule of the old English case of Heydon, where the Court must have

recourse to the purpose, object, text, and context of a particular provision

before arriving at a judicial result. In fact, the wheel has turned ful circle.

It started out by the rule as stated in 1584 in Heydon’s case, which was

PRACTICAL ASPECTS OF INSOLVENCY LAW

483

then waylaid by the literal interpretation rule laid down by the Privy Council

and the House of Lords in the mid-1800s, and has come back to restate

the rule somewhat in terms of what was most felicitously put over 400

years ago in Heydon’s case.’

In dealing with penal statutes, the Court was confronted with a body of case

law which stated that as penal consequences ensue, the provisions of such

statutes should be strictly construed. Here again, the modern trend in

construing penal statutes has moved away from a mechanical incantation

of strict construction. Several judgments were referred to and it was held

that a purposive interpretation of such statutes is not ruled out. Ultimately,

it was held that a fair construction of penal statutes based on purposive as

wel as literal interpretation is the correct modern day approach.

24. However, Dr. Singhvi cited Raghunath Rai Bareja v. Punjab National

Bank [2007] 2 SCC 230 and relied upon paragraphs 39 to 47 for the

proposition that the literal construction of a statute is the only mode of

interpretation when the statute is clear and unambiguous. Paragraph 43 of

the said judgment was relied upon strongly by the learned counsel, which

states :

“In other words, once we depart from the literal rule, then any number of

interpretations can be put to a statutory provision, each judge having a

free play to put his own interpretation as he likes. This would be destructive

of judicial discipline, and also the basic principle in a democracy that it is

not for the Judge to legislate as that is the task of the elected

representatives of the people. Even if the literal interpretation results in

hardship or inconvenience, it has to be followed (see G P Singh’s Principles

of Statutory Interpretations, 9th edn., pp. 45-49). Hence, departure from

the literal rule should only be done in very rare cases, and ordinarily there

should be judicial restraint in this connection.”

Regard being had to the modern trend of authorities referred to in the

concurring judgment in Ms. Eera through Dr. Manjula Krippendorf (supra),

we need not be afraid of each Judge having a free play to put forth his own

interpretation as he likes. Any arbitrary interpretation, as opposed to fair

interpretation, of a statute, keeping the object of the Legislature in mind,

would be outside the judicial ken. The task of a Judge, when he looks at the

literal language of the statute as wel as the object and purpose of the

statute, is not to interpret the provision as he likes but is to interpret the

provision keeping in mind Parliament’s language and the object that

Parliament had in mind. With this caveat, it is clear that judges are not

knight-errants free to roam around in the interpretative world doing as each

484

PRACTICAL ASPECTS OF INSOLVENCY LAW

Judge likes. They are bound by the text of the statute, together with the

context in which the statute is enacted; and both text and context are

Parliaments’, and not what the Judge thinks the statute has been enacted

for. Also, it is clear that for the reasons stated by us above, a fair construction

of Section 9(3)(c), in consonance with the object sought to be achieved by

the Code, would lead to the conclusion that it cannot be construed as a

threshold bar or a condition precedent as has been contended by Dr. Singhvi.

25. Dr. Singhvi then argued that the application of the principle in Taylor

(supra) should be fol owed when it comes to the correct interpretation of

Section 9(3)(c) of the Code. The principle of Taylor (supra), namely, that

where a statute states that a particular act is to be done in a particular

manner; it must be done in that manner or not at al , was fol owed by the

Privy Council in Nazir Ahmad v. King Emperor 63 IA 372 (1936). In that

case, the Privy Council held that Sections 164 and 364 of the Code of

Criminal Procedure, 1898 prescribed the mode in which confessions are to

be recorded by Magistrates, when made during investigation, and a

confession before a Magistrate not recorded in the manner provided was

inadmissible. In Ukha Kolhe v. State of Maharashtra [1964] 1 SCR 926 at

948-949, a Constitution Bench of this Court held that the principle contained

in Taylor (supra) would not apply when proof of a specified fact could be

obtained by means other than that statutorily specified. The argument in

that case was that Sections 129A and 129B prescribed the mode of taking

blood in the course of investigation of an offence under the Bombay

Prohibition Act, 1949, and that, therefore, production or examination of a

person before a registered medical practitioner during the course of such

investigation is the only method by which consumption of an intoxicant

may be proved. After setting out Sections 129A and 129B and the judgment

of the Privy Council in Nazir Ahmad (supra), this Court held :

“The rule in Taylor v. Taylor [1875] I Ch.D 426 on which the Judicial

Committee relied has, in our judgment, no application to this case. Section

66(2), as we have already observed, does not prescribe any particular

method of proof of concentration of alcohol in the blood of a person charged

with consumption or use of an intoxicant. Section 129A is enacted primarily

with the object of providing when the conditions prescribed are fulfil ed,

that a person shal submit himself to be produced before a registered

medical practitioner for examination and for collection of blood.

Undoubtedly, Section 129A(1) confers power upon a Police or a Prohibition

Officer in the conditions set out to compel a person suspected by him of

having consumed illicit liquor, to be produced for examination and for

col ection of blood before a registered medical practitioner. But proof of

PRACTICAL ASPECTS OF INSOLVENCY LAW

485

concentration of alcohol may be obtained in the manner described in

Section 129A(1) and (2), or otherwise; that is expressly provided by sub-

Section (8) of Section 129A. The power of a Police Officer to secure

examination of a person suspected of having consumed an intoxicant in

the course of investigation for an offence under the Act is undoubtedly

restricted by Section 129A. But in the present case the Police Officer

investigating the offence had not produced the accused before a medical

officer; it was in the course of his examination that Dr. Kulkarni, before

any investigation was commenced, came to suspect that the appel ant

had consumed liquor, and he directed that specimen of blood of the

appellant be col ected. This step may have been taken for deciding upon

the line of treatment, but certainly not for col ecting evidence to be used

against the appellant in any possible trial for a charge of an offence of

consuming liquor contrary to the provisions of the Act. If unlawful

consumption of an intoxicant by a person accused, may be proved

otherwise than by a report obtained in the conditions mentioned in Section

129A(1) and (2), there would be no reason to suppose that other evidence

about excessive concentration of alcohol probative of consumption is

inadmissible. Admissibility of evidence about concentration of alcohol in

blood does not depend upon the exercise of any power of the Police or

Prohibition Officer. Considerations which were present in Nazir Ahmad

case [1936] LR 63 IA 372 regarding the inappropriateness of Magistrates

being placed in the same position as ordinary citizens and being required

to transgress statutory provisions relating to the method of recording

confessions also do not arise in the present case.”

26. This judgment applies on al fours to the facts of the present case

inasmuch as, like Section 129A(8) of the aforesaid Act, proof of the existence

of a debt and a default in relation to such debt can be proved by other

documentary evidence, as is specifically contemplated by Section 9(3)(d)

of the Code. Like Section 66(2) of the aforesaid Act in Ukha Kolhe (supra),

Section 8 of the Code does not prescribe any particular method of proof of

occurrence of default. Consequently, we are of the opinion that the principle

contained in Taylor (supra) does not apply in the present situation.

27. Also, in Madan & Co. v. Wazir Jaivir Chand [1989] 1 SCC 264 at 268-

270, the interpretation of Section 11 of the Jammu and Kashmir Houses

and Shops Rent Control Act, 1966 was under consideration of this Court.

As stated in paragraph 4 of the judgment, the controversy in that case

turned on the question whether the notice sent by the respondent by registered

post can be said to have been served and the petitioner can be said to have

been in receipt of the said notice.

486

PRACTICAL ASPECTS OF INSOLVENCY LAW

In the words of the judgment :

“4. On the terms of the above Sections, the controversy in this case

turned on the question whether the notice sent by the respondent by

registered post on 26th November, 1976 can be said to have been served

and the petitioner can be said to have been in receipt of the said notice. If

the answer to this question is in the affirmative, as held by al the Courts

concurrently, there is nothing further to be said. The contention of the

appel ant tenant, however, is that the statute postulates a factual service

of the notice on, and the actual receipt of it by, the tenant and that this

admittedly not being the position in the present case, no eviction could

have been decreed.

5. Shri Soli J Sorabjee, learned counsel appearing for the tenant

submitted that the safeguards in Sections 11 and 12 of the Act are

intended for the benefit and protection of the tenant and that, therefore,

where the Act provides for the service of the notice, by post, this

requirement has to be strictly complied with. He referred to the decisions

in Hare Krishna Das v. Hahnemann Publishing Co. Ltd. [1965-66] 70 Cal.

WN 262 and Surajmull Ghanshyamdas v. Samadarshan Sur AIR 1969

Cal. 109/ILR [1969] 1 Cal. 379 to contend that such postal service can

neither be presumed nor considered to be good service where the letter

is returned to the sender due to the non-availability of the addressee. He

urges that, in the absence of any enabling provision such as the one

provided for in Section 106 of the Transfer of Property Act, service by

some other mode, such as affixture, cannot be treated as sufficient

compliance with the statute. In this context, he referred to the frequently

applied rule in Taylor v. Taylor [1875] 1 Ch.D 426 that where a power is

given to do a certain thing in a certain way, the thing must be done in

that way or not at all and that other methods of performance are

necessarily forbidden. He urged that even if service by affixture can be

considered to be permissible, there are stringent prerequisites for service

by affixture, such as those outlined in order V, rules 17 to 19, of the

Code of Civil Procedure (‘CPC’) and that these prerequisites were not

fulfilled in the present case. He pointed out that even under the CPC,

service by such affixture can be recognised as valid only if sincere and

vigilant attempts to serve the notice on the addressee personally are

unsuccessful. In the present case, it is submitted, the evidence shows

that the postman made no serious efforts to ascertain the whereabouts

of the addressee even though the evidence showed that a servant of

the petitioner firm was known to the postman and was present in the

neighbourhood. He, therefore, submitted that the High Court should have

PRACTICAL ASPECTS OF INSOLVENCY LAW

487

dismissed the suit for eviction filed by the landlord on the ground that

the requirements of Sections 11 and 12 of the Act were not satisfied.”

The Court turned down the contention based on Taylor (supra) in the following

terms :

“We are of opinion that the conclusion arrived at by the Courts below is

correct and should be upheld. It is true that the proviso to clause (i) of

Section 11(1) and the proviso to Section 12(3) are intended for the

protection of the tenant. Nevertheless it will be easy to see that too strict

and literal a compliance of their language would be impractical and

unworkable.”

***

‘In this situation, we have to choose the more reasonable, effective,

equitable and practical interpretation and that would be to read the word

“served” as “sent by post”, correctly and properly addressed to the tenant,

and the word “receipt” as the tender of the letter by the postal peon at

the address mentioned in the letter. No other interpretation, we think,

will fit the situation as it is simply not possible for a landlord to ensure

that a registered letter sent by him gets served on, or is received by, the

tenant.’

This judgment is also supportive of the proposition that when the principle

in Taylor (supra) leads to impractical, unworkable and inequitable results, it

cannot be applied out of context in situations which are predominantly

procedural in nature.

28. The decision in Smart Timing (supra) by the NCLAT, which was relied

upon by the impugned judgment, was then pressed into service by Dr. Singhvi

stating that an appeal from this judgment has been dismissed by this Court

and that, therefore, following the principle in Kunhayammed v. State of

Kerala [2000] 6 SCC 359, the NCLAT’s judgment has merged with the

Supreme Court’s order dated 18th August, 2017, which reads as follows :

“Heard the learned counsel appearing for the appellant. We do not find

any reason to interfere with the order dated 19th May, 2017 passed by the

National Company Law Appel ate Tribunal, New Delhi. In view of this, we

find no merit in the appeal.

Accordingly, the appeal is dismissed.”

Whether or not there is a merger, it is clear that the order dated 18th August,

2017 is not “law declared” within the meaning of article 141 of the Constitution

and is of no precedential value. Suffice it to state that the said order was

488

PRACTICAL ASPECTS OF INSOLVENCY LAW

also a threshold dismissal by the Supreme Court, having heard only the

learned counsel appearing for the appellant.

29. Dr. Singhvi then relied upon the Viswanathan Report dated November

2015, in particular Box 5.2, which reads as fol ows :

Box 5.2 - Trigger for IRP

1. The IRP can be triggered by either the debtor or the creditors by

submitting documentation specified in the Code to the Adjudicating

Authority.

2. For the debtor to trigger the IRP, she must be able to submit all

the documentation that is defined in the Code, and may be specified

by the Regulator above this.

3. The Code differentiates two categories of creditors : financial

creditors where the liability to the debtor arises from a solely

financial transaction, and operational creditors where the liability

to the debtor arises in the form of future payments in exchange for

goods or services already delivered. In cases where a creditor has

both a solely financial transaction as well as an operational

transaction with the entity, the creditor wil be considered a financial

creditor to the extent of the financial debt and an operational creditor

to the extent of the operational debt is more than half the full

liability it has with the debtor.

4. The Code will require different documentation for a debtor, a financial

creditor, and an operational creditor to trigger the IRP. These are

listed Box 5.3 under what the Adjudicator will accept as

requirements to trigger the IRP.

30. Item 2 in Box 5.2 does show that for the corporate debtor to trigger the

IRP, it must be able to submit al the documentation that is defined in the

Code and that different documentation is required insofar as financial creditors

and operational creditors are concerned, as is evident from Item 4 in Box

5.2. The sentence which is after Box 5.2 is significant. It reads, “therefore,

the Code requires that the creditor can only trigger the IRP on clear evidence

of default.” Nowhere does the report state that such “clear evidence” can

only be in the shape of the certificate, referred to in Section 9(3)(c), as a

condition precedent to triggering the Code. In fact, in Item 2(c) in Box 5.3,

the Committee, by way of drafting instructions for how the IRP can be

triggered, states :

“If an operational creditor has applied, the application contains :

PRACTICAL ASPECTS OF INSOLVENCY LAW

489

(i) Record of an undisputed bill against the entity, and where applicable,

information of such undisputed as filed at a registered information

utility.”

31. When it comes to the Joint Committee report dated April 2016, the draft

Section contained therein, namely, the definition of financial institution

contained in Section 3(14) of the Code, has added into it a sub-clause (c)

which is a public financial institution as defined in Section 2(72) of the

Companies Act, 2013. Apart from this, the draft statute that was placed

before the Joint Committee contains Section 9(3)(c) exactly as it is in the

present Code. This report again does not throw much light on the point at

issue before us.

32. Shri Mukul Rohatgi strongly relied upon a recent judgment delivered by

this Court in Surendra Trading Co. v. Juggilal Kamlapat Jute Mills Co.

Ltd. Civil Appeal No. 8400 of 2017 decided on 19th September, 2017. In this

case, the question of law framed by the NCLAT for its decision was whether

the time limit prescribed for admitting or rejecting a petition for initiation of

the insolvency resolution process is mandatory. The precise question was

whether, under the proviso to Section 9(5), the rectification of defects in an

application within 7 days of the date of receipt of notice from the Adjudicating

Authority was a hard and fast time limit which could never be altered. The

NCLAT had held that the 7 day period was sacrosanct and could not be

extended, whereas, insofar as the Adjudicating Authority is concerned, the

decision to either admit or reject the application within the period of 14 days

was held to be directory. This Court, in disagreeing with the NCLAT on the 7-

day period being mandatory, held :

“We are not able to decipher any valid reason given while coming to the

conclusion that the period mentioned in proviso is mandatory. The order

of the NCLAT, thereafter, proceeds to take note of the provisions of Section

12 of the Code and points out the time limit for completion of insolvency

resolution process is 180 days, which period can be extended by another

90 days. However, that can hardly provide any justification to construe

the provisions of proviso to sub-Section (5) of Section 9 in the manner in

which it is done. It is to be borne in mind that limit of 180 days mentioned

in Section 12 also starts from the date of admission of the application.

Period prior thereto which is consumed, after the filing of the application

under Section 9 (or for that matter under Section 7 or Section 10), whether

by the Registry of the Adjudicating Authority in scrutinising the application

or by the applicant in removing the defects or by the Adjudicating Authority

in admitting the application is not to be taken into account. In fact, till the

490

PRACTICAL ASPECTS OF INSOLVENCY LAW

objections are removed it is not to be treated as application validly filed

inasmuch as only after the application is complete in every respect it is

required to be entertained. In this scenario, making the period of seven

days contained in the proviso as mandatory does not commend to us. No

purpose is going to be served by treating this period as mandatory. In a

given case there may be weighty, valid and justifiable reasons for not

able to remove the defects within seven days. Notwithstanding the same,

the effect would be to reject the application.”

The Court further went on to hold :

“Further, we are of the view that the judgments cited by the NCLAT and

the principle contained therein applied while deciding that period of fourteen

days within which the Adjudicating Authority has to pass the order is not

mandatory but directory in nature would equally apply while interpreting

proviso to sub-Section (5) of Section 7, Section 9 or sub-Section (4) of

Section 10 as well. After al , the applicant does not gain anything by not

removing the objections inasmuch as til the objections are removed,

such an application would not be entertained. Therefore, it is in the interest

of the applicant to remove the defects as early as possible.

Thus, we hold that the aforesaid provision of removing the defects within

seven days is directory and not mandatory in nature. However, we would

like to enter a caveat.

We are also conscious of the fact that sometimes applicants or their

counsel may show laxity by not removing the objections within the time

given and may take it for granted that they would be given unlimited time

for such a purpose. There may also be cases where such applications are

frivolous in nature which would be filed for some oblique motives and the

applicants may want those applications to remain pending and, therefore,

would not remove the defects. In order to take care of such cases, a

balanced approach is needed.

Thus, while interpreting the provisions to be directory in nature, at the

same time, it can be laid down that if the objections are not removed

within seven days, the applicant while refilling the application after removing

the objections, file an application in writing showing sufficient case as to

why the applicant could not remove the objections within seven days.

When such an application comes up for admission/order before the

Adjudicating Authority, it would be for the Adjudicating Authority to decide

as to whether sufficient cause is shown in not removing the defects beyond

the period of seven days. Once the Adjudicating Authority is satisfied

PRACTICAL ASPECTS OF INSOLVENCY LAW

491

that such a case is shown, only then it would entertain the application on

merits, otherwise it wil have right to dismiss the application.”

This judgment also lends support to the argument for the appellant in that

it is well settled that procedure is the handmaid of justice and a procedural

provision cannot be stretched and considered as mandatory, when it causes

serious general inconvenience. As has been held in Mahanth Ram Das v.

Ganga Das [1961] 3 SCR 763 at 767-768, we have travel ed far from the

days of the laws of the Medes and the Persians wherein, once a decree

was promulgated, it was cast in stone and could not be varied or extended

later :

“Such procedural orders, though peremptory (conditional decrees apart)

are, in essence, in terrorem, so that dilatory litigants might put themselves

in order and avoid delay. They do not, however, completely estop a Court

from taking note of events and circumstances which happen within the

time fixed. For example, it cannot be said that, if the appel ant had started

with the ful money ordered to be paid and came wel in time but was set

upon and robbed by thieves the day previous, he could not ask for extension

of time, or that the Court was powerless to extend it. Such orders are not

like the law of the Medes and the Persians. Cases are known in which

Courts have moulded their practice to meet a situation such as this and

to have restored a suit or proceeding, even though a final order had been

passed.”

33. Insofar as the second point is concerned, the first thing that is to be

noticed is that Section 8 of the Code speaks of an operational creditor

delivering a demand notice. It is clear that had the Legislature wished to

restrict such demand notice being sent by the operational creditor himself,

the expression used would perhaps have been ‘issued’ and not ‘delivered’.

Delivery, therefore, would postulate that such notice could be made by an

authorised agent. In fact, in Forms 3 and 5 extracted hereinabove, it is clear

that this is the understanding of the draftsman of the Adjudicatory Authority

Rules, because the signature of the person “authorised to act” on behalf of

the operational creditor must be appended to both the demand notice as

wel as the application under Section 9 of the Code. The position further

becomes clear that both forms require such authorised agent to state his

position with or in relation to the operational creditor. A position with the

operational creditor would perhaps be a position in the company or firm of

the operational creditor, but the expression “in relation to” is significant. It is

a very wide expression, as has been held in Renusagar Power Co. Ltd. v.

General Electric Co. [1984] 4 SCC 679 at 704 and State of Karnataka v.

492

PRACTICAL ASPECTS OF INSOLVENCY LAW

Azad Coach Builders (P.) Ltd. [2010] 9 SCC 524 at 535, which specifically

includes a position which is outside or indirectly related to the operational

creditor. It is clear, therefore, that both the expression “authorised to act”

and “position in relation to the operational creditor” go to show that an

authorised agent or a lawyer acting on behalf of his client is included within

the aforesaid expression.

34. Quite apart from the above, Section 30 of the Advocates Act states as

follows :

“Right of advocates to practise. – Subject to provisions of this Act, every

advocate whose name is entered in the State rol shal be entitled as of

right to practise throughout the territories to which this Act extends, –

(i) in all Courts including the Supreme Court;

(i ) before any tribunal or person legal y authorised to take evidence; and

(iii) before any other authority or person before whom such advocate is

by or under any law for the time being in force entitled to practise.”

That the expression ‘practise’ is an expression of extremely wide import,

and would include all preparatory steps leading to the filing of an application

before a Tribunal. This is clear from a Constitution Bench judgment of this

Court in Harish Uppal (Ex-Capt.) v. Union of India [2003] 2 SCC 45 at 72,

which states :

“The right of the advocate to practise envelopes a lot of acts to be performed

by him in discharge of his professional duties. Apart from appearing in

the Courts he can be consulted by his clients, he can give his legal

opinion whenever sought for, he can draft instruments, pleadings, affidavits

or any other documents, he can participate in any conference involving

legal discussions, he can work in any office or firm as a legal officer, he

can appear for clients before an arbitrator or arbitrators, etc.”

35. The doctrine of harmonious construction of a statute extends also to a

harmonious construction of all statutes made by Parliament. In Harshad S

Mehta v. State of Maharashtra [2001] 8 SCC 257 at 280-81, the Special

Court (Trial of Offences Relating to Transactions in Securities) Act, 1992

was held, insofar as the criminal jurisdiction of the Special Court was

concerned, to be harmoniously construed with the Code of Criminal Procedure,

1973 in the fol owing terms :

‘48. To our mind, the Special Court has al the powers of a Court of Session

and/or Magistrate, as the case may be, after the prosecution is instituted

or transferred before that Court. The width of the power of the Special

PRACTICAL ASPECTS OF INSOLVENCY LAW

493

Court will be same whether trying such cases as are instituted before it or

transferred to it. The use of different words in Sections 6 and 7 of the Act

as already noticed earlier also shows that the words in Section 7 that the

prosecution for any offence shal be instituted only in the Special Court

deserve a liberal and wider construction. They confer on the Special Court

all powers of the Magistrate including the one at the stage of investigation

or inquiry. Here, the institution of the prosecution means taking any steps

in respect thereof before the Special Court. The scheme of the Act nowhere

contemplates that it was intended that steps at pre-cognisance stage

shall be taken before a Court other than a Special Court. We may note an

il ustration given by Mr. Salve referring to Section 157 of the Code. Learned

counsel submitted that the report under that Section is required to be

sent to a Magistrate empowered to take cognisance of offence. In relation

to offence under the Act, the Magistrate has no power to take cognisance.

That power is exclusively with the Special Court and, thus, report under

Section 157 of the Code will have to be sent to the Special Court though

the Section requires it to be sent to the Magistrate. It is clear that for the

expression “Magistrate” in Section 157, so far as the Act is concerned, it

is required to be read as “Special Court” and likewise in respect of other

provisions of the Code. If the expression “Special Court” is read for the

expression “Magistrate”, everything will fall in line. This harmonious

construction of the provisions of the Act and the Code makes the Act

work. That is what is required by principles of statutory interpretation.

Section 9(1) of the Act provides that the Special Court shal in the trial of

such cases fol ow the procedure prescribed by the Code for the trial of

warrant cases before the Magistrate. The expression “trial” is not defined

in the Act or the Code. For the purpose of the Act, it has a wider connotation

and also includes in it the pre-trial stage as well. Section 9(2) makes the

Special Court, a Court of Sessions by a fiction by providing that the

Special Court shal be deemed to be a Court of Sessions and shal have

al the powers of a Court of Sessions. In case, the Special Court is held

not to have the dual capacity and powers both of the Magistrate and the

Court of Sessions, depending upon the stage of the case, there will be a

complete hiatus. It is also to be kept in view that the Special Court under

the Act comprises of a High Court Judge and it is a Court of exclusive

jurisdiction in respect of any offence as provided in Section 3(2) which

wil include offences under the Indian Penal Code, the Prevention of

Corruption Act and other penal laws. It is only in the event of inconsistency

that the provisions of the Act would prevail as provided in Section 13

thereof. Any other interpretation wil make the provision of the Act

unworkable which could not be the intention of the Legislature. Section

494

PRACTICAL ASPECTS OF INSOLVENCY LAW

9(2) does not exclude Sections 306 to 308 of the Code from the purview

of the Act. This Section rather provides that the provisions of the Code

shal apply to the proceedings before the Special Court. The inconsistency

seems to be only imaginary. There is nothing in the Act to show that

Sections 306 to 308 were intended to be excluded from the purview of the

Act.’

Similarly, in CTO v. Binani Cements Ltd. [2014] 8 SCC 319 at 332, the rule

of construction of two Parliamentary statutes being harmoniously construed

was laid down as follows :

“35. Generally, the principle has found vast application in cases of there

being two statutes : general or specific with the latter treating the common

subject-matter more specifically or minutely than the former. Corpus Juris

Secundum, 82 CJS Statutes § 482 states that when construing a general

and a specific statute pertaining to the same topic, it is necessary to

consider the statutes as consistent with one another and such statutes,

therefore, should be harmonised, if possible, with the objective of giving

effect to a consistent legislative policy. On the other hand, where a general

statute and a specific statute relating to the same subject-matter cannot

be reconciled, the special or specific statute ordinarily wil control. The

provision more specifically directed to the matter at issue prevails as an

exception to or qualification of the provision which is more general in

nature, provided that the specific or special statute clearly includes the

matter in controversy – Edmond v. United States 137 L Ed 2d 917/520

US 651 (1997), Warden v. Marrero 41 L Ed 2d 383/417 US 653 (1974).”

More recently, in Binoy Viswam v. Union of India [2017] 7 SCC 59 at 132,

this Court construed the Income-tax Act, 1961 and the Aadhaar (Targeted

Delivery of Financial and Other Subsidies, Benefits and Services) Act, 2016

harmoniously in the fol owing manner :

“98. In view of the above, we are not impressed by the contention of the

petitioners that the two enactments are contradictory with each other. A

harmonious reading of the two enactments would clearly suggest that

whereas enrolment of Aadhaar is voluntary when it comes to taking benefits

of various welfare schemes even if it is presumed that requirement of

Section 7 of the Aadhaar Act that it is necessary to provide Aadhaar

number to avail the benefits of schemes and services, it is up to a person

to avail those benefits or not. On the other hand, purpose behind enacting

Section 139AA of the Act is to check a menace of black money as well

as money laundering and also to widen the income-tax net so as to cover

those persons who are evading the payment of tax.”

PRACTICAL ASPECTS OF INSOLVENCY LAW

495

36. The non-obstante clause contained in Section 238 of the Code wil not

override the Advocates Act as there is no inconsistency between Section

9, read with the Adjudicating Authority Rules and Forms referred to

hereinabove, and the Advocates Act. In Balchand Jain v. State of MP

[1976] 4 SCC 572 at 585-86, the anticipatory bail provision contained in

Section 438 of the Code of Criminal Procedure was held not to be wiped out

by the non-obstante clause contained in rule 184 of the Defence and Internal

Security of India Rules, 1971. Fazal Ali, J concurring with the main judgment,

held :

“16. Having regard to the principles enunciated above, we feel that there

does not appear to be any direct conflict between the provisions of rule

184 of the Rules and Section 438 of the Code. However, we hold that the

conditions required by rule 184 of the Rules must be impliedly imported in

Section 438 of the Code so as to form the main guidelines which have to

be fol owed while the Court exercises its power under Section 438 of the

Code in offences contemplated by rule 184 of the Rules. Such an

interpretation would meet the ends of justice, avoid all possible anomalies

and would at the same time ensure and protect the liberty of the subject

which appears to be the real intention of the Legislature in enshrining

Section 438 as a new provision for the first time in the Code. We think

that there is no real inconsistency between Section 438 of the Code and

rule 184 of the Rules and, therefore, the non obstante clause cannot be

interpreted in a manner so as to repeal or override the provisions of Section

438 of the Code in respect of cases where rule 184 of the Rules applies.”

Similarly, in R S Raghunath v. State of Karnataka [1992] 1 SCC 335 at

348, the non-obstante clause contained in rule 3(2) of the Karnataka Civil

Services (General Recruitment) Rules, 1977 was held not to override the

Karnataka General Service (Motor Vehicles Branch) (Recruitment) Rules,

1976. It was held :

“As already noted, there should be a clear inconsistency between the two

enactments before giving an overriding effect to the non-obstante clause

but when the scope of the provisions of an earlier enactment is clear the

same cannot be cut down by resort to non-obstante clause. In the instant

case we have noticed that even the General Rules of which rule 3(2)

forms a part provide for promotion by selection. As a matter of fact rules

1(3)(a), 3(1) and 4 also provide for the enforceability of the Special Rules.

The very rule 3 of the General Rules which provides for recruitment also

provides for promotion by selection and further lays down that the methods

of recruitment shal be as specified in the Special Rules, if any. In this

496

PRACTICAL ASPECTS OF INSOLVENCY LAW

background if we examine the General Rules it becomes clear that the

object of these Rules only is to provide broadly for recruitment to services

of all the departments and they are framed generally to cover situations

that are not covered by the Special Rules of any particular department. In

such a situation both the Rules including rules 1(3)(a), 3(1) and 4 of General

Rules should be read together. If so read it becomes plain that there is no

inconsistency and that amendment by inserting rule 3(2) is only an

amendment to the General Rules and it cannot be interpreted as to

supersede the Special Rules. The amendment also must be read as being

subject to rules 1(3)(a), 3(1) and 4(2) of the General Rules themselves.

The amendment cannot be read as abrogating al other Special Rules in

respect of al departments. In a given case where there are no Special

Rules then naturally the General Rules would be applicable. Just because

there is a non-obstante clause, in rule 3(2) it cannot be interpreted that

the said amendment to the General Rules though later in point of time

would abrogate the special rule the scope of which is very clear and

which co-exists particularly when no patent conflict or inconsistency can

be spelt out.

As already noted rules 1(3)(a), 3(1) and 4 of the General Rules themselves

provide for promotion by selection and for enforceability of the Special

Rules in that regard. Therefore, there is no patent conflict or inconsistency

at all between the General and the Special Rules.”

In Central Bank of India v. State of Kerala [2009] 4 SCC 94 at 141-42, the

non-obstante clauses contained in Section 34(1) of Recovery of Debts Due

to Banks and Financial Institutions Act, 1993 and Section 35 of the

Securitisation and Reconstruction of Financial Assets and Enforcement of

Security Interest Act, 2002 were held not to override specific provisions

contained in the Bombay Sales Tax Act, 1959 and the Kerala Sales Tax Act

1963 dealing with a declaration of a first charge in the fol owing terms :

“130. Undisputedly, the two enactments do not contain provision similar

to the Workmen’s Compensation Act, etc. In the absence of any specific

provision to that effect, it is not possible to read any conflict or

inconsistency or overlapping between the provisions of the DRT Act and

the Securitisation Act on the one hand and Section 38C of the Bombay

Act and Section 26B of the Kerala Act on the other and the non-obstante

clauses contained in Section 34(1) of the DRT Act and Section 35 of the

Securitisation Act cannot be invoked for declaring that the first charge

created under the State legislation wil not operate qua or affect the

proceedings initiated by banks, financial institutions and other secured

PRACTICAL ASPECTS OF INSOLVENCY LAW

497

creditors for recovery of their dues or enforcement of security interest, as

the case may be.

131. The Court could have given effect to the non-obstante clauses

contained in Section 34(1) of the DRT Act and Section 35 of the

Securitisation Act vis-a-vis Section 38C of the Bombay Act and Section

26B of the Kerala Act and similar other State legislations only if there was

a specific provision in the two enactments creating first charge in favour

of the banks, financial institutions and other secured creditors but as

Parliament has not made any such provision in either of the enactments,

the first charge created by the State legislations on the property of the

dealer or any other person, liable to pay sales tax, etc., cannot be destroyed

by implication or inference, notwithstanding the fact that banks, etc., fall

in the category of secured creditors.”

Since there is no clear disharmony between the two Parliamentary statutes

in the present case which cannot be resolved by harmonious interpretation,

it is clear that both statutes must be read together. Also, we must not forget

that Section 30 of the Advocates Act deals with the fundamental right under

article 19(1)(g) of the Constitution to practice one’s profession. Therefore, a

conjoint reading of Section 30 of the Advocates Act and Sections 8 and 9 of

the Code together with the Adjudicatory Authority Rules and Forms thereunder

would yield the result that a notice sent on behalf of an operational creditor

by a lawyer would be in order.

37. However, Dr. Singhvi referred to rule 4 of the Debts Recovery Rules and

Section 434(2) of the Companies Act, 1956, which state as follows :

“4. Procedure for filing applications. –

(1) The application under Section 19 or Section 31A, or under Section

30(1) of the Act may be presented as nearly as possible in Form-I, Form-

II and Form-III, respectively annexed to these rules by the applicant in

person or by his agent or by a duly authorised legal practitioner to the

Registrar of the Bench within whose jurisdiction his case fal s or shal be

sent by registered post addressed to the Registrar.

(2) An application sent by post under sub-rule (1) shal be deemed to

have been presented to the Registrar the day on which it was received in

the office of the Registrar.

(3) The application under sub-rule (1) shall be presented in two sets, in a

paper book along with an empty file size envelope bearing full address of

the defendant and where the number of defendants is more than one,

then sufficient number of extra paper-books together with empty file size

498

PRACTICAL ASPECTS OF INSOLVENCY LAW

envelopes bearing ful address of each of the defendant shal be furnished

by the applicant.

***

434. Company when deemed unable to pay its debts. –

(2) The demand referred to in clause (a) of sub-Section (1) shal be deemed

to have been duly given under the hand of the creditor if it is signed by

any agent or legal adviser duly authorised on his behalf, or in the case of

a firm, if it is signed by any such agent or legal adviser or by any member

of the firm.”

The argument then made was that when Parliament wishes to include a

lawyer for the purposes of litigation or to a pre-litigation stage, it expressly

so provides, and this not being so in the Code, it must be inferred that

lawyers are excluded when it comes to issuing notices under Section 8 of

the Code. We are afraid that this argument must be rejected, not only in

view of what has been held by us on a reading of the Code and on the

harmonious construction of Section 30 of the Advocates Act read with the

Code, but also on the basis of a judgment of this Court in Byram Pestonji

Gariwala v. Union Bank of India [1992] 1 SCC 31 at 47-48. In this judgment,

what fel for consideration was order XXIII, rule 3 of the Code of Civil

Procedure, 1908 after its amendment in 1976. It was argued in that case

that a compromise in a suit had, under order XXIII, rule 3, to be in writing

and “signed by the parties”. It was, therefore, argued that a compromise

effected by counsel on behalf of his client would not be effective in law,

unless the party himself signed the compromise. This was turned down

stating that Courts in India have consistently recognised the traditional

role of lawyers and the extent and nature of the implied authority to act on

behalf of their clients, which included compromising matters on behalf of

their clients. The Court held there is no reason to assume that the Legislature

intended to curtail such implied authority of counsel. It then went on to

hold :

‘38. Considering the traditionally recognised role of counsel in the common

law system, and the evil sought to be remedied by Parliament by the

CPC (Amendment) Act, 1976, namely, attainment of certainty and

expeditious disposal of cases by reducing the terms of compromise to

writing signed by the parties, and al owing the compromise decree to

comprehend even matters fal ing outside the subject-matter of the suit,

but relating to the parties, the Legislature cannot, in the absence of express

words to such effect, be presumed to have disallowed the parties to enter

into a compromise by counsel in their cause or by their duly authorised

PRACTICAL ASPECTS OF INSOLVENCY LAW

499

agents. Any such presumption would be inconsistent with the legislative

object of attaining quick reduction of arrears in Court by elimination of

uncertainties and enlargement of the scope of compromise.

39. To insist upon the party himself personally signing the agreement or

compromise would often cause undue delay, loss and inconvenience,

especially in the case of non-resident persons. It has always been

universally understood that a party can always act by his duly authorised

representative. If a power of attorney holder can enter into an agreement

or compromise on behalf of his principal, so can counsel, possessed of

the requisite authorisation by vakalatnama, act on behalf of his client.

Not to recognise such capacity is not only to cause much inconvenience

and loss to the parties personal y, but also to delay the progress of

proceedings in Court. If the Legislature had intended to make such a

fundamental change, even at the risk of delay, inconvenience and needless

expenditure, it would have expressly so stated.

40. Accordingly, we are of the view that the words “in writing and signed

by the parties”, inserted by the CPC (Amendment) Act, 1976, must

necessarily mean, to borrow the language of order III, rule 1, CPC :

“[A]ny appearance, application or act in or to any Court, required or

authorised by law to be made or done by a party in such Court, may

except where otherwise expressly provided by any law for the time being

in force, be made or done by the party in person, or by his recognised

agent, or by a pleader, appearing, applying or acting as the case may be,

on his behalf :

Provided that any such appearance shall, if the Court so directs, be made

by the party in person.”’

38. Just as has been held in Gariwala (supra), the expression “an operational

creditor may on the occurrence of a default deliver a demand notice “ under

Section 8 of the Code must be read as including an operational creditor’s

authorised agent and lawyer, as has been fleshed out in Forms 3 and 5

appended to the Adjudicatory Authority Rules.

39. For all these reasons, we are of the view that the NCLAT judgment has

to be set aside on both counts. Inasmuch as the two threshold bars to the

applications filed under Section 9 have now been removed by us, the NCLAT

will proceed further with these matters under the Code on a remand of these

matters to it. The appeals are al owed in the aforesaid terms.

500

PRACTICAL ASPECTS OF INSOLVENCY LAW

ANNEXURE X.16

IN THE NATIONAL COMPANY LAW APPELLATE TRIBUNAL

COMPANY

APPELLATE JURISDICTION

Company Appeal (AT) (Insolvency) No. 44 of 2017

(arising out of Order dated 21st April 2017 passed by NCLT, Mumbai

Bench, Mumbai in C.P.No. 69/I&BP/NCLT/MAH/2017

Neelkanth Township and Construction Pvt. Ltd.

...Appellant

Vs.

Urban Infrastructure Trustees Limited

.... Respondent

Present:

For Appellants: Dr. U.K. Chaudhary, Senior Advocate with

Mr. Kush Chaturvedi, Ms. Anshula Grover, Ms. Chaitrika Pathi,

Mr. Aman Uarma, Mr. Saket Mone and Mr. Himanshu Vij,

Advocates.

For Respondents: Mr. Jaideep Gupta, Sr. Advocate with

Mr. Arif Doctor, Ms. Surekharaman and Anuj Sharma,

Advocates.

JUDGEMENT

SUDHANSU JYOTI MUKHOPADHAYA, J

This appeal has been preferred by Appellant/ Corporate Debtor against order

dated 21st April 2017 passed by Learned Adjudicating Authority, (National

Company Law Tribunal), Mumbai Bench, Mumbai, in C.P. No. 69/I&BP/NCLT/

MAH/2017. By the impugned order Learned Adjudicating Authority

entertained the application preferred by the Respondent-Financial Creditor

under Section 7 of the Insolvency & Bankruptcy Code, 2016 (hereinafter

referred to as ‘I & B Code’), admitted the application and ordered moratorium

with further order to appoint an Insolvency Resolution Professional and

passed consequential directions.

2. Learned Counsel for the Appel ant-Corporate Debtor assailed the impugned

order mainly on the following grounds:—

(i) The application filed by Respondent under Section 7 is defective and

PRACTICAL ASPECTS OF INSOLVENCY LAW

501

not complete as it was not accompanying the documents, as

mandated by sub-section (3) of Section 7 of the ‘I & B Code’.

(i ) The application under section 7 is time barred, as the debt claimed

related to the years 2011, 2012 and 2013.

(iii) That the ‘default of debt’ as claimed by Respondent has not been

admitted by the Corporate Debtor and

(iv) That the Respondent is not a ‘Financial Creditor’, but an Investor.

3. Learned counsel for the appel ant submitted that an application by a

‘Financial Creditor’ under Section 7 can only be filed when it is furnished

with the documents provided under sub-section (3) of Section 7 and none

other, namely (a) a record of the default as recorded with the information

utility (b) Such other record or evidence of default as may be specified.

4. The expression “such other record of evidence of default” as may be

specified can only be such record or evidence as is specified by the Insolvency

and Bankruptcy Board of India (hereinafter referred to as “the Board”) under

sub-section 2(f) of Section 240 of ‘I & B Code’. Reliance was also placed on

definition of the word “specified” as defined under Section 3(32) of the ‘I&B

Code’.

5. Learned counsel for the appel ant placed reliance on decision of this

Appel ate Tribunal in “Smart Timing Steel Ltd. v. National Steel & Agro

Industries Ltd.” Company Appeal (AT) (Insolvency) No. 28 of 2017 to suggest

that the provision of sub-section 3(a) of Section 7 is mandatory.

6. It was also submitted that it was the duty of the Insolvency and Bankruptcy

Board of India (In short “Board”) to specify Regulations and in absence of

the same the proceeding under Section 7 of ‘I & B Code’ cannot be initiated.

7. In support of the second contention it was submitted that the time barred

debt cannot be enforced by filing an application for Corporate Insolvency

Resolution Process. The claim of the ‘Financial Creditor’, is completely time

barred as the debenture certificates were due for redemption as far back as

in the years 2011, 2012 and 2013 respectively. Consequently, the application

filed by the ‘Financial Creditor’ in the year 2017 is hopelessly time barred.

8. It was next submitted that the respondent does not come within the

meaning of “Financial Creditor” as defined in sub-section (7) read with sub-

section (8) of Section 5 of the ‘I & B code’. No ‘financial debt’ is owed to the

Respondent.

9. Counsel for the Appellant further submitted that ‘Debenture Certificates’

502

PRACTICAL ASPECTS OF INSOLVENCY LAW

forming basis of claim of the Respondent do not fal within the definition of

‘financial debt’ as provided under sub-section (8) of Section 5 of the ‘I & B

Code’. A plain reading of the definition of ‘financial debt’ makes it apparent

that it is the debt which is only if disbursed against the consideration for

time value of money. Therefore, there has to be a consideration flowing from

the advance of money which is at par with the time value of money. Since

the ‘debenture certificates’ issued to the Respondent were carrying zero

interest and another was carrying only one percent interest, the same were

not issued against consideration for time value of money, as envisaged

under sub-section (8) of Section 5. The debenture certificates were

purchased by Respondent only by way of an investment, and do not come

within the meaning of ‘financial debt’.

10. Learned Counsel for the appel ant also placed reliance on definition of

“debt” as defined under sub-section (11) of Section 3 of the ‘I & B Code’. It

was further contended that there is pendency of proceedings between the

parties as the ‘Financial Creditor’ has already invoked arbitration against

the ‘Corporate Debtor’ for the same cause of action which is an admitted

fact.

11. In reply Learned Counsel appearing on behalf of the respondent submitted

that in absence of the Regulations framed by the Board, the statutes (I & B

Code) cannot be made ineffective, having come into force since 15th

December 2016. Reliance was also placed on Insolvency and Bankruptcy

(Adjudicating Authority Rules, 2016) (hereinafter referred to as Adjudicatory

Rules) framed by the Central Government, under section 239 of the I & B

Code’.

12. Learned Counsel for the respondent submitted that the Balance Sheet

of ‘Corporate Debtor’ was noticed by Learned Adjudicating Authority, before

admitting the case. Reliance was also placed on Regulation 8(2) and ‘Form-

C’ of Insolvency and Bankruptcy Board of India (Insolvency Resolution

Process for Corporate Persons) Regulations 2016 (hereinafter referred to

‘Corporate Person’), Regulation 2016.

13. The question to be determined is whether in absence of record of default

as recorded with the information utility or any other “record or evidence of

default” specified by the Board, an application under Section 7 is maintainable

or not?

14. Process of initiation of Insolvency Resolution process by a financial

creditor is provided in Section 7 of the I & B Code. As per sub-section (1) of

Section 7 of the I & B Code, the trigger for filing of an application by a

financial creditor before the Adjudicating Authority is when a default in respect

PRACTICAL ASPECTS OF INSOLVENCY LAW

503

of any financial debt has occurred. Sub-section (2) of Section 7 provides

that the financial creditor shal make an application in prescribed form and

manner and with prescribed documents, including “record of the default”

recorded with the information utility or such other record or evidence of

default as may be specified”.

15. Once the application is filed by the ‘Financial Creditor’ with the Adjudicating

Authority, the Adjudicating Authority, within 14 days of the receipt of the

application under sub-section (2) of Section 8 required to ascertain the

existence of default from the records of an information utility or on the basis

of other evidence furnished by the ‘financial creditor’ under sub-section (3)(a)

of Section 7.

16. ‘Financial Creditor’ along with the application required to be furnished

information and other facts as prescribed under sub-section (3) of Section

7. Where the Adjudicating Authority is satisfied that 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 can admit such application and in case the application is

incomplete, required to provide 7 days’ time to complete the record and on

failure is to dismiss the application.

17. The aforesaid facts are to be considered from the procedure for initiation

of corporate insolvency resolution process by ‘financial creditor’ as mandated

under Section 7 of ‘I & B Code’, and quoted below: -

“7. (1) A financial creditor either by itself or jointly with other financial

creditors may file an application for initiating corporate insolvency resolution

process against a corporate debtor before the Adjudicating Authority when

a default has occurred.

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 shal 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 shal , 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

504

PRACTICAL ASPECTS OF INSOLVENCY LAW

(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 is 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 shal commence from

the date of admission of the application under sub-section (5).

(7) The Adjudicating Authority shal 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.”

18. It is wel settled that rules of procedure are to be construed not to frustrate

or obstruct the process of adjudication under the substantive provisions of

law. A procedural provision cannot override or affect the substantive obligation

of the adjudicating authority to deal with applications under Section 7 merely

on the ground that Board has not stipulated or framed Regulations with

regard to sub-section 3(a) of Section 7. The language of Section 240, whereby

Board have been empowered to frame regulations is clear that the said

regulation should be consistent with the ‘I & B’ Code and the rules made

thereunder by the Central Government.

PRACTICAL ASPECTS OF INSOLVENCY LAW

505

19. In exercise of power conferred by Section 239 read with Sections 7, 8,

9 and 10 of the ‘I & B code, the Central Government framed the rules known

as “Insolvency & Bankruptcy (Application to Adjudicating Authority) Rules,

2016 (hereinafter referred to as Adjudicating Authority Rules, 2016). As per

Rule 41, a ‘Financial Creditor’ required to apply itself or jointly in an application

under Section 7 in terms of Form-1 attached thereto. Part V of Form-1 deals

with particulars of ‘Financial Debt’ (documents, record and evidence of

default), as quoted below: -

“PART V

PARTICULARS OF FINANCIAL DEBT [ DOCUMENTS, RECORDS AND

EVIDENCE OF DEFAULT]

1. PARTICULARS OF SECURITY HELD, IF ANY, THE DATE OF ITS

CREATION, ITS ESTIMATED VALUE AS PER THE CREDITOR.

ATTACH A COPY OF A CERTIFICATE OF REGISTRATION OF

CHARGE ISSUED BY THE REGISTRAR OF COMPANIES (IF THE

CORPORATE DEBTOR IS A COMPANY)

2. PARTICULARS OF AN ORDER OF A COURT, TRIBUNAL OR

ARBITRAL PANEL ADJUDICATING ON THE DEFAULT, IF ANY

(ATTACH A COPY OF THE ORDER)

3. RECORD OF DEFAULT WITH THE INFORMATION UTILITY, IF ANY

(ATTACH A COPY OF SUCH RECORD)

4. DETAILS OF SUCCESSION CERTIFICATE, OR PROBATE OF A

WILL, OR LETTER OF ADMINISTRATION, OR COURT DECREE

(AS MAY BE APPLICABLE), UNDER THE INDIAN SUCCESSION

ACT, 1925 (10 OF 1925) (ATTACH A COPY)

5. THE LATEST AND COMPLETE COPY OF THE FINANCIAL

CONTRACT REFLECTING ALL AMENDMENTS AND WAIVERS TO

DATE (ATTACH A COPY)

6. A RECORD OF DEFAULT AS AVAILABLE WITH ANY CREDIT

INFORMATION COMPANY (ATTACH A COPY)

7. COPIES OF ENTIRES IN A BANKERS BOOK IN ACCORDANCE

WITH THE BANKERS BOOKS EVIDENCE ACT, 1891 (18 OF 1891)

8. LIST OF OTHER DOCUMENTS ATTACHED TO THIS APPLICATION

IN ORDER TO PROVE THE EXISTENCE OF OPERATIONAL DEBT

AND THE AMOUNT IN DEFAULT”

506

PRACTICAL ASPECTS OF INSOLVENCY LAW

20. The rules framed by the Central Government under Section 239 having

prescribed the documents, record and evidence of default as noticed above,

we hold that in absence of regulation framed by the Board relating to record

of default recorded with the information utility or other record of evidence of

default specified, “the documents”, ‘record’ and ‘evidence of default’ prescribed

at Part V of Form-1, of the Adjudicatory Rules 2016 will hold good to decide

the default of debt for the purpose of Section 7 of the ‘I & B Code’.

21. We further hold that the ‘Regulations framed by the Board’ being subject

to the provisions of ‘I & B Code’ and rules framed by the Central Government

under Section 239, ‘Part V of Form - 1’ of Adjudicating Authority Rules, 2016

framed by Central Government relating to ‘documents’, ‘record’ and ‘evidence

of default’, will override the regulations, if framed by the Board and if

inconsistent with the Rule. However, it is always open to Board to prescribe

additional records in support of default of debt, such as records of default

recorded with the information utility or such other record or evidence of

default in addition to the records as mentioned in Part V of Form-I.

22. At this stage, it is pertinent to note that the Board has also framed

Insolvency Resolution Process for Corporate Persons, Regulations, 2016

(‘Corporate Persons Regulation’ for short). It has come into force since

Notification dated 30th November 2016 was issued. Regulation 8 of ‘Corporate

Persons Regulation’, 2016 relate to claims by ‘Financial Creditor’. Regulation

11(2) relates to existence of debt due to ‘Financial Creditor’, which is to be

proved on the basis documents mentioned therein and quoted below: -

“8. Claims by financial creditors.

(1) A person claiming to be a financial creditor of the corporate debtor

shal submit proof of claim to the interim resolution professional in

electronic form in Form C of the Schedule:

Provided that such person may submit supplementary documents or

clarifications in support of the claim before the constitution of the

committee.

(2) The existence of debt due to the financial creditor may be proved on

the basis of —

(a) the records available with an information utility, if any; or

(b) other relevant documents, including —

(i) a financial contract supported by financial statements as

evidence of the debt;

PRACTICAL ASPECTS OF INSOLVENCY LAW

507

(i ) a record evidencing that the amounts committed by the financial

creditor to the corporate debtor under a facility has been drawn

by the corporate debtor;

(iii) financial statements showing that the debt has not been repaid;

or

(iv) an order of a court or tribunal that has adjudicated upon the

non-payment of a debt, if any.”

23. ‘Form - C attached to the Regulation relates to proof of claim of ‘Financial

Creditor’ whereunder at Serial No. 10, the ‘Financial Creditor’ is supposed to

refer the list of documents in proof of claim in order to prove the existence

and non-payment of claim dues to the ‘Operational Creditor’.

Therefore, the stand of the appel ant that the Board has not framed any

Regulations, relating to clause (a) of sub-section (3) of Section 7, cannot be

accepted.

24. The next ground taken on behalf of the appel ant is that the claim of the

respondent is barred by limitation, as the Debentures were matured between

the year 2011 - 2013 is not based on Law. There is nothing on the record that

Limitation Act, 2013 is applicable to I & B Code. Learned Counsel for the

appellant also failed to lay hand on any of the provision of I & B Code to

suggest that the Law of Limitation Act, 1963 is applicable. The I & B Code,

2016 is not an Act for recovery of money claim, it relates to initiation of

Corporate Insolvency Resolution Process. If there is a debt which includes

interest and there is default of debt and having continuous course of action,

the argument that the claim of money by Respondent is barred by Limitation

cannot be accepted.

25. Next question arises is whether the respondent come within the meaning

of ‘Financial Creditor’ or not.

26. For determination of the aforesaid issue, it is desirable to notice meaning

of ‘Financial Creditor’, as defined in sub-section (7) of Section 5 of I & B

Code’, and quoted hereunder: -

‘(7) “financial creditor” means any person to whom a financial debt is

owed and includes a person to whom such debt has been legal y assigned

or transferred to’

27. ‘Financial Debt’ means a debt along with interest, if any, which is disbursed

against the consideration of time value and money as defined in sub-section

(8) of Section 5, as quoted below: -

508

PRACTICAL ASPECTS OF INSOLVENCY LAW

‘Sec.5. Definitions - In this Part, unless the context otherwise requires, —

xxxx

(8) “financial debt” means a debt alongwith interest, if any, which is disbursed

against the consideration for the time value of money and includes—

(a) money borrowed against the payment of interest;

(b) any amount raised by acceptance under any acceptance credit facility

or its de-materialised equivalent;

(c) any amount raised pursuant to any note purchase facility or the issue

of bonds, notes, debentures, loan stock or any similar instrument;

(d) the amount of any liability in respect of any lease or hire purchase

contract which is deemed as a finance or capital lease under the

Indian Accounting Standards or such other accounting standards as

may be prescribed;

(e) receivables sold or discounted other than any receivables sold on

non-recourse basis;

(f) any amount raised under any other transaction, including any forward

sale or purchase agreement, having the commercial effect of a

borrowing;

(g) any derivative transaction entered into in connection with protection

against or benefit from fluctuation in any rate or price and for

calculating the value of any derivative transaction, only the market

value of such transaction shal be taken into account;

(h) any counter-indemnity obligation in respect of a guarantee, indemnity,

bond, documentary letter of credit or any other instrument issued by

a bank or financial institution;

(i) the amount of any liability in respect of any of the guarantee or

indemnity for any of the items referred to in sub-clauses (a) to (h) of

this clause.’

28. Clause (c) of sub-section (8) of Section 5 deals with any amount raised

pursuant to any note purchase facility or the issue of bonds, notes,

debentures, loan stock or any similar instrument.

29. From the aforesaid provision, we find that the debentures come within

the meaning of ‘Financial Debt’ as defined in Clause (c) of sub-section (8) of

Section 5.

30. ‘Debt’ is defined in sub-section (11) of Section 3 means:

PRACTICAL ASPECTS OF INSOLVENCY LAW

509

‘(11) “debt” means a liability or obligation in respect of a claim which is

due from any person and includes a financial debt and operational debt’

31. It is admitted that the appel ant is debenture holder. The Respondent-

‘Corporate Debtor’ also pleaded that the appel ant is Investor. From the relevant

facts as we noticed above, we find that the Respondent- ‘Corporate Debtor

has a liability and obligation in respect of amount which is due to the debenture

holder from the ‘Corporate Debtor’, including ‘Financial Debt’ i.e the amount

due on maturity of debentures.

32. The ‘default’ means non-payment of debt as defined in sub-section (12)

of Section 3, as below:—

‘(12) “default” means non-payment of debt when whole or any part or

instalment of the amount of debt has become due and payable and is not

repaid by the debtor or the corporate debtor, as the case may be’

33. The fact as pleaded and not disputed by Respondent - ‘Corporate Debtor’

that the ‘debenture holder’ (Appel ant) and amount matured in the year 2011,

2012 and 2013 has not been paid. Thus, we find there is a default as defined

under section 3(12) of the I & B Code.

The ‘Corporate Debtor’ had a liability and obligation in respect of claim of

respondent which includes the ‘Financial Debt’, including those come within

clause (c) of sub-section (8) of Section 5. As per the agreement, the same

was liable to be paid from the date of maturity along with interest, if any and

the same having not paid, the default of debt is apparent.

34. This apart we find that the amount of debt and interest, as shown by

appellant was to be disbursed against consideration for time value of the

money. Therefore, it cannot be stated that debentures on maturity do not

come within the purview of amount payable against the consideration for

the time value of the money.

35. In the aforesaid background, the Learned Adjudicating Authority having

admitted the application under Section 7, the application being complete,

no interference is cal ed for.

36. In absence of any merit the appeal is dismissed. However, in the facts

and circumstances, there shall be no order as to cost.

Sd/-

Sd/-

(Mr. Balvinder Singh)

(Justice S.J. Multhopadhaya)

Member (Technical)

Chairperson

NEW DELHI

11th August, 2017

510

PRACTICAL ASPECTS OF INSOLVENCY LAW

ANNEXURE X.17

NATIONAL COMPANY LAW APPELLATE TRIBUNAL

NEW DELHI

(Arising out of Order dated 11.04.2017 passed by the National Company

Law Tribunal, New Delhi Bench, New Delhi in Company Petition No.

(IB)41(ND)/2017)

Company Appeal (AT) (Insolvency) No. 47 of 2017

IN THE MATTER OF:

M/s. Speculum Plast Pvt. Ltd.

... Appellant

Versus

PTC Techno Pvt. Ltd.

... Respondent

Present:

For Appel ant: Shri Shubho Jana and Ms. Kanti Mohan

Rustagi, Advocates

For Respondent: Shri Dhruv Gupta, Advocate

WITH

Company Appeal (AT) (Insolvency) No. 76 of 2017

(Arising out of Order dated 25.04.2017 passed by the National Company

Law Tribunal, New Delhi Bench, New Delhi in Company Petition No.

(IB)-27(PB)/2017)

IN THE MATTER OF:

Parag Gupta & Associates

Appellant

Versus

B.K. Educational Services Pvt. Ltd.

Respondent

Present:

For Appel ant: Shri Mukul K. Gupta and Shri N.K. Singh,

Advocates

For Respondent: Ms. Ruchi Khurana and Shri Pertpal Singh,

Advocates

PRACTICAL ASPECTS OF INSOLVENCY LAW

511

WITH

Company Appeal (AT) (Insolvency) No. 78 of 2017

(Arising out of Order dated 04.05.2017 passed by the National Company

Law Tribunal, New Delhi Bench, New Delhi in Company Petition No.

(IB)-77(ND)/2017)

IN THE MATTER OF:

Ashlay Infrastructure Pvt. Ltd.

Appellant

Versus

LDS Engineers Pvt. Ltd.

Respondent

Present:

For Appel ant: Ms. Jhankar Rastogi with Shri Navodaya

Singh Rajpurohit, Advocates

For Respondent: Shri H.D. Arya, Advocate

JUDGEMENT

SUDHANSU JYOTI MUKHOPADHAYA, J.

1. In all these appeals as common question of law is involved, they were

heard together and are being disposed of by this common judgment.

2. The question that arises for determination in these appeals is :

Whether Limitation Act, 1963 is applicable for triggering “corporate insolvency

resolution process” under Insolvency and Bankruptcy Code, 2016 (‘I&B

Code’)?

3. According to learned counsel for the appel ant(s) I&B Code is a ‘Special

Act’ enacted by Parliament and is a “self-contained code” and in absence of

any specific provision made therein the Limitation Act, 1963 is not applicable

for triggering “corporate insolvency resolution process”.

4. To substantiate the arguments, learned counsel for the appellant(s) relied

on the report of the “Bankruptcy Law Reforms Committee” to suggest that

the legislative intent behind the formulation of the I&B Code is to formulate

a “single law”, independent of any other law including the Limitation Act.

5. On the other hand, according to learned counsel for the respondents-

”corporate debtor(s)” the Limitation Act, 1963 is applicable for triggering

“corporate insolvency resolution process” under I&B Code which is to be

read in conjunction with the provisions of the Companies Act, 2013 and

other Acts, as far as they are applicable.

512

PRACTICAL ASPECTS OF INSOLVENCY LAW

6. It was submitted that the “Adjudicating Authority”, as defined in sub-

Section (1) of Section 5 of the I&B Code being “National Company Law

Tribunal” as constituted under Section 408 of the Companies Act, 2013, the

provisions of Chapter XXVII of the Companies Act, 2013 including Section

433 of the said Act are applicable as it is not in conflict with the provisions

of the I&B Code.

7. Further, according to learned counsel for the “corporate debtor(s)”, as the

I&B Code nowhere specifically bars the applicability of the Companies Act,

2013, Section 433 of the Companies Act, 2013 is applicable to I&B Code.

8. Referring to Sections 424, 425, 433, 434 and 430 of the Companies Act,

2013, it was contended that the aforesaid provisions necessarily imply that the

law of limitation and procedure of the Tribunal are applicable to the I&B Code.

9. On merit, learned counsel for the “corporate debtor(s)” submitted that all

the application in question, having filed beyond the period of three years,

the application for triggering “corporate insolvency resolution process” were

not maintainable.

10. Mr. A S Chandhiok, learned senior counsel, who assisted the court as

amicus curiae, submitted that the doctrine of limitation and prescription is

based on two broad considerations.

First, there is a presumption that the right not exercised for a long time

becomes non-existent. The second is that the rights of debt or right on

property or rights in general should not be in a state of constant uncertainty,

doubt and suspense.

Reliance was placed on Salmond : Jurisprudence 12th edn., pp. 438 and

439, and observation of hon’ble Abbott, CJ, in Battley v. Faulkner [1820] 3 B

& Aid 288.

11. It was submitted that the above principles were also recognised by the

Supreme Court of India in Rajinder Singh v. Santa Singh AIR 1973 SC

2537.

12. It was further submitted that the object of fixing time-limit for litigation is

based on Public Policy, fixing a life span of legal remedies for the purpose

of general welfare as held by Supreme Court in N Balakrishnan v. M A

Krishnamurthy [1998] 31 CLA 139 (SC)/[1998] 7 SCC 123.

13. According to learned amicus curiae, the Limitation Act was enacted in

the year 1963, when the provisions relating to al kinds of winding up of the

companies were governed by the Companies Act, 1956 wherein the question

of limitation arose at two stages, i.e. ,

PRACTICAL ASPECTS OF INSOLVENCY LAW

513

(i) When winding up petition was presented before the hon’ble High Court,

and

(i ) When the creditor presented its claim against the company in winding

up before the official liquidator.

14. It was contended that it is a settled principle of law, that bar of limitation

applied to the winding up petitions which used to be presented before the

hon’ble High Court and a creditor is not entitled to file a winding up petition

based on a debt, if the debt is, otherwise time-barred.

15. Learned amicus curiae referred to Section 3 of Limitation Act, 1963 and

submitted that the bar of limitation would apply to a claim filed by a creditor

before the official liquidator attached to the hon’ble High Court in terms of

Companies Act, 1956, though the official liquidator is not a court or a Judicial

Tribunal or Quasi-Judicial Tribunal, but an executive appointed and authority

recognised under the Companies Act, 1956. Such official liquidator merely

invites claims and submits report before the hon’ble High Court.

16. According to him now under the I&B Code the insolvency professional

takes the position of the official liquidator, but with greater role to play, than

the official liquidator.

17. Learned amicus curiae also relied on Section 433 of the Companies

Act, which provides that the provision of Limitation Act, 1963 shal , as far

as may be, apply to proceedings or appeals before the Tribunal or the

Appellate Tribunal as the case may be. It was also submitted that the

Limitation Act, 1963 is also applicable for “corporate insolvency resolution

process”.

18. Learned amicus curiae placing reliance on sub-Section (6) of Section 60

of the I&B Code submitted that the said provision makes it clear that the

Limitation Act, 1963 is applicable to the proceedings under I&B Code.

19. It was further submitted that the Legislature in sub-Section (5) of Section

60 has not used the expression “Adjudicating Authority”, but retained the

word “National Company Law Tribunal” which also clears the intent of the

Legislature that Section 433 of the Companies Act, 2013 is applicable for

triggering the corporate insolvency resolution process under Sections 7 or 9

and 10 of the I&B Code.

Reliance was also placed on definition of “Adjudicating Authority” as defined

under sub-Section (1) of Section 5 of the I&B Code which means National

Company Law Tribunal constituted under Section 408 of the Companies

Act, 2013.

514

PRACTICAL ASPECTS OF INSOLVENCY LAW

20. According to learned senior counsel, even if it is accepted that I&B

Code is self-contained code, unless it expressly bars the provision(s), the

other provisions can be made applicable. Reliance was placed on hon’ble

Supreme Court decision in Girnar Traders (3) v. State of Maharashtra

[2011] 3 SCC 1, wherein two legislations fel for consideration before the

Apex Court, namely, the Maharashtra Regional and Town Planning Act,

1966 (‘MRTP Act’), and the “Land Acquisition Act, 1894”. The appel ant in

the said case had urged that the provisions of the Land Acquisition Act

would mutatis mutandis apply to an acquisition under the MRTP Act. The

respondent had, in contradiction, taken plea that MRTP Act was a self-

contained code in itself and as such the provisions of Land Acquisition Act

could not be referred to. In the said case, the Supreme Court considering

the aforesaid question raised by the parties held :

“69. For an Act to be a self-contained code, it is required to be shown that

it is a complete legislation for the purpose for which it is enacted. The

provisions of the MRTP Act relate to preparation, submission and sanction

of approval of different plans by the authorities concerned which are aimed

at achieving the object of planned development in contradistinction to

haphazard development. An owner/person interested in the land and who

wishes to object to the plans at the appropriate stage a self-contained

adjudicatory machinery has been spelt out in the MRTP Act. Even the

remedy of appeal is available under the MRTP Act with a complete chapter

being devoted to acquisition of land for the planned development. Providing

adjudicatory mechanism is one of the most important facets of deciding

whether a particular statute is a complete code in itself or not.”

21. We have noticed the rival contentions, the relevant provisions of law

and decisions, as referred to above.

22. For determination of the issue, it is to be noticed as to whether I&B

Code is a self- contained code or not.

In M/s. Innoventive Industries Ltd v. ICICI Bank and Anr. [2017] 140 CLA

39 (SC)/2017 SCC OnLine SC 1025 the Supreme Court noticed the

Statement of Objects and Reasons in passing the I&B Code based on

various reports, most important of which the report of Bankruptcy Law

Reforms Committee of November 2015, and observed :

“13. One of the important objectives of the Code is to bring the insolvency

law in India under a single unified umbrel a with the object of speeding up

of the insolvency process. As per the data available with the World Bank

in 2016, insolvency resolution in India took 4.3 years on an average,

which was much higher when compared with the United Kingdom (1 year),

PRACTICAL ASPECTS OF INSOLVENCY LAW

515

USA (1.5 years) and South Africa (2 years). The World Bank’s Ease of

Doing Business Index, 2015, ranked India as country number 135 out of

190 countries on the ease of resolving insolvency based on various indicia.”

23. In paragraph 16 of the said judgment, the Supreme Court noticed the

Bankruptcy Law Reforms Committee Report of November 2015 and the

“key economic question” in the Bankruptcy Process highlighted by Bankruptcy

Law Reforms Committee, as quoted below :

“The key economic question in the bankruptcy process

When a firm (referred to as the corporate debtor in the draft law) defaults,

the question arises about what is to be done. Many possibilities can be

envisioned. One possibility is to take the firm into liquidation. Another

possibility is to negotiate a debt restructuring, where the creditors accept

a reduction of debt on an NPV basis, and hope that the negotiated value

exceeds the liquidation value. Another possibility is to sel the firm as a

going concern and use the proceeds to pay creditors. Many hybrid

structures of these broad categories can be envisioned.

The committee believes that there is only one correct forum for evaluating

such possibilities, and making a decision: a creditors committee, where

al financial creditors have votes in proportion to the magnitude of debt

that then hold. In the past laws in India have brought arms of the

government (Legislature, Executive or Judiciary) into this question. This

has been strictly avoided by the Committee. The appropriate disposition

of a defaulting firm is a business decision, and only the creditors should

make it.”.

***

‘Speed is of essence

Speed is of essence for the working of the bankruptcy code, for two

reasons. First, while the “calm period” can help keep an organisation afloat,

without the ful clarity of ownership and control, significant decisions

cannot be made. Without effective leadership, the firm will tend to atrophy

and fail. The longer the delay, the more likely it is that liquidation wil be

the only answer. Second, the liquidation value tends to go down with time

as many assets suffer from a high economic rate of depreciation.

From the viewpoint of creditors, a good realisation can generally be obtained

if the firm is sold as a going concern. Hence, when delays induce

liquidation, there is value destruction. Further, even in liquidation, the

realisation is lower when there are delays. Hence, delays cause value

516

PRACTICAL ASPECTS OF INSOLVENCY LAW

destruction. Thus, achieving a high recovery rate is primarily about

identifying and combating the sources of delay.’’

***

“The role that insolvency and bankruptcy plays in debt financing

Creditors put money into debt investments today in return for the promise

of fixed future cash flows. But the returns expected on these investments

are stil uncertain because at the time of repayment, the sel er (debtor)

may make repayments as promised, or he may default and does not

make the payment. When this happens, the debtor is considered insolvent.

Other than cases of outright fraud, the debtor may be insolvent because

of –

• Financial failure – a persistent mismatch between payments by the

enterprise and receivables into the enterprise, even though the

business model is generating revenues, or

• Business failure – which is a breakdown in the business model of the

enterprise, and it is unable to generate sufficient revenues to meet

payments.

Often, an enterprise may be a successful business model while still

failing to repay its creditors. A sound bankruptcy process is one that

helps creditors and debtors realise and agree on whether the entity is

facing financial failure and business failure. This is important to al ow

both parties to realise the maximum value of the business in the

insolvency.”

***

“Control of a company is not divine right. When a firm defaults on its

debt, control of the company should shift to the creditors. In the absence

of swift and decisive mechanisms for achieving this, management teams

and shareholders retain control after default. Bankruptcy law must address

this.“

24. In the said decision of Supreme Court the “Principles driving the design”

the new Insolvency and Bankruptcy Resolution framework has been noticed

as quoted below :

“Principles driving the design

The committee chose the fol owing principles to design the new insolvency

and bankruptcy resolution framework :

I. The Code wil facilitate the assessment of viability of the enterprise at a

very early stage.

1. The law must explicitly state that the viability of the enterprise is a

matter of business, and that matters of business can only be

negotiated between creditors and debtor. While viability is assessed

as a negotiation between creditors and debtor, the final decision has

to be an agreement among creditors who are the financiers willing to

bear the loss in the insolvency.

2. The Legislature and the courts must control the process of resolution,

but not be burdened to make business decisions.

3. The law must set up a calm period for insolvency resolution where

the debtor can negotiate in the assessment of viability without fear

of debt recovery enforcement by creditors.

4. The law must appoint a resolution professional as the manager of

the resolution period, so that the creditors can negotiate the

assessment of viability with the confidence that the debtors will not

take any action to erode the value of the enterprise. The professional

wil have the power and responsibility to monitor and manage the

operations and assets of the enterprise. The professional wil manage

the resolution process of negotiation to ensure balance of power

between the creditors and debtor, and protect the rights of all creditors.

The professional will ensure the reduction of asymmetry of information

between creditors and debtor in the resolution process.

II. The Code will enable symmetry of information between creditors and

debtors.

5. The law must ensure that information that is essential for the

insolvency and the bankruptcy resolution process is created and

available when it is required.

6. The law must ensure that access to this information is made available

to all creditors to the enterprise, either directly or through the regulated

professional.

7. The law must enable access to this information to third parties who

can participate in the resolution process, through the regulated

professional.

III. The Code will ensure a time-bound process to better preserve economic

value.

8. The law must ensure that time value of money is preserved, and that

delaying tactics in these negotiations will not extend the time set for

negotiations at the start.

IV. The Code wil ensure a col ective process.

9. The law must ensure that al key stakeholders wil participate to

col ectively assess viability. The law must ensure that al creditors

who have the capability and the willingness to restructure their liabilities

must be part of the negotiation process. The liabilities of al creditors

who are not part of the negotiation process must also be met in any

negotiated solution.

V. The Code wil respect the rights of all creditors equal y.

10. The law must be impartial to the type of creditor in counting their

weight in the vote on the final solution in resolving insolvency.

VI. The Code must ensure that, when the negotiations fail to establish

viability, the outcome of bankruptcy must be binding.

11. The law must order the liquidation of an enterprise which has been

found unviable. This outcome of the negotiations should be protected

against al appeals other than for very exceptional cases.

VII. The Code must ensure clarity of priority, and that the rights of all

stakeholders are upheld in resolving bankruptcy.

12. The law must clearly lay out the priority of distributions in bankruptcy

to all stakeholders. The priority must be designed so as to incentivise

al stakeholders to participate in the cycle of building enterprises

with confidence.

13. While the law must incentivise collective action in resolving

bankruptcy, there must be a greater flexibility to al ow individual action

in resolution and recovery during bankruptcy compared with the phase

of insolvency resolution.”

25. The aforesaid “principles driving the design” shows that the Code has

been framed to facilitate the assessment of viability of the enterprise at a

very early stage; to enable symmetry of information between creditors and

debtors; to ensure a time-bound process to better preserve economic value;

to ensure a col ective process; to respect the rights of al creditors equally;

to ensure that when the negotiations fail to establish viability; the outcome

of bankruptcy must be binding and to ensure clarity of priority, and that the

rights of all stakeholders are upheld in resolving bankruptcy.

PRACTICAL ASPECTS OF INSOLVENCY LAW

519

26. The Supreme Court in Innoventive Industries Ltd. (supra) referring to

different provisions of the I&B Code, observed :

“59. The Insolvency and Bankruptcy Code, 2016 is an Act to consolidate

and amend the laws relating to reorganisation and insolvency resolution,

inter alia, of corporate persons. Insofar as corporate persons are concerned,

amendments are made to the fol owing enactments by Sections 249 to

252 and 255….”

The hon’ble Supreme Court further held :

“60. It is settled law that a consolidating and amending Act like the present

Central enactment forms a code complete in itself and is exhaustive of

the matters dealt with therein….”

The hon’ble Supreme Court further proceeded to hold :

‘63. There can be no doubt, therefore, that the Code is a Parliamentary

law that is an exhaustive code on the subject-matter of insolvency in

relation to corporate entities, and is made under Entry 9, List III in the 7th

Schedule which reads as under :

“9. Bankruptcy and insolvency.”’

27. Thereby it is clear that the I&B Code is complete code in itself.

28. Limitation Act, 1963 is the general legislation on the law of limitation.

Section 3 prescribes “bar of limitation”, as quoted below :

“3. Bar of limitation. – (1) Subject to the provisions contained in Sections

4 to 24 (inclusive), every suit instituted, appeal preferred, and application

made after the prescribed period shal be dismissed, although limitation

has not been set up as a defence.

(2) For the purposes of this Act – (2) For the purposes of this Act –

(a) a suit is instituted –

(i) in an ordinary case, when the plaint is presented to the proper

officer;

(i ) in the case of a pauper, when his application for leave to sue as

a pauper is made; and

(iii) in the case of a claim against a company which is being wound

up by the court, when the claimant first sends in his claim to

the official liquidator;

(b) any claim by way of a set off or a counter-claim, shal be treated as

520

PRACTICAL ASPECTS OF INSOLVENCY LAW

a separate suit and shall be deemed to have been instituted –

(i) in the case of a set off, on the same date as the suit in which

the set off is pleaded;

(i ) in the case of a counter-claim, on the date on which the counter-

claim is made in court;

(c) an application by notice of motion in a High Court is made when the

application is presented to the proper officer of that court.”

29. In view of aforesaid provisions in Mukri Gopalan v. Cheppilat

Puthanpuravil Aboobacker [1995] 5 SCC 5, the Supreme Court examined

the question whether Limitation Act, 1963 wil apply to the Kerala Buildings

(Lease and Rent) Control Act, 1965. Though, the court noticed that the Act

prescribes a period of limitation, which is different from the period of limitation

under the Limitation Act, 1963, in absence of any exclusion of Sections 4 to

24 of the Limitation Act 1963, the Supreme Court held that those Sections

4 to 24 of Limitation Act, 1963 shall be applicable to the Kerala Buildings

(Lease and Rent) Control Act, 1965.

30. However, in Hukumdev Narain Yadav v. Lalit Narain Mishra [1974] 2

SCC 133, a three-Judges Bench of the Supreme Court, while examining the

question as to whether the Limitation Act, 1963 would be applicable to the

provisions of Representation of People Act, held as under :

“17…. but what we have to see is whether the scheme of the special law,

that is in this case the Act, and the nature of the remedy provided therein

are such that the Legislature intended it to be a complete code by itself

which alone should govern the several matters provided by it. If on an

examination of the relevant provisions it is clear that the provisions of the

Limitation Act are necessarily excluded, then the benefits conferred therein

cannot be cal ed in aid to supplement the provisions of the Act. In our

view, even in a case where the special law does not exclude the provisions

of Sections 4 to 24 of the Limitation Act by an express reference, it would

nonetheless be open to the court to examine whether and to what extent

the nature of those provisions or the nature of the subject-matter and

scheme of the special law exclude their operation.”

31. From the decision of Supreme Court in Hukumdev Narain Yadav (supra),

it is clear that even if there exists no express exclusion in the special law,

the court reserves the right to examine the provisions of the special law, to

arrive at a conclusion as to whether the legislative intent was to exclude the

operation of the Limitation Act, 1963 or not.

PRACTICAL ASPECTS OF INSOLVENCY LAW

521

32. To examine the legislative intent to decide whether the I&B Code excludes

the operation of the Limitation Act, 1963, it is desirable to refer the previous

Acts on Insolvency, namely, the Presidency-Towns Insolvency Act, 1909

and the Provincial Insolvency Act, 1920.

33. In Part VII of the “Presidency-Towns Insolvency Act, 1909”, the period

of limitation was prescribed under Sections 101, which reads as fol ows :

“101. Limitation.

The period of limitation for an appeal from any act or decision of the

official assignee, or from an order made by an officer of the court

empowered under Section 6, shal be twenty days from the date of such

act, decision or order, as the case may be.”

34. Section 101A related to computing the period of limitation for any suit or

other legal proceedings, which reads as fol ows :

“101A. Where an order of adjudication has been annul ed under this Act,

in computing the period of limitation prescribed for any suit or other legal

proceeding (other than a suit or legal proceeding in respect of which the

leave of the court was obtained under Section 17) which might have been

brought but for the making of an order of adjudication under this Act, the

period from the date of the order of adjudication to the date of the order of

annulment shall be excluded :

Provided that nothing in this Section shal apply to any suit or other legal

proceeding in respect of a debt provable but not proved under this Act.”

35. Similarly in the Provincial Insolvency Act, 1920 under Section 78 the

limitation was prescribed, as quoted below :

“78. Limitation. – (1) The provisions of Sections 5 and 12 of the Indian

Limitation Act, 1908 (9 of 1908), shal apply to appeals and applications

under this Act, and for the purpose of the said Section 12, a decision

under Section 4 shal be deemed to be a decree.

(2) Where an order of adjudication has been annul ed under this Act, in

computing the period of limitation prescribed for any suit or application for

the execution of a decree or [other than a suit or application in respect of

which the leave of the court was obtained under sub-Section (2) of Section

28] which might have been brought or made but for the making of an order

of adjudication under this Act, the period from the date of the order of

adjudication to the date of the order of annulment shal be excluded :

Provided that nothing in this Section shal apply to a suit or application in

522

PRACTICAL ASPECTS OF INSOLVENCY LAW

respect of a debt provable but not proved under this Act.”

36. The Presidency-Towns Insolvency Act, 1909 and the Provincial

Insolvency Act, 1920 have been repealed by Section 243 of the I&B Code,

relevant provision of which reads as fol ows :

“243. Repeal of certain enactments and savings. – (1) The Presidency

Towns Insolvency Act, 1909 and the Provincial Insolvency Act, 1920 are

hereby repealed.

(2) Notwithstanding the repeal under sub-Sections (1), –

(i) al proceedings pending under and relating to the Presidency Towns

Insolvency Act, 1909, and the Provincial Insolvency Act, 1920

immediately before the commencement of this Code shal continue

to be governed under the aforementioned Acts and be heard and

disposed of by the concerned courts or tribunals, as if the

aforementioned Acts have not been repealed;

(i ) any order, rule, notification, regulation, appointment, conveyance,

mortgage, deed, document or agreement made, fee directed,

resolution passed, direction given, proceeding taken, instrument

executed or issued, or thing done under or in pursuance of any repealed

enactment shal , if in force at the commencement of this Code,

continue to be in force, and shall have effect as if the aforementioned

Acts have not been repealed;

(iii) anything done or any action taken or purported to have been done or

taken, including any rule, notification, inspection, order or notice made

or issued or any appointment or declaration made or any operation

undertaken or any direction given or any proceeding taken or any

penalty, punishment, forfeiture or fine imposed under the repealed

enactments shall be deemed valid;

(iv) any principle or rule of law, or established jurisdiction, form or course

of pleading, practice or procedure or existing usage, custom, privilege,

restriction or exemption shal not be affected, notwithstanding that

the same respectively may have been in any manner affirmed or

recognised or derived by, in, or from, the repealed enactments;

(v) any prosecution instituted under the repealed enactments and pending

immediately before the commencement of this Code before any court

or tribunal shal , subject to the provisions of this Code, continue to

be heard and disposed of by the concerned court or tribunal;

(vi) any person appointed to any office under or by virtue of any repealed

PRACTICAL ASPECTS OF INSOLVENCY LAW

523

enactment shal continue to hold such office until such time as may

be prescribed; and

(vi ) any jurisdiction, custom, liability, right, title, privilege, restriction,

exemption, usage, practice, procedure or other matter or thing not in

existence or in force shal not be revised or restored.

(3) The mention of particular matters in sub-Section (2) shall not be held

to prejudice the general application of Section 6 of the General Clauses

Act, 1897 with regard to the effect of repeal of the repealed enactments

or provisions of the enactments mentioned in the Schedule.”

37. Though the aforesaid two Acts have been repealed, in the I&B Code, the

Legislature did not choose to prescribe any separate provisions of ‘limitation’

as was made in Section 101 of the Presidency-Towns Insolvency Act, 1909

or sub-Section (1) of Section 78 of the Provincial Insolvency Act, 1920

whereunder provisions of Sections 5 and 12 of the Indian Limitation Act,

1908 were made applicable to appeals and applications under the aforesaid

Acts and the decision under the provisions was treated to be decree.

38. However, the provision of computing the period of limitation prescribed

for any suit or other legal proceeding, as ordered to be excluded in Section

101A of the Presidency-Towns Insolvency Act, 1909 and sub-Section (2) of

Section 78 of the Provincial Insolvency Act, 1920 has been retained with

appropriate modification under sub-Section (6) of Section 60 of the I&B

Code, as quoted below :

“60. Adjudicating Authority for corporate persons. – (6)

Notwithstanding anything contained in the Limitation Act, 1963 or in any

other law for the time being in force, in computing the period of limitation

specified for any suit or application by or against a corporate debtor for

which an order of moratorium has been made under this Part, the period

during which such moratorium is in place shal be excluded.”

39. The aforesaid provisions, makes clear the intent of the Legislature which

necessarily excluded the provisions of Sections 4 to 24 of the Limitation

Act, 1963.

40. A separate time period has been prescribed under different provisions of

the I&B Code such as :

Fourteen days’ time al owed under sub-Section (4) of Section 7 and sub-

Section (4) of Section 10 of the I&B Code has been allowed to the

Adjudicating Authority to ascertain fact and thereafter to admit or reject the

application, if incomplete.

524

PRACTICAL ASPECTS OF INSOLVENCY LAW

41. Similarly, ten days’ expiry period prescribed under sub-Section (1) of

Section 9 from the date of delivery of the notice or invoice demanding

payment under sub-Section (1) of Section 8 of the I&B Code has been

prescribed for filing an application under Section 9 of the I&B Code.

42. Like, Sections 7 and 8 of the I&B Code under sub-Section (5) of Section

9, the Adjudicating Authority has been al owed fourteen days’ time to admit

or reject the application if incomplete, provided before rejecting an application

seven days’ time is to be granted to the applicant to remove the defects.

43. Under Section 12 of the I&B Code, one hundred and eighty days time

has been prescribed for completion of insolvency resolution process though

it is open to the Adjudicating Authority to extend the period, but not exceeding

ninety days’ (Total 270 days). If the Resolution Plan is not received within

the aforesaid period by Adjudicating Authority or it rejects the same, under

Section 33 liquidation proceedings shal be initiated.

44. For preferring appeals under Section 61 while thirty days time has been

al owed, the Appel ate Tribunal has been al owed only fifteen days time

beyond thirty days to condone the delay.

45. Under Section 62 of the I&B Code, against order of Appel ate Tribunal,

an appeal can be preferred by aggrieved person to the Supreme Court but

such appeal is required to be preferred within forty-five days and the Supreme

Court has been allowed to condone the delay but not exceeding fifteen

days.

There are other provisions where such time limit has been prescribed, which

is different from the time prescribed under the Limitation Act, 1963.

46. From the aforesaid provision, we find that the scheme of the Special

Act, i.e., the I&B Code, and the nature of the remedy provided therein are

such that the Legislature intended it to be a complete code by itself which

alone should govern the several matters provided by it.

47. Insofar as, the application under Section 433 of the Companies Act,

2013 is concerned, we are of the view that the said provision is not applicable

for the fol owing reasons :

Under Section 255 of the I&B Code, certain provisions of the Companies

Act, 2013 have been amended in the manner specified in the Eleventh

Schedule of the I&B Code. Thereunder Section 424 of the Companies Act,

2013 has been made part of the I&B Code for the purpose of fol owing

procedural or principles of natural justice.

Section 433 of the Companies Act, 2013 relates to limitation as quoted

PRACTICAL ASPECTS OF INSOLVENCY LAW

525

below :

“433. Limitation. – The provisions of the Limitation Act, 1963 (36 of

1963) shall, as far as may be, apply to proceedings or appeals before the

Tribunal or the Appel ate Tribunal, as the case may be.”

However, Section 433 of the Companies Act, 2013 has not been amended

to make it as a part of the I&B Code, therefore, we hold that Section 433

which relates to limitation of the Companies Act, 2013, ipso facto wil not be

applicable to I&B Code.

48. There is a provision of limitation under the Recovery of Debts Due to

Banks and Financial Institutions Act, 1993 (‘DRT Act’) and Securitisation

and Reconstruction of Financial Assets and Enforcement of Security Interest

Act, 2002 (‘SARFAESI Act’).

49. By Section 249 of the I&B Code, the DRT Act has been amended in the

manner specified in the Fifth Schedule. In the said Act, sub-Section (1) and

sub-Section (4) of Section 1 has been amended, as quoted below :

‘(a) In sub-Section (1), for the words “Due to Banks and Financial

Institutions” the words “and Bankruptcy” shal be substituted;

(b) In sub-Section (4), for the words “the provision of this Code”, the

words “Save as otherwise provided, the provisions of this Code”,

shal be substituted.’

50. Section 24 of the DRT Act relates to limitation, as quoted below :

“24. Limitation.– The provisions of the Limitation Act, 1963 (36 of 1963),

shal , as far as may be, apply to an application made to a Tribunal.”

Section 24 of the said Act has not been amended by I&B Code and thereby

not made applicable to I&B Code.

51. Similarly, by Section 251 of the I&B Code the SARFAESI Act has been

amended in the manner specified in the Seventh Schedule. Thereunder in

sub-Section (9) of Section 13, for the words “In the case of”, the words and

figures “Subject to the provisions of the ‘I&B Code, in the case of” have

been substituted.

52. Section 36 of the SARFAESI Act relate to limitation, as quoted below :

“36. Limitation. – No secured creditor shall be entitled to take all or any

of the measures under sub-Section (4) of Section 13, unless his claim in

respect of financial asset is made within the period of limitation prescribed

under the Limitation Act, 1963 (36 of 1963).”

526

PRACTICAL ASPECTS OF INSOLVENCY LAW

However, Section 36 of the SARFAESI Act has not been amended to make

applicable to I&B Code.

53. In view of the aforesaid discussion, we hold that Section 24 of the

Recovery of Debts and Bankruptcy Act, 1993 and Section 36 of the

SARFAESI Act, 2002 are not applicable to the proceedings for initiation of

corporate insolvency resolution process.

54. On the other hand, the committee by its report suggested to frame law

for insolvency resolution process to facilitate the assessment of viability of

the enterprise at a very early stage; to enable symmetry of information

between creditors and debtors; to ensure a time-bound process to better

preserve economic value; to ensure a col ective process; to respect the

rights of all creditors equally; to ensure that when the negotiations fail to

establish viability, the outcome of bankruptcy must be binding and to ensure

clarity of priority, and that the rights of all stakeholders are upheld in resolving

bankruptcy, as noticed above.

55. In Innoventive Industries Ltd. (supra) the Supreme Court held that one

of the important objectives of the Code is to bring the insolvency law in

India under a single unified umbrel a with the object of speeding up of the

insolvency process. While noticing the key economic question in the

bankruptcy process, the Supreme Court noticed the report of the Bankruptcy

Law Reforms Committee, and observed that there is only one forum for

evaluating possibilities, and for taking a decision there is a creditors

committee, where al “financial creditors” have votes in proportion to the

magnitude of debt that they hold. As mentioned, the Supreme Court also

noticed that “speed is the essence” under I&B Code. We find that the

Committee never suggested that for admitting the “resolution process”

question of limitation, should also be considered.

56. The matter can be looked at from another angle. If law of limitation

prescribed under the Limitation Act, 1963 is made applicable, one may take

a plea that default of debt is barred by limitation to initiate corporate

insolvency resolution process under Section 7 or Section 9 of the I&B Code.

However, such stand cannot be taken, where a corporate applicant applies

for initiation of corporate insolvency resolution process against itself

(‘corporate debtor’), having no capacity to pay back the debt and default

having occurred. The law of limitation cannot be made applicable for filing

an application under Section 10, which otherwise will render the provisions

of Section 10 of the I&B Code redundant as the corporate applicants, do not

file application for money claim. This apart, there may be companies which

are closed for more than three years and having failed to pay a debt, such

PRACTICAL ASPECTS OF INSOLVENCY LAW

527

sick companies will have to be allowed to continue resulting in depreciation

of the value of its assets for time to come, which is against the Statement

and Object of the I&B Code.

57. Similarly, in a case which is not barred by limitation, if application filed

under Section 7 or Section 9 or Section 10 of the I&B Code is admitted,

pursuant to public notice under Section 15 of the I&B Code, the interim

resolution professional is required to receive and col ect al the claims as

may be submitted by creditors to him, as stipulated in clause (b) of sub-

Section (1) of Section 18. In such case, once the creditors put their claim,

the insolvency resolution professional cannot reject the claim on the ground

that the claim is barred by limitation, as the provision of Limitation Act,

1963 wil not be applicable for filing a claim before the interim resolution

professional. Similarly, the committee of creditors while deciding the resolution

plan, cannot reject any such claim, on the ground that the same is barred

by limitation though the committee of creditors may not make any provision

in the resolution plan on the ground of unexplained delay.

58. Even if it is accepted that the Limitation Act, 1963 is applicable, though

we have held otherwise, in that case also application under Section 7 or 9 or

10 cannot be rejected on the ground that the application is barred by limitation

for being filed beyond three years for fol owing reasons.

Except article 137 of Part II, i.e., ‘other applications’, as quoted below, no

other provisions of Limitation is applicable in the matter of filing application

under Section 7 or 9 or 10 :

Part II – Other application

Description of

Period of Limitation

application

137.

Any other application for

Three years

Time from which period

which no period of

begins to run when the

limitation is provided

right to apply accrues

elsewhere in this division.

59. From article 137 of the Limitation Act, 1963, it is clear that the period of

three years is to be counted from the date right to apply accrues to a financial

creditor or operational creditor or corporate debtor.

60. For initiation of corporate insolvency resolution process, the right to

apply accrues under Section 7 or Section 9 or Section 10 only with effect

from 1st December, 2016 when I&B Code has come into force, therefore,

the right to apply under Section 7 or Section 9 or Section 10 in al present

528

PRACTICAL ASPECTS OF INSOLVENCY LAW

cases having accrued after 1st December, 2016, such applications cannot

be rejected on the ground that the application is barred by limitation.

61. Learned amicus curiae rightly contended that there should be a time

limit for raising claim, including money claim. In this regard, it is desirable to

refer the definition of ‘debt’ and ‘default’ as defined in sub-Sections (11) and

(12) of Section 3 of the I&B Code, and quoted below :

‘3(11) “debt” means a liability or obligation in respect of a claim which is

due from any person and includes a financial debt and operational debt;

3(12) “default” means non-payment of debt when whole or any part or

instalment of the amount of debt has become due and payable and is not

repaid by the debtor or the corporate debtor; as the case may be.’

62. From the aforesaid definition, it is clear that ‘debt’ is a liability or obligation

in respect of a claim which is due from any person and includes a “financial

debt” and “operational debt”. It is further clear that when whole or any part or

instalment of the amount of debt has become due and payable and is not

repaid by the debtor or the “corporate debtor”, it amounts to ‘default’.

63. Now, the question arises, whether a person can claim any amount due

from another, a corporate debtor after long delay on the ground that Limitation

Act, 1963 is not applicable?

64. To decide the aforesaid issue, it is necessary to notice the doctrine of

limitation and prescription, as held by jurists and hon’ble courts. The doctrine

of limitation and prescription is based on two broad considerations. First,

there is a presumption that the right not exercised for a long time is non-

existent. In Salmond : Jurisprudence 12th edn., pp.438 and 439, the learned

author described the doctrine in the fol owing words :

“In order to avoid the difficulty and error that necessarily result from lapse

of time the presumption of the coincidence of fact and right is rightly

accepted as final after a certain number of years. Whoever wishes to

dispute this presumption must do so within the period, otherwise his right,

if has one wil be forfeited as a penalty for his neglect, vigilantibus non

dormientibus jura subvenient (laws come to the assistance of the vigilant

and not of the sleepy).”

65. It is also necessary to ensure that the rights of debt, in property or rights

in general should not be in a state of constant uncertainty, doubt and

suspense. Abbott, CJ, in Battley (supra) the court observed that “the statute

of limitation was intended for relief and quiet of the defendant and to prevent

the persons from being harassed at a distant period of time after the

committing of the injury complained of”.

PRACTICAL ASPECTS OF INSOLVENCY LAW

529

66. The above principles have been also recognised by the Supreme Court

of India in Rajinder Singh (supra), wherein the Supreme Court observed :

“The object of law of limitation is to prevent disturbance or deprivation of

what may have been acquired in equity and justice by long enjoyment or

what may have been lost by a party’s own inaction, negligence or laches.”

67. The object of fixing time-limit for litigation is based on Public Policy,

fixing a life span of legal remedies for the purpose of general welfare. The

Supreme Court in N Balakrishnan (supra), inter alia, observed :

“.....the rules of limitation are not meant to destroy the rights of the parties

but are meant to see that the parties do not resort to dilatory tactics but

seek their remedy promptly and the law of limitation fixes a life span for

legal injury suffered and that it is enshrined in the maxim interest reipublicae

ut sit finis litum, i.e., it is for the general welfare that a period to be put to

litigation and this is not meant to destroy the rights of the parties, but

they are meant to see that the party do not resort to dilatory tactics but

seek their remedy promptly because the idea is that every legal remedy

must be alive for a legislatively fixed period of time.”

68. In view of the settled principle, while we hold that the Limitation Act,

1963 is not applicable for initiation of corporate insolvency resolution

process, we further hold that the doctrine of limitation and prescription is

necessary to be looked into for determining the question whether the

application under Section 7 or Section 9 can be entertained after long delay,

amounting to laches and thereby the person forfeited his claim.

69. If there is a delay of more than three years from the date of cause of

action and no laches on the part of the applicant, the applicant can explain

the delay. Where there is a continuing cause of action, the question of

rejecting any application on the ground of delay does not arise.

70. Therefore, if it comes to the notice of the Adjudicating Authority that the

application for initiation of corporate insolvency resolution process under

Section 7 or Section 9 has been filed after long delay, the Adjudicating

Authority may give opportunity to the applicant to explain the delay within a

reasonable period to find out whether there are any laches on the part of the

applicant.

71. The stale claim of dues without explaining delay, normally should not be

entertained for triggering corporate insolvency resolution process under

Section 7 and 9 of the I&B Code.

72. However, the aforesaid principle for triggering an application under Section

530

PRACTICAL ASPECTS OF INSOLVENCY LAW

10 of the I&B Code cannot be made applicable as the corporate applicant

does not claim money but prays for initiation of corporate insolvency resolution

process against itself, having defaulted to pay the dues of creditors.

Insofar it relates to filing of claim before the insolvency resolution professional,

in case of stale claim, long delay and in absence of any continuous cause

of action, it is open to resolution applicant to decide whether such claim is

to be accepted or not, and on submission of resolution plan, the committee

of creditors may decide such question. If any adverse decision is taken in

regard to any creditor disputing the claim on ground of delay and laches, it

will be open to the aggrieved creditor to file objection before the Adjudicating

Authority against resolution plan and for its necessary correction who may

decide the same in accordance with the observations as made above.

73. Coming to merits of present matter, in the case of Speculum Plast (P.)

Ltd. v. PTC Techno (P.) Ltd. in Company Appeal (AT) (Insolvency) No. 47 of

2017, the Adjudicating Authority by impugned order dated 11th April, 2017

has not decided the question whether Limitation Act, 1963 is applicable in

the proceeding for initiation of corporate insolvency resolution process or

not and without deciding the same rejected the case on the ground that the

amount legally recoverable is beyond the period of limitation. It has not

been noticed that the invoices raised are of the period from 1st April, 2013

to 19th September, 2013, and, therefore, default must have occurred after

September 2013. The I&B Code having come into effect on 1st December,

2016, the Adjudicating Authority was not correct in dismissing the application

on the ground that the application is beyond the period of limitation.

74. For the reasons aforesaid, we set aside the impugned order dated 11th

April, 2017 passed by the Adjudicating Authority (National Company Law

Tribunal) New Delhi in Company Petition No. (IB)-41(ND)/2017 and remit

back the case to the Adjudicating Authority, New Delhi to find out whether

the application is otherwise complete or not and, after notice and hearing

the parties, will pass appropriate orders in accordance with law. In case, the

application is complete, the Adjudicating Authority will admit the application

preferred by the appel ants. In case it is incomplete, the appel ant be granted

minimum seven days’ time to remove the defects in terms of proviso to

sub-Section (5) of Section 9 of the I&B Code.

75. In Parag Gupta v. B K Educational Services (P.) Ltd. in Company

Appeal (AT) (Insolvency) No. 76 of 2017, the Adjudicating Authority observed

that the amount having been paid between the period 1st October, 2012 and

5th February, 2013, there was nothing on the record to suggest that it would

extend the limitation to recover the same. The Income-tax Returns filed by

PRACTICAL ASPECTS OF INSOLVENCY LAW

531

corporate debtor for the assessment years 2014-15 and 2015-16 were not

taken into consideration as it does not specify that the short-term borrowings

of over 8 crore including the loans alleged to have been given by the

appel ants as barred by limitation has taken into consideration for rejecting

the application for non-initiation of corporate insolvency resolution process,

the impugned order dated 25th April, 2017 cannot be sustained.

76. For the reasons aforesaid, the impugned order dated 25th April, 2017

passed by the Adjudicating Authority in Company Petition No. (IB)-27(PB)/

2017 is set aside and we remit the case to the Adjudicating Authority who

after notice and hearing the parties will consider the application under Section

7 of the I&B Code preferred by the appel ant-Mr. Parag Gupta and without

going into question of limitation, if application is complete, wil admit the

application. In case of any defect, the appel ant be granted seven days’

time to remove the defects in terms of proviso to sub-Section (5) of Section

9 of the I&B Code. Further, if the application is not maintainable for any

other reasons, the Adjudicating Authority record such reason.

77. In Ashlay Infrastructure (P.) Ltd. v. LDS Engineers (P.) Ltd. in Company

Appeal (AT) (Insolvency) No. 78 of 2017, the Adjudicating Authority rejected

the application preferred by the appel ant on the ground that it is time barred.

The impugned order dated 4th May, 2017 having been passed on the basis

that the Limitation Act, 1963 is applicable for initiation of corporate insolvency

resolution process, the said order cannot be sustained.

78. We accordingly set aside the impugned order dated 4th May, 2017 passed

in Company Petition No. (IB)-77(ND)/2017 and remit the case to the

Adjudicating Authority who after notice and hearing the parties will consider

the application preferred by appellant under Section 9 of the I&B Code and

without going into question of limitation, if application is complete, will admit

the application. In case of any defect, the appel ant be granted seven days’

time to remove the defects in terms of proviso to sub-Section (5) of Section

9 of the I&B Code. Further, if the application is not maintainable for any

other reasons, the Adjudicating Authority may record such reason.

79. Al the appeals are al owed with aforesaid observations and directions.

However, in the facts and circumstances, there shal be no order as to cost.

532

PRACTICAL ASPECTS OF INSOLVENCY LAW

ANNEXURE X.18

ITEM NO.30

COURT NO.12

SECTION XVII

SUPREME COURT OF INDIA

RECORD OF PROCEEDINGS

Civil Appeal No(s). 23988/2017

B.K EDUCATIONAL SERVICES PVT LTD

Appel ant(s)

VERSUS

PARAG GUPTA AND ASSOCIATES

Respondent(s)

(FOR ADMISSION and IA No.140884/2017-STAY APPLICATION)

Date : 10-01-2018 This appeal was cal ed on for hearing today.

CORAM :

HON'BLE MR. JUSTICE ROHINTON FALI NARIMAN

HON'BLE MR. JUSTICE NAVIN SINHA

For Appellant(s) Mr. Robin R. David, Adv.

Mr. Pritpal Singh, Adv.

Ms. Ruchi Khurana, Adv.

Mr. Munawwar Naseem, Adv.

Mr. Dhiraj Philip, Adv.

For M/s. Dua Associates, AOR

For Respondent(s)

UPON hearing the counsel the Court made the fol owing

O R D E R

Issue notice, returnable within two weeks.

There shal be a stay of remand in the meantime.

(R. NATARAJAN)

(SAROJ KUMARI GAUR)

COURT MASTER (SH)

COURT MASTER

PRACTICAL ASPECTS OF INSOLVENCY LAW

533

ANNEXURE X.19

NATIONAL COMPANY LAW APPELLATE TRIBUNAL, NEW DELHI

Company Appeals (AT)(Ins) No.31 of 2017

IN THE MATTER OF:

Era Infra Engineering Ltd.

...Appellant

Vs

Prideco Commercial Projects Pvt Ltd.

...Respondent

Present: Mr. Manoj K. Singh, Mr. Vijaya Singh, Ms Bornali Roy, Mr Mahip

Singh, Mr. Gyanendra Kumar, Mr. Tanuka De, Advocates for the

appellant.

ORDER

03.05.2017- The Appel ant/Corporate Debtor has chal enged the order(s)

dated 12th April, 2017, passed by the Adjudicating Authority, Principal Bench,

New Delhi in Insolvency Petition No. 26(ND) of 2017. By one of the order the

Adjudicating Authority held that the order is being passed, within 14 days,

as per Section 9 of Insolvency and Bankruptcy Code, 2016 (hereinafter

referred to as the ‘I&B Code’ for short). By the other order dated 12th April

2017, the Adjudicating Authority initiated Insolvency Resolution Process

by admitting the application, appointed interim resolution professional,

ordered Moratorium and passed the fol owing directions:

“14. (1) Subject to provisions of sub-sections (2) and (3), on the insolvency

commencement date, the Adjudicating Authority shal by order declare

moratorium for prohibiting al of the fol owing, namely:—

(a) the institution of suits or continuation of pending suits or proceedings

against the corporate debtor including execution of any judgment, decree

or order in any court of law, tribunal, arbitration panel or other authority;

(b) transferring, encumbering, alienating or disposing of by the corporate

debtor any of its assets or any legal right or beneficial interest therein;

(c) any action to foreclose, recover or enforce any security interest

created by the corporate debtor in respect of its property including

any action under the Securitisation and Reconstruction of Financial

Assets and Enforcement of Security Interest Act, 2002;

534

PRACTICAL ASPECTS OF INSOLVENCY LAW

(d) the recovery of any property by an owner or lessor where such property

is occupied by or in the possession of the corporate debtor.

(2) The supply of essential goods or services to the corporate debtor as

may be specified shal not be terminated or suspended or interrupted

during moratorium period.

(3) The provisions of sub-section (1) shal not apply to such transactions

as may be notified by the Central Government in consultation with any

financial sector regulator.

(4) The order of moratorium shal have effect from the date of such order

til the completion of the corporate insolvency resolution process:

Provided that where at any time during the corporate insolvency resolution

process period, if the Adjudicating Authority approves the resolution plan

under sub-section (1) of section 31 or passes an order for liquidation of

corporate debtor under section 33, the moratorium shal cease to have

effect from the date of such approval or liquidation order, as the case

may be.

10. The insolvency resolution professional shal also take steps and perform

his duties in terms of Section 15, 17 &

18. All personnel of the Corporate Debtor including its promoters are

expected to extend full cooperation to the interim resolution professional

as is provided by Section 19 and any other provisions of the Code. The

insolvency professional shal submit his report to us within four weeks.

11. The petition stands disposed of in above terms.”

2. Counsel for the Appel ant/Corporate Debtor submitted that the Adjudicating

Authority initiated the insolvency process under section 9 of the I & B

Code, 2016, and admitted the case, though the Application

preferred by Operational Creditor was not complete. It is contended that the

Appellant/ Corporate Debtor was not served any notice under section 8 of

the I & B Code, 2016, and the petition was not filed in terms of (Form 3)

Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules,

2016.

3. On notice, the Respondent/Operational Creditor has appeared and filed

reply affidavit. Ld. Counsel appearing on behalf of Operational Creditor while

accepted that no notice under section 8 of I & B Code, 2016, was served on

the Appel ant/Corporate Debtor, it is submitted that the other formalities

were completed. It is further submitted that earlier a notice was issued to

the Appel ant/Corporate Debtor under section 271 of the Companies Act,

2013, for winding up which should be treated to be a notice for the purpose

PRACTICAL ASPECTS OF INSOLVENCY LAW

535

of section 8 of the I & B Code, 2016. However, such submissions made on

behalf of the Operational Creditor cannot be accepted in view of the mandatory

provision under section 8 of the I 8& B Code read with Rule 5 of Insolvency

and Bankruptcy, (Application to Adjudicating Authority) Rules, 2016

(hereinafter referred to as I & B ‘Rules’ for short).

4. Insolvency resolution by an Operational Creditor can be initiated only on

the occurrence of a default which is to be fol owed by a demand notice of

unpaid Operational Debtor as stipulated sub-section (1) of Section 8, as

quoted below:

“ 8(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.”

5. Rule 5 of I 8& B Rules also mandates an Operational Creditor to deliver

the Corporate Debtor a demand notice in Form 3 or a copy of an invoice

attached with a notice in Form 4, as quoted below:

“5. Demand notice by operational creditor. — (1) An operational creditor

shal deliver to the corporate debtor, the fol owing documents, namely. -

(a) a demand notice in Form 3; or

(b) a copy of an invoice attached with a notice in Form 4.

(2) The demand notice or the copy of the invoice demanding payment

referred to in sub-section (2) of section 8 of the Code, may be delivered to

the corporate debtor,

(a) at the registered office by hand, registered post or speed post with

acknowledgement due; or

(b) by electronic mail service to a whole time director or designated

partner or key managerial personnel, if any, of the corporate debtor.

(3) A copy of demand notice or invoice demanding payment served under

this rule by an operational creditor shall also be filed with an information

utility, if any.”

6. The application for initiation of corporate insolvency resolution process,

thereafter can be filed by Operational Creditor after expiry of period of 10

days from the date of delivery of the notice or invoice demanding payment,

as provided under sub-section (1) of section 9.

7. Only thereafter, in terms of sub-section (5) of Section 9, the Adjudicating

Authority, within 14 days of receipt of the application, by an order is required

to either admit the application, if complete or to reject the application if

536

PRACTICAL ASPECTS OF INSOLVENCY LAW

incomplete, provided seven days’ time is granted for completion of the

application if incomplete. As per clause (i ) (c) & (d) of sub-section (5) of

section 9, the adjudicating authority is required to reject the application, in

absence of affidavit that the Operational Creditor in absence of delivery of

demand of notice or invoice demanding payment to the Corporate Debtor. In

this connection we refer Section 9 of the I & B Code, as quoted below:

9. (1) After the expiry of the period of ten days from the date of delivery of

the notice or invoice demanding payment under sub-section (1) of section

8, if the operational creditor does not receive payment from the corporate

debtor or notice of the dispute under sub-section (2) of section 8, the

operational creditor may file an application before the Adjudicating Authority

for initiating a corporate insolvency resolution process.

(2) The application under sub-section (1) shal be filed in such form and

manner and accompanied with such fee as may be prescribed.

(3) The operational creditor shal , along with the application furnish—

(a) a copy of the invoice demanding payment or demand notice delivered

by the operational creditor to the corporate debtor;

(b) an affidavit to the effect that there is no notice given by the corporate

debtor relating to a dispute of the unpaid operational debt;

(c) a copy of the certificate from the financial institutions maintaining

accounts of the operational creditor confirming that there is no

payment of an unpaid operational debt by the corporate debtor; and

(d) such other information as may be specified.

(4) An operational creditor initiating a corporate insolvency resolution

process under this section, may propose a resolution professional to act

as an interim resolution professional.

(5) The Adjudicating Authority shall, within fourteen days of the receipt of

the application under sub-section (2), by an order—

(i) admit the application and communicate such decision to the

operational creditor and the corporate debtor if,—

(a) the application made under sub-section (2) is complete;

(b) there is no repayment of the unpaid operational debt;

(c) the invoice or notice for payment to the corporate debtor has

been delivered by the operational creditor; (d) no notice of dispute

has been received by the operational creditor or there is no

record of dispute in the information utility; and

PRACTICAL ASPECTS OF INSOLVENCY LAW

537

(e) there is no disciplinary proceeding pending against any resolution

professional proposed under sub-section (4), if any.

Provided that Adjudicating Authority, shal before rejecting an application

under sub clause (a) of clause (i ) give a notice to the applicant to rectify

the defect in his application within seven days of the date of receipt of

such notice from the adjudicating Authority.

(6) The corporate insolvency resolution process shal commence from

the date of admission of the application under sub-section

(5) of this section”

Section 230 reads as fol ows: “The Board may, by general or special

order in writing delegate to any member or officer of the Board subject to

such conditions, if any, as may be specified in the order, such of its

powers and functions under this Code (except the powers under section

240 as it may deem necessary”

8. Admittedly, no notice was issued by Operational Creditor under section 8

of the I & B Code, 2016. Demand notice by Operational Creditor stipulated

under Rule 5 in Form 3 has not been served. Therefore, in absence of any

expiry period of tenure of 10 days there was no question of preferring an

application under section 9 of I & B Code, 2016.

9. The Adjudicating Authority has failed to notice the aforesaid facts and the

mandatory provisions of law as discussed above. Though the application

was not complete and there was no other way to cure the defect, the impugned

order cannot be upheld.

10. For the reasons aforesaid, we set aside the order dated 12th April 2014

passed by the Adjudicating Authority. The application preferred by Operational

Creditor under section 9 stands dismissed being incomplete. Al orders,

interim arrangement etc. as has been made are vacated, moratorium as

declared earlier is quashed, appointment of interim resolution professional

also stands quashed. Al action taken by interim resolution profession is

declared illegal. The appeal is al owed with the aforesaid observations.

(Justice S.J. Mukhopadhaya)

Chairperson

(Mr. Balvinder Singh)

Member (Technical)

538

PRACTICAL ASPECTS OF INSOLVENCY LAW

ANNEXURE X.20

NATIONAL COMPANY LAW APPELLATE TRIBUNAL, NEW DELHI

COMPANY APPELLATE JURISDICTION

Company Appeal (AT) (Insolvency) No. 07 of 2017

(arising out of Order dated 23RD January, 2017 passed by NCLT, New

Delhi Bench in C.P No (ISB)-03(PB)/2017)

IN THE MATTER OF:

Nikhil Mehta and Sons

...Appellants

Vs

AMR Infrastructure Ltd.

...Respondent

Present:

For Appel ant: - Mr. Varun Kathuria, Advocate

For Respondent: - Mr. Ajay Verma, Advocate

JUDGEMENT

SUDHANSU JYOTI MUKHOPADHAYA, J

This appeal has been preferred by appel ants against order dated 23rd January

2017 passed by ‘Adjudicating Authority (National Company Law Tribunal),

Principal bench, New Delhi whereby and whereunder the ‘Adjudicating

Authority’ held that appellants are not ‘Financial Creditor’ as defined under

section 5(7) of the Insolvency & Bankruptcy Code, 2016 (hereinafter referred

to as ‘I & B’ Code). The adjudicatory authority further held that as many

winding up petitions are pending before the Hon’ble Delhi High Court against

the ‘Corporate Debtor’ and Financial Liquidator has been appointed, the

application preferred by appel ants for triggering insolvency process by

invoking Section 7 of the ‘I & B’ Code read with Rule-4 and Rule-9(1) of the

Insolvency and Bankruptcy (Application to Adjudicating Authority), Rules,

2016 (hereinafter referred to as ‘Adjudicating Authority’ Rules, 2016) is not

maintainable.

2. The case of the appel ants and the submission as made by learned counsel

for the appel ants are as follows:—

The appel ants reached different agreements/Memorandum of Understanding

with respondent M/s. AMR Infrastructures Limited (hereinafter referred to

PRACTICAL ASPECTS OF INSOLVENCY LAW

539

as ‘Corporate Debtor’) for purchase of three units being a residential flat,

shop and office space in the projects, Kessel-I Val ey, One Mal and One

Home which were being developed by and promoted by ‘Corporate Debtor’.

3. The one of the unit was purchased by the Appel ant(s) under the ‘Committed

Return Plan’ as per which if the Appel ant(s) were to pay a substantial portion

of the total sale consideration upfront at the time of Execution of the MOU,

and the Respondent undertook to pay a particular amount to the buyer/

purchaser (The appellant(s) in this case) each month, as Committed Returns/

Assured Returns from the date of execution of the MOU til the time the

actual physical possession of the unit is handed over to the buyer/purchaser.

In the said projects the appel ants also had an option to choose the

construction/time linked payment plan as per which they were required to

pay a certain percentage of the sale consideration amount at various stages

of construction of the project.

4. The Respondent started paying the committed returns to the Appellant(s)

as per the MOU, but stopped paying the committed returns to the Appellant(s)

from April, 2014, for the unit of the Appellants No. 3 and 4, and from January,

2014, for the units of the remaining Appel ants, unilateral y and without

assigning any reason. The Appellants contacted the Respondent on various

occasions demanding the release/payment for their monthly committed

returns but to no avail.

5. Having no other option, the Appel ants had jointly filed an Application U/

s. 7 of the Insolvency and Bankruptcy Code, 2016, before the Adjudicating

Authority on 16.01.2017 which was dismissed vide order dated 23.01.2017,

which is why the present Appeal has been filed.

6. It is the case of the Appel ants that the concept and plan of payment of

Committed Returns/Assured Returns by the builders/real estate developers

such as the Respondent, is a method adopted by them to mobilise funds/

raise finance from the general public/open market at much lower rates than

what is normal y made available to them by banking and other financial

institutions without having the obligation to offer security or any col ateral

and without there being any regulatory body to supervise and oversee such

a transaction thereby making the Appel ants the “Financial Creditors” of the

Respondent as defined U/s. (5)(8)(f) of the I & B Code.

7. It is for this reason that the Respondent had offered to pay a fixed monthly

amount to the Appellants as Committed Returns/Assured Returns if the

Appellants were willing to pay a substantial portion of the entire consideration

amount upfront to them at the time of booking their units, as the Respondent

540

PRACTICAL ASPECTS OF INSOLVENCY LAW

was getting easy access to the funds of the Appellants without having to

offer/pledge any col ateral/security in return. It is pertinent to mention here

that there were no other contingencies/conditions/criteria which were to be

fulfilled/met by the Appel ants in order to get the monthly committed returns

and therefore, the agreement/Memorandum of Understanding and transaction

between the Appellants and the Respondent were not a simple real-estate

transaction. The Appel ants have also placed on record the order dated

19.12.2014 passed by SEBI in the matter of M/s. MVL Limited wherein it

has held that such transactions where the developer offers to pay assured

returns to the buyers “are not pure real estate transactions, rather they

satisfy all the ingredients of a Col ective Investment Scheme as defined

under Section 11AA of the SEBI Act,” and has made other observations as

wel stating that the developer was engaged in “fund mobilization activity”

by offering assured returns. Copy of the SEBI Order is at pages 451 to 473

of the Appeal.

8. It is the case of the Appel ants that various winding up petitions have

been filed and are pending against the Respondent for non-payment of the

assured returns to various buyers wherein the Respondent has admitted

liability and has offered to settle the claims but has not yet been able to do

so. Therefore, since the provision of the Winding up under the Companies

Act, stands substituted by the Insolvency and Bankruptcy Code, 2016,

then the Appel ants should be entitled to relief under the I & B Code itself.

9. It is the case of the Appel ants that they are undoubtedly “creditors” of the

Respondent as defined under the I & B Code, to whom an admitted and

quantified “debt” is owed by the Respondent and who have a valid “claim”

against the Respondent as has been defined under the I & B Code and

therefore, the Adjudicating Authority should have heard and al owed the

claim/application of the Appel ants holding them to be “Financial Creditors”

as defined under the I & B Code.

10. Further case of the Appel ants is that as per the latest balance sheet of

the respondent, the amount which is to be paid to the Appel ants by the

Respondent as Committed Returns/Assured Returns is shown as

“Commitment Charges” under the header of “Financial Costs”. The

Respondents has not filed any reply to the said claim of the Appel ants

despite of being given an opportunity to do so by this Appel ate Tribunal.

The said balance sheet is at pages 34-63 of the paper book dated 17.04.2017

of the Appel ants and the relevant entry is at page 60 of the said paper

book.

11. According to Appellants they are the “Financial Creditors” of the

PRACTICAL ASPECTS OF INSOLVENCY LAW

541

Respondent, and the Respondent was deducting TDS on the amount which

it was paying to the Appel ants as Committed Returns/Assured Returns

under Section 194(A) of the Income Tax Act, which is applicable to deduction

of TDS on the amount which is paid to some as “Interest, other than Interest

on Securities”. This therefore, makes it clear that the payment made by the

Respondent to the Appel ants in the form of Committed Returns/Assured

Returns is nothing but a payment of “interest” to the Appel ants by the

Respondent thereby making the amount paid by the Appel ants to the

Respondent at the time of booking of their unit a Loan given by the Appel ants

to the Respondent for constructing the project. In support of the above

claim the Appel ants have placed on records, their Form 16A and 26AS

which are at pages 5-33 of their paper book dated 17.-04.2017, filed before

this Appellate Tribunal.

12. The Respondent-Corporate Debtor has appeared but not filed any affidavit

denying the averments made by appellants or the enclosures attached with

the appeal.

13. The petition for condonation of delay of seven days in preferring the

appeal under Section 61(2) of the I & B Code’ has been filed. Taking into

consideration the grounds taken therein particularly that number of petitions

were wrongly mentioned in the original impugned judgment and on hearing

the parties the delay of seven days in preferring the appeal is condoned.

14. The question arises for consideration in this appeal are: -

(i) Whether the appel ants who reached with agreements/Memorandum

of Understandings with respondent for the purchase of three units

being a residential flat, shop and office space in the projects

developed, promoted and marketed by the respondent come within

the meaning of ‘Financial Creditor’ as defined under the provisions of

sub-section (5) of Section 7 of the I & B code and

(i ) Whether an application for triggering insolvency process under

Section 7 of I & B code’ is maintainable where winding up petitions

have been initiated and pending before Hon’ble High Court against

the ‘Corporate Debtor’.

15. To determine the first question it is desirable to notice and refer provisions

of Section 5(7) and 5(8) and Section 7 of the ‘I & B code’, which are set out

below:—

“5. In this Part, unless the context otherwise requires, —

(7) “financial creditor” means any person to whom a financial debt is owed

542

PRACTICAL ASPECTS OF INSOLVENCY LAW

and includes a person to whom such debt has been legal y assigned or

transferred to;

(8) “financial debt” means a debt along with interest, if any, which is

disbursed against the consideration for the time value of money and

includes—

(a) money borrowed against the payment of interest;

(b) any amount raised by acceptance under any acceptance credit facility

or its de-materialised equivalent;

(c) any amount raised pursuant to any note purchase facility or the issue

of bonds, notes, debentures, loan stock or any similar instrument;

(d) the amount of any liability in respect of any lease or hire purchase

contract which is deemed as a finance or capital lease under the

Indian Accounting Standards or such other accounting standards as

may be prescribed;

(e) receivables sold or discounted other than any receivables sold on

non-recourse basis;

(f) any amount raised under any other transaction, including any forward

sale or purchase agreement, having the commercial effect of a

borrowing;

(g) any derivative transaction entered into in connection with protection

against or benefit from fluctuation in any rate or price and for

calculating the value of any derivative transaction, only the market

value of such transaction shal be taken into account;

(h) any counter-indemnity obligation in respect of a guarantee, indemnity,

bond, documentary letter of credit or any other instrument issued by

a bank or financial institution;

(i) the amount of any liability in respect of any of the guarantee or

indemnity for any of the items referred to in sub-clauses (a) to (h) of

this clause;

“7. (1) A financial creditor either by itself or jointly with other financial

creditors may file an application for initiating corporate insolvency resolution

process against a corporate debtor before the Adjudicating Authority when

a default has occurred.

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.

PRACTICAL ASPECTS OF INSOLVENCY LAW

543

(2) The financial creditor shal 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 shal , 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.

(3) The financial creditor shal , 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

is 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 shal , 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 shal commence from

the date of admission of the application under sub-section (5).

(7) The Adjudicating Authority shal 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”

544

PRACTICAL ASPECTS OF INSOLVENCY LAW

16. From a bare perusal of Section 7, it is patent that the insolvency process

can be triggered by a ‘Financial Creditor’ or jointly against the ‘Corporate

Debtor’ when default or debt has occurred.

17. The first question arises for consideration is as to who is a ‘Financial

Creditor’. Learned Adjudicating Authority, for determination of the aforesaid

issue examined the definition provided in Section 5 (7) and 5(8) and in the

impugned judgment rightly observed:—

“12. A perusal of definition of expression ‘Financial Creditor’ would show

that it refers to a person to whom a Financial debt is owed and includes

even a person to whom such debt has been legally assigned or transferred

to. In order to understand the expression ‘Financial Creditor’, the

requirements of expression ‘financial debt’ have to be satisfied which is

defined in Section 5(8) of the IBC. The opening words of the definition

clause would indicate that a financial debt is a debt along with interest

which is disbursed against the consideration for the time value of money

and it may include any of the events enumerated in sub-clauses (a) to (i).

Therefore the first essential requirement of financial debt has to be met

viz. that the debt is disbursed against the consideration for the time value

of money and which may include the events enumerated in various sub-

clauses. A Financial Creditor is a person who has right to a financial debt.

The key feature of financial transaction as postulated by section 5(8) is

its consideration for time value of money. In other words, the legislature

has included such financial transactions in the definition of ‘Financial

debt’ which are usual y for a sum of money received today to be paid for

over a period of time in a single or series of payments in future. It may

also be a sum of money invested today to be repaid over a period of time

in a single or series of instalments to be paid in future. In Black’s Law

Dictionary (9th edition) the expression ‘Time Value’ has been defined to

mean “the price associated with the length of time that an investor must

wait until an investment matures or the related income is earned”. In both

the cases, the inflows and outflows are distanced by time and there is a

compensation for time value of money. It is significant to notice that in

order to satisfy the requirement of this provision, the financial transaction

should be in the nature of debt and no equity has been implied by the

opening words of Section 5(8) of the IBC. It is true that there are complex

financial instruments which may not provide a happy situation to decipher

the true nature and meaning of a transaction. It is pertinent to point out

that the concept ‘Financial Debt’ as envisaged under Section 5(8) of the

IBC is distinctly different than the one prevalent in England as provided in

its Insolvency Act, 1986 and the ‘Rules’ framed thereunder. It appears

PRACTICAL ASPECTS OF INSOLVENCY LAW

545

that in England there is no exclusive element of disbursement of debt

laced with the consideration for the time value of money. However, forward

sale or purchase agreement as contemplated by Section 5(8)(f) may or

may not be regarded as a financial transaction. A forward contract to sell

product at the end of a specified period is not a financial contract. It is

essentially a contract for sale of specified goods. It is true that some time

financial transactions seemingly restructured as sale and repurchase. Any

repurchase and reverse repo transaction are sometimes used as devices

for raising money. In a transaction of this nature an entity may require

liquidity against an asset and the financer in return sel it back by way of

a forward contract. The difference between the two prices would imply the

rate of return to the financer. (See Taxman’s Law Relating to IBC, 2016 by

Vinod Kothari & Sikha Bansal).”

18. However, while examining the nature of transactions of the present case

the learned Adjudicating Authority came to a conclusion that the appellants

do not come within the meaning of ‘Financial Creditor’, as in the case in

hand “Assured Returns” is associated with the delivery of possession of the

properties and has got nothing to do with the requirement of Section 5(8),

the time value of money which is mercifully missing in the transaction in

hand, with fol owing observations:—

“When we examine the nature of transactions in the present case, we

find that it is a pure and simple agreement of sale or purchase of a piece

of property.

The agreement to sel a flat or office space etc. Merely because some

“assured amount” of return has been promised and it stands breached,

such a transaction would not acquire the status of a ‘financial debt’ as

the transaction does not have consideration for the time value of money,

which is a substantive ingredient to be satisfied for fulfilling requirements

of the expression ‘Financial Debt’.

Essential y in the case in hand ‘Assured Returns’ is associated with the

delivery of possession of the aforementioned properties and has got

nothing to do with the requirement of sub-section (8) of section 5. It is the

consideration for the time value of money which is mercifully missing in

the transaction in hand. The classical transaction which would cover the

definition of financial debts is il ustrated in sub-clause (a) of sub-section

(8) of Section 5 i.e. the money borrowed against the payment of interest.

Learned Counsel of Applicants has not been able to show from any

material on record or otherwise that it is a financial transaction in which a

debt has been disbursed against the consideration for the time value of

546

PRACTICAL ASPECTS OF INSOLVENCY LAW

money and he being the Financial Creditor is entitled to trigger the

insolvency process against the Respondent in accordance with Section

7 of the IBC.”

From the provisions of Law and discussion as made and quoted above, we

find that fol owing essential criteria’s to be fulfil ed for a Creditor to come

within the meaning of ‘Financial Creditor’:—

(i) A person to whom a ‘Financial debt’ is owed and includes a person

whom such debt has been legally assigned or transferred to

(i ) The debt along with interest, if any, is disbursed against the

consideration for time value of money and include any one or more

mode of disbursed as mentioned in clauses (a) to (i) of sub-section

(8) of Section 5.

19. To determine the question whether appellants came within the meaning

of ‘Financial Creditor’, it is desirable to notice the relevant clause of one of

the Memorandum of Understanding dated 12th April 2008 reached between

the appel ants and the Respondent-Corporate Debtor, relevant portion of

which is quoted below:—

“AND whereas the Developer has represented that it shal complete the

construction of the Shopping Mal on or before December 2009, in all

respects and shall render the shopping mal ready for occupation &

possession by the said date unless the construction is stoped or odelayed

on account of factors beyond the control of Developer, as stipulated in

the later part of this memorandum of Understanding.”

AND WHEREAS the Investor is interested in booking of Shop No. E-47

measuring 1453.432 sq. ft. For a total consideration amount of Rs.

46,67,402/- (rupees Forty Six Lachs Sixty Seven Thousand four Hundred

Two Only). The Investor acknowledge, that the Developer has readily

provided al information & clarifications as required by them but that they

has not unduly relied upon and is not influenced by any architect’s plans,

advertisements representations, warranties, statements or estimates of

any nature whatsoever whether written or oral made by the Developer.

“Cheque of Rs. 27,00,000/- payable on Punjab National Bank vide Cheque

No. 462365 dated 19.03.2008.

Cheque of Rs. 9,00,000/- payable Punjab National Bank vide Cheque No.

462350 dated 19.03.2008.

The receipt of which is acknowledged by the Developer and the Developer

hereby discharge the Investor of al the Payments under this MOU except

PRACTICAL ASPECTS OF INSOLVENCY LAW

547

the amount of Rs. 10,17,402/- which is payable at the time of possession.

Since the Investor has paid most of the consideration as on 19.03.2008,

the Developer is ready to pay the monthly committed return to the Investor

but the Investor does not require the monthly return til December, 2008

i.e. for the 9 month. So the DEVELOPER hereby undertakes to make a

consolidated payment of Rs. 99,600/- (Rupees Ninety Nine Thousand Six

Hundred only) less TDS as applicable every calendar month to the

INVESTOR as a committed return w.e.f January 2009 up to the date of

handing over of possession to the INVESTOR.

The Investor has given the first leasing rights to the Developer and

Developer hereby assures the investor that they wil assist the Investor

in leasing out the shop as per general market trends and practices prevailing

til time of possession. The developer further assures the investor that if

they are not able to lease the unit til possession they wil pay the amount

of Rs. 1,10,000/-per month w.e.f. dated of possession till unit is first leased

out.”

20. From the aforesaid agreement/Memorandum of Understanding it is clear

that appel ants are “investors” and has chosen “committed return plan”. The

respondent in their turn agreed upon to pay monthly committed return to

investors. Thus, the amount due to the appel ants come within the meaning

of ‘debt’ as defined in Section 3(11) of the I & B Code’ which reads as

fol ows:—

“(11) “debt” means a liability or obligation in respect of a claim which is

due from any person and includes a financial debt and operational debt;”

21. The appel ants have enclosed the annual return of Respondent-Corporate

Debtor dated 31st March 2014. Therein the amount deposited by ‘investors’

including the appel ants as has been shown as committed return while giving

the ‘financial cost’/at par with interest on loans, as shown below:-

“27 FINANCIAL COSTS

Interest on Loans

39,83,980.89.00

9,33,359.01.00

Leasing Charges

5,93,29,559.00

1,96,67,593.00

Interest & Penalties for

non-compliance

55,85,518.00

59,75,659.05

Commitment Charges

15,30,91,296.00

32,32,97,199.00

Processing Fee

7,49,449.00

548

PRACTICAL ASPECTS OF INSOLVENCY LAW

Bank Charges

7,76,690.19

4,71,313.03

23,35,16,293.00

35,03,45,123.09"

22. Form 16-A shows the TDS deducted from the interest earned by the

appel ant Nikhil Mehta under Section 194-A of the Income-tax Act 1961.

Therein summary of payment including amount credited has been shown as

fol ows:—

Summary of Payment

Amount

Nature of

Date of

Status

paid/

Payment

payment/

of Booking

credited (Rs.)

credit

(dd/mm/yyyy)

41,107.00

194A-Interest other than

30/04/2011

MATCHED

Interest on Securities

41,107.00

194A-Interest other than

30/05/2011

MATCHED

Interest on Securities

41,107.00

194A-Interest other than

30/06/2011

MATCHED

Interest on Securities

Summary of Tax Deducted at Source in respect of deductee

Quarter

Receipt Numbers of

Amount of tax

Amount

original quarterly

deducted in

of tax

statements of TDS

respect of

deposited/

under sub-section (3)

the deductee

remitted in

of section 200

(Rs.)

respect of

deductee

(Rs.)

Q1

BHRXHRAC

12,333.00

12,333.00

23. From the ‘Annual Return’ of the Respondent and Form-16A, we find that

the ‘Corporate Debtor’ treated the appellants as ‘investors’ and borrowed the

amount pursuant to sale purchase agreement for their commercial purpose

treating at par with ‘loan’ in their return. Thereby, the amount invested by

appel ants come within the meaning of ‘Financial Debt’, as defined in Section

5(8)(f) of I & B Code, 2016 subject to satisfaction as to whether such

disbursement against the consideration is for time value of money, as

discussed in the subsequent paragraphs.

24. Learned Adjudicating Authority has rightly highlighted the opening word

PRACTICAL ASPECTS OF INSOLVENCY LAW

549

of the definition clause which indicate that a ‘financial debt’ is a debt along

with interest which is disbursed against the consideration for the time

value of money and may include any of the events enumerated in sub-

clauses (a) to (i). Therefore, it is to be seen whether the amount paid by the

appel ants to the Corporate Debtor, fulfil the other condition of “disbursement

against consideration of time value and money”, to come within the definition

of “Financial Creditor” having satisfied that the Corporate Debtor raised the

amount through a transaction of sale and purchase of agreement having

commercial effect of a borrowing (Section 5(8)(f)).

25. The agreement shows that the respondent agreed to complete the

construction of shopping mal on or before December 2009, in al respects,

and was required to complete and handover the shop in the shopping mall

before the said date. It is not the case of the respondent that the construction

was stopped or delayed on account of factors beyond the control of the

respondent, as stipulated in the later part of the Memorandum of

Understanding. It was agreed upon by the respondent that since the

appellants have paid most of the amount the respondent was ready to pay

“monthly committed returns” to the appel ants. However, as the appel ants

were not required the monthly return till December 2008 i.e. for 9 months so

the Respondent-Corporate Debtor undertook to make a consolidated payment

of Rs. 99,600/- less TDS. For every calendar month the Corporate Debtor

was liable to pay committee return w.e.f. January 2009 till the date of handing

over of the possession to the appel ants. Therefore, it is clear that the amount

disbursed by the appel ants was “against the consideration of the time value

of the money” and “the Respondent-Corporate Debtor raised the amount by

way of sale - purchase agreement, having a commercial effect of borrowing.”

This is also clear from annual returns filed by Respondent and not disputed

by the Respondent-Corporate Debtor in their annual returns, wherein the

amount so raised/borrowed has been shown as ‘commitment charges’ under

the head “Financial cost”. The financial cost includes “Interest of loans” and

other charges. Therefore, the ‘commitment charge’, which include interest

on loan, shown against the head “Financial cost” having accepted by the

Corporate Debtor in their annual return, we hold that the appel ants have

successfully proved that they are ‘financial Creditor’ within the meaning of

Section 5(7) of the I & B Code’.

26. Learned Adjudicating Authority while rightly interpreted the provisions of

law to understand the meaning of expression ‘financial creditor’ at paragraph

12 of the impugned judgment as quoted above, but failed to appreciate the

nature of transactions in the present case and wrongly came to a conclusion

“that it is a pure and simple agreement of sale and purchase of a piece of

550

PRACTICAL ASPECTS OF INSOLVENCY LAW

property and has not acquired the status of a financial debt as the transaction

does not have consideration for the time value of money”.

27. For the reasons aforesaid, we set aside the impugned judgment dated

23rd January 2017 passed by the learned Adjudicating Authority in C.P. No.

(ISB)-03(PB)/2017 and remit the matter to Adjudicating Authority to admit

the application preferred by appellants and pass appropriate order, if the

application under Section 7 of the ‘I & B Code’ is otherwise complete. In

case it is found to be not complete, the appel ants should be given seven

days’ time to complete the application as per proviso to Section 7 of the ‘I &

B Code’.

28. The appeal is allowed with aforesaid observations and directions.

However, in the facts and circumstances, there shal be no order as to cost.

(Mr. Balvinder Singh)

(Justice S.J. Mukhopadhaya)

Member (Technical)

Chairperson

NEW DELHI

21st July, 2017

PRACTICAL ASPECTS OF INSOLVENCY LAW

551

ANNEXURE X.21

NATIONAL COMPANY LAW APPELLATE TRIBUNAL

NEW DELHI

Company Appeal (AT) (Insolvency) No. 95 of 2017

IN THE MATTER OF:

Lokhandwala Kataria Construction Pvt. Ltd.

...Appellant

Versus

Nisus Finance & Investment Manager LLP.

...Respondent

Present:

For Appellant: - Shri Abhiman Vashist, Sr. Advocate, Shri

Peshwan Jehangir and Shri Snehal Kakrania, Advocates

For Respondent: Shri Shiv Kumar Suri and Shri Shikhil Suri,

Advocates

ORDER

13.07.2017 This appeal is preferred by the appel ant, Corporate Debtor against

order dated 15th June, 2017 passed by learned Adjudicating Authority

(National Company Law Tribunal) Mumbai Bench, Mumbai in CP No.61/

1&BP/NCLT/MAH/2017 whereby and whereunder the application preferred

by the respondent, financial creditor under Section 7 of the Insolvency and

Bankruptcy Code, 2016 (hereinafter referred to as I&B Code’) has been

admitted, with fol owing observation and direction:

“It is very much evident on the record the first cheque issued for redemption

of the part of the debenture being dishonoured, it is evident that default

has occurred and the Corporate Debtor is under obligation to make

repayment to the debenture holders, the same not being made, this

application is fit for initiating corporate insolvency resolution process.

Accordingly, this application is hereby admitted.”

Learned counsel appearing on behalf of the respondent - Financial Creditor

submitted that the parties have settled the dispute and part amount has

already been paid. This is also highlighted by learned counsel for Corporate

Debtor. However, such settlement cannot be ground to interfere with the

impugned order in absence of any other infirmity.

At this stage, we may notice and refer Rule 8 of I&B (Application to

552

PRACTICAL ASPECTS OF INSOLVENCY LAW

Adjudicating Authority) Rules, 2016, which reads as fol ows:

“8 Withdrawal of Application - The Adjudicating Authority may permit

withdrawal of the application made under Rules 4, 6 or 7, as the case

may be, on a request made by the applicant before its admission. ”

Thus, before admission of an application under Section 7, it is open to the

Financial Creditor to withdraw the application but once it is admitted, it

cannot be withdrawn and is required to fol ow the procedures laid down

under Sections 13, 14, 15, 16 and 17 of I&B Code, 2016. Even the Financial

Creditor cannot be al owed to withdraw the application once admitted, and

matter can not be closed til claim of al the creditors are satisfied by the

corporate debtor.

Mere admission without subsequent step of advertisement having carried

out, would not amount to refusal of claim of other creditors. Such submission

as made by learned counsel for the appellant cannot be accepted in view of

the provisions of the Act.

Learned counsel for the appel ant requests to exercise inherent power, under

Rule 11 of the National Company Law Appellate Tribunal Rules, 2016 which

reads as fol ows:

.

“11. Inherent powers - Noting in these rules shall be deemed to limit or

otherwise affect the inherent powers of the Appel ate Tribunal to make

such orders or give such directions as may be necessary for meeting the

ends of justice or to prevent abuse of the process of the Appel ate Tribunal.”

However, as the said Rule 11 has not been adopted for the purpose of I&B

Code, 2016 and only Rules 20 to 26 have been adopted in absence of any

specific inherent power and where there is no merit, the question of exercising

inherent power does not arise.

‘

We find no merit in this appeal. The appeal is accordingly dismissed. No

cost.

[Justice S.J. Mukhopadhaya]

Chairperson

[Balvinder Singh]

Member (Technical)

PRACTICAL ASPECTS OF INSOLVENCY LAW

553

ANNEXURE X.22

IN THE SUPREME COURT OF INDIA CIVIL APPELLATE

JURISDICTION

CIVIL APPEAL NO. 9279 OF 2017

LOKHANDWALA KATARIA CONSTRUCTION PRIVATE LIMITED

Appellant(s)

VERSUS

NISUS FINANCE AND INVESTMENT MANAGERS LLP Respondent(s)

O R D E R

1) Heard the learned Senior Counsel appearing for the parties.

2) The present appeal raises an interesting question as to whether, in view

of Rule 8 of the I&B (Application to Adjudicating Authority) Rules, 2016, the

National Company Law Appel ate Tribunal could utilize the inherent power

recognized by Rule 11 of the National Company Law Appellate Tribunal

Rules, 2016 to allow a compromise before it by the parties after admission

of the matter.

3) By the impugned order dated 13.07.2017, the National Company Law

Appellate Tribunal was of the view that the inherent power could not be so

utilized. According to us, prima facie this appears to be the correct position

in law.

4) However, since al the parties are before us today, we utilize our powers

under Article 142 of the Constitution of India to put a quietus to the matter

before us. We take the Consent Terms dated 28.06.2017 and 12.07.2017

entered into between the parties on record and also record the undertaking

of the appellant before us to abide by the Consent Terms in toto. The appellant

also undertakes to pay the sums due on or before the dates mentioned in

the aforesaid Consent Terms.

5) With this, the present appeal is disposed of.

554

PRACTICAL ASPECTS OF INSOLVENCY LAW

6) In view of our order made today, nothing further survives in the aforesaid

appeal.

.................... J

(ROHINTON FALI NARIMAN)

....................

(SANJAY KISHAN KAUL)

New Delhi;

July 24, 2017

ITEM NO.41

COURT NO.12

SECTION XIV

SUPREME COURT OF INDIA

RECORD OF PROCEEDINGS

Civil Appeal No(s). 9279/2017

LOKHANDWALA KATARIA CONSTRUCTION PRIVATE LIMITED

Appel ant(s)

VERSUS

NISUS FINANCE AND INVESTMENT MANAGERS LLP

Respondent(s)

(IA No.58825/2017-STAY APPLICATION AND IA No.58826/2017-

EXEMPTION FROM FILING C/C OF THE IMPUGNED JUDGMENT and IA

No.59782/2017-PERMISSION TO FILE ADDITIONAL DOCUMENTS)

Date : 24-07-2017 This appeal was cal ed on for hearing today.

CORAM :

HON’BLE MR. JUSTICE ROHINTON FALI NARIMAN

HON’BLE MR. JUSTICE SANJAY KISHAN KAUL

For Appellant(s)

Mr. Mukul Rohatgi, Sr. Adv.

Mr. K.V. Viswanathan, Sr. Adv. Mr. Prateek Kumar, Adv.

Snehal Kakrania, Adv.

Mr. Peshwan Jehangir, Adv.

Ms. Anushak Sharda, Adv.

M/s. Khaitan & Co., AOR

For Respondent(s)

Mr. Krishnan Venugopal, Sr. Adv. Mr. Shikhil Suri,

Adv.

Mr. Shiv Kumar Suri, AOR Ms. Shilpa Saini, Adv.

PRACTICAL ASPECTS OF INSOLVENCY LAW

555

UPON hearing the counsel the Court made the fol owing

O R D E R

The appeal is disposed of in terms of the signed order. Pending applications,

if any, also stand disposed of.

(R. NATARAJAN)

(SAROJ KUMARI GAUR)

COURT MASTER

COURT MASTER

(Signed order is placed on the file)

556

PRACTICAL ASPECTS OF INSOLVENCY LAW

ANNEXURE X.23

IN THE SUPREME COURT OF INDIA

CIVIL APPELLANT JURISDICTION

CIVIL APPEAL NO. 18520 OF 2017

(Arising out of SLP(C) No. 26824 of 2017)

UTTARA FOODS AND FEEDS PRIVATE LIMITED

... Appellant(s)

Versus

MONA PHARMACHEM

... Respondent(s)

O R D E R

Leave granted.

Mr. Shyam Divan, learned senior counsel appearing on behalf of the appellant

and the learned counsel appearing on behalf of the respondent both agree

that the matter has since been settled amicably between the parties.

In an earlier order dated 24.07.2017, this Bench had observed that in view

of Rule 8 of the I & B (Application to Adjudicating Authority) Rules, 2016,

the National Company Law Appellate Tribunal prima facie could not avail of

the inherent powers recognised by Rule 11 of the National Law Appel ate

Tribunal Rules, 2016 to al ow a compromise to take effect after admission

of the insolvency petition. We are of the view that instead of al such orders

coming to the Supreme Court as only the Supreme Court may utilise its

powers under Article 142 of the Constitution of India, the relevant Rules be

amended by the competent authority so as to include such inherent powers.

This will obviate unnecessary appeals being filed before this Court in matters

where such agreement has been reached. On the facts of the present case,

we take on record the settlement between the parties and set aside the

NCLAT order.

As a result, the appeal is al owed in the aforesaid terms.

A copy of this order be sent to the Ministry of Law & Justice immediately.

....................J.

(ROHINTON FALI NARIMAN)

New Delhi,

.....................J.

Dated: 13th November, 2017.

(SANJAY KISHAN KAUL)

PRACTICAL ASPECTS OF INSOLVENCY LAW

557

ITEM NO.6

COURT NO.12

SECTION IX

SUPREME COURT OF INDIA

RECORD OF PROCEEDINGS

Petition(s) for Special Leave to Appeal (C) No(s). 26824/2017

(Arising out of impugned final judgment and order dated 19-07-2017 in CP

No. 1081/2017 passed by the National Company Law Tribunal, Mumbai Bench)

UTTARA FOODS AND FEEDS PRIVATE LIMITED

Petitioner(s)

VERSUS

MONA PHARMACHEM

Respondent(s)

Date : 13-11-2017 This petition was cal ed on for hearing today.

CORAM :

HON'BLE MR. JUSTICE ROHINTON FALI NARIMAN

HON'BLE MR. JUSTICE SANJAY KISHAN KAUL

For Petitioner(s)

Mr. Shyam Divan, Sr. Adv.

Ms. Malini Sud, Adv.

Mr. Hemant Sethi, Adv.

Mr. Vikas Mishra, Adv.

Mr. S.P.Singh Chawla, Adv.

Ms. B. Vijayalakshmi Menon, AOR

For Respondent(s)

Mr. Diggaj Pathak, Adv.

Ms. Shweta Sharma, Adv.

Ms. Vishaki Bhatia, Adv.

UPON hearing the counsel the Court made the fol owing

ORDER

Leave granted.

The appeal is al owed in terms of the signed order.

Pending applications, if any, shal stand disposed of.

(SHASHI SAREEN)

(SAROJ KUMARI GAUR)

AR CUM PS

BRANCH OFFICER

(Signed order is placed on the file)

558

PRACTICAL ASPECTS OF INSOLVENCY LAW

ANNEXURE X.24

REPORTABLE IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NOs. 8337-8338 OF 2017

M/S. INNOVENTIVE INDUSTRIES LTD.

…APPELLANT

VERSUS

ICICI BANK & ANR.

...RESPONDENTS

JUDGMENT

R.F. Nariman, J

1. The present case raises interesting questions which arise under the

Insolvency and Bankruptcy Code, 2016 (‘the Code’), which received the

Presidential assent on 28th May, 2016, but which provisions were brought

into force only in November-December 2016.

2. The appellant before us is a multi-product company catering to applications

in diverse sectors. From August 2012, owing to labour problems, the appellant

began to suffer losses. Since the appel ant was not able to service the

financial assistance given to it by 19 banking entities, which had extended

credit to the appellant, the appellant itself proposed corporate debt

restructuring. The 19 entities formed a consortium, led by the Central Bank

of India, and by a joint meeting dated 22nd February, 2014, it was decided

that a CDR resolution plan would be approved. The details of this plan are

not immediately relevant to the issues to be decided in the present case.

The lenders, upon perusing the terms of the CDR proposal given by the

appellant and a techno-economic viability study, (which was done at the

instance of the lenders), a CDR empowered group admitted the restructuring

proposal vide minutes of a meeting dated 23rd May, 2014. The joint lenders

forum at a meeting of 24th June, 2014 final y approved the restructuring

plan.

3. In terms of the restructuring plan, a master restructuring agreement was

entered into on 9th September, 2014 (‘the MRA’), by which funds were to be

infused by the creditors, and certain obligations were to be met by the

debtors. The aforesaid restructuring plan was implementable over a period

of 2 years.

PRACTICAL ASPECTS OF INSOLVENCY LAW

559

4. Suffice it to say that both sides have copiously referred to various letters

which passed between the parties and various minutes of meetings.

Ultimately, an application was made on 7th December, 2016 by ICICI Bank

Ltd., in which it was stated that the appel ant being a defaulter within the

meaning of the Code, the insolvency resolution process ought to be set in

motion. To this application, a reply was filed by means of an interim application

on behalf of the appel ant dated 17th December, 2016, in which the appel ant

claimed that there was no debt legally due inasmuch as vide two notifications

dated 22nd July, 2015 and 18th July, 2016, both under the Maharashtra

Relief Undertakings (Special Provisions) Act, 1958 (‘the Maharashtra Act’),

al liabilities of the appel ant, except certain liabilities with which we are not

concerned, and remedies for enforcement thereof were temporarily

suspended for a period of one year in the first instance under the first

notification of 22nd July, 2015 and another period of one year under the

second notification of 18th July, 2016. It may be added that this was the

only point raised on behalf of the appel ant in order to stave off the admission

of the ICICI Bank application made before the NCLT. We are informed that

hearings took place in the matter on 22nd and 23rd December, 2016, after

which the NCLT adjourned the case to 16th January, 2017.

5. On this date, a second application was filed by the appel ant in which a

different plea was taken. This time, the appellant pleaded that owing to non-

release of funds under the MRA, the appel ant was unable to pay back its

debts as envisaged. Further, it repaid only some amounts to five lenders,

who, according to the appel ant, complied with their obligations under the

MRA. In the aforesaid circumstances, it was pleaded that no default was

committed by it.

6. By an order dated 17th January, 2017, the NCLT held that the Code would

prevail against the Maharashtra Act in view of the non-obstante clause in

Section 238 of the Code. It, therefore, held that the Parliamentary statute

would prevail over the State statute and this being so, it is obvious that the

corporate debtor had defaulted in making payments, as per the evidence

placed by the financial creditors. Hence, the application was admitted and a

moratorium was declared.

7. By a separate order dated 23rd January, 2017 passed by the NCLT, in

which a clarification application was dismissed, it was held that the second

application of 16th January, 2017 was raised belatedly and would not be

maintainable for two reasons – (1) because no audience has been given to

the corporate debtor in the Tribunal by the Code; and (2) the corporate debtor

has not taken the plea contained in the second application in the earlier

application.

560

PRACTICAL ASPECTS OF INSOLVENCY LAW

This was because a limited timeframe of only 14 days was available under

the Code from the date of filing of the creditors’ petition, to decide the

application.

8. From the aforesaid order, an appeal was carried to the NCLAT, which met

with the same fate. The NCLAT, however, held that the Code and the

Maharashtra Act operate in different fields and, therefore, are not repugnant

to each other. Having recorded this, however, the NCLAT went on to hold

that the appellant cannot derive any advantage from the Maharashtra Act to

stal the insolvency resolution process under Section 7 of the Code. It was

further held as under :

“80. Insofar as master restructuring agreement dated 8th September, 2014

is concerned; the appel ant cannot take advantage of the same. Even if it

is presumed that fresh agreement came into existence, it does not absolve

the Appel ant from paying the previous debts which are due to the financial

creditor.

81. The Tribunal has noticed that there is a failure on the part of appel ant

to pay debts. The financial creditor has attached different records in support

of default of payment. Apart from that it is not supposed to go beyond the

question to see whether there is a failure on fulfilment of obligation by the

financial creditor under one or other agreement, including the master

restructuring agreement. In that view of the matter, the appel ant cannot

derive any advantage of the master restructuring agreement dated 8th

September, 2014.”

9. Dr. A M Singhvi, learned senior advocate, who appeared on behalf of the

appellants, has argued before us that the Appellate Tribunal, in fact, decided

in his favour by holding the two Acts to be not repugnant to each other, but

then went on to say that the Maharashtra Act will not apply. According to

him, the Maharashtra Act would apply for the reason that the moratorium

imposed by the two notifications under the Maharashtra Act continued in

force at the time when the insolvency application was made by ICICI and

that, therefore, the Code would not apply. According to him, the debt was

kept in temporary abeyance, after which the Code would apply. He argued

that he had a vested right under the Maharashtra Act and that the debt was

only suspended temporarily. According to him, no repugnancy exists between

the two statutes under article 254 of the Constitution and each operates in

its own field. The Maharashtra Act provides for relief against unemployment,

whereas the Code is a liquidation process. Further, the Code is made under

Entry 9, List III of the Seventh Schedule to the Constitution, whereas the

Maharashtra Act, which is a measure for unemployment relief, is made

PRACTICAL ASPECTS OF INSOLVENCY LAW

561

under Entry 23, List III of the Seventh Schedule. This being so, as correctly

held by the appellate Tribunal, the two Acts operated in different spheres

and, therefore, do not clash. Dr. Singhvi mounted a severe attack on the

Appel ate Tribunal by stating that the Tribunal ought to have gone into the

MRA, in which case it would have discovered that there was no debt due by

the appel ant, inasmuch as the funds that were to be disbursed by the

creditors to the appel ant were never disbursed, as a result of which the

corporate restructuring package never took off from the ground. He further

argued that amounts due under the MRA had not yet fructified and for that

reason also the application was premature.

10. Shri H N Salve, learned senior advocate, appearing on behalf of the

respondents, took us through the Code in some detail and argued before us

that the object of this Code is that the interests of all stakeholders, namely,

shareholders, creditors and workmen, are to be balanced and the old notion

of a sick management which cannot pay its financial debts continuing

nevertheless in the management seat has been debunked by the Code. The

entire object of the Code would be stultified if we were to heed Dr. Singhvi’s

submission, as according to Shri Salve, when an application is made under

Section 7 of the Code, the only limited scope of argument before the NCLT

by a corporate debtor is that the debt is not due for any reason. According to

Shri Salve, the first application in reply to the corporate debtor was, in fact,

the only arguable point in the case which has been concurrently turned

down.

According to Shri Salve, after an interim resolution professional has been

appointed and a moratorium declared, the directors of the company are no

longer in management and could not, therefore, maintain the appeal before

us. Also, according to Shri Salve, the NCLT and NCLAT were both right in

refusing to go into the plea that, since the financial creditors had not pumped

in funds, the corporate debtor could not pay back its debts in accordance

with the MRA, as this plea was an after-thought which could easily have

been taken in the first reply. Further, in order to satisfy our conscience, he

has taken us through the MRA to some detail to show us that the appel ant

would emerge as a defaulter under the MRA in any case.

He has also argued that it is obvious that the two Acts are repugnant to

each other, inasmuch as they cannot stand together. Under the Maharashtra

Act, a limited moratorium is imposed after which the State Government

may take over management of the company.

Under the Code, however, a ful moratorium is to automatically attach the

moment an application is admitted by the NCLT, and management of the

562

PRACTICAL ASPECTS OF INSOLVENCY LAW

company is then taken over by an interim resolution professional. Obviously,

the moratorium under the Maharashtra Act and the management taken over

by the State Government cannot stand together with the moratorium imposed

under the Central Act and takeover of the management by the interim

resolution professional. According to him, therefore, no case whatsoever is

made out and the appeal should be dismissed, both on grounds of

maintainability and on merits.

11. Having heard learned counsel for both the parties, we find substance in

the plea taken by Shri Salve that the present appeal at the behest of the

erstwhile directors of the appel ant is not maintainable. Dr. Singhvi stated

that this is a technical point and he could move an application to amend the

cause title stating that the erstwhile directors do not represent the company,

but are filing the appeal as persons aggrieved by the impugned order as

their management right of the company has been taken away and as they

are otherwise affected as shareholders of the company. According to us,

once an insolvency professional is appointed to manage the company, the

erstwhile directors who are no longer in management, obviously cannot

maintain an appeal on behalf of the company. In the present case, the

company is the sole appel ant. This being the case, the present appeal is

obviously not maintainable. However, we are not inclined to dismiss the

appeal on this score alone.

Having heard both the learned counsel at some length, and because this is

the very first application that has been moved under the Code, we thought

it necessary to deliver a detailed judgment so that al Courts and Tribunals

may take notice of a paradigm shift in the law.

Entrenched managements are no longer allowed to continue in management

if they cannot pay their debts.

12. The Insolvency and Bankruptcy Code, 2016 has been passed after great

deliberation and pursuant to various committee reports, the most important

of which is the report of the Bankruptcy Law Reforms Committee of

November 2015. The Statement of Objects and Reasons of the Code reads

as under :

“STATEMENT OF OBJECTS AND REASONS

There is no single law in India that deals with insolvency and bankruptcy.

Provisions relating to insolvency and bankruptcy for companies can be

found in the Sick Industrial Companies (Special Provisions) Act, 1985,

the Recovery of Debts Due to Banks and Financial Institutions Act, 1993,

the Securitisation and Reconstruction of Financial Assets and Enforcement

PRACTICAL ASPECTS OF INSOLVENCY LAW

563

of Security Interest Act, 2002 and the Companies Act, 2013. These statutes

provide for creation of multiple fora such as Board for Industrial and

Financial Reconstruction (‘BIFR’), Debts Recovery Tribunal (‘DRT’) and

National Company Law Tribunal (‘NCLT’) and their respective Appel ate

Tribunals. Liquidation of companies is handled by the High Courts. Individual

bankruptcy and insolvency is dealt with under the Presidency Towns

Insolvency Act, 1909, and the Provincial Insolvency Act, 1920 and is

dealt with by the Courts. The existing framework for insolvency and

bankruptcy is inadequate, ineffective and results in undue delays in

resolution, therefore, the proposed legislation.

2. The objective of the Insolvency and Bankruptcy Code, 2015 is to

consolidate and amend the laws relating to reorganisation and insolvency

resolution of corporate persons, partnership firms and individuals in a

time bound manner for maximisation of value of assets of such persons,

to promote entrepreneurship, availability of credit and balance the interests

of all the stakeholders including alteration in the priority of payment of

government dues and to establish an Insolvency and Bankruptcy Fund,

and matters connected therewith or incidental thereto. An effective legal

framework for timely resolution of insolvency and bankruptcy would support

development of credit markets and encourage entrepreneurship. It would

also improve Ease of Doing Business, and facilitate more investments

leading to higher economic growth and development.

3. The Code seeks to provide for designating the NCLT and DRT as the

Adjudicating Authorities for corporate persons and firms and individuals,

respectively, for resolution of insolvency, liquidation and bankruptcy. The

Code separates commercial aspects of insolvency and bankruptcy

proceedings from judicial aspects. The Code also seeks to provide for

establishment of the Insolvency and Bankruptcy Board of India (‘Board’)

for regulation of insolvency professionals, insolvency professional agencies

and information utilities. Till the Board is established, the Central

Government shal exercise al powers of the Board or designate any

financial sector regulator to exercise the powers and functions of the

Board. Insolvency professionals will assist in completion of insolvency

resolution, liquidation and bankruptcy proceedings envisaged in the Code.

Information Utilities would col ect, col ate, authenticate and disseminate

financial information to facilitate such proceedings. The Code also

proposes to establish a fund to be cal ed the Insolvency and Bankruptcy

Fund of India for the purposes specified in the Code.

4. The Code seeks to provide for amendments in the Indian Partnership

564

PRACTICAL ASPECTS OF INSOLVENCY LAW

Act, 1932, the Central Excise Act, 1944, Customs Act, 1962, Income-tax

Act, 1961, the Recovery of Debts Due to Banks and Financial Institutions

Act, 1993, the Finance Act, 1994, the Securitisation and Reconstruction

of Financial Assets and Enforcement of Security Interest Act, 2002, the

Sick Industrial Companies (Special Provisions) Repeal Act, 2003, the

Payment and Settlement Systems Act, 2007, the Limited Liability

Partnership Act, 2008, and the Companies Act, 2013.

5. The Code seeks to achieve the above objectives.” [emphasis supplied]

13. One of the important objectives of the Code is to bring the insolvency

law in India under a single unified umbrella with the object of speeding up of

the insolvency process. As per the data available with the World Bank in

2016, insolvency resolution in India took 4.3 years on an average, which

was much higher when compared with the United Kingdom (1 year), USA

(1.5 years) and South Africa (2 years). The World Bank’s Ease of Doing

Business Index, 2015, ranked India as country number 135 out of 190

countries on the ease of resolving insolvency based on various indicia.

14. Other nations are have marched ahead much before us. For example,

the USA has adopted the Bankruptcy Reform Act of 1978, which has since

been codified in Title XI of the United States Code.

The US Code continues to favour the debtor. In a reorganisation case under

Chapter 11, the debtor and its existing management ordinarily continue to

operate the business as a “debtor in possession” – See USC 11, Section

1107-1108. The Court can appoint a trustee to take over management of the

debtor’s affairs only for “cause” which includes fraud, dishonesty or gross

mismanagement of the affairs of the debtor – See USC 11, Section 1104.

Having regard to the aforesaid grounds, such appointments are rare. Creditors

are not permitted a direct role in operating the on-going business operations

of the debtor. However, the United States Trustee is to appoint a committee

of creditors to monitor the debtor’s ongoing operations. A moratorium is

provided, which gives the debtor a breathing spel in which he is to seek to

reorganise his business.

While a Chapter 11 case is pending, the debtor only needs to pay post-

petition wages, expenses, etc. In the meanwhile, the debtor can work on

permanent financial resolution of its pre-petition debts. It is only when this

does not work that the bankruptcy process is then put into effect.

15. The UK law, on the other hand, is governed by the Insolvency Act of

1986 which has served as a model for the present Code.

PRACTICAL ASPECTS OF INSOLVENCY LAW

565

While piloting the Code in Parliament, Shri Arun Jaitley, learned Finance

Minister, stated on the floor of the House :

“SHRI ARUN JAITLEY : One of the differences between your Chapter 11

and this is that in Chapter 11, the debtor continues to be in possession.

Here the creditors wil be in possession. Now, the SICA is being phased

out, and I wil tell you one of the reasons why SICA didn’t function. Under

SICA, the predominant experience has been this, and that is why a decision

was taken way back in 2002 to repeal SICA when the original Company

Law amendments were passed. Now since they were challenged before

the Supreme Court, it didn’t come into operation. Now, the object behind

SICA was revival of sick companies. But not too many revivals took

place.

But what happened in the process was that a protective wall was created

under SICA that once you enter the BIFR, nobody can recover money

from you. So, that non-performing investment became more non-performing

because the companies were not being revived and the banks were also

unable to pursue any demand as far as those sick companies were

concerned, and, therefore, SICA runs contrary to this whole concept of

exit that if a particular management is not in a position to run a company,

then instead of the company closing down under this management, a

more liquid and a professional management must come and then save

this company. That is the whole object. And if nobody can save it, rather

than allowing it to be squandered, the assets must be distributed — as

the Joint Committee has decided — in accordance with the waterfall

mechanism which they have created.” [emphasis supplied]

16. At this stage, it is important to set out the important paragraphs contained

in the report of the Bankruptcy Law Reforms Committee of November 2015,

as these excerpts give us a good insight into why the Code was enacted

and the purpose for which it was enacted :

“As Chairman of the Committee on bankruptcy law reforms, I have had

the privilege of overseeing the design and drafting of a new legal framework

for resolving matters of insolvency and bankruptcy. This is a matter of

critical importance : India is one of the youngest republics in the world,

with a high concentration of the most dynamic entrepreneurs. Yet these

game changers and growth drivers are crippled by an environment that

takes some of the longest times and highest costs by world standards to

resolve any problems that arise while repaying dues on debt. This problem

leads to grave consequences : India has some of the lowest credit

compared to the size of the economy. This is a troublesome state to be

566

PRACTICAL ASPECTS OF INSOLVENCY LAW

in, particularly for a young emerging economy with the entrepreneurial

dynamism of India. Such dynamism not only needs reforms, but reforms

done urgently.”

***

“The limited liability company is a contract between equity and debt. As

long as debt obligations are met, equity owners have complete control,

and creditors have no say in how the business is run. When default takes

place, control is supposed to transfer to the creditors; equity owners have

no say.

This is not how companies in India work today. For many decades, creditors

have had low power when faced with default. Promoters stay in control of

the company even after default. Only one element of a bankruptcy

framework has been put into place : to a limited extent, banks are able to

repossess fixed assets which were pledged with them.

While the existing framework for secured credit has given rights to banks,

some of the most important lenders in society are not banks. They are

the dispersed mass of households and financial firms who buy corporate

bonds. The lack of power in the hands of a bondholder has been one

(though not the only) reason why the corporate bond market has not worked.

This, in turn, has far reaching ramifications such as the difficulties of

infrastructure financing.

Under these conditions, the recovery rates obtained in India are among

the lowest in the world. When default takes place, broadly speaking, lenders

seem to recover 20 per cent of the value of debt, on an NPV basis.

When creditors know that they have weak rights resulting in a low recovery

rate, they are averse to lend. Hence, lending in India is concentrated in a

few large companies that have a low probability of failure. Further, secured

credit dominates, as creditors rights are partially present only in this case.

Lenders have an emphasis on secured credit. In this case, credit analysis

is relatively easy : It only requires taking a view on the market value of

the collateral. As a consequence, credit analysis as a sophisticated

analysis of the business prospects of a firm has shriveled.

Both these phenomena are unsatisfactory. In many settings, debt is an

efficient tool for corporate finance; there needs to be much more debt in

the financing of Indian firms. E.g. long-dated corporate bonds are essential

for most infrastructure projects. The lack of lending without collateral, and

the lack of lending based on the prospects of the firm, has emphasised

debt financing of asset-heavy industries. However, some of the most

PRACTICAL ASPECTS OF INSOLVENCY LAW

567

important industries for India’s rapid growth are those which are more

labour intensive. These industries have been starved of credit.”

***

“The key economic question in the bankruptcy process

When a firm (referred to as the corporate debtor in the draft law) defaults,

the question arises about what is to be done. Many possibilities can be

envisioned. One possibility is to take the firm into liquidation. Another

possibility is to negotiate a debt restructuring, where the creditors accept

a reduction of debt on an NPV basis, and hope that the negotiated value

exceeds the liquidation value. Another possibility is to sel the firm as a

going concern and use the proceeds to pay creditors. Many hybrid

structures of these broad categories can be envisioned.

The Committee believes that there is only one correct forum for evaluating

such possibilities, and making a decision : a creditors committee, where

al financial creditors have votes in proportion to the magnitude of debt

that they hold. In the past, laws in India have brought arms of the

government (Legislature, Executive or Judiciary) into this question. This

has been strictly avoided by the Committee. The appropriate disposition

of a defaulting firm is a business decision, and only the creditors should

make it.”

***

“Speed is of essence

Speed is of essence for the working of the bankruptcy code, for two

reasons. First, while the “calm period” can help keep an organisation afloat,

without the ful clarity of ownership and control, significant decisions

cannot be made. Without effective leadership, the firm will tend to atrophy

and fail. The longer the delay, the more likely it is that liquidation wil be

the only answer. Second, the liquidation value tends to go down with time

as many assets suffer from a high economic rate of depreciation.

From the viewpoint of creditors, a good realisation can generally be obtained

if the firm is sold as a going concern. Hence, when delays induce

liquidation, there is value destruction. Further, even in liquidation, the

realisation is lower when there are delays. Hence, delays cause value

destruction. Thus, achieving a high recovery rate is primarily about

identifying and combating the sources of delay.”

***

568

PRACTICAL ASPECTS OF INSOLVENCY LAW

“The role that insolvency and bankruptcy plays in debt financing

Creditors put money into debt investments today in return for the promise

of fixed future cash flows. But the returns expected on these investments

are stil uncertain because at the time of repayment, the sel er (debtor)

may make repayments as promised, or he may default and does not

make the payment. When this happens, the debtor is considered insolvent.

Other than cases of outright fraud, the debtor may be insolvent because

of

• Financial failure – a persistent mismatch between payments by the

enterprise and receivables into the enterprise, even though the

business model is generating revenues, or

• Business failure – which is a breakdown in the business model of the

enterprise, and it is unable to generate sufficient revenues to meet

payments.

Often, an enterprise may be a successful business model while still failing

to repay its creditors. A sound bankruptcy process is one that helps

creditors and debtors realise and agree on whether the entity is facing

financial failure and business failure. This is important to al ow both parties

to realise the maximum value of the business in the insolvency.”

***

“Control of a company is not divine right. When a firm defaults on its debt,

control of the company should shift to the creditors. In the absence of

swift and decisive mechanisms for achieving this, management teams

and shareholders retain control after default. Bankruptcy law must address

this.”

***

“Objectives

The Committee set the following as objectives desired from implementing

a new Code to resolve insolvency and bankruptcy :

1. Low time to resolution.

2. Low loss in recovery.

3. Higher levels of debt financing across a wide variety of debt

instruments.

The performance of the new Code in implementation will be based on

measures of the above outcomes.

PRACTICAL ASPECTS OF INSOLVENCY LAW

569

Principles driving the design

The Committee chose the following principles to design the new insolvency

and bankruptcy resolution framework :

I. The Code will facilitate the assessment of viability of the enterprise

at a very early stage.

1. The law must explicitly state that the viability of the enterprise

is a matter of business, and that matters of business can only

be negotiated between creditors and debtor. While viability is

assessed as a negotiation between creditors and debtor, the

final decision has to be an agreement among creditors who are

the financiers willing to bear the loss in the insolvency.

2. The Legislature and the Courts must control the process of

resolution, but not be burdened to make business decisions.

3. The law must set up a calm period for insolvency resolution

where the debtor can negotiate in the assessment of viability

without fear of debt recovery enforcement by creditors.

4. The law must appoint a resolution professional as the manager

of the resolution period, so that the creditors can negotiate the

assessment of viability with the confidence that the debtors

will not take any action to erode the value of the enterprise. The

professional wil have the power and responsibility to monitor

and manage the operations and assets of the enterprise. The

professional wil manage the resolution process of negotiation

to ensure balance of power between the creditors and debtor,

and protect the rights of all creditors. The professional will ensure

the reduction of asymmetry of information between creditors

and debtor in the resolution process.

II. The Code will enable symmetry of information between creditors and

debtors.

5. The law must ensure that information that is essential for the

insolvency and the bankruptcy resolution process is created

and available when it is required.

6. The law must ensure that access to this information is made

available to al creditors to the enterprise, either directly or

through the regulated professional.

7. The law must enable access to this information to third parties

570

PRACTICAL ASPECTS OF INSOLVENCY LAW

who can participate in the resolution process, through the

regulated professional.

III. The Code will ensure a time-bound process to better preserve

economic value.

8. The law must ensure that time value of money is preserved,

and that delaying tactics in these negotiations will not extend

the time set for negotiations at the start.

IV. The Code will ensure a col ective process.

9. The law must ensure that all key stakeholders will participate

to col ectively assess viability. The law must ensure that all

creditors who have the capability and the willingness to

restructure their liabilities must be part of the negotiation

process. The liabilities of al creditors who are not part of the

negotiation process must also be met in any negotiated solution.

V. The Code will respect the rights of all creditors equal y.

10. The law must be impartial to the type of creditor in counting

their weight in the vote on the final solution in resolving

insolvency.

VI. The Code must ensure that, when the negotiations fail to establish

viability, the outcome of bankruptcy must be binding.

11. The law must order the liquidation of an enterprise which has

been found unviable. This outcome of the negotiations should

be protected against all appeals other than for very exceptional

cases.

VII. The Code must ensure clarity of priority, and that the rights of all

stakeholders are upheld in resolving bankruptcy.

12. The law must clearly lay out the priority of distributions in

bankruptcy to al stakeholders. The priority must be designed

so as to incentivise al stakeholders to participate in the cycle

of building enterprises with confidence.

13. While the law must incentivise col ective action in resolving

bankruptcy, there must be a greater flexibility to allow individual

action in resolution and recovery during bankruptcy compared

with the phase of insolvency resolution.”

***

PRACTICAL ASPECTS OF INSOLVENCY LAW

571

“An application from a creditor must have a record of the liability and

evidence of the entity having defaulted on payments. The Committee

recommends different documentation requirements depending upon the

type of creditor, either financial or operational. A financial creditor must

submit a record of default by the entity as recorded in a registered

Information Utility (referred to as the IU) as described in Section 4.3 (or

on the basis of other evidence). The default can be to any financial creditor

to the entity, and not restricted to the creditor who triggers the IRP. The

Code requires that the financial creditor propose a registered insolvency

professional to manage the IRP. Operational creditors must present an

“undisputed bil ” which may be filed at a registered information utility as

requirement to trigger the IRP. The Code does not require the operational

creditor to propose a registered insolvency professional to manage the

IRP. If a professional is not proposed by the operational creditor, and the

IRP is successfully triggered, the Code requires the Adjudicator to

approach the Regulator for a registered insolvency professional for the

case.

In case the financial creditor triggers the IRP, the Adjudicator verifies the

default from the information utility (if the default has been filed with an

information utility, tit such be incontrovertible evidence of the existence

of a default) or otherwise confirms the existence of default through the

additional evidence adduced by the financial creditor, and puts forward

the proposal for the RP to the Regulator for validation. In case the

operational creditor triggers the IRP, the Adjudicator verifies the

documentation. Simultaneously, the Adjudicator requests the Regulator

for an RP. If either step cannot be verified, or the process verification

exceeds the specified amount of time, then the Adjudicator rejects the

application, with a reasoned order for the rejection. The order rejecting the

application cannot be appealed against. Instead, application has to be

made afresh. Once the documents are verified within a specified amount

of time, the Adjudicator will trigger the IRP and register the IRP by issuing

an order. The order will contain a unique ID that will be issued for the case

by which al reports and records that are generated during the IRP will be

stored, and accessed.”

***

“Steps at the start of the IRP : In order to ensure that the resolution can

proceed in an orderly manner, it is important for the Adjudicator to put in

place an environment of a “calm period” with a definite time of closure,

that wil assure both the debtor and creditors of a time-bound and level

572

PRACTICAL ASPECTS OF INSOLVENCY LAW

field in their negotiations to assess viability. The first steps that the

Adjudicator takes is put in place an order for a moratorium on debt recovery

actions and any existing or new law suits being filed in other Courts, a

public announcement to col ect claims of liabilities, the appointment of

an interim RP and the creation of a creditor committee.” [emphasis supplied]

17. The stage is now set for an in-depth examination of Part II of the Code,

with which we are immediately concerned in this case.

18. There are two sets of definition Sections. They are rather involved, the

dovetailing of one definition going into another. Section 3 defines various

terms as follows :

“Section 3(6) “claim” means –

(a) a right to payment, whether or not such right is reduced to judgment,

fixed, disputed, undisputed, legal, equitable, secured or unsecured;

(b) right to remedy for breach of contract under any law for the time

being in force, if such breach gives rise to a right to payment, whether

or not such right is reduced to judgment, fixed, matured, unmatured,

disputed, undisputed, secured or unsecured;

Section 3(10) “creditor” means any person to whom a debt is owed and

includes a financial creditor, an operational creditor, a secured creditor,

an unsecured creditor and a decree-holder;

Section 3(11) “debt” means a liability or obligation in respect of a claim

which is due from any person and includes a financial debt and operational

debt;

Section 3(12) “default” means non-payment of debt when whole or any

part or instalment of the amount of debt has become due and payable

and is not repaid by the debtor or the corporate debtor, as the case may

be;

Section 3(13) “financial information”, in relation to a person, means one or

more of the fol owing categories of information, namely :

(a) records of the debt of the person;

(b) records of liabilities when the person is solvent;

(c) records of assets of person over which security interest has been

created;

(d) records, if any, of instances of default by the person against any

debt;

PRACTICAL ASPECTS OF INSOLVENCY LAW

573

(e) records of the balance sheet and cash-flow statements of the person;

and

(f) such other information as may be specified.

Section 3(19) “insolvency professional” means a person enrol ed under

Section 206 with an insolvency professional agency as its member and

registered with the Board as an insolvency professional under Section

207;’ [emphasis supplied]

19. Certain definitions contained in Section 5 are also important from our

point of view. Section 5(7), (8), (12), (14), (20) and (27) read as under :

“5. (7) “financial creditor” means any person to whom a financial debt is

owed and includes a person to whom such debt has been legally assigned

or transferred to;

(8) “financial debt” means a debt along with interest, if any, which is

disbursed against the consideration for the time value of money and

includes –

(a) money borrowed against the payment of interest;

(b) any amount raised by acceptance under any acceptance credit facility

or its de-materialised equivalent;

(c) any amount raised pursuant to any note purchase facility or the issue

of bonds, notes, debentures, loan stock or any similar instrument;

(d) the amount of any liability in respect of any lease or hire purchase

contract which is deemed as a finance or capital lease under the

Indian Accounting Standards or such other accounting standards as

may be prescribed;

(e) receivables sold or discounted other than any receivables sold on

non-recourse basis;

(f) any amount raised under any other transaction, including any forward

sale or purchase agreement, having the commercial effect of a

borrowing;

(g) any derivative transaction entered into in connection with protection

against or benefit from fluctuation in any rate or price and for

calculating the value of any derivative transaction, only the market

value of such transaction shal be taken into account;

(h) any counter-indemnity obligation in respect of a guarantee, indemnity,

bond, documentary letter of credit or any other instrument issued by

574

PRACTICAL ASPECTS OF INSOLVENCY LAW

a bank or financial institution;

(i) the amount of any liability in respect of any of the guarantee or

indemnity for any of the items referred to in sub-clauses (a) to (h) of

this clause;

***

(12) “insolvency commencement date” means the date of admission of

an application for initiating corporate insolvency resolution process by

the Adjudicating Authority under Sections 7, 9 or Section 10, as the case

may be;....

(14) “insolvency resolution process period” means the period of one hundred

and eighty days beginning from the insolvency commencement date and

ending on one hundred and eightieth day;....

(20) “operational creditor” means a person to whom an operational debt is

owed and includes any person to whom such debt has been legally

assigned or transferred;....

(27) “resolution professional”, for the purposes of this Part, means an

insolvency professional appointed to conduct the corporate insolvency

resolution process and includes an interim resolution professional;”

20. Under Section 4 of the Code, Part II applies to matters relating to the

insolvency and liquidation of corporate debtors, where the minimum amount

of default is rupees one lakh. Sections 6, 7 and 8 form part of one scheme

and are very important for the decision in the present case. They read as

fol ows :

‘6. Persons who may initiate corporate insolvency resolution process.

– Where any corporate debtor commits a default, a financial creditor, an

operational creditor or the corporate debtor itself may initiate corporate

insolvency resolution process in respect of such corporate debtor in the

manner as provided under this Chapter.

7. Initiation of corporate insolvency resolution process by financial

creditor. – (1) A financial creditor either by itself or jointly with other

financial creditors may file an application for initiating corporate insolvency

resolution process against a corporate debtor before the Adjudicating

Authority when a default has occurred.

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.

PRACTICAL ASPECTS OF INSOLVENCY LAW

575

(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 is 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 shal commence from

the date of admission of the application under sub-Section (5).

(7) The Adjudicating Authority shal 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.

576

PRACTICAL ASPECTS OF INSOLVENCY LAW

8. 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 shal , 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

(i ) by sending an attested copy of record that the operational

creditor has encashed a cheque issued by the corporate debtor.

Explanation : For the purposes of this Section, a “demand notice” means

a notice served by an operational creditor to the corporate debtor demanding

repayment of the operational debt in respect of which the default has

occurred.’

21. Section 12 provides for a time limit for completion of the insolvency

resolution process and reads as fol ows :

“12. Time-limit for completion of insolvency resolution process. –

(1) Subject to sub-Section (2), the corporate insolvency resolution process

shal be completed within a period of one hundred and eighty days from

the date of admission of the application to initiate such process.

(2) The resolution professional shall file an application to the Adjudicating

Authority to extend the period of the corporate insolvency resolution

process beyond one hundred and eighty days, if instructed to do so by a

resolution passed at a meeting of the committee of creditors by a vote of

seventy-five per cent of the voting shares.

(3) On receipt of an application under sub-Section (2), if the Adjudicating

Authority is satisfied that the subject-matter of the case is such that

corporate insolvency resolution process cannot be completed within one

hundred and eighty days, it may by order extend the duration of such

PRACTICAL ASPECTS OF INSOLVENCY LAW

577

process beyond one hundred and eighty days by such further period as it

thinks fit, but not exceeding ninety days :

Provided that any extension of the period of corporate insolvency resolution

process under this Section shal not be granted more than once.”

22. Sections 13 and 14 deal with the declaration of moratorium and public

announcements and read as under :

“13. Declaration of moratorium and public announcement. – (1) The

Adjudicating Authority, after admission of the application under Section 7

or Section 9 or Section 10, shal , by an order –

(a) declare a moratorium for the purposes referred to in Section 14;

(b) cause a public announcement of the initiation of corporate

insolvency resolution process and call for the submission of claims

under Section 15; and

(c) appoint an interim resolution professional in the manner as laid down

in Section 16.

(2) The public announcement referred to in clause (b) of sub-Section (1)

shal be made immediately after the appointment of the interim resolution

professional.

14 Moratorium. – (1) Subject to provisions of sub-Sections (2) and (3),

on the insolvency commencement date, the Adjudicating Authority shall

by order declare moratorium for prohibiting al of the fol owing, namely :

(a) the institution of suits or continuation of pending suits or

proceedings against the corporate debtor including execution of

any judgment, decree or order in any Court of law, tribunal,

arbitration panel or other authority;

(b) transferring, encumbering, alienating or disposing of by the corporate

debtor any of its assets or any legal right or beneficial interest therein;

(c) any action to foreclose, recover or enforce any security interest

created by the corporate debtor in respect of its property including

any action under the Securitisation and Reconstruction of Financial

Assets and Enforcement of Security Interest Act, 2002;

(d) the recovery of any property by an owner or lessor where such property

is occupied by or in the possession of the corporate debtor.

(2) The supply of essential goods or services to the corporate debtor as

may be specified shal not be terminated or suspended or interrupted

578

PRACTICAL ASPECTS OF INSOLVENCY LAW

during moratorium period.

(3) The provisions of sub-Section (1) shal not apply to such transactions

as may be notified by the Central Government in consultation with any

financial sector regulator.

(4) The order of moratorium shal have effect from the date of such order

til the completion of the corporate insolvency resolution process :

Provided that where at any time during the corporate insolvency resolution

process period, if the Adjudicating Authority approves the resolution plan

under sub-Section (1) of Section 31 or passes an order for liquidation of

corporate debtor under Section 33, the moratorium shal cease to have

effect from the date of such approval or liquidation order, as the case

may be.”

23. Under Section 17, from the date of appointment of the interim resolution

professional, the management of the affairs of the corporate debtor vests

with interim resolution professional. Section 17(1)(a) reads as under :

“17. Management of affairs of corporate debtor by interim resolution

professional. – (1) From the date of appointment of the interim resolution

professional, –

(a) the management of the affairs of the corporate debtor shal vest in

the interim resolution professional;”

24. Under Section 20 of the Act, the interim resolution professional shall

manage the operations of the corporate debtor as a going concern. Section

21 is extremely important and provides for appointment of a committee of

creditors. Section 21 reads as follows :

“21. Committee of creditors. – (1) The interim resolution professional

shal after col ation of al claims received against the corporate debtor

and determination of the financial position of the corporate debtor, constitute

a committee of creditors.

(2) The committee of creditors shal comprise al financial creditors of the

corporate debtor :

Provided that a related party to whom a corporate debtor owes a financial

debt shal not have any right of representation, participation or voting in a

meeting of the committee of creditors.

(3) Where the corporate debtor owes financial debts to two or more financial

creditors as part of a consortium or agreement, each such financial

creditor shal be part of the committee of creditors and their voting share

PRACTICAL ASPECTS OF INSOLVENCY LAW

579

shal be determined on the basis of the financial debts owed to them.

(4) Where any person is a financial creditor as wel as an operational

creditor, –

(a) such person shal be a financial creditor to the extent of the financial

debt owed by the corporate debtor, and shal be included in the

committee of creditors, with voting share proportionate to the extent

of financial debts owed to such creditor;

(b) such person shal be considered to be an operational creditor to the

extent of the operational debt owed by the corporate debtor to such

creditor.

(5) Where an operational creditor has assigned or legally transferred any

operational debt to a financial creditor, the assignee or transferee shall be

considered as an operational creditor to the extent of such assignment or

legal transfer.

(6) Where the terms of the financial debt extended as part of a consortium

arrangement or syndicated facility or issued as securities provide for a

single trustee or agent to act for al financial creditors, each financial

creditor may –

(a) authorise the trustee or agent to act on his behalf in the committee

of creditors to the extent of his voting share;

(b) represent himself in the committee of creditors to the extent of his

voting share;

(c) appoint an insolvency professional (other than the resolution

professional) at his own cost to represent himself in the committee

of creditors to the extent of his voting share; or

(d) exercise his right to vote to the extent of his voting share with one or

more financial creditors jointly or several y.

(7) The Board may specify the manner of determining the voting share in

respect of financial debts issued as securities under sub-Section (6).

(8) Al decisions of the committee of creditors shal be taken by a vote of

not less than seventy-five per cent of voting share of the financial creditors

:

Provided that where a corporate debtor does not have any financial

creditors, the committee of creditors shal be constituted and comprise of

such persons to exercise such functions in such manner as may be

580

PRACTICAL ASPECTS OF INSOLVENCY LAW

specified by the Board.

(9) The committee of creditors shall have the right to require the resolution

professional to furnish any financial information in relation to the corporate

debtor at any time during the corporate insolvency resolution process.

(10) The resolution professional shall make available any financial

information so required by the committee of creditors under sub-Section

(9) within a period of seven days of such requisition.”

25. Under Section 24, members of the committee of creditors may conduct

meetings in order to protect their interests. Under Section 28, a resolution

professional appointed under Section 25 cannot take certain actions

without the prior approval of the committee of creditors. Section 28 reads

as under :

“28. Approval of committee of creditors for certain actions. – (1)

Notwithstanding anything contained in any other law for the time being in

force, the resolution professional, during the corporate insolvency

resolution process, shall not take any of the fol owing actions without the

prior approval of the committee of creditors namely :

(a) raise any interim finance in excess of the amount as may be decided

by the committee of creditors in their meeting;

(b) create any security interest over the assets of the corporate debtor;

(c) change the capital structure of the corporate debtor, including by

way of issuance of additional securities, creating a new class of

securities or buying back or redemption of issued securities in case

the corporate debtor is a company;

(d) record any change in the ownership interest of the corporate debtor;

(e) give instructions to financial institutions maintaining accounts of the

corporate debtor for a debit transaction from any such accounts in

excess of the amount as may be decided by the committee of creditors

in their meeting;

(f) undertake any related party transaction;

(g) amend any constitutional documents of the corporate debtor;

(h) delegate its authority to any other person;

(i) dispose of or permit the disposal of shares of any shareholder of the

corporate debtor or their nominees to third parties;

PRACTICAL ASPECTS OF INSOLVENCY LAW

581

(j) make any change in the management of the corporate debtor or its

subsidiary;

(k) transfer rights or financial debts or operational debts under material

contracts otherwise than in the ordinary course of business;

(l) make changes in the appointment or terms of contract of such

personnel as specified by the committee of creditors; or

(m) make changes in the appointment or terms of contract of statutory

auditors or internal auditors of the corporate debtor.

(2) The resolution professional shall convene a meeting of the committee

of creditors and seek the vote of the creditors prior to taking any of the

actions under sub-Section (1).

(3) No action under sub-Section (1) shal be approved by the committee

of creditors unless approved by a vote of seventy-five per cent of the

voting shares.

(4) Where any action under sub-Section (1) is taken by the resolution

professional without seeking the approval of the committee of creditors in

the manner as required in this Section, such action shal be void.

(5) The committee of creditors may report the actions of the resolution

professional under sub-Section (4) to the Board for taking necessary

actions against him under this Code.”

26. The most important Sections dealing with the restructuring of the corporate

debtor are Sections 30 and 31, which read as under :

“30. Submission of resolution plan. – (1) A resolution applicant may

submit a resolution plan to the resolution professional prepared on the

basis of the information memorandum.

(2) The resolution professional shall examine each resolution plan received

by him to confirm that each resolution plan –

(a) provides for the payment of insolvency resolution process costs in a

manner specified by the Board in priority to the repayment of other

debts of the corporate debtor;

(b) provides for the repayment of the debts of operational creditors in

such manner as may be specified by the Board which shall not be

less than the amount to be paid to the operational creditors in the

event of a liquidation of the corporate debtor under Section 53;

582

PRACTICAL ASPECTS OF INSOLVENCY LAW

(c) provides for the management of the affairs of the corporate debtor

after approval of the resolution plan;

(d) the implementation and supervision of the resolution plan;

(e) does not contravene any of the provisions of the law for the time

being in force;

(f) conforms to such other requirements as may be specified by the

Board.

(3) The resolution professional shall present to the committee of creditors

for its approval such resolution plans which confirm the conditions referred

to in sub-Section (2).

(4) The committee of creditors may approve a resolution plan by a vote of

not less than seventy-five per cent of voting share of the financial creditors.

(5) The resolution applicant may attend the meeting of the committee of

creditors in which the resolution plan of the applicant is considered :

Provided that the resolution applicant shal not have a right to vote at the

meeting of the committee of creditors unless such resolution applicant is

also a financial creditor.

(6) The resolution professional shall submit the resolution plan as approved

by the committee of creditors to the Adjudicating Authority.

31. Approval of resolution plan. – (1) If the Adjudicating Authority is

satisfied that the resolution plan as approved by the committee of creditors

under sub-Section (4) of Section 30 meets the requirements as referred

to in sub-Section (2) of Section 30, it shall by order approve the resolution

plan which shal be binding on the corporate debtor and its employees,

members, creditors, guarantors and other stakeholders involved in the

resolution plan.

(2) Where the Adjudicating Authority is satisfied that the resolution plan

does not confirm to the requirements referred to in sub-Section (1), it

may, by an order, reject the resolution plan.

(3) After the order of approval under sub-Section (1), –

(a) the moratorium order passed by the Adjudicating Authority under

Section 14 shal cease to have effect; and

(b) the resolution professional shal forward al records relating to the

conduct of the corporate insolvency resolution process and the

resolution plan to the Board to be recorded on its database.”

PRACTICAL ASPECTS OF INSOLVENCY LAW

583

27. The scheme of the Code is to ensure that when a default takes place, in

the sense that a debt becomes due and is not paid, the insolvency resolution

process begins. Default is defined in Section 3(12) in very wide terms as

meaning non-payment of a debt once it becomes due and payable, which

includes non-payment of even part thereof or an instalment amount. For the

meaning of ‘debt’, we have to go to Section 3(11), which in turn tells us that

a debt means a liability of obligation in respect of a ‘claim’ and for the

meaning of ‘claim’, we have to go back to Section 3(6) which defines ‘claim’

to mean a right to payment even if it is disputed. The Code gets triggered

the moment default is of rupees one lakh or more (Section 4). The corporate

insolvency resolution process may be triggered by the corporate debtor

itself or a financial creditor or operational creditor. A distinction is made by

the Code between debts owed to financial creditors and operational creditors.

A financial creditor has been defined under Section 5(7) as a person to

whom a financial debt is owed and a financial debt is defined in Section 5(8)

to mean a debt which is disbursed against consideration for the time value

of money. As opposed to this, an operational creditor means a person to

whom an operational debt is owed and an operational debt under Section

5(21) means a claim in respect of provision of goods or services.

28. When it comes to a financial creditor triggering the process, Section 7

becomes relevant. Under the Explanation to Section 7(1), a default is in

respect of a financial debt owed to any financial creditor of the corporate

debtor – it need not be a debt owed to the applicant financial creditor. Under

Section 7(2), an application is to be made under sub-Section (1) in such

form and manner as is prescribed, which takes us to the Insolvency and

Bankruptcy (Application to Adjudicating Authority) Rules, 2016. Under rule

4, the application is made by a financial creditor in Form 1 accompanied by

documents and records required therein. Form 1 is a detailed form in 5

parts, which requires particulars of the applicant in Part I, particulars of the

corporate debtor in Part II, particulars of the proposed interim resolution

professional in Part III, particulars of the financial debt in Part IV and

documents, records and evidence of default in Part V. Under rule 4(3), the

applicant is to despatch a copy of the application filed with the adjudicating

authority by registered post or speed post to the registered office of the

corporate debtor.

The speed, within which the adjudicating authority is to ascertain the

existence of a default from the records of the information utility or on the

basis of evidence furnished by the financial creditor, is important.

This it must do within 14 days of the receipt of the application. It is at the

584

PRACTICAL ASPECTS OF INSOLVENCY LAW

stage of Section 7(5), 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.

Under sub-Section (7), the adjudicating authority shall then communicate

the order passed to the financial creditor and corporate debtor within 7 days

of admission or rejection of such application, as the case may be.

29. The scheme of Section 7 stands in contrast with the scheme under

Section 8 where an operational creditor is, on the occurrence of a default, to

first deliver a demand notice of the unpaid debt to the operational debtor in

the manner provided in Section 8(1) of the Code. Under Section 8(2), the

corporate debtor can, within a period of 10 days of receipt of the demand

notice or copy of the invoice mentioned in sub-Section (1), bring to the

notice of the operational creditor the existence of a dispute or the record of

the pendency of a suit or arbitration proceedings, which is pre-existing –

i.e., before such notice or invoice was received by the corporate debtor. The

moment there is existence of such a dispute, the operational creditor gets

out of the clutches of the Code.

30. On the other hand, as we have seen, in the case of a corporate debtor

who commits a default of a financial debt, the adjudicating authority has

merely to see the records of the information utility or other evidence produced

by the financial creditor to satisfy itself that a default has occurred. It is of

no matter that the debt is disputed so long as the debt is ‘due’, i.e., payable

unless interdicted by some law or has not yet become due in the sense that

it is payable at some future date. It is only when this is proved to the

satisfaction of the adjudicating authority that the adjudicating authority may

reject an application and not otherwise.

31. The rest of the insolvency resolution process is also very important. The

entire process is to be completed within a period of 180 days from the date

of admission of the application under Section 12 and can only be extended

beyond 180 days for a further period of not exceeding 90 days if the committee

of creditors by a voting of 75 per cent of voting shares so decides. It can be

seen that time is of essence in seeing whether the corporate body can be

put back on its feet, so as to stave off liquidation.

PRACTICAL ASPECTS OF INSOLVENCY LAW

585

32. As soon as the application is admitted, a moratorium in terms of Section

14 of the Code is to be declared by the adjudicating authority and a public

announcement is made stating, inter alia, the last date for submission of

claims and the details of the interim resolution professional who shal be

vested with the management of the corporate debtor and be responsible for

receiving claims. Under Section 17, the erstwhile management of the

corporate debtor is vested in an interim resolution professional who is a

trained person registered under Chapter IV of the Code. This interim resolution

professional is now to manage the operations of the corporate debtor as a

going concern under the directions of a committee of creditors appointed

under Section 21 of the Act. Decisions by this committee are to be taken by

a vote of not less than 75 per cent of the voting share of the financial

creditors. Under Section 28, a resolution professional, who is none other

than an interim resolution professional who is appointed to carry out the

resolution process, is then given wide powers to raise finances, create

security interests, etc., subject to prior approval of the committee of creditors.

33. Under Section 30, any person who is interested in putting the corporate

body back on its feet may submit a resolution plan to the resolution

professional, which is prepared on the basis of an information memorandum.

This plan must provide for payment of insolvency resolution process costs,

management of the affairs of the corporate debtor after approval of the plan,

and implementation and supervision of the plan. It is only when such plan is

approved by a vote of not less than 75 per cent of the voting share of the

financial creditors and the adjudicating authority is satisfied that the plan,

as approved, meets the statutory requirements mentioned in Section 30,

that it ultimately approves such plan, which is then binding on the corporate

debtor as wel as its employees, members, creditors, guarantors and other

stakeholders. Importantly, and this is a major departure from previous

legislation on the subject, the moment the adjudicating authority approves

the resolution plan, the moratorium order passed by the authority under

Section 14 shal cease to have effect. The scheme of the Code, therefore,

is to make an attempt, by divesting the erstwhile management of its powers

and vesting it in a professional agency, to continue the business of the

corporate body as a going concern until a resolution plan is drawn up, in

which event the management is handed over under the plan so that the

corporate body is able to pay back its debts and get back on its feet.

Al this is to be done within a period of 6 months with a maximum extension

of another 90 days or else the chopper comes down and the liquidation

process begins.

586

PRACTICAL ASPECTS OF INSOLVENCY LAW

34. On the facts of the present case, we find that in answer to the application

made under Section 7 of the Code, the appel ant only raised the plea of

suspension of its debt under the Maharashtra Act, which, therefore, was

that no debt was due in law. The adjudicating authority correctly referred to

the non-obstante clause in Section 238 and arrived at a conclusion that a

notification under the Maharashtra Act would not stand in the way of the

corporate insolvency resolution process under the Code. However, the

Appel ate Tribunal by the impugned judgment held, thus :

“78. Fol owing the law laid down by hon’ble Supreme Court in Yogendra

Krishnan Jaiswal and Madras Petrochem Ltd. we hold that there is no

repugnancy between I&B Code, 2016 and the MRU Act as they both

operate in different fields. The Parliament has expressly stated that the

provisions of the I&B Code, 2016 (which is a later enactment to the MRU

Act) shal have effect notwithstanding the provisions of any other law for

the time being in force. This stipulation does not mean that the provisions

of MRU Act or for that matter any other law are repugnant to the provisions

of the Code.

79. In view of the finding as recorded above, we hold that the appellant is

not entitled to derive any advantage from MRU Act, 1956 to stal the

insolvency resolution process under Section 7 of the Insolvency and

Bankruptcy Code, 2016.”

This statement by the Appel ate Tribunal has to be tested with reference to

the constitutional position on repugnancy.

35. Article 254 of the Constitution of India is substantially modeled on Section

107 of the Government of India Act, 1935. Article 254 reads as under :

“Article 254 – Inconsistency between laws made by Parliament and

laws made by the Legislatures of States.

(1) If any provision of a law made by the Legislature of a State is repugnant

to any provision of a law made by Parliament which Parliament is competent

to enact, or to any provision of an existing law with respect to one of the

matters enumerated in the Concurrent List, then, subject to the provisions

of clause (2), the law made by Parliament, whether passed before or after

the law made by the Legislature of such State, or, as the case may be,

the existing law, shall prevail and the law made by the Legislature of the

State shal , to the extent of the repugnancy, be void.

(2) Where a law made by the Legislature of a State with respect to one of

the matters enumerated in the Concurrent List contains any provision

repugnant to the provisions of an earlier law made by Parliament or an

PRACTICAL ASPECTS OF INSOLVENCY LAW

587

existing law with respect to that matter, then, the law so made by the

Legislature of such State shal , if it has been reserved for the consideration

of the President and has received his assent, prevail in that State :

Provided that nothing in this clause shal prevent Parliament from enacting

at any time any law with respect to the same matter including a law

adding to, amending, varying or repealing the law so made by the

Legislature of the State.”

Section 107 reads as follows :

“Inconsistency between Federal Laws and Provincial or State Laws.

(1) If any provision of a Provincial law is repugnant to any provision of a

Federal law which the Federal Legislature is competent to enact or to any

provision of an existing Indian law with respect to one of the matters

enumerated in the Concurrent Legislative List, then, subject to the

provisions of this Section, the Federal law, whether passed before or

after the Provincial law, or as the case may be, the existing Indian law,

shal prevail and the Provincial law shall, to the extent of the repugnancy,

be void.

(2) Where a Provincial law with respect to one of the matters enumerated

in the Concurrent Legislative List contains any provision repugnant to the

provisions of an earlier Federal law or an existing Indian law with respect

to that matter, then, if the Provincial law, having been reserved for the

consideration of the Governor-General has received the assent of the

Governor-General or for the signification of His Majesty’s pleasure has

received the assent of the Governor-General or of His Majesty, the

Provincial law shall in that Province prevail, but nevertheless the Federal

Legislature may at any time enact further legislation with respect to the

same matter :

Provided that no Bil or amendment for making any provision repugnant

to any Provincial law, which, having been so reserved has received the

assent of the Governor-General or of His Majesty, shall be introduced or

moved in either Chamber of the Federal Legislature without the previous

sanction of the Governor-General in his discretion.

(3) If any provision of a law of a Federated State is repugnant to a Federal

law which extends to that State, the Federal law, whether passed before

or after the law of the State, shal prevail and the law of the State shal , to

the extent of the repugnancy be void.”

36. The British North America Act, which is the oldest among the

588

PRACTICAL ASPECTS OF INSOLVENCY LAW

Constitutions framed by the British Parliament for its colonies, had under

Sections 91 and 92 exclusive law making power for the different subjects

set out therein which is distributed between Parliament and the Provincial

Legislatures. The only concurrent subject was stated in Section 95 of the

said Act, which reads as fol ows :

“In each Province the Legislature may make laws in relation to agriculture

in the Province, and to immigration into the Province; and it is hereby

declared that the Parliament of Canada may from time-to-time make laws

in relation to agriculture in al or any of the Provinces, and to immigration

into all or any of the Provinces; and any law of the Legislature of a Province

relative to agriculture or to immigration shal have effect in and for the

Province as long and as far only as it is not repugnant to any Act of the

Parliament of Canada.”

It is for this reason that the Canadian cases on repugnancy were said to be

somewhat restricted and have rarely been applied in construing article 254.

37. Insofar as the US Constitution is concerned, there again legislative

powers are reserved completely to the States and Congress is given the

power to legislate only on enumerated subjects that are set out in article 1,

Section 8 of the US Constitution. In this context, no questions of repugnancy

can arise as the States can legislate even with respect to matters laid down

in article 1 Section 8 so long as they do not exceed the territorial boundary

of the State. It is only when Congress actually enacts legislation under

article 1, Section 8 that State legislation, if any, on the same subject-matter

can be said to be ousted. However, when Congress passed the Eighteenth

Amendment to the US Constitution, by which it imposed prohibition, Section

2 thereof stated that Congress and the several States shall have concurrent

powers to enforce this article by appropriate legislation. The question that

arose in State of Rhode Island v. Palmer 253 US 350, was as to the meaning

of the expression “concurrent power”. It was argued that, unless both

Congress and the State Legislatures concurrently enact laws, laws under

Section 2 of the Eighteenth Amendment could not be made. This argument

was turned down by the majority judgment of Van Devanter, J which, strangely

enough, merely announced conclusions on the questions involved without

any reasoning 1. Van Devanter, J.’s majority judgment held (at 387) :

‘8. The words “concurrent power” in that Section do not mean joint power,

or require that legislation thereunder by Congress, to be effective, shall

be approved or sanctioned by the several States or any of them; nor do

they mean that the power to enforce is divided between Congress and the

several States along the lines which separate or distinguish foreign and

PRACTICAL ASPECTS OF INSOLVENCY LAW

589

interstate commerce from intra-State affairs.

9. The power confided to Congress by that Section, while not exclusive,

is territorially co-extensive with the prohibition of the first Section, embraces

manufacture and other intra-State transactions as wel as importation,

exportation and inter-State traffic, and is in no wise dependent on or

affected by action or inaction on the part of the several States or any of

them.”

Two dissents, on the other hand, held that unless the Congress and the

States concurrently legislate, Section 2 does not give them the power to

enforce prohibition. The US cases also do not, therefore, assist in this

context.

38. On the other hand, the Commonwealth of Australia Constitution Act of

1900, also enacted by the British Parliament, has a scheme by which

Parliament, in Section 51, has power to make laws with respect to 39 stated

matters. Under Section 52, Parliament, subject to the Constitution, has

exclusive power to make laws only qua three subjects set out therein. Section

109 of the Australian Constitution reads as under :

“When a law of a State is inconsistent with a law of the Commonwealth,

the latter shall prevail, and the former shall, to the extent of the

inconsistency, be invalid.”

39. Since the Australian cases deal with repugnancy in great detail, they

have been referred to by the early judgments of this Court.

40. In Zaverbhai Amaidas v. State of Bombay [1955] 1 SCR 799, a question

arose as to the efficacy of a Bombay Act of 1947 vis-a-vis the Essential

Supplies (Temporary Powers) Act of 1946, as amended in 1950. This Court,

after referring to Section 107 of the Government of India Act and article 254

of the Constitution, stated that article 254, is in substance, a reproduction

of Section 107 with one difference – that the power of Parliament under

article 254(2) goes even to the extent of repealing a State law. This Court

then examined the subject-matters of the two Acts and found that the

Parliamentary enactment as amended in 1950 prevailed over the Bombay

Act in as much as the higher punishment given for the same offence under

the Bombay Act was repugnant to the lesser punishment given by Section

7 of the Parliamentary enactment.

41. In Tika Ramji v. State of UP [1956] SCR 393, this Court, after setting

out article 254 of the Constitution, referred in detail to a treatise on the

Australian Constitution and to various Australian judgments as follows :

590

PRACTICAL ASPECTS OF INSOLVENCY LAW

“Nicholas in his Australian Constitution, 2nd ed., p. 303, refers to three

tests of inconsistency or repugnancy. – (1) There may be inconsistency

in the actual terms of the competing statutes – R v. Brisbane Licensing

Court [1920] 28 CLR 23.

(2) Though there may be no direct conflict, a State law may be inoperative

because the Commonwealth law, or the award of the Commonwealth Court,

is intended to be a complete exhaustive code – Clyde Engineering Co.

Ltd. v. Cowburn [1926] 37 CLR 466.

(3) Even in the absence of intention, a conflict may arise when both State

and Commonwealth seek to exercise their powers over the same subject-

matter – Victoria v. Commonwealth [1937] 58 CLR 618; Wenn v. Attorney-

General (Vict.) [1948] 77 CLR 84 Isaacs, J, in Clyde Engineering Co., Ltd.

v. Cowburn [1926] 37 CLR 466, 489 laid down one test of inconsistency

as conclusive : “If, however, a competent Legislature expressly or implicitly

evinces its intention to cover the whole field, that is a conclusive test of

inconsistency where another Legislature assumes to enter to any extent

upon the same field”.

Dixon, J, elaborated this theme in Ex parte McLean [1930] 43 CLR 472,

483 :

“When the Parliament of the Commonwealth and the Parliament of a State

each legislate upon the same subject and prescribe what the rule of conduct

shall be, they make laws which are inconsistent, notwithstanding that the

rule of conduct is identical which each prescribes, and Section 109 applies.

That this is so is settled, at least when the sanctions they impose are

diverse. But the reason is that, by prescribing the rule to be observed, the

Federal statute shows an intention to cover the subject-matter and provide

what the law upon it shal be. If it appeared that the Federal law was

intended to be supplementary to or cumulative upon State law, then no

inconsistency would be exhibited in imposing the same duties or in inflicting

different penalties. The inconsistency does not lie in the mere co-existence

of two laws which are susceptible of simultaneous obedience. It depends

upon the intention of the paramount Legislature to express by its enactment,

completely, exhaustively, or exclusively, what shal be the law governing

the particular conduct or matter to which its attention is directed. When a

Federal statute discloses such an intention, it is inconsistent with it for

the law of a State to govern the same conduct or matter.”

To the same effect are the observations of Evatt, J in Stock Motor Plough

Ltd. v. Forsyth [1932] 48 CLR 128, 147 :

PRACTICAL ASPECTS OF INSOLVENCY LAW

591

‘It is now established, therefore, that State and Federal laws may be

inconsistent, although obedience to both laws is possible. There may

even be inconsistency although each law imposes the very same duty of

obedience. These conclusions have, in the main, been reached, by

ascribing “inconsistency” to a State law, not because the Federal law

directly invalidates or conflicts with it, but because the Federal law is

said to “cover the field”. This is a very ambiguous phrase, because subject-

matters of legislation bear little resemblance to geographical areas. It is

no more than a cliche for expressing the fact that, by reason of the subject-

matter dealt with, and the method of dealing with it, and the nature and

multiplicity of the regulations prescribed, the Federal authority has adopted

a plan or scheme which wil be hindered and obstructed if any additional

regulations whatever are prescribed upon the subject by any other authority;

if, in other words, the subject is either touched or trenched upon by State

authority.’

The Calcutta High Court in G P Stewart v. B K Roy Chaudhury AIR 1939

Cal. 628 had occasion to consider the meaning of repugnancy and B N Rau,

J, who delivered the judgment of the Court observed at p. 632 :

“It is sometimes said that two laws cannot be said to be properly repugnant

unless there is a direct conflict between them, as when one says “do” and

the other “don’t”, there is no true repugnancy, according to this view, if it

is possible to obey both the laws. For reasons which we shal set forth

presently, we think that this is too narrow a test : there may wel be cases

of repugnancy where both laws say “don’t” but in different ways. For

example, one law may say, “No person shal sel liquor by retail, that is, in

quantities of less than five gallons at a time” and another law may say,

“No person shal sel liquor by retail, that is, in quantities of less than ten

gal ons at a time”. Here, it is obviously possible to obey both laws, by

obeying the more stringent of the two, namely, the second one; yet it is

equally obvious that the two laws are repugnant, for to the extent to which

a citizen is compel ed to obey one of them, the other, though not actually

disobeyed, is nullified.”

The learned Judge then discussed the various authorities which laid down

the test of repugnancy in Australia, Canada, and England and concluded at

p. 634 :

“The principle deducible from the English cases, as from the Canadian

cases, seems, therefore, to be the same as that enunciated by Isaacs,

J, in the Australian 44 hour case (37 CLR 466) if the dominant law has

expressly or impliedly evinced its intention to cover the whole field, then

592

PRACTICAL ASPECTS OF INSOLVENCY LAW

a subordinate law in the same field is repugnant and, therefore, inoperative.

Whether and to what extent in a given case, the dominant law evinces

such an intention must necessarily depend on the language of the

particular law”.

Sulaiman, J in Shyamakant Lal v. Rambhajan Singh [1939] FCR 188,

212, thus, laid down the principle of construction in regard to repugnancy :

“When the question is whether a Provincial legislation is repugnant to

an existing Indian law, the onus of showing its repugnancy and the extent

to which it is repugnant should be on the party attacking its validity.

There ought to be a presumption in favour of its validity, and every

effort should be made to reconcile them and construe both so as to

avoid their being repugnant to each other; and care should be taken to

see whether the two do not really operate in different fields without

encroachment. Further, repugnancy must exist in fact, and not depend

merely on a possibility. Their lordships can discover no adequate grounds

for holding that there exists repugnancy between the two laws in districts

of the Province of Ontario where the prohibitions of the Canadian Act

are not and may never be in force : Attorney-General for Ontario v.

Attorney-General for the Dominion [1896] AC 348, 369-70.” (at pp. 424-

427) (emphasis supplied)

This Court expressly held that the pith and substance doctrine has no

application to repugnancy principles for the reason that :

“The pith and substance argument also cannot be imported here for the

simple reason that, when both the Centre as wel as the State Legislatures

were operating in the concurrent field, there was no question of any

trespass upon the exclusive jurisdiction vested in the Centre under Entry

52 of List I, the only question which survived being whether, putting both

the pieces of legislation enacted by the Centre and the State Legislature

together, there was any repugnancy, a contention which wil be dealt with

hereafter.” (at pp. 420-421)

42. In Deep Chand v. State of UP [1959] Supp (2) SCR 8, this Court

referred to its earlier judgments in Zaverbhai (supra) and Tika Ramji

(supra) and held :

“Repugnancy between two statutes may, thus, be ascertained on the

basis of the fol owing three principles :

(1) Whether there is direct conflict between the two provisions;

(2) Whether Parliament intended to lay down an exhaustive code in

PRACTICAL ASPECTS OF INSOLVENCY LAW

593

respect of the subject-matter replacing the Act of the State Legislature;

and

(3) Whether the law made by Parliament and the law made by the State

Legislature occupy the same field.” (at page 43)

43. In Pandit Ukha Kolhe v. State of Maharashtra [1964] 1 SCR 926, this

Court found that Sections 129A and 129B did not repeal in its entirety an

existing law contained in Section 510 of the Code of Criminal Procedure in

its application to offences under Section 66 of the Bombay Prohibition Act.

It was held that Sections 129A and 129B must be regarded as enacted in

exercise of power conferred by Entries 2 and 12 in the Concurrent List. It

was then held :

“It is, difficult to regard Section 129B of the Act as so repugnant to Section

510 of the Code as to make the latter provision whol y inapplicable to

trials for offences under the Bombay Prohibition Act. Section 510 is a

general provision dealing with proof of reports of the Chemical Examiner

in respect of matters or things duly submitted to him for examination or

analysis and report.

Section 129B deals with a special class of reports and certificates. In the

investigation of an offence under the Bombay Prohibition Act, examination

of a person suspected by a Police Officer or Prohibition Officer of having

consumed an intoxicant, or of his blood may be carried out only in the

manner prescribed by Section 129A : and the evidence to prove the facts

disclosed thereby wil be the certificate or the examination viva voce of

the registered Medical Practitioner, or the Chemical Examiner, for

examination in the course of an investigation of an offence under the Act

of the person so suspected or of his blood has by the clearest implication

of the law to be carried out in the manner laid down or not at al . Report of

the Chemical Examiner in respect of blood col ected in the course of

investigation of an offence under the Bombay Prohibition Act, otherwise

than in the manner set out in Section 129A cannot therefore, be used as

evidence in the case. To that extent Section 510 of the Code is superseded

by Section 129B. But the report of the Chemical Examiner relating to the

examination of blood of an accused person col ected at a time when no

investigation was pending, or at the instance not of a Police Officer or a

Prohibition Officer remains admissible under Section 510 of the Code.”

(at pages 953-954)

44. In M Karunanidhi v. Union of India [1979] 3 SCR 254, this Court

referred to a number of Australian judgments and judgments of this Court

and held :

594

PRACTICAL ASPECTS OF INSOLVENCY LAW

“It is well settled that the presumption is always in favour of the

constitutionality of a statute and the onus lies on the person assailing the

Act to prove that it is unconstitutional. Prima facie, there does not appear

to us to be any inconsistency between the State Act and the Central

Acts. Before any repugnancy can arise, the following conditions must be

satisfied :

1. That there is a clear and direct inconsistency between the Central

Act and the State Act.

2. That such an inconsistency is absolutely irreconcilable.

3. That the inconsistency between the provisions of the two Acts is of

such a nature as to bring the two Acts into direct col ision with each

other and a situation is reached where it is impossible to obey the

one without disobeying the other.

In Colin Howard’s Australian Federal Constitutional Law, 2nd edn. the author

while describing the nature of inconsistency between the two enactments

observed as follows :

“An obvious inconsistency arises when the two enactments produce

different legal results when applied to the same facts.”

In the case of Hume v. Palmer 38 CLR 441 Knox, CJ observed as

follows :

“The rules prescribed by the Commonwealth law and the State law

respectively are for present purposes substantial y identical, but the

penalties imposed for the contravention differ… In these circumstances,

it is I think, clear that the reasons given by my brothers Issacs and Starke

for the decisions of this Court in Union Steamship Co. of New Zealand

v. Commonwealth 36 CLR 130 and Clyde Engineering Co. v. Cowburn 37

CLR 466 establish that the provisions of the law of the State for the

breach of which the appellant was convicted are inconsistent with the law

of the Commonwealth within the meaning of Section 109 of the Constitution

and are, therefore, invalid.”

Issacs, J observed as follows :

“There can be no question that the Commonwealth Navigation Act, by its

own direct provisions and the Regulations made under its authority, applies

upon construction to the circumstances of the case. It is inconsistent

with the State Act in various ways, including (1) general supersession of

the regulations of conduct, and so displacing the State Regulations,

whatever those may be; (2) the jurisdiction to convict, the State law

PRACTICAL ASPECTS OF INSOLVENCY LAW

595

empowering the Court to convict summarily, the Commonwealth law making

the contravention an indictable offence, and, therefore, bringing into

operation Section 80 of the Constitution, requiring a jury; (3) the penalty,

the State providing a maximum of £50 the Commonwealth Act prescribing

a maximum of £100, or imprisonment, or both; (4) the tribunal itself.”

Starke, J observed as follows :

“It is not difficult to see that the Federal Code would be “disturbed or

deranged” if the State Code applied a different sanction in respect of the

same act. Consequently the State regulations are, in my opinion,

inconsistent with the law of the Commonwealth and rendered invalid by

force of Section 109 of the Constitution.”

In a later case of the Australian High Court in Ex. Parte Mclean 43 CLR

472 Issacs and Starke, JJ, while dwel ing on the question of repugnancy

made the following observation :

“In Cowburn’s case (supra) is stated the reasoning for that conclusion

and we wil now refer to those statements without repeating them. In short,

the very same conduct by the same persons is dealt with in conflicting

terms by the Commonwealth and State Acts. A Court, seeing that, has

no authority to inquire further, or to seek to ascertain the scope or bearing

of the State Act. It must simply apply Section 109 of the Constitution,

which declares the invalidity pro tanto of the State Act.”

Similarly Dixon, J observed, thus :

“When the Parliament of the Commonwealth and the Parliament of a State

each legislate upon the same subject and prescribe what the rule of conduct

shall be, they make laws which are inconsistent, notwithstanding that the

rule of conduct is identical which each prescribes, and Section 109 applies.

That this is so is settled, at least when the sanctions they impose are

diverse Hume v. Palmer (supra).”

In the case of Zaverbhai Amaidas v. State of Bombay [1955] 1 SCR

799 this Court laid down the various tests to determine the inconsistency

between two enactments and observed as fol ows –

“The important thing to consider with reference to this provision is whether

the legislation is “in respect of the same matter”. If the later legislation

deals not with the matters which formed the subject of the earlier legislation

but with other and distinct matters though of a cognate and allied character,

then article 254(2) wil have no application. The principle embodied in

Section 107(2) and article 254(2) is that when there is legislation covering

596

PRACTICAL ASPECTS OF INSOLVENCY LAW

the same ground both by the Centre and by the Province, both of them

being competent to enact the same, the law of the Centre should prevail

over that of the State.”

“It is true, as already pointed out, that on a question under article 254(1)

whether an Act of Parliament prevails against a law of the State, no

question of repeal arises; but the principle on which the rule of implied

repeal rests, namely, that if subject-matter of the later legislation is identical

with that of the earlier, so that they cannot both stand together, then the

earlier is repealed by the later enactment, wil be equal y applicable to a

question under article 254(2) whether the further legislation by Parliament

is in respect of the same matter as that of the State law.”

In the case of Ch. Tika Ramji v. State of Uttar Pradesh [1956] SCR 393

while dealing with the question of repugnancy between a Central and a

State enactment, this Court relied on the observations of Nicholas in his

Australian Constitution, 2nd Ed. p.303, where three tests of inconsistency

or repugnancy have been laid down and which are as follows :

“(1) There may be inconsistency in the actual terms of the competing

statutes – R v. Brisbane Licensing Court [1920] 28 CLR 23.

(2) Though there may be no direct conflict, a State law may be inoperative

because the Commonwealth law, or the award of the Commonwealth

Court, is intended to be a complete exhaustive code – Clyde

Engineering Co. Ltd. v. Cowburn [1926] 37 CLR 466.

(3) Even in the absence of intention, a conflict may arise when both

State and Commonwealth seek to exercise their powers over the

same subject-matter – Victoria v. Commonwealth [1937] 58 CLR

618; Wenn v. Attorney-General (Vict.) [1948] 77 CLR 84. This Court

also relied on the decisions in the case of Hume v. Palmer as also

the case of Ex. Parte Mclean (supra) referred to above. This Court

also endorsed the observations of Sulaiman, J, in the case of

Shyamakant Lal v. Rambhajan Singh [1939] FCR 188 where

Sulaiman, J, observed as fol ows :

“When the question is whether a Provincial legislation is repugnant to an

existing Indian law, the onus of showing its repugnancy and the extent to

which it is repugnant should be on the party attacking its validity. There

ought to be a presumption in favour of its validity, and every effort should

be made to reconcile them and construe both so as to avoid their being

repugnant to each other, and care should be taken to see whether the two

do not really operate in different fields without encroachment. Further,

PRACTICAL ASPECTS OF INSOLVENCY LAW

597

repugnancy must exist in fact, and not depend merely on a possibility.”

In the case of Om Prakash Gupta v. State of UP [1957] SCR 423 where

this Court was considering the question of the inconsistency between the

two Central enactments, namely, the Indian Penal Code and the Prevention

of Corruption Act held that there was no inconsistency and observed as

follows :

“It seems to us, therefore, that the two offences are distinct and separate.

This is the view taken in Amarendra Nath Roy v. State AIR 1955 Cal.

236 and we endorse the opinion of the learned Judges, expressed therein.

Our conclusion, therefore, is that the offence created under Section 5(1)(c)

of the Corruption Act is distinct and separate from the one under Section

405 of the Indian Penal Code and, therefore, there can be no question of

Section 5(1)(c) repealing Section 405 of the Indian Penal Code. If that is

so, then, article 14 of the Constitution can be no bar.”

Similarly in the case of Deep Chand v. State of Uttar Pradesh [1959]

Supp 2 SCR 8 this Court indicated the various tests to ascertain the

question of repugnancy between the two statutes and observed as

follows :

“Repugnancy between two statutes may, thus, be ascertained on the

basis of the fol owing three principles :

(1) Whether there is direct conflict between the two provisions;

(2) Whether Parliament intended to lay down an exhaustive code in

respect of the subject-matter replacing the Act of the State Legislature;

and

(3) Whether the law made by Parliament and the law made by the State

Legislature occupy the same field.”

In the case of Megh Raj v. Allah Rakha AIR 1942 FC 27 where

Varadachariar, J, speaking for the Court pointed out that where as in

Australia a provision similar to Section 107 of the Government of India

Act, 1935 existed in the shape of Section 109 of the Australian Constitution,

there was no corresponding provision in the American Constitution.

Similarly, the Canadian cases have laid down a principle too narrow for

application to Indian cases. According to the learned Judge, the safe rule

to follow was that where the paramount legislation does not purport to be

exhaustive or unqualified there is no inconsistency and in this connection

observed as follows :

“The principle of that decision is that where the paramount legislation

598

PRACTICAL ASPECTS OF INSOLVENCY LAW

does not purport to be exhaustive or unqualified, but itself permits or

recognises other laws restricting or qualifying the general provision made

in it, it cannot be said that any qualification or restriction introduced by

another law is repugnant to the provision in the main or paramount law.”

“The position wil be even more obvious, if another test of repugnancy

which has been suggested in some cases is applied, namely, whether

there is such an inconsistency between the two provisions that one must

be taken to repeal the other by necessary implication.”

In the case of State of Orissa v. M A Tulloch & Co. [1964] 4 SCR 461

Ayyangar, J, speaking for the Court observed as follows :

“Repugnancy arises when two enactments both within the competence of

the two Legislatures col ide and when the Constitution expressly or by

necessary implication provides that the enactment of one Legislature has

superiority over the other then to the extent of the repugnancy the one

supersedes the other. But two enactments may be repugnant to each

other even though obedience to each of them is possible without disobeying

the other. The test of two legislations containing contradictory provisions

is not, however, the only criterion of repugnancy, for if a competent

Legislature with a superior efficacy expressly or impliedly evinces by its

legislation an intention to cover the whole field, the enactments of the

other Legislature whether passed before or after would be overborne on

the ground of repugnance. Where such is the position, the inconsistency

is demonstrated not by a detailed comparison of provisions of the two

statutes but by the mere existence of the two pieces of legislation.”

In the case of T S Balliah v. T S Rangachari [1969] 3 SCR 65 it was

pointed out by this Court that before coming to the conclusion that there

is a repeal by implication, the Court must be satisfied that the two

enactments are so inconsistent that it becomes impossible for them to

stand together. In other words, this Court held that when there is a direct

col ision between the two enactments which is irreconcilable then only

repugnancy results. In this connection, the Court made the fol owing

observations :

“Before coming to the conclusion that there is a repeal by implication, the

Court must be satisfied that the two enactments are so inconsistent or

repugnant that they cannot stand together and the repeal of the express

prior enactment must flow from necessary implication of the language of

the later enactment. It is, therefore, necessary in this connection to

scrutinise the terms and consider the true meaning and effect of the two

enactments.”

PRACTICAL ASPECTS OF INSOLVENCY LAW

599

“The provisions enacted in Section 52 of the 1922 Act do not alter the

nature or quality of the offence enacted in Section 177, Indian Penal Code

but it merely provides a new course of procedure for what was already an

offence. In a case of this description the new statute is regarded not as

superseding, nor repealing by implication the previous law, but as

cumulative.”

“A plain reading of the Section shows that there is no bar to the trial or

conviction of the offender under both enactments but there is only a bar

to the punishment of the offender twice for the same offence. In other

words, the Section provides that where an act or omission constitutes an

offence under two enactments, the offender may be prosecuted and

punished under either or both the enactments but shal not be liable to be

punished twice for the same offence.”

On a careful consideration, therefore, of the authorities referred to above,

the fol owing propositions emerge :

1. That in order to decide the question of repugnancy it must be shown

that the two enactments contain inconsistent and irreconcilable

provisions, so that they cannot stand together or operate in the same

field.

2. That there can be no repeal by implication unless the inconsistency

appears on the face of the two statutes.

3. That where the two statutes occupy a particular field, there is room

or possibility of both the statutes operating in the same field without

coming into col ision with each other, no repugnancy results.

4. That where there is no inconsistency but a statute occupying the

same field seeks to create distinct and separate offences, no question

of repugnancy arises and both the statutes continue to operate in the

same field.’ (at pages 272-278) [emphasis supplied]

45. In Hoechst Pharmaceuticals Ltd. v. State of Bihar [1983] 3 SCR 130,

this Court after referring to the earlier judgments held :

‘Article 254 of the Constitution makes provision first, as to what would

happen in the case of conflict between a Central and State law with regard

to the subjects enumerated in the Concurrent List, and secondly, for

resolving such conflict. Article 254(1) enunciates the normal rule that in

the event of a conflict between a Union and a State law in the concurrent

field, the former prevails over the latter. Clause (1) lays down that if a

State law relating to a concurrent subject is “repugnant” to a Union law

600

PRACTICAL ASPECTS OF INSOLVENCY LAW

relating to that subject, then, whether the Union law is prior or later in

time, the Union law will prevail and the State law shal , to the extent of

such repugnancy, be void. To the general rule laid down in clause (1),

clause (2) engrafts an exception, viz., that if the President assents to a

State law which has been reserved for his consideration, it wil prevail

notwithstanding its repugnancy to an earlier law of the Union, both laws

dealing with a concurrent subject. In such a case, the Central Act will

give way to the State Act only to the extent of inconsistency between the

two, and no more. In short, the result of obtaining the assent of the

President to a State Act which is inconsistent with a previous Union law

relating to a concurrent subject would be that the State Act will prevail in

that State and override the provisions of the Central Act in their applicability

to that State only. The predominance of the State law may, however, be

taken away if Parliament legislates under the proviso to clause (2). The

proviso to article 254(2) empowers the Union Parliament to repeal or amend

a repugnant State law, either directly, or by itself enacting a law repugnant

to the State law with respect to the “same matter”. Even though the

subsequent law made by Parliament does not expressly repeal a State

law, even then, the State law will become void as soon as the subsequent

law of Parliament creating repugnancy is made. A State law would be

repugnant to the Union law when there is direct conflict between the two

laws. Such repugnancy may also arise where both laws operate in the

same field and the two cannot possibly stand together – see Zaverbhai

Amaidas v. State of Bombay [1955] 1 SCR 799, M Karunanidhi v. Union

of India [1979] 3 SCR 254 and T Barai v. Henry Ah Hoe [1983] 1 SCC 177.

We may briefly refer to the three Australian decisions relied upon. As

stated above, the decision in Clyde Engineering Co.’s case (supra), lays

down that inconsistency is also created when one statute takes away

rights conferred by the other. In Ex Parte McLean’s case (supra), Dixon,

J, laid down another test, viz., two statutes could be said to be inconsistent

if they, in respect of an identical subject-matter, imposed identical duty

upon the subject, but provided for different sanctions for enforcing those

duties. In Stock Motor Ploughs Ltd.’s case (supra), Evatt, J held that

even in respect of cases where two laws impose one and the same duty

of obedience there may be inconsistency. As already stated the

controversy in these appeals falls to be determined by the true nature

and character of the impugned enactment, its pith and substance, as to

whether it fal s within the legislative competence of the State Legislature

under article 246(3) and does not involve any question of repugnancy

under article 254(1).

PRACTICAL ASPECTS OF INSOLVENCY LAW

601

We fail to comprehend the basis for the submission put forward on behalf

of the appellants that there is repugnancy between sub-Section (3) of

Section 5 of the Act which is relatable to Entry 54 of List II of the Seventh

Schedule and paragraph 21 of the Control order issued by the Central

Government under sub-Section (1) of Section 3 of the Essential

Commodities Act relatable to Entry 33 of List III and, therefore, sub-

Section (3) of Section 5 of the Act which is a law made by the State

Legislature is void under article 254(1). The question of repugnancy under

article 254(1) between a law made by Parliament and a law made by the

State Legislature arises only in case both the legislations occupy the

same field with respect to one of the matters enumerated in the Concurrent

List, and there is direct conflict between the two laws. It is only when both

these requirements are fulfilled that the State law wil , to the extent of

repugnancy become void. Article 254(1) has no application to cases of

repugnancy due to overlapping found between List II on the one hand and

List I and List III on the other. If such overlapping exists in any particular

case, the State law will be ultra vires because of the non-obstante clause

in article 246(1) read with the opening words “Subject to” in article 246(3).

In such a case, the State law will fail not because of repugnance to the

Union law but due to want of legislative competence. It is no doubt true

that the expression “a law made by Parliament which Parliament is

competent to enact” in article 254(1) is susceptible of a construction that

repugnance between a State law and a law made by Parliament may take

place outside the concurrent sphere because Parliament is competent to

enact law with respect to subjects included in List III as wel as “List I”.

But if article 254(1) is read as a whole, it will be seen that it is expressly

made subject to clause (2) which makes reference to repugnancy in the

field of Concurrent List – in other words, if clause (2) is to be the guide in

the determination of scope of clause (1), the repugnancy between Union

and State law must be taken to refer only to the Concurrent field. Article

254(1) speaks of a State law being repugnant to (a) a law made by

Parliament, or (b) an existing law.

There was a controversy at one time as to whether the succeeding words

“with respect to one of the matters enumerated in the Concurrent List”

govern both (a) and (b) or (b) alone. It is now settled that the words “with

respect to” qualify both the clauses in article 254(1), viz., a law made by

Parliament which Parliament is competent to enact as well as any provision

of an existing law. The underlying principle is that the question of

repugnancy arises only when both the Legislatures are competent to

legislate in the same field, i.e., with respect to one of the matters

602

PRACTICAL ASPECTS OF INSOLVENCY LAW

enumerated in the Concurrent List. Hence, article 254(1) can not apply

unless both the Union and the State laws relate to a subject specified in

the Concurrent List, and they occupy the same field.

This construction of ours is supported by the observations of Venkatarama

Ayyar, J, speaking for the Court in A S Krishna’s case (supra), while

dealing with Section 107(1) of the Government of India Act, 1935 to the

effect :

“For this Section to apply, two conditions must be fulfilled : (1) The

provisions of the Provincial law and those of the Central legislation must

both be in respect of a matter which is enumerated in the Concurrent List,

and (2) they must be repugnant to each other. It is only when both these

requirements are satisfied that the Provincial law wil , to the extent of the

repugnancy, become void.” In Ch. Tika Ramji’s case (supra), the Court

observed that no question of repugnancy under article 254 of the

Constitution could arise where parliamentary legislation and State

legislation occupy different fields and deal with separate and distinct

matters even though of a cognate and allied character and that where, as

in that case, there was no inconsistency in the actual terms of the Acts

enacted by Parliament and the State Legislature relatable to Entry 33 of

List III, the test of repugnancy would be whether Parliament and State

Legislature, in legislating on an entry in the Concurrent List, exercised

their powers over the same subject-matter or whether the laws enacted

by Parliament were intended to be exhausted as to cover the entire field,

and added :

“The pith and substance argument cannot be imported here for the simple

reason that, when both the Centre as wel as the State Legislatures were

operating in the concurrent field, there was no question of any trespass

upon the exclusive jurisdiction of the Centre under Entry 52 of List I, the

only question which survived being whether put in both the pieces of

legislation enacted by the Centre and the State Legislature, there was

any such repugnancy.” This observation lends support to the view that in

cases of overlapping between List II on the one hand and Lists I and III

on the other, there is no question of repugnancy under article 254(1).

Subba Rao, J, speaking for the Court in Deep Chand’s case (supra),

interpreted article 254(1) in these terms :

“Article 254(1) lays down a general rule. Clause (2) is an exception to that

article and the proviso qualified the said exception. If there is repugnancy

between the law made by the State and that made by the Parliament with

respect to one of the matters enumerated in the Concurrent List, the law

PRACTICAL ASPECTS OF INSOLVENCY LAW

603

made by Parliament shal prevail to the extent of the repugnancy and law

made by the State shal , to the extent of such repugnancy, be void.”’ (at

pages 179-183) [emphasis supplied]

46. In Vijay Kumar Sharma v. State of Karnataka [1990] 2 SCC 562, this

Court held that the Karnataka Contract Carriages (Acquisition) Act, 1976

enacted under Entry 42 of List III was not repugnant to the Motor Vehicles

Act, 1988 enacted under Entry 35 of the same List. In so holding, Sawant,

J, laid down :

“32. Thus, the Karnataka Act and the MV Act, 1988 deal with two different

subject-matters. As stated earlier the Karnataka Act is enacted by the

State Legislature for acquisition of contract carriages under Entry 42 of

the Concurrent List read with Article 31 of the Constitution to give effect

to the provisions of articles 39(b) and (c) thereof. The MV Act 1988 on the

other hand is enacted by the Parliament under Entry 35 of the Concurrent

List to regulate the operation of the motor vehicles. The objects and the

subject-matters of the two enactments are materially different. Hence,

the provisions of article 254 do not come into play in the present case

and, hence, there is no question of repugnancy between the two

legislations.” (at page 581)

47. Ranganath Misra, J, in a concurring judgment, posed the question as to

whether when the State law is under one head of legislation in the Concurrent

List and the Parliamentary legislation is under another head in the same list,

can there be repugnancy at all?

The question was answered, thus :

“13. In clause (1) of article 254 it has been clearly indicated that the

competing legislations must be in respect of one of the matters enumerated

in the Concurrent List. The seven-Judge Bench examining the vires of the

Karnataka Act did hold that the State Act was an Act for acquisition and

came within Entry 42 of the Concurrent List. That position is not disputed

before us. There is unanimity at the bar that the Motor Vehicles Act is a

legislation coming within Entry 35 of the Concurrent List. Therefore, the

Acquisition Act and the 1988 Act as such do not relate to one common

head of legislation enumerated in the Concurrent List and the State Act

and the parliamentary statute deal with different matters of legislation.”

“19. A number of precedents have been cited at the hearing and those

have been examined and even some which were not referred to at the bar.

There is no clear authority in support of the stand of the petitioners –

where the State law is under one head of legislation in the Concurrent

604

PRACTICAL ASPECTS OF INSOLVENCY LAW

List, the subsequent Parliamentary legislation is under another head of

legislation in the same list and in the working of the two it is said to give

rise to a question of repugnancy.” (at pages 575 and 577)

48. In Rajiv Sarin v. State of Uttarakhand [2011] 8 SCC 708, this Court

examined the Kumaun and Uttarakhand Zamindari Abolition and Land

Reforms Act, 1960 vis-a-vis the Forest Act, 1927 and found that there was

no repugnancy between the two. This Court held :

‘52. The aforesaid position makes it quite clear that even if both the

legislations are relatable to List III of the Seventh Schedule of the

Constitution, the test for repugnancy is whether the two legislations

“exercise their power over the same subject-matter...” and secondly, whether

the law of Parliament was intended “to be exhaustive to cover the entire

field”. The answer to both these questions in the instant case is in the

negative, as the Indian Forest Act, 1927 deals with the law relating to

forest transit, forest levy and forest produce, whereas the KUZALR Act

deals with the land and agrarian reforms.

53. In respect of the Concurrent List under Seventh Schedule to the

Constitution, by definition both the Legislatures, viz., the Parliament and

the State Legislatures are competent to enact a law. Thus, the only way

in which the doctrine of pith and substance can and is utilised in determining

the question of repugnancy is to find out whether in pith and substance

the two laws operate and relate to the same matter or not. This can be

either in the context of the same Entry in List III or different Entries in List

III of the Seventh Schedule of the Constitution. In other words, what has

to be examined is whether the two Acts deal with the same field in the

sense of the same subject-matter or deal with different matters.” (at page

727) [emphasis supplied]

49. It wil be noticed that the Constitution Bench judgment in Rajiv Sarin

(supra) does not at al refer to Tika Ramji (supra). Tika Ramji (supra) had

clearly held that the doctrine of pith and substance cannot be referred to in

determining questions of repugnancy, once it is found that both the

Parliamentary law and State law are referable to the Concurrent List.

Therefore, the statement in paragraph 53 in Rajiv Sarin (supra), that the

doctrine of pith and substance has utility in finding out whether, in substance,

the two laws operate and relate to the same matter, may not be a correct

statement of the law in view of the unequivocal statement made in Tika

Ramji (supra) by an earlier Constitution Bench decision. However, the

following sentence is of great importance, which is, that the two laws, namely,

the Parliamentary and the State legislation, do not need to find their origin in

PRACTICAL ASPECTS OF INSOLVENCY LAW

605

the same Entry in List III so long as they deal, either as a whole or in part,

with the same subject-matter. This clarification of the law is important in

that Ranganath Misra, J.’s separate concurring opinion in Vijay Kumar Sharma

(supra) seems to point to a different direction. However, Hoechst

Pharmaceuticals (supra), also does not agree with this view and indicates

that so long as the two laws are traceable to a matter in the Concurrent List

and there is repugnancy, the State law wil have to be yield to the Central

law except if the State law is covered by article 254(2).

50. The case law referred to above, therefore, yields the following

propositions :

(i) Repugnancy under article 254 arises only if both the Parliamentary

(or existing law) and the State law are referable to List III in the 7th

Schedule to the Constitution of India.

(i ) In order to determine whether the Parliamentary (or existing law) is

referable to the Concurrent List and whether the State law is also

referable to the Concurrent List, the doctrine of pith and substance

must be applied in order to find out as to where in pith and substance

the competing statutes as a whole fal . It is only if both fal , as a

whole, within the Concurrent List, that repugnancy can be applied to

determine as to whether one particular statute or part thereof has to

give way to the other.

(iii) The question is what is the subject-matter of the statutes in question

and not as to which entry in List III the competing statutes are

traceable, as the entries in List III are only fields of legislation; also,

the language of article 254 speaks of repugnancy not merely of a

statute as a whole but also “any provision” thereof.

(iv) Since there is a presumption in favour of the validity of statutes

general y, the onus of showing that a statute is repugnant to another

has to be on the party attacking its validity. It must not be forgotten

that that every effort should be made to reconcile the competing

statutes and construe them both so as to avoid repugnancy – care

should be taken to see whether the two do not real y operate in different

fields qua different subject-matters.

(v) Repugnancy must exist in fact and not depend upon a mere possibility.

(vi) Repugnancy may be direct in the sense that there is inconsistency

in the actual terms of the competing statutes and there is, therefore,

a direct conflict between two or more provisions of the competing

statutes. In this sense, the inconsistency must be clear and direct

606

PRACTICAL ASPECTS OF INSOLVENCY LAW

and be of such a nature as to bring the two Acts or parts thereof into

direct collision with each other, reaching a situation where it is

impossible to obey the one without disobeying the other.

This happens when two enactments produce different legal results

when applied to the same facts.

(vi ) Though there may be no direct conflict, a State law may be inoperative

because the Parliamentary law is intended to be a complete,

exhaustive or exclusive code. In such a case, the State law is

inconsistent and repugnant, even though obedience to both laws is

possible, because so long as the State law is referable to the same

subject-matter as the Parliamentary law to any extent, it must give

way. One test of seeing whether the subject-matter of the Parliamentary

law is encroached upon is to find out whether the Parliamentary statute

has adopted a plan or scheme which will be hindered and/or obstructed

by giving effect to the State law. It can then be said that the State

law trenches upon the Parliamentary statute. Negatively put, where

Parliamentary legislation does not purport to be exhaustive or

unqualified, but itself permits or recognises other laws restricting or

qualifying the general provisions made in it, there can be said to be

no repugnancy.

(vii ) A conflict may arise when Parliamentary law and State law seek to

exercise their powers over the same subject-matter. This need not be

in the form of a direct conflict, where one says “do” and the other

says “don’t”. Laws under this head are repugnant even if the rule of

conduct prescribed by both laws is identical. The test that has been

applied in such cases is based on the principle on which the rule of

implied repeal rests, namely, that if the subject-matter of the State

legislation or part thereof is identical with that of the Parliamentary

legislation, so that they cannot both stand together, then the State

legislation will be said to be repugnant to the Parliamentary legislation.

However, if the State legislation or part thereof deals not with the

matters which formed the subject-matter of Parliamentary legislation

but with other and distinct matters though of a cognate and al ied

nature, there is no repugnancy.

(ix) Repugnant legislation by the State is void only to the extent of the

repugnancy. In other words, only that portion of the State’s statute

which is found to be repugnant is to be declared void.

(x) The only exception to the above is when it is found that a State

legislation is repugnant to Parliamentary legislation or an existing

PRACTICAL ASPECTS OF INSOLVENCY LAW

607

law if the case fal s within article 254(2), and Presidential assent is

received for State legislation, in which case State legislation prevails

over Parliamentary legislation or an existing law within that State.

Here again, the State law must give way to any subsequent Parliamentary

law which adds to, amends, varies or repeals the law made by the Legislature

of the State, by virtue of the operation of article 254(2) proviso.

51. Applying the aforesaid rules to the facts of the present case, we find

that the State statute in question is the Maharashtra Act.

The Statement of Objects and Reasons for the aforesaid Act reads, thus :

‘In order to mitigate the hardship that may be caused to the workers who

may be thrown out of employment by the closure of an undertaking,

Government may take over such undertaking either on lease or on such

conditions as may be deemed suitable and run it as a measure of

unemployment relief. In such cases Government may have to fix revised

terms of employment of the workers or to make other changes which may

not be in consonance with the existing labour laws or any agreements or

awards applicable to the undertaking. It may become necessary even to

exempt the undertaking from certain legal provisions. For these reasons

it is proposed to obtain power to exclude an undertaking, run by or under

the authority of Government as a measure of unemployment relief, from

the operation of certain labour laws or any specified provisions thereof

subject to such conditions and for such periods as may be specified. It is

also proposed to make a provision to secure that while the rights and

liabilities of the original employer and workmen may remain suspended

during the period the undertaking is run by Government, they would revive

and become enforceable as soon as the undertaking ceases to be under

the control of Government.” There is no doubt that this Maharashtra Act is

referable to Entry 23, List III in the 7th Schedule to the Constitution,

which reads as under :

“23. Social security and social insurance; employment and unemployment.”

Sections 3 and 4 of the Maharashtra Act are material and are set out

herein :

“3. Declaration of relief undertaking. – (1) If at any time it appears to

the State Government necessary to do so, the State Government may,

by notification in the Official Gazette, declare that an industrial undertaking

specified in the notification, whether started, acquired or otherwise taken

over by the State Government, and carried on or proposed to be carried

on by itself or under its authority, or to which any loan, guarantee or

608

PRACTICAL ASPECTS OF INSOLVENCY LAW

financial assistance has been provided by the State Government shall,

with effect from the date specified for the purpose in the notification, be

conducted to serve as a measure of preventing unemployment or of

unemployment relief and the undertaking shall accordingly be deemed to

be a relief undertaking for the purposes of this Act.

(2) A notification under sub-Section (1) shal have effect for such period

not exceeding twelve months as may be specified in the notification; but

it shal be renewable by like notifications from time-to-time for further

periods not exceeding twelve months at a time, so, however, that al the

periods in the aggregate do not exceed fifteen years.

4. Power to prescribe industrial relations and other facilities

temporarily for relief undertakings. – (1) Notwithstanding any law, usage,

custom, contract, instrument, decree, order, award, submission,

settlement, standing order or other provision whatsoever, the State

Government may, by notification in the Official Gazette, direct that –

(a) in relation to any relief undertaking and in respect of the period for

which the relief undertaking continues as such under sub-Section

(2) of Section 3 –

(i) al or any of the laws in the Schedule to this Act or any provisions

thereof shall not apply (and such relief undertaking shal be

exempt therefrom), or shall, if so directed by the State

Government, be applied with such modifications (which do not,

however, affect the policy of the said laws) as may be specified

in the notification;

(i ) al or any of the agreements, settlements, awards or standing

orders made under any of the laws in the Schedule to this Act,

which may be applicable to the undertaking immediately before

it was acquired or taken over by the State Government or before

any loan, guarantee or other financial assistance was provided

to it by, or with the approval of the State Government, for being

run as a relief undertaking, shal be suspended in operation or

shal , if so directed by the State Government, be applied with

such modifications as may be specified in the notification;

(iii) rights, privileges, obligations and liabilities shall be determined

and be enforceable in accordance with clauses (i) and (ii) and

the notification;

(iv) any right, privilege, obligation on liability accrued or incurred

before the undertaking was declared a relief undertaking and

PRACTICAL ASPECTS OF INSOLVENCY LAW

609

any remedy for the enforcement thereof shal be suspended

and al proceedings relative thereto pending before any Court,

tribunal, officer or authority shal be stayed;

(b) the right, privilege, obligation and liability referred to in clause (a)(iv)

shall, on the notification ceasing to have force, revive and be enforceable

and the proceedings referred to therein shal be continued :

Provided that in computing the period of limitation for the enforcement of

such right, privilege, obligation or liability, the period during which it was

suspended under clause (a)(iv) shall be excluded notwithstanding anything

contained in any law for the time being in force.

(2) A notification under sub-Section (1) shal have effect from such date,

not being earlier than the date referred to in sub-Section (1) of Section 3,

as may be specified therein, and the provisions of Section 21 of the

Bombay General Clauses Act, 1904, shal apply to the power to issue

such notification.’

52. On the other hand, the Insolvency and Bankruptcy Code, 2016 is an Act

to consolidate and amend the laws relating to reorganisation and insolvency

resolution, inter alia, of corporate persons. Insofar as corporate persons are

concerned, amendments are made to the following enactments by Sections

249 to 252 and 255 :

“249. Amendments of Act 51 of 1993.

The Recovery of Debts due to Banks and Financial Institutions Act, 1993

shal be amended in the manner specified in the Fifth Schedule.

250. Amendments of Act 32 of 1994.

The Finance Act, 1994 shal be amended in the manner specified in the

Sixth Schedule.

251. Amendments of Act 54 of 2002.

The Securitisation and Reconstruction of Financial Assets and

Enforcement of Security Interest Act, 2002 shall be amended in the manner

specified in the Seventh Schedule.

252. Amendments of Act 1 of 2004.

The Sick Industrial Companies (Special Provisions) Repeal Act, 2003

shal be amended in the manner specified in the Eighth Schedule….

255. Amendments of Act 18 of 2013.

The Companies Act, 2013 shal be amended in the manner specified in

the Eleventh Schedule.”

610

PRACTICAL ASPECTS OF INSOLVENCY LAW

53. It is settled law that a consolidating and amending Act like the present

Central enactment forms a code complete in itself and is exhaustive of the

matters dealt with therein. In Ravula Subba Rao v. Commissioner of Income-

tax [1956] SCR 577, this Court held :

‘The Act is, as stated in the preamble, one to consolidate and amend the

law relating to income-tax. The rule of construction to be applied to such

a statute is, thus, stated by Lord Herschel in Bank of England v. Vagliano

[1891] AC 107, 141 :

“I think the proper course is in the first instance to examine the

language of the statute, and to ask what is its natural meaning,

uninfluenced by any considerations derived from the previous state of

the law, and not to start with inquiring how the law previously stood,

and then, assuming that it was probably “intended to leave it unaltered...”

We must, therefore, construe the provisions of the Indian Income-tax

Act as forming a code complete in itself and exhaustive of the matters

dealt with therein, and ascertain what their true scope is.” (at page

585) Similarly in Union of India v. Mohindra Supply Co. [1962] 3

SCR 497, this Court held :

“The Arbitration Act, 1940 is a consolidating and amending statute and is

for al purposes a code relating to arbitration. In dealing with the interpretation

of the Indian Succession Act, 1865, the Privy Council in Narendra Nath

Sircar v. Kamlabasini Desai [1896] LR 23, IA 18 observed that a code

must be construed according to the natural meaning of the language used

and not on the presumption that it was intended to leave the existing law

unaltered. The Judicial Committee approved of the observations of Lord

Herschell in Bank of England v. Vagliano Brothers [1891] AC 107, 144-

145] to the fol owing effect :

“I think the proper course is in the first instance to examine the language

of the statute and to ask what is its natural meaning uninfluenced by any

considerations derived from the previous state of the law, and not to start

with enquiring how the law previously stood, and then, assuming that it

was probably intended to leave it unaltered, to see if the words of the

enactment wil bear an interpretation in conformity with this view. If a

statute, intended to embody in a code a particular branch of the law, is to

be treated in this fashion, it appears to me that its utility wil be almost

entirely destroyed, and the very object with which it was enacted wil be

frustrated. The purpose of such a statute surely was that on any point

specifically dealt with by it the law should be ascertained by interpreting

the language used instead of, as before, by roaming over a vast number

PRACTICAL ASPECTS OF INSOLVENCY LAW

611

of authorities in order to discover what the law was, extracting it by a

minute critical examination of the prior decisions….” The Court in

interpreting a statute must, therefore, proceed without seeking to add

words which are not to be found in the statute, nor is it permissible in

interpreting a statute which codifies a branch of the law to start with the

assumption that it was not intended to alter the pre-existing law; nor to

add words which are not to be found in the statute, or “for which authority

is not found in the statute”.” (at pages 506-508) In Joseph Peter v. State

of Goa, Daman and Diu [1977] 3 SCC 280, this Court dealt with a Goa

regulation vis-a-vis the Code of Criminal Procedure. In that context, this

Court observed :

“A Code is complete and that marks the distinction between a Code and

an ordinary enactment. The Criminal Procedure Code, by that canon, is

self-contained and complete.” (at page 282) There can be no doubt, therefore,

that the Code is a Parliamentary law that is an exhaustive code on the

subject-matter of insolvency in relation to corporate entities, and is made

under Entry 9, List III in the 7th Schedule which reads as under :

“9. Bankruptcy and insolvency”

54. On reading its provisions, the moment initiation of the corporate

insolvency resolution process takes place, a moratorium is announced by

the adjudicating authority vide Sections 13 and 14 of the Code, by which

institution of suits and pending proceedings, etc., cannot be proceeded

with. This continues until the approval of a resolution plan under Section 31

of the said Code. In the interim, an interim resolution professional is appointed

under Section 16 to manage the affairs of corporate debtors under Section

17.

55. It is clear, therefore, that the earlier State law is repugnant to the later

Parliamentary enactment as under the said State law, the State Government

may take over the management of the relief undertaking, after which a

temporary moratorium in much the same manner as that contained in

Sections 13 and 14 of the Code takes place under Section 4 of the

Maharashtra Act. There is no doubt that by giving effect to the State law,

the aforesaid plan or scheme which may be adopted under the Parliamentary

statute wil directly be hindered and/or obstructed to that extent in that the

management of the relief undertaking, which, if taken over by the State

Government, would directly impede or come in the way of the taking over of

the management of the corporate body by the interim resolution professional.

Also, the moratorium imposed under Section 4 of the Maharashtra Act would

directly clash with the moratorium to be issued under Sections 13 and 14 of

612

PRACTICAL ASPECTS OF INSOLVENCY LAW

the Code. It wil be noticed that whereas the moratorium imposed under the

Maharashtra Act is discretionary and may relate to one or more of the matters

contained in Section 4(1), the moratorium imposed under the Code relates

to al matters listed in Section 14 and fol ows as a matter of course. In the

present case it is clear, therefore, that unless the Maharashtra Act is out of

the way, the Parliamentary enactment wil be hindered and obstructed in

such a manner that it wil not be possible to go ahead with the insolvency

resolution process outlined in the Code. Further, the non-obstante clause

contained in Section 4 of the Maharashtra Act cannot possibly be held to

apply to the Central enactment, inasmuch as a matter of constitutional law,

the later Central enactment being repugnant to the earlier State enactment

by virtue of article 254 (1), would operate to render the Maharashtra Act

void vis-a-vis action taken under the later Central enactment. Also, Section

238 of the Code reads as under :

“238. Provisions of this Code to override other laws.

The provisions of this Code shal have effect, notwithstanding anything

inconsistent therewith contained in any other law for the time being in

force or any instrument having effect by virtue of any such law.”

It is clear that the later non-obstante clause of the Parliamentary enactment

wil also prevail over the limited non-obstante clause contained in Section 4

of the Maharashtra Act. For these reasons, we are of the view that the

Maharashtra Act cannot stand in the way of the corporate insolvency

resolution process under the Code.

56. Dr. Singhvi, however, argued that the notification under the Maharashtra

Act only kept in temporary abeyance the debt which would become due the

moment the notification under the said Act ceases to have effect. We are

afraid that we cannot accede to this contention. The notification under the

Maharashtra Act continues for one year at a time and can go upto 15 years.

Given the fact that the timeframe within which the company is either to be

put back on its feet or is to go into liquidation is only 6 months, it is obvious

that the period of one year or more of suspension of liability would completely

unsettle the scheme of the Code and the object with which it was enacted,

namely, to bring defaulter companies back to the commercial fold or otherwise

face liquidation. If the moratorium imposed by the Maharashtra Act were to

continue from one year up to 15 years, the whole scheme and object of the

Code would be set at naught. Undeterred by this, Dr. Singhvi, however,

argued that since the suspension of the debt took place from July 2015

onwards, the appel ant had a vested right which could not be interfered with

by the Code. It is precisely for this reason that the non-obstante clause, in

PRACTICAL ASPECTS OF INSOLVENCY LAW

613

the widest terms possible, is contained in Section 238 of the Code, so that

any right of the corporate debtor under any other law cannot come in the

way of the Code. For al these reasons, we are of the view that the Tribunal

was correct in appreciating that there would be repugnancy between the

provisions of the two enactments. The judgment of the Appel ate Tribunal is

not correct on this score because repugnancy does exist in fact.

57. Both the Tribunal and the Appel ate Tribunal refused to go into the other

contentions of Dr. Singhvi, viz., that under the MRA, it was because the

creditors did not disburse the amounts thereunder that the appel ant was

not able to pay its dues. We are of the view that the Tribunal and the Appel ate

Tribunal were right in not going into this contention for the very good reason

that the period of 14 days within which the application is to be decided was

long over by the time the second application was made before the Tribunal.

Also, the second application clearly appears to be an after-thought for the

reason that the corporate debtor was ful y aware of the fact that the MRA

had failed and could easily have pointed out these facts in the first application

itself. However, for reasons best known to it, the appel ant chose to take up

only a law point before the Tribunal. The law point before the Tribunal was

argued on 22nd and 23rd December, 2016, presumably with little success.

It is only as an after-thought that the second application was then filed to

add an additional string to a bow which appeared to the appellants to have

already been broken.

58. Even otherwise, Shri Salve took us through the MRA in great detail. Dr.

Singhvi did likewise to buttress his point of view that having promised to

infuse funds into the appel ant, not a single naya paisa was ever disbursed.

According to us, one particular clause in the MRA is determinative on the

merits of this case, even if we were to go into the same. Under Article V

entitled “Representations and Warranties”, clause 20(t) states as fol ows :

“(t) Nature of obligations.

The obligations under this agreement and the other Restructuring

Documents constitute direct, unconditional and general obligations

of the Borrower and the Reconstituted Facilities, rank at least pari

passu as to priority of payment to all other unsubordinated

indebtedness of the Borrower other than any priority established under

applicable law.”

59. The obligation of the corporate debtor was, therefore, unconditional and

did not depend upon infusing of funds by the creditors into the appel ant

company. Also, the argument taken for the first time before us that no debt

614

PRACTICAL ASPECTS OF INSOLVENCY LAW

was in fact due under the MRA as it has not fal en due (owing to the default

of the secured creditor) is not something that can be countenanced at this

stage of the proceedings. In this view of the matter, we are of the considered

view that the Tribunal and the Appel ate Tribunal were right in admitting the

application filed by the financial creditor ICICI Bank Ltd.

60. The appeals, accordingly, stand dismissed. There shall, however, be no

order as to costs.

…………………………......J.

(R.F. Nariman)

…………………………......J.

(Sanjay Kishan Kaul)

New Delhi;

August 31, 2017.

PRACTICAL ASPECTS OF INSOLVENCY LAW

615

ANNEXURE X.25

NATIONAL COMPANY LAW APPELLATE TRIBUNAL, NEW DELHI

Company Appeal (AT) (Insolvency) No. 51 of 2017

(arising out of Order dated 19th April, 2017 passed by the National

Company Law Tribunal, Ahmedabad Bench in CP (IB) No. 5/7/NCLT/

AHM/ 2017).

IN THE MATTER OF:

Steel Konnect (India) Private Limited

....Appellant

Vs.

M/s Hero Fincorp Limited

...Respondent

Present:

For Appellant: - Shri Vivek Sibal, Ms. Pooja

M.Saizal, Advocates and Shri Ajoy Tola, C.A.

For Respondent: - Shri Venancio D’Costa and Ms. Astha

JUDGEMENT

Justice Sudhansu Jyoti Mukhopadhaya, Chairperson

The respondent M/s. Hero Fincorp Limited (hereinafter referred to as

‘Financial Creditor’) preferred an application under Section 7 of the

Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as ‘I & B

Code’), for initiation of Corporate Insolvency Resolution Process against

Appellant-’Corporate Debtor’. The Learned Adjudicating Authority (National

Company Law Tribunal), Ahmedabad Bench, by impugned order dated 19th

April 2017 in C.P. No. (IB) 05/NCLT/AHM/2017, admitted the application,

appointed an Interim Resolution Professional and passed order of

moratorium with certain observations and directions in terms of ‘I & B

Code’.

2. Learned Counsel for the appel ant submitted that the impugned order was

passed by the Adjudicating Authority in violation of Rules of natural justice

without giving any notice to the Appel ant - ‘Corporate Debtor’.

3. It was also submitted that no post filing notice under Rule 4(3) of the

Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules,

2016 (hereinafter referred to as ‘Adjudicating Authority Rules’) was given by

the respondent - “Financial Creditor”. A notice was served on appel ant,

616

PRACTICAL ASPECTS OF INSOLVENCY LAW

purported to be a notice under Rule 4(3), was pre-filing notice with wrong

date of admission of the application mentioned therein.

4. It was further submitted that a record of default recorded with the

information utility or a record of default available with any Credit Information

Company (CIBIL) or copies of entries in Banker’s book in accordance with

the Bankers Book Evidence Act, 1891 as required in terms of Form - I read

with Rule 4 of the Adjudicating Authority Rules was not filed. Reliance was

also placed on sub-section (3) of Section 7 to suggest that record of default

recorded with the information utility or such other record or evidence of

default as specified by Insolvency & Bankruptcy Board of India (IBBI) has

not been filed.

5. On the other hand, according to Learned Counsel for the respondents,

the appel ant has no locus to file this appeal after appointment of Interim

Resolution Professional, who has already taken over the management of

the ‘Corporate Debtor’. The powers of Board of Directors, since then stands

suspended in terms of Section 17(l)(a) & (b) of the ‘I & B Code’.

6. In so far as notice under Rule 4(3) is concerned, according to Learned

Counsel for the respondent proper notice was issued to the ‘Corporate Debtor’

who had appeared before Learned Adjudicating Authority on 17thApril 2017

and was given ample opportunity to present the case.

7. Relying on the decision of the Appellate Tribunal in Innoventive Industries

Ltd. v. ICICI Bank (Company Appeal (AT)(Ins.) Nos. 1 and 2 of 2017 decided

on 15th May 2017), it was contended that the Adjudicating Authority is

required to issue only a limited notice to the ‘Corporate Debtor’ before

admitting a case for ascertainment of existence of default. It was submitted

that along with application under Section 7 of ‘I & B Code’ preferred before

the Learned Adjudicating Authority, notice was issued to appel ant under

Rule 4(3) of the Adjudicating Authority Rules, intimating that the said

application is likely to be listed. Therefore, according to respondent there is

no violation of Rule 4(3) of the Rules or the principles of natural justice.

8. In so far as statement of account is concerned it was contended that

Learned Adjudicating Authority, before admitting the application under Section

7 of the ‘I & B Code’, is only required to ascertain whether there has been a

default of debt on the part of the ‘Corporate Debtor’. In the present case, the

‘Financial Creditor’, apart from filing the statement of accounts duly certified

by the office of the ‘Financial Creditor’s Company, filed records of default

which is available with CIBIL. In so far as Banker’s Book of Evidence Act,

1891 is concerned, it is submitted that the same is not applicable to the

non-banking financial companies.

PRACTICAL ASPECTS OF INSOLVENCY LAW

617

9. We have heard learned counsel for the parties and perused the record.

10. In “M/s. Innoventive Industries Limited Vs. ICICI Bank & Ann” - Company

Appeal (AT) (Insol.) No. 1 & 2 of 2017, this Appellate Tribunal by judgment

dated 15th May 2017, noticed the exception of the principle of rules of natural

justice, as fol ows: —

“42. From the aforesaid decisions of Hon’ble Supreme Court, the

exception on the Principle of Rules of natural justice can be summarised

as follows: —

(i) Exclusion in case of emergency,

(i ) Express statutory exclusion,

(iii) Where discloser would be prejudicial to public interests,

(iv) Where prompt action is needed,

(v) Where it is impracticable to hold hearing or appeal,

(vi) Exclusion in case of purely administrative matters,

(vi ) Where no right of person is infringed,

(vii ) The procedural defect would have made no difference to the outcome,

(ix) Exclusion on the ground of ‘no fault’ decision maker etc.”

11. In the said case this Appel ate Tribunal, taking into consideration the

facts that though notice was not issued to “M/s. Innoventive Industries

Limited” (Appel ant), but the said appel ant having appeared and heard by

Adjudicating Authority at the time of admission of the application under

Section 9 of the ‘I & B Code’, observe and held as under: —

“65. In the present case though no notice was given to the Appel ant

before admission of the case but we find that the Appel ant intervened

before the admission of the case and al the objections raised by appellant

has been noticed, discussed and considered by the ‘adjudicating authority’

while passing the impugned order dated 17th January 2017. Thereby, merely

on the ground that the Appellant was not given any notice before admission

of the case cannot render the impugned order illegal as the Appellant has

already been heard. If the impugned order is set aside and the case is

remitted back to the adjudicating authority, it would be ‘useless formality’

and would be futile to order its observance as the result would not be

different. Therefore, order to fol ow the principles of natural justice in the

present case does not arise.”

12. In the present case we find that the respondent issued post filing notice

618

PRACTICAL ASPECTS OF INSOLVENCY LAW

under Rule 4(3) along with application under Section 7 of ‘I & B Code’. In the

said notice date of hearing was shown as 11th April 2017 but the matter was

listed before the Adjudicating Authority, a day earlier on 10th April 2017. In

the aforesaid background, the Adjudicating Authority adjourned the matter,

and directed to issue notice on respondent. When the application was taken

up for admission on 19th April 2017, the appel ant appeared through their

lawyers, Mr. Ketan Parikh with Mr. Pavan Godiawala. Paragraph 6 of the

impugned order dated 19th April 2017 suggests that both the counsel for the

“Financial Creditor” (Respondent) and “Corporate Debtor” (Appellant) were

heard wherein after the impugned order was passed.

In the aforesaid background, we hold that even if it is presumed that no

separate notice was issued by Adjudicating Authority to the “Corporate

Debtor”, the appel ant having heard before passing the impugned order, the

question of remitting the case for hearing on the ground of non-compliance

of principles of natural justice does not arise as it will be futile. For the

reason aforesaid we are not inclined to interfere with the impugned order

dated 19th April 2017 on the ground that no notice was issued to appel ant

by the Adjudicating Authority.

13. For the same reason, we also reject the plea taken by the appellant that

the notice under Rule 4(3) of the Adjudicating Authority Rules was a pre-

filing notice, wrong date of hearing having shown therein.

14. Whether enclosures of record of default or copies of entries in Banker’s

Book as required in terms of Form - 1, read with Rule 4 of the Adjudicating

Authority Rules and sub-section (3) of Section 7 of the ‘I & B Code’, is

mandatory or not fel for consideration before this Appel ate Tribunal in

Neelkanth Township & Construction (P.) Ltd. v. Urban Infrastructure

Trustees Ltd. - Company Appeal (AT) (Insolvency) No. 44 of 2017 by its

judgment dated 11thAugust 2017. In the said case, this Appellate Tribunal

held:

’18. It is wel settled that rules of procedure are to be construed not to

frustrate or obstruct the process of adjudication under the substantive

provisions of law. A procedural provision cannot override or affect the

substantive obligation of the adjudicating authority to deal with applications

under Section 7 merely on the ground that Board has not stipulated or

framed Regulations with regard to sub-section 3(a) of Section 7. The

language of Section 240, whereby Board have been empowered to frame

regulations is clear that the said regulation should be consistent with the

‘I & B’ Code and the rules made thereunder by the Central Government.

19. In exercise of power conferred by Section 239 read with Sections 7,

PRACTICAL ASPECTS OF INSOLVENCY LAW

619

8, 9 and 10 of the ‘I&B code, the Central Government framed the rules

known as “Insolvency & Bankruptcy (Application to Adjudicating Authority)

Rules, 2016 (hereinafter referred to as ‘Adjudicating Authority Rules, 2016).

As per Rule 41, a ‘Financial Creditor’ required to apply itself or jointly in an

application under Section 7 in terms of Form-1 attached thereto. Part V of

Form-1 deals with particulars of ‘Financial Debt’ (documents, record and

evidence of default), as quoted below: —

“PART V

PARTICULARS OF FINANCIAL DEBT [DOCUMENTS,

RECORDS AND EVIDENCE OF DEFAULT]

1. PARTICULARS OF SECURITY HELD, IF ANY, THE DATE OF ITS

CREATION, ITS ESTIMATED VALUE AS PER THE CREDITOR. ATTACH

A COPY OF A CERTIFICATE OF REGISTRATION OF CHARGE ISSUED

BY THE REGISTRAR OF COMPANIES (IF THE CORPORATE DEBTOR IS

A COMPANY)

2. PARTICULARS OF AN ORDER OF A COURT, TRIBUNAL OR ARBITRAL

PANEL ADJUDICATING ON THE DEFAULT, IF ANY (ATTACH A COPY OF

THE ORDER)

3. RECORD OF DEFAULT WITH THE INFORMATION UTILITY, IF ANY

(ATTACH A COPY OF SUCH RECORD)

4. DETAILS OF SUCCESSION CERTIFICATE, OR PROBATE OF A WILL,

OR LETTER OF ADMINISTRATION, OR COURT DECREE (AS MAY BE

APPLICABLE), UNDER THE INDIAN SUCCESSION ACT, 1925 (10 of

1925) (ATTACH A COPY)

5. THE LATEST AND COMPLETE COPY OF THE FINANCIAL CONTRACT

REFLECTING ALL AMENDMENTS AND WAIVERS TO DATE (ATTACH A

COPY)

6. A RECORD OF DEFAULT AS AVAILABLE WITH ANY CREDIT

INFORMATION COMPANY (ATTACH A COPY)

7. COPIES OF ENTIRES IN A BANKERS BOOK IN ACCORDANCE WITH

THE BANKERS BOOKS EVIDENCE ACT, 1891 (18 of 1891)

8. LIST OF OTHER DOCUMENTS ATTACHED TO THIS APPLICATION IN

ORDER TO PROVE THE EXISTENCE OF OPERATIONAL DEBT AND

THE AMOUNT IN DEFAULT”

620

PRACTICAL ASPECTS OF INSOLVENCY LAW

20. The rules framed by the Central Government under Section 239 having

prescribed the documents, record and evidence of default as noticed

above, we hold that in absence of regulation framed by the Board relating

to record of default recorded with the information utility or other record of

evidence of default specified, “the documents”, ‘record’ and ‘evidence of

default’ prescribed at Part V of Form-1, of the Adjudicatory Rules, 2016

wil hold good to decide the default of debt for the purpose of Section 7 of

the ‘I & B Code’.

21. We further hold that the ‘Regulations framed by the Board’ being subject

to the provisions of ‘I & B Code’ and rules framed by the Central

Government under Section 239, ‘Part V of Form - 1 of Adjudicating

Authority Rules, 2016 framed by Central Government relating to

‘documents’, ‘record’ and ‘evidence of default’, will override the regulations,

if framed by the Board and if inconsistent with the Rule. However, it is

always open to Board to prescribe additional records in support of default

of debt, such as records of default recorded with the information utility or

such other record or evidence of default in addition to the records as

mentioned in Part V of Form-I.

22. At this stage, it is pertinent to note that the Board has also framed

Insolvency Resolution Process for Corporate Persons, Regulations, 2016

(‘Corporate Persons Regulation’ for short). It has come into force since

Notification dated 30th November 2016 was issued. Regulation 8 of

‘Corporate Persons Regulation’, 2016 relate to claims by ‘Financial Creditor’.

Regulation 11(2) relates to existence of debt due to ‘Financial Creditor’,

which is to be proved on the basis documents mentioned therein and

quoted below:—

“8. Claims by financial creditors.

(1) A person claiming to be a financial creditor of the corporate debtor

shal submit proof of claim to the interim resolution professional in

electronic form in Form C of the Schedule:

Provided that such person may submit supplementary documents or

clarifications in support of the claim before the constitution of the

committee.

(2) The existence of debt due to the financial creditor may be proved on

the basis of—

(a) the records available with an information utility, if any; or

(b) other relevant documents, including -

PRACTICAL ASPECTS OF INSOLVENCY LAW

621

(i) a financial contract supported by financial statements as

evidence of the debt;

(i ) a record evidencing that the amounts committed by the financial

creditor to the corporate debtor under a facility has been drawn

by the corporate debtor;

(i i) financial statements showing that the debt has not been repaid; or

(iv) an order of a court or tribunal that has adjudicated upon the

non-payment of a debt, if any.”

23. ‘Form - C’ attached to the Regulation relates to proof of claim of

‘Financial Creditor’ whereunder at Serial No. 10, the ‘Financial Creditor’ is

supposed to refer the list of documents in proof of claim in order to prove

the existence and non-payment of claim dues to the ‘Operational Creditor’.

Therefore, the stand of the appel ant that the Board has not framed any

Regulations, relating to clause (a) of sub-section (3) of Section 7, cannot

be accepted.’

15. The case of the appel ant is covered by the decision in “Neelkanth

Township & Construction (P.) Ltd. (supra)”. For the said reason, the

contention with regard to documents, records and evidence of default as

raised by appel ant is also rejected.

For determination of the issue whether the “Corporate Debtor” can prefer

appeal under Section 61 of the ‘I & B Code’ through the Board of Directors,

which stand suspended after admission of an application it is necessary to

refer to Section 17, which reads as follows:—

“17. Management of affairs of corporate debtor by interim resolution

professional. —

(1) From the date of appointment of the interim resolution professional, —

(a) the management of the affairs of the corporate debtor shal vest in

the interim resolution professional;

(b) the powers of the board of directors or the partners of the corporate

debtor, as the case may be, shal stand suspended and be exercised

by the interim resolution professional;

(c) the officers and managers of the corporate debtor shal report to the

interim resolution professional and provide access to such documents

and records of the corporate debtor as may be required by the interim

resolution professional;

622

PRACTICAL ASPECTS OF INSOLVENCY LAW

(d) the financial institutions maintaining accounts of the corporate debtor

shal act on the instructions of the interim resolution professional in

relation to such accounts and furnish al information relating to the

corporate debtor available with them to the interim resolution

professional.

(2) The interim resolution professional vested with the management of

the corporate debtor shall—

(a) act and execute in the name and on behalf of the corporate debtor all

deeds, receipts, and other documents, if any;

(b) take such actions, in the manner and subject to such restrictions, as

may be specified by the Board;

(c) have the authority to access the electronic records of corporate debtor

from information utility having financial information of the corporate debtor;

(d) have the authority to access the books of account, records and other

relevant documents of corporate debtor available with government

authorities, statutory auditors, accountants and such other persons

as may be specified”

16. From Clause (a) of sub-section (1) of Section 17 while it is clear that the

Management of affairs of the ‘Corporate Debtor’ stand vested with the ‘Interim

Resolution Professional’, such vesting is limited and restricted to the extent

of power vested under sub-section (2) of Section 17 which empowers the

‘Interim Resolution Professional’ to act and execute in the name of ‘Corporate

Debtor’ all deeds, receipts, and other documents, if any, to take such action

in the manner and subject to such restrictions, as may be specified by the

Board and have access of authority to the electronic records of ‘Corporate

Debtor’, books of account, records etc.

From the aforesaid provision we find that “Interim Resolution Professional’’

has not been vested with any specific power to sue any person on behalf of

the ‘Corporate Debtor’. However, in case of such difficulty, it is always open

to the ‘Interim Resolution Professional’ to bring to the notice of the

Adjudicating Authority for appropriate order.

17. Admittedly, ‘Corporate Debtor’ was a party respondent to the resolution

process when application under Section 7 or 9 is preferred. The ‘Corporate

Debtor’ represented itself, at the initial stage before the Adjudicating Authority

through the Board of Directors or person authorised by the Board of Directors.

It is only after hearing the ‘Corporate Debtor’ the Adjudicating Authority can

pass an order under Section 7 or 9, admitting or rejecting the application.

PRACTICAL ASPECTS OF INSOLVENCY LAW

623

18. Once the application under Section 7 or 9 is admitted, the ‘Corporate

Insolvency Resolution Process’ starts in such case one of the aggrieved

party being the ‘Corporate Debtor’ has a right to prefer an appeal under

Section 61, apart from any other aggrieved person like Director(s) of the

company or members, who do not cease to be Director(s) or member(s), as

they are not suspended but their function as ‘Board of Director(s)’ is suspend.

19. The ‘Corporate Debtor’ if represented before the Adjudicating Authority

through its Board of Directors or any person authorised by Board of Directors

or its officers, for the purpose of preferring an appeal, no objection can be

raised that the ‘Corporate Debtor’ cannot appear through its Board of Directors

or authorised person or officer through whom ‘Corporate Debtor’ represented

before the Adjudicating Authority.

Once a ‘Corporate Debtor’ appeared before the Adjudicating Authority through

its Board of Director(s) or its officers or through authorised person and is

heard before admission of an application under ‘I & B Code’, being aggrieved

such ‘Corporate Debtor’ cannot prefer an appeal under Section 61 on the

ground that the ‘Corporate Debtor’ appeared through another person ‘Interim

Resolution Professional’, though he had not appeared before the Adjudicating

Authority.

20. Though the Board of Directors or partners of ‘Corporate Debtor’, as the

case may be is suspended and their power can be exercised by the ‘Interim

Resolution Professional’, but such exercise of power is limited to the extent

to sub-section (2) of Section 17 of the ‘I & B Code’ and not for any other

purpose. If the matter is looked from another angle, it wil be clear as to why

‘Corporate Debtor’ should not be represented through ‘Interim Resolution

Professional’ for preferring an appeal under Section 61 of the ‘I & B Code’.

The Role of ‘Interim Resolution Professional’ starts after initiation of ‘Corporate

Insolvency Resolution Process’ against the ‘Corporate Debtor’. The ‘Interim

Resolution Professional’ once given consent to function directly or indirectly

he cannot challenge his own appointment, except in case where he has not

given consent. If the ‘Corporate Debtor’ is left in the hands of ‘Interim

Resolution Professional’ to raise his grievance by filing an appeal under

Section 61, it will be futile, as no ‘Interim Resolution Professional’ will

chal enge the initiation of ‘Insolvency Resolution Process’ which ultimately

result into the chal enge of his appointment.

21. For example, if an application under Section 7 or 9 is admitted and at

the stage of admission, the ‘Interim Resolution Professional’ is not appointed

and such appointment is made later on within 14 days of admission under

Section 16, then in case of appointment of an ineligible ‘Interim Resolution

624

PRACTICAL ASPECTS OF INSOLVENCY LAW

Professional’ against whom a Departmental proceeding is pending, can the

‘Corporate Debtor’ prefer appeal under Section 61 challenging the appointment

of ‘Interim Resolution Professional’, if the ‘Corporate Debtor’ is asked to be

represented through the same very ‘Interim Resolution Professional’? The

answer wil be in negative means a ‘Corporate Debtor’ in such case cannot

be represented to the ‘Interim Resolution Professional’, whose appointment

is under challenge and for all purpose to be represented through the person

who represented the ‘Corporate Debtor’ at the stage of admission before the

Adjudicating Authority.

22. At this stage, it is desirable to notice that though pursuant to Section

17, the ‘Board of Directors’ of a ‘Corporate Debtor’ stand suspended (for a

limited period of ‘Corporate Resolution Process maximum 180 days or

extended period of 90 days i.e. 270 days), but they continued to remain as

Directors and members of the Board of Directors for all purpose in the records

of Registrar of Companies under the Companies Act, 2013.

23. For the reasons aforesaid, we also reject the plea taken by Learned

Counsel for the appel ant that the “Corporate Debtor” has no locus to prefer

appeal under sub-section (1) of Section 61 through its Board of Directors or

authorise person or its officers except through the “Interim Resolution

Professional”.

24. We find no merit in this appeal. It is accordingly dismissed. However, in

the facts and circumstances of the case the parties shal bear the respective

costs.

(Balvinder Singh)

(Justice S.J. Mukhopadhaya)

Member (Technical)

Chairperson

NEW DELHI

29th August 2017

PRACTICAL ASPECTS OF INSOLVENCY LAW

625

ANNEXURE X.26

IN THE NATIONAL COMPANY LAW TRIBUNAL MUMBAI BENCH

MA 701 in C.P. 1055/I&BP/2017

Under section 33 & 60(5) of the IBC, 2016

In the matter of

Roofit Industries Limited

Jitender Kumar Jain

Resolution Professional

.... Applicant

Order delivered on 22.01.2018

Coram: Hon'ble Mr. B.S.V. Prakash Kumar, Member (Judicial)

Hon'ble Mr. V. Nal asenapathy, Member (Technical)

For the Applicant :

Jitender Kumar Jain

Resolution Professional

Per V. Nallasenapathy, Member (Technical)

ORDER

1. Mr. Jitender Kumar, the Resolution Professional of Roofit Industries Ltd.

filed this Application under sections 33 and under section 60(5) of the

Insolvency & Bankruptcy Code (the Code), praying for the fol owing reliefs :

(a) Pending disposal of this application, the Applicant be al owed to

continue to act as the Resolution Professional of the Corporate Debtor

from 26th December, 2017 til final disposal of this application.

(b) The Corporate Debtor be liquidated in terms of the provisions of the

Chapter - III of the Insolvency Code.

(c) To appoint some other insolvency professional as the liquidator of

the Corporate Debtor (in place of the Resolution Professional because

the Resolution Professional is unwilling to act liquidator of the

Corporate Debtor) as per the provisions of section 34 of the Insolvency

Code.

(d) To allow the payment of remuneration to the Applicant / Resolution

Professional for the period starting from 26th December, 2017 till

626

PRACTICAL ASPECTS OF INSOLVENCY LAW

final disposal of this application for acting as the Resolution

Professional of the Corporate Debtor at a rate equal to the

remuneration paid during the CIRP period as part of Corporate

insolvency resolution process cost or liquidation case, as the case

may be.

(e) Any other relief or reliefs in favour of the Applicant/ Corporate Debtor

as this Hon'ble Tribunal deems fit and proper.

2. The Corporate Debtor M/s. Roofit Industries Ltd. was put on in Insolvency

Resolution process, on its own Petition under section 10 of the Code, by an

Order of this Adjudicating Authority dated 28.06.2017. The Applicant herein

was appointed as Interim Resolution Professional, he has made a public

announcement of insolvency resolution process in two newspapers and on

the website of Insolvency and Bankruptcy Board of India (lBBI).

3. In the first meeting of the Committee of Creditors (CoC) held on 27.7.2017,

the Applicant was confirmed as Resolution Professional as per Section 22

of the Code. The Corporate Insolvency resolution period expired on

26.12.2017 and no extension of the Corporate Insolvency Resolution period

was sought. The Applicant states that no resolution plan has been received

and hence this Application is filed under section 33 of the Code seeking

Liquidation Order.

4. The Petition reveals that the fol owing are the immoveable properties of

the Corporate Debtor:

No.

Particulars

Type of

Property

1.

B-15, MIDC Mirjole, Ratnagiri - 415 639, Cement

Land, Building

Sheet Factory

& Plant &

Machinery

2.

Plot No.379, Village Abitghar, Taluka Wada, Dist.

Land, Building

Thane 421 363 Gat No.379-B (part) &

Plant &

Machinery

3.

B-42, SIPCOT Industrial Complex,

Land, Building

Gummidipoondi - 601 201, Chennai Survey

& Plant &

No.12 part, 13 part, 14 part & 19 part land

Machinery

4.

Survey No.206-207, District- Trivellore, Taluka

Land &

Gummidipoondi, Chennai.

Building

5.

Shop No.l , 5th floor, Topaz Building, Panjagutta,

Shop

Hyderabad.

PRACTICAL ASPECTS OF INSOLVENCY LAW

627

6.

A-91/92, MIDC Daund, Pune-Solapur Road,

Plant &

Kurkhumbh 413801 Plot No.A-91 and A-92

Machinery, Land

and Building

7.

E-25, MIDC, Chikalthana, Aurangabad - 431210

Land &

Plot No.E-25

Building

8.

2nd floor, South Square Building, Near Manorama Office

Junction, Ernakulam

9.

Plot No.39, B-Nanji Industrial Estate, S.

Land &

No.200/1/2, Village Kharadpada, Silvasa -

Building.

396203

5. The Petition further reveals that previously the assets of the Corporate

Debtor were attached under the provisions of Maharashtra Protection of

Interest of Depositors (in Financial Establishment) Act, 1999 by the

competent authority under the said Act and subsequently the said attachment

was released by the MPID Court by its Order dated 18.8.2017 made in an

Application filed by the Resolution Professional, which is inclusive of a sum

of Rs.40,00,000 in cash plus interest accrued. However, the said sum of

Rs. 40,00,000 is not yet received by the Resolution Professional.

6. The Petition also reveals that the valuation of properties was undertaken

by me resolution Professional by appointing two Valuers and the Report is

also enclosed. After the receipt of liquidation value of the Corporate Debtor,

two advertisements inviting expression of interest in terms of Section 25 of

the Code was given. The Petition further reveals that the fol owing expressions

of interest was received by the Applicant:

(a) Robuster Constructware LLP in respect of Kurkumbh property.

(b) PR Developers in respect of al the properties.

(c) Gummidipoondi Roofit Employees' Welfare Foundation for B-42

Gummidipoondi factory.

(d) Phoenix ARC Private Limited as resolution applicant.

(e) Madras Building Products Private Limited for B-42 Gummidipoondi

Factory.

(f) Mr. E. C. John in respect of Wada property.

7. The Applicant further submits that the fol owing two proposals were

received in respect of B-42 Gummidipoondi Factory :

(a) Gummidipoondi Roofit Employees' Welfare Foundation of 17

December, 2017.

628

PRACTICAL ASPECTS OF INSOLVENCY LAW

(b) Madras Building Products Private Limited on 18 December, 2017.

The above proposals were laid before the fourth meeting of the CoC held on

21 December, 2017.

8. The Applicant further states that Resolution Plan from Gummidipoondi

Roofit Employees' Welfare Association, which is only in respect of B-42

Gummidipoondi Factory (excluding other units), was received on the night

of 20th December, 2017 i.e. less than one day prior to the CoC meeting

scheduled at 11 a.m. on 21.12.2017 the said Resolution Plan was not

presented before the CoC because of the reason that the Resolution

Professional did not have enough time to examine the Resolution Plan.

However, the same was informed to the Coc.

9. Since the CIRP period of 180 days ended on 26.12.2017 and no Resolution

Plan for the Corporate Debtor is received by the Resolution Professional,

except for B-42 Gummidipoondi Factory only, submitted by the

Gummidipoondi Roofit Employees' Welfare Association, the Resolution

Professional filed this Application for liquidation under section 33 of the

Code. Considering the fact that the Resolution Plan submitted by the above

said Employees' Association is only in respect of Gummjidipoondi Factory

excluding other units, this Bench is of the view that the Resolution Plan

cannot be considered for a particular unit excluding others and hence, the

same cannot be considered as a Resolution at al under the Code.

10. On hearing the submissions of the Applicant and on reading the

Application and the documents enclosed therein, for the RP has complied

with the procedure laid under the Code r/w Regulations of CIRP, for the

valuation report filed by the valuer has not been disputed by the CoC, on

verification, we are of the view that this case is fit to pass liquidation order

as mentioned under sub-section 2 of section 33 of the Code and accordingly,

the Corporate Debtor is ordered to be liquidated.

11. The Resolution Professional/Applicant herein has stated that he is not

wil ing to act as a Liquidator of the Corporate Debtor. However, section 34(

1) of the Code provides that where the Adjudicating Authority passes an

order for Liquidation of the Corporate Debtor under section 33, the Resolution

Professional appointed for the Corporate Insolvency resolution process under

Chapter - II shall act as a liquidator for the purpose of liquidation unless

replaced by the Adjudicating Authority under sub-section (4). In view of this

provision, this Adjudicating Authority cannot concede the request of the

Applicant. Apart from this, the Resolution Professional having dealt with

the Corporate Debtor during the last six months it is not advisable to make

somebody else as Liquidator because of the mere reason that no funds are

PRACTICAL ASPECTS OF INSOLVENCY LAW

629

available with the Corporate Debtor to pay the remuneration for RP.

12. Consequently, the Applicant Resolution Professional is appointed as

the Liquidator as provided under section 34( 1) of the Code. Al powers of

the board of directors, key managerial personnel and the partners of the

corporate debtor, as the case may be, shal cease to have effect and shall

be vested in the liquidator;

13. This Bench hereby directs the personnel of the corporate debtor to extend

al assistance and cooperation to the liquidator as may be required by him

in managing the affairs of the corporate debtor.

14. Since Liquidation order has been passed no suit or other legal

proceedings shal be instituted by or against the Corporate Debtor, save

and except as mentioned in section 52 of the Code, as to institution of legal

proceedings by the Liquidator, he is at liberty to initiate suit or legal

proceedings with prior approval of this Adjudicating Authority, but this

direction shall not apply to legal proceedings in relation to such transactions

as may be notified by the Central Government in consultation with any

financial sector regulator.

15. This order shal be deemed to be a notice of discharge to the officers,

employees and workmen of the Corporate Debtor except to the extent of

business the Corporate Debtor carrying.

16. We hereby direct that the fee shal be paid to the Liquidator as envisaged

under Regulation 4 of IBBI (Liquidation Process) Regulations, which forms

part of the liquidation cost.

17. The Liquidator appointed herein is directed to issue public announcement

stating that the Corporate Debtor is in liquidation and also required to send

the copy of this Order to the concerned Registrar of Companies as required

under section 33(1) of the Code.

18. Accordingly, this Application is hereby al owed directing the Liquidator

appointed in this case to initiate liquidation process as envisaged under

Chapter-III of Insolvency and Bankruptcy Code 2016 by following the

liquidation process given in IBBI (Liquidation Process) Regulations 2016.

Sd/-

Sd/-

V. NALLASENAPATHY

B. S.V. PRAKASH KUMAR

Member (Technical)

Member (Judicial)

NOTES

Document Outline

1-77 Chapter 1 to 6.pdf

78-139 Chapter 7.pdf

140-209 Chapter 8-10.pdf

210-628 Annexure.pdf

1-77 Chapter 1 to 6.pdf

78-139 Chapter 7.pdf

140-209 Chapter 8-10.pdf

210-628 Annexure.pdf