CAN SUPREME COURT USE ARTICLE 142 OF THE CONSTITUTION TO PUT QUIETUS TO THE ISSUE WHEN NCLAT WAS RELECTANT TO TAKE RECOGNITION THE COMPROSISE BETWEEN DEBTOR AND CREDITOR IN THE CIRP PROCEEDIGNS ALREADY COMMENCED UNDER IBC 2016?

CAN SUPREME COURT USE ARTICLE 142 OF THE CONSTITUTION TO PUT QUIETUS TO THE ISSUE WHEN NCLAT WAS RELECTANT TO TAKE RECOGNITION THE COMPROSISE BETWEEN DEBTOR AND CREDITOR IN THE CIRP PROCEEDIGNS ALREADY COMMENCED UNDER IBC 2016?

Lokhandwals Kataria Construction P Ltd vs Nisus Finance and Investment Managers LLP

FACTS OF THE CASE

The Mumbai bench of the National Company Law Tribunal (NCLT) on 15 June initiated a corporate insolvency resolution process against the debtor. 

Later, the company and the creditor approached the National Company Law Appellate Tribunal (NCLAT) saying that the two had settled the dispute and that some of the dues had already been paid.

NCLAT said on 13 July 2017 that under the IBC 2016, a case can be withdrawn before the admission of an insolvency case, and not after that. 

The parties then filed a plea with the Supreme Court, which allowed a settlement to be considered under article 142 of the Indian constitution. 

WHAT IS THE MEANING OF QUITEUS ORDER UNDER ARTICLE 142 OF THE CONSTITUTION?

Article 142 provides that “the Supreme Court in the exercise of its jurisdiction may pass such decree or make such order as is necessary for doing complete justice in any cause or matter pending before it”. 

RECOMMENDATION

As of now, there is no provision under IBC 2016 to order a winding up case as closed when the parties to the dispute have made an out-of-court settlement.

The government may also consider amending the IBC to make provisions for settlement of insolvency proceedings once a plea is admitted.

It should be noted that all the creditors should have come into compromise arrangement and not a single creditor in each case. In this case, the settlement is made between a debtor and a creditor. It is not known whether all the creditors have given their consent for the compromise as the compromise has been made with a single creditor.

The amendment should specify that a compromise is to be reached with the all the creditors and not with a single creditor or appellant alone. 

CORPORATE GUARANTEE WHICH HAS NOT BEEN INVOKED BEFORE COMMENCEMENT OF INSOLVENCY PROCESS CANNOT BE CONSIDERED AS DEBT SAYS NCLT, ALLAHABAD BENCH.

CORPORATE GUARANTEE WHICH HAS NOT BEEN INVOKED BEFORE COMMENCEMENT OF INSOLVENCY PROCESS CANNOT BE CONSIDERED AS DEBT SAYS NCLT, ALLAHABAD BENCH.

NCLT REJECTS EXIM BANK’S CLAIM OF RS 625 CRORE ON JEKPL

Allahabad bench of the bankruptcy court has rejected a plea from Exim Bank to treat its claim of Rs 625 crore on JEKPL Private Limited to be treated as financial debt after insolvency proceedings have been filed against the Allahabad-based firm.

The decision of Allahabad National Company and Law Tribunal (NCLT) is expected to further push lenders not to dither in filing insolvency proceedings after similar action has been taken by other creditors.

Exim Bank had approached NCLT after resolution professional Mukesh Mohan rejected its claim to treat the counter corporate guarantee of Rs 625 crore given to JEKPL as a valid claim under ‘financial debt’ and to include it in committee of creditors with a voting share proportional to amount of claims.

The bank had invoked its claim on March 30, almost two weeks after corporate insolvency resolution process (CIRP) was initiated against the company on March 17.

Adjudicating authority had already declared moratorium period when proceedings on the corporate debtor company are restrained.

 In its verdict, NCLT observed, “It is clear that corporate guarantee which has not been invoked before commencement of insolvency process cannot be considered as debt.”

 It said status of Exim Bank cannot be categorised as a financial creditor in the committee of creditors (COC).

“Therefore, we do not see any infirmity in the action of the resolution professional,” it said. NCLT in its verdict further observed that the resolution professional possesses necessary jurisdiction to consider claim of a particular class of creditors to be treated as financial creditors.

“In this case the RP has allowed the bank to be a permanent invitee in the committee of creditors (COC) but without voting rights for the purpose of resolution process (CIRP),”

Courtesy  Economic Times 

THE ROLE OF COMMITTEE OF CREDITORS (COC) IN (CIRP) CORPORATE INSOLVENCY RESOLUTION PROCESS UNDER THE INSOLVENCY AND BANKRUPTCY CODE, 2016

THE ROLE OF COMMITTEE OF CREDITORS (COC) IN (CIRP) CORPORATE INSOLVENCY RESOLUTION PROCESS UNDER THE INSOLVENCY AND BANKRUPTCY CODE, 2016

COMMITTEE OF CREDITORS (COC)

The Insolvency and Bankruptcy Code, 2016 (Code), however, envisages that if they fail to service the debt, the corporate in default undergoes corporate insolvency resolution process (CIRP). An Insolvency Professional (IP) carries on the business operations of the corporate as a going concern until the Committee of Creditors (CoC) draws up a resolution plan that would keep the business of the corporate going on for ever.

CORPORATE INSOLVENCY RESOLUTION PROCESS (CIRP)

The Code, as stated in the long title, requires a CIRP to (a) maximise value of assets of the corporate, and (b) while doing so, balance the interests of all the stakeholders, and assigns this responsibility primarily to the IP, and the CoC comprising non-related financial creditors. The Code maximizes the value by striking a balance between resolution and liquidation. It encourages and facilitates resolution in most cases where creditors would receive at least as much as they would in liquidation. This would happen where enterprise value is ‘sufficiently’ higher than the liquidation value. In such cases, resolution preserves and maximizes the enterprise value as a going concern. In the remaining cases, the Code facilitates liquidation as that maximizes the value for stakeholders.

RESOLUTION VS LIQUIDATION

The Code enables initiation of CIRP at the earliest, even at the very first default, when enterprise value is usually higher than the liquidation value and hence the CoC has the motivation to resolve insolvency of the corporate rather than liquidate it. It mandates resolution in a time bound manner to prevent decline in enterprise value with time, reducing motivation of the CoC to opt for liquidation. It facilitates resolution; makes a cadre of professionals available to run the corporate as a going concern; prohibits suspension or termination of supply of essential services; enables raising interim finances required for running the corporate; etc.

In contrast, the Code prohibits any action to foreclose, recover or enforce any security interest during CIRP and thereby prevents a creditor(s) from maximising his interests. It expects the creditors to recover their default amounts collectively from future earnings of the corporate rather than from sale of its assets.

PROWESS INTERNATIONAL PVT. LTD. VS. PARKER HANNIFIN INDIA PVT. LTD

In the matter of Prowess International Pvt. Ltd. Vs. Parker Hannifin India Pvt. Ltd., the NCLAT reiterated: “It is made clear that Insolvency Resolution Process is not a recovery proceeding to recover the dues of the creditors.” Further, the Code enables a financial creditor to trigger CIRP even when the corporate has defaulted to another creditor and thereby prevents any preferential treatment to a creditor over others.

PARKER HANNIFIN INDIA PVT. LTD. VS. PROWESS INTERNATIONAL PVT. LTD

In the matter of Parker Hannifin India Pvt. Ltd. Vs. Prowess International Pvt. Ltd., the NCLT observed: “The nature of insolvency petition changes to representative suit and the list does not remain only between a creditor and the corporate debtor.” Resolution maximizes the value of assets of the corporate and enables every stakeholder to continue with the corporate to share its fate. All of them stand to gain or lose from resolution, while stakeholders in a category receive similar treatment. In contrast, liquidation allows satisfaction of their claims one after another. If there is any surplus after satisfying the claims of one set of stakeholders fully, the claim of the next set of stakeholders is considered.

THE ROLE OF CIRP

On both counts, maximization of value of assets and balancing the interests, resolution triumphs over recovery as well as liquidation in most cases. Balancing interests under CIRP assumes significance as every corporate may not have enough resources at the commencement of CIRP to satisfy the claims of all stakeholders fully, while resolution provides an opportunity to the CoC to consider and balance their interests. In fact, the Code prescribes several balances in resolution process: repayment of at least liquidation value to operational creditors; repayment of interim finance in priority; approval of resolution plan by 75% voting power; etc.

The CIRP regulations also provide for several balances. They allow a dissenting financial creditor to exit at the liquidation value and thereby protect its interests. Many creditors, however, may not like to exit at the liquidation value. And those who exit, leave the enterprise value behind. This balances the interests of financial creditors’ inter-se while tilting the balance in favour of resolution.

A STATEMENT TO TAKE CARE OF THE INTERESTS OF ALL STAKEHOLDERS

The regulations also require a resolution plan to include a statement as to how it has dealt with the interests of all stakeholders, including financial creditors and operational creditors, of the corporate debtor. The judicial pronouncements require consideration of the interests of all stakeholders in a resolution.

PROWESS INTERNATIONAL PVT. LTD. VS. PARKER HANNIFIN INDIA PVT. LTD.,

In the matter of Prowess International Pvt. Ltd. vs. Parker Hannifin India Pvt. Ltd., the NCLAT held: “In the circumstances, instead of interfering with the impugned order, we remit the case to the Adjudicating Authority for its satisfaction whether the interest of all stakeholders have been satisfied ...”

PRABODH KUMAR GUPTA VS. JAYPEE INFRATECH LIMITED AND OTHERS

In the matter of Prabodh Kumar Gupta vs. Jaypee Infratech Limited and others, the NCLT observed: “..the position of present petitioner is undisputedly of stakeholders. Therefore, the IRP appointed by this Court in respect of the corporate debtor company is equally expected to consider and take care of the interests of the petitioner….”

Courtesy : IBBI Upadates July-September 2017