By Pooja Mahajan
The corporate insolvency resolution provisions of the Insolvency and Bankruptcy Code, 2016 (IBC) came into force on December 1, 2016. Nine months later, the Supreme Court has passed a detailed judgment in the matter of M/s Innoventive Industries Ltd. vs. ICICI Bank noting the paradigm shift in law brought about by the IBC and putting to rest certain interpretational issues that had arisen thereunder.
The ruling has its genesis in an application filed by ICICI Bank Limited (ICICI) before the National Company Law Tribunal, Mumbai (NCLT) to initiate corporate insolvency resolution process (CIRP) of Innoventive Industries Limited (Innoventive). Interestingly this was the first application filed under the IBC and has seen some twists and turns in its journey.
The application was filed by ICICI as a financial creditor of Innoventive, under Section 7 of the IBC, on account of default made by Innoventive in payment of amounts due under certain credit facilities availed from ICICI.
It was inter alia argued by Innoventive that as its liabilities stood suspended pursuant to a relief order passed by the Government of Maharashtra under the Maharashtra Relief Undertaking (Special Provisions Act) 1958 (MRUA) no amounts were due and payable by it to ICICI and hence, Section 7 application cannot be admitted. Rejecting the argument inter alia on the basis that the IBC had an overriding effect over the MRUA, NCLT admitted ICICI’s application, declared moratorium and appointed an Interim Resolution Professional (IRP).
The NCLT order was challenged by Innoventive before the National Company Law Appellate Tribunal (NCLAT). In a seminal order passed by NCLAT, it dismissed the appeal holding that while deciding Section 7 applications, NCLT is only to look at Section 7 ingredients– i.e. presence of debt and default, CIRP application being complete and no disciplinary proceedings being pending against the IRP. It also held that there is no repugnancy between MRUA and IBC as they both operate in different fields. However, since IBC has an overriding effect, it shall prevail over the provisions of MRUA.
Against the NCLAT order, an appeal was filed before the Hon’ble Supreme Court by Innoventive. One of the preliminary issues addressed by the Supreme Court was whether the appeal is maintainable as it had been filed by the erstwhile directors (in the name of Innoventive). The Supreme Court held that once an IRP is appointed to manage the company, the erstwhile directors, who are no longer in the management, cannot maintain the appeal on company’s behalf – and since in the present case, Innoventive was the sole applicant – the appeal was not maintainable.
Interestingly, the Supreme Court refused to dismiss the appeal on this score alone, noting that it is delivering a detailed judgment so that all courts and tribunals may take notice of the paradigm shift in the law. The Supreme Court undertook an in-depth examination of IBC provisions dealing with corporate insolvency resolution and inter alia laid down the following principles:
Supreme Court held that for triggering Section 7 (1) of the IBC, a default could be in respect of default of financial debt owed to any financial creditor of the corporate debtor – it need not be a debt owed to the applicant financial creditor.
The Supreme Court contrasted the IBC provisions relating to applications by financial and operational creditors. It held that under Section 8(1), an operational creditor is required to deliver a demand notice on the occurrence of a default and under Section 8(2), the corporate debtor can bring to the notice of the creditor, existence of a dispute or the record of pendency of a suit or arbitration proceedings, which is pre-existing. Existence of such a dispute will make the application of operational creditor inadmissible.
On the other hand, under Section 7, the moment NCLT is satisfied that a default has occurred, the application of the financial creditor must be admitted (unless it is incomplete). 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. Supreme Court held that 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.
The Supreme Court delved into case law and constitutional principles surrounding repugnancy between Central and State laws in the context of Article 254 of the Constitution. It held that the MRUA is repugnant to IBC as under the MRUA, the State Government may take over the management of the undertaking and impose moratorium in much the same manner as that contained in the IBC. It held that by giving effect to the MRUA, the plan/ scheme which may be adopted under the IBC will directly be hindered and/or obstructed and that there would be direct clash between moratoriums under the two statutes.
Supreme Court further held that the non-obstante clause of IBC will prevail over the non-obstante clause in the MRUA. On the issue of suspension of debt on account of the relief order under the MRUA, it held that on account of the non-obstante clause in the IBC, any right of the corporate debtor under any other law cannot come in the way of the IBC.
Key Takeaways
The Supreme Court ruling reinforces the primacy being accorded to the IBC by various stakeholders, including the government and the Reserve Bank of India While the NCLAT had already opined on principles of Section 7 (which have been upheld), there are some new principles laid down by the Supreme Court which merit attention.
Supreme Court has opined that Section 7 application can be filed by a financial creditor for default on another financial debt. So far, such cases have not been filed in NCLTs. Given the moratorium on recovery actions, so long as a financial creditor is being paid on time, there is no incentive for such creditor to file for CIRP on account of default of another financial debt. The incentive would only come if its debt is due later but the creditor fears that the company will not be able to service the debt when the time comes. It remains to be seen whether the Supreme Court ruling will give rise to increased applications by financial creditors for default on another’s debt.
On account of Court’s finding that the erstwhile directors cannot maintain an appeal on behalf of the company, appeals against admission orders of the NCLT will now need to be filed by the erstwhile management in their individual capacity (as shareholders or erstwhile management, aggrieved with the order). One interesting question that is likely to come up in coming weeks is the fate of existing appeals before the NCLAT and even decided applications where appeals have been filed by the erstwhile directors or promoters in the name of the company.
While the ruling primarily deals with Section 7, the Court also makes certain observations on Section 8 of the IBC. Importantly, it observes that under Section 8 (2), the corporate debtor can 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 and that such dispute must be pre-existing, i.e. existing before receipt of demand notice or invoice by the corporate debtor. These observations of the Hon’ble Supreme Court can be viewed as a broad affirmation of the NCLAT ruling in Kirusa Software Private Limited vs. Mobilox Innovations Private Limited in which NCLAT held that a ‘dispute’ under Section 8 (2) need not be pending in a suit or arbitration proceeding; however, the same must be ‘pending’ and cannot be raised for the first time by the corporate debtor while replying to a demand notice.
Lastly, interestingly the Court holds that debt may not be due if it is not payable in law or in fact and that debt is “due” i.e. payable unless interdicted by some law or has not yet become due in the sense that it is payable at some future date. However, at the same time, it rejected the argument of Innoventive on its debt being suspended as per MRUA on the basis that any right of the corporate debtor under any other law cannot come in the way of the IBC on account of the wide non-obstante clause in the IBC.
Pooja Mahajan is the Managing Partner at Chandhiok & Associates.