How do the rules of insolvency operate? Were rules of insolvency disrupted by judicial intervention by NCLAT in Essar case?

by Shardul S Shroff – Executive Chairman, Shardul Amarchand Mangaldas & Co. and Member of the Standing Committee of the Insolvency Law Committee (ILC)

Background and History of Insolvency Laws in Provincial Towns & Presidency Towns and Banking Recovery Laws in India and new law for insolvency in India

The dysfunctional Presidency Towns Insolvency Act, 1909 and the Provincial Insolvency Act of 1920 governed the insolvency and bankruptcy of natural persons and the provisions of the Companies Act Part VII (commencing from Sections 425 to 560) regulated the insolvency of corporate persons.

In August 2014 the Bankruptcy Law Reform Committee (BLRC) was constituted to study the corporate bankruptcy legal framework in India as there were serious concerns that India’s weak insolvency law was one of the several causes for the malfunctioning of its credit markets.

The World Bank’s Ease of Doing Business Index 2015 ranked India at an extremely low level, at 137 out of 189 countries for the Ease of Resolving Insolvencies based on various indicators such as time, cost of resolution or recovery for creditors, the management of a debtors’ assets during resolution, if permissible and during the insolvency proceedings, creditor participation and strength of the insolvency law framework.

The Insolvency & Bankruptcy Code, 2016 (IBC) was the end result of the TK Viswanathan Committee Report or the BLRC Report.

Financial firms were excluded since a separate proposal was made in June 2017 to introduce the Financial Resolution and Deposit Insurance Bill, 2017.  However, this Bill did not become law.

Previous laws like the Sick Industrial Companies (Special Provisions) Act, 1955, the Recovery of Debts Due to Banks & Financial Institutions Act, 1993 and the Securities & Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 were unsuccessful in resolving the huge non-performing asset problem of banks and financial institutions in India.  The fundamental shift conceptualised and recognised by BLRC was a changed strategy to shift the legal regime to a “creditor in possession” rather than “debtor in possession” regime.  This was to improve the resolution rate, displace failed promoters and render them ineligible to participate in corporate resolution or liquidation unless they cure the NPA overdues, and find new entrepreneurs capable of stepping in and taking over the corporate debtors who were insolvent or incapable of reworking their bank debt.  Finally, if nothing succeeded, to recover secured debt and liquidate the insolvent corporate debtors.

The Insolvency & Bankruptcy Code, 2016 was approved by the Parliament in May 2016 and its sections were progressively notified as having come into force pursuant to publication on the Official Gazette. Different dates were appointed for different provisions of the Code.

The Insolvency and Bankruptcy Board of India (IBBI) was constituted in October 2016 and it proactively prepared the various regulations to bring functionality to the IBC.

The Act has been implemented from December 1, 2016, as most of the regulations needed for operations and processes under the Code were made and were available by November/December, 2016.

The IBC has been amended several times to further the purpose of the IBC, for maximisation of value of assets, and to promote entrepreneurship, availability of credit and balancing the interest of all stakeholders including alteration in the order of priority of payment of government dues and to establish an Insolvency and Bankruptcy Board of India.

The last major amendment to IBC was made on June 6, 2018.

Currently, the IBC provisions have been activated only for corporate insolvency proceedings and personal insolvency provisions have yet to be notified[1].

Teething Problems for Corporate Insolvency Resolution Process under IBC

The provisions of Chapter II of the IBC were a new innovation to deal with resolution of potential liquidation of a corporate debtor (company) in a time-bound programme before actually ordering the company to be liquidated.

The Companies Act, 1956 and the Companies Act, 2013 did not provide for any structured competitive process to attempt to resolve the bankruptcy or defaults of the defaulter company with its consenting creditors except in relation to compromises, arrangements and amalgamations (under Section 391 of the Companies Act, 1956 and under Section 230 of the Companies Act, 2013).

The procedure for a compromise under company law is substantially different from the procedure of Corporate Insolvency Resolution under Chapter II of the IBC.

The provisions of Section 6 to 32 of the IBC require the Interim Resolution Professional (IRP) or the Resolution Professional (RP) to take control of the management and assets of the corporate defaulter (corporate debtor) and to receive and collate all the claims submitted by creditors to such IRP / RP, for enabling a principal and agency solution for creditors for moribund companies.

Upon admission of  a financial creditors’ or operational creditors’ application, Section 13(i)(b), Section 15, Section 18(1)(b), Section 25(2)(e) cast a duty on the IRP / RP to gather, collect and maintain a list of all claims of all types of creditors including secured financial creditors, unsecured financial creditors, unsecured operational creditors and other creditors.  This applies to cases of corporate debtor initiated applications also.

Under the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (“CIRP”) and Regulations 8 to 9A of Chapter IV of CIRP there are statutorily prescribed forms (Form B to Form F) for proof of claims by operational creditors, financial creditors, financial creditors in a class, proof of claim by a workmen or an employee, proof of claim for submission by an authorised representative of workmen and employees and proof of claim by creditors (other than financial creditors and operational creditors).  These claims are substantiated pursuant to Regulation 10, 12, 13 and 14 of CIRP and distinct evidence is sought from financial creditors pertaining to the details of any security held, the value of the security and such data as was given in Form C, Form CA and Form F as part of proof of claims of financial creditors.

The purpose of such detailed information pertaining to security interest and the value of the security and the date it was given, is deliberate as even at the stage of CIRP there is a recognised need to separate the type of creditors under CIRP (secured and unsecured) so that if the CIRP process fails and the liquidation process commences, the data collected at the CIRP stage is available for tally pursuant to collection of Forms C to G of the Insolvency and Bankruptcy Board of India (“Liquidation Process”) Regulations, 2016 (“Liquidation Regs”) and pursuant to Regulations 17 to 20 thereof[2].

Between the CIRP Regs and the Liquidation Regs information of a secured financial creditor, unsecured financial creditor, operational creditor and other creditors and workmen and employees are fully gathered and verified in the context of secured creditor charges filed by or for secured lenders and registered under Chapter VI of the Companies Act, 2013.  If a charge is proved the security interest of a secured financial creditor is established and binding against the Official Liquidator.  Chapter VI of the Companies Act, 2013 is a complete code on creating charges over corporate assets and property under India company law.  It specifically provides how a charge is registered, what is the extent of the charge, what is the priority of the charge, what are the modifications of any prior charge, if a later financial creditor is allowed to enter and participate in the first charge, etc.

The registered charges are crucial in determining the assets secured and value of charges already created vis-a-vis liquidation value of the corporate debtor as assessed by licensed and registered valuers in India.  For general creditors (unsecured financial or operational or other creditors) the dividend from sale proceeds from free assets is the only means of satisfying their unpaid debts.

Global Rules of Insolvency Law

Even prior to the Companies Act, 1956 or the Companies Act, 2013 the law of Provincial Insolvency and Presidency Towns Insolvency recognised three fundamental rules of insolvency in the winding up of insolvent companies. These rules are:-

557. First Rule: A secured creditor “stands outside the bankruptcy” – White Vs. Simmons (1871) LR 6 CH APP Page 555, 557.  He may rely on his security or as it is said “sit upon his securities” in ordinary proceedings by suit and execution and need not prove.  He can rely entirely upon his decree and execution proceedings and he is not in any way debarred by any provisions of the IBC.  He may proceed to realise his debt from the security and if anything is left due, then he may come before the insolvency court to prove for the balance;
558. Second Rule: He may give up his security and then come to the insolvency court to prove his whole debt along with other creditors;
559. Third Rule: He may value his security and then come to the insolvency court and prove his debt. The court may redeem his security according to the valuation given.  The creditor will be entitled to receive dividend only in respect of the balance due to him after deducting the value assessed[3].

These rules of insolvency referred above were incorporated and embedded under Section 325 of the Companies Act, 2013 (since deleted from November 15, 2016 by the IBC, XI Schedule).

Participation by secured creditors in a CIRP under IBC does not and cannot destroy these three fundamental rights of secured creditors.  These three rights continue to apply and operate in favour of secured creditors throughout CIRP and through the liquidation process.  Participation in the CIRP by secured creditors do not alter the rules of priority between a secured creditor and an unsecured financial and operational creditor.  No tribunal can compel a secured creditor to do that in either CIRP or in liquidation. It is only when a resolution plan is approved by the Adjudicating Authority that the original contracts of loan get modified or part satisfied, or fully satisfied and debts reduced but priority in distribution is unchanged.  The bargain between the resolution applicant and the secured or other financial creditors once approved by requisite majority of financial creditors cannot be altered or substituted by the Adjudicating Authority or Appellate Authority at the stage of approval of the resolution plan under Section 31(1) of the IBC.  The voluntary bargain to consent, to sacrifice a part of the security interests or reduce the financial debt or partially waive security is for taking care of employees, workmen, unsecured creditors, preference shareholders and equity as stakeholders is a choice available and offered by the lenders or financial creditors when a resolution applicant makes a proposal and a resolution plan as per IBC[4]. 

Corporate Insolvency Resolution Process

Under Sections 6 to 10 of the IBC a default by the corporate debtor enables a financial creditor or operational creditor or the corporate debtor itself to initiate corporate insolvency resolution process in respect of the corporate debtor under Chapter II of the IBC.

The process of CIRP is time bound and is required to be completed in 180 days.  If it is not complete in that time frame, a further 90 days is available upon the Adjudicating Authority extending time by its order. Only one extension of 90 days is allowed under Section 12 of the IBC, so that an outer time limit of 270 days is available for resolution.  No more than that.  It is not compulsory for banks or financial institutions or secured or unsecured financial creditors, to keep continuing a CIRP in motion endlessly.  When the losses by delay negate the viability and considerations applied for the sacrifices, the process can be aborted.

There are several provisions in Chapter II of IBC (which need not be detailed now), which inter alia deal with moratorium (prevention of execution in distress) and the role of interim resolution professional, the resolution professional and the committee of creditors for facilitating the management of operations of a corporate debtor as a going concern during the CIRP (Section 20 of the IBC).

The CIRP contemplates that the resolution professional prepare an information memorandum (“IM”).  The terms of the IM are as specified in the CIRP, pursuant to Regulation 36 thereof[5].

The CIRP Regulation 36A and Form G of the CIRP provides that an invitation for expression of interest is sent to interested and eligible prospective resolution applicants to submit resolution plans for stepping in as new promoters or stakeholders who agree to cure the defaults and render the assets as standard as set out in the resolution plan or compromise arrangement[6].

The request for resolution plans is regulated by Regulation 36B of CIRP and details each step in the process, the manner and purposes of interaction between the resolution professional and the prospective resolution applicant along with corresponding time lines.  The least time for preparation of the plan is 30 days as available to a resolution applicant to submit a resolution plan.

Regulation 37 of CIRP read with Section 30 of the IBC details the minimum mandatory requirements of the resolution plan and its mandatory contents for disclosure purposes.

It is the resolution plan of the resolution applicant, based on the IM read with the evaluation matrix, which proposes the reduction in amount payable to creditors and satisfaction or modification of any security interest of secured creditors.  This is not a Tribunal’s authority, and they ought not to do so. 

Thus, there is a direct link and need for disclosure of the existing charges registered, their priority, the extent and nature of the security created in favour of a secured creditor and the manner in which this resolution applicant proposes to reduce all debt, modify or satisfy the security interest, bring new funds under the resolution plan and the recordal of new charges under the resolution plan.

From Section 30 of the IBC and Regulations 37 and 38, it is crystal clear that the determination of the reduction of debt, the modification of the security interest in the charge register, the potential satisfaction of a charge are originated and proposed by the resolution applicant.  The committee of creditors responds to the proposed resolution plan of the resolution applicant and the financial creditors could mutually modify the plan with resolution applicant’s consent before accepting it by majority voting as per Section 30(4) of the IBC and then submitting it through the RP to the Adjudicating Authority or Appellate Authority.  The Adjudicating Authority or the Appellate Authority has no role in the preparation of the resolution plan or in dictating its contents.  These tribunals have no role in introducing terms and conditions of a resolution plan as modification to resolution plan already voted upon and approved by financial creditors.

Section 30(4) provides how a resolution plan has to be voted upon by 66% of the voting share of financial creditors who constitute the committee of creditors, after considering the plan’s feasibility and viability and such requirements as may be specified by the Board.  It is thus the Regulations drafted by IBBI which constitute requirements, which decides the procedure and process for the resolution pursuant to Sections 29 and 30 of the IBC.  There is no such role given to the tribunals (Adjudicating Authority or Appellate Tribunal)[7].

CIRP Regulation 39(3) mandates that the committee of creditors evaluate the resolution plans received strictly as per the evaluation matrix to identify the best resolution plan.

In this context, the judicial decision of the NCLAT in Essar Steel Limited (whereby it modifies the payment proposals, alters the security interest and disregards the rules of CIRP insolvency) that has caused serious disruption of well-settled principles and rules of insolvency.

NCLAT decided the appeals in relation to the Essar Steel Limited on July 4, 2019. 

After the delivery of the judgment, the entire banking universe of India and the international community of bankers, Indian and international distressed asset management companies, financial acquirers of debt and security interests, lenders to resolution applicants publically expressed their dismay of the distortion of the principles of insolvency.  Such bankers and international investors clearly enunciated that this new legal principle adjudged by NCLAT was / will be a deterrent to future investments in stressed assets in India and they would avoid financing such assets or support opportunities in India, based on distorted unsecured lender rights, giving them equality of distribution and priority above secured financial creditors for payment (Section 38(1) of the IBC).

Even Indian bankers and financial institutions complained that their secured interests are being equated with unsecured creditors (both financial and operational) and this is contrary to well-established law and practice.

Participation in a resolution process was not based on any express of implied representation that there is an agreement between secured creditors and unsecured creditors to reprioritize or share their debt repayment equally and give unsecured operational or other creditors’ priority of payment in 30 days.  The long term secured lenders at time postpone recovery by 5 – 10 years and reduce interest also[8],[9].

There is no authority in either the Companies Act or the IBC granted to the Adjudicating Authority to unscramble the approval of the committee of creditors which has already approved the resolution plan.

Insolvency & Bankruptcy Code (Amendment) Bill, 2019

The Press Information Bureau published the Cabinet decision of July 17, 2019, which reads as follows:-

“The Union Cabinet today approved the proposal to carry out 7 amendments to the Insolvency and Bankruptcy Code, 2016 through the Insolvency and Bankruptcy Code (Amendment) Bill, 2019.

The amendments aim to fill critical gaps in the corporate insolvency resolution framework as enshrined in the Code, while simultaneously maximizing value from the Corporate Insolvency Resolution Process (CIRP).  This will enable the Government to ensure maximization of value of a corporate debtor as a going concern while simultaneously adhering to strict timelines.

Salient features of the 7 amendments to the Insolvency and Bankruptcy Code:

1. Clarity on allowing comprehensive corporate restructuring schemes such as mergers, demergers, amalgamations etc as part of the resolution plan.
2. Greater emphasis on the need for time bound disposal at application stage.
3. A deadline for completion of CSRP within an overall limit of 330 days, including litigation and other judicial processes.
4. Votes of all financial creditors covered under Section 21(6A) shall be case in accordance with the decision approved by the highest voting share (more than 50%) of financial creditors on present and voting basis.
5. A specific provision that financial creditors who have not voted in favour of the resolution plan and operational creditors shall receive at least the amount that would have been received by them if the amount to be distributed under resolution plan had been distributed in accordance with Section 53 of the Code or the amount that would have been received if the liquidation value of the corporate debtor had been distributed in accordance with Section 53 of the Code, whichever is higher. This will have retrospective effect where the resolution plan has not attached finality or has been appealed against.
6. Inclusion of commercial consideration in the matter of distribution proposed in resolution plan, within the powers of the Committee of Creditors.
7. Clarity that the plan shall be binding on all stakeholders including the Central Government, any Stage Government or local authority to whom a debt in respect of the payment of the dues may be owed.
8. Clarity that the Committee of Creditors may take the decision to liquidate the corporate debtor, any time after constitution of the Committee of Creditors and before preparation of Information Memorandum.”

The text of the amendment bill to the IBC is not available in the public domain as at the time of writing of this article.

It is clear that the Government of India (Ministry of Corporate Affairs) has acted with incredible alacrity in preparing an amendment bill within 13 days from the judgment of the NCLAT delivered on July 4, 2019, in the matter of Essar Steel Limited.

The 7 amendments proposed are not merely limited to the calming and unravelling the disruption to the rules of insolvency but to tackle other on-going gaps in the corporate insolvency resolution framework, which are hindrances in the corporate insolvency resolution process.

There is a Standing Committee for Review of Implementation of Insolvency and Bankruptcy Code, 2016[10].

What is the import of the Cabinet decision of July 17, 2019?

Firstly, it is to fill critical gaps in the CIRP whilst simultaneously maximizing value under the CIRP.  Maximization of value of a corporate debtor and keeping the corporate debtor as a going concern are the primary drivers but adherence to strict timelines is also uppermost in their mind.

The Ministry of Corporate Affairs is conscious of the doctrine “actus curiae neminem gravabit” referred to and incorporated in the judgment in the case of Arcelor Mittal India Private Limited – Civil Appeal No.9402 – 9405 of 2018 delivered by Justice RF Nariman for himself and Ms. Justice Indu Malhotra on 4^th October, 2018[11].

The Cabinet decision has quoted this to bring attention to the fact that they are concerned with the non-adherence to strict timelines.  The 7 amendments also indicate that there is no time bound disposal at the application stage for admitting applications under Section 7, 8 and 10 of the IBC.

Under Section 12 of the IBC the timelines prescribed for the CIRP was 180 days and one extension of 90 days was permitted.  Regulation 40A of the CIRP also gives detailed timelines for steps to be taken.

By virtue of the doctrine recognised in paragraph 83 of the Arcelor Mittal judgment, the Supreme Court recommended a reasonable and balanced construction of the statute but despite that the Government of India in Cabinet note of July 17, 2019 appears to be disappointed in the exclusion of time taken in judicial processes and decision making.  IBBI has evidence that several cases have taken more than 270 days.  In the Essar Steel Limited’s case more than 2 years from the insolvency commencement date have lapsed.  The Government of India is conveying its feeling that the NCLT and NCLAT for CIRP has been tardy.  It is possible that for reasons of such humungous delays it has cut down the time for court process and litigation to no more than 60 days beyond 270 days, for extra judicial time becoming available in legal proceedings for either accepting or rejecting a resolution plan.

The 11 months time line (330 days) now intended to be made available is recognising “the need for the chopper falling as corporate death” beyond 330 days.  By legislative amendment, with intent and consciousness of para 83 of the Arcelor Mittal judgement and based on empirical and actual evidence of case disposal, the Government of India is intending to displace the doctrine of exclusion of court time taken in approval for a successful resolution plan, and has legislatively planned to truncate judicial delay in CIRP by enunciating a mandatory timeline without exclusions beyond 60 more days over the 270 days already available.

The amendment introducing a potential for comprehensive corporate restructuring scheme is to propose that actual life situations for restructuring are not plain vanilla cases.  There is a need to have complex structures which embed mergers, demergers, amalgamations and other asset disposal measures as part of a resolution plan so as to tackle such complex restructurings and resolution plan within the ambit of CIRP.  Some cases appear to have been jammed because of the inability to accept complex comprehensive corporate resolution plans and this Cabinet decision is a good attempt to extend and incorporate the ability to deal with more complicated situations through the amending Bill proposed.

Para (e) of the salient features in the Cabinet decision of July 17, 2019 is essentially to plug the distortion arising from the NCLAT judgment in Essar.  The equality of distribution and the inequality of priority of payment operating in favour of operational creditors is proposed to be tackled in the proposed amendment.  The freedom of interpretation that the Adjudicating Authority or the Appellate Authority or the High Court or Supreme Court had, is being truncated.  The amendments are intended to provide a guide post to the tribunals to note the change and to ensure that the application of proceeds from a CIRP are to be distributed in the same priority as provided in Section 53 of the IBC.

Section 53(1) notes that the workmen’s dues and debts owed to a secured creditor have a second priority in the waterfall.  It recognises that a financial debt owed to unsecured creditors is 4^th in priority.  It recognises that the Central Government and the State Government as operational creditors are 5^th in priority and ranked equally along with debts owed to a secured creditor for any amount unpaid following the enforcement of security interest.  The 6^th priority is to other remaining debts and dues.

If financial creditors eligible to vote have not voted in favour of a resolution plan, they are considered as dissenting creditors or opposing financial creditors.  Such financial creditors have two options pursuant to the changing law (our interpretation, without seeing the Amending Bill).

The CIRP recognises competitive bid type process by its regulations for enabling success of the best resolution applicant offering the maximum value for the corporate debtor and propounding the best resolution plan.

Hence, the Cabinet is recognising that a bidder or a resolution applicant can propose mere liquidation value for unsecured financial creditors and operational creditors or alternatively can pay higher than such liquidation value for ensuring the Applicant’s competitive success. The proposed amendment seems to suggest that if under the resolution plan a higher amount is proposed to be paid by the resolution applicant to dissenting financial creditors or operational creditors versus mere liquidation value proposed, then whichever is the higher value will be payable to non-voting or dissentient financial creditors and operational creditors.  This change is made retrospective so that resolution plans which have not attained finality or which are pending in appeal will fall in line with the amendment proposed or referred to in clause (e).  Clause (e) tackles both the priority of payment and priority of distribution as it refers to distribution in accordance with Section 53 of the Code.  Section 53 deals with the waterfall mechanism for distribution in liquidation but this has now been clearly and unequivocally extended to CIRP.

Para (g) of the Cabinet decision is re-emphasising the binding nature of a scheme on Central Government, State Government or local authorities to whom a debt is owed.  The Government’s intention is to bind the Central Government or State Government or local authorities are stakeholders or operational creditors in the resolution plan and to prevent their contest for tax dues or other local authority for dues, after the resolution plan is approved and sanctioned.

The bankers complaint that the bankers’ ability to commercially decide on a resolution plan as a matter of business decision is being recognised vide clause (f) of the Cabinet note.

The committee of creditors’ primacy of decision and the inclusion of commercial consideration in decision making for approval of the resolution plan and the manner of distribution is now restored.

Clause (h) of the Cabinet decision seems to recognise that the committee of creditors in the process of CIRP (before the preparation of the IM by the RP) has the authority to decide on the liquidation of the corporate debtor without going through an empty formality or meaningless pursuit of CIRP. The Code clearly has recognised the committee of creditors’ decision-making process for a successful resolution subject to and on the basis of financial viability and feasibility of performing and implementing the resolution plan.

This Cabinet view again demonstrates the change in focus of the Government to shut down a corporate debtor and enable the recirculation of their assets in the stream of commerce.  The liquidation of a company is not the end of the world.  Justice Nariman in the Arcelor Mittal judgment has recognised that even in liquidation, the liquidator can sell the corporate debtor as a going concern[12].

Lastly, clause (d) in the Cabinet decision relates to Section 21(6A) of the IBC.  This provision in the Code recognises that financial creditors may be creditors who hold securities or deposits, or, maybe a class of creditors (exceeding 10) for other financial debts, and they need an authorised representative to vote on their behalf.

The problem of the authorised representative having “to vote on behalf of each financial creditor to the extent of his voting share” resulted in extreme distortions in pending cases for home buyers.  The proposed amendment will be made in Section 21; and the CIRP regulations will be amended to provide recognition that there are separate class of financial creditors, within the committee of creditors[13].  The authorised representative of financial creditors referred to in Section 21 (6A) will at their class of creditor meetings determine subject to the majority vote how the class rather than the individual financial creditor votes on his voting share.  The amendment seems to indicate that the authorised representative will be empowered by the majority decision of the relevant class of creditors to vote all the financial creditors covered in Section 21(6A) as a block vote representing the total highest vote of financial creditors on the basis of present and voting.  But this is not absolutely clear, without reading the actual text of the Amending Bill.

In conclusion, the proposed amendments are clearly to strengthen the process of CIRP, provide strict and mandatory timelines or consequential abatement of the CIRP on failure to complete in in 330 days and commencement of the liquidation process after 11 months (or 330 days) notwithstanding the pendency of any ongoing litigation or other judicial processes.

The clear departure and non-acceptance of the doctrine of judicial time exclusion as enunciated in Clause 83 of the Arcelor Mittal judgement as referred above, indicates that the Government is conscious of the effect of judicial delays and is strictly and seriously enunciating a maximum of 330 days (11 months) to complete the CIRP or forfeit the ability to resolve under Chapter II of the IBC.  “The chopper willfall on the 331^st day”, as this is the express intention, due to changed legislation disagreeing with the judicial time exclusion, except for the maximum of further 60 days.  We hope the Government articulates that clearly in the Bill or statement of objects and reasons.

The potential to resolve corporate indebtedness and NPAs even in liquidation is covered under Regulation 32 of the Liquidation Regs and still continues to be available.  However, the seriousness of a revival plan in liquidation process in a timely manner which can succeed would now depend upon a truly doable scheme or plan in the course of liquidation process and not a frivolous plan just to stall liquidation.  It will have to be totally accepted by secured creditors before enunciation to the Tribunal and financially backed, by tangible demonstrable funds, at the very outset, in the liquidation process.  Further value destruction and delays must be frowned upon.

[1] General Principles of Insolvency – Phillip Wood Principles of Insolvency Page 1

Insolvency law is the root of commercial and financial law because it obliges the law to choose.  There is no enough money to go round and so the law must chose who to  pay. The choice cannot be avoided or compromised or fudged.  The law must always decide who is to bear the risk so that there is always a winner and a loser.  On bankruptcy it is difficult to split the difference.  That is why bankruptcy is the most crucial indicator of the attitudes of a legal system and arguably the most important of all commercial legal disciplines.

Further, bankruptcy has a profound effect on normal legal relationships.  Bankrupts and their directors are disqualified from working and their basic freedom and liberty compromised and controlled.  Property is seized and sequestrated, including that of creditors.  Assets are expropriated without compensation.  Contracts are shattered and their terms interfered with or negated.  Security interests are frozen or avoided or debased below priority creditors. People lose their jobs.  The economy of the state itself may be sapped.  Bankruptcy is  a destroyer and spoliator.

[2] Now with the proposed amending bill, it is clear that these differential rights of secured creditors will be applied in CIRP, while approving a plan, both for priority claims and the distribution of payment.

[3] Mulla Law of Insolvency  – Rights of Secured Creditors in General 6^th Edition Page 377 – 378

Therefore, until a secured creditor makes any of these options, it is not open to a corporate debtor to include his secured debt in the petition for insolvency.  The nature of the security, the extent of the security, the extent of the debt, are not part of the liquidation estate.  The corporate debtor has a mere right of redemption as the security interest belongs to the secured creditors.  The corporate debtor has a right to the securities of a secured creditor only upon payment of his secured loan, and upon satisfaction and discharge of the debt.

[4] a)            Pursuant to Schedule XI of IBC, the Companies Act, 2013 was amended and Section 325 of the Companies Act, 2013 was omitted.  Section 325 of the Companies Act, 2013 was rendered redundant as Sections 52 and 53 of the IBC incorporated the rules of insolvency applicable to corporate insolvencies.  Section 52 of the IBC now clearly provides the rights of a secured creditor in liquidation proceedings and their priority rights over an unsecured creditor under rules of insolvency.

1. b) Section 53 deals with a secured creditor’s rights from the sale of assets and the distribution rights in order of priority over the secured interests and realisations therefrom, in a liquidation proceeding. Section 53 has to be read with the CIRP Regs when the ICR process is on-going and Liquidation Regs as the priority inter se financial creditors, the ranking of the unsecured operational creditors and financial creditors and the other creditors in liquidation is explained by these regulations and the other procedures in the Liquidation Regs.

[5] It is important to note:

Regulation 36 necessitates the RP to ensure that the IM provides “a list of creditors containing the name of creditors, the amounts claimed by them, the amounts of their claims admitted and the security interest, if any, in respect of such claims.

The priority of charges registered with the Registrar of Companies in relation to secured financial creditors is the determinate non-convertible proof of security interest as per Verification of Claims, under CIRP as also Liquidation Regs.

Therefore, the RP, who is responsible for the IM has to specify the value of debt, priority of charges, the extent of the charges, the nature of the security interest, the property secured, as these are public information available with the Registrar of Companies and internally available with the corporate debtor pursuant to the register of charges maintained by it (Section 29 read with Regulation 36 of CIRP).

The IM has to be submitted to the committee of creditors, no later than 54 days from the insolvency commencement date.  The IBBI has prescribed additional requirements for the IM as mandatory requirements.

[6] The IM is embedded by reference as an essential document relied upon by the resolution applicant for preparing a resolution plan.  The evaluation matrix as disclosed is the criteria for winning or selection of the resolution plan and the resolution applicant.

[7] The Adjudicating Authority / Appellate Authority are tribunals created and empowered pursuant to the IBC or Companies Act, 2013.  As creatures of the statutes, they cannot arrogate to themselves the power of a civil court or constitution court.

On the express language and content of the CIRP, it is clear that there is no role of the Adjudicating Authority or the Appellate Authority to alter a resolution plan presented by the resolution applicant and approved by the committee of creditors; as such exercise of jurisdiction would breach and defeat the purpose of Regulation 36A to Regulation 38 of the CIRP.  It would be an abuse of authority and excessive assumption of power not confirmed on such authority.

[8] The manner of achieving a resolution is based on the resolution applicant’s detailed resolution plan which has to set out the modality of payments and payment distribution process and terms specifically.

The evaluation matrix laid down by the financial creditors and the RP as criteria to emerge successful in competition has to specify the process of how secured lender dues and payments to financial and operational creditors are proposed by the resolution applicant for agreement and vote by the committee of creditors with requisite majority.

The jurisdiction of the Adjudicating Authority or the Appellate Authority arises / emanates from a consensual resolution plan consistent with law and approved by majority vote of financial creditors.  There is no authority given by law to enable such tribunals to substitute their decision for the commercial wisdom and decision of secured lenders and even the proposal of the resolution plan by the resolution applicant and the consent it embed cannot be substituted or supplemented by such tribunals.

[9] There are plethora of judgements under Section 230 of the Companies Act, 2013 or the provisions of Section 391 – 394 of the Companies Act, 1956, which clearly state that it is the propounder of a scheme for a defaulting corporate debtor or a new strategic partner or financial investor offer which constitutes a scheme of compromise the propounder proposes the payment terms and new security interests by modification or satisfaction of charges of old lenders and by introduction by new financial lenders.  The company court has no role or authority to alter or amend the commercial wisdom of the propounder of the scheme, or the decision of the creditors who vote to approve such compromise arrangement.

If any modifications have to be made of the scheme, the same have to be done well before the compromise is sanctioned.  Any such change is introduced by the relevant shareholders or creditors at their meeting and modified before voting upon the plan.  There is no post decision change of terms by unilateral terms introduced by such tribunals.

The body of shareholders and creditors by special majority, approve these modifications and approve the modified scheme of compromise before finally approving it by voting on the resolution plan, which becomes the final scheme of compromise to be approved by the shareholders, company and the creditors, who compromise.

[10] It was reconstituted by government order dated 6^th March, 2019.  There are on-going continuous meetings of the ILC, which have not exhausted the total range of amendments required for proper implementation of the Insolvency and Bankruptcy Code, 2016.  Cross border insolvency provisions, group insolvency provisions and some aspects of personal insolvency are under deliberation with the ILC.  The Government’s plan would be to introduce more comprehensive amendments to the IBC later.  The 7 amendments proposed are in the nature of remedial measures and clarifications to resolve immediate hindrances that have been noticed in the administration and implementation of the IBC.

[11] At paragraph 83 of the judgement the court addressed the question “what happens in a case where the NCLAT decide a matter arising out of Section 31 of the Code beyond the time limit of 180 days or the extended time of 270 days? Actus Curiae Neminem Gravabit – the act of the court shall harm no man.  This is a maxim firmly rooted in our jurisprudence…… It is also true that the time taken by a tribunal should not set at naught the time limits within which the corporate insolvency resolution process must take place.  However, we cannot forget that the consequence of the chopper falling is corporate debt.  The only reasonable construction of the court is the balance to be maintained between timely completion of the corporate insolvency resolution process, and the corporate debtor otherwise being put in liquidation.  We must not forget that the corporate debtor consist of several employees and workmen whose daily bread is dependent on the outcome of the corporate insolvency resolution process.  If there is a resolution applicant who can continue to run the corporate debtor as a going concern, every effort must be made to try and see that this is made possible. A reasonable and balanced construction of this statute would therefore lead to the result that, where a resolution plan is upheld by the Appellate Authority, either by way of allowing or dismissing an appeal before it, the period of time taken in litigation ought to be excluded.  This is not to say that the NCLT and NCLAT will be tardy in decision making.  This only to say that in the event of the NCLT, or the NCLAT, or this Court taking time to decide an application beyond the period of 270 days, the time taken in legal proceedings to decide the matter cannot possibly be excluded, as otherwise a good resolution plan may have to be shelved, resulting in corporate death, and the consequent displacement of employees and workers.

[12] Footnote 3 in para 83 of the Arcelor Mittal judgement.

[13] Regulation 2(aa) was introduced in the CIRP regulations for defining class of creditors, and this has been effective from 3^rd July, 2018.