Justice Rohinton Nariman’s contribution to IBC jurisprudence in India

The Insolvency & Bankruptcy Code, 2016 was first envisaged publicly back in July 2014. Then Union Finance Minister Arun Jaitley, while presenting the Budget 2014-15 on July 10, 2014, stated in his speech that an “entrepreneur friendly legal bankruptcy framework” will be developed.

This seventh month of 2014 is remarkable for one more reason – Justice Rohinton Fali Nariman was appointed as a judge of the Supreme Court of India on July 7, 2014. Viewed thus, the beginning of Justice Nariman’s journey as a judge almost coincided with conceiving of IBC as a near term legislation. In hindsight, this providential connection was a sign of things to come.

Justice Nariman authored the first extensive decision by the Supreme Court on IBC in Innoventive Industries Ltd. v. ICICI Bank. It was held that no appeal can be maintained on behalf of the petitioner company itself as the directors are suspended and no longer in management. This ratio led to a creative practice before the National Company Law Appellate Tribunal (NCLAT), wherein appeals are filed by the aggrieved directors as suspended management or shareholders, in their own right, with the company being the contesting respondent under the Resolution Professional. This was the first practical impact of this decision.

More importantly, this decision is considered a locus classicus on the issue of “default” under IBC. Justice Nariman acknowledged that there is a paradigm shift in law and hence deemed it fit to lay down a clinical comparative analysis to show how the procedures and requirements differ for applications filed by financial creditors and operational creditors.

Justice Nariman then pronounced the second landmark decision in the case of Mobilox Innovations Pvt. Ltd. v. Kirusa Software, laying down the law on what constitutes “dispute” under the IBC. The “dispute” is not a patently feeble legal argument or an assertion of fact unsupported by evidence. He held that the Court does not need to be satisfied that the defence is likely to succeed. So long as a dispute truly exists in fact and is not spurious, hypothetical or illusory, the application has to be rejected.

In Alchemist Asset Reconstruction Co Ltd v. Hotel Gaudavan Pvt. Ltd., Justice Nariman interpreted the moratorium under Section 14 to conclude that arbitration that has been instituted after the aforesaid moratorium is non est in law and even Section 37 proceedings cannot be maintained in such case.

In Macquarie Bank Limited v. Shilpi Cable Technologies Ltd, he based his decision on the difference between the words “issued” and “delivered”. He thus held that a demand notice under Section 8 of IBC could be issued by an advocate on behalf of the operational creditor. 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”.

In an interesting decision in K Kishan v. Vijay Nirman Co. Pvt. Ltd, Justice Nariman expanded the scope of his Mobilox ruling to hold that a challenge under Section 34 of the Arbitration & Conciliation Act, 1996 qualifies as ‘pre-existing dispute’ for the purposes of thwarting the Corporate Insolvency Resolution Process (CIRP). Thus, a claim can be based on arbitral awards but the same would have to be undisputed.

In one of the rare and important decisions that furthered the objective of the IBC insofar as workmen are concerned, Justice Nariman in JK Jute Mill Mazdoor Morcha v. Juggilal Kamlapat Jute Mills Company Limited held that a registered trade union can maintain a petition as an operational creditor on behalf of all its members. This proved to be a cost-saving mechanism for workmen across the country and also formed a sort of class action under the IBC.

In Hindustan Construction Company Ltd. v. Union of India, it was held that a statutory body which functions as an extended limb of the Central government, and performs governmental functions, cannot be taken over under the IBC.

Justice Nariman again wrote the first Supreme Court decision on the interplay of IBC with the Limitation Act, 1963. The case of BK Educational Services Private Limited v. Parag Gupta & Associates took into consideration Section 238-A and held that the Limitation Act, 1963 is applicable to applications filed under the IBC from its inception.

In Gaurav Hargovindbhai Dave v. Asset Reconstruction Company (India) Limited, he re-iterated the above ruling to hold that “an application” which is filed under Section 7 would fall only within the residuary Article 137. The period of limitation of 3 years begins to run from the date of declaration of an account as a non-performing asset (NPA).

In the recent landmark ruling of Asset Reconstruction Company (India) Limited v. Bishal Jaiswal, it was held that the entries in the books of accounts of the appellant would amount to an acknowledgement of the liability under Section 18 of the Limitation Act, 1963 and would extend the period of limitation under IBC as well. There was a caveat that the acknowledgment has to be read with the notes to accounts to gather whether entries in the balance sheet are actually an acknowledgment of dues.

On a reading of the above rulings, one can sense that Justice Nariman was laying down the model conduct and a conceptual clarity which would go to the root of the jurisdiction and procedure under the IBC. His decisions helped clear many fundamental issues in a law that was only recently introduced.

Justice Nariman’s contribution to the IBC jurisprudence will be long remembered for his simplification of complex issues. A few leading examples are as follows:

In ArcelorMittal India Pvt Ltd. v. Satish Kumar Gupta, one of the largest resolutions under IBC till date, Justice Nariman addressed various complex issues. He observed that the period of time spent in litigation shall be excluded from the mandatory time limit under IBC. He undertook a detailed and critical analysis of Section 29A which barred defaulting promoters from submitting plans. Importantly, he held that “control" under Section 29A is different than that of the definition under the Companies Act, 2013. Under the IBC, it means de jure or de facto proactive or positive control, and not mere negative control.

Similarly, in Swiss Ribbons Pvt. Ltd. v. Union of India, he held that the classification between ‘Financial Creditor’ and ‘Operational Creditor’ is not discriminatory. Most importantly, he read down an amendment which prescribed a mandatory outer limit of 330 days for completion of the CIRP. He ruled in favour of the corporate debtors by holding that the term “mandatorily” is struck down as being manifestly arbitrary and the time can be extended in certain circumstances.

In another leading case, CoC, Essar Steel India Ltd. v. Satish Kumar Gupta, he propounded the “clean slate” theory for the first time under the IBC, wherein a successful resolution applicant cannot suddenly be faced with “undecided” claims after the resolution plan is approved. He gave primacy to the commercial wisdom of the Committee of Creditors and held that only a limited judicial review is available to interfere with this wisdom.

In an important challenge to the IBC in homebuyers proceedings in Pioneer Urban Land and Infrastructure Ltd. v. Union of India, Justice Nariman held that allottees/homebuyers were always included in Section 5(8)(f). Most interestingly, he provided the grounds for defence available to builders, though none of the grounds form part of the provisions under the IBC!

In a decision that furthered transparency under the IBC, Justice Nariman in Vijay Kumar Jain v. Standard Chartered Bank held that suspended directors have the right to receive copies of the resolution plans presented to the CoC. The directors, being well versed in the affairs of the company, may be able to assist the CoC on determining whether the resolution plan addresses the cause of default by the company. This aspect is again not provided for in the IBC.

In a ruling that was a jolt for the Income Tax department, Justice Nariman in PCIT v. Monnet Ispat And Energy Ltd held that in view of Section 238, IBC will override the Income Tax Act. He made it clear that income tax dues, being in the nature of Crown debts, do not take precedence even over secured creditors.

There was a long standing debate regarding cheque bouncing proceedings pending in criminal courts after the initiation of moratorium. Justice Nariman pronounced a landmark decision in the case of P Mohanraj & Ors. Vs. M/s. Shah Brothers Ispat Pvt. Ltd where he held that cheque dishonour cases brought under Section 138 of the Negotiable Instruments Act cannot be initiated or continued against corporations subject to the moratorium imposed by Section 14 (1) (a) of the IBC. The Bench held that these proceedings are in nature of a “civil sheep” dressed as a “criminal wolf”.

Based on his extensive study of the IBC and background materials, Justice Nariman was probably the first judicial authority to understand the importance of timelines under the IBC. It was in 2018 that Justice Nariman, through the Mobilox ruling, observed that strict adherence of timelines is of essence to both the triggering process and the insolvency resolution process. He exhorted the NCLT and NCLAT to keep in mind this principal objective sought to be achieved by the Code and to strictly adhere to the time frame.

This dictum was probably picked up by the executive and they introduced Regulation 40A, prescribing a model timeline for all the stakeholders under IBC. Justice Nariman took note of this amendment in ArcelorMittal’s case and held that it is of utmost importance for all the authorities concerned to follow this model timeline as closely as possible.

There was a time when the Supreme Court was flooded with appeals wherein the parties had settled the outstanding debts and sought setting aside of CIRP under Article 142 of the Constitution of India. Justice Nariman expressed a slight discomfort with this approach in Uttara Foods & Feeds Pvt. Ltd. v. Mona Pharmachem wherein he recommended that relevant rules be amended so as to provide NCLTs with such inherent powers of setting aside the CIRP on grounds of settlement. This was promptly done with the introduction of Section 12A of IBC and Regulation 30A.

However, Justice Nariman soon realised a loophole in the newly introduced provisions as well. The new provisions did not cater to a situation wherein no CoC has been formed but settlement has been arrived at. This was highlighted by Justice Nariman in his landmark Swiss Ribbons ruling. This gap was again addressed by a prompt amendment to Regulation 30A.

The above overview shows that the IBC’s journey has been an ever-evolving one, with mostly one person at the centre of it – Justice Nariman. He took it upon himself to further the objectives of the IBC. This becomes clear on a bare reading of his now oft-quoted epilogue in the Swiss Ribbons ruling where he stated with conviction that “the defaulter‘s paradise is lost. In its place, the economy‘s rightful position has been regained.”

The IBC is still at a very nascent stage but it was more so when Justice Nariman began hearing the matters. He identified major gaps in the law and also in the working of the law. He adopted creative and harmonious interpretations to further the cause of the IBC. When necessary, he clarified aspects of his own decisions. He drew from his vast experience as an expert in commercial laws and was quick to understand the practical commercial difficulties as well issues involved in the insolvency process.

His judgments on the subject are filled with copious references to regulations, provisions, statutory forms, reports, foreign jurisprudence and case laws from the earlier insolvency regime. These judgments provide the base for students of law and professionals interested in commercial insolvency laws in India. They also provide an invaluable base for current and future judges to borrow from Justice Nariman’s wisdom. He has left an indelible mark on the jurisprudence around IBC. He may have retired from the Supreme Court, but his legacy on the bench will continue to steer and contribute towards the development of IBC jurisprudence. As a practitioner of insolvency law and a student of law in general, I express my deepest gratitude to Justice Nariman.

Deepak Joshi is a dually qualified professional. He is a graduate of Campus Law Centre, Faculty of Law, University of Delhi and a Fellow Chartered Accountant. He currently practices law in the courts of Delhi. He can be reached at mail@deepakjoshi.in

Disclaimer: The author has been part of the teams that have appeared in some of the cases referred in the article.