15 Key Developments in the Insolvency and Bankruptcy Code, 2016 in the year 2019

In the winter of 2015, the Indian Legislature sought to tackle the persistent problem of bad debts
affecting Indian financial institutions and trade creditors by enacting the Insolvency and Bankruptcy
Code, 2016 (“Code”), which was finally notified in May 2016. The key purpose of the enactment was
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 maximization of value of
assets of such persons / entities.

Since its inception, the Code has been under continuous refinement and has undergone several
amendments. The judiciary has also played its significant part in streamlining various provisions of
the Code. As 2019 has drawn to an end, we have enumerated below some of the noteworthy
changes made in the law by highlighting 15 significant developments in the field of insolvency law in
India in the year 2019.

1. Code: Constitutional or Unconstitutional

On 25 January 2019, the Supreme Court in Swiss Ribbons Pvt. Ltd. vs. Union of India upheld the
constitutional validity of the Code and inter alia held / observed the following:

i. with respect to discrimination between a financial creditor and operational creditor, since equality
is only among equals, no discrimination shall be caused if there exists an intelligible differentia
between the said creditors;

ii. that there was no violation of Article 14 of the Constitution with respect to the voting rights of the
operational creditors in committee of creditors (“CoC”) because a detailed study has already been
undertaken by a financial creditor before sanctioning a loan, and hence they are in a better position
to evaluate the contents of a resolution plan as compared to an operational creditor, who only
provide goods / services and are involved only in recovering amounts that are paid for such goods /
services;

iii. that the CoC did not have the last word about withdrawal of insolvency application and if the CoC
arbitrarily rejects a just settlement and / or withdrawal claim, the Adjudicating Authority can always
set aside the same;

iv. that the resolution professional has no adjudicating powers under the Code. Also, a resolution
professional can be replaced by the CoC in case they are unhappy with his performance. Hence, the
resolution professional is really a facilitator of the resolution process, whose administrative
functions are overseen by the CoC and by the Adjudicating Authority;
v. that the restrictions laid down under section 29A(c) of the Code is not limited to malfeasance by
an erstwhile manager and rejected the argument relating to the fact that somebody merely happens
to be a relative of an ineligible person cannot be good enough to oust such person from becoming a
resolution applicant, if he is otherwise qualified;

vi. that the ‘distribution waterfall’, as provided under the Code, is not discriminatory and manifestly
arbitrary to operational creditors. The Court further held that the repayment of financial debts
infuses capital into the economy in as much as banks and financial institutions are able, with the
money that has been paid back, to further lend such money to other entrepreneurs for their
businesses. This creates an intelligible differentia between financial debts and operational debts,
which are unsecured, which is directly related to the object sought to be achieved by the Code.

2. Role of the Adjudicating Authority in approving or rejecting a resolution plan

On 05 February 2019, in K. Sashidhar vs. Indian Overseas Bank and Ors. the Supreme Court held that
the “commercial wisdom” of the CoC in approving or rejecting a resolution plan is not open to
judicial scrutiny.

The NCLT’s jurisdiction in such cases is to satisfy itself that the statutory requirements specified in
Section 30(2) of the Code are met with in the resolution plan approved by the CoC i.e. the resolution
plan should contain provisions in relation to (i) priority of payments (as prescribed under the Code);
(ii) management of the corporate debtor; (iii) implementation and supervision of resolution plan;
and (iv) compliance with applicable law.

The Supreme Court clarified that where a resolution plan was subject to rejection by the CoC on the
grounds listed under Section 30(2) of the Code, including a decision on the eligibility of a resolution
applicant under Section 29A of the Code, the said decision would still be subject to judicial review.

3. Corporate Guarantors can be dragged into insolvency

On 11 February 2019, the Supreme Court upheld the order passed by NCLAT inFerro Alloys
Corporation Limited vs. Rural Electrification Corporation Ltd. which held that on a harmonious and
purposeful reading of the definitions of corporate person, corporate debtor, debt, claim, financial
debt, operational debt, financial creditor and default it can be concluded that as soon as a guarantee
is invoked the said guarantee becomes a debt and thereafter a guarantor becomes a 'corporate
debtor' as defined under the Code.
In other words, corporate insolvency resolution process under the Code can be initiated against the
guarantor who is a ‘corporate person’ and who by operation of law ipso facto becomes a ‘corporate
debtor’ by satisfying the ingredients as required for a ‘corporate person’ under the Code.

It further held that without initiating insolvency resolution process against the principal borrower it
is always open to a 'financial creditor' to initiate insolvency resolution process under Section 7 of the
Code against a 'corporate guarantor' as the creditor is also the 'financial creditor' qua 'corporate
guarantor’.

4. Striking down the Reserve Bank of India’s (“RBI”) Circular dated 28 February 2018 (“RBI Circular”)

On 02 April 2019, in Dharani Sugars and Chemicals Ltd vs. Union of India, the Supreme Court set
aside the RBI Circular containing the framework for resolution of stressed assets for being ultra vires
of Section 35AA of Banking Regulation Act, 1949 (“BR Act”). The RBI Circular mandated banks and
financial institutions to initiate resolution against defaulting companies with exposure of more than
INR 20 billion (~USD 278.8 million)

The RBI Circular was challenged, inter alia, on the ground that the RBI cannot exercise its power to
issue such directions without obtaining authorisation from the Central Government and that further
RBI is not empowered under Section 35AA of the BR Act to issue directions for reference to the Code
of ‘all cases’ without considering ‘specific defaults’.

The Supreme Court examined in detail the power granted to RBI under Section 35 AA of the BR Act
and held that RBI can direct banks and financial institutions to move under the Code only if the
following two conditions are satisfied:

i. RBI should obtain authorisation from the Central Government to issue direction; and

ii. it should be in respect of a specific default.

On 7 June 2019, the RBI released the Reserve Bank of India (Prudential Framework for Resolution of
Stressed Assets) Directions 2019 that provided fresh directions to lenders on the resolution of
stressed assets.

5. A tad bit of relief for Home Buyers

On 09 August 2019, in Pioneer Urban Land and Infrastructure Limited vs. Union of India, the
challenge on the constitutionality of the Insolvency and Bankruptcy Code (Second Amendment) Act,
2018 was rejected by the Supreme Court.Under the new amendment, the ambit of the financial
creditor was broadened to include ‘Real estate allottees’ (home buyers) as per Section 2(d) of the
Real Estate (Regulation and Development) Act, 2016.

In its findings, the Supreme Court observed that where between the developer and the home buyer
a sale agreement exists, it would have the same ‘commercial effect’ as that of a borrowing, so as to
mean that the home buyers get back the flats / apartments in lieu of money advanced for temporary
use. Further, the Supreme Court clarified that in such a case, both parties have their vested
‘commercial interest’, the real estate developer who derives profit on sale of apartment and the
purchaser of such flat/apartment by such sale of the apartment. Thus, the Supreme Court concluded
that the amount raised under the real estate agreements from the home buyers aim towards profit
and are therefore included within ‘financial debt’ under Section 5(8)(f) of the Code, not even
requiring an explanation introduced by the Amendment Act.

6. In an application for insolvency filed by a financial creditor, the existence of default is to be

determined in a time bound manner.

On 16 August 2019 an amendment was made to the Code which clarified that an application for
insolvency filed by a financial creditor is to be admitted or rejected within the prescribed period of
14 days from the date of receipt of the application. In the event of a failure to do so, the NCLT is
required to record the reasons in writing for the delay in determination of default. The 14-day period
will only be extended in exceptional cases and not as a matter of routine.

7. Insolvency resolution process must be completed within an overall timeline of 330 days from the
insolvency commencement date.

Vide amendment dated 16 August 2019, the overall timeline of 270 days for completing the
insolvency resolution process was revised to 330 days. As per the amendment the insolvency
resolution process must mandatorily be completed within an overall timeline of 330 days from the
insolvency commencement date. The 330 days period includes all or any extensions granted as well
as any litigations and related legal proceedings. For an ongoing insolvency resolution process, the
amendment provides an additional relaxation of 90 days if the 330-day timeline has already been
breached at the time when the amendment came into force.

However, the Supreme Court in Committee of Creditors of Essar Steel India Limited vs. Satish Kumar
Gupta & Ors. vide its judgment dated 15 November 2019, struck down the word “mandatorily” as
unconstitutional and held that insolvency resolution process should be completed “ordinarily” within
330 days.
8. Appointment of an Authorised Representative

Where there exist a large number of financial creditors the authorised representative of a particular
class of financial creditors will vote in the CoC, on behalf of all financial creditors represented by him.
Where the financial creditors represented by the authorised representative has taken a decision by a
vote of more than 50% of the voting share of the financial creditors of such class, the authorised
representative will put his vote as per the decision taken. Such majority vote obtained within a class
of creditors will be counted as a 100% vote from that class of creditors in favour or against a voting
item.

However, this voting process will not be applicable for taking a decision on the withdrawal of a
resolution application and the voting process in such cases will be as originally provided under the
Code wherein each individual financial creditor will vote individually.

This amendment was introduced in view of cases such as Jaypee Infratech Limited, where the
majority of the CoC comprised of thousands of homebuyers and decision-making had been severely
hampered on account of creditors not voting on resolutions.

9. Corporate Debtor can be liquidated before preparation of information memorandum

The Code now permits liquidating the corporate debtor post constitution of the CoC and prior to
preparing the information memorandum.

This amendment introduced on 16 August 2019 would enable stakeholders to liquidate the
corporate debtor if it is found that the corporate debtor does not have assets and the best way of
value maximisation is to liquidate the company.

10. Supreme Court on Essar Steel- The End Game

On 15 November 2019, the Supreme Court set aside the order of the NCLAT in Standard Chartered
Bank vs. Satish Kumar Gupta, R.P. of Essar Steel Ltd. and Ors. wherein the NCLAT inter alia held that:

i. financial and operational creditors must be given similar treatment (which has been interpreted to
mean the same percentage of haircut); and

ii. discrimination amongst financial creditors on the basis of existing priorities or security interest is
not permitted in a resolution plan.
The Supreme Court held that ‘equitable treatment’ is accorded to each creditor depending upon the
class to which it belongs: secured or unsecured, financial or operational. The equality principle
cannot be stretched to the extent of treating unequal as equals.

Accordingly, the Supreme Court allowed the CoC to distinguish between secured financial creditors
based on the value of their respective security interests.

11. Code now expanded to NBFC’s

The Ministry of Corporate Affairs in November 2019 had issued two notifications under section 227
of the Code. These notifications prescribe the rules governing the insolvency and liquidation of
financial service provider (“FSPs”) and directs the application of these rules and the Code to
systematically important Non-Banking Financial Companies (“NBFCs”) (inclusive of the housing
finance companies) having an asset size of over INR 5 billions (~USD 69.7 million) as class of FSPs.

The procedure would be governed by The Insolvency and Bankruptcy (Insolvency and Liquidation
Proceedings of Financial Service Providers and Application to Adjudicating Authority) Rules, 2019
(“FSP Rules”).

RBI has been notified as the 'Appropriate Regulator' for the NBFCs. On occurrence of a financial
default only the Appropriate Regulator of the concerned FSP can file an application. Further,
voluntary liquidation process can only be initiated with the approval of the Appropriate Regulator.

The FSP Rules specifically clarify that the moratorium against the FSP will not extend to third party
assets or properties which are held in trust by the FSP for such third parties.

12. Provisions relating to personal guarantors under Chapter III of the Code comes into effect from
01 December 2019.

An application for initiation of insolvency against a Personal Guarantor can be made by the debtor
(i.e. Guarantor himself); or a creditor either individually or collectively along with other creditors; or
through a resolution professional. This process of initiation of insolvency is identical to that of a
corporate debtor.

An "interim moratorium" in relation to any debts of the Guarantor will commence as soon as the
application for insolvency is filed before the Adjudicating Authority. Within 10 days of appointment
of the resolution professional, the resolution professional after examining the application is required
to prepare and submit a report to the Adjudicating Authority recommending approval or rejection of
the application.

The Adjudicating Authority is required to take into account the recommendations of the resolution
professional so appointed, and either admit or reject the application so filed, within 14 days from
the date of submission of the report by the resolution professional. On admission of the application,
the interim moratorium ceases to have effect and the period of moratorium commences.

Once the order admitting the application is passed, a public notice inviting claims from the creditors
is to be issued by the Adjudicating Authority within 7 days. A claimant will have a right to submit its
claims within 21 days of issuance of such public notice. After receiving the claims, a list of creditors
will have to be prepared by the resolution professional. In this process the formation of CoC is not
required, as the creditors meet and directly vote on the repayment plan. There is no distinction
between the nature of creditor under this process.

According to the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for
Corporate Persons) (Third Amendment) Regulations, 2019 , a repayment plan is to be prepared by
the debtor in consultation with the resolution professional which should consist of the term of the
repayment plan and its implementation schedule as well as the source of funds. Within 21 days from
the last day of submission of claims by the creditors, the resolution professional has to submit the
repayment plan along with his report to the Adjudicating Authority.

A meeting of creditors has to be convened by the resolution professional on the request made by
the creditors having 33% of the voting share (that is in proportion to the debt owed by the personal
guarantor to such creditor). Furthermore, any decision taken by the creditors requires approval of
more than 50% of voting share of the creditors who vote, unless otherwise specified in the Code.

The debtor and the creditor have the right to file an application for bankruptcy of the debtor on
rejection of the repayment plan by the Adjudicating Authority.

13. Insolvency commencement date

The ordinance passed on 28 December 2019 amends the Code to provide that the insolvency
commencement date is the date of admission of application for insolvency.

Prior to the ordinance, in case an interim resolution professional was not appointed in the order
admitting the insolvency application, the insolvency commencement date was considered to be the
date on which such insolvency professional is appointed by the Adjudicating Authority.
14. Immunity provided to corporate debtor and their assets

Vide ordinance dated 28 December 2019, a new section i.e. Section 32(A) is introduced in the Code.
This section provides immunity to the corporate debtor and its assets from prosecution for offences
committed before the commencement of corporate insolvency resolution process. The immunity is
given only to a corporate debtor and not to an individual director or designated partner of an LLP
who is being prosecuted for personal vicarious liability. This introduction provides protection to
successful bidders from any liabilities or litigation that may arise on account of offences committed
by the erstwhile promoters. However, the corporate debtor or the new management will have to
provide complete assistance to the investigating team.

15. Minimum threshold for initiating corporate insolvency process for certain class of financial
creditors

The ordinance passed on 28 December 2019 amends the code and provides for minimum threshold
for initiating corporate insolvency process for certain class of financial creditors. In order to initiate
an insolvency process against the Corporate Debtor, where the debt owed is either in form of
security/deposits or to a class of creditors, the application should be filed jointly by at least one
hundred creditors in the same class or not less than ten percent of creditors of same class;
whichever is less. The same threshold applies for allottees under real estate projects.
Recent Key Developments Under The Insolvency And Bankruptcy Code

In the past few months, the Central Government and the Insolvency and Bankruptcy Board of India
('IBBI') have introduced several changes to the Insolvency and Bankruptcy Code, 2016 ('IBC') and the
regulations issued thereunder. Some of the important changes introduced by the amendments have
been discussed below.

1. Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019 ('Ordinance') (operative with
effect from December 28, 2019)

Some of the key aspects of the Ordinance are summarized below:

i. 'Interim finance' under the IBC means any financial debt raised by the corporate debtor after
insolvency commencement date. The Ordinance expands the scope of interim finance to any other
debt that may be notified. No such notification has been made till date. However, it is expected that
certain categories of last mile financing made available to distressed companies in the zone of
insolvency may be notified as interim finance.

ii. The Ordinance clarifies that the effect of the approval of a resolution plan by the Adjudicating
Authority ('AA') should result in: (i) the extinguishment of all liabilities of the corporate debtor
existing at or pertaining to the period prior to the insolvency commencement date; and (ii) no action
being taken against the property of the corporate debtor, in relation to the offences committed in
the period prior to the insolvency commencement date. However this immunity is only available in
cases where the resolution plan specifically provides for change in the management or control of the
corporate debtor to a person not being a promoter managing or controlling the corporate debtor/
any related party or a person against whom a complaint or report has been filed before the relevant
authority in relation to the aforementioned offence.

iii. The Ordinance has prescribed minimum thresholds for filing of the application in certain cases
i.e., in terms of number: (a) in case of homebuyers/ allottees, at least 100 homebuyers/ allottees
under the same project or at least 10% of the total number of such allottees whichever is less; and
(b) in case of a class of creditors identified under Section 21(6A)(a) and Section 21(6A)(b) of the IBC,
at least 100 creditors of such class or at least 10% of the total number of creditors in such class,
whichever is less.

iv. The Ordinance introduces a second set of essential services other than the services specifically
listed out in the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for
Corporate Persons) Regulations, 2016 ('CIRP Regulations'). If the resolution professional is of the
opinion that the supply of any goods or services is critical to run the operations of the corporate
debtor as a going concern, then such services will not be terminated, suspended or interrupted
during the period of moratorium subject to the condition that there is no default in the payment of
fees pertaining to the period of moratorium.

v. The Ordinance also provides protection against automatic termination/ suspension of license,
permit, registration, quota, concession, clearances or a right given by the Government or sectoral
regulator or any other authority by reason of commencement of insolvency resolution of the
borrower. It is subject to the condition that there is no default in the payment of fees pertaining to
the period of moratorium.

2. Personal Insolvency Regime (operative with effect from December 1, 2019)

The provisions relating to individual insolvency under the IBC relate to three distinct classes of
persons: (i) personal guarantors to corporate debtors; (ii) partnership firms and proprietorship firms;
and (iii) other individuals. The Central Government recently, by way of the notification dated
November 15, 2019 ('Notification'), appointed December 1, 2019 as the date for the commencement
of first phase i.e., the provisions relating to personal guarantors to corporate debtors. The insolvency
resolution against personal guarantors may be triggered on default of amount equal to or more than
INR 1000 (approx. USD 14). The AA for guarantors is the relevant: (i) National Company Law Tribunal
('NCLT') in cases where: (a) CIRP/ liquidation proceedings are pending against the corporate debtor
to such guarantor in NCLT and a fresh application is required to be filed against such guarantor
under IBC; and (b) the application is pending against the corporate debtor to such guarantor and the
proceedings against the guarantor is also pending against some Court/Tribunal; and (ii) Debt
Recovery Tribunal ('DRT'), in all cases other than those falling under category (i) above.

To fall in the category of 'personal guarantor', the person should be a guarantor to the company or
the limited liability partnership or any other person with limited liability, as the case may be, and the
guarantee given must have been invoked by the relevant creditor and remain unpaid in full or part.

3. Insolvency and Bankruptcy Board of India (Liquidation Process) (Amendment) Regulations, 2020
('Amendment Regulations') (operative with effect from January 6, 2020)

Some of the key amendments are set out below:

i. The Amendment Regulations clarify that a person, who is not eligible under the IBC to submit a
resolution plan for insolvency resolution of the corporate debtor, will not be a party in any manner
to a compromise or arrangement of the corporate debtor under Section 230 of the Companies Act,
2013. It also clarifies that a secured creditor cannot sell or transfer an asset, which is subject to
security interest, to any person, who is not eligible under the IBC to submit a resolution plan.
ii. Further, if a secured creditor proceeds to realise its security interest and does not opt to relinquish
such interest to the liquidation estate, such secured creditor will contribute its share of the
insolvency resolution process costs, liquidation process cost and workmen's dues (relating to 24
months preceding the liquidation commencement date), within 90 days of the liquidation
commencement date.

iii. The secured creditor is also required to pay the excess realised value of the asset, which is subject
to security interest, over the amount of its claims admitted, within 180 days of the liquidation
commencement date. Where the secured creditor fails to pay such amounts to the liquidator within
90 days or 180 days, as the case may be, the asset will become part of liquidation estate.
Insolvency And Bankruptcy Laws: Key Developments

he following are the key developments including some recent case-laws in the insolvency and
bankruptcy law in India i.e. the Insolvency and Bankruptcy Code (hereinafter referred to as 'the
Code'):

1. Increase in threshold under Section 4 of the Code

The Central Government vide Notification No. S.O. 1205(E) dated 24th March, 2020, in exercise of
the powers conferred by the proviso to Section 4 of the Code has increased the minimum amount of
default (under Part-II) from Rupees One Lakh to Rupees One Crore. This means that a Financial
creditor or an Operational creditor of a Corporate debtor can now initiate the Corporate Insolvency
Resolution Process ("CIRP") on the occurrence of a default of minimum of Rupees One Crore. The
amendment has been made on account of the COVID-19 pandemic. However, what remains unclear
as of now is the plight of the pending cases before the Adjudicating Authority, which have not yet
reached the stage of admission. Given the existing practice under the Code, it may be possible that
the cases which have been admitted would remain unaffected and those which have not yet been
admitted, may be rejected on account of the above stated notification.

2. Preferential Transactions: Interpretation of Sections 43 and 44 of the Code

The Supreme Court in Anuj Jain, Interim Resolution Professional for Jaypee Infratech Limited v. Axis
Bank Limited Etc.,1 set aside the judgment dated 1st August, 2019 of the Appellate Authority in
relation to avoidance of transactions under Sections 43, 45 and 66 of the Code, whereby the
corporate debtor (JIL) had mortgaged its properties for the financial assistance taken by its holding
company (JAL). In Anuj Jain, the Supreme Court for the first time laid down certain principles in
relation to avoidance of transactions under the Code, which are discussed below:

In order to find as to whether a transaction of transfer of property or an interest thereof of the

corporate debtor falls squarely within the ambit of Section 43 of the Code, ordinarily, the following
questions shall have to be examined in a given case:

Whether such transfer is for the benefit of a creditor or a surety or a guarantor?

Whether such transfer is for or on account of an antecedent financial debt or operational debt or
other liabilities owed by the corporate debtor?

Whether such transfer has the effect of putting such creditor or surety or guarantor in a beneficial
position than it would have been in the event of distribution of assets being made in accordance
with Section 53 of the Code?

If such transfer had been for the benefit of a related party (other than an employee), whether the
same was made during the period of two years preceding the insolvency commencement date; and
if such transfer had been for the benefit of an unrelated party, whether the same was made during
the period of one year preceding the insolvency commencement date?
Whether such transfer is not an excluded transaction in terms of sub-section (3) of Section 43?

With regard to transactions in question, the Supreme Court observed that it is true that there had
not been any creditor-debtor relationship between the lender banks and corporate debtor JIL but
that will not be decisive of the question of the ultimate beneficiary of these transactions. The
mortgage deeds in question, entered by the corporate debtor/JIL to secure the debts of JAL,
obviously, amount to creation of security interest to the benefit of JAL. JAL as holding company of
corporate debtor, is a creditor and also surety of corporate debtor. It is a related party to corporate
debtor. The corporate debtor owed antecedent financial debts as also operational debts and other
liabilities towards JAL. The impugned transactions had been of transfers for the benefit of JAL, who is
a related party of the corporate debtor JIL and is its creditor and surety by virtue of antecedent
operational debts as also other facilities extended by it; and the impugned transactions have the
effect of putting JAL in a beneficial position than it would have been in the event of distribution of
assets being made in accordance with Section 53 of the Code. It was thus held that the corporate
debtor JIL has given a preference in the manner laid down in sub-section (2) of Section 43 of the
Code.

Look back period in terms of Section 43(4)

By virtue of proviso to sub-section (3) of Section 1 of the Code, different dates can be provided for
enforcement of different provisions of the Code; and in fact, different provisions have been brought
into effect on different dates. However, after coming into force of the provisions, if a look-back
period is provided for the purpose of any particular enquiry, it cannot be said that the operation of
the provision itself would remain in hibernation until such look-back period from the date of
commencement of the provision comes to an end. Therefore, the transaction commencing from
10.08.2015 until the date of insolvency commencement shall fall under the scanner. The contention
of respondents that most of the mortgages were not creation of new encumbrance by JIL as the
properties were already mortgaged and during that period they were only re-mortgaged, was
rejected as the so called re-mortagage was made only as a fresh mortgage. Therefore, the
transaction in question had been of deemed preference to related party JAL by the corporate debtor
JIL during the look back period of two years and covered under Section 43(4).

Whether the transaction in question was made in the ordinary course of business

An activity could be regarded as 'business' if there is a course of dealings, which are either actually
continued or contemplated to be continued with a profit motive. Even when furnishing a security
may be one of normal business practices, it would become a part of 'ordinary course of business' of
a particular corporate entity only if it falls in place as part of 'the undistinguished common flow of
business done'; and is not arising out of 'any special or particular situation'. The ordinary course of
business or financial affairs of the corporate debtor JIL cannot be taken to be that of providing
mortgages to secure the loans and facilities obtained by its holding company and that too at the cost
of its own financial health. As noticed, JIL was already reeling under debts with its accounts with
some of the lenders having been declared NPA; and it was also under heavy pressure to honour its
commitment to the home buyers. In the given circumstances, it was held that the transfers in
question were not made in ordinary course of business or financial affairs of the corporate debtor
JIL.

Interpretation of Section 43(3) (a)

With regard to interpretation of Section 43(3) (a), the Supreme Court inter alia held that, "we have
no hesitation in accepting the submissions made on behalf of the appellants that the said contents
of clause (a) of sub-section (3) of Section 43 call for purposive interpretation so as to ensure that the
provision operates in sync with the intention of legislature and achieves the avowed objectives.
Therefore, the expression "or", appearing as disjunctive between the expressions "corporate debtor"
and transferee", ought to be read as "and"; so as to be conjunctive of the two expressions i.e.,
"corporate debtor" and "transferee". Thus read, clause (a) of sub-section (3) of Section 43 shall
mean that, for the purposes of sub-section (2), a preference shall not include the transfer made in
the ordinary course of the business or financial affairs of the corporate debtor and the transferee.
Only by way of such reading of "or" as "and", it could be ensured that the principal focus of the
enquiry on dealings and affairs of the corporate debtor is not distracted and remains on its
trajectory, so as to reach to the final answer of the core question as to whether corporate debtor
has done anything which falls foul of its corporate responsibilities."

Whether lenders of JAL could be categorised as financial creditors of JIL

A person having only security interest over the assets of corporate debtor (like the third party
securities), even if falling within the description of 'secured creditor' by virtue of collateral security
extended by the corporate debtor, would nevertheless stand outside the sect of 'financial creditors'
as per the definitions contained in sub-sections (7) and (8) of Section 5 of the Code.

3. Whether bid by a resolution applicant should match the liquidation value?

In Maharasthra Seamless Limited v. Padmanabhan Venkatesh & Ors.,2 appeal was filed by the
Resolution Applicant (Maharashtra Seamless Ltd.) inter alia contending that the Appellate Authority
has exceeded its jurisdiction by giving directions that the value of resolution plan should match the
liquidation value. The Supreme Court inter alia observed in this regard that there is no such
provision in the Code that requires that the bid of a Resolution Applicant shall be equal to the
liquidation value. The valuation process as per the rules and regulations of the Code is only for
assisting the Committee of Creditors to select a proper and efficient resolution plan.

4. Applicability of the Code to a Government Company (more specifically the NHAI)

In Hindustan Construction Company Limited & Anr. v. Union of India & Ors.,3 a constitutional
challenge was made to the Code. It was contended that the provisions of the Code would operate
arbitrarily on the Petitioner therein inasmuch as, on the one hand, an automatic-stay of arbitral
awards in its favour would be granted under the Arbitration and Conciliation Act, 1996 as a result of
which those monies cannot be used to pay-off the debts of Petitioner's creditors. On the other hand,
any debt of over INR One Lakh owed to a financial or operational creditor which remains unpaid,
would attract the provisions of the Code against the Petitioner making these provisions arbitrary,
discriminatory and violative of Articles 14 and 19(1)(g) of the Constitution of India. It was thus
contended that in order for the Petitioner to recover monies from Government Companies and
NHAI, the definition of 'corporate person' contained in Section 3(7) of the Code should either be
read without the words "with limited liability" contained in the third part of the definition, or have
Section 3(23)(g) of the Code, which is the definition of 'person', read into the aforesaid provision.

The Supreme Court inter alia observed that the first part of 'corporate person', as defined in Section
3(7) of the Code, means a company as defined in Clause 20 of Section 2 of the Companies Act 2013.
Sections 2(20) and 2(45) of the Companies Act, 2013, read as under:
"2(20). "company" means a company incorporated under this Act or under any previous company
law;"

"2(45). "Government company" means any company in which not less than fifty-one per cent of the
paid-up share capital is held by the Central Government, or by any State Government or
Governments, or partly by the Central Government and partly by one or more State Governments,
and includes a company which is a subsidiary company of such a Government company."

The Apex Court held that from a reading of the aforesaid definition, it is clear that the three entities
who owe monies under arbitral awards to the Petitioner No.1, being Government companies, would
be subsumed within the first part of the definition. As regard applicability of the Code to NHAI, the
Court held, "...what is clear is that NHAI is a statutory body which functions as an extended limb of
the Central Government, and performs governmental functions which obviously cannot be taken
over by a resolution professional under the Insolvency Code, or by any other corporate body. Nor
can such Authority ultimately be wound-up under the Insolvency Code. For all these reasons, it is not
possible to ... either read in, or read down, the definition of 'corporate person' in Section 3(7) of the
Insolvency Code."

5. Reverse Corporate Insolvency Resolution Process

In Flat Buyers Association Winter Hills – 77, Gurgaon v. Umang Realtech Pvt. Ltd through IRP & Ors.,4
the 'Flat Buyers Association of Winter Hills -77, Gurgaon' and the original applicants (i.e. the
allottees) wanted Corporate Insolvency Resolution Process for resolution but did not want approval
of any plan of a third party (Resolution Applicant). In such circumstances, Uppal Housing Pvt. Ltd.
(one of the promoters) was directed to cooperate with the Interim Resolution Professional and
disburse amount (apart from the amount already disbursed) from outside as Lender (financial
creditor) and not as promoter to ensure that the project is completed with the time frame given by
it. The disbursement of amount which had been made by Uppal Housing Pvt. Ltd. and the amount as
will be generated from dues of the Allottees (Financial Creditors) during the CIRP was directed to be
deposited in the account of the company (Corporate Debtor) to keep the company a going concern.

It was further held that in CIRP against a real estate corporate debtor, if allottees (Financial
Creditors) or Financial Institutions/Banks (Other Financial Creditors) or Operational Creditors of one
project initiated CIRP against the Corporate Debtor (real estate company), it must be confined to the
particular project, it cannot affect any other project(s) of the same real estate company (Corporate
Debtor). Therefore, all the assets of the company (Corporate Debtor) are not to be maximized. The
assets of the company (Corporate Debtor – real estate) of that particular project is to be maximized
for balancing the creditors such as allottees, financial institutions and operational creditors of that
particular project. It was therefore held that CIRP should be project basis, as per approved plan by
the competent authority. Any other allottees (financial creditors) or financial institutions/ banks
(other financial creditors) or operational creditors of other project cannot file a claim before the
Interim Resolution Professional of other project and such claim cannot be entertained.
6. Interpretation of Section 32A

In JSW Steel Ltd. v. Mahender Kumar Khandelwal,5 in the CIRP of Bhushan Power & Steel Limited
('Corporate Debtor'), the resolution plan submitted by JSW Steel Limited ('Resolution Applicant') was
approved by the Adjudicating Authority vide order dated 5th September 2019 with certain
conditions. After the approval of the plan whilst the monitoring committee was monitoring the
change of management, on 10th October, 2019, the Directorate of Enforcement of Central
Government attached assets of the corporate debtor under Section 5 of the Prevention of Money
Laundering Act, 2002. One of the questions that was raised before the Appellate Authority was
whether after approval of a resolution plan under Section 31 of the Code, is it open to the
Directorate of Enforcement to attach the assets of the Corporate Debtor on the alleged ground of
money laundering by erstwhile Promoters. In this regard it was held that in view of Section 32A, the
Directorate of Enforcement could not attach the assets of the Corporate Debtor after approval of the
resolution plan. It was further held that the Directorate of Enforcement has not been empowered
under the Code to decide the question whether JSW Steel Limited is ineligible under Section 29A or
Section 32A (1) (a) and this can be determined by the Committee of Creditors/Adjudicating
Authority.

It was also pleaded by the Directorate of Enforcement that Section 32A introduced w.e.f. 28th
December, 2019 is prospective and would not apply to a resolution plan which has already been
approved under Section 31 of the Code. The Appellate Authority rejected the said plea and inter alia
held that a plain reading of Section 32A(1) and (2) clearly suggests that the Directorate of
Enforcement/other investigating agencies do not have the powers to attach assets of a corporate
debtor, once the resolution plan stands approved and the criminal investigations against the
corporate debtor stand abated. Section 32A of the Code does not in any manner suggest that the
benefit provided thereunder is only for such resolution plans which are yet to be approved.

Another issue was whether the resolution applicant was a related party of the corporate debtor? It
was contended by the Directorate of Enforcement that under Section 32A (1), the liability of the
corporate debtor shall not cease for the reason that JSW Steel Limited is a related party of the
corporate debtor, for the reason that M/s. Bhushan Power & Steel Limited ('Corporate Debtor') and
M/s. JSW Steel Limited are associated as shareholders holding 24.09% and 49% equity respectively in
a Joint venture company namely M/s. Rohne Coal Company Private Limited. In this regard, the
Appellate Authority noted that where a party for the purpose of its business, if mandated by the
Central Government to join hands together and are forced to form a consortium or as joint
associate, such person ('Resolution Applicant') cannot be held ineligible in terms of Section 32A (1)
(a) on the ground of 'related party'.

7. NCLT has jurisdiction to enquire into allegations of fraud, but it is not vested with the power of
judicial review over administrative action

In M/s Embassy Property Developments Pvt. Ltd v. State of Karnataka & Ors.,6 the Apex Court
mainly dealt with two issues:
Whether the High Court ought to interfere, under Article 226 or 227 of the Constitution, with an
Order passed by the National Company Law Tribunal in a proceeding under the Code, ignoring the
availability of a statutory remedy of appeal to the National Company Law Appellate Tribunal and if
so, under what circumstances?

Whether questions of fraud can be inquired into by the NCLT/NCLAT in the proceedings initiated
under the Insolvency and Bankruptcy Code, 2016?

With regard to the facts of the case, the Supreme Court observed that the decision of the
Government of Karnataka to refuse the benefit of deemed extension of lease, is in the public law
domain and hence the correctness of the said decision can be called into question only in a superior
court which is vested with the power of judicial review over administrative action. The NCLT, being a
creature of a special statute to discharge certain specific functions, cannot be elevated to the status
of a superior court having the power of judicial review over administrative action. The NCLT is not
even a Civil Court, which has jurisdiction by virtue of Section 9 of the Code of Civil Procedure to try
all suits of a civil nature excepting suits, of which their cognizance is either expressly or impliedly
barred. Therefore, NCLT can exercise only such powers within the contours of jurisdiction as
prescribed by the statute, the law in respect of which, it is called upon to administer. From a
combined reading of sub-section (4) and sub-section (2) of Section 60 with Section 179, it is clear
that none of them hold the key to the question as to whether NCLT would have jurisdiction over a
decision taken by the government under the provisions of MMDR Act, 1957 and the Rules issued
there-under. The only provision which can probably throw light on this question would be Sub-
section (5) of Section 60, as it speaks about the jurisdiction of the NCLT. Clause (c) of Sub-section (5)
of Section 60 is very broad in its sweep, in that it speaks about any question of law or fact, arising
out of or in relation to insolvency resolution. But a decision taken by the government or a statutory
authority in relation to a matter which is in the realm of public law, cannot, by any stretch of
imagination, be brought within the fold of the phrase "arising out of or in relation to the insolvency
resolution" appearing in clause (c) of sub-section (5).

While answering the second issue, the Supreme Court whilst referring to Section 65 of the Code
(which specifically deals with fraudulent or malicious initiation of proceedings) observed that if, as
contended by the Government of Karnataka, the CIRP had been initiated by one and the same
person taking different avatars, not for the genuine purpose of resolution of insolvency or
liquidation, but for the collateral purpose of cornering the mine and the mining lease, the same
would fall squarely within the mischief addressed by Section 65(1). It was thus held that the NCLT
has jurisdiction to enquire into allegations of fraud. As a corollary, NCLAT will also have jurisdiction.
Hence, fraudulent initiation of CIRP cannot be a ground to bypass the alternative remedy of appeal
provided in Section 61.

8. Whether Sole Proprietorship firm can file application under Section 7 or Section 9 of the Code?

The NCLT, New Delhi had earlier held in the matter of R.G. Steels vs. Berry Auto Ancillaries (P) Ltd.
that a sole proprietorship firm would not be covered under the definition of "person" under the
Insolvency and Bankruptcy Code. However, recently, in the matter of Neeta Saha v. Mr. Ram Niwas
Gupta,7 the NCLAT reversed this decision and held that Section 2 of the Code would be applicable to
sole proprietorship firms as well. It was also observed by the Appellate Authority that the definition
of "person" in Section 3(23) of the Code is not exclusive, but an inclusive one.

9. Whether initiation of proceedings under SARFAESI Act precludes the Financial Creditor to initiate
proceedings under Section 7 of the Code and whether filing of the insolvency petition in such a case
attracts Section 65 of the Code?

In Punjab National Bank v. Vindhya Cereals,8 the Adjudicating Authority i.e. NCLT, Ahmedabad
issued a show cause notice to the Chief Manager of the Financial Creditor to show cause why he
should not be penalised under Section 65 of the Code as the Financial Creditor had already initiated
parallel proceedings under SARFAESI Act, 2002. The Financial Creditor went in appeal against the
said order of the Adjudicating Authority.

The NCLAT formulated the questions for consideration before it as below:

Whether a Financial Creditor can initiate parallel proceedings under SARFAESI Act, 2002 as well as
under the Insolvency and Bankruptcy Code; and

Whether filing of parallel proceedings attracts proceedings under Section 65 of the Insolvency and
Bankruptcy Code?

Reversing the NCLT's view, the NCLAT held that the Financial Creditor can proceed simultaneously
under SARFAESI Act, 2002 as well as under the Insolvency and Bankruptcy Code. It observed that
Section 238 of the Code provides that the provisions of the 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 the virtue of any such law. Thus, the non-obstante clause of the I&B
Code will prevail over any other law for the time being in force.

The NCLAT further observed that the Financial Creditor has initiated parallel proceedings against the
Corporate Debtor in SARFAESI Act as well as the Code. Only on this ground, it cannot be inferred that
proceedings against the Corporate Debtor are fraudulent or malicious. Therefore, mere filing of
parallel proceedings does not attract Section 65 of the Code.

Footnotes

1. Civil Appeal Nos. 8512-8527 of 2019 and other petitions.

2. [2020] 113 taxmann.com 421 (SC).

3. WP(Civil)No. 1074/2019 with other Civil Appeals.

4. Company Appeal (AT) (Insolvency) No. 926 of 2019.

5. [2020] 114 taxmann.com 428 (NCL-AT).

6. Civil Appeal Nos. 9170 to 9172 of 2019, decision dated December 3, 2019.

7. Company Appeal(AT) (Insolvency) No. 321 of 2020, decision dated February 25, 2020.

8. Company Appeal (AT) (Insolvency) No. 854 of 2019, decision dated February 26, 2020.