Landmark Rulings of Supreme Court and NCLAT on IBC

[Published by Taxmann Group of Publications in June 2019 Issue]

Introduction
1. The Insolvency & Bankruptcy Code, 2016 (IBC) has been in operation for more than 2 years now. It changed the scenario of debt recovery and the concept from "debtor-controlled company management" to the "creditors-controlled company management." This paradigm shift has been possible, inter alia, due to the positive interpretation of the provisions of the IBC by the Hon'ble Supreme Court of India and by the National Company Law Appellate Tribunal (NCLAT). This has made it possible to deal with many intricate legal issues which basically attempted to create roadblocks in the working of the IBC.
In this article, an attempt has been made to highlight some of the excerpts of important/notable judgments of the Hon'ble Supreme Court of India, as also the judgments passed by the NCLAT on the interpretation of the provisions of the IBC.

Role of National Company Law Tribunal (NCLT) to admit applications filed under section 7 or 9 of the IBC
2. As early as in 2017, the Hob'ble Supreme Court of India, in its judgment in the case of Mobilox Innovations (P.) Ltd. v. Kirusa Software (P.) Ltd. [2017] 85 taxmann.com 292/144 SCL 37 has observed that:-

"Once the adjudicating authority/tribunal is satisfied as to the existence of the default and has ensured that the application is complete and no disciplinary proceedings are pending against the proposed resolution professional, it shall admit the application. The adjudicating authority/Tribunal is not required to look into any other criteria for admission of the application."

In other words, an application under section 7 or section 9 of the IBC is acceptable so long as the debt is proved to be due and there has been an occurrence or existence of default. What is material is that the default is for at least Rs. 1 lakh. In view of section 4 of the IBC, the moment default is of Rs. 1 lakh or more, an application to trigger Corporate Insolvency Resolution Process (CIRP) under the IBC is maintainable. If the corporate debtor fails to show that there is no debt due or default in existence, he cannot avoid the provisions of the IBC.

Also, while interpreting the provisions of the IBC, the Adjudicating Authorities (AA) (i.e., the NCLT) has taken a persistent view that in financial transactions, adjustments and compromises are to be left to the parties to settle the matter in their best interest or exigencies of the business. However, in the absence of any binding compromise agreement/debt restructuring approval, it is beyond the powers of the AA to extend time indefinitely or to defer the prayer of the applicant-financial creditor/operational creditor for admission of the application u/s 7 or 9 of the IBC, as the case may be. The respective AAs/NCLTs have also taken a persistent view that time is the essence of the Code and that a far strict time frame is expected to be followed by the AA at every stage of the proceedings.

This strict line of enforcement of the provisions of the IBC has prompted many of the debtor companies to approach the financial creditor/operational creditor to work out a settlement and/or compromise so as to avoid being dragged to the NCLT under the provisions of the IBC. Such attempts are made not only prior to filing of the application under IBC, but even while the application is pending adjudication or even after the stage of admission of such application - to settle the matter to come out of rigour of the provisions of IBC which render the erstwhile Board of Directors of the debtor-company powerless as the management of the company goes out of their hands.

Filing of Resolution Plan - How defaulters/related persons are prevented from bidding - Supreme Court's judgment interpreting section 29A of the IBC
3. Broadly speaking, once the debtor-company goes out of the hands of the erstwhile defaulting promoters/management and the working of the company is managed by the Committee of Creditors (CoC) with the help of the appointed Resolution Professional (RP), in order to complete the CIRP within the stipulated maximum 180 days (extendable by another 90 days), bids are invited from interested parties to submit their Resolution Plans for the revival/rehabilitation of the debtor-company and stricter norms are adopted to evaluate such bids. The provisions of section 29A of the IBC have been enacted so as to prevent the defaulter directors/promoters/related persons from bidding for the same company and section 29A does not even allow them to have backdoor entry via the clever device of bidding through entities projecting as 'Resolution Applicant'. One such interesting and important case relates to the debt ridden company, Essar Steel and how the matter reached the Hon'ble Supreme Court. The Hon'ble Supreme Court of India in its judgment dated 4th October, 2018, in the case of Arcelor Mittal (P.) Ltd. v. Satish Kumar Gupta [2018] 98 taxmann.com 99/150 SCL 354 (hereinafter, "Arcelor Mittal") dealt not only with the important issue regarding eligibility criteria of the resolution applicant under Section 29A of the IBC for bidding in the resolution plan of the debt-ridden company, but the said judgment also dealt with other important issues relating to interpretation of some of the provisions of the IBC.

It needs to be highlighted here that in order to prevent the erstwhile promoters of the debtor-company and the persons acting in concert with them, from bidding in the resolution application process, section 29A was introduced in the IBC, whereby many disqualifications were inserted to disentitle the resolution applicants to be persons connected with the promoters of the debtor-company. In the aforementioned Supreme Court's Arcelor Mittal (P.) Ltd. case (supra), the provision of section 29A of the IBC which came up for interpretation was the opening line of section 29A which read as below:
"A person shall not be eligible to submit a resolution plan, if such person, or any other person, acting jointly or in concert with such person…" (followed by the instances laid down in the various sub-clauses mentioned under section 29A).

The Hon'ble Supreme Court of India, in its aforesaid Arcelor Mittal (P.) Ltd.'s case (supra) judgment, while interpreting section 29A of the IBC held that:

"The opening lines of section 29A of the Amendment Act refer to a de facto as opposed to a de jure position of the persons mentioned therein. This is a typical instance of a "see through provision", so that one is able to arrive at persons who are actually in "control", whether jointly, or in concert, with other persons. A wooden, literal, interpretation would obviously not permit a tearing of the corporate veil when it comes to the "person" whose eligibility is to be gone into. However, a purposeful and contextual interpretation, such as is the felt necessity of interpretation of such a provision as section 29A, alone governs. For example, it is well-settled that a shareholder is a separate legal entity from the company in which he holds shares. This may be true generally speaking, but when it comes to a corporate vehicle that is set-up for the purpose of submission of a resolution plan, it is not only permissible but imperative for the competent authority to find out as to who are the constituent elements that make up such a company. In such cases, the principle laid down in Salomon v. A. Salomon and Co. Ltd. [1897] AC 22 will not apply. For it is important to discover in such cases as to who are the real individuals or entities who are acting jointly or in concert, and who have set-up such a corporate vehicle for the purpose of submission of a resolution plan."

Supreme Court Allows Piercing of Corporate Veil in Analysing Section 29A of IBC
4. The Supreme Court pierced the corporate veil and analysed the complex structure of both the competing resolution applicants and held that "since section 29A(c) is a see through provision, great care must be taken to ensure that persons who are in charge of the corporate debtor for whom such resolution plan is made, do not come back in some other form to regain control of the company without first Paying off its debts."
Further, the Supreme Court held that it is important for the competent authority to see that persons who are otherwise ineligible and hit by sub-clause (c), do not wriggle out of the proviso to sub-clause (c) by other means, so as to avoid the consequences of the proviso. For this purpose, despite the fact that the relevant time for the ineligibility under sub-clause (c) to attach is the time of submission of the resolution plan, antecedent facts reasonably proximate to this point of time can always be seen to determine whether the persons referred to in section 29A are, in substance, seeking to avoid the consequences of the proviso to sub-clause (c) before submitting a resolution plan. If it is shown on facts that at a reasonably proximate point of time before submission of the resolution plan, the affairs of the persons referred to in section 29A are so arranged as to avoid paying off the debts of the non-performing assets concerned, such persons must be held to be ineligible to submit a resolution plan or otherwise both, the purpose of the first proviso to sub-section (c) of section 29A, as well as the larger objective sought to be achieved by the said clause in public interest, will be defeated.

​Supreme Court holds that resolution applicant has no vested right that his resolution plan be considered
5. In the aforesaid Arcelor Mittal India (P.) Ltd.'s case (supra) judgment, the Hon'ble Supreme Court also examined the issue as to whether any challenge can be made at various stages of the CIRP, particularly when the RP, under section 30(2) of the IBC, rejects a resolution plan, at the threshold. The Supreme Court held that it is settled law that a statute is designed to be workable and the interpretation thereof should be designed to make it so workable. The Supreme Court further stated that "given the time limit referred to above and given the facts that the resolution applicant has no vested right that his resolution plan be considered, it is clear that no challenge can be preferred to the adjudicating authority at this stage. A writ petition under Article 226 filed before a High Court would also be turned down on the ground that no right, much less a fundamental right, is affected at this stage."

Role of the Resolution Professional (RP) vis-à-vis the Resolution Plans submitted to him
6. The Supreme Court further held that the RP is only to "examine" and "confirm" as to whether a resolution plan conforms to what is provided by section 30(2) and that under Section 25(2)(i) of the IBC, the RP shall undertake to present all resolution plans at the meetings of the COC and confirms whether all the prescribed statutory conditions have been followed by the Resolution Applicant, especially with regard to eligibility criteria enumerated under section 29A(c). It was further held by the Apex Court that a conspectus of all the relevant provisions would show that the RP is required to examine that the resolution plan submitted by various applicants is complete in all respects before submitting it to the COC and that section 30(2)(e) does not empower the RP to "decide" whether the resolution plan does or does not contravene the provisions of law. It would be in the fitness of things if he appends the due diligence report carried out by him with respect to each of the resolution plans under consideration and states briefly as to why it does, or does not conform to the law.

Supreme Court holds that IBC is not intended to be a substitute for a recovery forum
7. The Hon'ble Supreme Court's judgment dated 23-10-2018 in Transmission Corpn. of Andhra Pradesh Ltd. v. Equipment Conductors & Cables Ltd. [2018] 98 taxmann.com 375/150 SCL 447 spelled out clearly that "in a recent judgment of this Court in Mobilox Innovations (P.) Ltd. v. Kirusa Software (P.) Ltd. (2018) 1 SCC 353 this Court has categorically laid down that IBC is not intended to be substitute to a recovery forum. It is also laid down that whenever there is existence of real dispute, the IBC provisions cannot be invoked." In its 23-10-2018 judgment, as aforesaid, the Supreme Court also referred, inter alia, to para 51 of its judgment in Mobilox Innovations (P.) Ltd.'s case (supra), which reads as under:--

"It is clear, therefore, that once the operational creditor has filed an application, which is otherwise complete, the adjudicating authority must reject the application u/s 9(5)(2)(d), if notice of dispute has been received by the operational creditor or there is a record of dispute in the information utility. It is clear that such notice must bring to the notice of the operational creditor the "existence" of a dispute or the fact that a suit or arbitration proceeding relating to a dispute is pending between the parties. Therefore, all that the adjudicating authority is to see at this stage is whether there is a plausible contention which requires further investigation and that the "dispute" is not a patently feeble legal argument or an assertion of fact unsupported by evidence. It is important to separate the grain from the chaff and to reject a spurious defence which is mere bluster. However, in doing so the Court does not need to be satisfied that the defence is likely to succeed. The Court does not at this stage examine the merits of the dispute except to the extent indicted above. So long as a dispute truly exists in fact and is not spurious, hypothetical or illusory, the adjudicating authority has to reject the application."

Furthermore, even in its judgment dated 25-1-2019, the Hon'ble Supreme Court of India in Swiss Ribbons (P.) Ltd. v. Union of India [2019] 152 SCL 365/101 taxmann.com 389 ('Swiss Ribbons'), with regard to the approach of the IBC, has observed, inter alia, that "the objective of the IBC is to ensure revival and continuation of the corporate debtor by protecting it from its own management and from liquidation and that the Code is a beneficial legislation which puts the corporate debtor back on its feet, not being a mere recovery legislation for creditors."

Conclusion
8. In the aforesaid Swiss Ribbons judgment, the Hon'ble Supreme Court, while upholding the constitutional validity of the IBC, has observed that "the IBC is a legislation which deals with economic matters and, in the larger sense deals with the economy of the country as a whole. Earlier experiments, in terms of legislations having failed, "trial" having led to repeated "errors", ultimately led to the enactment of the IBC. The experiment contained in the Code, judged by the generality of its provisions and not by so-called crudities and inequities that have been pointed out by the petitioners, passes constitutional muster. To stay experimentation in things economic is a grave responsibility, and denial of the right to experiment is fraught with serious consequences to the nation…In the working of the Code, the flow of financial resources to the commercial sector in India has increased exponentially as a result of financial debts being repaid. The experiment conducted in enacting the Code is proving to be largely successful. The defaulter's paradise is lost. In its place, the economy's rightful position has been regained."
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