Case Studies of critical legal issues involved and emerging under Insolvency and Bankruptcy Code

1. CHAMBER OF TAX CONSULTANTS
DELHI CHAPTER
Case studies of
critical legal issues involved and
emerging under Insolvency and
Bankruptcy Code 2016
Madhusudan Sharma
7th October 2017

2. TOPICS FOR DISCUSSION
Rules of Interpretation of Statutes
Critical Legal Issues
Case Studies
Jaypee Infra Ltd
Innoventive Industries
2

3. CRITICAL LEGAL ISSUES
Rights of Home Buyers (Other Creditors)
Opportunity of being heard
Non-Obstante Clause and Repugnancy
of State Laws
Withdrawal of application after admission
by NCLT
Meaning of ‘Dispute’ and ‘Existence of
Dispute’
Timelines Mandatory or Directory
Applicability of Law of Limitation
3

4.  Appeal by Corporate Debtor through the Board
of Directors
 Liability to pay Debt after Restructuring
Agreement with Banks
 Requirement of Consent of Joint Lenders Forum
before filing of an application by Financial
Creditor
 Mandatory documents with Application
 Resolution Professional's Remuneration/Fee
4

5. CASES DISCUSSED
Hon’able Supreme Court
 Chitra Sharma & Ors Vs Union of India & Ors
 Innoventive Industries Ltd Vs ICICI Bank Ltd
 Lokhandwala Kataria Construction Pvt. Ltd.
 Mothers Pride Dairy India Pvt. Ltd.
 Falcon Tyres Ltd
 Mobilox Innovations Private Limited Vs Kirusa Software
Private Limited
 Surendra Trading Co. Vs JK Jute Mills co. Ltd
High Courts
 Sree Metaliks Ltd & Ann
 Innoventive Industries Ltd.Vs Union of India & ors
5

6. CASES DISCUSSED
NCLAT
 Lokhandwala Kataria Construction Pvt. Ltd.
 Innoventive Industries Ltd Vs ICICI Bank Ltd
 Steel Konnect (India)
 Neelkanth Township and Construction Pvt. Ltd
 Macquarie Bank Limited Vs. Uttam Galva Metallics Limited
 S3 Electrical and Electronics Pvt Ltd
NCLT
 Magicrete Building Solutions Pvt. Ltd. Vs Pratibha Industries
Ltd,
 Brian Lau
 Jeena and Co
 Berger Paints India Ltd.
6

7. INTERPRETATION OF STATUTES
 Word of everyday use must be constructed in its
popular sense
 When material words are capable of two meanings,
one of which is likely to defeat or impair the purpose
and policy of the Act and another likely to assist
achievement then courts would prefer the later.
 Principle of Literal construction. Where the words
of a statute are plain, precise and unambiguous, the
intention of the Legislature is to be gathered from the
language of the statute itself and no external aid is
admissible to construe those words.
7

8. MISCHIEF RULE
 Get an exact conception of the aim, scope and
object of the whole Act to consider:
 What was law before the Act was passed?
 What was the mischief and defect for which the
law had not provided?
 What remedy Parliament has resolved and
appointed to cure the disease? and
 The true reason of the remedy
 And then the judges have to make such
construction as shall suppress the mischief, and
advance the remedy, and to suppress such
inventions and evasions for continuance of the
mischief. 8

9.  Sometimes clear and simple language may also
pose great difficulty
 In PV Narashimha Rao v. State (CBI), regarding
bribes paid for defeating no confidence motion.
 Held by majority, a member who voted in
parliament after receipt of bribe cannot be
prosecuted due to immunity under Article
105(2). However illegal gratification for abstaining
from voting was not entitled to immunity.
 Article 105 (2) of the Constitution: No member of
Parliament shall be liable to any proceedings in
any court in respect of anything said or any vote
given by him in Parliament or any committee
thereof,..... 9

10. INTERPRETATION?

11. INTERPRETATION?

12. AIDS TO INTERPRETATION
 Internal and External aids:
 Internal Aids those found within the statute: Title or
Preamble of the statute, Definitions, Chapter
Headings, Marginal Notes, Punctuations, Provisos,
Explanation, Saving Clauses and non-obstante
Clauses.
 External Aids not contained in the statute:
Historical background, Statement of objects and
reasons, original Bill as drafted and introduced,
Debates in the Legislature, State of things at the
time a particular legislation was enacted, Judicial
construction, Legal dictionaries and Commonsense.
12

13. RIGHTS OF HOME BUYERS
 SC - Chitra Sharma & Ors Vs Union of India & Ors
 NCLT Allahabad - IDBI Vs Jaypee Infratech Ltd.
 NCLAT - Nikhil Mehta and Sons Vs AMR
Infrastructure Ltd
 NCLT- Col. Vinod Awasthy Vs AMR Infrastructure
Ltd.
 Insolvency and Bankruptcy Code 2016 – Provisions
 Bankruptcy Law Reforms Committee (BLRC)
Report
13

14. DEVELOPMENTS IN IDBI-JAYPEE CASE
 9-Aug-17 CIRP application by IDBI admitted on by
Allahabad Bench of NCLT
 12-Aug-7 Public Announcement issued by IRP to
submit claims by 24th August 2017
 16-Aug-17 IBBI added Rule 9A and introduced a
new Form F for Creditors other than Financial
and Operational Creditors
 21-Aug-17 Home buyers filed a writ petition under
Article 32 of the Constitution
 4-Sep-17 SC Stayed NCLT order and fixed
hearing on 10th October 2017
 11-Sep-17 SC vacated the stay and passed other
directions on interlocutory application by IDBI.
14

15. SC ORDERS IN CHITRA SHARMA VS UNION OF INDIA
On 4th September 2017:
 Granted Permission to file SLP
 Order passed by the NCLT, Allahabad in IDBI Bank vs.
Jaypee Infratech Ltd stayed until further orders
On 11th September 2017:
 IRP shall forthwith take over the Management of JIL and
formulate and submit an Interim Resolution Plan within
45 days to SC.
 Interim Resolution Plan shall make all necessary
provisions to protect the interests of the home buyers
 Mr.Shekhar Naphade and Ms.Shubhangi Tuli shall
participate in the meetings of the CoC u/s 21 of IBC to
protect the interests of home buyers
15

16.  MD and the Directors of JIL and JAL shall not leave
India without the prior permission of SC
 JAL ,which is not a party to the insolvency
proceedings, shall deposit a sum of Rs.2,000
crores with SC on or before 27.10.2017.
 JAL should obtain prior approval of SC if any assets
or property are required to be sold
 All suits and proceeding instituted against JIL
remain stayed shall in terms of Section 14(1)(a) of
IBC
 “passed this order keeping in view the provisions of
the Act and also the interest of the home buyers”.
16

17. WHY PIL BY HOME BUYERS?
 PIL under Article 32 for violation of Article 14, 19 (1) (g),
21 of Constitution of India
 They are being non suited and rendered remediless in
violation of Article 14 and 21 of the Constitution of India
 Several pending litigation before the consumer forums
will not proceed in view of the moratorium under IBC
 Flats for which they have already paid nearly 90 to 95%
of the value will be counted as an Asset of the Company,
since the title over the said flats have not yet been
transferred in their name.
17

18. PRAYERS IN THE PIL BY HOME BUYERS
 That Section 14 of IBC 2016 should not curtail the legal
statutory and vested rights of the flat owners/buyers as
consumers under the Consumer Protection Act, 1986; or
 Alternative direction to declare the flat owners/buyers to
be notified by the Central Government as a secured
creditor in accordance with power provided under Section
36 (4)(a) (v) of the IBC
 Appoint an independent Auditor to conduct a Forensic
Audit
 The challenge is made particularly against Section 14, 53
and 238 of the IBC
18

19. CONSTITUTION OF INDIA
 Article 14 - The State shall not deny to any person
equality before the law or the equal protection of the laws
within the territory of India.
 Article 19 (1) All citizens shall have the right—
(g) to practise any profession, or to carry on any
occupation, trade or business.
 Article 21 No person shall be deprived of his life or
personal liberty except according to procedure
established by law.
19

20. REASONS FOR CHALLENGE
 NCLT as well as NCLAT in Col. Vinod Awasthy v. AMR
Infrastructure Limited and Nikhil Mehra vs. AMR
Infrastructure Limited have held that the flat buyers are
neither financial creditors nor operational creditors under
the IBC.
 An operational debt would be confined only to four
categories as specified in Section 5(21) of the IBC like
goods, services, employment and Government dues.
 Debt owed to the a flat purchaser had not arisen from
any goods, services, employment or dues which were
payable under any statute to the Centre / State
Government or local bodies.
20

21. NCLT IN COL. VINOD AWASTHY V. AMR INFRA
 The framer of the code has not included in the
expression ‘Operation Debt’ as any debt other
than the Financial Debt. It is thus confined to four
categories like goods, services, employment and
Government dues.
 Refund sought is necessarily associated with the
delivery of the possession of immovable property
which has been delayed to be recovered by the
Petitioner was associated with the possession of
immovable property.
21

22.  Final report of the Committee in Para 5.2.1
defines Operational Creditor like, the wholesale
vendor of spare parts whose spark plugs are
kept in inventory by the car mechanic and who
gets paid only after the spark plugs are sold to
acquire the status of ‘operational creditor’ so on
and so forth. The petitioner in the present case
has neither supplied any goods nor has
rendered any service to acquire the status of an
‘operational creditor’.
22

23.  We are further of the view that given the time line
in the code it is not possible to construe section 9
read with section 5(20) & (21) of the Code so
widely to include within its scope even the case
where dues are on account of advance made to
purchase the flat or a commercial site from a
construction company like the Respondent in
present case specially when Petitioner has
remedy available under Consumer Protection
Act and the General Law of the land.
23

24. NCLAT IN NIKHIL MEHTA AND SONS VS
AMR INFRASTRUCTURE LTD.
 We hold that the appellants have successfully
proved that they are 'financial Creditor' within the
meaning of Section 5(7) of the 'I & B Code
 Learned AA while rightly interpreted the provisions
of law to understand the meaning of expression
'financa1 creditor' ......... but failed to appreciate the
nature of transactions in the present case and
wrongly came to a conclusion "that it is a pure and
simple agreement of sale and purchase of a piece
of property and has not acquired the status of a
financial debt as the transaction does not have
consideration for the time value of money". 24

25. IBC PROVISIONS – SECTION 3
 Sec 3 (10) "creditor" means any person to
whom a debt is owed and includes a financial
creditor, an operational creditor, a secured
creditor, an unsecured creditor and a decree
holder;
 Sec 3 (11) "debt" means a liability or obligation
in respect of a claim which is due from any
person and includes a financial debt and
operational debt;
25

26. IBC PROVISIONS - SECTION 5
 Sec 5 (20) "operational creditor" means a
person to whom an operational debt is owed and
includes any person to whom such debt has
been legally assigned or transferred;
 Sec 5 (21) "operational debt" means a claim
in respect of the provision of goods or
services including employment or a debt in
respect of the repayment of dues arising under
any law for the time being in force and payable to
the Central Government, any State Government
or any local authority;
26

27. IBBI (IRP FOR CP) REGULATIONS 2016
 7. Claims by operational creditors.
(1) A person claiming to be an operational creditor, other
than workman or employee of the corporate debtor, shall
submit proof of claim to the interim resolution
professional in person, by post or by electronic means in
Form B of the Schedule.
 9A Claims by Other creditors
(1) A person claiming to be a creditor, other than those
covered under regulations 7, 8, or 9, shall submit proof of
its claim to the interim resolution professional or
resolution professional in person, by post or by electronic
means in Form F of the Schedule. (As inserted w.e.f.
16th August 2017)
27

28. Excerpts related to Operational Creditors
from the Report of
the Bankruptcy Law Reforms Committee
(BLRC) Volume I: Rationale and Design
28

29. BLRC REPORT
 The Committee proposes that any creditor,
whether financial or operational, should be
able to initiate the insolvency resolution process
(IRP) under the proposed code.
 It may be noted that operational creditors will
include workmen and employees whose past
payments are due.
 The Committee also recommends that a
resolution plan must necessarily provide for
certain protections for operational creditors.
(Pg 13) 29

30.  Enterprises have financial creditors by way of loan and
debt contracts as well as operational creditors such as
employees, rental obligations, utilities payments and
trade credit. (Pg 22)
 Liabilities fall into two broad sets: liabilities based on
financial contracts, and liabilities based on operational
contracts.
 Operational contracts typically involve an exchange
of goods and services for cash. For an enterprise, the
latter includes payables for purchase of raw-materials,
other inputs or services, taxation and statutory liabilities,
and wages and benefits to employees. (Pg 54)
30

31.  The second set of liabilities are operational liabilities,
which are more difficult to centrally capture given that the
counterparties are a wide and heterogeneous set.
(Pg 54)
 Operational creditors are those whose liability from the
entity comes from a transaction on operations. (Pg 77)
(Para 5.2.1)
 Who can trigger the IRP?
The Committee considers that both the debtor and the
creditors should have the power to trigger insolvency
resolution. (Pg 76) (Para 5.2.1)
31

32. ???
 A new category “Other Creditors” added through the
Regulations. Is it in line with the spirit of BLRC and IBC?.
 The term “Other Creditors” not used in the Act or Rules
 Does it mean Homebuyers have no rights under IBC to
initiate CIRP?
 Can a law deprive one category of creditors, of their
Constitutional rights to remedy?
 Can this be done by Regulations, which are subordinate
to Rules and Act, without modifying Act and Rules?
32

33. PRINCIPLES OF NATURAL JUSTICE –
OPPORTUNITY OF HEARING
 SC-Falcon Tyres Ltd Vs Edelweiss Asset Reconstruction
Co. Ltd, 05th Jun 2017
 HC-Calcutta Sree Metaliks Ltd & Ann Vs Union of India,
07th Apr 2017
 NCLAT - Innoventive Industries Ltd Vs ICICI Bank Ltd,
15th May 2017
33

34. SC IN FALCON TYRES
 NCLT is directed to provide opportunity of hearing to
the learned counsels of all parties before it and thereafter
consider the petition in accordance with law including on
the issue relating to the admission of petition before it.
 Calcutta HC in Sree Metaliks Ltd.
 Where a statute is silent on the right of hearing and it
does not in express terms, oust the principles of natural
justice, the same can and should be read into in.
 This statutory requirement of ascertainment of default
brings within its wake the extension of a reasonable
opportunity to the CD to substantiate by document or
otherwise, that there does not exist a default as claimed
against it.
34

35.  The proceedings before the NCLT are adversarial in
nature. Both the sides are, therefore, entitled to a
reasonable opportunity of hearing.
 Adherence to the principles of natural justice by NCLT or
NCLAT would not mean that in every situation, NCLT or
NCLAT is required to afford a reasonable opportunity of
hearing to the respondent before passing its order. In a
given case, a situation may arise which may require
NCLT to pass an exparte ad interim order against a
respondent.
35

36.  Therefore, in such situation, it may proceed to pass an
exparte ad-interim order, however, after recording the
reasons for grant of such an order and why it has chosen
not to adhere to the principles of natural justice at that
stage.
 It must, thereafter proceed to afford the party respondent
an opportunity of hearing before confirming such exparte
ad-interim order.
 In such circumstances, the challenge to the vires to
Section 7 of the Code of 2016 fails.
36

37. NCLAT IN INNOVENTIVE IND.
 As amended Section 424 of the Companies Act, 2013 is
applicable to the proceeding under the I&B Code, 2016,
it is mandatory for the adjudicating authority to follow
the Principles of rules of natural justice while passing an
order under I&B Code, 2016.
 Further, as Section 424 mandates the 'Tribunal' and
Appellate Tribunal, to dispose of cases or/appeal before it
subject to other provisions of the Companies Act, 2013 or
IB Code 2016 such as, Section 420 of the Companies
Act 2013 was applicable and to be followed by the
Adjudicating Authority. (Para 49)
37

38.  AA is bound to issue a limited notice to the CD before
admitting a case for ascertainment of existence of default
based on material submitted by the CD and to find out
whether the application is complete and or there is any
other defect required to be removed.
 Adherence to Principles of natural justice would not
mean that in every situation the AA is required to afford
reasonable opportunity of hearing to the Corporate
debtor before passing its order. (Para 53)
38

39. COMAPNIES ACT 2013 - PROVISIONS
 Section 420 of Companies Act, regarding reasonable
opportunity of being heard, refers to 'orders of Tribunal'
and not of Adjudicating Authority.
 Section 424 of Companies Act stands amended by IBC
as:
“The Tribunal and the Appellate Tribunal ...... , but shall
be guided by the principles of natural justice, and,
subject to the other provisions of this Act or of
Insolvency and Bankruptcy Code 2016 and of any
rules made there under,....”
39

40. IBC PROVISIONS
 Sec. 5 (1) of IBC defines "adjudicating authority" as
NCLT constituted u/s 408 of Companies Act
 IBC empowers AA' to pass orders u/s 7, 9 and 10 of the
Code, and not NCLT
 Rule 4 (3) IB (AAA) Rules 2016 - The applicant shall
dispatch forthwith, a copy of the application filed with the
Adjudicating Authority, by registered post or speed post
to the registered office of the corporate debtor.
(Application by Financial Creditor)
40

41.  Rule 6 (2) The applicant (OC) under sub-rule (1) shall
dispatch forthwith, a copy of the application filed with the
AA, by registered post or speed post to the registered
office of the corporate debtor.
(Application by Operational Creditor)
 Rule 7 (2) The applicant (CA) under sub-rule(1) shall
dispatch forthwith, a copy of the application filed with the
AA, by registered post or speed post to the registered
office of the corporate debtor.
(Application by Corporate Applicant)
41

42. REPUGNANCY OF STATE LAWS
 Innoventive Industries Ltd Vs ICICI Bank Ltd,
 SC - 31st Aug 2017
 NCLAT -15th May 2017
 NCLT Mumbai 17th and 23rd January 2017
42

43. SC IN INNOVENTIVE IND
 A Code is complete and that marks the
distinction between a Code and an ordinary
enactment, by that canon, is self-contained and
complete.
 It is settled law that a consolidating and
amending act like the present Central enactment
forms a code complete in itself and is exhaustive
of the matters dealt with therein. (Similarly held
for CPC, Income Tax Act and Arbitration Act )
43

44.  IBC is a Parliamentary law that is an exhaustive
code on the subject matter of insolvency in
relation to corporate entities, and is made under
Entry 9, List III in the 7th Schedule which reads
as under: “9. Bankruptcy and insolvency”
(Para 53)
 For these reasons, we are of the view that the
Maharashtra Act cannot stand in the way of the
corporate insolvency resolution process under
the Code.
44

45.  ...... the non-obstante clause, in the widest
terms possible, is contained in Section 238 of
the Code, so that any right of the CD under any
other law cannot come in the way of the Code.
For all these reasons, we are of the view that the
Tribunal was correct in appreciating that there
would be repugnancy between the provisions of
the two enactments.
 The judgment of the Appellate Tribunal is not
correct on this score because repugnancy does
exist in fact. (Para 56)
45

46. NCLAT ORDER
 ....it is apparent that the two enactments operate in
entirely different fields. This is further made clear by the
fact that the MRU Act is enacted under Entry 23 of List
III while the Code has been enacted under Entry 9 of the
List III.
 We hold that there is no repugnancy between I&B Code,
2016 and the MRU Act as they both operate in different
fields. The Parliament has expressly stated that the
provisions of the I&B Code, 2016 (which is a later
enactment to the MRU Act) shall have effect
notwithstanding the provisions of any other law for the
time being in force... (Para 75)
46

47. NCLT ORDER
 Since the liability suspended under MRU Act
being inconsistent with the default occurred to
the debt payable to the creditor, this order will
not be against the ratio decided by Hon'ble
Apex Court in Vishal N Kalsa v. Bank of India
and Others (2016) 3 see 762 (Para 113)
therefore, this Bench having not noticed any
merit in the argument of the CD Counsel, the
Application filed by the CD is hereby
dismissed. (Para 13).
47

48. KEY ISSUES IN DECIDING REPUGNANCY
 Cannot obey one without disobeying other
 Subject matter is relevant not the Entry in
Schedule III
48

49. WITHDRAWAL OF APPLICATION AFTER
ADMISSION
 SC- Lokhandwala Kataria Construction Pvt. Ltd. Vs Nisus
Finance and Investments Managers LLP, 24th July 2017
 SC - Mothers Pride Dairy India Pvt. Ltd. Vs Portrait
Advertising and Marketing Pvt. Ltd. 28th July 2017
 NCLAT - Lokhandwala Kataria Const. Pvt. Ltd. Vs Nisus
Finance and Inv. Managers LLP
13th Jul 2017
49

50. SC IN LOKHANDWALA KATARIA CONST.
 By the impugned order dated 13.07.2017, the
NCLAT was of the view that the inherent power could
not be so utilized. According to us, prima facie this
appears to be the correct position in law.
 However, since all the parties are before us today,
we utilize our powers under Article 142 of the
Constitution of India to put a quietus to the matter
before us. We take the Consent Terms dated
28.06.2017 and 12.07.2017 entered into between
the parties on record and also record the
undertaking of the appellant before us to abide by
the Consent Terms in toto.
50

51. SC IN MOTHERS PRIDE DAIRY INDIA
 Though we find that the order passed by the NCLAT is
correct, yet we think it is a fit case to exercise power
under Article 142 of the Constitution and accept the
settlement that has been entered into between the
parties.
 As we are accepting the settlement, the proceeding
pending before the NCLT, stands disposed of.
51

52. NCLAT IN LOKHANDWALA KATARIA CONST.
 Before admission of an application under Sec. 7, it is
open to the FC to withdraw the application but once it is
admitted, it cannot be withdrawn and is required to
follow the procedures laid down under Sections 13, 14,
15, 16 and 17 of I&B Code, 2016.
 Even the FC cannot be allowed to withdraw the
application once admitted, and matter can not be closed
till claim of all the creditors are satisfied by CD
52

53. NCLAT IN LOKHANDWALA KATARIA CONST.
 Rule 11 has not been adopted for the purpose of I&B
Code, 2016 and only Rules 20 to 26 have been adopted
in absence of any specific inherent power and where
there is no merit, the question of exercising inherent
power does not arise.
53

54. I & B (AAA) RULES 2016
 Rule 8 Withdrawal of application
The Adjudicating Authority may permit withdrawal of the
application made under rules 4, 6 or 7, as the case may
be, on a request made by the applicant before its
admission.
 Rule 10 Filing of application and application fee.—(1)
Till such time the rules of procedure for conduct of
proceedings under the Code are notified, the application
made under sub-section (1) of section 7, sub-section (1)
of section 9 or sub-section (1) of section 10 of the Code
shall be filed before the Adjudicating Authority in
accordance with Rules 20, 21, 22, 23, 24 and 26 of Part
III of the National Company Law Tribunal Rules, 2016.
54

55.  NCLT Rules 2016 - Rule 11 Inherent powers
Nothing in these rules shall be deemed to limit or
otherwise affect the inherent powers of the Tribunal to
make such orders or give such directions as may be
necessary for meeting the ends of justice or to
prevent abuse of the process of the Tribunal.
 NCLAT Rules 2016- Rule 11 Inherent powers
Nothing in these rules shall be deemed to limit or
otherwise affect the inherent powers of the Appellate
Tribunal to make such orders or give such directions as
may be necessary for meeting the ends of justice or to
prevent abuse of the process of the Appellate Tribunal.
55

56. CONSTITUTION OF INDIA -
 Article 142 (1) The Supreme Court in the exercise of its
jurisdiction may pass such decree or make such order as
is necessary for doing complete justice in any cause or
matter pending before it, and any decree so passed or
order so made shall be enforceable throughout the
territory of India in such manner as may be prescribed by
or under any law made by Parliament and, until provision
in that behalf is so made, in such manner as the
President may by order prescribe.
56

57. CODE OF CIVIL PROCEDURE
 Section 151 Saving of inherent powers of Court
Nothing in this code shall be deemed to limit or otherwise
effect the inherent powers of the court to make such
orders as may be necessary for the ends of the justice
or to prevent abuse of the process of the court.
57

58. ???
 Despite bar on withdrawal of application after admission,
SC has used its inherent powers to allow it.
 Inherent powers of NCLT and NCLAT under Rule 11 are
not made applicable for IBC
 After settlement of default/dues parties have to prefer
appeal to NCLAT and then SC to set aside CIRP.
Avoidable huge time and cost
58

59. ‘DISPUTE AND EXISTENCE OF DISPUTE
 Mobilox Innovations Private Limited Vs Kirusa
Software Private Limited
 NCLT rejected application on the ground that the default
payment was disputed
 NCLAT allowed the appeal on the ground that condition
of demand notice under Section 8(2) has not been
fulfilled by the CD and the defence claiming dispute was
not only vague, got up and motivated to evade the
liability.
 SC set aside the order of NCLAT
59

60. IBC PROVISIONS – DISPUTE
 Sec 5 (6) "dispute" includes a suit or arbitration
proceedings relating to—
 (a) the existence of the amount of debt;
 (b) the quality of goods or service; or
 (c) the breach of a representation or warranty;
 Sec 8 (2) The corporate debtor shall, within a period of
ten days of the receipt of the demand notice or copy of
the invoice mentioned in sub-section (1) bring to the
notice of the operational creditor—
 (a) existence of a dispute, if any, and record of the
pendency of the suit or arbitration proceedings filed
before the receipt of such notice or invoice in relation to
such dispute; 60

61.  Sec 9 (5) (ii) reject the application and communicate
such decision to the operational creditor and the
corporate debtor, if—
 (a) the application made under sub-section (2) is incomplete;
 (b) there has been repayment of the unpaid operational debt;
 (c) the creditor has not delivered the invoice or notice for
payment to the corporate debtor;
 (d) notice of dispute has been received by the operational
creditor or there is a record of dispute in the information
utility; or
 (e) any disciplinary proceeding is pending against any
proposed resolution professional:
61

62. SUPREME COURT HELD
 The AA, when examining an application u/s 9 of the Act
will have to determine:
 (i) Whether there is an “operational debt” as defined exceeding
Rs.1 lakh? (See Section 4 of the Act)
 (ii) Whether the documentary evidence furnished with the
application shows that the aforesaid debt is due andpayable
and has not yet been paid? and
 (iii) Whether there is existence of a dispute between the
parties or the record of the pendency of a suit or arbitration
proceeding filed before the receipt of the demand notice of the
unpaid operational debt in relation to such dispute?
 If any one of the aforesaid conditions is lacking, the
application would have to be rejected. (Para 25)
62

63.  ……, the word “and” occurring in Section 8(2)(a)
must be read as “or” keeping in mind the legislative
intent and the fact that an anomalous situation would
arise if it is not read as “or”.
 …..in that a dispute may arise a few days before
triggering of the insolvency process, in which case,
though a dispute may exist, there is no time to
approach either an arbitral tribunal or a court.
(Para 29)
 It is settled law that the expression “and” may be
read as “or” in order to further the object of the
statute and/or to avoid an anomalous situation.
(Para 30) 63

64.  ….., all that the AA 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.
….., 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 adjudicating
authority has to reject the application.
(Para 40)
64

65. TIMELINES MANDATORY OR DIRECTORY
 SC in Surendra Trading Co. Vs JK Jute Mills co.
Ltd on 19th September 2017
 NCLAT in JK Jute Mills co. Ltd Vs Surendra
Trading Co. Vs on 1st May 2017
 SC in Mobilox Innovations Private Limited Vs
Kirusa Software Private Limited on 21st
September 2017
65

66. TIME LINES UNDER IBC
 14 days for AA to accept or reject application for CIRP
{Sec. 7(4), 9(5) and 10(4) respectively for FC, OC, and CA }
 Upto 10 more days for reasons to be recorded Sec 64
(1)
 7 days for removal of defect in the application
{Proviso to Sec 7(5), 9(5) and 10(4) for FC, OC, and CA}
 180 days to complete the CIRP process Sec 12 (1), 90
days for Fast Track Sec 56 (1)
 Up to 90 days’ one time extension for CIRP Sec 12 (3),
45 days’ for Fast Track Sec 56 (3)
 Within 14 days of ICD, AA to appoint an IRP Sec 16 (1)
 Up to 30 days - Term of the IRP Sec 16(5)
66

67. NCLAT HELD IN JK JUTE MILLS
 Mandatory Timelines
 180 days to complete the CIRP process and up to 90
days’ one time extension
 7 days for removal of defect in the application
 Directory Timelines
 14 days for AA to accept or reject application for CIRP
 Within 14 days of ICD, AA to appoint an IRP
 Up to 30 days - Term of the IRP
67

68. SC HELD IN SURENDRA TRADING CO
 Regarding 7 days for removal of defect in the
application
 When this period of fourteen days given by the
statute to the adjudicating authority to take a
decision to admit or reject the application is
directory, there is no reason to make it
mandatory in respect of the first stage, which is
pre-adjudication stage. (Para 22)
 Thus, we hold that the aforesaid provision of
removing the defects within seven days is
directory and not mandatory in nature. (Para 24)68

69. CAVEAT
 When such an application comes up for
admission/order before the AA, it would be for
the AA to decide as to whether sufficient cause is
shown in not removing the defects beyond the
period of seven days.
 Once the AA is satisfied that such a case is
shown, only then it would entertain the
application on merits, otherwise it will have right
to dismiss the application. (Para 24)
69

70. REASONS
 Whether such a rejection is rejection on merits thereby
debarring filing fresh application, or
 It is to be treated as an administrative order and
application not examined on merits.
 In the former case it would be travesty of justice that the
applicant is shown the door without adjudication of his
application on merits.
 If the latter alternative is accepted, then rejection is not
going to serve any purpose as the applicant would be
permitted to file fresh application.
 Thus, in either case, no purpose is served by treating the
aforesaid provision as mandatory. (Para 21)
70

71. SC IN MOBILOX INNOVATIONS VS KIRUSA
SOFTWARE
 ........., the AA must follow the mandate of
Section 9, as outlined above, and in
particular the mandate of Section 9(5) of
the Act, and admit or reject the application,
as the case may be, depending upon the
factors mentioned in Section 9(5) of the Act.
(Para 25)
71

72.  The strict adherence of these timelines is of
essence to both the triggering process and
the insolvency resolution process.
 Both the Tribunal and the Appellate Tribunal
will do well to keep in mind this principal
objective sought to be achieved by the
Code and will strictly adhere to the time
frame within which they are to decide
matters under the Code. (Para 27)
72

73. APPLICABILITY OF LAW OF LIMITATION
 NCLAT in Neelkanth Township and Construction Pvt.
Ltd. V/s. Urban Infrastructure Trustees Ltd.,
 There is nothing on the record that Limitation Act,
2013 is applicable to I& B Code.
 The I& B Code, 2016 is not an Act for recovery of
money claim, it relates to initiation of Corporate
Insolvency Resolution Process. If there is a debt
which includes interest and there is default of debt
and having continuous course of action, the
argument that the claim of money by Respondent is
barred by Limitation cannot be accepted.
(Para 24)
73

74.  Section 60 (6) Notwithstanding anything contained in the
Limitation Act, 1963 or in any other law for the time being
in force, in computing the period of limitation specified for
any suit or application by or against a corporate debtor
for which an order of moratorium has been made under
this Part, the period during which such moratorium is in
place shall be excluded.
74

75. APPEAL BY CD THROUGH DIRECTORS
 SC - Innoventive Industries Ltd Vs ICICI Bank Ltd 31st
August 2017
 NCLAT- Steel Konnect (India) Pvt. Ltd. Vs Hero Fincorp
Ltd, 29th Aug 2017
75

76. SUPREME COURT IN INNOVENTIVE
 According to us, once an insolvency professional
is appointed to manage the company, the
erstwhile directors who are no longer in
management, obviously cannot maintain an
appeal on behalf of the company.
 In the present case, the company is the sole
appellant. This being the case, the present
appeal is obviously not maintainable.
(Obiter dicta?)
76

77. NCLAT HELD
 "IRP' has not been vested with any specific power to
sue any person on behalf of the 'CD'. However, in
case of such difficulty, it is always open to the 'IRP'
to bring to the notice of the AA for appropriate order.
 Once the application under Section 7 or 9 is
admitted, the 'CIRP' starts in such case one of the
aggrieved party being the 'CD' has a right to prefer
an appeal under Sec., apart from any other
aggrieved person like Director(s) of the company or
members, who do not cease to be Director(s) or
member(s), as they are not suspended but their
function as 'Board of Director(s)' is suspend. 77

78.  The 'IRP' once given consent to function directly
or indirectly, he cannot challenge his own
appointment, except in case where he has not
given consent. If the 'CD' is left in the hands of
'IRP' to raise his grievance by filing an appeal
under Sec. 61, it will be futile, as no 'IRP' will
challenge the initiation of 'Insolvency Resolution
Process' which ultimately result into the
challenge of his appointment.
78

79.  'CD' in such case cannot be represented by the
'IRP', whose appointment is under challenge and
for all purpose to be represented through the
person who represented the 'CD' at the stage of
admission before the Adjudicating Authority.
79

80. APPEAL CONTINUATION OF SUIT
 Bay Berry Apartments Pvt. Ltd. v. Shobha [Bench
Strength 2], CA No. 8814/2003 (19/10/2006),
2007 AIR(SC) 226:
 Held, an appeal is a continuation of suit - An
appeal thus is a re-hearing of the main matter
and the appellate court can re-appraise, re-
appreciate and review the entire evidence oral as
well as documentary and can come to its own
conclusion
80

81.  Rekha Mukherjee v. Ashish Kumar Das [Bench
Strength 3], CA No. 9131/2003 (18/11/2003), 2004
AIR(SC)
 Even in relation to a civil dispute, an appeal is
considered to be a continuation of the suit and a
decree becomes executable only when the same is
finally disposed of by the Court of Appeal
 Having regard to the doctrine of merger as also the
principle that an appeal is in continuation of suit, we
are of the opinion that the decision of the
Constitution Bench in S.S. Rathore (supra) was to be
followed in the instant case. 81

82. APPEAL BY THIRD PARTY
 A financial creditor filed appeal for stay on
insolvency else the winding up petition will be
affected. NCLAT turned down saying if the
application under IBC is complete NCLAT cannot
interfere (Madhur Engineers Pvt Ltd & Anr.Vs
Facor Steels Ltd. )
82

83. LIABILITY TO PAY DEBT AFTER RESTRUCTURING
 Innoventive Industries Ltd Vs ICICI Bank Ltd
 SC - 31st Aug 2017
 NCLAT -15th May 2017
83

84.  According to us, one particular clause in the MRA is
determinative on the merits of this case, even if we
were to go into the same. Under Article V entitled
“Representations and Warranties”, clause 20(t)
states as follows:
 “(t) NATURE OF OBLIGATIONS. The obligations
under this Agreement and the other Restructuring
Documents constitute direct, unconditional and
general obligations of the Borrower and the
Reconstituted Facilities, rank at least pari passu as
to priority of payment to all other unsubordinated
indebtedness of the Borrower other than any priority
established under applicable law.”
84

85.  The obligation of the corporate debtor was,
therefore, unconditional and did not depend
upon infusing of funds by the creditors into the
appellant company.
 NCLAT-Insofar as MRA dated 8th Sep 2014 is
concerned; the appellant cannot take advantage
of the same. Even if it is presumed that fresh
agreement came into existence, it does not
absolve the Appellant from paying the
previous debts which are due to the financial
creditor. (Para 80)
85

86. CONSENT OF JLF BEFORE FILING OF AN
APPLICATION BY FC
 NCLAT - Innoventive Industries Ltd Vs ICICI Bank Ltd -
15th May 2017
 The AA is not required to look into any other factor,
including the question whether permission or consent has
been obtained from one or other authority, including the
JLF. (Para 84)
86

87.  For initiation of corporate resolution process by FC
under Section 7 (4) of the Code, 2016, the ‘AA' on
receipt of application under sub-section (2) is
required to ascertain existence of default from the
records of IU or on the basis of other evidence
furnished by the FC under sub-section (3). Under
Section 7 (5), the ‘AA' is required to satisfy -
 (a) Whether a default has occurred;
 (b) Whether an application is complete; and
 (c) Whether any disciplinary proceeding is against
the proposed Insolvency Resolution Professional.
(Para 82)
87

88. MANDATORY DOCUMENTS WITH APPLICATION
 NCLAT -Neelkanth Township and Construction Pvt. Ltd.
V/s. Urban Infrastructure Trustees Ltd., 11th August 2017
 NCLAT- Macquarie Bank Limited Vs. Uttam Galva
Metallics Limited 17th April 2017
 NCLT Mumbai - Magicrete Building Solutions Pvt. Ltd. Vs
Pratibha Industries Ltd, 31st July 2017
88

89. APPLICATION BY FC
 Sec 7(2) The FC shall make an application under sub-
section (1) in such form and manner and accompanied
with such fee as may be prescribed.
 (3) The financial creditor shall, along with the application
furnish—
 (a) record of the default recorded with the information utility
or such other record or evidence of default as may be
specified;
 (b) the name of the resolution professional proposed to act as
an interim resolution professional; and
 (c) any other information as may be specified by the Board.
89

90. NCLAT HELD THAT
 It is well settled that rules of procedure are to
be construed not to frustrate or obstruct the
process of adjudication under the substantive
provisions of law. A procedural provision cannot
override or affect the substantive obligation of
the adjudicating authority to deal with
applications under Section 7 merely on the
ground that Board has not stipulated or framed
Regulations with regard to sub-section 3(a) of
Section 7. (Para 18)
90

91.  Under Rule 4(1) of IB (AAA) Rules, 2016, a 'FC' is
required to apply itself or jointly in an application
under Section 7 in terms of Form-1. Part V of Form-1
deals with particulars of 'Financial Debt' (documents,
record and evidence of default). (Para 19)
 We hold that in absence of regulation framed by the
Board relating to record of default recorded with the
information utility or other record of evidence of
default specified, "the documents", 'record' and
'evidence of default' prescribed at Part V of Form-1,
of the Adjudicatory Rules 2016 will hold good to
decide the default of debt for the purpose of Section
7 of the 'I&BCode'. (Para 20)
91

92. APPLICATION BY OC
 Sec 9 (3) The operational creditor shall, along with the
application furnish—
 (a) a copy of the invoice demanding payment or demand
notice delivered by the operational creditor to the
corporate debtor;
 (b) an affidavit to the effect that there is no notice given
by the corporate debtor relating to a dispute of the unpaid
operational debt;
 (c) a copy of the certificate from the financial
institutions maintaining accounts of the operational
creditor confirming that there is no payment of an unpaid
operational debt by the corporate debtor; and
 (d) such other information as may be specified.
92

93.  Sec 3 (14) "financial institution" means—
 (a) a scheduled bank;
 (b) financial institution as defined in section 45-I
of the Reserve Bank of India Act, 1934;
 (c) public financial institution as defined in clause
(72) of section 2 of the Companies Act, 2013;
and
 (d) such other institution as the Central
Government may by notification specify as a
financial institution;
93

94. NCLAT HELD
 We thereby, hold that 'Macquarie Bank', Australia not
being a 'financial institution' within the meaning of
sub-section (14) of Section 3 of the 'I & B Code', any
certificate given by the said bank cannot be relied
upon, to decide default of debt (Para 10)
 There is another reason to hold that the application
under Section 9 is not maintainable. We find from
the record that the so called application under
Section 8 is not in accordance with law and is
defective. The notice under sub-section (1) of
Section 8 of 'I & B Code was not issued by the
'Operational Creditor' but by a Lawyer of Singapore.
(Para 11)
94

95. NCLT MUMBAI DIRECTION TO BANKS
 In Magicrete Building Solutions Vs Pratibha Ind
 The petitioner counsel having reported that
Bank maintaining the account of OC not issuing
certificates as envisaged u/s 9 of IBC 2016. It is
hereby made clear that all citizens of the country
are bound by the statute governing the people of
this country, therefore the bank is not exempted
under the statute, whereby the respective Bank
may issue certificate as envisaged under
respective section on creditor approaching Bank
95

96. SC IN MOBILOX INNOVATIONS VS KIRUSA SOFTWARE
 The confirmation from a financial institution that there is
no payment of an unpaid operational debt by the
corporate debtor is an important piece of information that
needs to be placed before the adjudicating authority,
under Section 9 of the Code, but given the fact that the
adjudicating authority has not dismissed the application
on this ground and that the appellant has raised this
ground only at the appellate stage, we are of the view
that the application cannot be dismissed at the
threshold for want of this certificate alone. (Para 41)
96

97.  NCLT Delhi allows application by OC if Bank Account
Statement is filed along with affidavit
 Demand Notice has to be under IBC in the format
prescribed and not a general demand notice or a
notice under section 433 and 434 of CA, 1956 ( Era
Infra Engineering Ltd Vs Prideco Commercial
Projects Pvt Ltd )
 Joint application by Ocs not allowed - Notice and
application has to be filed by OC individually and not
jointly. As the OC will have to issue their individual
claim and the claims of different OC will vary. (Uttam
Galva Steel Limited.VsDF Deutsche Forfait AG ) 97

98. AUTHORITY TO PRESENT CIRP APPLICATION
 Power of attorney holder are not authorised to
present Insolvency petition. Only representatives
duly authorised by Board Resolution are can do so.
(ICICI Bank Vs.Palogix Infrastructure Pvt. Ltd. and
Diamond Engineering (Chennai) Vs Shah Brothers)
98

99. IRP /RP FEE FIXATION
 NCLAT - S3 Electrical & Electronics Pvt. Ltd Vs Brian
Lau with Andhra Bank Vs Brian Lau
2nd August 2017
 NCLT Delhi - Brian Lau Vs S3 Electrical and Electronics
Pvt. Ltd, 31st August 2017
 NCLT Chandigarh - Jeena and Co. vs. lnox Wind Ltd, 4th
August 2017
 NCLT Kokata - Berger Paints India Ltd. Vs. Precision
Engineers & Fabricators Pvt. Ltd., 16th August 17.
99

100. NCLAT IN S3 ELECTRICAL
 Order(s), if any, passed by the Learned AA
appointing any 'IRP' or declaring moratorium,
......... and action, if any, taken by the ‘IRP',
including the advertisement, .........are declared
illegal and are set aside. (Para 8)
 Learned AA will fix the fee of 'IRP', if appointed
and the appellant-'CD' will pay the fees of the
IRP, for the period he has functioned. (Para 9)
100

101. NCLT DELHI (PB) IN BRIAN LAU
 We do not find that the claim made by IRP
suffers from any arbitrariness or is excessive.
 Minimum fee suggested by a Statutory
Institution of Cost and Works Accountants of
India, cannot be regarded as excessive.
 Fee charged Rs. 15,000 per day for 17 visits to
CD and cost of manpower @ Rs. 1000 per
person for 5 persons for 64 days.
 Total fee charged Rs. 5,25,000 by IRP
101

102. NCLT CHANDIGARH IN JEENA AND CO.
 The fee of the lRP is assessed at Rs. 3 lacs. Out
of the total fee of Rs. 3 lacs, the "OC" has paid
Rs. 1.75 lacs to the lRP which has already been
reimbursed to them by the 'CD'.
 It is directed that the remaining amount of Rs.
1.25 lacs be paid to the lRP by the CD within two
weeks
102

103. NCLT KOLKATA IN BERGER PAINTS I LTD
 RP has accepted Rs. 1,00,000 as remuneration,
again COC recommended Rs. 2,00,000 as
remuneration and its meeting dated 11.8.2017
has approved the remuneration of RP of Rs.
3,00,000. It is pertinent to mention here that IRP
has given his consent to accept Rs. 1,00,000
then how his remuneration is increased from Rs.
1,00,000 to Rs. 3,00,000, is a matter of concern
and COC will decide on the matter in its next
meeting.
103

104. ???
 Tribunals have taken a liberal view in support of decent
fee for IPs
 Low quote for IRP assignment may adversely affect the
prospects of higher fee later as RP, as happened in case
of Berger Paints
 Free Market, and Protection from exploitation
 Healthy Competition or cut throat competition
104

105. जय ह द Jai Hind
ध यवाद Thanks
Madhusudan Sharma
Advocate, Insolvency Professional, FCS, FCMA
madhu.mss@gmail.com 9868872918
105