vol. 7, august-october, 2019 › 2020 › 09 › nuals-ibc-e-newsletter-vol-vii.pdfu/s. 7 or s.9 of...

Vol VII CPSLR, NUALS

NUALS IBC E-NEWSLETTER [1]

NUALS IBC E-NEWSLETTER

Vol. 7, August-October, 2019

* All views expressed are those of the authors. The Newsletter is for private circulation and not

for sale.

CONTENTS

KEY HIGHLIGHTS…………………………………………………………………...5

[ARTICLES]

WHETHER RESOLUTION PROFESSIONAL CAN ADMIT A CLAIM OF

UNLIQUIDATED DAMAGES FOR BREACH OF CONTRACT UNDER IBC

By: Prachi Jain and Bhanu Prakash Pandey……………………………………………………..14

RELEASING LIABILITY OF GUARANTOR POST APPROVAL OF

RESOLUTION PLAN: STILL UP IN THE AIR?

By: Saumya Agarwal………………………………………………………………………...17

FAVORITISM IN DEALING WITH CREDITORS: THE WELL-SETTLED

DOCTRINE OF INSOLVENCY LAW

By: Aastha Agarwalla & Daksh Aggarwal…………………………………………………….21

SECTION 230 OF COMPANIES ACT: A SURROGATE ROUTE OR NOT?

By: Shrey Mahajan…………………………………………………………………………..25

AN INITIATIVE OF THE CENTRE FOR PARLIAMENTARY STUDIES AND LAW REFORMS, NUALS (KOCHI)



APPLICABILITY OF MORATORIUM ON SUITS OR PROCEEDINGS UNDER

SECTION 14 OF THE IBC- AN ANALYSIS

By: Ashish Paliwal…………………………………………………………………………..29

NBFCS ARE NO MORE BEYOND THE PURVIEW OF IBC: AN ANALYSIS OF

THE INSOLVENCY AND BANKRUPTCY (INSOLVENCY AND

LIQUIDATION PROCEEDINGS OF FINANCIAL SERVICE PROVIDERS

AND APPLICATION TO ADJUDICATION AUTHORITY) RULES 2019

By: Rupal Jaiswal……………………………………………………………………………32

CHANGE OF CAPITAL STRUCTURE OF CORPORATE DEBTOR- TUSSLE

BETWEEN COC AND NCLT

By: Rishika Mehta & K. Shiva……………………………………………………………….37

LIABILITY OF PERSONAL GUARANTORS UNDER THE INSOLVENCY

RULES: EXTENDING THE SCOPE OF INSOLVENCY AND BANKRUPTCY

CODE, 2016

By: Pranay Bhattacharya……………………………………………………………………..41

[CASE UPDATES]

SUPREME COURT.…………………………………………………………..45

NCLAT………………………………………………………………………………..50

NCLT.…………………………………………………………………………………60



OUR ADVISORS

NUALS IBC E-NEWSLETTER TEAM

Rohitesh Tak

Chitransh Vijayvergia

Pulkit Khare

Vaidehi Soni

Dilmrig Nayani

Mudit Jain

Nafiza Parveen

Poorthi Balakrishnan

Parul Sharma

Puru Varma

Vidit Goyal

Jagriti Sanghi

Nikhil Gupta

Shashwat Bhaskar

Vallari Dronamraju

Abhishek Lalwani

Abhinav Mathur

Adarsh Vijaykumaran

Ashwin Sathish Nair

Nihal Sahu

Husna Fayaz

Winy Daigavane

Belmannu Pavan

Anubhav Sharma

Shiren Panjolia

Padmavathi Prasad

Gayathri K.K.

Jyotsna Punshi

Abhishek Jamalpur

Rishabh Saxena

Dr. Anil R. Nair

Associate Professor

NUALS,

Kochi

Nihas Basheer

Partner

Wadia Ghandy & Co.,

Mumbai

Suharsh Sinha

Partner

AZB & Partners,

Mumbai

Rajeev Vidhani

Partner

Khaitan & Co.,

Mumbai



LIST OF ABBREVIATIONS

S. NO. ABBREVIATION MEANING

1. A/c Account

2. AA Adjudicating Authority

3. AGM Annual General Meeting

4. Arbitration Act Arbitration & Conciliation Act, 1996

5. AT Appellate Tribunal

6. BoD Board of Directors

7. CD Corporate Debtor

8. CIN Corporate Identification Number

9. CIRP Corporate Insolvency Resolution Process

10. CIRP Regulations Corporate Insolvency Resolution Process Regulations, 2016

11. CPSLR Centre for Parliamentary Studies and Law Reforms, Kochi

12. CWP Company Writ Petition

13. EGM Extra-Ordinary General Meeting

14. FC Financial Creditor

15. HC High Court

16. IBBI Insolvency and Bankruptcy Board of India

17. IBC/Code Insolvency and Bankruptcy Code, 2016

18. IRP Interim Resolution Professional

19. I.T. Act Information Technology Act, 2000

20. JLF Joint Lenders Forum

21. JV Agreement Joint Venture Agreement

22. NCLAT National Company Law Appellate Tribunal

23. NCLT National Company Law Tribunal

24. N.I. Act Negotiable Instruments Act, 1881

25. RBI Reserve Bank of India

26. Reg. Regulation

27. RoC Registrar of Companies

28. RP Resolution Professional

29. S. Section

30. Ss. Sections

31. SARFAESI Securitisation and Reconstruction of Financial Assets and

Enforcement of Security Interest Act, 2002

32. SC Supreme Court of India

33. SICA Repeal Act,

2003

The Sick Industrial Companies (Special Provisions) Repeal Act,

2003

34. u/S. Under Section



KEY HIGHLIGHTS

Serial No.

Case Name Date Key Findings Page No.

SUPREME COURT OF INDIA

1. Pioneer Urban Land and Infrastructure Limited & Anr. v. Union of India & Ors., Civil Original/Appellate Jurisdiction Writ Petition (Civil) No. 43 of 2019

August 09, 2019 The treatment of homebuyer’s as FCs under the Code is not violative of Article 14 and 19(1)(g) r/w Article 19(6) of the Constitution of India, 1950.

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2. Vashdeo R Bhojwani v. Abhyudaya Co-Operative Bank Ltd & Anr., Civil Appeal No. 11020 of 2018

September 02, 2019

The right to file an application u/S. 7 or S.9 of the Code accrues only when the default occurs three years prior to the filing of an application. The default resulting after the issue of recovery certificate in favor of the creditor is not a continuing wrong under S. 23 of the Limitation Act, 1963.

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3. Gaurav Harigovindbhai Dave v. Asset Reconstruction Company (India) Ltd & Anr., Civil Appeal No. 4952 of 2019

September 18, 2019

The intent of the Code is not to give a new lease of life to debts which are already time-barred. The period of limitation would start to run not from the date of assignment of debt but from the date when the account of the CD is classified as an NPA.

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4. Duncan Industries Ltd. v. A. J. Agrochem, Civil Appeal No. 5120 of 2019

October 04, 2019

The provisions of the IBC overrides that of the Tea Act, 1953.

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5. Rahul Jain v. Rave Scans Pvt. Ltd. & Ors., Civil Appeal No. 7940 of 2019

November 08, 2019

The amendment to Reg. 38 of the ‘CIRP Regulations’ is prospective in nature and not retrospective. The dissenting FC could be paid only the liquidation value if the CIRP has been initiate prior to the CIRP Regulations amendment, w.e.f. October 05, 2018.

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NCLAT

6. Ilam Chand Kamboj v. M/s ANG Industries Ltd., Company Appeal (AT) (Insolvency) No. 253 of 2019 And I.A. No. 995 of 2019

August 02, 2019

The AA shall not pass any adverse observation against the RP without providing him a reasonable opportunity to be heard. Adverse observations made by the AA against the RP are not conclusive and final. The IBBI shall adjudicate upon the liability of RP on merit and in compliance with the principles of natural justice.

50

7. Sukhbeer Singh v. Dinesh Chandra Agarwal (Resolution Professional, Maple Realcon Pvt. Ltd. & Ors., Company Appeal (AT) (Insolvency) No. 259 of 2019

August 07, 2019

The promoters who can settle the matter with all the FCs, OCs including the allottees’ can give their proposal. The RP is bound to place such proposal before the CoC, which shall consider it in the light of S. 12A of the Code.

50

8. Sundaresh Bhatt, Resolution Professional for Sterling Biotech Ltd. v. Andhra Bank, Company Appeal (AT) (Insolvency) No. 601 of 2019

August 28, 2019

The disqualification under S. 29 A of the Code would be inapplicable when an application under 12A is filed and approved by more than 90% of the voting share in the CoC.

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9. Union of India & Anr. v. Videocon Industries Ltd. & Ors. Company Appeal (AT)(Insolvency) No. 408 of 2019

August 30, 2019

The CD cannot be asked to part away with any amount in furtherance of a demand notice issued against the CD during the CIRP including the share of profit during the period of moratorium.

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10. Encore Asset Reconstruction Company Private Limited v. Calyx Chemicals & Pharmaceuticals Limited & Ors. Company Appeal (AT) (Insolveny) No. 657 of 2019

August 30, 2019

The resolution plan, once approved by the CoC, cannot be challenged before the AA even if the FCs have to bear a haircut of more than 95%.

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11. Mr. K.P. Jayaram and Anr. v. M/s. Radha Exports (India) Pvt. Ltd., Company

September 02, 2019

The claim was held to be not barred by limitation as the Appellants moved to the

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Appeal (AT) (Insolvency) No. 224 of 2019

appropriate forum u/S. 433 (e) of the Companies Act, 2013 and it was due to the deletion of the provision which gave Appellants no option but to move under the IBC.

12. N. Padmanabhan & Anr. v. M/s. Sri Adinath Enterprises & Anr., Company Appeal (AT) (Insolvency) No. 577 of 2019

September 02, 2019

A restructuring plan for revival of the CD can be submitted at the stage of liquidation as per S. 230 of the Companies Act, 2013.

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13. Mr. Ranjan Goyal v. Sharad Vadehra, Company Appeal (AT) (Insolvency) No. 173 of 2019

September 02, 2019

If a JV agreement is entered into by the CD (‘holding company’) and its subsidiary for development of land then an application u/S. 7 by an allottee will also be maintainable against the CD.

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14. P.V. Krishnaprasad & Anr. v. Mr. J. Manivannan, Company Appeal (AT) (Insolvency) No. 884 of 2019

September 03, 2019

Even if all the creditors were not informed of the CIRP and there is no ‘Resolution Plan’, there could be no exclusion of any period as the order of ‘Liquidation’ had been passed. All the creditor’s interest could be safeguarded by the ‘Liquidator’ in the process of Liquidation.

55

15. Mr. Hemang Phophalia v. The Greater Bombay Co-operative Bank, Company Appeal (AT) Insolvency No. 765 of 2019

September 05, 2019

An application under S. 7 or 9 of the Code is maintainable against the CD, even if its name has been removed from the ‘Register of Companies’.

55

16. Sagar Sharma & Anr. v. Phoenix ARC Private Limited, Company Appeal (AT) (Insolvency) No. 177 of 2019

September 05, 2019

The CIRP can be initiated against the CD even if the decision of the JLF is pending for finalization of a corrective action plan.

55

17. Arunava Sikdar v. Sanjeev Saxena & Ors., Company Appeal (AT) (Insolvency) No. 914 of 2019

September 05, 2019

The provisions of IBC are binding on all the stakeholders, State Govt., Central Govt., and the Local Authorities. Once the CIRP is initiated the State Govt. shall

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hand over the possession of assets, records, management, and affairs of CD in favor of the RP. The State Govt. cannot change the BoD of CD as it stands suspended as per S.17 of the IBC

18. XL Energy Ltd. v. Khandoba Prasanna Sakhar Karkhana Ltd. & Ors. Company Appeal (AT) (Insolvency) No. 907 of 2019

September 11, 2019

A claim when submitted after the approval of the resolution plan by the CoC cannot be considered for payment by the AA.

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19. Sanjay Kumar Ruia v. Catholic Syrian Bank Ltd. & Anr Company Appeal (AT) (Insolvency) No. 876 of 2019

September 11, 2019

The fee of the RP and the cost incurred by him can be filed as a claim before the Liquidator. Once the amount is shown as ‘fees’ and ‘resolution cost’ the same shall be paid as per S. 53 of the IBC.

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20. Jagwani Group of Industries Pvt. Ltd. & Anr v. Aryavart Chemicals Pvt. Ltd. & Ors. Company Appeal (AT) (Insolvency) No.938 - 939 of 2019

September 11, 2019

As per S. 61 (2) of Code the AT is not empowered to condone a delay beyond 15 days.

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21. Sreeram E. Techno School Pvt. Ltd. v. Beans and More Hospitality Pvt. Ltd. through R.P. Prabhjit Singh Soni Company Appeal (AT) (Insolvency) No. 936 of 2019

September 11, 2019

The promoter of the CD can submit the resolution plan if it not an ineligible party as per S. 29 A of the Code.

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22. Armada Singapore Pvt. Ltd. v. Ashapura Minechem Ltd. Company Appeal (AT) Insolvency No. 350 of 2019

September 30, 2019

An application filed under S. 10 of the Code without the approval through AGM/EGM shall be rejected for lack of bona-fides.

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23. Pratima P. Shah (Ex-Director Amar Remedies Ltd.) v. IDBI Bank Ltd. & Ors. Company Appeal (AT) (Insolvency) No. 196 of 2019

September 30, 2019

The prohibition enumerated under S. 11 of the Code is not applicable to reference application filed under S. 252 r/w S. 10 of the Code.

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24. Padmaiah Vuppu v. Reliance Capital AIF

October 14, 2019

As the execution of corporate guarantee was never

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Trustee Company Pvt. Ltd. & Ors., Company Appeal (AT) (Insolvency) No. 1025 of 2019

challenged by any shareholder/director of CD, raising such contention at a belated stage in a petition u/S. 7 was not allowed by the NCLAT.

25. JSW Steel Limited v. Mahender Kumar Khandelwal & Anr., Company Appeal (AT) (Insolvency) No. 957 of 2019

October 14, 2019

Post approval of a resolution plan, the assets of the CD cannot be attached by the ED, as the resolution plan is binding on all stakeholders including government agencies.

59

26. M/s Saregama India Limited v. Home Movir Makers Private Limited, Company Appeal (AT) Insolvency No. 359 of 2019

October 23, 2019

The AA is not a civil court to decide about the breach of contract between the parties.

60

NCLT

27. Noble Resources International Pvt. Ltd. v. Resolution Professional of Uttam Galva Metallics Ltd. & Ors, MA 2141/2019 in CP No. 1830/IBC/NCLT/MB/MAH/2018

August 01, 2019

The unsuccessful resolution applicant is not entitled to receive the minutes of the meeting by which the CoC approves the resolution plan of the bidder. As per Reg. 35(2) of the CIRP Regulations the RP is obliged to maintain confidentiality of fair market value and liquidation value of assets of the CD.

60

28. Agarwal Associates & Agencies v. Vinay Fabrics Private Limited, CP No. 4376/IBC/NCLT/MB/MAH/2018

August 02, 2019

A loan will not have a commercial effect of borrowing if there is no agreement for the payment of interest and the borrower is not a promotor, director or shareholder of the Company.

61

29. Jayanta Banerjee v. Incab Industries Limited, CP (IB) No. 1684/KB/2018

August 07, 2019

The AA can exercise jurisdiction even when a dispute regarding the debt assignment agreement is pending before the High Court.

62

30. Stressed Assets Stabilisation Fund v. Galda Power &

August 14, 2019

The miscalculation of the amount of debt is not a ground to reject the

63

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Telecommunications Ltd., CP(IB)No. 384/7/HDB/2018

application under S. 7 of the Code. The AA only needs to ascertain the existence of default of minimum 1 lakh. Further, the period of limitation starts when the debt was last acknowledged.

31. Bank of India v. Syncom Healthcare Limited, CP 42 (IB)/MB/2019

August 14, 2019

Non-filing of the information with the IU is not fatal to prove the existence of debt and default under S. 7 of the Code.

63

32. In the matter of Mira Green Tech Private Limited, CP No. IB-928-ND-2019

August 21, 2019

The invoices, even if incomplete in particulars, could be considered as valid piece of evidence for the proof of debt and default.

63

33. In the matter of Votary Trading Private Limited, CP (IB) No. 735-KB-2019

August 21, 2019

A claim in respect of the sale of equity shares is an ‘operational debt’ under the Code.

64

34. In the matter of Rathna Stores Pvt. Ltd., MA-779-2019 in CP-608-IB-2017

August 21, 2019

A private sale of the assets of the CD could be conducted by the liquidator without the permission of the AA, if there exists no mala-fide intention and the selling price is more than the reserve price.

64

35. In the matter of RMOL Engineering and Offshore Ltd., C.P. (IB) No. 171-7-NCLT-AHM-2017

August 21, 2019

The AA shall not examine or call for documents which are not mandatory as per the CIRP Regulations for filing the application and cannot be considered while deciding the issue of admission or otherwise.

64

36. Credit Suisse Funds AG v. Kumar Kedia RP of B.P. Foods Ltd., CP (IB) 209/NCLT/AHM/2017

August 23, 2019

The Code does not confer the RP with the power to adjudicate the claim filed by the party.

65

37. Allahabad Bank v. Meghalaya Infratech Ltd., CP (IB) No. 13/GB/2019

August 28, 2019

When the term loans are availed against mortgages, the period of limitation would be 12 years for filing the claim.

66

38. Deepak Gupta HUF v. M/s Sparkspell Homes Pvt.

August 28, 2019

The issuance of cheque against the default on loans

66

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Ltd., CP (IB) No. 76/ALD/2019

amounts to acknowledgment of the liability. The pendency of suits with regards to the dishonor of cheque amounts to admission of debt.

39. Budge Budge Company Ltd. v. UTM Packaging (India) Ltd., IB-271/(ND)/2019

August 28, 2019

The mere pendency of a proceeding under S. 138 of the N.I. Act does not amount to ‘dispute in existence’ between the parties under S. 9 of the Code.

67

40. Sahil Holdings Pvt. Ltd. v. Saluja Constructions Co. Ltd., CP No. IB-1457(PB)-2019

August 29, 2019

The IBC has an overriding effect and hence a violation under Punjab Money Lending Act, 2017 does not refrain the FC from filing an application under S. 7 of the Code.

67

41. Nandish Patel v. M.V. Omni Projects (India) Ltd., 404-9-NCLT-AHM-2019

August 29, 2019

The mere pendency of a proceedings under the provisions of ‘Minimum Wages Act, 1948’ does not amount to ‘dispute in existence’ between the parties as per S. 9 of the Code.

67

42. In the matter of Padmaadevi Sugars Limited MA-699-2018 in CP-768-IB-2018

August 30, 2019

The promoter who discharges the debt of the CD as a guarantor is entitled to claim its dues as an FC owing to S. 140 read with S. 145 of the ICA.

68

43. Dinesh Khetan v. Bigmoon Buildcon Pvt. Ltd., CP No. (IB)-572 (PB)/2019

September 03, 2019

The ‘service charge’ for the arrangement of financial assistance qualifies as a ‘financial debt’ under the Code.

68

44. Axis Bank Ltd. v. Lanco Amarkantak Power Limited, CP (IB) No.420/7/HDB 2018

September 05, 2019

As per S. 238 the provisions of the Code override the RBI circulars.

70

45. M/s Bipin Industries Pvt. Ltd. v. M/s ABW Infrastructure Limited, CP No. (IB)-375(PB)/2018

September 12, 2019

The pendency of a winding up petition before the High Court will not be a bar for initiation of CIRP under S.7 of the Code.

71

46. State Bank of India v. Mastana Foods Pvt.

September 18, 2019

The Code does not require the AA to ascertain the quantum

72

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Limited, CP No. IB-630 (PB)/2019

of amount of default. It only requires the AA to ascertain and record satisfaction in a summary adjudication as to the occurrence of default before admitting the petition.

47. Alliance Broadband Services Private Limited v. Manthan Broadband Services Private Limited, CA (IB) No. 1052/KB/2019

September 18, 2019

The payment of interest is not a pre-requisite to classify a transaction for disbursement of a loan as a financial debt. The AA shall consider the financial and commercial considerations linked with the time duration to ascertain the nature of financial debt.

72

48. State Bank of India v. Saber Papers Pvt. Ltd., CP (IB) No.395/Chd/Pb/2018

September 18, 2019

The period for filing the claim under the Code with regard to a mortgaged property is 12 years as per the Limitation Act, 1963.

73

49. In the matter of Alpfly Private Limited, CA No. 448-C-3-ND of 2019 in CP (IB) No. in 358-ND 2018

September 30, 2019

The AA has the power to pierce the corporate viel in cases of fraud to find out the persons who are acting behind the cloak.

74

50. In the matter of Kalpataru Cold Storage Private Ltd., CP (IB) No. 1489-KB-2018

September 30, 2019

The application under S. 7 of the Code can be accepted by the AA, even if the validity of the deed of assignment, challenged before a court.

75

51. The Press Trust of India v. Axion Estates Advisory Services Pvt. Ltd., CP(IB) No. 616/KB/2018

October 01, 2019

The arrears of rent towards electricity and water charges constitutes a claim as per S. 3(6) of the IBC.

75

52. State Bank of India v. SEL Manufacturing Company Limited, CA Nos. 773/2019, 825/2019, 826/2019, 827/2019 & 828/2019 IN CP (IB) No. 114/Chd/Pb/2019 (Admitted Matter)

October 10, 2019

In cases where CIRP is pending and has not been completed within a period of 330 days, the third proviso to S. 12 is applicable.

75

53. Oriental Bank of Commerce v. Ambey Iron Private Limited, MA 82 of 2019 in CP

October 14, 2019

The RA would be required to pay the claims for the government liabilities & statutory dues which would

76

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No.1704/I&BC/MB/MAH/2017

accrue in the future. There cannot be a complete waiver for the payment towards future liabilities.

54. SQM Europe N.V v. Salvi Chemical Industries Limited, C.P. (IB) No. 2519/NCLT/MB/2018

October 15, 2019

The existence of debt could be proved through the acknowledgment via email. The mere non-compliance of a technical requirement under the ‘I.T. Act’ cannot defeat the purpose of document and contents thereof.

78

55. In the matter of Fozal Power Private Limited, CP No. IB-1223(PB)-2019

October 21, 2019

The ‘Statement of Accounts’ filed by the Banks as proof of debt are invalid, if not certified as per S. 2A(a) and (b) of the ‘Bankers Book Evidence Act, 1891’.

78

56. Catalyst Trusteeship v. Riyasat Towers Private Limited, C.P. No. IB-1392/(ND)/2019

October 22, 2019

The debentures, inclusive of the interest fall within the ambit of financial debt under the Code.

78

57. M/s Shree Ram Lime Products Pvt. Ltd. v. Gee Ispat Pvt. Ltd., CA-666/2019 in (IB)-250(ND)/2017

October 22, 2019

The ‘capital gains tax’ that accrues by the sale of secured assets during the liquidation process shall be included in the liquidation cost. Its distribution shall be made as per S. 53 of the Code and not as per S. 178 or 194IA of the Income Tax Act.

79

58. Jain Construction Pvt. Ltd. v. Kariwala Designers Pvt. Ltd., CP (IB) No. 533/KB/2018

October 24, 2019

The pendency of an application under S. 240 and S. 241 of the Companies Act, 2013 filed by some shareholders is not a bar for initiation of the CIRP against the CD.

79

59. United Bank of India v. Purple Advertising Services Pvt. Ltd., CP (IB) No. 108-KB-2019

October 29, 2019

The period of the debt starts from the date when there is an acknowledgment of debt and not when the account is classified as an NPA.

80

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WHETHER RESOLUTION

PROFESSIONAL CAN ADMIT A

CLAIM OF UNLIQUIDATED

DAMAGES FOR BREACH OF

CONTRACT UNDER IBC

Prachi Jain and Bhanu Prakash Pandey,

4th year students

Faculty of Law, Banaras Hindu University

INTRODUCTION

The ‘Resolution Professional’ (“RP”) is

enjoined under S. 18 of the ‘Insolvency and

Bankruptcy Code, 2016’ (“IBC or Code”) to

receive and collate all the claims submitted to

him by the creditors. Therefore, the moot

question that arises is whether the RP is bound

to admit each claim including a claim for

unliquidated damages for breach of a contract

particularly when he has no adjudicatory power

under the Code or the CIRP Regulations, 2016

(“CIRP Regulation”). Further, the Supreme

Court (“SC”) has observed that RP has no

jurisdiction to decide a claim.1

The SC has spoken in categorical terms that the

RP does not have any adjudicatory powers.

The RP determines the claim based on

available records, only for the constitution of

CoC and to decide on voting share. Such

determination of claim by RP is open to

correction and is not done in judicial or quasi-

1 Swiss Ribbons Pvt. Ltd. & Anr. v. Union of India & Ors, (2019) SCC OnLine SC 73.

judicial capacity. It is relevant to refer to the

case of Swiss Ribbons (P.) Ltd., wherein the

Hon'ble SC held that RP is a facilitator of the

resolution process, whose administrative

functions are overseen by the ‘Committee of

Creditors’ (“CoC”) and by the ‘Adjudicating

Authority’ (“AA”). He is given administrative

powers as opposed to quasi-judicial powers.

The CIRP Regulations stipulate that where the

amount claimed by the creditor is not precise

due to any contingency or other reason, the RP

shall make the best estimate of the amount of

claim based on the information available with

him. The function of RP is to administratively

determine the amount of claim, or ‘get it

determined.’ He is legally expected to collate

and verify the claim submitted before him and

place it before the CoC for its proper

consideration under the provisions of S. 21.2 It

won’t be pleonastic to mention that the

liquidator, in liquidation proceedings under the

Code, has to consolidate and verify the claims,

and either admit or reject such claims. It is clear

from Ss. 41 and 42 that when the liquidator

determines the value of claims admitted under

S. 40, such determination is a ‘decision’, which

is quasi-judicial in nature, and appealable to the

AA under S. 42 of the Code. Contrarily, even

when RP exercises his discretion in certain

2 Reliance Industries Ltd. v. Satish Kumar Gupta, (2019) 152 CSL 637.



situations, he does so administratively and is

subject to an adjudicatory body overseeing the

same.

It is an unwritten rule of the law that whenever

a decision-making function is entrusted to the

subjective satisfaction of a statutory

functionary, there is an implicit obligation to

apply his mind to pertinent and proximate

matters. The duties of the RP under S. 18 of

the Code read with Regulations 8 and 14 of the

CIRP Regulation enjoin that once necessary

documents evidencing the debt have been

furnished by the applicant then he is bound to

admit the claimed amount of the applicant. In

this regard, one needs to explore the meaning

of claim and debt under the Code and examine

the scope for unliquidated damages for breach

of contract.

UNLIQUIDATED DAMAGES

CONSTITUTE A CLAIM

A person aggrieved for breach of contract has

the right to remedy under S. 73 of the Indian

Contract Act, 1882 (“ICA”). Under the Code,

a claim includes a right to remedy for breach of

contract under any law for the time being in

force, if such breach gives rise to a right to

payment, whether or not such right is reduced

3 Insolvency and Bankruptcy Code 2016, S. 3(6)(b).

to judgment, fixed, matured, unmatured,

disputed, undisputed, secured or unsecured.3

It is important to differentiate between a claim,

debt and default. A claim gives rise to a debt

only when it becomes “due”, a default occurs

only when a debt becomes “due and payable”

and is not paid by the debtor. It is for this

reason that a financial creditor has to prove

“default” as opposed to an operational creditor

who merely “claims” a right to payment of a

liability or obligation in respect of a debt which

may be due.

The scheme of the Code is to ensure that when

a default takes place, in the sense that a debt

becomes due and is not paid, the ‘Corporate

Insolvency Resolution Process’ begins. The

term “default” is defined in Section 3(12) in

very wide terms as meaning non-payment of a

debt once it becomes due and payable, which

includes non-payment of even part thereof or

an instalment amount. For the meaning of

debt, S. 3(11), provides that a debt means a

liability or obligation in respect of a claim

which is due from any person and claim u/S.

3(6) means a right to payment even if it is

disputed.4 Going by the conjoint reading of

these provisions, it can be deduced that a claim

for damages for the breach of contract qualifies

4 Innoventive Industries Ltd. v. ICICI Bank and Anr., (2018) 1 SCC 407.



as a claim under the Code. Further, even if the

claim is for unliquidated damages the applicant

who claims itself as an operational creditor

cannot even be directed to crystallize its claim

of damages for breach of contract through suit

or arbitration proceedings in the wake of the

moratorium which operates during CIRP. The

effect of S. 14(1) is that the arbitration/suit that has

been instituted after the aforesaid moratorium is non-est

in law.5 Consequently, if the corporate debtor

goes into liquidation, the debtor would lose the

valuable contractual right conferred under

Section 73 of the ICA, leading to a shortfall in

recovery of the debt. Therefore, the RP should

refrain from mechanical rejection of claims

which also amounts to abuse of discretion by

him.

UNLIQUIDATED DAMAGES DO

NOT CONSTITUTE A CLAIM

Opposite to the above line of argument, a

claim cannot be made out of unliquidated

damages. The claim for unliquidated damages

does not give rise to a debt until the liability is

adjudicated upon and damages are assessed by

an Adjudicatory Authority.6 When there is a

breach of contract, the party who commits the

breach does not eo instanti incur any pecuniary

5 Alchemist Asset Reconstruction Company Ltd. v. Hotel Gaudavan Pvt. Ltd., (2018) 146 SCL 588. 6 Union of India v. Raman Iron Foundry, (1974) 3 SCR 556.

obligation nor does the party complaining of

the breach become entitled to a debt due from

the other party. The only right which the party

aggrieved by the breach has is the right to sue

for damages, and this is not an actionable

claim. The definition of claim under the Code

envisages that the breach of contract must give

rise to a right of payment therefore damages

become payable only when they are crystallized

upon adjudication. Until and unless

adjudication takes place with a resultant decree

for damages, there is no debt due and payable.7

The Karnataka High Court in the matter of

Greenhills Exports (Private) Limited,

Mangalore v. Coffee Board, Bangalore,8

ruled that a claim for damages becomes a ‘debt

due’, not when the loss is quantified by the

party complaining of breach, but when a

competent court holds on enquiry, that the

person against whom the claim for damages is

made, has committed breach and incurred a

pecuniary liability towards the party

complaining of breach and assesses the

quantum of loss and awards damages. Not

every failure to perform the contract is a breach

of contract, the failure may be due to several

valid or lawful reasons which may show that

7 TATA Chemicals Limited v. Raj Process Equipment's and Systems Private Limited, CP, 21/I&BP/NCLT/MAH/2018. 8 Greenhills Exports (Private) Limited, Mangalore v. Coffee Board, Bangalore, (2001) 4 KarLJ 158.



the failure to act on the terms of the contract is

not a ‘default’ or ‘breach’ in which event, no

pecuniary liability may fasten on him ergo,

damages are payable only on account of a fiat

of the court and not on account of

quantifications by the person alleging breach.

Correspondingly, one of the arguments

supporting the rejection of unliquidated

damages as a claim is that the main purpose of

IBC is the resolution of distressed companies

and not to provide parties a weapon to arm

twist an entity resulting in succumbing to

claims, which may not even have been

adjudicated upon. Further the RP has to verify

the claims as provided by Regulation 13 of the

CIRP Regulations before admitting them with

the help of the proofs provided by the

applicant as mandated by Regulation 12.

CONCLUSION

On perusal of the rules framed under IBC it is

clear that there can be other types of debt apart

from financial and operational debt in relation

to a corporate debtor. However, the RP can

admit only operational and financial debt and

the damages for breach of contract is generally

covered under operational debt ergo the

applicant must establish that the breach of

contract for which the damages are being

claimed, was for a transaction required to keep

the Company (‘Corporate Debtor’)

operational as a going concern.

It cannot be denied that acceptance of claim(s)

by ‘Interim Resolution Professional’ (“IRP”) /

RP has space for subjectivity, this requires

some criteria or guidelines as may be followed

by IRP / RP to avoid issues which may crop

up resulting into unnecessary delay in CIRP or

liquidation process. Until then, for harmonious

functioning of the duties of verification,

collation, determination of claim, and with

non-judicial authority, RPs need to balance

between the do’s and don’ts and get the work

done by the anticipated means.

RELEASING LIABILITY OF

GUARANTOR POST APPROVAL OF

RESOLUTION PLAN: STILL UP IN

THE AIR?

Saumya Agarwal, 4th year student,

National Law Institute University, Bhopal

The Insolvency and Bankruptcy Code, 2016

(“Code”) came into effect on 28.05.2016 and

the main objective it curtails is maximization of

value of assets in a time bound manner. Since

its commencement, the Code has gone through

major amendments and subsidiary additions

through rules and regulations to keep up with

its objectives in light of the coming issues in

the market. It is thus safe to say that the Code



has changed tremendously over the span of

three years and will continue to evolve while

facing lacuna/grey areas and dealing with the

same.

One such grey area is that of the liability of a

guarantor post approval of a resolution plan.

This has been put to question in various case

laws in different forms, however the position

as of now seems to be settled yet at a deeper

level unsettled.

Through this article, the author will try to

determine the final position by first looking

through the lens of comparative understanding

into the three jurisdiction where the code finds

its roots viz., United Kingdom, United States

of America and Singapore and then by

analysing the decisions given by the Indian

courts.

POSITION IN FOREIGN

JURISDICTIONS

A. SINGAPORE

Singapore deals with Insolvency under

Insolvency, Restructuring and Dissolution Act

2018 (“Singapore Act”) which was acted in

November, 2018 repealing Bankruptcy Act

(Chapter 20 of the 2009 Revised Edition). The

9 Chan Siew Lee Jannie v. Australia and New Zealand Banking Group Ltd [2016] SGCA 23. 10 Empire Capital Resources Pte Ltd .[2018] SGHC 36.

S. 397 (4) and (7) of the Singapore Act

enumerate upon effect of discharge which

summarily states that such a discharge does not

affect the secured creditors’ right to secure

payment of outstanding debt from which

bankrupt has been released, as releasing it

would mean that secured creditor did not

improve his position even by an iota by taking

additional security. 9

However, recently in Empire Capital

Resources Pte Ltd10, the question came up

again. In the process, the court looked into

various authorities11 and concluded that

relation between debt and security should be

seen and third party releases in themselves are

not something that should be restricted and

guarded against.

Hence, it can be seen that a slight shift has been

made and is also seen as being a more sensible

and commercial approach.

B. UNITED KINGDOM

Third party non-debtor releases is a common

practice under the United Kingdom Law

especially when it related to the release of

affiliate guaranteed of the debt which is being

satisfied under the scheme.12 In re Lehman

11 Daewoo Singapore Pte Ltd v. CEL Tractors [2001] 2 SLR (R); See also In re Opes Prime Stockbroking Ltd [2009] FCA 813. 12 In re T&N Ltd and Others (No 4) [2006] EWHC (Ch) 1447.



Brothers13, it was observed that it is entirely

viable to extend jurisdiction of the court to the

extent that it approves such a scheme which

proposes release or variation of such rights of

action of claim against such third parties which

are guarantors to the debtor company

facilitating recovery of same debt. The

reasoning was based on the argument that it is

entirely based on the agreement between the

debtor company and its creditors.

C. UNITED STATES OF AMERICA

The general principle as laid down under

Chapter 11 of the U.S. Code, sub-chapter II, S.

524(e) is that a guarantor is not released of his

liability to pay even after the plan has been

confirmed under S. 1129 of Chapter 11 of the

U.S. Code.

However, in the case of In re Avanti

Communications Group PLC14 (“Avanti”),

it has been discussed in details that how

different circuits have been taking different

stands-ranging from total prohibition to third

party releases in a reorganisation plan on being

satisfied that there is presence of consent.

Thereby, it can be seen that though there is no

uniform system of application when it comes

13 In re Lehman Brothers International (Europe) (No 2) [2009] EWCA (Civ) 1161. 14 In re Avanti Communications Group PLC [2018] 582 B.R 603. 15 SBI v. V. Ramakrishnan, Civil Appeal No. 4553 of 2018.

to the USA, the element of consent if present,

the release of third party liability is allowed at

most circuits.

INDIA: CURRENT POSITION OF LAW

Indian Contracts Act, 1872 (“Contracts Act”)

under S. 126 and S. 128 enumerate upon

contract of guarantee and co-extensive liability

of surety and corporate debtor. The position of

guarantor under the Code vis-à-vis Contracts

Act has been looked into by the courts time

and again. The major defences taken under Ss.

133, 134 and 140 of the Contract Act happen

to be of no application for people under CIRP.

In the case of SBI v. V. Ramakrishnan15, the

SC held that under S. 31 of the Code, the

resolution plan is binding on all parties

including guarantors and the intention of the

Code was never to relive the guarantor from

paying debt. Therefore, the relief under S. 133

of the Contracts Act cannot be taken. Similarly,

under the Code, the discharge of corporate

debtor is not fulfilling the sine qua non of

voluntary discharge by creditor needed under

S. 134 as the same is being done due to

operation of law, i.e., approval of the resolution

plan by the ‘Adjudicating Authority’.16 In

16 Maharastra State Electricity Board, Bombay v. Official Liquidator, High Court of Ernakulam, AIR 1982 SC 1497, ¶ 7; see also Jagannath Ganeshram Aggarwala v. Shivnarayan Bhagirath, AIR 1940 Bom. 247, ¶ 5.



furtherance, it should be noted that in Lalit

Mishra and Ors. v. Sharon Bio Medicine

Ltd17, the NCLAT has squarely covered the

issue of right of subrogation under S. 140

Contracts Act and has ruled in non-availability

of such a right to the guarantor. Lastly, the

Report of the Insolvency Law Committee,

dated 26th March, 2018 has also furthered the

same viewpoint and has enabled right of

creditor to recover from guarantor. Relying on

the authorities above, recently NCLT Delhi

Principal Bench in Rave Scans Ltd18 ruled

against release of guarantors post approval of

resolution plan.

These authorities seem to create an illusion of

a settled position. However, there are cases

which point towards the contrary. In State

Bank of India v. Sungrowth Share & Stocks

Limited, (NCLT Kolkata Bench)19, the SBI, a

financial creditor, filed an application under S.

7 against the corporate guarantor M/s.

Sungrowth and Share & Stock Limited

(“Sungrowth”) of corporate debtor M/s.

Adhunik Alloys & Power Limited

(“Adhunik”) after approval of resolution

plan. Adhunik challenged maintainability of the

17 Lalit Mishra and Ors. v. Sharon Bio Medicine Ltd, Company Appeal (AT) (Insolvency) No. 164 of 2018 (Date of Judgement: December 19, 2018), ¶ 9. 18 National Company Law Tribunal, Rave Scan Pvt. Ltd, NCLT (Principal Bench), New Delhi, (Aug. 18, 2019, 17:00PM) https://nclt.gov.in/sites/default/files/Interim-order-

application on the ground that on approval of

resolution plan the guarantors stand

discharged. The court ruled in negative and

found it maintainable on following grounds:

(i) The terms of guarantee clearly state that

Sungrowth would be bound to pay outstanding

balance irrespectrive of whether or not the

creditors have discharged the principal debtor

and also that the guarantor cannot ask for

discharge under Contracts Act or any other

law.

(ii) On perusing relevant parts of the approved

resolution plan it was noticed that the plan

clearly puts a blanket on release of the

guarantors.

It is also interesting to note that the how the

court in its judgement dated 04.09.2019, failed

to hold the above application as non-

maintainable on the ground that it was filed

against the corporate guarantor, when

inclusion of corporate and personal guarantors

under the insolvency and bankruptcy process

of the Code has been done via rules and

regulations notified much later on 15.11.2019

and 22.11.2019 respectively.

pdf/Rave%20Scans%20Private%20Limited%20_11.pdf. 19 State Bank of India v. Sungrowth Share & Stocks Limited, MANU/NC/6316/2019, (Date of Judgement: September 04, 2019).



Additionally, in IDBI Bank Ltd v. EPC

Constructions India Ltd.20, through MA

354/2019 filed by Export Import Bank of India

(creditor with 12.20% voting share) a request

was made to amend the approved resolution

plan which restricted the applicant from

enforcing its rights against the guarantors and

it was asserted that such a right ought to be

protected while approving or implementing the

resolution plan. In this case it is pertinent to

note that though under the deed of guarantee

dated 05.06.2012, guarantor has agreed to pay

irrevocably and unconditionally; under the

resolution plan approved with 73.17% majority

vote all guarantees, security, pledge or letter of

credit was to be automatically released and all

liability thereof was to be extinguished. The

court held that since the issue of guarantors

was placed very well before the committee of

creditors (“CoC”), to interfere with it would

be to interfere with the wisdom of CoC and

therefore the application was dismissed. The

court termed resolution plan as a one-time

settlement and also stated that if not expressly

stated, the guarantee does not survive after

approval of plan.

20 IDBI Bank Ltd v. EPC Constructions India Ltd, CP No. 1832/IBC/NCLT/MB/MAH/2017 (Date of Judgement: September 20, 2019).

CONCLUSION

Through the above discussion, it would be safe

to conclude that if the ‘Resolution Plan’,

‘Scheme of Arrangement’, ‘Reorganization

Plan’, ‘Debt Restructuring Plan’, as addressed

in different jurisdiction proposes release of

guarantor from its liability and the same is

approved by due process of law then the

guarantors cannot be held liable for payment

post completion of the CIRP. The creditors

have the authority of approving a resolution

plan and it is upon them to consider the

question of discharge and if they do, such

resolution plan, releasing such guarantors

would stand valid.

FAVORITISM IN DEALING WITH

CREDITORS: THE WELL-SETTLED

DOCTRINE OF INSOLVENCY LAW

Aastha Agarwalla & Daksh Aggarwal, 2nd

year students, Campus Law Centre,

Faculty of Law, University of Delhi

INTRODUCTION

The differential treatment to different

stakeholders who are assigned unalike roles

and responsibilities and unique status, is the

rule of fairness in insolvency and bankruptcy

regime. The United Nations Commission on

International Trade Law (“UNCITRAL”)



legislative guide clearly states — “The objective of

equitable treatment is based on the notion that, in

collective proceedings, creditors with similar legal rights

should be treated fairly, receiving a distribution on their

claim in accordance with their relative ranking and

interests. This key objective recognizes that all creditors

do not need to be treated identically, but in a manner

that reflects the different bargains they have struck with

the debtor”21 The objective behind this rule is

that dissimilar class of creditors must deserve

different treatment i.e. in accordance with their

relative bargaining power and claims

demanded.

Recently, the Hon’ble Supreme Court (“SC”)

overruled the whimsical verdict of National

Company Law Appellate Tribunal

(“NCLAT”) in the case Committee of

Creditors of Essar Steel India Limited

Through Authorised Signatory v. Satish

Kumar Gupta & Ors. (“Essar Steel Case

II”)22 as the NCLAT tweaked the

aforementioned existing rule in Standard

Chartered Bank v. Satish Kumar Gupta.

R.P. of Essar Steel Ltd. and Ors. (“Essar

Steel Case I”)23. The Appellate Authority

exhibited an abominable lack of maturity and

held that the Financial Creditors (“FC”) would

21 UN LEGISLATIVE GUIDE (2005). 22 Committee of Creditors of Essar Steel India Limited Through Authorised Signatory v. Satish Kumar Gupta & Ors, Civil Appeal No. 8766-67 of 2019.

get approximately 60% of the admitted claims,

about the same as Operational Creditors

(“OC”). Succinctly, the tribunal put the two

classes of creditors on equal footing.

In this article, the authors aim to analyse the

significance of the rule of preferential

treatment of the creditors in insolvency law

and advance some arguments negating the

distorted narrative of the NCLAT.

LEGAL SCRUTINY OF THE

JUDGMENT

One of the essential propositions that

supplement the principle of pari passu is the

‘par condicio creditorum’ or ‘equal treatment of

creditors’. Under this proposition, some

actions taken in the insolvency process can be

nullified if they favour a certain class of

creditors. However, secured transactions have

been the fundamental exception to this theory.

It must be noted that the apex court in Swiss

Ribbons Pvt. Ltd. & Anr v. Union of

India,24 categorically held that most FCs are

secured creditors, whereas most OCs are

unsecured. The Division Bench of the Hon’ble

SC opined that “since equality is only among equals,

no discrimination results if the court can be shown that

23 Standard Chartered Bank v. Satish Kumar Gupta. R.P. of Essar Steel Ltd. and Ors., Company Appeal (AT) (Ins.) No. 242 of 2019. 24 Swiss Ribbons Pvt. Ltd. & Anr. v. Union of India, (2019) 4 SCC 17.



there is an intelligible differentia which separates two

kinds of creditors.” Hence, the court accordingly

concluded that the distinction between FC and

OC is “neither discriminatory, nor arbitrary, and

therefore non-violative of Article 14.” To further

crystallize the position of the creditors,

Hon’ble NCLT (Kolkata Bench) in SBI v.

M/s Adhunik Alloys & Power Ltd.,25

strongly endorsed that the creation of classes

amongst FCs is well known to law and further

held that classification of FCs considering their

security interest cannot be declared illegal.

However, on the contrary, in the matter of

Essar Steel Case I, the NCLAT had deviated

from the well settled judicial dicta by making

two erroneous observations. Firstly, it held that

the FCs cannot be discriminated on the ground

of being ‘secured’ or ‘unsecured’ and secondly,

the OCs shall be treated at par with the FCs.

Hence, NCLAT by treating OCs at par with

FCs postulated an undesirable theory — equal

treatment of different classes of creditors.

The SC, however, correctly observed that the

real position of the creditors is purely a matter

of equity and cannot be settled by an

unreasonable order passed by the adjudicating

authority as every creditor strikes a

25 SBI v. M/s Adhunik Alloys & Power Ltd, CA (IB) Nos. 1086 & 1092/KB/2018.

fundamentally different commercial bargain

with the corporate debtor which also includes

grant of security interest by the debtor to the

creditor. The NCLAT by equally treating

different classes of creditors possessing

different bargain capacities with the corporate

debtor, had severely violated the doctrine -

“treat similar similarly and treat different differently”

enshrined in Article 14 of the constitution, as

stated in the case of Atyant Pichhara Barg

Chhatra Sangh and Ors. v. Jharkhand State

Vaishya Federation and Ors.26 Fortunately,

the apex court, echoing the essence of the

Constitution, negated the flawed reasoning of

the NCLAT and recognized the principle of

giving priority to secured FCs.

FOUNDATION OF THE JUDGMENT:

A SOUND STATUTORY MANDATE

On perusal of the provisions of the Insolvency

and Bankruptcy Code, 2016 (“Code”), it will

be clearly established that the judgment is in

consonance with the Code. The lawmakers

have categorically chalked out distinct

definitions of FC and OC in S. 5(20) and S. 5(7)

of the Code, respectively. Therefore, it is

evident that the legislators intended to draw the

distinction to avoid inclusive or exclusive

26 Atyant Pichhara Barg Chhatra Sangh and Ors. v. Jharkhand State Vaishya Federation and Ors., (2006) 6 SCC 718.



interpretation of the two terms. Additionally, S.

53 of the Code specifies the order of the

priority of payment due to various classes of

creditors in the event of liquidation. A perusal

of the hierarchy of claims under the said

section reflects the intention of the legislature

by placing preference of the FCs over the

OCs.

The Bankruptcy Law Reforms Committee,

tasked with the responsibility of drafting a

unified framework to resolve the matters of

insolvency and bankruptcy, clearly states

— “In the Insolvency Resolution Process, the financial

creditors had the power to choose the best solution to

keep the entity as a going concern, with the condition

that the liabilities of the other creditors will be fully met

within a reasonable period in the implementation of the

solution.”27

It has been argued that the amended Reg. 38 of

the Insolvency and Bankruptcy Board of India

(Insolvency Resolution Process for Corporate

Persons) Regulations, 2016 and S. 30(2)(b) of

the Code, explicitly or implicitly, prioritize the

claims of the OCs over the FCs. However, the

highest judicial court opined that complete

authority to decide on commercial decisions

27 THE REPORT OF THE BANKRUPTCY LAW REFORMS COMMITTEE VOLUME I: RATIONALE AND DESIGN (November, 2015).

with respect to the resolution plans is vested

entirely with the commercial wisdom

Committee of Creditors (“CoC”), formed

under S. 21 of the Code, solely comprising of

the FCs. The final court of appeal also

concluded that “the fact that the operational creditors

are given priority in payment over all financial creditors

does not lead to the conclusion that such payment must

necessarily be the same recovery percentage as financial

creditors.”

In the light of the above discussion, it can be

rightly concluded that the creditors with

different security interests of varied nature,

value and kind cannot be placed on an equal

footing.

EQUITABLE TREATMENT VIS-A-VIS

EQUAL TREATMENT: AN

INTERNATIONAL PERSPECTIVE

The principle of ‘classification of creditors’ is

well recognized across various jurisdictions in

the world owing to the acceptance of the said

principle by the International Monetary Fund

(“IMF”) and the World Bank (“WB”) under

the international insolvency regime. The IMF

in its report – ‘Orderly & Effective

Insolvency Procedures – Key Issues’,28 and

28 INTERNATIONAL MONETARY FUND, PROMOTING ORDERLY & EFFECTIVE INSOLVENCY PROCEDURES (March, 2000), available at https://www.imf.org/external/pubs/ft/fandd/2000/03/pdf/hagan.pdf.



the WB in its research paper — ‘Principles for

Effective Insolvency and Creditor/Debtor

Regime’,29 have clearly suggested that “for

having an effective insolvency system there shall be

equitable treatment of similarly situated creditors and

differential treatment of creditors that are not similarly

situated may be necessary as a matter of equity.”

Therefore, the principle of ‘treat similar similarly

and treat different differently’ with respect to the

creditors has been well accepted in the

international jurisprudence of insolvency law.

CONCLUSION

Adding to the misery, the NCLAT, in October

2019, passed another troubling order in the

case of Pr. Commissioner of Income Tax-6,

Chennai vs. M/s Star Agro Marine Exports

Pvt. Ltd. & Ors. (“Agro Marine Case”)30

and held that OCs must be treated at par with

the FCs. However, now when the apex court

has specified the preferential order of the

creditors in an unambiguous manner, the

impugned order of the NCLAT in

aforementioned case automatically stands

nullified.

The SC’s judgment is a landmark in the short

history of the insolvency regime as it

29 WORLD BANK, PRINCIPLES FOR EFFECTIVE INSOLVENCY AND CREDITOR/DEBTOR REGIME (2016), available at http://pubdocs.worldbank.org/en/919511468425523509/ICR-Principles-Insolvency-Creditor-Debtor-Regimes-2016.pdf.

impeccably establishes the supremacy of the

‘Doctrine of Security Recognition’ (as

implicitly stated in “Principles of International

Insolvency” by Philip R Wood) which considers

secured creditors as the super-priority creditors

in the event of insolvency. Rightly so, the apex

court observed that “differential payment to

different class of creditors, together with negotiating with

a prospective resolution applicant for better or different

terms which may also involve differences in distribution

of amounts between different classes of creditors" and

conclusively held that “the equality principle cannot

be stretched to treating unequals equally, as that will

destroy the very objective of the IBC – to resolve stressed

assets.”

SECTION 230 OF COMPANIES ACT:

A SURROGATE ROUTE OR NOT?

Shrey Mahajan, 3rd year student,

Symbiosis Law School, Pune

INTRODUCTION

The Insolvency and Bankruptcy Code, 2016

(“Code”) has been a source of great relief to

financially sick corporate bodies and more

importantly, their creditors to achieve success

in reviving the monetarily unsound companies

whilst protecting them from going into

30 Pr. Commissioner of Income Tax-6, Chennai v. M/s Star Agro Marine Exports Pvt. Ltd. & Ors, Company Appeal., (AT) (Ins) No. 717 of 2019.



liquidation and by providing for an essentially

more viable and better structured deal to the

creditors in this vulnerable and fluctuating

economy.

The Insolvency and Bankruptcy Code

(Amendment) Act, 201731 inserted S. 29A to

the Code which disqualified people who have

had a role to play in the default that is caused

by the corporate debtor or are a ‘related party’ to

the same from filing an application to submit a

resolution plan under the Code. Subsection (g)

of the said section explicitly bars the promoters

of the corporate debtor from regaining the

control over it again. This was based on the

principle laid down by the Supreme Court that

it has been held that the primary focus of the

legislation (the Insolvency and Bankruptcy

Code) is to ensure revival and continuation of

the corporate debtor by ‘protecting the corporate

debtor from its own management’.32

While this amendment was very much in the

spirit of the Code, there were certain gaps left

unfilled which has led to a lot of questions

being unanswered before the court.

THE SURROGATE ROUTE THROUGH

COMPANIES ACT, 2013 (“COMPANIES

ACT”)

31 The Insolvency and Bankruptcy Code (Amendment) Act, 2017, S. 5. 32 ArcelorMittal India Pvt. Ltd. v. Satish Kumar Gupta & Ors., (2019) 2 SCC 1.

An interesting turn of events took place when

a very creative application was made before the

court to allow the promoters of the corporate

debtor who were disqualified under S. 29A

through a surrogate route under the

Companies Act in the case of R. Vijay

Kumar.33 This posed two major issues before

the court:

1. Whether a relief under S. 230 of the

Companies Act can be sought while

liquidation proceedings are going on

under the Code?

2. If yes, then whether a promoter, being

barred from being a resolution

applicant under Section 29A, is eligible

to present such scheme?

S. 230 of the Companies Act, 2013 provides for

a scheme of arrangement between the corporate

debtor and its creditors to save the former

from insolvency and subsequent liquidation.

INSOLVENCY AND SCHEME OF

ARRANGEMENT IN THE PAST

The Hon’ble NCLAT in the case of S.C.

Sekaran v. Amit Gupta & Ors.,34 while

emphasizing on the importance of the

principle of keeping the corporate debtor as a going

33 Y. Shivram Prasad v. S. Dhanapal & Ors., 2019 SCC OnLine NCLAT 172. 34 S.C. Sekaran v. Amit Gupta & Ors., [2019] 103 taxmann.com 222/152 SCL 536 (NCLAT).



concern laid down in Swiss Ribbons,35 affirmed

that the provisions laid down under S. 230 of

the Companies Act can be invoked while

liquidation process is going on under the Code.

The NCLAT also held that in the event where

the liquidator or the Adjudicating Authority

initiates the process under S. 230 of the Act,

the same has to be completed within 90 days.

However, this wasn’t the first time when the

courts have allowed such an arrangement.

Before the introduction of the Code, there

have been certain decisions wherein the court

has allowed schemes to be presented under

Companies Act, 1956 while the company was

undergoing liquidation. The Supreme Court in

the case of Meghal Homes36 allowed the

liquidator to proceed in accordance with S. 391

of the Companies Act, 1956 which provided

for the similar arrangement of scheme as

provided under the Section 230 of the

amended Act. In the case of Vasant

Investment Corporation37, the court

observed that the creditors of the corporate

debtor had the right to move under S. 391 of

the Act to enter into an arrangement with the

corporate debtor while the former is

35 Swiss Ribbons Pvt. Ltd. Anr. v. Union of India & Ors., (2019) 4 SCC 17. 36 Meghal Homes Pvt. Ltd. v. Shree Niwas Girni K.K. Samiti & Ors., (2007) 7 SCC 753. 37 Vasant Investment Corporation v. Official Liquidator,

1981 51 CompCas 20 Bom.

undergoing liquidation. Similarly, in the case of

Rajendra Prosad Agarwalla38, the court

observed that even the liquidator had the right

to make an application under S. 391 of the Act

of 1956 while the corporate debtor is going

under liquidation.

THE QUESTIONABLE RULING OF

THE NCLT

The court in the instant case relied upon the

decision of the NCLAT in the case of Y.

Shivram39 where the NCLAT put emphasis on

the rulings on cases like Meghal Homes40 and

reaffirmed that relief can be sought by the

creditors/liquidator under S. 230 of the

Companies Act, while the liquidation of the

corporate debtor is undergoing.

The Hon’ble NCLT, in the instant case,

emphasizing the importance of revival of the

corporate debtor and keeping it as a going

concern, as laid down in the aforementioned

judgments, ruled that promoters barred under

S. 29A could present a scheme to the

Committee of Creditors under S. 230 of the

Companies Act. The NCLT completely

disregarded the objective of saving the

38 Rajendra Prosad Agarwalla & Ors v. Official

Liquidator, 1978 48 CompCas 476 Cal. 39 Y. Shivram Prasad v. S. Dhanapal & Ors., 2019SCC OnLine NCLAT 172. 40 Supra Note 36.



corporate debtor from its own management as

laid down by the Supreme Court in the cases of

Swiss Ribbon and ArcelorMittal. This was

discussed by the Bankruptcy Law Reform

Committee41 wherein it’s was stated that while S.

29A of the Act disqualified the promoters to

be Resolution Applicants, there was no law

that prohibited them from seeking relief under

S. 230 of the Companies Act to enter into an

arrangement with the creditors. Further, the

IBBI (Liquidation Process) Regulations, 2016 were

amended42 to insert Regulation 2B which

provided for the provision of the surrogate

route of entering into an arrangement under

the Companies Act but was silent on whether

it could be exercised by promoters that are

barred under S. 29A of the Code.

However, all the aforementioned authorities

have absolutely failed to cognisance of S. 238

of the Code which clearly provides that in the

event of any inconsistency, the Code will

prevail over any other law. The same was

reiterated by the court in the case of PR

Commissioner of Income Tax v. Monnet

41 INSOLVENCY AND BANKRUPTCY BOARD OF INDIA, DISCUSSION PAPER ON CORPORATE LIQUIDATION PROCESS ALONG WITH DRAFT REGULATIONS, 27th April, 2019. 42 Insolvency and Bankruptcy Board of India

(Liquidation Process) (Amendment) Regulations (2019),

S. 3. 43 PR Commissioner of Income Tax v. Monnet Ispat and Energy Ltd., 2017 SCC OnLine Del 12759.

Ispat and Energy Ltd.43 While S. 29A bars

promoters to regain control of the corporate

debtor, going under Companies Act to seek

relief would be a clear violation of the

overriding clause and the spirit of the Code.

This wasn’t taken into consideration by the

NCLT thus making the order passed very

questionable and creating ambiguity around

the same. There is also a disregard of a holistic

view of the objectives of the Code wherein the

corporate debtor has to be saved from

liquidation as well as be protected from going

back into the hands which led to its default.

SETTLEMENT OF ISSUE BY THE

NCLAT

The NCLAT recently cleared the legality of the

issue of promoters being eligible to opt for a

surrogate route under the

vol. 7, august-october, 2019 › 2020 › 09 › nuals-ibc-e-newsletter-vol-vii.pdfu/s. 7 or s.9 of...

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