The Parliament’s Standing Committee on Finance has said that MSMEs’ dues should be paid on priority during a resolution process. MSMEs are operational creditors. Previously, the Federation of Indian Micro and Small & Medium Enterprises had sought an amendment to the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 because the recovery process under the IBC significantly favoured financial creditors.
The Parliament has passed the Insolvency and Bankruptcy Code (Amendment) Bill, 2020 on March 12. This Bill will replace the ordinance introduced in December 2019.
The Supreme Court of India has asserted that there is nothing in the law to suggest that the ‘resolution’ or ‘bid’ value should be higher than or equal to the liquidation value. This ruling is expected to clear roadblocks in a few different resolution processes.
Nearly a quarter of the cases admitted under the Insolvency and Bankruptcy Code (IBC) till January 31, 2020, have gone into liquidation, fetching a liquidation value as low as 6.67 per cent. The jury is out on whether that figure represents a failure.
MS Sahoo, the Chairperson of the Insolvency and Bankruptcy Board of India pointed out some broader gains from the IBC that were not considered by the World Bank in its 2019 Ease of Doing Business Report
The fresh start process or FSP, the first component of the individual insolvency provisions under the IBC has several operational challenges.
At least 9 banks from the UAE are in the process of initiating legal action against Indian defaulters to recover around Rs 50,000 crore, after the Indian government on January 17 issued a notification allowing the decrees of certain UAE courts in civil cases to be enforceable in India.
The Committee of Creditors has approved a resolution plan for the Reliance Communications under which the lenders will receive 70 per cent or Rs 23,000 crore of their total outstanding dues of Rs 33,000 crore.
The assets of a financially distressed corporate debtor going through a resolution process, may, without the knowledge of the prospective resolution applicants, include assets that have been created using proceeds of a crime, and hence, potentially liable to be attached under the Prevention of Money Laundering Act. This conflict had come to the fore in the resolution proceedings of Bhushan Power & Steel Limited.
What are the income tax implications of resolution under the IBC?
From the Docket
In Orbit Lifescience Private Limited v. Raj Ralhan (RP of the CD), the National Company Law Appellate Tribunal (“NCLAT”) dismissed the appeal filed by Orbit. Orbit was aggrieved by the decision of the Resolution Professional to not allow it to retrieve some goods provided to the corporate debtor under a bailment agreement. The NCLAT held that if there was default in payment of charges and dues by an operational creditor to the corporate debtor, the latter could exercise lien on the goods belonging to that operational creditor and available with it.
In Vijay Pal Garg v. Pooja Bahry (Liquidator in the matter of Gee Ispat Private Limited Streaming Technologies, the NCLAT has held that the NCLT was not empowered to directly order an investigation into the affairs of the corporate debtor to be carried out by the central government under the Companies Act, 2013. Under the Code, it has the option to issue notice in regard to the charges or allegations levelled against the promoters and others after following the due procedure enshrined in Section 213 of the Companies Act. It was further held that, in case an ex facie or prima facie case is made out, then, the tribunal is empowered to refer the matter to the central government for an investigation by its inspectors and following that, if the central government is of the opinion that the subject needs to be investigated through the Serious Fraud Investigation Office, it may then proceed in accordance with the law.
The NCLAT has set aside an order of the NCLT that had admitted a petition for CIRP filed by an operational creditor of Flipkart. The NCLAT, while considering the correctness of the order passed by the NCLT, held that whether a demand notice is sent in Form 3 or Form 4 would depend on the nature of operational debt and not be determined as per the discretion of the operational creditor. The NCLAT said that when the operational debt involved transactions where corresponding invoices are generated, the operational creditor cannot choose to not file the invoice on the pretext that the demand notice was sent in Form 3.
It further held that if the operational debt was of the nature where an invoice is generated as part of the transaction, then the invoice was essential to prove the existence of that debt. It is only in cases where the transaction does not involve the generation of an invoice that Form 3 could be resorted to and then, the debt would have to be proved through the documents listed out in column 7 of Form 3.
In Anuj Jain Interim Resolution Professional for Jaypee Infratech Limited v. Axis Bank, the Supreme Court said that Section 43 was in the nature of a deeming fiction. Wherever the following are fulfilled i.e., (i) the transaction of transfer of property or an interest thereof of the corporate debtor, ought to be for the benefit, which may be direct or indirect, of a creditor or a surety or a guarantor for (or on account of) an antecedent financial debt or operational debt or other liabilities owed by the corporate debtor; (ii) it has the effect of putting such creditor or surety or guarantor in a beneficial position than it would have been in the event of distribution of assets under Section 53 of the IBC; and (iii) finally, such event, of giving preference, ought to have happened within and during the relevant time, then such transactions would be hit by Section 43 of the Code.
The Supreme Court also favoured a purposive interpretation of Section 43(3)(a) and held that the word “or” in that provision should be read as “and”. Lastly, in a major jolt to the banks and FIs who had lent to JAL on the basis of the mortgage given by JIL, the Supreme Court held that these banks are not “financial creditors” of JIL and therefore, not entitled to a seat at the CoC.
In Flat Buyers Association Winter Hills-77 Gurgaon v. Umang Realtech Private Limited through IRP, the NCLAT held that the corporate insolvency resolution process initiated by a homebuyer or a financial institution would be limited to the project concerned and not impact other projects of developers. It observed that “reverse corporate insolvency resolution process” can be followed in the cases of real infrastructure companies in the interest of the allottees and survival of the real estate companies.
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