Two recent judgments were heavily criticized for the impact they may have on India’s credit system. The IL&FS case has had the less charged response. In that case, the NCLT held that provident funds, even if they are not secured or senior creditors, should be paid their dues at par with or even over secured creditors because the beneficiaries of these funds are more vulnerable. In the Essar Steel case, the latest chapter in the long-running saga, the NCLAT set aside the distribution put forth by the committee of creditors and ordered that 40 percent be given to operational creditors. This attracted a lot of attention.
Critics have argued that both these cases undermine the hierarchy of secured credit over unsecured credit and would lead to banks only giving unsecured credit at high rates of interest. One suggestion has been to amend the IBC to cap the share of operational creditors.
Essar’s lenders have now questioned before the Supreme Court, the NCLAT’s power to amend the CoC’s distribution. The NCLAT had upheld the CoC’s acceptance of Arcelor Mittal’s offer to pay Rs. 42,000 crore for the debt-laden firm.
Another interesting challenge before the Supreme Court also involves the NCLAT’s power to set aside – this time, a rejection of a resolution plan. Homebuyers have challenged the NCLAT’s order to set aside the rejection of a resolution plan for Jaypee Infratech, especially after the statutory period for the completion of a CIRP has expired. This challenge comes in the backdrop of lingering concerns over the ability of the IBC to safeguard the interests of homebuyers.
SEBI has challenged before the Supreme Court, an NCLT order directing the securities markets regulator to de-attach some properties of a corporate debtor and hand them over to the resolution professional for insolvency proceedings. The Supreme Court’s decision in this matter will ultimately determine which regulations – securities regulations or insolvency regulations, will address cases of entities that have raised money from thousands of savers but then have failed to meet repayment obligations.
The Union Cabinet has also approved a proposal to introduce a bill to carry out eight amendments to the IBC. The changes are expected to lead to timely admission of applications and timely completion of the CIRP, through greater clarity on the permissibility of corporate restructuring schemes, the manner of distribution of amounts amongst financial and operational creditors, the rights and duties of authorized representatives of voters and applicability of the resolution plan on all statutory authorities.
Civil Aviation Minister Hardeep Singh Puri informed the Lok Sabha that the Central government has ruled out raising funds for Jet Airways and asserted that its revival was now possible only under the IBC. Lenders referred the case to the Mumbai bench of the NCLT which has admitted it. Now, the committee of creditors will, among other things, consider options for its interim funding.
The collapse of Jet Airways has brought to the fore, questions about cross-border insolvency. The Report of Insolvency Law committee on cross border insolvency has listed four important principles for the regime to come into force including exhaustive changes in jurisdictional rules and changes in the attitudes of the courts.
There was also the usual hand-wringing about the effectiveness of India’s still young insolvency regime. The promise of time-bound resolution has just not transpired, the NCLT infrastructure has been inadequate for the number of cases coming into the system, and in the absence of legal precedent, cases have meandered through the system. The Economic Survey for 2018-19 however, has pointed out that the IBC had systematically improved India’s debt recovery mechanism and proposed the strengthening of the NCLT and its appellate tribunal.
From the docket
The National Company Law Appellate Tribunal in Housing Development Finance Corporation v. RHC Holding has held that a non-banking financial institution carrying on the business of a financial institution does not come within the meaning of corporate person or corporate debtor. Reading the definitions of “financial service” and “financial service provider” together, it was clear that “financial service providers” need not accept deposits. Any activity in Section 3(16) of the Code, such as the safeguarding and administering assets consisting of financial products belonging to another person, is sufficient for an entity to come within the definition of “financial service provider”.
The NCLAT in National Spot Exchange v. Anil Kohli, RP of Dunar Foods held that it has no jurisdiction to condone the delay beyond 15 days under Section 61(2) of the IBC.
In Alliance Projects v. RP of Ind-Barath Power (Madras), the NCLAT held that the corporate insolvency resolution process cannot be extended beyond 270 days and where 270 days have passed, then the adjudicating authority has no option but to pass liquidation order. The liquidator however, was directed to allow 90 days for taking of steps under Section 230 of the Companies Act.
The NCLAT in Raymond Construction Co. v. Larsen and Toubro held that a civil dispute cannot be decided by the NCLT or the NCLAT.
In R. Anil Bafna v. Madhu Desikan, the NCLAT held that if a liquidation order has been passed by the NCLT, then the promoter can take advantage of Section 230 of the Companies Act.
In Insolvency and Bankruptcy Board of India (IBBI) v. Shri Rishi Prakash Vats, the NCLAT held that once a disciplinary proceeding is initiated by the IBBI against a resolution professional on the recommendation of the adjudicating authority, the final order has to be passed by the IBBI. The adjudicating authority cannot quash a proceeding initiated by the IBBI.
In Rotomac Global v. Deputy Director, Directorate of Enforcement, the NCLAT held that the liquidator cannot attach properties which relate to ‘proceeds of crime’ under the Prevention of Money Laundering Act.
That’s all we have for you this month.
We hope that this update on India’s insolvency laws will prove useful for you and that you will be watching out for these again next month.