Welcome back to our updates on Indian insolvency law for June, 2020.
On July 1, the IBBI released a discussion paper to regulate the number of assignments that may be handled by insolvency professionals under the IBC. It proposes to cap the number of assignments to five CIR or liquidation (including voluntary liquidation) processes. The number of assignments is also proposed to be linked to the turnover of the corporate debtor. Comments have been invited from the public.
Meanwhile, the Indore Bench of the Madhya Pradesh High Court has issued notice in a petition challenging the constitutionality of the June 2020 ordinance, which suspends the initiation of CIRP for a period of six months. As we had written in our last issue, the language of the ordinance leaves much to be desired and it is not surprising that such a petition has been filed.
The government is also mulling over a special framework for MSMEs that would enable them to initiate bankruptcy proceedings while remaining in control in contrast to the “lenders in control” mode of the IBC.
The Supreme Court has issued notice to the Centre in a petition challenging the constitutional validity of the Insolvency and Bankruptcy Code (Amendment) Act, 2020 which inter alia introduced a ten percent threshold for allottees of a real-estate project to initiate a CIRP. The Supreme Court has also directed that status quo be maintained in respect of pending petitions.
From the Docket
In Pankaj Agarwal v. Union, the Delhi High Court stayed an NCLT order dated 29 May 2020 relying on a notification dated 24.03.2020 from the Ministry of Corporate Affairs, which increased the jurisdiction of the NCLT to Rs. 1 Crore (from Rs. 100,000). This is an interim order and the matter has not been finally decided.
The NCLAT has allowed the exit from CIRP in a case where after the order of initiation of CIRP, IRP had been appointed but the Committee of Creditors had not been constituted. The corporate debtor and the relevant operational creditor reached a settlement. The NCLAT has also left it open to the operational creditor to revive the CIRP if the settlement terms are not adhered to.
In OBC v. Lotus Auto, the Principal Bench of the NCLT held that the word ‘may’ in Section 30(4) gives discretion to the Committee of Creditors to either reject or accept the resolution plan. Upon failure of a confirmed resolution process and if there is no approved resolution plan, the CIRP having lapsed, the liquidation has to follow, and the Adjudicating Authority has to give effect to it.
In the matter of Indus Biotech, the NCLT, Mumbai referred the parties to arbitration instead of passing an order of initiation of CIRP against the corporate debtor. The case arose out of an alleged default in conversion of optionally redeemable preference shares issued by Indus Biotech to certain entities. The tribunal relied on a judgment in Innoventive Industries and held that Section 7 of the IBC mandates the adjudicating authority to ascertain and record satisfaction as to the occurrence of default before admitting the application. A mere claim by the financial creditor that a default has occurred is not sufficient.
In Excel Infra v. Karnani Solvex, the NCLAT has reiterated that the dispute for purposes of Section 9 of the IBC must be a “pre-existing dispute”, that is, raised before the receipt of the demand notice under Section 8.
In Srikanth Dwarakanath v. BHEL, the National Company Law Appellate Tribunal allowed the liquidator to sell the assets of the corporate debtor despite BHEL (a secured creditor) not relinquishing its interest in the secured assets. In this case, BHEL had been given a security interest pursuant to an arbitral award and was the only creditor (by number) who refused to relinquish its interest, thereby stalling the sale. The NCLAT held that Section 13(9) of the SARFAESI Act would be applicable to end such a deadlock. The appellate tribunal opined that if a secured creditor does not have 60% value in the secured interest, that secured creditor does not have the right to realize its security interest as it would be detrimental to the liquidation process and the interest of other secured creditors.
In the case of Siemens Gamesa, the Chennai Bench of NCLT has clarified that the June 2020 Ordinance will apply to all those cases where the default has occurred after 25 March 2020 and therefore, that the said ordinance would have retrospective effect to that extent.
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