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IBC Brief-January and February, 2021

The Ministry of Corporate Affairs invited comments from the public on the proposal for pre-pack insolvency resolution. This mechanism is intended to be debtor-in-control instead of the creditor-driven process under the IBC at present. Our partner, Ms. Mani Gupta commented on this development in this article for Global Restructuring Review.
Should the Swiss challenge method of auction be permitted? The Delhi High Court has asked the IBBI to…

Hello and welcome back to our updates on insolvency and restructuring.

The Ministry of Corporate Affairs invited comments from the public on the proposal for pre-pack insolvency resolution. This mechanism is intended to be debtor-in-control instead of the creditor-driven process under the IBC at present. Our partner, Ms. Mani Gupta commented on this development in this article for Global Restructuring Review.

Should the Swiss challenge method of auction be permitted? The Delhi High Court has asked the IBBI to consider the writ petition pending before itself as a representation on the issue of adoption of the Swiss challenge method as a form of an auction. Some authors have argued that the method is not suitable for India.

There is a need for harmonisation of various procedures for recovery and restructuring in India, argues one author, to maximise the potential.

The Central Government has by a notification dated 22 December 2020 extended the partial suspension of the IBC introduced as a COVID relief measure by a further period of three months up to 25 March 2021.

Ahead of the annual Budget, India’s Economic Survey said that the Insolvency and Bankruptcy Code (IBC) was facing serious hurdles due to litigation initiated by various parties, and advocated for efficient legal systems.

Read the implications of the Supreme Court’s validation of Section 32A of the IBC (see news below).
Some commentators have argued that the IBC has been a lifeline for Indian assets stressed by the pandemic.

The government had announced plans for a new insolvency process for MSMEs but some reports indicate that only debtors will be permitted to initiate their own insolvencies.

From the Docket

In Manish Kumar v. Union, the Supreme Court has upheld the constitutional validity of the amendments to the IBC in 2020 whereby a threshold was introduced before flat-owners could initiate CIRP against a real estate developer, and Section 32A of the IBC. In a very detailed judgment, the Court held that the creation of a sub-class within a class is not antithetical to the guarantee of equality under Article 14. Further, the Court held that what distinguishes the home buyers from other financial creditors is the numerosity, heterogeneity and the individuality in decision-making.

The Supreme Court has clarified that the term ‘allotment’ means allotment in the sense of documented booking as mentioned in Section 11(1)(b) of the RERA. A person to whom allotment of a plot, apartment, or a building has been made is an allottee. The allottee would also include a person who acquires the allotment either through sale, transfer or otherwise. Furthermore, the threshold requirement has to be met at the time of filing of an application.

In respect of Section 32A introduced in the IBC, the Court held that having regard to the object of the Code, the experience of its working, and the interests of all stakeholders, including most importantly the imperative need to attract resolution applicants who would not shy away from offering reasonable and fair value as part of the resolution plan, it would not interfere in the legislature’s policy that immunity be granted to the corporate debtor and its property.

In Action Ispat and Power v. Shyam Metalics, the Supreme Court has upheld the decision of the division bench of the High Court of Delhi. The Supreme Court held that the company court should proceed with the winding up of the company only if the winding up proceedings have reached a stage where it would be ‘irreversible’- making it impossible for a transfer to the NCLT. So long as no actual sales of the immovable or movable properties have taken place, nothing irreversible is done which would warrant a company court staying its hands on a transfer application made to it by a creditor or any party to the proceedings.

Section 10A of the IBC introduced in light of the COVID-19 pandemic should be read purposively, said the Supreme Court in Ramesh Kymal v. Siemens Gamesa. The SC held that on a reading of the provisions harmoniously, it is evident that the Parliament intended to impose a bar on the filing of applications for the commencement of the CIRP in respect of a corporate debtor for a default occurring on or after 25.03.2020. The SC rejected the argument that Section 10A applies prospectively only from 10.06.2020.

In Phoenix ARC v. Spade Financial Services, the Supreme Court has interpreted the provisions of the IBC purposively to hold that those related party financial creditors that cease to be related parties in order to circumvent the exclusion under the first proviso to Section 21(2), should also be considered as being covered by the exclusion thereunder.

In POSCO India v. RP of Poggenamp Nagatsheth Powertronics, the Ahmedabad Bench of NCLT held that registration of a corporate debtor as an MSME during the insolvency resolution process amounts to changing the nature and character of the corporate debtor and is not permissible. The NCLT also held that the resolution plan submitted by a promoter of such an entity would have to be rejected as being in violation of Section 29A as the corporate debtor was not an MSME on the insolvency commencement date.

Whether there is a pre-existing dispute or not is a question to be determined from the date of the first demand notice served by the operational creditor and not any subsequent demand notice, ruled the NCLAT in Naresh Sevantilal Shah v. Malharshanti Enterprises.

In Thakaran Web Innovations v. Cyriac Njavally, the NCLT (Kochi Bench, Kerala) held that the notification dated 24.03.2020 published by the Ministry of Corporate Affairs does not give a ‘blanket protection’ to debtors where defaults have occurred before the pandemic. If such was the case, it would require an amendment to the Code and not a mere notification. This order has been challenged subsequently and has been stayed by the Kerala High Court.

In Bishal Jaiswal v ARCIL, a five-member bench of the NCLAT has refused to reconsider the judgment in V. Padmakumar v. Stressed Assets Stabilization Fund, terming the order of reference as a misadventure.

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