Pre-pack under the IBC: an option for MSME Corporates to resolve its financial distress without losing control

India has made drastic change on the way insolvency is resolved for corporate entity with limited liabilities with the enactment of much coveted Insolvency and Bankruptcy Code, 2016 (the IBC). And recently it has witnessed the 6th amendment to the IBC. This shows that while the IBC is in the making (work in progress), what is heartening is that based on experience gained, necessary amendments are made, from time to time, to smoothen the process.

Earlier the Insolvency and Bankruptcy (Amendment) Ordinance, 2021 was promulgated on 4th April 2021, which introduced the Pre-packaged Insolvency Resolution Process (PPIRP) for corporates classified as micro, small and medium enterprises (MSMEs)[1]

The Preamble to the said Ordinance stated its objective as an attempt to provide an efficient alternative insolvency resolution process for MSMEs under the IBC, ensuring quicker, cost-effective and value maximising outcomes for all stakeholders, in a manner which is least disruptive to the continuity of their businesses and which preserves jobs[2].

Considering preamble to the said Ordinance, but not the provision of Sub-sec.(2) of Sec.54A of the IBC or the Rules and the Regulations thereunder[3], it can be said that the PPIRP is available only to corporate debtor (either LLP or Pvt Ltd or Ltd company)[4], classified as MSME[5]

On 11th August 2021, the said Ordinance is repealed and replaced with the Insolvency and Bankruptcy Code (Amendment) Act, 2021, with a savings clause for anything done or actions taken under the Ordinance. The said Amendment Act is operative (retrospectively) from 4th of April 2021 (same as the repealed Ordinance). However, unlike the said Ordinance, there is no pre-amble to the IBC (Amendment) Act, 2021. Thus, suggesting that PPIRP is not intended to be restricted to MSMEs only, though initially its available for MSMEs only.

The igniting point for PPIRP is a ‘default’ by a Corporate Debtor (CD), on or after 9th April 2021, of INR 10 lakh (INR 1 million) or more[6]. Unlike RBI circular no. DBR.No.BP.BC.18/21.04.048/2018-19 dated 1st January 2019, upper cap for default is not prescribed and hence MSME borrower (which is CD) with default of INR 10 lakh (1 mn.) or more (without upper limit) can avail the benefit of PPIRP.

And CD making default, on or after 25th March 2021, of INR 1 crore (INR 10 million) or more[7] can resolve its insolvency by Corporate Insolvency Resolution Process (CIRP) u/s.10 of the IBC. 

At present, the IBC does not permit creditors to initiate PPIRP. However, in case of default of INR 1 crore (INR 10 million) or more, creditors can initiate CIRP u/sec. 7 of IBC (by Financial Creditor / FCs) or u/sec. 9 of IBC (by Operational Creditor / OCs).

The consequence of two different limits for PPRIP and CIRP is explained with examples below:

Where amount of default by CD is of:

(1) INR 10 million or more, and CD which is classified as MSME has option of either initiating CIRP u/s.10 of the IBC or to initiate PPIRP u/s.54A(2) of the IBC. Here, FCs and OCs are eligible to initiate CIRP (but not PPIRP). It may be noted that, presently PPIRP can be initiated by CD only. 

(2) INR 1 million (10 lakh) or more but below INR 10 million, and CD is classified as MSME, then it may initiate PPIRP u/s.54A of IBC. In such cases, as the value of default remains below INR 10 million, CIRP cannot be initiated either by CD or by FCs and OCs.

(3) less than INR 1 million (INR 10 lakh), CD cannot initiate PPIRP u/s.54A of IBC. However, if such CD is MSME, it can avail RBI’s one-time restructuring facility for MSME (stated infra).

Introduction of PPIRP is timely and is of relevance considering that:

  • suspension of CIRP (due to Pandemic COVID-19) has ended on 24th March 2021. 
  • While default made by CD during 25th March 2020 to 24th March 2021 is shielded u/s.10A of the IBC, the said protection is not available from 25th March 2021, though disruption due to the pandemic continues. 

PPIRP for COVID-19 affected CD, is an alternative to:

  • the Reserve Bank of India’s (RBI) one-time restructuring facility for MSME borrower upto INR 25 crore (INR 250 million), which were classified by lenders as ‘standard’ as on 1st March 2020 but may have slipped into ‘Non-Performing Asset’ (NPA) category, has ended on 31st March 2021[8]. For those MSMEs who had not availed this facility, are eligible under extended facility[9] till 30thSeptember 2021, if accounts of MSMEs are classified by lenders as ‘standard’ as on 31st March 2021.
  • the RBI’s Resolution framework dated 6th August 2020[10] for borrowers (includes MSMEs as well) facing stress on account of Covid-19. It applies, inter alia, to borrowers whose aggregate exposure to lending institutions collectively, is more than INR 25 crore (INR 250 million); and 
  • the Reserve Bank of India (Prudential Framework for Resolution of Stressed Assets) Directions 2019, dated 7th June 2019.

Above resolution frameworks of RBI requires CD to approach and negotiate with individual lender banks/NBFCs (except under RBI’s 7th June 2019), whereas PPIRP requires that resolution is proposed and negotiated with all the unrelated FCs. Thus, PPIRP provides better option, as it avoids time, efforts and cost in negotiation with every lenders required under the RBI framework. PPIRP involves all unrelated FCs and not restricted to banks/NBFCs. PPIRP requires approval of only 66% in value of total debt due to unrelated FCs whereas RBI framework of 7th June 2019 requires inter-creditors agreement amongst lender banks/NBFCs and twin consent of (i) 75% in value of total debt due to banks/NBFCs and (ii) 60% in number of banks/NBFCs involved.

Lender(s) may treat ‘resolution’ under PPIRP as restructuring under above notifications, particularly the provisioning norms as per the Directions of 7th June 2019 shall apply. If this cannot be achieved, company’s account with lending banks/NBFCs cannot be upgraded. Therefore, to encourage PPIRP, RBI may consider tweaking its notification.

What is PPIRP?

PPIRP in its simplest form can be described as a legal process under which CD, prepares a plan to resolve its state of insolvency. Such a plan is called a ‘base resolution plan’, which may be proposed by the CD either alone or jointly with any other person to its creditors. It is called “pre-packaged” because before formally initiating insolvency resolution process, the CD prepares a draft base resolution plan, circulates to its creditors and negotiates. Once, it is agreed the same is put to the formal PPIRP process for ensuring transparency and seek independent judicial approval for making it legally binding. Thus, PPIRP comprises of informal and formal process, both recognised under the IBC (Amendment) Act 2021.

It is available to CDs who has not undergone CIRP or PPIRP in 3 years prior to formally initiating PPIRP.

Benefits of PPIRP:

  1. Speed: The PPIRP is proposed to be faster than CIRP. If it is planned and implemented well, the pre-pack resolution plan can be completed within a week or even less after nod of NCLT to commence PPIRP! It is not some hype. Consider any delay or negligence can lead account of CD into NPA (if default continues for 90 days) and thereby lenders may need to make higher provisions in its book, though CD being MSME may remain eligible u/s.29A r/w sec.240A IBC, to propose PPIRP. Thus, balancing the needs of CD and lenders – for lenders, early resolution ensues saving higher provisioning in its books and for CD, to retain the control. Thus, it appears that PPIRP taking less than 90 days may become the norm.
  2. Retain management: Unlike CIRP, under the PPIRP, Board of Directors/ Designated Partners retains the control of CD during PPIRP and thereafter, whether the resolution plan is approved or not. (Section 54H).
  3. Least disruption in business and reputation: PPIRP provides opportunity for least disruption in business of CD, privacy and confidentiality, and if the securities of such CD are traded on stock exchanges, there will be least erosion in its stock prices. It also helps maintain reputation of promoters and the CD. 
  4. Moratorium: The moratorium (as in CIRP) is available till the date of closure of the PPIRP process[11]. It thus protects CD from actions of creditors while PPIRP is underway. However, there is no moratorium prior to date of admission of application by NCLT for commencing PPIRP. Thus, CD need to act with speed and in camouflage so that possible actions by OCs and others may be avoided before the draft base resolution plan is agreed by unrelated FCs and formal PPIRP is initiated.
  5. Avoid action by Creditors: PPIRP can be used by CD to avoid CIRP by creditors (as it is believed that in most cases debt and default would exceed Rs1 crore), which is lengthy and costly affairs and mostly results into management losing its control. It is believed that under PPIRP all major stakeholders takes timely action to avoid worst situation and thereby intends to provide win-win situation for all.
  6. Maximise value for stakeholders: It gives option to eligible CD for proposing its resolution plan proposal for quicker approval and implementation, thereby saving its business, saving jobs and maximise value for all stakeholders.

Legal provisions:

The IBC (Amendment) Act, 2021 has inserted 17 provisions. It has inserted new Chapter III-A (Ss.54A to 54P) providing for the PPIRP. Also interplay of applications for PPIRP and CIRP, where default by CD is of INR 1 crore (INR 10 million) or more, is provided by newly inserted S.11A. New provisions are also inserted to deal with fraudulent management during PPIRP (S.67A), punishment for offences related to PPIRP (S.77A); authority to AA to levy penalty for initiating PPIRP with intent to defraud any person or for purpose other than insolvency resolution (newly inserted Sub-sec.(3) to Sec.65); and provision for pro-active functions and duties of insolvency professional prior to formal initiation of PPIRP (newly inserted sub-sec.(1A) to Sec.208). The role of insolvency professional prior to commencement of PPIRP is now statutorily recognised[12]. Name of Insolvency Professional to act as Resolution Professional is to be proposed by unrelated FCs. And is appointed with consent of unrelated FCs with atleast 66% in value of financial debt[13].

To implement the provisions of PPIRP, Ministry of Corporate Affairs/MCA has notified the PPIRP Rules, 2021 dealing with manner of filing application for initiating PPIRP[14] and the Insolvency and Bankruptcy Board of India (IBBI) has notified the PPIRP Regulations, 2021 for the purpose[15]

Checks and balances under PPIRP:

To avoid misuse of PPIRP by CDs, safeguards are provided. If during the PPIRP process it is found that:

  • valuation is substantially different from the valuation represented by CD; or 
  • CD had indulged into avoidance transactions or fraudulent activities or 
  • where CD proposes a different plan than what was informally agreed as base resolution plan, 

the creditors may terminate the PPIRP process and in certain cases management gets transferred to Resolution Professional (RP) or CIRP may be initiated or CD may be liquidated.

Management of the CD is not intended to be vested with the RP. However, in exceptional cases, where during PPIRP the affairs of CD is conducted prejudicial to creditors or fraudulently or in case of gross mismanagement of the affairs of CD, the COC may decide with 66% voting to vest the management in the RP. And if the NCLT agrees with the COC, then the management of the CD vests with the RP[16].

The far reaching consequence of vesting management of CD with RP is that if the resolution plan for CD is not approved by the COC, then the NCLT shall order liquidation of CD[17].

Consider alternative options:

India is a competitive market economy. IBC is competing with other options for resolution of financial stress. There is no compulsion on CD to opt for PPIRP or upon bankers to approve base resolution plan under PPIRP proposed by defaulter CD

Other options could be, resolution under the RBI Prudential framework, or RBI’s one-time restructuring framework for MSMEs, or bilateral negotiation, or Scheme of arrangement or compromise under the Companies Act 2013 or even Corporate Insolvency Resolution Process (CIRP) under IBC or takeover / bailout by knight rider(s).

Thus, PPIRP is one more but a significant option and a tool with CD for resolving its insolvency. 

CD also need to factor about time, efforts and cost involved in resolving its insolvency under various options.

If pre-packaged negotiation fails, all concerned have other sets of options, and such options are driving force in negotiating the pre-packed resolution plan. It may be noted that limitation period is not stopped until moratorium is declared by NCLT.

Some of the important factors for CD in considering PPIRP

  1. Resolution applicant(s) shall be eligible under Section 29A of the IBC. It may be noted that for MSMEs, benefit of relaxation from the provisions of clause (c) of section 29A i.e. even if account of CD is classified as NPA and clause (h) of section 29A i.e. even if guarantee given by resolution applicant(s) is invoked by creditor(s) and remains unpaid (fully or partly). [Per section 240A IBC]
  2. To commence PPIRP, CD needs: (i) prior consent of members of CD by special resolution / and where CD is LLP, prior approval of three-fourth partners; and (ii) consent of unrelated FCs with atleast 66% in value of the financial debt[18]
  3. Early proposal of PPIRP may be better since limitation period of 3 years for FCs to initiate appropriate action starts from the time the loan becomes NPA. 
  4. CD need to furnish declaration regarding the existence of any avoidance transactions that may be within the scope of provisions under Chapter III or fraudulent or wrongful trading under Chapter VI of the IBC[19]. Also, the RP is duty bound (even under PPIRP) to determine existence of such transactions and seek its avoidance[20].
  5. From the date of admission of application for PPIRP by the Adjudicating Authority (NCLT), moratorium (as in CIRP) is available to CD till the date of closure of the process[21].
  6. During the PPIRP, the management remains with the CD. However certain transactions by CD requires prior approval of the COC and disclosure of information by CD is expected at a higher degree[22].
  7. RP to appoint two independent registered valuers to determine fair value and liquidation value of the CD. RP to maintain its confidentiality and share the same with COC members, only after receipt of a resolution plan, and upon written undertaking of confidentiality from the COC members[23].
  8. The public announcement (PA) upon admission of application for commencing PPIRP is to be sent, inter alia, to every creditor of the CD[24] for informing that CD is undergoing PPIRP and not for submission of claims. The claim details will be provided by the CD in the preliminary Information Memorandum prepared by it and submits the same to the Resolution Professional (RP). RP is proposed by unrelated FCs[25] and appointed by NCLT[26]. RP will confirm the amount of claim from the records of the CD and then inform about the same to each creditors of the CD and seek their objections, if any.
  9. Base resolution plan is prepared and proposed by the CD to its unrelated FCs for approval. It is only where a base resolution plan is not approved by the COC or if the base plan impairs the claims of OCs then RP shall call for competing resolution plan(s) for CD from open market, adopting a method commonly known as Swiss Challenge method[27].
  10. Unrelated FCs are grouped together and called Committee of Creditors (COC). Before approval of resolution plan, COC may with atleast 66% voting decide to either (i) terminate PPIRP at any time[28], or (ii) initiate CIRP, if default amount is INR 1 crore (10 million) or more[29], and thereby terminate PPIRP.
  11. COC may not approve a resolution plan, resulting in termination of PPIRP[30]. And in such an eventuality, CD need to bear the entire cost of PPIRP, if any[31].
  12. If the COC approves the resolution plan, further approval is required from the NCLT and then it becomes binding on all concerned[32].
  13. The approval of COC to the resolution plan need to be obtained in maximum of 90 days of commencement of PPIRP[33]. And thereafter, NCLT may either approve[34] or reject[35] the resolution plan within next 30 days. Thus, maximum period envisaged to complete PPIRP is 120 days.

It is pertinent to note that period of 90 days is the outer limit. And along with the Application for admission of PPIRP, consent of unrelated FCs (atleast 66% in value of total debt) is required. Thus, much water would have undergone before filing of application for PPIRP with the Adjudicating Authority. Considering no regulatory intervention provided before filing of application with NCLT for commencing PPIRP, the CD, its creditors and probable resolution professional would do a lot of homework, meetings and negotiations, documentation, draft base resolution plan etc. And where the market value is not being reflected in the base resolution plan, COC would go for a Swiss challenge otherwise it should be like a green channel process where CD can come and immediately get the regulatory benefit of PPIRP.

Thus, practically it may be that PPIRP may conclude much earlier than 90 days from the date of admission of application by NCLT.

  1. There is no provision under the IBC permitting CD to opt out of PPIRP, once the application to initiate PPIRP is admitted by NCLT. This is so because, prior to filing application with NCLT to initiate PPIRP, it is expected that CD and its FCs arrives at mutually acceptable resolution proposal.
  2. There is no provision in the IBC on ipso facto clauses in contracts whereby ‘event of default’ may be specified, such as filing of insolvency application and thereby give right to terminate contract. And until the IBC / law provides for the same, the validity of ipso facto clauses would be decided on facts of each case[36].


PPIRP in India is an alternative to several options that may be available for CD to resolve its financial distress. PPIRP can be a safety valve to save CD particularly where financial stress is due to COVID-19 or due to factors other than mismanagement / fraud. 

It offers an option to promoters/ management to retain control of CD and propose a resolution to its financial distress in a fair and transparent manner, before it runs out of options.

The success of PPIRP is in (i) maintaining confidentiality thereby giving CD option to propose resolution without alerting OCs who may get panicked, (ii) speed as financial distress of CD and creditors’ action cannot be deferred for long; and (iii) ensuring transparency for instilling confidence in the process.

RBI may consider to recognise PPIRP in its prudential framework (of 7th June 2019 notification) so that PPIRP gets required clarity and boost.The objective is laudable and framework is in place. We need to see how it eventually turns out. 

[1] Section 54A(1) of the IBC.

[2] 6th, 7th and 8th Para of the Preamble to the IBC (Amendment) Ordinance, 2021.

[3] Sub-sec.(1) of Sec.54A states CD classified as MSME may initiate PPIRP and sub-sec.(2) thereof states without prejudice to sub-sec.(1) any CD (MSME or not) in default u/s.4 may initiate PPIRP. Further, neither the Rules notified by the MCA nor the Regulations framed by IBBI specifies that CD shall be MSME!!

[4] Section 3(8) r/w Sec. 3(7) of IBC.

[5] For criteria of classification see

[6] Vide MCA’s notification no. S.O. 1543(E) dated 9th April 2021 (per second proviso to sec.4 of IBC). Hopefully MCA will notify the same amount under the IBC (Amendment) Act 2021.

[7] Vide MCA’s notification no. S.O. 1205(E) dated 24th March 2020, limit for CIRP was increased from INR 1 lakh (INR 100,000) to INR 1 crore i.e. INR 10 million (as per first proviso to sec.4 of IBC) and suspension of initiation of CIRP u/s.10A ended on 24th March 2021.

[8] RBI’s Circular No. DOR.No.BP.BC/4/21.04.048/2020-21 dated 6th August 2020 to be read with RBI’s Circular No. DOR.STR.REC.20/21.04.048/2021-22 dated 4th June 2021, whereby limit enhanced from INR 25 crore (INR 250 million) to INR 50 crore (INR 500 million).

[9] RBI’s Circular No. DOR.STR.REC.12/21.04.048/2021-22 dated 5th May 2021 to be read with the RBI’s Circular No. DOR.STR.REC.21/21.04.048/2021-22 dated 4th June 2021.

[10] Parts B and C of annex. to the RBI’s Circular No. DOR.No.BP.BC/3/21.04.048/2020-21 dated 6th August 2020

[11] Section 54E of the IBC

[12] Sec. 54B of the IBC prescribes duties of insolvency professional proposed to be appointed as the resolution professional for PPIRP purpose.

[13] Sec. 54A(2)(e) of the IBC.

[14] the Insolvency and Bankruptcy (prepackaged insolvency resolution process) Rules, 2021, notified on and effective from 9th April 2021. The same continues under the IBC Amendment Act 2021 by virtue of Sec.24 of the General Clauses Act, 1897 r/w ruling of Constitutional Bench of Hon’ble Supreme Court in West Ramnad Electric Distribution Co. Ltd. Vs. State of Madras, AIR 1962 SC 1753.

[15] the Insolvency and Bankruptcy Board of India (Pre-packaged Insolvency Resolution Process) Regulations, 2021, notified on and effective from 9th April 2021. The same continues under the IBC Amendment Act 2021 by virtue of Sec.24 of the General Clauses Act, 1897 r/w ruling of Hon’ble Supreme Court in State of Punjab vs. Harnek Singh, AIR 2002 SC 1074.

[16] section 54J(1) and (2), r/w regulation 50 of the PPIRP Regulations

[17] section 54N(4)

[18] Section 54A(3) of the IBC

[19] Section 54C(3)(c) ibid r/w. regulation 16(2) of the PPIRP Regulations

[20] Regulation 41 of the PPIRP Regulations

[21] Section 54E of the IBC

[22] Section 54F r/w regulations 9, 10, 18, 20, 50 of the PPIRP Regulations

[23] Regulations 38 and 39 of the PPIRP Regulations

[24] Regulation 19(2)(b) of the PPIRP Regulations

[25] Section 54A(2)(e) of the IBC

[26] Section 54E(1)(b)

[27] Section 54K(5) of the IBC r/w Regulation 48 of the PPIRP Regulations

[28] Section 54N(2) of the IBC

[29] Section 54O(1) of the IBC

[30] Ss. 54D(3) and proviso to 54K(12), ibid r/w regulation 49(4) ibid

[31] Sec. 54N(3) of the IBC

[32] Section 54D(2) ibid

[33] Section 54D(2) of the IBC

[34] Section 54L(1) of the IBC

[35] Section 54L(3) of the IBC

[36] Hon’ble Supreme Court of India in Gujarat Urja Vikas Nigam Ltd vs. Amit Gupta and Ors., 2021 SCC OnLine SC 194, Para 145.

When can you initiate IBC action, if the Arbitration award is in your favour?

Hon’ble Supreme Court in K. Kishan vs. M/s. Vijay Nirman Company Pvt. Ltd. (in Civil Appeal No.21824 of 2018, decided on 14.08.2018) addressed – whether the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as “the IBC”) can be invoked in respect of an operational debt where an Arbitral Award has been passed against the operational debtor, which has not yet been finally adjudicated upon.

M/s Vijay Nirman Company Pvt. Ltd. (the Respondent) entered into a sub-Contract Agreement with one M/s Ksheerabad Constructions Pvt. (‘KCPL’) on 01.02.2008.

Apart from this Agreement, a separate agreement of the same date was entered into between the said KPCL and one M/s SDM Projects Private Limited, Bangalore, as a result of which, a tripartite Memorandum of Understanding was entered into on 09.05.2008 between KCPL, M/s SDM Projects Pvt. Ltd. and the Respondent.

During the course of the project, disputes and differences arose between the parties and the same were referred to an Arbitral Tribunal, which delivered its Award on 21.01.2017. One of the claims that was allowed by the said Award was in favour of the respondent for a sum of Rs.1,71,98,302/-.

At this stage, a notice dated 06.02.2017 was sent by the Respondent to KCPL to pay an amount of Rs. 1,79,00,166/-. This notice was stated to be a notice under Section 8 of the IBC. Within 10 days, by a letter dated 16.02.2017, KCPL disputed the invoice that was referred to in the said notice, stating that the said amount was, in fact, the subject-matter of an arbitration proceeding.

After the notice and reply, on 20.04.2017, a Section 34 petition was filed by KCPL under the Arbitration and Conciliation Act, 1996 (hereinafter referred to as “the Arbitration Act”) challenging the aforesaid Award. The same was filed within the period of limitation set down in Section 34(3) of the Arbitration Act.

It is only thereafter that a petition was filed under Section 9 of the IBC, on 14.07.2017 with the National Company Law Tribunal (NCLT).

According to the NCLT, the fact that a Section 34 petition was pending was irrelevant for the reason that the claim stood admitted, and there was no stay of the Award. For these reasons, therefore, the Section 9 petition was admitted.

An appeal filed to the National Company Law Appellate Tribunal (NCLAT) met with the same fate, as according to the NCLAT, the non-obstante clause contained in Section 238 of the IBC would override the Arbitration Act. Also, according to the NCLAT, since Form V of Part 5 of the Insolvency & Bankruptcy (Application to Adjudicating Authority) Rules, 2016 requires particulars of an order of an arbitral panel adjudicating on the default, this would have to be treated as “a record of an operational debt”, as a result of which the petition would have to be admitted, as was correctly done by the NCLT.

The Apex Court relied upon its ruling in Mobilox Innovations Private Limited vs. Kirusa Software Private Limited, (2018) 1 SCC 353 – in particular para 13 thereof on the legislative history; para 27 on the notes on clauses annexed to the Bill; para 32 where it is noticed that the original Bill which ultimately became the IBC had the expression “bona fide dispute” contained in an inclusive definition. It is significant to note that by the time the IBC was enacted the expression “bona fide” was dropped and an observation therein that what is important is that the existence of the dispute and/or a suit or arbitration proceeding must be pre-existing i.e. it must exist before the receipt of the demand notice or invoice; para 38 and para 51 of the said ruling in Mobilox case.

Hon’ble Supreme Court observed that “the alarming result of an operational debt contained in an arbitral award for a small amount of say, two lakhs of rupees, cannot possibly jeopardize an otherwise solvent company worth several crores of rupees”. And that that the judgment in Mobilox Innovations (supra) has made it clear that the insolvency process, particularly in relation to operational creditors, cannot be used to bypass the adjudicatory and enforcement process of a debt contained in other statutes.

And held that the filing of a Section 34 petition against an Arbitral Award shows that a pre-existing dispute which culminates at the first stage of the proceedings in an Award, continues even after the Award, at least till the final adjudicatory process under Sections 34 & 37 has taken place.

The Apex Court has thrown important light by making its observation that-

(i) that there may be cases where a Section 34 petition challenging an Arbitral Award may clearly and unequivocally be barred by limitation, in that it can be demonstrated to the Court that the period of 90 days plus the discretionary period of 30 days has clearly expired, after which either no petition under Section 34 has been filed or a belated petition under Section 34 has been filed. And in such cases insolvency process under the IBC can commence.

(ii) There may also be other cases where a Section 34 petition may have been instituted in the wrong court, as a result of which the petitioner may claim the application of Section 14 of the Limitation Act to get over the bar of limitation laid down in Section 34(3) of the Arbitration Act. In such cases also, it is obvious that the insolvency process under the IBC cannot be put into operation without an adjudication on the applicability of Section 14 of the Limitation Act.

Asset held in trust not subject to the moratorium u/s.14 of the IBC

Asset held in trust not subject to the moratorium u/s.14 of the IBC.

Sun Pharmaceutical Industries Ltd. filed application before NCLT, Chandigarh bench seeking its direction to allow it to lift its stock of raw materials of approx. Rs.14 crore in possession of the Parabolic Drugs Ltd (Corporate Debtor). The Corporate Debtor was undergoing the corporate insolvency resolution process and the Resolution Professional appointed was managing the affairs. In terms of “Manufacturing & Supply Agreement” dated 11.02.2010 entered with the Corporate debtor. And as per the said agreement, Sun Pharma supplied the raw-material to the Corporate Debtor for the purpose of manufacturing of the agreed Drug. As per the agreement, the Corporate Debtor agreed to keep the raw materials supplied by the Sun Pharma in trust and to be used only for the purpose of manufacturing finished product and such finished product should be supplied to Sun Pharma only. Further, as per the said agreement, the property and ownership in the raw materials, packaging or other materials and the finished Products or stock in-process of manufacture shall at all times remain and shall be deemed to be vested in RANBAXY (as acquired by Sun Pharma).

The grievance of the Sun Pharma was that neither the manufactured product was made available nor raw material was returned to the Sun Pharma. And after the

pronouncement of moratorium Sun Pharma had not been allowed to visit the manufacturing unit and even electricity connection at the factory of the Corporate Debtor was disconnected. The apprehension is that the raw material being a sensitive chemical might get perished by the passage of time.

Representatives appeared on behalf of the CoC and the Resolution Professional,  opposed the application. It is pleaded that once the Moratorium u/s 14 of IBC is in operation, then the recovery of any property by any owner which is in possession of the Corporate Debtor is prohibited, referred section 14(1)(d) of the Code.

It was also argued that the term “property” is defined u/s 3(27) of the insolvency code which includes money, goods, actionable claim, land, etc. The raw material which is supplied is the “Property” as mentioned in section 14(1)(d) which is under prohibition, therefore, cannot be recovered from the possession of the Corporate Debtor.

Held: The statute has mandated vide section 18(1)(f) that the Interim Resolution Professional shall perform several duties such as ‘take control and custody of any asset over which the Corporate Debtor has ownership rights as recorded in the Balance Sheet of the Corporate Debtor’. Tangible assets whether movable or immovable is within the category of “Assets” as defined in this section vide insertion of an Explanation. Through this explanation an exception is carved out that for the purpose of this section i.e. section 18(1)(f) the followings shall not constitute an Asset and therefore, an Asset owned by a third party, however, in possession of the Corporate Debtor, held under trust or under contractual arrangement.

In the light of this provision if we examine the facts of this case, it is not in dispute that the Operational Creditor M/s. Sun Pharmaceutical Ltd. has supplied the raw material which is in possession of the Corporate Debtor i.e. Parabolic Drugs Ltd. should be released without delay being perishable in nature, following section 18(1)(f) r/w Explanation.

The distinction between Sec.14 and Sec.18 was considered and held that the general rule of Sec.14 is that property in possession of the Corporate Debtor at the commencement of corporate insolvency resolution process cannot be recovered. However, an exception to the said general rule is carved out in the explanation to section 18. When Sec. 18 r/w explanation the term ”asset” shall not include an asset owned by third party in possession of Corporate Debtor, either (i) under trust, or under (ii) contractual arrangements including bailment.

[CA 206/2019, decided on 26/4/2019]

Supreme Court holds that the RBI Circular of 12 Feb 2018 not valid

Hon’ble Supreme Court, in Dharani Sugars and Chemicals Ltd v Union of India and Others, on 02 April 2019 held the constitutional validity of Ss. 35AA and 35AB of the Banking Regulations Act, 1949 (the Banking Regulation Act) and also held that the RBI circular of 12.02.2018 directing banking and non-banking companies to initiate action under the Insolvency and Bankruptcy Code 2016 (the Insolvency Code) as invalid being violative of Section 35AA of the said Act and hence action under the said circular shall fail. Here is the brief analysis of the said judgement.

The Banking Regulation (Amendment) Ordinance, 2017 introduced Sections 35AA and 35AB as amendments to the Banking Regulation Act on 04.05.2017. The same reads as under:

“35AA. The Central Government may by order authorise the Reserve Bank to issue directions to any banking company or banking companies to initiate insolvency resolution process in respect of a default, under the provisions of the Insolvency and Bankruptcy Code, 2016. 

Explanation. – For the purposes of this section, “default” has the same meaning assigned to it in clause (12) of section 3 of the Insolvency and Bankruptcy Code, 2016. 

35AB. (1) Without prejudice to the provisions of section 35A, the Reserve Bank may, from time to time, issue directions to the banking companies for resolution of stressed assets. 

(2) The Reserve Bank may specify one or more authorities or committees with such members as the Reserve Bank may appoint or approve for appointment to advise banking companies on resolution of stressed assets.” 

Hon’ble Supreme Court has upheld the constitutional validity of Sections 35AA and 35AB of the Banking Regulation Act, 1949.

The constitutional validity is upheld by replying upon the following principles:

(i) economic legislation to be viewed with great latitude (referring to para 85 of Swiss Ribbons Pvt. Ltd. and Anr. v. Union of India and Ors., 2019 (2) SCALE 5).

(ii) Petitioners failed to point out how either of these provisions are manifestly arbitrary [referring to ‘manifestly arbitrariness’ as in Shayara Bano v. Union of India, (2017) 9 SCC 1]. And further observing that these provisions (Ss. 35AA and 35AB) are not different in quality from any of the sections which have already conferred such powers (Sections 14A, 17, 18, 20, 21, 22 – Sec.22(3) in particular, 25, 29, 30 and 31 of the Banking Regulation Act). Further, Hon’ble Court also found that the amendment does not suffer from adequate guidelines [referring to Harishankar Bagla v. State of M. P., (1955) 1 SCR 380 – para 9]; and Gwalior Rayon Silk Mfg. (Wvg.) Co. Ltd. v. The Assistant Commissioner of Sales Tax and Ors. – paras 13, 15, 17 and 18].

Section 35AA makes it clear that the Central Government may, by order, authorise the RBI to issue directions to any banking company or banking companies when it comes to initiating the insolvency resolution process under the provisions of the Insolvency Code. The first thing to be noted is that without such authorisation, the RBI would have no such power. 

In exercise of power under section 35AA, the Central Government authorised the RBI vide its order dated 05.05.2017 to take defaulters to NCLT under the Insolvency and Bankruptcy Code, 2016 (‘the Insolvency Code’). Thereupon, the RBI issued circular dated 12.02.2018.

The salient features of the RBI circular dated 12.02.2018 are that restructuring in respect of borrower entities de hors the Insolvency and Bankruptcy Code, 2016 can only occur if the resolution plan that involves restructuring is agreed to by all lenders, i.e., 100 per cent concurrence. Secondly, what has been chosen to be the subject matter of the circular is debts with an aggregate exposure of INR 2000 crore and over on or after 01.03.2018. With respect to such debts, if default persists for 180 days from 01.03.2018, or if the date of first default is after 01.03.2018, then 180 days calculated with effect from that date, lenders shall file applications singly or jointly under the Insolvency Code within 15 days from the expiry of the aforesaid 180 days. In short, unless a restructuring process in respect of debts with an aggregate exposure of over INR 2000 crore is fully implemented on or before 195 days from the reference date or date of first default, the lenders will have to file applications as financial creditors under the Insolvency Code.

It was contended before Hon’ble Supreme Court that the RBI already had such power under Section 35A of the Banking Regulation Act, however it was countered by the Petitioners that when section 35A was introduced in the said Act, at that time the Code was not prevalent and hence RBI directing banks and NBFCs to take action under the Code u/s.35A cannot be accepted.

Held, all statutes are to be interpreted as “always speaking statutes”, unless they reveal a contrary intention. Meaning with change of time meaning in words in statute also gets changed. And thus, has section 35AA not been brought to the Statute book, RBI could have exercised its power u/s. 35A of the Banking Regulations Act, even for IBC.

“The corollary of this is that prior to the enactment of Section 35AA, it may have been possible to say that when it comes to the RBI issuing directions to a banking company to initiate insolvency resolution process under the Insolvency Code, it could have issued such directions under Sections 21 and 35A. But after Section 35AA, it may do so only within the four corners of Section 35AA. 

The matter can be looked at from a slightly different angle. If a statute confers power to do a particular act and has laid down the method in which that power has to be exercised, it necessarily prohibits the doing of the act in any manner other than that which has been prescribed.

The contention that though RBI had enough power u/s. 21 and u/s.35A, new section 35AA was introduced to the Banking Regulation Act as an abundant caution, was not accepted. Hon’ble Supreme Court held that it cannot be so accepted as (i) two conditions precedent introduced in section 35AA, without which, powers cannot be exercised by RBI; and (ii) it is well settled that Parliament does not legislate when no legislation is called for.

Further Hon’ble Supreme Court concluded that “Therefore, the scheme of Sections 35A, 35AA, and 35AB is as follows: 

  • (a)  When it comes to issuing directions to initiate the insolvency resolution process under the Insolvency Code, Section 35AA is the only source of power.
  • (b)  When it comes to issuing directions in respect of stressed assets, which directions are directions other than resolving this problem under the Insolvency Code, such power falls within Section 35A read with Section 35AB. This also becomes clear from the fact that Section 35AB(2) enables the RBI to specify one or more authorities or committees to advise any banking company on resolution of stressed assets. This advice is obviously de hors the Insolvency Code, as once an application is made under the Insolvency Code, such advice would be wholly redundant, as the Insolvency Code provisions would then take over and have to be followed. 
  • Further Hon’ble Supreme Court concluded that it is clear also from the Press Note dated 05.05.2017 of the Central Government (Ministry of Finance), which introduced the Ordinance and specifically referred to resolution of “specific” stressed assets which will empower the RBI to intervene in “specific” cases of resolution of NPAs. The Statement of Objects and Reasons for introducing Section 35AA also emphasises that directions are in respect of “a default”. Thus, it is clear that directions that can be issued under Section 35AA can only be in respect of specific defaults by specific debtors. This is also the understanding of the Central Government when it issued the notification dated 05.05.2017, which authorised the RBI to issue such directions only in respect of “a default” under the Code. Thus, any directions which are in respect of debtors generally, would be ultra vires Section 35AA. 

Then Section 13 of the General Clauses Act, 1897 [“General Clauses Act”] was relied upon to state that the singular would include the plural. To which Hon’ble Court noted that there is no doubt whatsoever that this would be so unless the context otherwise requires, as is provided by Section 13 of the General Clauses Act itself. In the present case, the context of Section 35AA makes it clear that the power to be exercised under the authorisation of the Central Government requires “due deliberation and care” to refer to specific defaults. 

Finally it is held that “Consequently, all actions taken under the said circular, including actions by which the Insolvency Code has been triggered must fall along with the said circular. As a result, all cases in which debtors have been proceeded against by financial creditors under Section 7 of the Insolvency Code, only because of the operation of the impugned circular will be proceedings which, being faulted at the very inception, are declared to be non-est.”

Our comments:
Consequently, proceedings taken by banks and /or NBFCs by virtue of the RBI Circular by taking corporate persons to NCLT under the Insolvency Code has become nullity and without support of law. However, that does not mean that banks / NBFCs are not entitled to recover their debts. Banks/ NBFCs may decide to restructure the debt of such cases outside the Insolvency Code, including under the Sashakt Project. And also equally possible that any one of the Banks / NBFCs may initiate fresh action under the Insolvency Code.

It is believed that the RBI may issue a fresh circular and thereby direct banks and/or NBFCs on steps to be taken due to strike down of its Circular dt. 12.02.2018 by Hon’ble Supreme Court.

Genesis of the RBI Circular 12.02.2018 and impact of the judgement in Dharani Sugars case: To better understand the situation, it is relevant to know the genesis in brief.

Asset Quality Review (AQR) for banks was implemented by RBI in the second half of 2015 and it revealed the true picture of NPA problem. The gross NPAs of Scheduled Commercial Banks (SCBs) rose to Rs.10.4 trillion in March 2018 from Rs.3.2 trillion in March 2015. The problem was more severe for the Public Sector Banks (PSBs) with gross NPAs reaching Rs.9 trillion from Rs.2.8 trillion during the same period.

RBI tried to resolve the NPA problem through several initiatives, including CDR, SDR, S4A, JLF etc.  Two major initiatives have been the Prompt Corrective Action (PCA) by RBI and the recapitalisation of the PSBs by the Government. In April 2017, RBI revised the PCA framework and in October 2017 the Government announced Rs.2.11 trillion recapitalisation package for ailing PSBs, of which Rs.1.53 trillion would be infusion by Government and balance to be raised from the market. 

As these experiments failed, and upon implementation of the IBC, the RBI scrapped all these initiatives and issued a revised guideline on 12 Feb. 2018 for early resolution of stressed assets.

Thereafter, in July 2018, the scheme, called ‘Sashakt’, was recommended by a bankers’ committee and accepted by the government. It is inter-lenders agreement. And it proposes to have a resolution plan for defaulting borrowers and the same to be implemented in a time bound manner. The nature of the resolution plans approved under the inter-creditor agreements would be similar to those under consideration as part of the Insolvency process. However, in this case promoters would continue to be in-charge.

Since this was not enough, particularly after remaining in ICU under PCA for over two years, merger of PSBs is also adopted, as has been done since bank nationalisation. A compulsory merger of banks under section 45 of the Banking Regulation Act, 1949. Amalgamation of Vijaya Bank and Dena Bank with Bank of Baroda has been notified on January 2, 2019. The notification has come into force on April 1, 2019.

And now comes the ruling of the Hon’ble Supreme Court of India, whereby it precludes the RBI from issuing any general directions to banks to initiate insolvency under the Insolvency and Bankruptcy Code, 2016. What is now left for the RBI and the Government is action under Section 35AA and 35AB of the Banking Regulations Act. The Central Government may now analyse specific cases of defaults and issue directions to the RBI in respect of those specific cases. 

Technically, the judgment revives the ability of borrowers to rely on CDR, SDR, S4A, JLF and other restructuring measures (“Traditional Measures”), which were repealed by the RBI Circular of 12 Feb. 2018. However, the market awaits clarity from the RBI on these Traditional Measures.

Given that these Traditional Measures have not achieved much success in resolving NPA issue, Banks are likely to exercise their rights to initiate insolvency proceedings on their own, being their statutory right under section 7 the Code as a financial creditor, probably after taking defaulting borrowers through the Sashakt framework. However, in deserving cases, Banks may take defaulting borrowers directly to NCLT under the Code instead of the Sashakt framework. The Code has given lenders ‘stick’ to deter enough the defaulting Corproate Borrowers to remain on edge.

Way forward: 

Upon request of RBI, from time to time, the Central Govt. to consider ‘specific’ cases for taking under the Insolvency Code and authorise RBI to issue direction to banks and NBFCs to take such specific defaulting borrowers to NCLT under the Insolvency Code. Obviously, such ‘specific’ cases could be where banks on their own are not taking companies to NCLT under the Code.

Alternatively, the Government (mostly after election) may either modify / scrap section 35AA of the Banking Regulations Act and thus enable RBI to bring back the general circular, based on observation of Hon’ble Supreme Court in Dharani Sugars case that RBI could have issued circular similar to circular dt. 12.2.2018 had section 35AA was not legislated. And before deciding on such actions, the Government need to take policy decision on whether to allow further time to specific sectors like power, cement etc. considering their contribution to employment and the economy.

While some of the defaulting corporate borrowers might be happy for now, it’s not going to last long.

Sec.138 of NI Act is not hit by Section 14 of I&B Code

This post is about the judgement of Hon’ble National Company Law Appellate Tribunal (NLCAT) in  Shah Brothers Ispat Pvt. Ltd v. P. Mohanraj & Ors. (Order dt.31.7.2018). The order is under challenge before Hon’ble Supreme Court.

It may be recalled that upon the admission of matter for corporate insolvency resolution process (u/Ss. 7 or 9 or 10) of the IBC, moratorium u/s.14 of the IBC is declared and it prevents the institution of suits or continuance of pending suits or proceedings against the Corporate Debtor (Company or LLP), including execution of any judgement, decree or order in any court of law, tribunal, arbitration panel or other authority.

Shah Brothers Ispat Pvt. Ltd. preferred an appeal before the Hon’ble National Company Law Appellate Tribunal (NCLAT), challenging an order passed by the Chennai Bench of the National Company Law Tribunal dated 24th May 2018. In this case, the NCLAT held that no criminal proceeding is barred by Section 14 of  I&B Code. Thus, while there may be moratorium u/s.14 of IBC, existing and new criminal proceedings can survive.

The Hon’ble National Company Law Tribunal (NCLT), Chennai Bench, had directed the Shah Brothers Ispat Pvt. Ltd. to withdraw a complaint case filed under Section 138 of Negotiable Instrument Act treating it as a proceeding hit by sec.14 of IBC as it was filed post commencement of the Corporate Insolvency Resolution Process (as moratorium was declared vide order dated 6th June 2017). And, according to NCLT, proceeding u/s.138 of NI Act is prevented by sec. 14 of IBC.

The question for consideration in this appeal was whether the order of moratorium (u/s.14 of IBC) will cover a criminal proceeding initiated under Section 138 of NI Act. And if so, proceedings u/s.138 cannot be continued, if already commenced or cannot be instituted during the period of moratorium.

The NCLAT held that the Company cannot be imprisoned, therefore punishment under Section 138 of NI Act cannot be imposed against the company (Corporate Debtor). However, fine can be imposed by a court of competent jurisdiction on the Company (Corporate Debtor), if found guilty. Also, it was observed that as section 138 is a penal provision, which empowers the court of competent jurisdiction to pass an order of imprisonment or fine, which cannot be held to be proceeding or any judgment or decree of money claim. Hence, the criminal proceedings cannot fall within the purview of Section 14 of IBC. Accordingly, the appeal was allowed.


Since section 138 proceedings are excluded from the purview of the moratorium under  IBC, it shall have the following repercussions.

1. It prevents Corporate Debtors who approach the adjudicating authority under Section 10,  to take shelter of the moratorium to escape proceedings under Sec.138 of the N.I. Act.

2. The assets of the Corporate Debtor are maintained and in the custody of the Resolution Professional during the moratorium period. Therefore, the creditors are assured that the assets of the Corporate debtor are safe while they discuss the viability and possible resolution plan of the Corporate Debtor. As section 138 NI Act proceedings are held to be not included in the ambit of section 14 of the Code it threatens the Creditor that the complainant may recover his dues from the Corporate Debtor.

3. Any recovery by the Complainant pursuant to sec.138 of NI Act from the Corporate Debtor may lead to preferential treatment under section 43 of the IBC. The proviso to Sec.43(3) states “Any transfer made in pursuance of the order of a court shall not, preclude such transfer to be deemed as giving of preference by the corporate debtor”. However, one need to wait for jurisprudence on this aspect.


From the above analysis, it is crystal clear that  moratorium will not be applicable to proceedings under section 138 of the Act and therefore, those cases which are pending before the admission of application under section 7, 9 or 10 of the Code i.e., before the initiation of insolvency process will not be affected by the moratorium. Further, an action under section 138 of the NI Act, 1881 can be initiated even after the commencement of the insolvency process. Albeit, section 14 of the Insolvency and Bankruptcy Code, 2016 does not specifically cover the proceedings under section 138 (dishonour of cheque), the intent of the provision is to cover all such proceedings which are in the nature of recovery of money and to ensure that during this period there is no additional stress on the assets of the Corporate Debtor.   

In a nutshell, exclusion of proceedings under Section 138 of the Negotiable Instrument Act, from the purview of the moratorium has been allowed by the Hon’ble Appellate Tribunal. However, we need to keep an eye on what the Hon’ble Supreme Court decides as the decision of NCLAT is appealed and pending before it.

Our Comments:

Whether proceedings under Section 138 of the Negotiable Instrument Act be considered as civil or criminal in nature. 

The nature of proceedings under N.I. Act is still under a grey patch and ambiguous owing to the different views of the Court. 

Hon’ble Delhi High Court in the matter of Bhajanpura Cooperative Urban Thrift and Credit Society Ltd. Vs. Sushil Kumar, MANU/DE/2084/2014 held that proceedings under section 138 of NI Act, 1881 primarily is of quasi-civil and criminal in nature.

In M/s Meters and Instruments Pvt. Ltd. & Anr. v. Kanchan Mehta, (2018) 1 SCC 560, the Supreme Court observed that the offence under section 138 is primarily a civil wrong and the purpose of the provision is predominantly compensatory. The penal element is mainly for the purposes of enforcing the compensatory element. 

The Hon’ble Supreme Court in Kaushalya Devi Massand v. Roopkishore Khore, (2011) 4 SCC 593 had held that the gravity of a complaint under the NI Act cannot be equated with an offence under the provisions of the Indian Penal Code, 1860 (“IPC”) or other criminal offences. As per the Hon’ble Supreme Court, “an offence under Section 138 NI act is almost in the nature of a civil wrong, which has been given criminal overtones.”

In Damodar S. Prabhu v. Sayed Babalal, it was held by the Apex Court that section 138 is actually in the nature of a civil wrong which has been given criminal implications. This is because the interest of the complainant is the recovery of the money and not sending the accused behind bars. 

Whether provisions of section 14 of IBC is akin to section 446 of the Companies Act 1956?

The division bench of Hon’ble Bombay High Court, in Indorama Synthetics (I.) Ltd. Vs. State of Maharashtra, 2016 (4) Mh.L.J. 249, while interpreting sub-section (1) of section 446 of the Companies Act, 1956 held that the words “suit or other proceedings” exclude criminal complaints filed under section 138 of the NI Act. However, it is relevant to note that in the judgement it was observed that ‘The provisions of section 446(1) of the Companies Act are to be invoked judiciously only when it has got any concern with either the winding-up proceedings or with the assets of the Company. The expression “suit or other proceedings”, therefore, as used in section 446(1) of the Companies Act, has to be construed accordingly and not to be interpreted so liberally and widely so as to include each and every proceeding of whatsoever nature initiated against the Company, including even the criminal proceedings like for the offence under section 138 of N.I. Act, which has got no bearing on the winding-up proceedings of the Company and are not concerned with, directly with the assets of the Company, but are mainly dealing with the penal and personal liability of the Directors of the Company.’. Prior to this, there was a conflicting view on the matter of two single benches of Bombay High Court. Comment: However, in our view, IBC is on a totally different plateau and cannot be compared with Sec.446 of the Companies Act 1956. 

Recently, Hon’ble Bombay High Court in Tayal Cotton P Ltd vs State of Maharashtra (2019) 1 Mah LJ 312 held “However, in my considered view, the aim and object behind providing the bar under Sub Section 1 of Section 446 of the Companies Act and that of Section 14 of the Code are similar and therefore, though not strictly as a precedent, the decision in the case of Indorama is not applicable to the matter in hand, the reasonings and the logic in interpreting the provision contained in Sub Section 1 of Section 446 of the Companies Act laid down therein can easily be pressed into service even in the matter in hand.” And further applying the principle of ejusdem generis held that “the word ‘proceedings’ used therein and even the words ‘order’ and ‘in Court of law’ will have to be interpreted as a proceeding arising in the nature of a suit and orders passed in such proceedings and suits. Apart from the fact that the Legislature has not conspicuously used the words ‘criminal’ as an adjective to the word ‘proceedings’ and as an adjective to the noun ‘Court of law’, it must be assumed that the Legislature in its wisdom has consciously omitted to use such adjectives since it must have intended to prohibit only the suits and execution of the judgments and decrees or a proceeding of the like nature. “

It seems that Hon’ble NCLAT has not been presented with the above rulings. Had attention of Hon’ble NCLAT been drawn to aforesaid rulings, perhaps judgement could have been different.

The order is under challenge before Hon’ble Supreme Court and it will be interesting to note how the Apex Court determines the issue.

The constitutional validity of the IBC upheld by the Apex Court

Sharing a summary of a landmark Judgement of Hon’ble Supreme Court (dated 25.1.2019) in Swiss Ribbons Pvt Ltd & Anr. vs. Union of India & Ors. The Constitutional validity of the Insolvency and Bankruptcy Code, 2016 (the Code or the IBC) was challenged by 10 writ petitions and an SLP. All these are disposed of off, holding that the IBC is constitutionally valid.;

The Judgement sets a wonderful background of the status of Lochner doctrine in the US before deciding on the Constitutional validity of IBC. 

It also in a way recognises observations of US Supreme Courts that 

(i) Legislative bodies have broad scope to experiment with economic problems. 
(ii) We refuse to sit as a super legislature to weigh the wisdom of legislation. 
(ii) we emphatically refuse to go back to the time when courts used the Due Process Clause ―to strike down state laws, regulatory of business and industrial conditions, because they may be unwise, improvident, or out of harmony with a particular school of thought. 

Some of the these and other observations are clearly drawing a line between Legislature and Judiciary and some of the Judgements of India holding that: 
(i) The court should feel more inclined to give judicial deference to legislative judgment in the field of economic regulation than in other areas where fundamental human rights are involved 
(ii) laws, including executive action relating to economic activities, should be viewed with greater latitude than laws touching civil rights such as freedom of speech, religion, etc. 

Summary of the Decision:
1. Considering the composition of selection committee set-up in 2015 for appointment of members of National Company Law Tribunal (NCLT) and National Company Law Appellate Tribunal (NCLAT) as well as amendment brought in 2018 to Section 412 of the Companies Act 2013, held appointment of members of NCLT and NCLAT to be valid.

2. Directs the Union of India to set up Circuit Benches of the NCLAT within a period of 6 months. 

3. Administration of IBC shall be transferred from MCA to the Ministry of Law and Justice. 

4. Classification between financial creditor and operational Creditor neither discriminatory, nor arbitrary, nor violative of article 14 of the Constitution Of India.

Financial creditors are clearly different from operational creditors and therefore, there is obviously an intelligible differentia between the two which has a direct relation to the objects sought to be achieved by the Code. 
The trigger for a financial creditor‘s application is non-payment of dues when they arise under loan agreements. It is for this reason that Section 433(e) of the Companies Act, 1956 has been repealed by the Code and a change in approach has been brought about. The legislative policy now is to move away from the concept of “inability to pay debts” to “determination of default”.

Four policy reasons have been stated by the learned Solicitor General for this shift in legislative policy. First is predictability and certainty. Secondly, the paramount interest to be safeguarded is that of the corporate debtor and admission into the insolvency resolution process does not prejudice such interest but, in fact, protects it. Thirdly, in a situation of financial stress, the cause of default is not relevant; protecting the economic interest of the corporate debtor is more relevant. Fourthly, the trigger that would lead to liquidation can only be upon failure of the resolution process. 

5. Section 12A passes the constitutional muster, for the reasons stated hereafter. Where before a committee of creditors is constituted (as per the timelines that are specified, a committee of creditors can be appointed at any time within 30 days from the date of appointment of the interim resolution professional. The Judgement makes it clear that at any stage where the committee of creditors is not yet constituted, a party can approach the NCLT directly, which Tribunal may, in exercise of its inherent powers under Rule 11 of the NCLT Rules, 2016, allow or disallow an application for withdrawal or settlement. This will be decided after hearing all the concerned parties and considering all relevant factors on the facts of each case. 

If the committee of creditors arbitrarily rejects a just settlement and/or withdrawal claim, the NCLT, and thereafter, the NCLAT can always set aside such decision under Section 60 of the Code. 

6. Evidence provided by private Information Utilities is only prima facie evidence of default, which is rebuttable by the corporate debtor.

7. Resolution Professional has no adjudicatory powers (He has administrative powers as opposed to quasi-judicial powers), whereas Liquidator has quasi-judicial powers in determining the claims filed with her/him against the Corporate Debtor in liquidation. 

8. Re-confirm its findings in ArcelorMittal’s case that a resolution applicant who applies under Section 29A(c) has no vested right to apply for being considered as a resolution applicant. The basis for one year under Section 29A(c) is the RBI Master Circular on Prudential Norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances dated 01.07.2015. And after account becoming NPA, one more year is allowed before the account is to be treated as Doubtful Asset. And thus passes constitutional muster.

9. There is no vested right in an erstwhile promoter of a corporate debtor to bid for the immovable and movable property of the corporate debtor in liquidation, as section 29A is applicable to liquidation also – per the proviso to section 35(1)(f) of the Code. 

10. On Section 29A(j), held that the expression “related party” and “relative” contained in the definition Sections must be read noscitur a sociis with the categories of persons mentioned in Explanation I to Section 29A, and so read, would include only persons who are connected with the business activity of the resolution applicant. 

Also, an argument that the expression “connected person” in Explanation I, clause (ii) to Section 29A(j) cannot possibly refer to a person who may be in management or control of the business of the corporate debtor in future. This would be arbitrary as the explanation would then apply to an indeterminate person. This contention is also repelled by holding that the Explanation I seeks to make it clear that if a person is otherwise covered as a “connected person”, this provision would also cover a person who is in management or control of the business of the corporate debtor during the implementation of a resolution plan. Therefore, any such person is not indeterminate at all but is a person who is in the saddle of the business of the corporate debtor either at an anterior point of time or even during the implementation of the resolution plan.

11. Section 53 of the Code is valid. An argument has been made by the petitioners that in the event of liquidation, operational creditors will never get anything as they rank below all other creditors, including other unsecured creditors who happen to be financial creditors. And hence would render Section 53 and in particular, Section 53(1)(f) discriminatory and manifestly arbitrary and thus, violative of Article 14 of the Constitution of India. Held that differentiating between secured and unsecured debt is an Internationally accepted practice. Further, repayment of financial debts infuses capital into the economy inasmuch as banks and financial institutions are able, with the money that has been paid back, to further lend such money to other entrepreneurs for their businesses. This rationale creates an intelligible differentia between financial debts and operational debts which are unsecured, which is directly related to the object sought to be achieved by the Code. In any case, workmen‘s dues, which are also unsecured debts, have traditionally been placed above most other debts. Thus, it can be seen that unsecured debts are of various kinds, and so long as there is some legitimate interest sought to be protected, having relation to the object sought to be achieved by the statute in question, Article 14 does not get infracted. For these reasons, the challenge to Section 53 of the Code must also fail.

NCLAT triggers insolvency against an unincorporated Joint Venture IBC

On 30 Nov 2018, the NCLAT has held that insolvency can be triggered against an unincorporated joint venture between two companies. Effectively, insolvency will be triggered against both companies. It is a landmark judgement in several aspects.

The most important aspect is that it gives relief to property buyers, where under the grab of tri-patry agreement between a buyer and a developer and landowner, or such similar cases where due to infights of developer(s) and/or landowner(s), the property buyer suffers.

A single application against two Corporate Debtor is allowed. There is no provision under the Code where a petition for Insolvency Resolution Process can be initiated against two Corporate Debtors who have collaborated for a Joint Venture.

Applicant financial credit did not file the application in the required format and also did not name interim resolution professional.

The appeal was filed against the order dt 12 March 2018 of NCLT, New Delhi bench which disallowed initiating corporate insolvency resolution process against two corporate debtors under a single application of a financial creditor / property buyer.

Two companies, AMB Infrabuild Pvt. Ltd. and Earth Galleria Pvt. Ltd. entered into a collaboration agreement for developing a complex. The former being the owner of the land and the latter being the developer. The collaboration agreement between them established the rights of both parties for the purposes of this project i.e. sale of the property to the extent of their respective share. Thereafter, a tripartite MoU was entered into between the two companies and an allottee, Mrs. Mamatha for booking a property for a sum of Rs. 3 crore. Of which advance of Rs. 5 lakh was paid.

In the said Memorandum of Understanding, the ‘Developer’ and the ‘Land Owner’ has been jointly referred to as the “Company” and the Appellant has been shown as the “Allottee”.

While these companies formed a joint venture for developing this project, they did not register this joint venture as a separate company.

Both companies failed to allot the promised property to the purchaser. The failure to allot was on account of two entities, the relationship between both of which was based on a collaboration agreement.

NCLAT held "If the two ‘Corporate Debtors’ collaborate and form an independent corporate unit entity for developing the land and allotting the premises to its allottee, the application under Section 7 will be maintainable against both of them jointly and not individually against one or other. In such case, both the ‘Developer’ and the ‘Land Owner’, if they are corporate should be jointly treated to be one for the purpose of initiation of ‘Corporate Insolvency Resolution Process’ against them."

The NCLAT accordingly remitted the case back to NCLT for admission, after notice to the parties. And also stated that before admission of the case, it will be open to the Respondents to settle the matter and in such case, the Appellant may withdraw the case.

We need to watch – if the settlement reaches or the aggrieved Corporate appeals to the Supreme Court.

Provident fund, Pension fund and Gratuity to have priority over waterfall u/s.53 of IBC

NCLT, Mumbai in the matter of Precision Fasteners Ltd vs. Employees Provident Fund Organisation, Thane, Vapi and Vashi
Decision dated 12 Sept. 2018
M.A. 576 & 752 of 2018 in C.P. (IB) 1339 (MB) of 2017

Hon’ble NCLT holds that workmen’s due under the provident fund, pension fund and gratuity fund, even though remained unpaid for several years prior to liquidation commencement date of Corporate Debtor, shall not form part of liquidation estate. And hence such PF etc. dues to have priority over waterfall mechanism u/s.53 of the Insolvency and Bankruptcy Code 2016.


Corporate Debtor failed to pay dues under EPF Act for 15 years to EPFO. And EPFO despite it proceeding against Corporate Debtor, could not realise the dues owing one or the other legal implications. However, EPFO could attach the assets of the Corporate Debtor. And that attachment is now challenged under IBC by the Liquidator.

Liquidator filed M.A. u/s. 60(5) of Insolvency and Bankruptcy Code, 2016 (‘IBC’) against EPFO seeking reliefs for declaring attachment of movable and immovable properties (‘Properties’) of the Corporate Debtor’s units at Kalwa, Silvassa and Mahad by EPFO as null and void, so as to enable the liquidator to dispose of the properties under IBC.

Properties of the Corporate Debtor were attached by EPFO for not depositing PF dues of workers/employees since long. Dues of workers/employees were determined u/s.7A of EPF Act.

Liquidator, while acting as Resolution Professional, had intimated EPF (APFC and Recovery officer) about his appointment under IBC and had requested for release of Properties.

EPFO filed its claim before the Liquidator of approx. Rs. 16.06 crores and refused to release the attachment of Properties stating that there is no provision to vacate attachment without receipt of the dues due to it.

The contention of the Liquidator before Hon’ble NCLT:
1. He requires Properties to form Liquidation Estate
2. Dues of EPF does not fall within the meaning of ’secured debt’ under IBC and hence cannot be considered as secured creditor on par with other secured creditors.
3. Properties attached by EPFO have been charged / mortgaged to various creditors (secured creditors) prior to attachment by EPFO. And hence attachment by EPFO cannot lie against the secured creditors. Thus, attachment by EPFO impairs the right of secured creditors.
4. Liquidator u/s.35(b) and (d) is required to take into his custody and control all the assets of the Corporate Debtor and take necessary measures to protect and preserve them.
5. U/s.36 Liquidator is entitled to include encumbered assets in the liquidation estate and hence EPFO be directed to release the attachment over Properties.
6. Section 36(4)(a)(iii) of IBC, dues of PF, Pension fund and gratuity fund fo any workmen or employees already credited to those accounts cannot be included in liquidation estate. But the funds that remained as arrears to be deposited with EPFO, is not required to be considered by the Liquidator and hence attachment over Properties by EPFO for arrears of dues of PF shall be released.
7. IBC overrides other laws including EPF Act 1952 per section 238 of the Code. Also IBC enacted later than EPF Act and hence shall override EPF Act 1952. And hence Liquidator in exercise of power conferred u/s.35 and u/s.36 of IBC can comprise the Properties already attached by EPF in liquidation estate.
8. Liquidator relied upon following judgements:
* Ananta Mills Ltd vs. City Dy. Collector (1972 Comp Cas 476), to say that attachment over an asset is only to prevent alienation of the asset but by mere such attachment of the assets, that creditor will not be conferred with any interest in the said asset. In view of this scenario, the attachment over the secured assets upon which already interest has been created in favour of some other creditors will not alter or nullify the rights of the secured creditors and therefore the attachments shall be declared illegal.
* Leo Edibles & Fats Ltd vs. Tax Recovery Officer & Ors. (WP no. 8560 of 2018, order dated 26.07.2018 passed by Hon’ble High Court of Hyderabad) to say that evenif attachments constitute an encumbrance on the property, still it will not have the effect of taking it out of the purview of section 36(3)(b) of IBC.
* Innoventive Industries Ltd vs. ICICI Bank and Ors. (2017 SCC OnLIne SC 1025) to say that one of the important objectives of the Code is to bring Insolvency law in India under a single unified umbrella with the object of speeding up of the insolvency process.
* To say that the Code has overriding effect over other enactments – relied upon (i) Raman Ispat Pvt Ltd vs Executive Engineer, Paschimanchal Vidyut Vitran Nigam Ltd & District Collector, Muzaffarpur Nagar, U.P. & Tahisildar, Office of Tahsildar Sadar, Muzaffarnagar, U.P. [Comp. Application. No. 88/ALD/2018 in C.P. (IB) 23/ALD/2017] and (ii) Surendra Kumar Joshi vs. REI Agro Limited and Mr. Anil Goel, Liquidator vs. Deputy Director, Directorate Enforcement, Delhi [CA (IB) No.453/KB/2018 in CP (IB) No.73/KB/2017] – but states that those cases not being related to PF issue, they are not applicable to present case.

The contention of the EPFO before Hon’ble NCLT:
1. EPFO is a statutory body established under EPF Act 1952
2. EPF Act is a social legislation with an endeavour to protect the weaker sections of the society i.e. workers employed in Factory and other establishments.

From the Judgement, it is not clear whether EPFO contended that dues of workmen, being their savings – which along with the contribution of employer i.e. the Corporate Debtor was not paid and hence there is unjust enrichment to the Corporate Debtor and which will be used to pay off other secured creditors.

Hon’ble NCLT framed the issue for the determination as under:
Whether or not the PF, Pension Fund due and payable to workers or employees of the Corporate Debtor will become part of Liquidation Estate in the light of section 36 of IBC?

Corporate Debtor failed to pay dues under EPF Act for 15 years to EPFO. And EPFO despite it proceeding against Corporate Debtor, could not realise the dues owing one or the other legal implications. However, EPFO could attach the assets of the Corporate Debtor. And that attachment is now challenged under IBC by the Liquidator.

Hon’ble NCLT analysed Section 36(4) of the IBC. It noted that legislature has enumerated five types of assets under clauses a, b, c, d and e of sub-section (4) of section 36 which shall not form part of liquidation estate to avoid ambiguity.
And under clause (a) of Sec.36(4), there are further five kinds of assets owned by a third party but in the possession of the Corporate Debtor. To know implications of these clauses and understand commonality in bringing in these clauses under one head of assets possessed by Corporate Debtor without title over it, Hon’ble NCLT analysed it as under:
1. Sec.36(4)(a)(i) – any asset lying in trust with the corporate debtor for the benefit of the third party, that asset shall be excluded from the liquidation estate.
2. Sec.36(4)(a)(ii) – in bailment contracts, if goods have been in possession of corporate debtor for a specific purpose, corporate debtor being bailee not having title over such asset, that asset shall not be included in liquidation estate.
3. Sec.36(4)(a)(iii) – sums due to any workmen or employees from the provident fund, pension fund and the gratuity fund shall not be included in the liquidation estate.
4. Sec.36(4)(a)(iv) – contractual arrangements or transferring title to Corporate Debtor except for use of the assets will not form part of liquidation estate.
5. Sec.36(4)(a)(v) – any assets notified but the Central Government in consultation with financial sector regulator, shall not be included in the liquidation estate.

Sec.36(4)(a) of IBC is an inclusive definition of assets which are in possession of Corporate Debtor without title over it and which shall not form part of liquidation estate. Since it is inclusive, its meaning cannot be restricted – as held in Oswal Fats and Oils Ltd vs. Additional Commissioner (administration), Bareilly Division, Bareilly and Others [MANU/SC/0216/2010 – para 25].
While Sec.36(4)(a)(i), (ii) and (iv) of IBC deals with the assets in possession of the Corporate Debtor without any title over such assets, Sec.36(4)(a)(iii) and (v) of IBC, need not be seen as to whether title is vested with the Corporate Debtor or not, it is by operation of law that says when provident fund is payable to the workmen or employees, such payment dues have to be deemed as an asset of worker or employees, it makes no difference whether it has been maintained in a separate account or not. In view of this deeming fiction, the workmen/employees need not prove that whether any sum (interest) has been explicitly vested with them or not. So is the case when an asset of the Corporate Debtor is notified by the Central Government in consultation with any financial sector regulator. By including sub-clauses (iii) and (v) along with sub-clauses (i), (ii) and (iv) of clause (a) of sub-section (4), an overreaching interest and title has been created in favour of the workmen in respect to provident fund, etc. and in favour of Government in respect of the asset notified treating these two assets under sub-clauses (iii) and (v) as not included in the liquidation estate.[para 25]

Hon’ble NCLT noted historical background of the legislation of interplay between Sec.529A of the Companies Act 1956 and Section 11 of EPF Act as held in Employees Provident Fund Commissioner vs. O.L. of Esskay Pharmaceuticals Ltd. (2011) 10 SCC 727, wherein it was held that Section 11(2) of EPF Act will have the first charge on the assets of the establishment (here in case of Corporate Debtor) and will become payable in priority to all other debts. In particular paras 15, 16 and 17 of the said judgement was relied upon. Further Hon’ble NCLT considered that from the said Judgement it is clear that EPF Act is a social legislation and in furtherance of the directive principles of State.

Further, Hon’ble NCLT considered Section 529 of Companies Act 1956 and noted that similar provision is retained u/Ss.326 and 327 of the Companies Act 2013. It concludes that by excluding asset of PF etc. dues of workmen/employees from liquidation estate, the rights of workmen/employees are further strengthened as it is left open to the workmen or the PF authority to realise their PF/Pension/Gratuity dues without standing in line of waterfall mechanism.
In view of above, Hon’ble NCLT held that if we go by the provisions of law and the judge made law, it is evident that duty is conferred upon the liquidator and the Tribunal to ensure that PF dues are excluded from liquidation estate so as to enable the workmen realise their savings, as well as the matching contribution, comes from the employer giving priority even above the costs of liquidator because the liquidator is also entitled to realise the costs from the liquidation estate only, whereas the workmen for PF dues need not remain in line to realise their PF dues from the liquidation estate. This right in fact emanated from the fundamental right of Right to life. [Para 29]

Further, Hon’ble NCLT referred to Bandhua Mukti Morcha vs. Union of India (1984 AIR 802), where Hon’ble Justice Bhagwati hold the right to live with dignity under Article 21 derives its right from the Directive Principles of State Policy, particularly from Article 39(e) and (f) and Articles 41 and 42 of the Constitution of India.

Then Hon’ble NCLT expressed the view that right of workmen to savings during working life for later part of life must not be diluted as it is right to life. And hence dues of workmen by way of PF dues are treated under IBC as assets lying with Corporate Debtor and not to be treated as par with other creditors. [Para 30]

When PF contribution from the workmen is deducted from the wages by the Corporate Debtor, it has to be deemed that matching contribution has been allocated by the Corporate Debtor. It makes no difference whether it has been released from the Corporate Debtor or not. Once deduction has been made from the wages of the workmen, it is to be deemed as the asset of the workmen and not as an asset of the Corporate Debtor or the company as the case may be. Hence argument of liquidator that per section 36(4)(a)(iii) of IBC only PF amount already released and lying with EPFO needs to be considered. [Para 31]

Hon’ble NCLT referred to the overriding effect of EPF Act per sections 8 and 11 thereof whereby dues of PF, Pension and Gratuity fund has to be paid in priority to all other debts in the distribution of the property to the insolvent or the assets of the company being wound up, as the case may be. [para 32]. And since the dues of PF, Pension and Gratuity are not forming part of the liquidation estate per section 36(4)(a)(iii) of IBC, the provisions of IBC will not be applicable for realisation of such dues from the assets of the Corporate Debtor. The intriguing aspect lying in thus scenario is that though it is a due payable by the Corporate Debtor, as to PF, Pension, Gratuity Fund dues are considered, the Code has treated it as an asset of the workmen lying with the Corporate Debtor. [para 33].

And hence the overriding effect of Section 238 will not have any bearing over assets of the Corporate Debtor because that asset is not considered as part of the liquidation estate. Further, there is no inconsistency between IBC and PF Act as section 36(4)(a)(iii) excludes PF dues lying with the Corporate Debtor from the liquidation estate and section 53 is not applicable to dues not forming part of liquidation estate. [para 34]

And the PF Act is having overriding effect over and is later in time of Presidency Insolvency Act, Provincial Insolvency Act and the Companies Act 1956. Further, in view of section 36(4)(a)(iii) of IBC, the dues under PF Act are assets of workmen/employees with the Corporate Debtor and hence IBC does not come in the way. [para 35]

It does not matter whether assets are secured or not for realisation of PF dues from the Corporate Debtor because charge created over the assets of the Corporate Debtor by operation of law (EPF Act) will have first charge over any asset of the Corporate Debtor notwithstanding whether it is secured or unsecured. And hence argument of Liquidator that since the charges is created over the assets of CD in favour of other creditors, EPFO is not at par with secured creditors, is rejected. The charge in relation to PF dues will be the first charge in priority to all other debts, including Liquidation cost because the PF dues have been excluded from the liquidation estate. [para 36]

And workmen dues has been assigned u/s.53(1)(b)(i) of IBC the same meaning as under section 326 of the Companies Act 2013 will not have any bearing over section 36(4)(a)(iii) of IBC. The term used in section 53(1)(b)(i) of IBC shall not be construed as PF dues become part of the distribution of assets pari passu basis along with secured creditors, as distribution u/s. 53 will be of assets comprised u/s.36 of IBC i.e. liquidation estate. [para 37]

In the facts of the case, it is held that by virtue of EPF Act and section 36(4)(a)(i) of IBC, the charge will remain in force against the assets of the Corporate Debtor until it has been paid off by Liquidator before making payment to any entity fall under waterfall mechanism devised u/s.53 of the Code. [para 38]

And since caveat is included in sec.36(3) that the same is subject to sec.36(4) of IBC and hence ratio decided in Leo Edibles & Fats Ltd vs. Tax recovery Officer & Ors. By Hon’ble High Court of Hyderabad will not have the effect of removing the charge over assets under PF Act. [para 39]

Since dues under PF Act is not forming part of liquidation estate per section 36 of IBC itself, ratio of Innoventive Industries Ltd vs. ICICI Bank Ltd is not applicable. [para 40]

It makes no difference whether attachments have been made prior to or subsequent to the admission of Company Petition under IBC, the statutory first charge having remained in force against the Corporate Debtor. [para 41]

Accordingly, liquidator was directed to pay the PF dues to EPFO from the liquidation estate before distributing the same to the claimants, as the liquidator has to sale the assets of the Corporate Debtor and pay off the PF dues in priority to all other claims.[para 42]


In my view, considering that under section 53(1)(b)workmen’s due for the period of twenty-four months preceding the liquidation commencement date ranks equally with debts due to a secured creditor if such creditor relinquishes security u/s.52 and hence the liquidator is required to distribute the same equally – the conclusion of Hon’ble NCLT in para 37 is not totally correct. What the liquidator is required to do, in such a situation, as in the present case, is to sale liquidation estate, pay off dues of workmen under PF Act for a period prior to twenty-four months preceding the liquidation commencement date. And thereafter, whatever remains shall be paid as per section 53 of the IBC. This is so, as PF dues form part of workmen’s due under section 326 of Companies Act 2013 and hence also under section 53 of the IBC (in view of explanation (ii) to section 53 of IBC).

Proceedings pending u/s.34 of Arbitration Act whether constitute ‘dispute’ u/s.5(6) of IBC?

Facts in brief:
M/s Vijay Nirman Company Private Limited, being an operational creditor, had initiated the Corporate Insolvency Resolution Process against corporate debtor viz. M/s Ksheeraabad Constructions Private Limited by way of an application under Section 9 of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as “the Code”).

The National Company Law Tribunal (NCLT) vide its order dated 29 August 2017 admitted the application (holding that application u/s.34 of Arbitration and Conciliation Act 1996 (hereafter referred to as “Arbitration Act”) before Court is not ‘dispute’ u/s.5(6) of the Code.

In an appeal before National Company Law Appellate Tribunal (NCLAT), made by M/s Ksheeraabad Constructions Private Limited (Appellant) against the said order of NCLT, the NCLAT agreed with views of NCLT.

Aggrieved thereby, the matter came before the Hon’ble Supreme Court, on an important question of law as to whether the Code can be invoked in respect of an operational debt where an Arbitral Award has been passed against the operational debtor, which has not yet been finally adjudicated upon.

Rulings of Hon’ble Supreme Court:

A bench of Justice Rohinton Fali Nariman and Justice Indu Malhotra (in K Kishan vs. Vijay Nirman Company Pvt Ltd) in a Judgement dated 14.08.2018 observed that filing of Section 34 (Arbitration) petition against an arbitral award shows a pre-existing dispute which culminates at the first stage of the proceedings in an award continues even after the award, at least till the final adjudicatory process under Sections 34 and 37 of the Arbitration Act has taken place.

Hon’ble Supreme Court also dealt with different situation under which an appeal u/s.34 of Arbitration Act may be and its consequence under the Code as under:

(i) Where a Section 34 petition challenging an arbitral award may clearly and unequivocally be barred by limitation, in that it can be demonstrated to the court that the period of 90 days plus the discretionary period of 30 days has clearly expired, after which either no petition under Section 34 has been filed or a belated petition under Section 34 has been filed. It is only in such clear cases that the insolvency process under the Code may then be put into operation.

(ii) In cases where a Section 34 petition may have been instituted in the wrong court, as a result of which the petitioner may claim the application of Section 14 of the Limitation Act to get over the bar of limitation laid down in Section 34(3) of the Arbitration Act, the insolvency process under the Code cannot be put into operation without an adjudication on the applicability of Section 14 of the Limitation Act.

Further, the bench disagreed with the view of NCLAT that Section 238 of the Code overrides Arbitration Act. It said Section 238 of the Code would apply in case there is an inconsistency between the Code and the Arbitration Act. In the present case, no such inconsistency is observed. On the contrary, the Award passed under the Arbitration Act together with the steps taken for its challenge would only make it clear that the operational debt, in the present case, happens to be a disputed one.

No approval of members for resolution plan under IBC – clarification by MCA

Insolvency and Bankruptcy Code, 2016 (the Code)
Consent of members of Corporate Debtor not required for approval of the resolution plan or for its implementation.
It is clarified by the Ministry of Corporate Affairs (MCA) on 25th October 2017 (vide General Circular No. IBC/01/2017) that once the resolution plan is approved by the Adjudicating Authority i.e. National Company Law Tribunal (NCLT), no further approval of the resolution plan is required from the shareholders/members of the Corporate Debtor.
It has put to an end to an interpretation issue of Section 31(2)(e) of the Code. Once resolution applicant submits a resolution plan for a Corporate Debtor under Corporate Insolvency Resolution Process, the Resolution Professional (insolvency professional appointed by NCLT) need to examine the same and ensure that such plan conforms to the requirements stated in section 30(2) of the Code. One of the requirements is that the resolution plan ‘does not contravene any of the provisions of the law for the time being in force’. After the confirmation, the resolution professional need to present it to the Committee of Creditors (COC) for its approval (by a majority of 75% in value). And thereafter, COC approved resolution plan is to be submitted to NCLT for its final approval. The resolution plan once approved by NCLT, it is binding upon the Corporate Debtor, its employees, members, creditors, guarantors and other stakeholders involved in the resolution plan (Section 31(1) of the Code).
An interpretation issue arose that when the resolution plan envisages, say, further issue of capital or reduction of capital, then whether the consent of members of Corporate Debtor as required under the Companies Act 2013 (for further issue/reduction of capital) is required to be obtained or not and if yes, at which stage? That is whether after/before approval of COC or after/before approval of NCLT?
It is clarified by MCA that consent of members of Corporate Debtor is not required either before approval of the resolution plan by COC/NCLT or thereafter, i.e. while its implementation.
This has brought much-needed clarity on the matter and brings a more effective way of implementing the resolution plan. Practically, if members approval is required for implementation of the approved resolution plan, then its like giving backdoor entry to promoter shareholders of Corporate Debtor, who may block or create impediments in implementation of the resolution plan, particularly wherein Corporate Debtor driven resolution process (u/s10 of the Code) or where resolution plan of the promoters of Corporate Debtor is not approved or the promoters of the Corporate Debtor do not agree/like the approved resolution plan.
This is a timely and welcome clarity from MCA, considering more and more resolution plans would be placed before NCLT for its final approval.