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RESEARCH METHOD & LEGAL EDUCATION

SYNOPSIS ON

THE EVOLUTION OF INSOLVENCY AND BANKRUPTCY


CODE

Submitted to:

Mr. Tapan R. Mohanty

Submitted by:

Muktesh Swamy

Roll No.- 2018 LLM 33

National Law Institute University

Bhopal, Madhya Pradesh

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THE EVOLUTION OF BANKRUPTCY CODE
The Insolvency and Bankruptcy Code, 2016 has been seen as a representative of a major shift in
the way Business is regulated in India. The code coming into force took the mantle from the
relatively new Companies Act in regards to handling the issue of Insolvency and Liquidation of
Corporate entities. As a result, the whole of Chapter 19 of the Companies Act 2013 was omitted.
The Bankruptcy code heralded the beginning of new reforms aimed squarely at reshaping the
regulation of Business entities and attracting new players both international and domestic to
enter into the market.
However the code was new and the authority to adjudicate upon it was also given to a new class
of tribunal called National Company Law Tribunal and National Company Law Appellate
Tribunal. So starting from scratch, jurisprudence was destined to develop and changes were
bound to follow. A new regulator was appointed called the Insolvency and Bankruptcy Board of
India and it set in place a new breed of professionals called Insolvency Resolution Professional.
The tribunals, unburdened unlike traditional courts, immediately went to work and not long
before creative interpretations started shaping the code and jurisprudence emerged. Likewise, the
regulator spent no time in reacting to the changes happening in the code due to interpretations of
the courts as well as in the society as a result of coming into force of the Code.
So with a proactive regulator and an adjudication body which was continuously reading new
things into the code as result of interpretation has seen the code rapidly evolve. So much so that
even the Legislature has been forced to make amendments into the code to take into account the
judicial pronouncements.
The 4 major changes made to the Code are:
1. Insertion of Section 29A: Persons ineligible to be Resolution Applicant.
2. Coming into force of Fast Track Resolution process.
3. Coming into Force of Voluntary Liquidation Process.
4. Promulgation of 2018 Ordinance.

OBJECTIVES

The following are the objectives of the project:

1. To trace the development and evolution of Insolvency and Bankruptcy Code.


2. To explain the reasoning behind the 4 major changes made to the code.
3. To analyze landmark cases and judgments in the field of Insolvency and Bankruptcy.

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HYPOTHESIS

The amendments and changes in the Insolvency and Bankruptcy code are a result of judicial
pronouncements which themselves are a result of the need to administer justice by way of
creative interpretation because of the complexity of facts and issues of the case.

RESEARCH METHODOLOGY

This Project is descriptive, theoretical and doctrinal in nature. The methodology adopted for the
purpose of this project is descriptive. Since this project pertains to tracing of the evolution of the
Insolvency and Bankruptcy code, secondary data has been used to achieve the objectives of the
project. The topic deal with various concepts like Insolvency, Operational Debt, Financial Debt,
Operational Creditor and Financial Creditor, Resolution Applicant, Liquidation.

REVIEW OF LITERATURE

The fact that the Insolvency and Bankruptcy code is still in its nascent stage gives logical
assertion to the fact that there is great scope for further evolution and interpretation. A logical
result of the newness of the law is the fact that literature on the topic is scant and a researcher in
this field has to make do with online articles and case analysis. However this does not mean
there’s an absence of literature. Mr. Sumant Batra’s latest work - Corporate Insolvency: Law and
Practice, EBC Publications 2017, captures the need for the code in the first place and then
proceeds to explain the code equating it with global developments. His work also takes into
account various cases where the tribunal has breathed flesh into the skeleton of the code. Mr.
Batra is an authority when it comes to insolvency law; he is a senior international consultant to
the IMF, World Bank Group and OECD. Mr. Sumant is currently President of Society of

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Insolvency Practitioners of India, Chief Mentor of INSOL India and Chairman of ASSOCHAM
National Council of Insolvency and Bankruptcy.

INTRODUCTION

The word insolvency has greatly been in use in the Indian legal arena for the past couple of
years. News continues to flood in of either Insolvency process initiated against high profile
names or a landmark decision being passed every other day.

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Ever since the Code came into picture in 2016, it has opened up the channel for creditors to
resolve their long standing financial issues with their corporate debtors. Although a channel was
available to them under the Companies Act but having a separate code provides a much needed
impetus.

The word Insolvency has really been making rounds on national as well as global level. On
Indian shore, big names like Monnet Ispat & Energy Ltd., Essar Steel Ltd., Jaypee Infratech and
Bhushan Steel Ltd. have gone under the hammer of Insolvency and Bankruptcy code, herein
after to be referred as IBC. Globally the biggest news that concerns India is that of Vijay
Mallaya's venture into the world of Formula One by the name of Force India which has been
placed in administration under the British Insolvency laws.

Globally the Insolvency laws have started out as channel allowing the creditors of a company to
shred the company to fulfill their debts. But then there was a paradigm shift in the philosophy
and credence was given to allow the Company to continue as an “on-going concern” with the
focused having shifted towards revival failing which liquidation would be the only avenue left.

India, being late to the party in terms of having a dedicated code for Insolvency, benefitted in
terms of having robust set of laws it could take inspiration from, namely the US Bankruptcy
Code and UK’s Insolvency Act of 1986. Our code resembles the above two very closely, but
since it’s passing has evolved into something unique.

In this project, the emphasis is on 4 major changes or evolution to the code and will be dealt in
detail in the upcoming chapters.

CHAPTER I: SECTION 29A

Within just 1 year of working of the Code, a big loophole was discovered in the code. Under the
scheme of the code, any person could present a resolution plan and become a resolution
applicant. There were no qualifying criteria as to who can be a resolution applicant. This allowed

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the previous promoters who had run the company into dire straits, to gain a back door entry into
the management.

To address this loophole, two changes were made. First Section 29A was inserted which
disqualified various categories of people from becoming a resolution applicant. Section 29A
reads as:

29A. A person shall not be eligible to submit a resolution plan, if such person, or
any other person acting jointly or in concert with such person—

(a) is an undischarged insolvent;

(b) is a wilful defaulter in accordance with the guidelines of the Reserve Bank of
India issued under the Banking Regulation Act, 1949;

(c) has an account, or an account of a corporate debtor under the management or


control of such person or of whom such person is a promoter, classified as non-
performing asset in accordance with the guidelines of the Reserve Bank of India
issued under the Banking Regulation Act, 1949 and at least a period of one year
has lapsed from the date of such classification till the date of commencement of
the corporate insolvency resolution process of the corporate debtor:

Provided that the person shall be eligible to submit a resolution plan if such
person makes payment of all overdue amounts with interest thereon and charges
relating to non-performing asset accounts before submission of resolution plan;

(d) has been convicted for any offence punishable with imprisonment for two
years or more;

(e) is disqualified to act as a director under the Companies Act, 2013;

(f) is prohibited by the Securities and Exchange Board of India from trading in
securities or accessing the securities markets;

(g) has been a promoter or in the management or control of a corporate debtor in


which a preferential transaction, undervalued transaction, extortionate credit

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transaction or fraudulent transaction has taken place and in respect of which an
order has been made by the Adjudicating Authority under this Code;

(h) has executed an enforceable guarantee in favour of a creditor in respect of a


corporate debtor against which an application for insolvency resolution made by
such creditor has been admitted under this Code;

(i) has been subject to any disability, corresponding to clauses (a) to

(h), under any law in a jurisdiction outside India; or

(j) has a connected person not eligible under clauses (a) to (i).

Explanation.— For the purposes of this clause, the expression "connected


person" means—

(i)
any person who is the promoter or in the management or control of the resolution
applicant; or
(ii)
any person who shall be the promoter or in management or control of the
business of the corporate debtor during the implementation of the resolution
plan; or
(iii)
the holding company, subsidiary company, associate company or related party of
a person referred to in clauses (i) and (ii):
Provided that nothing in clause (iii) of this Explanation shall apply to—
(A) a scheduled bank; or
(B) an asset reconstruction company registered with the Reserve Bank of India
under section 3 of the Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002; or
(C) an Alternate Investment Fund registered with the Securities and Exchange
Board of India.".

Secondly, section 5(25) was amended to read that a resolution applicant is one who submits a
resolution plan to the resolution professional upon an invitation made under section 25(2)(h).
Section 25(2)(h) was amended to the effect that the resolution professional invite resolution plans

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from such applicants who fulfil the criteria laid down by the resolution professional with the
approval of the committee of creditors keeping in consideration the complexity and the scale of
business of the corporate debtor. Therefore, a prospective resolution applicant in order to be
eligible to submit a resolution plan shall not only meet the criteria laid down by the resolution
professional under section 25(2)(h) but shall also not fall under any of the categories laid down
by section 29A for disqualification.

A cursory glance of 29A reveals that there are 4 tiers of ineligibility. They are:

1. the person itself is ineligible.


2. A connected person is ineligible
3. being a “related party” of connected persons.
4. a person acting jointly/in concert with a person suffering from first tier/second tier/third
tier ineligibility, becomes ineligible.

The Code was designed to find the best possible way out for an ailing entity- it was meant to be
more inclusive in approach and there was definitely no intention to avoid promoters from
submitting resolution plans. However, the reach of Section 29A extends to four tiers (as
explained above), and may lead to exactly opposite results. It is quintessential to ensure that the
citadel of insolvency resolution does not have holes into it but at the same time, it is also
important to ensure that the citadel is not inaccessible, with no steps, doors or windows. The
intent of Section 29A will be counter- productive if it results into a whole lot of intending
resolution applicants being disentitled, because the recursive definitions of related party,
connected persons etc are cast wide enough, intertwining all the entities promoted by an entity.1

CHAPTER II: FAST TRACK RESOLUTION PROCESS

As a matter of prudence, the code prescribes a limit of 180 days and a 90 day extension, in which
the whole process of resolution must be completed or else the company faces liquidation. In an
Insolvency process though, time is really of essence, so much so that depending upon a situation,
this 180 day limit may even prove to be too much. Therefore a shorter, in terms of procedures
and time frame, process within the code is prescribed. Called the Fast Track process, this process
1 Richa Saraf & Sikha Bansal, Ineligibility criteria under section 29A: A net too wide!, LIVE LAW, (Feb. 18, 2018)
http://www.livelaw.in/ineligibility-criteria-u-s-29a-ibc-net-wide/

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was already present but came into effect only on 14 June 2017 and provided that an Application
for Fast track corporate insolvency resolution process may be made in respect of the following
corporate debtors:

1. a small company as defined under clause (85) of section 2 of Companies Act, 2013
2. a Startup (other than the partnership firm) as defined in the notification of the
Government of India in the Ministry of Commerce and Industry dated the 23rd May,
2017; or
3. an unlisted company with total assets, as reported in the financial statement of the
immediately preceding financial year, not exceeding rupees one crore.

Now the major question to be asked is why a fast track process was specified in the first place?
Well there are several reasons. One is that India had a dismal rank in terms of Insolvency process
as per World Bank estimates, which ranked it at 136 out of 189 nations. Another World Bank
estimate showed that on an average, it takes 4 year to windup a company in India which is not a
good number. The same estimate showed that India recovers only 25.7 cents on a dollar, which is
among the worst in the emerging economies.

There were other reasons as well such as the fact that it made no sense for small and non-
complex companies to spend so much time in resolution despite the fact that the insolvency
process for them ends earlier.

Hence a separate chapter called Chapter IV is dedicated to Fast Track Resolution Process. While
section 56 prescribes a period of 90 days, with an extension of 45 days, section 57 is of main
importance here.

57. An application for fast track corporate insolvency resolution process may be
filed by a creditor or corporate debtor as the case may be, alongwith—

(a) the proof of the existence of default as evidenced by records available with an
information utility or such other means as may be specified by the Board; and

(b) such other information as may be specified by the Board to establish that the
corporate debtor is eligible for fast track corporate insolvency resolution process.

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So the notification of Fast Track Resolution process was another evolutionary step as it paved a
faster way for certain companies to sort out their Insolvency issues in a shorter time frame. Mind
you the chapter IV was already a part of the code in 2016 but was notified only in 2017 after it
was clear that there indeed was a scope for a faster process. Also the fact that it was not
determined on which companies the process would be applicable and only after gauging the
reaction and needs of Companies, the government notified the list of eligible companies who are
allowed to initiate the process.

CHAPTER III: VOLUNTARY LIQUIDATION PROCESS

Chapter V of the Code is completely dedicated to Voluntary Liquidation process. The scheme of
the code is that any company that defaults in paying its dues can be made to undergo Corporate
Insolvency Resolution process by either its creditors or by its own volition. If the process fails,
then mandatorily it is liquidated i.e. dissolved. With respect to dissolution of a company,
previously the governing law was The Companies Act 2013, but with Insolvency and Bankruptcy
Code coming into effect in 2016, the requisite chapter in the Companies Act 2013 was repealed.

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So now the process was that a Company which wanted to get dissolved voluntarily had no other
choice but go through the Insolvency process which made no sense. Hence Chapter V of the code
was bought into force on 1 April 2017.

As per Section 59 of the Code read with the Regulations, any corporate entity may initiate a
voluntary liquidation proceeding if it satisfies all the following conditions:

1. It has not committed any default;


2. If majority of the directors or designated partners of the corporate person make a
declaration verified by an affidavit to the effect that :
i) the corporate person has no debt or it will be able to pay its debts in full out of the
sale proceeds of its assets under the proposed liquidation; and
ii) liquidation is not initiated to defraud any person;
3. Such declaration is accompanied by the audited financial statements and valuation report
of the corporate person;
4. Within 4 (four) weeks of such declaration, a special resolution (an ordinary resolution
would suffice in cases of voluntary liquidation by reason of expiry of its duration or
occurrence of any dissolution event) is passed by the contributories* requiring the
corporate person to be liquidated and appointing an insolvency professional as a
liquidator (Contributories’ Resolution); and
5. Creditor(s) representing two thirds in value of the total debt owed by the corporate
person, approve the Contributories’ Resolution within 7 (seven) days of its passage
(Creditors’ Approval).

Voluntary winding up therefore was an important step as it finally assumed all the steps related to
Insolvency and Bankruptcy. Dissolution is one of a natural outcome of the two process name
earlier, with the provisions in the Companies Act 2013 not in force, the subject matter was
governed by the archaic 1956 law which was a major bottleneck on the corporate world. A new
law was needed and the delay with enforcing 2013 Act’s provision meant the problem persisted.
With the legislature working behind the scene to get the Code out and the rationale being that a
code is a complete system of law on a particular ground, it was natural that dissolution of
companies be governed by the Code rather than having to refer to the Companies Act.

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CHAPTER IV: 2018 ORDINANCE

The biggest evolutionary change in the IBC is that represented by the 2018 Ordinance. This
ordinance introduced a raft of changes into the Code to bring it in tune with judicial
pronouncements. This Chapter deals in brief all the changes made to the Code.

The headline grabbing change was the fact that Homebuyers who had advanced certain sum of
money to the builder for the construction and later possession of the house were deemed as
financial creditors of the builder. This meant that in case the builder is a company and it defaults
in delivering the possession of the house to the homebuyer, then in that case the homebuyer

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could initiate the Insolvency resolution process against the builder. This was a major move as it
strengthens the position of not only the homebuyer but also adds to the credibility of the Code.

It was a position of great joy for the Homebuyers as after the RERA Act this was a major philip
to their position against the recalcitrant Builders. The Real Estate sector before RERA was driven
completely by the Builders and Homebuyers were at their mercy as various articles had referred
to the real estate sector as a landmine for potential homebuyers.

Another change was to the Section 29A discussed in Chapter I which relates to disability of
certain persons from becoming resolution applicant. The section, as it stood then had ran into
some trouble and sprouted certain complexities that needed to be addressed. The 2018 Ordinance
did exactly that.

The definition of ‘related party’ in the context of an individual person has been introduced which
was earlier missing, providing clarity to the scope of connected persons of a resolution applicant
who have to be tested for disqualifications set out in paragraphs (a) through (i) of Section 29A.
The definition of an individual’s related party is extensive and will cast a wide net. In addition,
where the individual whose connected persons need to be determined is married, the relative of
the individual’s spouse will also be included within the scope of ‘connected persons’. This, on
the face of it is excessive and could have been handled better by limiting the definition of
relatives as used in the Companies Act, 2013. The wider definition under the 2018 Ordinance
will increase the burden on the resolution professional and the Committee of Creditors.

One of the major concerns highlighted by market participants is that financial investors should
not be barred from bidding for companies under the IBC on account of Section 29A. This was
and to a certain degree continues to be the case, given the broad ambit of the Disqualification
Criteria, the principal amongst them being Section 29A(c), which disqualifies a person who is
the promoter or in control of a company whose account has been a non-performing account
(NPA) whether in India or abroad for more than one year.

The 2018 Ordinance identifies certain ‘financial entities’ – though NBFCs are conspicuously
absent from this list – which have been exempt from the NPA Disqualification provided that such

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financial entities are not related to the corporate debtor (in the manner as prescribed under the
2018 Ordinance). Also, it is worth noting that

(i) Such an exemption is available only where the resolution applicant is a ‘financial
entity’ and not to connected persons of the resolution applicant.
(ii) For an entity to qualify as a ‘financial entity’, it would also have to comply with
additional criteria to be prescribed by the Government in consultation with the relevant
financial sector regulator.

The 2018 Ordinance also exempts the NPA Disqualification for a resolution applicant that has
acquired a company (whose account is an NPA) pursuant to a resolution plan approved by the
NCLT under the IBC. This exemption is available to the relevant resolution applicant for a period
of three years following the approval of the plan.

The 2018 Ordinance provides further relief to ‘micro’, ‘small’ and ‘medium’ enterprises by
exempting them from the Disqualification Criteria under paragraphs (c) and (h) of Section 29A
and also allows the Government to exempt the other Disqualification Criteria for MSMEs as
well.2

Previously, all decisions of the Committee of Creditors needed to be approved by 75% of the
voting share of the Committee of Creditors members. This threshold has now been lowered to
51% except for the following requirements:

1. 90% approval for withdrawal of an insolvency application post admission by the NCLT.
2. 66% approval for resolutions: (i) proving extension of the corporate insolvency process
beyond 180 days; (ii) relating to matters listed out under Section 28 of the IBC; (iii)
approving a resolution plan; and (iv) replacing a resolution professional.

2 L. Viswanathan & Abhijeet Das, 2018 IBC Ordinance: Impact of Changes, INDIA CORPORATE LAW (Jul. 16,
2018), https://corporate.cyrilamarchandblogs.com/2018/07/2018-ibc-ordinance-impact-changes/

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CHAPTER V: IMPORTANT CASES

The whole jurisprudence and major evolution of the Code has been a product of some creative
interpretation on the part of National Company Law Tribunal, National Company Law Appellate
Tribunal and Supreme Court. Name any major change and there’s a high chance that it has been
the result of a judgment by any of the adjudicating body named above. In this chapter, we deal
with the important cases, basically judgments that heralded a major change in the understanding
of the Code.

1. Macquarie Bank Limited v. Shilpi Cable Technologies Limited (Supreme Court)3

The said appeal raised two imperative questions:

A. Whether in relation to an operational debt, the provision contained in Section 9(3)(c) of the
Code is mandatory?

3 Macquarie Bank Limited v. Shilpi Cable Technologies Limited, A.I.R. 2018 SC 498.

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— A fair construction of Section 9(3)(c), in consonance with the object sought to be achieved by
the Code, would lead to the conclusion that it cannot be construed as a threshold bar or a
condition precedent.

B. Whether a demand notice of an unpaid operational debt can be issued by a lawyer on behalf of
the operational creditor?

— “…Section 8 of the Code speaks of an operational creditor delivering a demand notice. It is


clear that had the legislature wished to restrict such demand notice being sent by the operational
creditor himself, the expression used would perhaps have been “issued” and not “delivered”.
Delivery, therefore, would postulate that such notice could be made by an authorized agent. In
fact, in Forms 3 and 5 extracted hereinabove, it is clear that this is the understanding of the
draftsman of the Adjudicatory Authority Rules, because the signature of the person “authorized
to act” on behalf of the operational creditor must be appended to both the demand notice as well
as the application under Section 9 of the Code. The position further becomes clear that both
forms require such authorized agent to state his position with or in relation to the operational
creditor. A position with the operational creditor would perhaps be a position in the company or
firm of the operational creditor, but the expression “in relation to” is significant. …”

“It is clear, therefore, that both the expression “authorized to act” and “position in relation to the
operational creditor” go to show that an authorized agent or a 59 lawyer acting on behalf of his
client is included within the aforesaid expression.”

“….Since there is no clear disharmony between the two Parliamentary statutes in the present
case which cannot be resolved by harmonious interpretation, it is clear that both statutes must be
read together. Also, we must not forget that Section 30 of the Advocates Act deals with the
fundamental right under Article 19(1)(g) of the Constitution to practice one’s profession.
Therefore, a conjoint reading of Section 30 of the Advocates Act and Sections 8 and 9 of the
Code together with the Adjudicatory Authority Rules and Forms there under would yield the
result that a notice sent on behalf of an operational creditor by a lawyer would be in order.”

2. Mobilox Innovations Private Limited v. Kirusa Software Private Limited (Supreme


Court)4

4 Mobilox Innovations Private Limited v. Kirusa Software Private Limited, A.I.R. 2017 SC 4532.

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Section 9(1) contains the conditions precedent for triggering the Code insofar as an operational
creditor is concerned. The requisite elements necessary to trigger the Code are:

i. occurrence of a default;

ii. delivery of a demand notice of an unpaid operational debt or invoice demanding payment of
the amount involved; and

iii. the fact that the operational creditor has not received payment from the corporate debtor
within a period of 10 days of receipt of the demand notice or copy of invoice demanding
payment, or received a reply from the corporate debtor which does not indicate the existence of a
pre-existing dispute or repayment of the unpaid operational debt.

On existence of Dispute:

“24. The scheme under Sections 8 and 9 of the Code, appears to be that an operational creditor,
as defined, may, on the occurrence of a default (i.e., on non-payment of a debt, any part whereof
has become due and payable and has not been repaid), deliver a demand notice of such unpaid
operational debt or deliver the copy of an invoice demanding payment of such amount to the
corporate debtor in the form set out in Rule 5 of the Insolvency and Bankruptcy (Application to
Adjudicating Authority) Rules, 2016 read with Form 3 or 4, as the case may be (Section 8(1)).
Within a period of 10 days of the receipt of such demand notice or copy of invoice, the corporate
debtor must bring to the notice of the operational creditor the existence of a dispute and/or the
record of the pendency of a suit or arbitration proceeding filed before the receipt of such notice
or invoice in relation to such dispute (Section 8(2)(a)). What is important is that the existence of
the dispute and/or the suit or arbitration proceeding must be pre-existing – i.e. it must exist
before the receipt of the demand notice or invoice, as the case may be. In case the unpaid
operational debt has been repaid, the corporate debtor shall within a period of the self-same 10
days send an attested copy of the record of the electronic transfer of the unpaid amount from the
bank account of the corporate debtor or send an attested copy of the record that the operational
creditor has encashed a cheque or otherwise received payment from the corporate debtor
(Section 8(2)(b)). It is only if, after the expiry of the period of the said 10 days, the operational
creditor does not either receive payment from the corporate debtor or notice of dispute, that the
operational creditor may trigger the insolvency process by filing an application before the

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adjudicating authority under Sections 9(1) and 9(2). This application is to be filed under Rule 6
of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 in Form
5, accompanied with documents and records that are required under the said form. Under Rule
6(2), the applicant is to dispatch by registered post or speed post, a copy of the application to the
registered office of the corporate debtor. Under Section 9(3), along with the application, the
statutory requirement is to furnish a copy of the invoice or demand notice, an affidavit to the
effect that there is no notice given by the corporate debtor relating to a dispute of the unpaid
operational debt and a copy of the certificate from the financial institution maintaining accounts
of the operational creditor confirming that there is no payment of an unpaid operational debt by
the corporate debtor. Apart from this information, the other information required under Form 5 is
also to be given. Once this is done, the adjudicating authority may either admit the application or
reject it. If the application made under sub-section (2) is incomplete, the adjudicating authority,
under the proviso to sub-section 5, may give a notice to the applicant to rectify defects within 7
days of the receipt of the notice from the adjudicating authority to make the application
complete. Once this is done, and the adjudicating authority finds that either there is no repayment
of the unpaid operational debt after the invoice (Section 9(5)(i)(b)) or the invoice or notice of
payment to the corporate debtor has been delivered by the operational creditor (Section 9(5)(i)
(c)), or that no notice of dispute has been received by the operational creditor from the corporate
debtor or that there is no record of such dispute in the information utility (Section 9(5)(i)(d)), or
that there is no disciplinary proceeding pending against any resolution professional proposed by
the operational creditor (Section 9(5)(i)(e)), it shall admit the application within 14 days of the
receipt of the application, after which the corporate insolvency resolution process gets triggered.
On the other hand, the adjudicating authority shall, within 14 days of the receipt of an application
by the operational creditor, reject such application if the application is incomplete and has not
been completed within the period of 7 days granted by the proviso (Section 9(5)(ii)(a)). It may
also reject the application where there has been repayment of the operational debt (Section 9(5)
(ii)(b)), or the creditor has not delivered the invoice or notice for payment to the corporate debtor
(Section 9(5)(ii)(c)). It may also reject the application if the notice of dispute has been received
by the operational creditor or there is a record of dispute in the information utility (Section 9(5)
(ii)(d)). Section 9(5)(ii)(d) refers to the notice of an existing dispute that has so been received, as

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it must be read with Section 8(2)(a). Also, if any disciplinary proceeding is pending against any
proposed resolution professional, the application may be rejected (Section 9(5)(ii)(e)).”

“28. It is now important to construe Section 8 of the Code. The operational creditors are those
creditors to whom an operational debt is owed, and an operational debt, in turn, means a claim in
respect of the provision of goods or services, including employment, or a debt in respect of
repayment of dues arising under any law for the time being in force and payable to the
Government or to a local authority. This has to be contrasted with financial debts that may be
owed to financial creditors, which was the subject matter of the judgment delivered by this Court
on 31.8.2017 in Innoventive Industries Ltd. v. ICICI Bank & Anr. ….”

“40. It is clear, therefore, that once the operational creditor has filed an application, which is
otherwise complete, the adjudicating authority must reject the application under Section 9(5)(2)
(d) if notice of dispute has been received by the operational creditor or there is a record of
dispute in the information utility. It is clear that such notice must bring to the notice of the
operational creditor the “existence” of a dispute or the fact that a suit or arbitration proceeding
relating to a dispute is pending between the parties. Therefore, all that the adjudicating authority
is to see at this stage is whether there is a plausible contention which requires further
investigation and that the “dispute” is not a patently feeble legal argument or an assertion of fact
unsupported by evidence. It is important to separate the grain from the chaff and to reject a
spurious defence which is mere bluster. However, in doing so, the Court does not need to be
satisfied that the defence is likely to succeed. The Court does not at this stage examine the merits
of the dispute except to the extent indicated above. So long as a dispute truly exists in fact and is
not spurious, hypothetical or illusory, the adjudicating authority has to reject the application.”

“43. According to learned counsel for the respondent, the definition of “dispute” would indicate
that since the NDA does not fall within any of the three sub-clauses of Section 5(6), no “dispute”
is there on the facts of this case. We are afraid that we cannot accede to such a contention. First
and foremost, the definition is an inclusive one, and we have seen that the word “includes”
substituted the word “means” which occurred in the first Insolvency and Bankruptcy Bill.
Secondly, the present is not a case of a suit or arbitration proceeding filed before receipt of notice
– Section 5(6) only deals with suits or arbitration proceedings which must “relate to” one of the
three subclauses, either directly or indirectly. We have seen that a “dispute” is said to exist, so

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long as there is a real dispute as to payment between the parties that would fall within the
inclusive definition contained in Section 5(6). The correspondence between the parties would
show that on 30th January, 2015, the appellant clearly informed the respondent that they had
displayed the appellant’s confidential client information and client campaign information on a
public platform which constituted a breach of trust and a breach of the NDA between the parties.
They were further told that all amounts that were due to them were withheld till the time the
matter is resolved. On 10th February, 2015, the respondent referred to the NDA of 26th
December, 2014 and denied that there was a breach of the NDA. The respondent went on to state
that the appellant’s claim is unfounded and untenable, and that the appellant is trying to avoid its
financial obligations, and that a sum of Rs.19,08,202.57 should be paid within one week, failing
which the respondent would be forced to explore legal options and ……”

Whether non-provision of Banker’s certificate be construed as a ground for rejection of IBC


Application?

“41. Coming to the facts of the present case, it is clear that the argument of Shri Mohta that the
requisite certificate by IDBI was not given in time will have to be rejected, inasmuch as neither
the appellant nor the Tribunal raised any objection to the application on this score. The
confirmation from a financial institution that there is no payment of an unpaid operational debt
by the corporate debtor is an important piece of information that needs to be placed before the
adjudicating authority, under Section 9 of the Code, but given the fact that the adjudicating
authority has not dismissed the application on this ground and that the appellant has raised this
ground only at the appellate stage, we are of the view that the application cannot be dismissed at
the threshold for want of this certificate alone.”

3. Innoventive Industries Ltd. v. ICICI Bank & Anr. (Supreme Court)5

The difference between Section 7 and Section 9 of the Code:

“29. The scheme of Section 7 stands in contrast with the scheme under Section 8 where an
operational creditor is, on the occurrence of a default, to first deliver a demand notice of the
unpaid debt to the operational debtor in the manner provided in Section 8(1) of the Code. Under
Section 8(2), the corporate debtor can, within a period of 10 days of receipt of the demand notice

5 Innoventive Industries Ltd. v. ICICI Bank, A.I.R. 2017 SC 4084.

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or copy of the invoice mentioned in subsection (1), bring to the notice of the operational creditor
the existence of a dispute or the record of the pendency of a suit or arbitration proceedings,
which is pre-existing – i.e. before such notice or invoice was received by the corporate debtor.
The moment there is existence of such a dispute, the operational creditor gets out of the clutches
of the Code.

30. On the other hand, as we have seen, in the case of a corporate debtor who commits a default
of a financial debt, the adjudicating authority has merely to see the records of the information
utility or other evidence produced by the financial creditor to satisfy itself that a default has
occurred. It is of no matter that the debt is disputed so long as the debt is “due” i.e. payable
unless interdicted by some law or has not yet become due in the sense that it is payable at some
future date. It is only when this is proved to the satisfaction of the adjudicating authority that the
adjudicating authority may reject an application and not otherwise.”

4. Surendra Trading Company v. Juggilal Kamlapat Jute Mills Company Limited and
Others (Supreme Court)6

In this case, the question of law framed by the NCLAT for its decision was whether the time limit
prescribed for admitting or rejecting a petition for initiation of the insolvency resolution process
is mandatory. The precise question was whether, under the proviso to Section 9(5), the
rectification of defects in an application within 7 days of the date of receipt of notice from the
adjudicating authority was a hard and fast time limit which could never be altered. The NCLAT
had held that the 7 day period was sacrosanct and could not be extended, whereas, insofar as the
adjudicating authority is concerned, the decision to either admit or reject the application within
the period of 14 days was held to be directory.

However, the Supreme Court differed in its perspective and held as follows:

“We are not able to decipher any valid reason given while coming to the conclusion that the
period mentioned in proviso is mandatory. The order of the NCLAT, thereafter, proceeds to take
note of the provisions of Section 12 of the Code and points out the time limit for completion of
insolvency resolution process is 180 days, which period can be extended by another 90 days.
However, that can hardly provide any justification to construe the provisions of proviso to sub-

6 Surendra Trading Company v. Juggilal Kamlapat Jute Mills Company Limited, MANU/SC/1294/2017.

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section (5) of Section 9 in the manner in which it is done. It is to be borne in mind that limit of
180 days mentioned in Section 12 also starts from the date of admission of the application.
Period prior thereto which is consumed, after the filing of the application under Section 9 (or for
that matter under Section 7 or Section 10), whether by the Registry of the adjudicating authority
in scrutinising the application or by the applicant in removing the defects or by the adjudicating
authority in admitting the application is not to be taken into account. In fact, till the objections
are removed it is not to be treated as application validly filed inasmuch as only after the
application is complete in every respect it is required to be entertained. In this scenario, making
the period of seven days contained in the proviso as mandatory does not commend to us. No
purpose is going to be served by treating this period as mandatory. In a given case there may be
weighty, valid and justifiable reasons for not able to remove the defects within seven days.
Notwithstanding the same, the effect would be to reject the application.”

“Further, we are of the view that the judgments cited by the NCLAT and the principle contained
therein applied while deciding that period of fourteen days within which the adjudicating
authority has to pass the order is not mandatory but directory in nature would equally apply
while interpreting proviso to sub-section (5) of Section 7, Section 9 or sub-section (4) of Section
10 as well. After all, the applicant does not gain anything by not removing the objections
inasmuch as till the objections are removed, such an application would not be entertained.
Therefore, it is in the interest of the applicant to remove the defects as early as possible.

Thus, we hold that the aforesaid provision of removing the defects within seven days is directory
and not mandatory in nature. However, we would like to enter a caveat.

We are also conscious of the fact that sometimes applicants or their counsel may show laxity by
not removing the objections within the time given and make take it for granted that they would
be given unlimited time for such a purpose. There may also be cases where such applications are
frivolous in nature which would be filed for some oblique motives and the applicants may want
those applications to remain pending and, therefore, would not remove the defects. In order to
take care of such cases, a balanced approach is needed. Thus, while interpreting the provisions to
be directory in nature, at the same time, it can be laid down that if the objections are not removed
within seven days, the applicant while refilling the application after removing the objections, file
an application in writing showing sufficient case as to why the applicant could not remove the

Page 22
objections within seven days. When such an application comes up for admission/order before the
adjudicating authority, it would be for the adjudicating authority to decide as to whether
sufficient cause is shown in not removing the defects beyond the period of seven days. Once the
adjudicating authority is satisfied that such a case is shown, only then it would entertain the
application on merits, otherwise it will have right to dismiss the application.”

This judgment also lends support to the argument for the appellant in that it is well settled that
procedure is the handmaid of justice and a procedural provision cannot be stretched and
considered as mandatory, when it causes serious general inconvenience.

5. Alchemist Asset Reconstruction Company Limited v. M/s Hotel Gaudavan Private


Limited & Ors.7

An arbitration proceeding cannot be started after imposition of moratorium and that that the
effect of Section 14(1)(a) is that the arbitration that has been instituted after the aforesaid
moratorium is non est in law.

6. Black Pearl Hotels Pvt. Ltd. v. Planet M. Retail Ltd. (Supreme Court)8

The duty of determination of an instrument or, to explicate, to determine when there is a contest
a particular document to be of specific nature, the adjudication has to be done by the judge after
hearing the counsel for the parties. It is a part of judicial function and hence, the same cannot be
delegated.

7. Nikhil Mehta & Sons (HUF) & Ors. v. M/s AMR Infrastructures Ltd. (NCLT Delhi)9

The NCLAT has ruled that a purchaser of real estate, under an ‘Assured-return’ plan, would be
considered as a ‘Financial Creditor’ for the purposes of IBC and is, therefore, entitled to initiate
corporate insolvency process against the builder, in case of non-payment of such
‘Assured/Committed return’ and non-delivery of unit.

The Appellant had booked a residential unit, office space and a shop in a project being developed
by AMR. The unit never came to be delivered to the Appellant. The Appellant had an MoU with
7 Alchemist Asset Reconstruction Company Limited v. M/s Hotel Gaudavan Private Limited,
MANU/DE/0696/2016.
8 Black Pearl Hotels Pvt. Ltd. v. Planet M. Retail Ltd, A.I.R. 2017 SC 1974.
9 Nikhil Mehta & Sons (HUF) & Ors. v. M/s AMR Infrastructures Ltd, MANU/NC/5731/2018

Page 23
AMR, whereby AMR had assured ‘Assured/Committed returns’ to him, from the date of
execution of the MoU till the handing over of the physical possession of the unit(s). This was
ostensibly done in view of the substantial down payment made by the Appellant. The Assured
returns were paid for some time, however, the payments dwindled and then stopped altogether.
Despite various demands, no further payments were made by the Builder. This constrained the
Flat buyer to initiate Insolvency process against the Builder.

The NCLT dismissed the Application on the singular premise that the agreement in question was
clearly a ‘pure and simple agreement of sale and purchase of a piece of property and has not
acquired the status of a financial debt as the transaction does not have consideration for the time
value of money. The NCLT held, that disbursal of monies ‘against the consideration for the time
value of money’ was an essential precondition for the debt to qualify as a ‘financial debt’.

At the NCLAT, it was argued that through this mechanism of ‘Assured returns’, a huge amount
of money was mobilized by AMR to ensure the development of the project, without any
collateral or security. In absence of this scheme, AMR would have been constrained to procure
this amount from financial institutions at extremely high interest rates. Instead, this amount was
secured from unsuspecting buyers on the guarantee and under the garb of ‘Assured/Committed
returns’.

The NCLAT, reversing the decision of the NCLT, ruled in favour of the Flat Buyer and held it to
be a ‘Financial Creditor’. The operative part of the decision reads: “It is clear that Appellants are
‘investors’ and has chosen ‘committed return plan. The Respondent in their turn agreed upon to
pay monthly committed return to investors.”

NCLAT further went on to rule that the ‘debt’ in this case was disbursed against the
consideration for the ‘time value of money’ which is the primary ingredient that is required to be
satisfied in order for an arrangement to qualify as ‘Financial Debt’ and for the lender to qualify
as a ‘Financial Creditor’, under the scheme of IBC.

8. Indian Overseas Bank & Ors. v. Kamineni Steel & Power India Private Limited (NCLAT
Delhi)10

10 Indian Overseas Bank & Ors. v. Kamineni Steel & Power India Private Limited,

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The Hyderabad bench of the NCLT, in an insolvency petition against Kamineni Steel & Power
India, allowed a resolution plan approved by 66.67% of its committee of creditors (CoC). The
Hyderabad NCLT said in its order that Section 30 (4) does not say whether such percentage is
out of the total voting share of the financial creditors or those present during meetings of the
CoC. “Since IBC is a new code and still evolving, the above percentage has to be read with
various circulars issued by the Reserve Bank of India.

The National Company Law Appellate Tribunal (NCLAT) has struck down an order passed by
the bankruptcy court that approved a resolution plan for Kamineni Steel & Power despite the fact
that it failed to receive the mandatory 75 per cent vote share, a pre-requite according to the
Insolvency and Bankruptcy Code (IBC) to get the plan endorsed by the court.

9. K.S. Rangasamy v. State Bank of India & Anr. (NCLAT Delhi)11

“18. For the reasons aforesaid, we are not inclined to interfere with the impugned order dated
13th June, 2017. However, as we find that the Appellant has taken plea that the ‘Corporate
Debtor’ is ready to pay the total amount with 9% interest p.a. in 12 equal monthly installments, it
will be open to the ‘Financial Creditor’ to settle the dispute, if the ‘Resolution Applicant’
proposes ‘lesser amount’ and ‘more time’ than the ‘amount and time’ proposed by the Appellant.
In such case, it will be also open to the concerned person to move before an appropriate forum to
make the settlement absolute.”

If the offer of the promoters is better than the resolution plan, leeway has been provided to
approach the appropriate forum to get the settlement recorded.

11 K.S. Rangasamy v. State Bank of India & Anr, K.S. Rangasamy v. State Bank of India & Anr

Page 25
CONCLUSION

The Insolvency and Bankruptcy code is a piece of legislation that’s still evolving as this project
is being written. Because of the fact it’s so new, has an adjudication body that’s unburdened and
the fact that it is such an important piece of legislation for the corporate world that the change is
happening at a rapid pace.

A thorough look at the changes will reveal the fact that the majority of changes are a result of
judicial pronouncements. Some very big changes made to the code for example like the
amendment made to section 29A, conferring the status of financial creditors on homebuyers,
clarifying the difference between the status of operational and financial creditors etc have all
been done by the adjudicating body in pursuance of resolution of a dispute. Majority of
amendments that have been made to the Act have been done to give the statutory status to these
judicial pronouncements. Therefore the hypothesis set out at the beginning of this project stands
confirmed.

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BIBLIOGRAPHY

1. Batra Sumant, (2017), Corporate Insolvency: Law and Practice, First edition, EBC

2. http://www.ibbi.gov.in/

3. https://www.ey.com/Publication/vwLUAssets/ey-interpreting-the-insolvency-and-
bankruptcy-code/$FILE/ey-interpreting-the-insolvency-and-bankruptcy-code.pdf

4. https://taxguru.in/corporate-law/easy-understanding-insolvency-bankruptcy-code-
2016.html

5. https://www.bloombergquint.com/insolvency/2017/11/25/the-insolvency-and-bankruptcy-
code-amendments-everything-you-need-to-know

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