Fundamental Change in Insolvency Commencement Date – Ambivalent Thinking

The Insolvency and Bankruptcy Second Amendment Bill, 2018 provides for a fundamental change in the insolvency commencement date (ICD) of Corporate Insolvency Resolution Process (CIRP). Presently ICD commences on the date when the order is passed by NCLT admitting the application for CIRP under section 7, 9 or 10. ICD is a significant date in the Code and many things turn on it such as the countdown for period of CIRP begins from ICD and the moratorium takes effect from ICD amongst others. In some cases, while passing the order of admission, the Bench does not simultaneously appoint an Interim Resolution Professional. This was a source of confusion as the appointment of the IRP at a later date than admission used to allow the IRP or RP lesser time than envisaged under the Code. The Second Amendment Bill, in order to correct this situation, has proposed to commence the ICD from the date of appointment of the IRP by NCLT by adding a proviso in section 5(12).

The proposed amendment looks reasonable on paper and is probably  based on experience out of the cases under the Code so far. The Code, we all know, owes its genesis to the Vishwanathan Committee Report (Bankruptcy Law Reforms Committee Report). The Report has an incomparable sense of clarity of thought and as per the Report, the ICD plays an important role in the CIRP. 

The Report recommended commencement of moratorium from Insolvency Commencement Date. The date of passing of order of admission by the Adjudicating Authority was considered as a significant date and the moratorium also commenced from this date. Moratorium has a rational relation to CIRP in the sense that this marks the beginning of calm period. Calm period provides for no coercive action against the assets of the corporate debtor and also bars transfer or alienation of property of the corporate debtor. 

With the proposal to shift the Insolvency Commencement Date to the date of appointment of IRP by NCLT, there may be gap of few days in the date of order admitting the application and date of appointment of IRP. For this gap, no moratorium will be in effect and this may prove to be counter productive. Section 14(2) provides that supply of essential goods or services to the corporate debtor shall not be terminated or suspended or interrupted during moratorium period. During the gap between the order admitting the application for CIRP and date of appointment of IRP, this provision will not have any effect and the essential services may get disrupted which may affect the functionality and working of the corporate debtors as the news of CIRP spreads like wild fire. This does not behold good for the stakeholders of the corporate debtor. Penal sections such as section 71 will effectively lose their sting.

The solution lies in amending several provisions of the existing Code to retain the effect of the provisions of the Code. This is the beginning of more changes.

© Ashish Makhija: ashish@ashishmakhija.com

Disclaimer: The views expressed here are views based on my personal interpretation for academic purposes alone and should not be deemed as legal or professional advise on the subject. If relied upon, the author does not take any responsibility for any liability or non-compliance.

 

Dear NCLT : Till Now We Believed Circulars Do Not Override Law?

 

While disposing off a Petition under Section 74(2) of the Companies Act, 2013 (the 2013 Act) of Darshan Jewel Tools Private Limited, Mumbai Bench of National Company Law Tribunal (NCLT) has ruled on 17th February, 2017 that in the light of a general circular issued by the Ministry of Corporate Affairs, the petition has become redundant, effectively reversing the settled legal position on the point whether circulars can override the provisions of law?

Darshan Jewels had sought extension of time in repayment of deposits accepted from the directors and shareholders for a period of 3 years until 31st March, 2018.While the petition of the company was pending, Ministry of Corporate Affairs issued a general circular on 30th March, 2015 that the deposits accepted by private companies prior to 1st April, 2014 from the members, directors or their relatives shall not be treated as deposits under the 2013 Act and the relevant rules provided appropriate disclosure is made in the financial statement by the company. On this basis, it sought withdrawal of the Petition.

Without examining the legal validity of the general circular issued by Ministry of Corporate Affairs, NCLT dismissed the Petition. The operative part of the order is reproduced here –

“In the light of the above discussion and the present legal position, the Company Petition, now under consideration, has become redundant. The General Circular (supra) issued by Ministry of Corporate Affairs dated 30th March, 2015 has clarified that the amounts received by a Private Limited Company from their members, Directors and relatives prior to 1* April, 20L4 shall not be treated as deposits under the Companies Ad, 2013. In the financial statements and in the Petition, the Company has duly recorded the figures of such amount along with relevant details. As a consequence of the said General Circular, this Petition has now become redundant. The same is, therefore, dismissed due to non-applicability of the relevant provisions of Companies Act, 2013. No order as to cost.”

Dear NCLT, the legal position on general circulars is otherwise and not what has been ruled in the order. The circulars lack statutory recognition. Not only the Principal Bench of erstwhile Company Law Board has reiterated the position that general circulars lack statutory recognition, Bombay High Court, relying on the judgment of Supreme Court in State Bank of Travancore v. CIT [1986 AIR 757]  held that ”such an order, instruction or direction cannot override the provisions of the Act; that would be destructive of all the known principles of law as the same would really amount to giving power to a delegated authority to even amend the provisions of law enacted by the parliament.” [Banque Nationale De Paris v. CIT [(1999) 237 ITR 518 Bom].

The legal position on the validity of the circulars vis-a-vis statutory provisions stands settled. NCLT, not only ignored to examine the legal position but accepted the general circular issued by Ministry of Corporate Affairs as the ‘new legal position’. The question that arises is – whether NCLT was not bound to examine the legal validity of the general circular, which stated a position in complete contrast to the statutory provisions? The cursory manner in which the ruling has been given makes a strong case against ‘tribunalisation’ in the country. Judicial examination of the provisions is lacking.

Unfortunately, this position is likely to continue as the circular favours the companies and the MCA, having issued the circular, is not going to challenge this ruling.

© Ashish Makhija: ashish@ashishmakhija.com

Disclaimer: The views expressed here are views based on my personal interpretation for academic purposes alone and should not be deemed as legal or professional advise on the subject. If relied upon, the author does not take any responsibility for any liability or non-compliance.