More Hits than Misses – Critical Analysis of India’s Insolvency & Bankruptcy Ordinance, 2018

Second Ordinance in Six Months

The Indian Insolvency law is shedding its infancy sooner than expected. In a span of little over six months, the President has promulgated the second Ordinance brining sweeping changes in the Insolvency and Bankruptcy Code, 2016 (Code). It can be argued that the Government is responsive to the needs of the time, but some look at it as a result of poor drafting in the original law. Regardless of the reason, it looks like the Government is taking the emerging misperceptions seriously. The upshot of the Code is that the limited liability business entities are forced to make sweeping changes in their business dealings with the creditors. They can no longer afford to ignore their timely payments. Financial discipline is here to stay. The second Ordinance has its roots in Insolvency Law Committee Report, 2018.

Immediate Commencement of the Provisions

As expected of any Ordinance, this one also comes into force immediately, that is, from 6thJune, 2018. But the question that begs answer is whether the Government and the Regulator are ready with the consequent amendments in Rules and Regulations? The most likely answer is ‘No’. The Insolvency and Bankruptcy Board of India (Board or Regulator) and the Central Government would work on the Regulations after the promulgation of the Ordinance as they are not supposed to know its contents beforehand.  This means that it will be some time before we see amended rules or regulations to be notified. Practically speaking, the provisions requiring amendment in Rules and Regulations would remain on paper unless supported by the Rules or Regulations.

Home buyers are Financial Creditors

Bringing home buyers under the umbrella of financial creditor was a long-standing demand of the society. In few cases, the debt owed to them forms a majority, yet they were relegated to the fringe by the Code. To strike a balance, they are now considered as a financial creditor under S. 5(8)(f); the amount paid by a home buyer is now deemed as the amount having the commercial effect of borrowing. The impact of this amendment is far reaching and the home buyers now, being a financial creditor, get a right to be a part of committee of creditors albeit through a representative who will be the insolvency professional appointed by the NCLT. How many of us know that proposal to include home buyers in financial creditor was dissented to by three committee members of Insolvency Law Committee? Like home buyers, there are many creditors who are neither operational creditors nor financial creditors. Ordinance has not offered any solutions for them. Amending the definition of operational creditors to mean “creditors other than financial creditors” would solve the problem. This, it seems, has to wait.

Assets of Personal and Corporate Guarantors are outside Moratorium

 Conflicting judgments of NCLT Benches, NCLAT and Allahabad High Court have been set to rest and rightly so by an amendment placing the assets of personal and corporate guarantors outside the purview of moratorium. Corporate insolvency resolution process cannot be allowed to disturb the contractual arrangement between the lender and the surety. The personal and corporate guarantors need to fend themselves without taking a shelter of moratorium under the Code.

Related Party and Relatives

The Ordinance now defines ‘related party in relation to an individual’for the purposes of corporate insolvency resolution process. It is extensive and is meant to control the conflict of interest of individuals associated with corporate insolvency resolution process. Surprisingly, the definition contains the phrase ‘spouse’ but does not define it. Interestingly, Companies Amendment Bill 2008 also contained this phrase in the definition of relative but was omitted from the next version of Bill. The Explanation defines relative for the purposes of ‘related party in relation to an individual’. This may confound the confusion as relative is defined for the purposes of newly added clause (24A) in S. 5 but the term relative for the purposes of clause (24) – related party in relation to a corporate debtor has no definition. Having not been defined, one will rely on its definition in the Companies Act, 2013 by virtue of S. 3(37). This may lead to a dichotomous situation – same phrase having two different meanings under the Code. This calls for super amendment now.

Correcting the Drafting errors

The Ordinance corrects many drafting errors in the Code. Supreme Court laid down the law that in S. 8, the word ‘and’ should be read as ‘or’ for the corporate debtor to bring to the notice of the operational creditor the existence of dispute or record of pendency of suit or arbitration proceedings in response to demand notice. The Ordinance seeks to correct this error. Similarly, the Ordinance corrects the situation by making a bank certificate optional for filing of application by an operational creditor.

Special Resolution made mandatory for initiation of corporate insolvency resolution process by Corporate Debtor

No longer corporate debtors would be permitted to file for their corporate insolvency resolution process on the basis of board resolution. Filing of such application now requires a special resolution by a company or three-fourth of the total number of partners of LLP. While adding this requirement, the Government missed an opportunity to correct drafting error in clause (b) of S. 10(3) which reads as “the information relating to the resolution professional proposed to be appointed as an interim resolution professional”. It should actually read as “the information relating to the insolvency professional proposed to be appointed as an interim resolution professional”.

 Lowering of the Decision-Making Threshold in Committee of Creditors

In the Code, the decisions of the committee of creditors were to be made by a majority of 75%. It stands changed as follows:


Decision Voting Percentage in Committee of creditors Prior to the amendment Voting Percentage in Committee of creditors after the amendment
Extension of period of corporate insolvency resolution process 75 66
Withdrawal of application for corporate insolvency resolution process It was not allowed 90
Replacement of Resolution Professional 75 66
Actions under section 28 75 66
Approval of Resolution Plan 75 66
Decision of the Committee of creditors to liquidate 75 66
All other decisions 75 51

Lower threshold limit means the critical decisions such as approval of resolution plan, change of resolution professional, will now have a greater chance of getting through the committee of creditors. This may have been done to hear more success stories under the Code.

Interim Resolution Professional to continue after 30 days

 The Interim Resolution Professional will now hold office until the date of appointment of the resolution professional under section 22 and not until 30 days from the date of his appointment as per the provisions of Code. Similarly, the resolution professional shall continue to manage the operations of the corporate debtor after the expiry of corporate insolvency resolution process until an order is passed by NCLT approving or rejecting the resolution plan, provide the resolution plan has been submitted. These provisions correct the situation of uncertainty prevailing under the Code.

Interim Resolution Professional is responsible for all statutory compliances

A reigning doubt in the minds of the Interim Resolution Professionals has been set to rest by the Ordinance clearly mandating that the Interim Resolution Professional shall be responsible for complying with the requirements under any law on behalf of the corporate debtor.

Banks or FI’s holding shares in corporate debtor are no longer excluded from representation etc in committee of creditors

Banks or Financial Institutions, even though they were financial creditors, had no right of representation, participation and voting in the committee of creditors if they held more than twenty percent of voting rights. This led to an anomalous situation, which has now been corrected with the addition of a proviso in S. 21(2) providing that financial creditors regulated by a financial sector regulator shall not be excluded from representation, participation and voting in the committee of creditors merely because of the fact that their debt was converted into equity prior to insolvency commencement date.

Unwilling Interim Resolution Professional not to be continued as Resolution professional

The Interim Resolution Professional, if not willing, cannot be forced to continue as a Resolution Professional now as the Ordinance makes it mandatory to have the consent of Interim Resolution Professional before being appointed as resolution professional. Infact, consent of insolvency professionals to act as Interim Resolution Professional, Resolution professional or liquidator is a mandatory condition under the Code.

Implementation of Resolution Plan

 The Code had a gaping hole as to implementation of a resolution plan. The Ordinance makes it mandatory for NCLT to satisfy itself as to the provisions in the resolution plan for effective implementation. The onus to approve necessary approvals under any law has been fixed on the resolution applicant. These approvals will have to be obtained within a period of one year from the date of approval of the resolution plan by NCLT.

Accepted Claims can also be Appealed

The Ordinance has sorted out another anomaly in the Code by providing that claims accepted by the Liquidator can also be appealed. Earlier, only rejected claims could be appealed. This amendment was not really necessary as acceptance of lower amount of claim by liquidator was in fact a ‘rejection’ of the remaining amount and an appeal could lie for the partial rejection.

NCLT to exercise Jurisdiction in cases of Insolvency Resolution or Liquidation of Corporate Guarantors to a corporate debtor

In addition to the personal guarantors, the Ordinance now mandates that the insolvency resolution process or liquidation of a corporate guarantor to a corporate debtor shall be dealt by the bench of NCLT where the corporate insolvency resolution process or liquidation of the corporate debtor is under process. This is regardless of the location of the registered office of the corporate guarantor. Ordinarily, under the Code, the jurisdiction of NCLT Bench is decided by the situation of registered office of the corporate person but in case of corporate guarantor, it will be subject to the jurisdiction of the NCLT Bench dealing with the corporate insolvency resolution process or liquidation of the corporate debtor. Here, corporate guarantor means a corporate personwho is the surety in a contract of guarantee to a corporate debtor. Corporate guarantor will include company as well as limited liability partnership. The change also indicates that if the corporate insolvency resolution process or liquidation proceedings of a corporate guarantor is in process, having commenced prior in time to that of corporate debtor, such cases shall stand transferred to the NCLT bench dealing with corporate insolvency resolution process or liquidation of the corporate debtor.

Bar on Jurisdiction of Civil Courts

The Ordinance has extended the bar on jurisdiction of civil courts over the action taken in pursuance of orders passed by the Boardunder the Code. The Board is empowered to pass orders under several circumstances under the Code. Now, no such order can be questioned in a civil court. Earlier only orders of adjudicating authority were covered.

Limitation Act applies to the Code

 The Ordinance settles the dust over the applicability of law of limitation. Henceforth, no creditor with time barred debts can approach NCLT for initiating the corporate insolvency resolution process against the corporate person. This effectively nullifies the judgments of NCLAT which first held that law of limitation cannot apply to proceedings before modifying it to a substantial extent in a later judgment, which is under a stay by the Supreme Court. Now that case becomes infructuous.

Relief to Micro, Small and Medium Enterprises

 The Central Government has been delegated the power to determine the applicability of the provisions of the Code to micro, small and medium enterprises. The big relief also comes into the form of removing disqualification to act as a resolution applicant in two circumstances, namely, clause (c) and (g) of Section 29A. Further, if a person was convicted for any offence punishable with imprisonment for two years or more, he was not eligible to be a resolution applicant. Offences were not restricted to specific laws. The Ordinance has now added the Twelfth Schedule giving a list of 25 Acts, the offences of which shall make a person ineligible to act as a resolution applicant.

Transfer of Winding-up proceedings to the Tribunal

 Interestingly a proviso has been added in section 434 of the Companies Act, 2013 to provide that proceedings relating to winding-up of companies pending before High Court or any other Court prior to commencement of the Code can be directed to be transferred by such Court to the NCLT on an application made by any party to the proceedings. Such transferred proceedings shall be treated as an application for corporate insolvency resolution process under the Code. This provision may trigger transfer of winding-up cases from High Courts to NCLT.

The language employed is, however, confusing and may lead to unintended results. Firstly, it is not clear whether the intent is to transfer applications pending consideration of the Court whether to pass winding-up order or not, or to all cases including those where winding-up has been ordered or provisional liquidator has been appointed. The language suggests all cases including where winding-up is under process can be transferred.

Secondly, all such transferred cases will assume the status of application for initiation of corporate insolvency resolution process. It is not clear how the cases where winding-up is under process and substantially advanced be treated as application for initiation of corporate insolvency resolution process.

Thirdly, winding-up under the Companies Act, 1956 and 2013 was possible on many grounds including inability to pay debts. The Code has omitted only ‘inability to pay debts’ as a ground of winding-up from the Companies Act but not others. Inability to pay dents has been included in the Code broadly classifying it as ‘default’. The corporate insolvency resolution process is triggered on occurrence of default and not on any other ground. If a winding-up was pending before the High Court due to ‘other ground’ on the date of commencement of the Code, its transfer to the NCLT and treating it as a case of corporate insolvency resolution process defies reasoning and logic.

The confusion, it seems will be settled by the Courts. The agony of poor drafting, however, continues. Intriguingly, the Insolvency Law Committee did not deal with this aspect. It only suggested to amend section 434 of the Companies Act, 2013 by amending paragraph 34 of schedule XI of the Code to state that if a petition for winding up on the grounds of inability to pay debts is pending and an order for winding up of the company has been made or a provisional liquidator has been appointed, the leave of the court hearing the winding up proceeding must be obtained, if applicable, for initiation of the CIRP proceedings against such corporate debtor under the Code. The intent and content seem to be at variance. Law will take its own interpretational course.


The Ordinance was the need of the hour and irons out the blunt edges of the Code, which caused confusion amongst insolvency professionals and legal fraternity. The benches of NCLT, NCLAT and Supreme Courts were also at variance with each other, passing diametrically opposite judgments on some aspects. Making similar conceptual changes in Part III can be regarded as a missed opportunity. The experience of corporate insolvency resolution process is here and that could have been applied to the provisions of individual and partnership insolvency resolution and bankruptcy. It seems we will see another Ordinance after the commencement of Part III of the Code. But like it or hate it, insolvency law is here to stay. The full colour of the provisions of the Code is yet to be seen by the corporate persons, promoters, directors and insolvency professionals. One thing is clear, ignorance of this law will hit the debtors very hard.

© Ashish Makhija:

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.

Has NCLT interpreted provisions of Insolvency & Bankruptcy Code judicially? Analyzing Judgment of Principal Bench under section 7 of Insolvency & Bankruptcy Code, 2016 in AMR Infrastructures Limited

Legal interpretation of provisions of Insolvency & Bankruptcy Code, 2016 (IBC 2016 or IBC) commences with judgment of Principal Bench of National Company Law Tribunal rendered on 23rd January, 2017 in the matter of AMR Infrastructures Limited. IBC brings in new regime in insolvency of corporates. As opposed to provisions of the Companies Act, IBC 2016 provides for resolving the bankruptcy, staring at the companies. The provisions are now ‘corporate debtor friendly’ as against ‘creditor friendly’ under the earlier regime. IBC 2016 is premised on allowing a chance of fresh start to the companies in financial and business strain. In the AMR judgment, NCLT was called upon to interpret the definition of ‘financial creditor’ and ‘financial debt’ and the meaning of ‘time value of money’ appearing in financial debt definition.

Analyzing the judgment brings to the fore following questions: –

  1. Does IBC 2016 in any way comes to the aid of investors having paid substantial sums to the company in return of their promise to deliver flats or apartments or office premises?
  2. Was the NCLT correct in arriving at a conclusion that an agreement containing assured return does not satisfy the requirement of a financial debt?
  3. Was the NCLT competent to entertain the application under section 7 of IBC 2016 in view of fact that provisional liquidator stands appointed by orders of High Court, as noted by NCLT in its order?

These are early days under IBC and one judgment cannot be held to be conclusive in interpretation of the provisions of IBC. IBC 2016, for the uninformed, allows either a financial creditor or operational creditor to initiate corporate insolvency resolution process. IBC provides that a financial creditor or an operational creditor can apply to NCLT for initiating the corporate insolvency resolution process at the trigger point of default being committed by the company. ‘Default’ means non-payment of debt when whole or any part or instalment of the amount of debt has become due and payable and is not repaid by the debtor or the corporate debtor, as the case may be.

Commitment of default comprises one part; the other part being the eligibility criteria, that is, the applicant should either be a financial creditor or an operational creditor. Instead of using the generic term ‘creditor’, IBC has categorized them into financial and operational creditor with specific meaning attached to these two terms. Not all but only a financial creditor or operational creditor can initiate the resolution process. The only possible logic in segregating the creditors into financial and operational seems to be providing a preferential treatment to the financial creditor in as much as the occurrence of default by the company becomes the cause of action for a financial creditor whereas in the case of operational creditor, a secondary process of sending a notice of demand to the corporate debtor is to be fulfilled prior to initiating the resolution process. Instead of defining the operational creditor the way it has been done in IBC, the purpose of providing a preference to financial creditor would have served by only defining the financial creditor and treating the rest of the creditors as ‘non-financial creditors’ i.e. all creditors other than financial creditors. This would have simplified the interpretation process of the phrases ‘financial creditor’ and ‘operational creditor’ saving precious judicial time.

Let us examine the consequences of specific definitions of financial creditor and operational creditor. By implication, it seems reasonable to presume that the creditor should either be a financial creditor or operational creditor and in some circumstances may be both. Under IBC, a third possibility has emerged that the creditor is neither a financial creditor nor an operational creditor. Was this intended? By doing this, grave injustice has been done to several creditors who might have invested huge sums of money in a company engaged in constriction of real estate. The amount paid by customers would neither fall under the definition of financial debt nor operational debt. In these cases, the amount invested is generally substantial and in many cases the investors pay their life savings in the hope of getting their home or office. NCLT has come to a conclusion that amount paid under MOU for real estate, even though the MOU has ‘assured return’ clause after the expiry of period of promised delivery of property, is not a financial debt and hence the creditor does not fall under the category of ‘financial creditor’. NCLT has also concluded that ‘assured return’ clause would not satisfy the requirement of ‘time value of money’ appearing in the definition of ‘financial debt’. Looking at the definition of ‘operational debt’, the payment made for promised delivery of homes or offices will also not be treated as operational debt, there being no claim of ‘goods’ or ‘services’ against the corporate debtor. Immovable property cannot, by any stretch of imagination, be treated as ‘goods’. It is neither the ‘service’ to be rendered by the corporate debtor. Such investors having invested huge sums of money have been left to fend for themselves by invoking civil remedies. The anomaly seems unintentional but a clear cut case of drafting error. Under the existing regime of winding-up of companies under the company law, such creditors were being permitted to file petition for winding-up with the High Court against defaulting corporate debtors. Once the provisions of Companies Act, 2013 are repealed, the investors, like these, will only live in mirage of invoking the resolution process.

‘Assured return’ is a committed payment which the corporate debtor undertakes to pay in the event of failure on its part to make promised delivery. The ‘assured return’ partakes the character of compensation in terms of money, that is, it becomes the obligation of the corporate debtor to recompense the loss incurred by the investor for having remained invested longer than desired. With due respect, had the NCLT examined the assured return in this view, probably it would have come to a different conclusion. It tangled itself in mere technicalities of the phrases ‘time value of money’ and ‘financial debt’. The definition of ‘financial debt’ is an inclusive definition and should have been construed broadly rather than in a narrow spectrum.

Lastly, the NCLT has ignored the provisions of Section 446 read with Section 441 of the Companies Act, 1956 (these provisions are still effective). Having noted that provisional liquidator has been appointed in AMR, there was no occasion for the NCLT to entertain application under IBC in view of the clear cut bar provided in Section 446 of the 1956 Act. It should have saved its precious judicial time by dismissing the application in limine or should have kept it in abeyance till such time leave of the High Court was obtained by the applicant without entering the domain of interpreting the phrases ‘financial debt’, ‘financial creditor’ and ‘time value of money’ in a hurry.

This is just the beginning and it is expedient that NCLT should don the mantle of judicious interpreter to chart the path to be tread in times to come by the litigants. The interpretations will have far reaching impact and it is expected that provisions are examined deeply looking at Indian judicial precedents and cross-border jurisdictions as well.

Keep watching this space for more analysis of NCLT/NCLAT judgments.

© Ashish Makhija:

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.