Good News! Apex Court Holds Retired Bankers and Receiving Pension Eligible to be Appointed As Resolution Professional in CIRP

Appellate Tribunal’s judgment holding that an Insolvency Professional who was in service and getting pension from a financial creditor was disentitled to be a Resolution professional has been rejected by the Supreme Court. In an order passed by a 3-judge bench on 19th August, 2020, the Supreme Court has categorically held that the approach adopted by NCLAT is not correct “that merely Resolution Professional who remained in the service of SBI and is getting pension, was disentitled to be Resolution professional” .

The Court held that since the order of NCLAT does not reflect correct approach, the same shall not be considered as a precedent. Incidentally, following its own judgment, NCLAT, in another case, also followed it and removed another past banker who was drawing pension.

Appellate Tribunal’s judgment holding that an Insolvency Professional who was in service and getting pension from a financial creditor was disentitled to be a Resolution professional has been rejected by the Supreme Court. In an order passed by a 3-judge bench on 19th August, 2020, the Supreme Court has categorically held that the approach adopted by NCLAT is not correct “that merely Resolution Professional who remained in the service of SBI and is getting pension, was disentitled to be Resolution professional” .

The Court held that since the order of NCLAT does not reflect correct approach, the same shall not be considered as a precedent. Incidentally, following its own judgment, NCLAT, in another case, also followed it and removed another past banker who was drawing pension.

Understanding 2019 IBC Amendments

Insolvency and Bankruptcy Code of India has been the subject of interpretation at various judicial forums from Adjudicating Authority to Appellate Tribunal to Apex Court of India. Last amendment in 2018 brought in home buyers as financial creditors but many questions remained unanswered as most of the homebuyers did not participate in the voting process. New issues relating to distribution to operational creditors in a resolution plan cropped up with the judgment of Appellate Tribunal in Essar Steel in July 2019, which is now under a stay by the Apex Court.  

The IBC Amendment Bill 2019, introduced in Rajya Sabha on 24 July, 2019 was passed by Rajya Sabha on 29thJuly and by Lok Sabha on 1stAugust, 2019. It is awaiting President’s assent and the Central Government’s notification.

Here is the analysis of the 2019 amendments in IBC:

Ascertaining existence of default in 14 days by NCLT

A provision exists in the Code which mandates the Adjudicating Authority (NCLT for Corporate Insolvency) to ascertain the existence of default within 14 days of the receipt of the application from a financial creditor for initiating corporate insolvency resolution process. The use of the word `shall’ in the mandate cannot be overemphasized. However, this wasn’t being put to practice. The reasons could be either too much workload at hand (the application filed is not listed so soon before NCLT after filing) and the Courts reading principle of natural justice in this provision by issuing notice of the application filed to the corporate debtors. Naturally, the process of filing reply and rejoinders took longer than required 14 days. 

The amendment now requires the NCLT to record reasons if the ascertainment of existence of default is not done within 14 days of filing of application. Under the existing provision, it is incumbent upon the NCLT to dispose of the application within 14 days of the receipt of application and not only ascertain the existence of default. It is important to refer to section 64 of the Code which provides for expeditious disposal of the applications by NCLT. It also provides that NCLT should record reasons if the application is not disposed of within the prescribed time frame and that an extension should be sought from the President of NCLT by the Adjudicating Authority giving reasons of delay and the President is empowered to extend it for maximum of 10 days on the basis of reasons recorded. Looking through this prism, the existing provision intended to achieve the same objective that is now sought to be achieved. From a practical perspective, section 64 was rendered nugatory by the judgment of Appellate Tribunal in J.K.Jute Mills Company Limited vs Surendra Trading Company, 1stMay, 2017, wherein by a stroke of pen, the Appellate Tribunal held that the period of 14 days within which NCLT is mandated to admit or eject the application is directory and not mandatory. Unfortunately, this part of judgment wasn’t touched by the Apex Court in an appeal before it.

Being already covered by this judgment of Appellate Tribunal, the proposed amendment is a non-starter from the word go. If not, judiciary will find a way through this. It is flummoxing why a similar amendment has not been brought in section 9 and 10 which also mandate the NCLT to pass an order within 14 days of receipt of application.

Fixing the outer time-limit for completion of Corporate Insolvency Resolution Process

The Code boldly announced that corporate insolvency resolution process shall be completed within 180 days with an extension of maximum of 90 days; in all 270 days. The experience says as on 30thJune, 2019, 445 insolvency processes are going on beyond 270 days out of the total pendency of 1292; a whopping 34%. Time period of 270 days does not look to be practical due to cases going back and forth to Appellate Tribunal and to Supreme Court. 

The amendment now provides that whatever may be the reason of delay including the period consumed in litigation or stay, the overall time period for a corporate insolvency resolution process cannot exceed 330 days under any circumstance. The use of the phrase “shall mandatorily be completed”reflects the urgency and dictate of the Parliament. While granting outer limit of 330 days, the provision has been couched in a language which covers extension and exclusion of period for any reason curtailing the power of the Adjudicating Authority granted to it under the judgment of Appellate Tribunal in Quinn Logistics India P. Ltd. v. Mack Soft Tech Pvt. Ltd.whereby the Adjudicating Authority could exclude certain period from the 270 days for good grounds and unforeseen circumstances. 

There have been spurt in exclusion applications after this judgment and in few cases, the Adjudicating Authority has allowed exclusion of 270 days on the ground of non-cooperation by the personnel of the corporate debtor! The amendment wishes to rein this in but again judiciary may have the last laugh. The big question that arises is whether Quinn Logisticssurvives after this amendment? The amendment nullifies the judicial decision for now, but it remains to be seen – how long. 

In cases where 300 days have already gone by, the amendment provides that they must be completed within 90 days from the date of commencement of the Amendment.

Allottees’ (Homebuyers) Majority Decision Makes Their Voting Share Absolute

The allottees were considered as a ‘class of creditors’ and attained the status of financial creditors by an amendment in 2018 to be represented by an Authorised Representative in a Committee of Creditors (CoC), who used to vote in the CoC on their behalf as per the voting pattern by each allottee. Their voting share were counted on the basis of the debt due to each of them. Experientially, all the allottees never voted and they always fell short of their aggregate voting share. For example, in a CoC, if the voting share of 560 allottees was 66% and assuming only allottees holding 56% voting share voted, the decision was left at the mercy of other financial creditors in the CoC. The amendment takes care of this anomaly and it provides that once the allottees in a class of creditors take a decision by more than 51% vote (correct phrase would have been fifty one percent or more), the Authorised Representative shall cast the vote as if 100% of them have approved it. Here, more than fifty one percent is calculated on the basis of the votes cast and not total votes. Let us understand by way of an illustration:

ParticularsNumber/Percentage
Voting Share of aggregate of allottees in CoC66%
Voting Percentage of votes cast in favour of an item by allottees56% 
Voting Percentage of votes cast against the item by allottees10%
Voting Percentage of abstention of allottees34%
Overall Voting Share of allottees for the purposes of voting in CoC (prior to amendment)36.96 (56% of 66%)
Overall Voting Share of allottees for the purposes of voting in CoC (after amendment)66%

This is beneficial for the allottees as law now assumes that 100% of the allottees have decided in one way or the other if decision is represented by more than 51% of the votes cast. This makes their voting share in CoC absolute even though the actual voting share may be lesser. Authorised Representative shall, henceforth, vote as a group of ‘class of creditors’ and not as per wish of each allottee.

Anticipated Problem Due to Erroneous Drafting in 2019 Amendment

The problem, however, does not end here. The erroneous drafting is bound to make things complex. Assuming, the votes cast to arrive at a decision do not attain the benchmark of ‘more than fifty one percent’ (Votes cast in favour – 50.80% and against – 49.20%). It is not clear how the Authorised Representative will vote in such a situation. Instead of the phrase, ‘more than fifty one percent’, the use of ‘by majority’would have been appropriate and practical.

Protecting Interest of Operational Creditors and Dissenting Financial Creditors in a Resolution Plan

In order to further protect the interest of the operational creditors, amendment has been made in section 30. Now it is mandatory for a resolution plan to provide for minimum payment to operational creditors, which should be higher of amount that would have been paid to operational creditors under liquidation in accordance with section 53 or amount that would have been paid to operational creditors if the amount under the resolution plan would have been distributed as per order of priority stated in section 53 of the Code. Prior to amendment, it was restricted to the amount that would have been paid to the operational creditors under liquidation.

The change now enhances their chances of being considered for payment on a higher footing. Under liquidation, the amount would have restricted to ‘liquidation value’ but now the order of priority for operational creditors would be considered higher of ‘liquidation value’ and ‘amount under resolution plan’. 

 The dissenting financial creditors are also allowed to be paid the amount not less than the amount payable in accordance with order of priority in section 53 of the Code. The manner of such payment has been left to be specified by the Board. Consequent amendment has been made in regulation making power of the Board in section 240.

Interestingly, this provision will operate retrospectively for all cases where the approval of Adjudicating Authority to a resolution plan is pending, or appeal is pending or time for filing appeal has not lapsed, or where any other legal proceeding is pending against the decision of the Adjudicating Authority in respect of a resolution plan. Retrospective application of these provisions would make the process slow, complicated and may result in unintended consequences. Let us take a case where the application for approval of resolution plan is pending under section 30/31, the resolution plan, which is not in accordance with the amended provisions, will have to be re-drawn and re-approved by the committee of creditors. If the corporate insolvency resolution period is already over (original period allowed plus extension of 90 days plus exclusion), embargo of 330 days in section 12 will apply and it would make it legally impossible to grant more time eventually leading to liquidation of such a corporate debtor.   

 To overcome recent Essar Steel judgment of the Appellate Tribunal which paved way for parity of payment to operational creditors, the amendment now provides that the manner of distribution proposed must take into account the order of priority amongst creditors as laid down in Section 53 and the value of security interest of a secured creditor. The mandatory consideration of ‘value of the security interest of a secured creditor’ seems ambiguous and unnecessary. Section 53 disregards the value of security interest of a secured creditor, which means if the secured creditor relinquishes the security interest, the amount available is distributed proportionately amongst secured creditors regardless of the value of the security interest and ranking of their charge. This amendment is prospective and will not apply retrospectively to plans approved but pending for approval of adjudicating authority or pending in appeal or other legal proceeding. 

Resolution Plan Binding on Government and Government Authorities

An amendment has been made in section 31 providing that the resolution plan once approved shall also be binding of Central Government, State Government, local authority in respect of statutory dues owed to them. This amendment is clarificatory in nature as there was not any doubt in this regard but in some cases, the statutory authorities such as Income Tax etc interpreted it otherwise. By specifically including them here, the amendment paves the way for resolution plan being binding on Government and government authorities.

Decision to Liquidate Can Be Taken at Any Stage

The unamended provision gave ample powers to the committee of creditors to take the decision to liquidate at any stage of corporate insolvency resolution process. But some benches of NCLT ruled otherwise and in few cases passed strictures against committee of creditors if they decided to liquidate at early stages of corporate insolvency resolution process. Fortifying the intent of the Code that commercial decision to resolve or liquidate fall within the exclusive domain of the committee of creditors, the amendment now seeks to clarify that the committee of creditors is free to take decision to liquidate at any stage even before the preparation of information memorandum. This amendment would reduce the financial burden on the members of the committee of creditors as they will not be required to shell out CIRP costs and costs relating to keeping the corporate debtor as a going concern when they foresee no viability in the business of the corporate debtor. The amendment strengthens the decision-making power of the committee of creditors. However, this may not take away the power of Adjudicating Authority or Appellant Tribunal or the Supreme Court to examine whether such a decision has been taken fraudulently.

Retaining Books of Account Post Dissolution of a Corporate Debtor

Uncertainty remains as to how long the Liquidator should maintain the books of account of the corporate debtor under the Insolvency and Bankruptcy Code, 2016. Do they become bona vacantia? For clarity, it may be noted the Liquidation Regulations specify that the liquidator shall preserve specified registers and books of account for a period of eight years from the date of dissolution of the corporate debtor. These can be referred to as ‘books of the liquidator pertaining to liquidation’. The format of the registers and books of account has also been specified in the regulations. The regulations also mandate that the liquidator should complete the books of account of the corporate debtor if they are incomplete on the liquidation commencement date. The reference to books of account here is to ‘books of the corporate debtor prior to liquidator. In this sense, there are ‘books of the corporate debtor’ and books of the liquidator’.

The period of preservation of books of the liquidatorhas been provided in the regulations. But the Code and the regulations are silent on the period for which the books of the corporate debtorare to be preservedby the liquidator. Can they be destroyed upon order of dissolution?

The requirement of maintenance and preservation of books of account of a company is provided in the Companies Act, 2013 in following terms:

Books of Account are to be maintained for period of not less than eight financial years immediately preceding a financial year together with the vouchers relevant to any entry in such books of account. Where an investigation has been ordered in respect of the company, the Central Government may direct that the books of account may be kept for such longer period as it may deem fit (s. 128).

The company shall maintain and preserve at its registered office copies of all documents and information as originally filed for incorporation till its dissolution (s.7).

Interestingly, the Companies Act, 2013 deals with the disposal of books of account upon dissolution as under (s. 347):

  • The books and papers of a company to be dissolvedand those of the Company Liquidator to be disposed of in the manner as directed by the Tribunal.
  • After the expiry of five years from the dissolution of the company, no responsibility shall devolve on the company, the Company Liquidator, or any person to whom the custody of the books and papers has been entrusted, by reason of any book or paper not being forthcoming to any person claiming to be interested therein.
  • The Central Government may, by rules, prevent for such period the destruction of the books and papers of a company which has been wound up and of its Company Liquidator.

Under the Company (Court) Rules, 1959 [Applicable to winding-up governed by provisions of the Companies Act, 1956], the High Court, in its discretion, can pass orders directing disposal of the books and papers of the company and of the Liquidator.

Section 356 of the CA 2013 provides that the dissolution can be declared as void by the Tribunal upon an application being made within two years from the date of dissolution.

Similar provisions find no place in the Code or in the Regulations. The period for preservation for books of liquidator is provided in the Regulations but not for books of the corporate debtor. Section 347 of the Companies Act, 2013 cannot be applied for liquidation under the Code regardless of the fact that the same Tribunal has the authority to deal with winding-up under the Companies Act, 2013 as well as liquidation under the Code. In any case, corporate debtor under the Code is a broader term and also includes limited liability partnership and there is no question of extending the applicability of provisions of the Companies Act, 2013 to a LLP. Winding-up process under the Companies Act, 2013 and liquidation process under the Code are two distinct processes under two different statutes.

Typically, the regulations should be amended to provide for the period of preservation of books of the corporate debtor. Until, this is done, the onus lies on the Tribunal using its power under section 60(5) of the Code to direct the period and the manner of preservation or disposal of the books of account of the corporate debtor upon the order of dissolution.

There may be case of pending investigation and litigation against the corporate debtor. Should the books and records be maintained till the end of investigation or litigation? The answer lies in the question itself. No corporate debtor should, ordinarily, be dissolved if any investigation, litigation or case is pending against it. Dissolving such a corporate debtor would be a huge lapse giving rise to a legal crisis.

@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.

 

 

 

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.

 

To Empanel or Not To Empanel – Confusion Confounds!

The Insolvency professionals are in a dilemma. The banks and financial institutions are creating a panel of their own to select insolvency professionals to be appointed as Interim Resolution Professional and Resolution Professionals. The lenders are doing this based on their own criteria and parameters. The persons selected to be on their panel are the registered insolvency professionals.

Mussadi Lal’s case set the tone when the Principal Bench headed by the President of NCLT rejected the decision of the committee of creditors to appoint a Resolution Professional in place of the Interim Resolution Professional because the insolvency professional was on the panel of one of the financial creditors. The Bench held that such a insolvency professional cannot be regarded as independent umpire to conduct corporate insolvency resolution process. The mere fact of empanelment of the insolvency professional became the cause of rejection.

The New Delhi Bench, in a recent order in Uttam Strips Limited, has, however, held that shortlisting of the names of eligible Resolution Professionals (sic) and maintenance of the list by Banks does not per se give rise to the fact that Resolution Professional would lean in favour of the financial creditor. The Bench held that his work is open to scrutiny and subject to final decision of the CoC.

The Bench took judicial note of the fact that banks normally propose the appointment of a Resolution Professional of their own choice and a person different from the one who had initially acted as the IRP. The Bank had shortlisted names of empaneled and eligible Resolution Professionals  for recommending the names in various corporate insolvency resolution processes. The Bench also noted that the person recommended had not rendered any professional services to the Bank in the past in any professional capacity. The Bank had shortlisted the names of 125 professionals for their appointment as Resolution Professional. This was done so that no time is lost in assessing their eligibility or seeking their consent. The fact that the bank had previously scrutinised the credentials of a professional is no ground to impute partiality.  The Bench held that there is nothing wrong in any bank maintaining their list of resolution professionals whom they feel are competent or experienced to handle the resolution process.

Understanding Counter View

This order by New Delhi Bench is in stark contrast to the earlier order of the Principal Bench. The interest of empanelled IPs may conflict if they have rendered any services to the Bank or financial creditor empanelling them. There may be a counter argument that the IP appointed as IRP or RP may have to tow the line of the Bank or else may not stand any chance of being recommended again for appointment in another case. The neutrality gets affected to this extent. But this argument may not hold good as the IP is bound by the ethical norms under the Code and Regulations. Independence is a state of mind and IP is independent if he acts independently.

© 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.