On August 31st 2017, the Supreme Court of India in the case of Innoventive Industries Limited v. ICICI Bank Limited* delivered its first extensive ruling on the operation and functioning of the Insolvency and Bankruptcy Code, 2016 (Insolvency Code). The Court said that it is pronouncing its detailed judgment in the very first application under the Insolvency Code, so that all Courts and Tribunals may take notice of a paradigm shift in the law.
The Supreme Court dismissed the appeal filed on behalf of Innoventive Industries Limited and confirmed the decision of the National Company Law Appellate Tribunal (NCLAT), which in turn had affirmed the order passed by the National Company Law Tribunal Mumbai (NCLT) admitting the insolvency petition filed by ICICI Bank Limited against Innoventive Industries Limited.
The broad issues before the Supreme Court were (i) what is the concept of default under the Insolvency Code and how it must be ascertained (ii) what is the scope and extent of enquiry at the admission of a insolvency application; (iii) consequently what is the scope of hearing to be provided to a corporate debtor; and (iii) whether the protection granted under the Maharashtra Relief Undertaking Act (MRU Act) renders an application under the Insolvency Code not maintainable.
Even after concluding that the appeal filed in the name of the Innoventive Industries Limited by its former director after the insolvency resolution professional that been appointed to manage the company, is not maintainable in the initial part of the judgment itself, the Supreme Court still proceeded to examine the legislative history and the scheme of the Insolvency Code in detail and held that adherence to timelines specified in the Insolvency Code and speed of the resolution process are critical to the effectiveness of the Insolvency Code.
After comparing the provisions of the prevalent insolvency laws in UK and US, the Court came to the conclusion that UK Law viz. the Insolvency Act of 1986 has served as a model for Insolvency Code. The Court noted that the crucial difference between the US Law and UK Law is that whist the debtor remained in possession in the former under the latter the debtor made way for an administrator once insolvency was commenced.
Whilst discussing and determining the above issues, the Supreme Court observed:
- Insolvency Code brings a paradigm shift in law including a need to remove the management of a corporate debtor which defaults on its debts. Thus, entrenched managements are no longer allowed to continue in case of non-payment of debts.
- The concept of default under the Insolvency Code is very wide. It is simpliciter a non-payment of debt when the same becomes due and includes non-payment of even a part thereof. Even non-payment of a disputed financial debt when due would constitute a default under the Code. In other words, as long as the debt is due it does not matter if the same is disputed.
- The Court noticed that the difference in the scheme of initiation of insolvency proceedings at the instance of a financial creditor (under Section 7) and by an operational creditor (under Section 8) of the Insolvency Code. Under Section 7 the Court found that, 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. The scope of enquiry before the adjudicating authority is therefore limited to assessing the records provided by the financial creditor to satisfy itself that the 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. The adjudicating authority may therefore only reject an application on a defence taken by the corporate debtor that the debt was not due and not otherwise.
- Whilst noticing the provisions of the Section 7 of the Insolvency Code, the Court found that “The speed, within which the adjudicating authority is to ascertain the existence of a default from the records of the information utility or on the basis of evidence furnished by the financial creditor, is important. This it must do within 14 days of the receipt of the application.
- It is at the stage of Section 7(5), where the adjudicating authority is to be satisfied that a default has occurred, that the corporate debtor is entitled to point out that a default has not occurred in the sense that the “debt”, which may also include a disputed claim, is not due. A debt may not be due if it is not payable in law or in fact. The moment the adjudicating authority is satisfied that a default has occurred, the application must be admitted unless it is incomplete, in which case it may give notice to the applicant to rectify the defect within 7 days of receipt of a notice from the adjudicating authority.”
- After noticing the scheme of the Insolvency Code in detail, the Court found that the scheme of the Insolvency Code, therefore, is to make an attempt, by divesting the erstwhile management of its powers and vesting it in a professional agency, to continue the business of the corporate body as a going concern until a resolution plan is drawn up, in which event the management is handed over under the plan so that the corporate body is able to pay back its debts and get back on its feet. All this is to be done within a period of 6 months with a maximum extension of another 90 days or else the chopper comes down and the liquidation process begins.
- On the question of whether both the NCLT and NCLAT had erred in refusing to go into the other contention of Innoventive that it was because the creditors did not disburse the amounts under the MRA that Innoventive was not able to pay its dues, the Court held that the NCLT and the NCLAT were right in not going into this contention for the very good reason, first that the period of 14 days within which the application is to be decided was long over by the time the second application was made before the NCLT and second the second application clearly appears to be an after-thought for the reason that the corporate debtor was fully aware of the fact that the MRA had failed and could easily have pointed out these facts in the first application itself.
- The Court said that even otherwise, it was satisfied that the obligations of the corporate debtor under MRA were unconditional and did not depend upon infusing of funds by the creditors into the appellant company.
- On the aspect of whether the provisions of the MRU Act will prevail over the provisions of the Insolvency Code, the Court held that MRU Act operates in the same field as the Insolvency Code and is repugnant to Insolvency Code and that the later non-obstante clause (Section 238) of the Parliamentary enactment (Insolvency Code) will also prevail over the limited non-obstante clause contained in Section 4 of the Maharashtra Act.
The judgment recognizes that the Insolvency Code has brought about a paradigm shift in law and economic policy. The judgment is truly progressive, forward looking and path breaking and should pave the way of efficient and effective implementation of the Insolvency Code through adherence to the timelines specified under the Insolvency Code and speed of the resolution process.
* Senior Counsel Mr. Harish Salve and Mr Shyam Divan, as instructed by Cyril Amarchand Mangaldas represented ICICI Bank Ltd. before the Supreme Court