India: Adjudication Process Under The Insolvency And Bankruptcy Code, 2016

Introduction

Since, a sound and effective insolvency system is a sine qua non for any sustainable economy, the Indian Insolvency regime underwent a turmoil to come up with the Insolvency and Bankruptcy Code, 2016 (referred to as Code/IBC).

With the commencement of the comprehensive Insolvency and Bankruptcy Code in 2016, India headed towards a new era of managing insolvencies and bankruptcies of both corporates as well as individuals. The Code is a unique legislation which brings the Indian insolvency regime at par with global standards to facilitate ease of doing business.

With the demise of Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986) (SICA) on the November 30, 2016 the Government of India put in place a new restructuring mechanism under the guise of Insolvency and Bankruptcy Code, 2016 on December 1, 2016. The Code provides alternative process for resolving the insolvency issues of the stakeholders. As a result of repeal of SICA, the Board for Industrial and Financial Reconstruction (BIFR) and the Appellate Authority for Industrial and Financial Reconstruction (AAIFR) became non-functional and all the inquiries and references pending before the Board or any appeal or proceeding of any nature pending before the Appellate Authority stand receded.

However, the SICA Repeal Act provides that a company in respect of which such appeal or reference or inquiry under SICA stands abated, may make reference to the National Company Law Tribunal (NCLT/tribunal) under the IBC within one hundred and eighty days from the commencement of the IBC in accordance with the provisions of the IBC.

The Code establishes a unique procedure for easy resolution (if unsuccessful) followed by the liquidation for the corporates. The prime objective of the insolvency legislation is to rescue corporate debtors in distress. The Code specifies a time-bound insolvency resolution process, including any litigation, which must be completed within 330 days. The fulfilment of IBC's objectives is evident from the cases that have seen successful resolutions. The preamble of the Code clearly describes its objective as to "consolidate and amend the laws relating to reorganisation and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximisation of value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders including alteration in the order of priority of payment of Government dues and to establish an Insolvency and Bankruptcy Board of India, and for matters connected therewith or incidental thereto".

To achieve the above-mentioned objectives, the Code establishes four pillars for a strong and consistent support. It is pertinent to mention that since the overall structure of the Code rests on these pillars, functioning of every pillar is equally important for the success of the Code. These four pillars are Information Utilities, Information Professional, Adjudicating Authority, and the Insolvency and Bankruptcy Board of India.

IBC and Tribunals

Adjudicating Authority is one of the four pillars of the Code. Under the Code, no resolution or liquidation is possible without the final seal of approval from the Adjudicating Authority. The design of the resolution process is closely monitored by the Adjudicating Authority, leaving less scope of irrational and selfish decisions by the Committee of Creditors.

The Code recognizes National Company Law Tribunal (the NCLT) constituted under Section 408 of the Companies Act, 2013 as Adjudicating Authority for the purpose of insolvency resolution and liquidation for corporate persons.

According to Section 60 (1) of the Code,

"The Adjudicating Authority, in relation to insolvency resolution and liquidation for corporate persons including corporate debtors and personal guarantors thereof shall be the National Company Law Tribunal having territorial jurisdiction over the place where the registered office of a corporate person is located."

Section 61 provides National Company Law Appellate Tribunal (NCLAT) to be the Appellate Authority for cases of appeal against any decision of the Adjudicating Authority.

The Code also recognizes Debt Recovery Tribunal (DRT) constituted under subsection (1) of Section 3 of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 as Adjudicating Authority for the purpose of insolvency resolution and bankruptcy of partnership firms and individuals.

Jurisdiction of NCLT

Situs of the registered office of the corporate entity is the deciding criteria for insolvency resolution and liquidation of corporate persons, corporate debtors and personal guarantors thereof. Application for initiating insolvency resolution process or liquidation of corporate debtor shall be filed before the NCLT having jurisdiction over the place where registered office of the corporate entity is situated.

Similarly, voluntary liquidation application of corporate person shall be filed before the NCLT having jurisdiction over the place where registered office of the corporate entity is situated. Though, DRT is recognized as adjudicating authority for partnership firms and individuals, but, where an individual is personal guarantor of a corporate debtor and a corporate insolvency resolution process or liquidation proceedings of such corporate debtor is pending before a NCLT, an application relating to the insolvency resolution or bankruptcy of personal guarantor of such corporate debtor shall also be filed before such NCLT.

In dealing with the application relating to the insolvency resolution or bankruptcy of personal guarantor of corporate debtor the NCLT shall be vested with the powers of DRT dealing with the insolvency resolution or bankruptcy of individual.

Further, under Section 60(5) the NCLT is bestowed with the jurisdiction to decide: (i) 'any' application or proceeding against a corporate debtor; (ii) 'any' claim made by or against a corporate debtor including claims by or against its subsidiaries; and (iii) 'any' questions of priority or 'any' question of law or facts, arising out of or in relation to insolvency resolution or liquidation proceedings of the corporate debtor.

The Supreme Court in the matter of Committee of Creditors of Essar Steel India Limited vs Satish Kumar Gupta, explained section 60 (5) as residuary jurisdiction of NCLT by which NCLT can decide any question of law or fact concerned with insolvency or liquidation of the corporate debtor under the Code.

The apex court has also stated that being a non-obstante clause, Section 60(5) is designed to ensure that the NCLT alone has jurisdiction to decide applications and proceedings by or against a corporate debtor; thus, making it clear that no other forum has jurisdiction to entertain such applications or proceedings. Such interpretation is in harmony with the intent with which the NCLT was established, i.e. a single forum to deal with all matters related to insolvency which were previously distributed across multiple forums resulting in inefficiency, ineffectiveness and undue delay. The decision of the Supreme Court in Union of India v R. Gandhi, President, Madras Bar Association discusses the recommendations of Justice Eradi Committee which were accepted by the Government. The NCLT and NCLAT were established to take over the functions previously performed collectively by the High Courts, Company Law Board, Board for Industrial and Financial Reconstruction (BIFR) and Appellate Authority for Industrial and Financial Reconstruction (AAIFR) so as to avoid long drawn litigation before multiple forums.

Section 61 of the IBC enables any person aggrieved by an order of an AA to appeal to the NCLAT, provided the appeal is filed within 30 days of receiving the order. The NCLAT can extend the time limit for a maximum of 15 days if it is satisfied that the appellant had genuine reasons for not being able to file within the prescribed 30 days.

The section further specifies the grounds on which an appeal against an AA order approving a resolution plan under section 31 of the IBC may be filed. Such an appeal is allowed if it is felt that the resolution plan contravenes any provision of the IBC or any other law, or if there has been any material irregularity or fraud by the RP, while exercising his powers during the CIRP or liquidation process.

The jurisdiction of NCLT under IBC is very wide and thus its scope has been interpreted by the Hon'ble Supreme Court from time to time. For instance, in the case of Gujarat Urja Vikas Nigam Limited vs. Amit Gupta & Ors., the hon'ble court held that the NCLT has jurisdiction to adjudicate disputes, which arises solely or relates to the insolvency of a corporate debtor.

Bar on Jurisdiction: According to section 63 of the IBC, no civil court or any other authority shall have jurisdiction on any matter in which an AA or NCLAT is empowered by the IBC to pass orders. Nor can such courts grant an injunction on any action taken—or about to be taken— following an order passed by an AA.

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Footnotes

1 Pihu Mishra is a research scholar pursuing her PhD in Insolvency and Bankruptcy. She is currently working as Research Associate with ASL- Legal.

2 Section 3 (8) "corporate debtor" means a corporate person who owes a debt to any person.

3 Section 12 of the Insolvency and Bankruptcy Code 2016.

4 Understanding the IBC- Key Jurisprudence and practical considerations. Available at: e42fddce80e99d28b683a7e21c81110e.pdf (ibbi.gov.in)

5 Section 408- The Central Government shall, by notification, constitute, with effect from such date as may be specified therein, a Tribunal to be known as the National Company Law Tribunal consisting of a President and such number of Judicial and Technical members, as the Central Government may deem necessary, to be appointed by it by notification, to exercise and discharge such powers and functions as are, or may be, conferred on it by or under this Act or any other law for the time being in force.

6 Section 60 of Insolvency and Bankruptcy Code, 2016

7 Section 61. Appeals and Appellate Authority. - (1) Notwithstanding anything to the contrary contained under the Companies Act 2013 (18 of 2013), any person aggrieved by the order of the Adjudicating Authority under this part may prefer an appeal to the National Company Law Appellate Tribunal.

8 Section 179 (1)- Subject to the provisions of section 60, the Adjudicating Authority, in relation to insolvency matters of individuals and firms shall be the Debt Recovery Tribunal having territorial jurisdiction over the place where the individual debtor actually and voluntarily resides or carries on business or personally works for gain and can entertain an application under this Code regarding such person.

9 Section 3 (7) "corporate person" means a company as defined in clause (20) of section 2 of the Companies Act, 2013 (18 of 2013), a limited liability partnership, as defined in clause (n) of sub-section (1) of section 2 of the Limited Liability Partnership Act, 2008 (6 of 2009), or any other person incorporated with limited liability under any law for the time being in force but shall not include any financial service provider;

10 Section 5 (22) "personal guarantor" means an individual who is the surety in a contract of guarantee to a corporate debtor;

11 60 (3)- An insolvency resolution process or 2 liquidation or bankruptcy proceeding of a corporate guarantor or personal guarantor, as the case may be, of the corporate debtor pending in any court or tribunal shall stand transferred to the Adjudicating Authority dealing with insolvency resolution process or liquidation proceeding of such corporate debtor.

12 Section 60 (4)- The National Company Law Tribunal shall be vested with all the powers of the Debt Recovery Tribunal as contemplated under Part III of this Code for the purpose of subsection (2).

13 Section 60 (5)

14 (2020) 8 SCC 531

15 ArcelorMittal India Private Limited v Satish Kumar Gupta and Ors. (2019) 2SCC 1

16 Statements of Objects and Reasons of the Insolvency and Bankruptcy Code, 2016

17 (2010) 11 SCC 1

18 Civil Appeal No. 9241 of 2019