Insolvency and Bankruptcy Code, 2016 (IBC)

The motive behind these Frequently Asked Questions is to address the basic queries of the stakeholder
(Companies, Individuals, Partnership Firms, CEO, MD, Directors, professionals, students) on the
Insolvency and Bankruptcy Code, 2016.

Evolution, purpose of IBC and Authorities involved:

1. What is Insolvency and Bankruptcy Code, 2016? When does it come into force?
The Bankruptcy Law Reforms Committee designed a set of processes to resolve insolvency and
bankruptcy and with the suggestions of various committees, professionals and general public, the
Insolvency and Bankruptcy Code, 2016 (IBC) was enacted and came into force with effect from
28th May, 2016. However, the provisions on Corporate Insolvency Resolution Process under IBC have
come into effect only from 1st December, 2016.
2. What’s the purpose of framing IBC?
It was framed with the intention to expedite & simplify the process of Insolvency and Bankruptcy
proceedings in India, ensuring fair negotiations between Debtor and Creditor by removing the
asymmetry of debt and default information.
3. How the process is said to be expedited?
The insolvency resolution process which would otherwise take ages to conclude, shall now be
completed by the Adjudicating Authority within 180 days of making the application, unless extended
for 90 more days as per the provisions of the Code
4. To whom IBC is applicable?
The provisions of the IBC, 2016 are applicable to Individuals, Unlimited Partnership Firms, Limited
Liability Partnerships and Companies. The provisions relating to Corporate in the Code, i.e., Limited
Liability Partnerships and Companies is notified and in force w.e.f. 1st December, 2016. The
provisions related to Individuals and Unlimited Partnership Firms – the Part III of IBC, 2016 is yet to
be notified.
5. What is debt?
As per Sec.3(11) of IBC “debt” means a liability or obligation in respect of a claim which is due from
any person and includes a financial debt and operational debt.
6. What is default?
Sec.3(12) of IBC, “default” means non-payment of debt when whole or any part or instalment of the
amount of the debt has become due and payable and is not repaid by the debtor or the Corporate
debtor, as the case may be.For the purposes of Sec.7(1) of the IBC, default includes a default in respect
of the financial debt owed not only to the applicant financial creditor but to any other financial creditor
of the corporate debtor.
7. What are the possible consequences when a debt is defaulted?
When an entity (individual or corporate) defaults on the debt repayment, there are three possibilities:
a. A creditor or a group of creditors can enforce the debt repayment against the debtor;
b. The debt can be reorganized; or
c. If the entity is limited liability firm or company, then it can be liquidated. If the entity is an
individual, then he can be forced into bankruptcy. In either case, the assets of entity are
distributed among its creditors.
8. Who are involved in the infrastructure of Insolvency and Bankruptcy Process under IBC?
The four pillars of supporting institutional infrastructure, to make the Insolvency and Bankruptcy
Process work efficiently are:
a. The regulator – The Insolvency and Bankruptcy Board of India (IBBI)
b. Adjudicating Authority (AA):
 i. National Company Law Tribunal (NCLT) – For Corporate, i.e., Companies and
Limited Liability Partnerships
ii. National Company Law Appellate Tribunal (NCLAT) will act as Appellate Authority.
Section 61,IBC.
iii. Debt Recovery Tribunal (DRT) – For Individuals and Unlimited Partnership Firms
c. A private industry of Insolvency Professionals (IPs) with oversight by private Insolvency
Professional Agencies (IPAs)
d. A private industry of Information Utilities (Ius)

Corporate Insolvency Resolution Process:

9. When can Corporate Insolvency Resolution Process be initiated?

It can only be initiated when the minimum amount of default is rupees is one lakh or such higher
amount as may be notified by the Central Government which shall not exceed one crore rupees.
10. Who can initiate Corporate Insolvency Resolution Process?
The Financial Creditor, Operational Creditor and the Corporate Debtor can initiate the Corporate
Insolvency Process.
a. Financial Creditor (by itself or jointly with other creditors), on occurrence of default, can file
the application.
b. Operational Creditor, after giving 10 days notice to the Corporate Debtor, on default or no
response to such notice, can file the application.
c. The Corporate Debtor himself may also initiate the Corporate Insolvency Process.
11. Who cannot initiate Corporate Insolvency Resolution Process?
Sec.11 of the IBC, states that the following persons are not entitled to make an application to initiate
Corporate Insolvency Resolution Process:
a. A corporate debtor undergoing the corporate insolvency resolution process
b. A corporate debtor having completed corporate insolvency resolution process twelve months
preceeding the date of application.
c. A corporate debtor or financial creditor who has violated any terms of the resolution plan
which was approved twelve months before the date of making application.
d. A corporate debtor in respect of whom a liquidation order has been made.

Here, Corporate debtor includes a corporate applicant in respect of such corporate debtor.

12. What is the time limit within which Adjudicating Authority may reject the application on
Corporate Insolvency Resolution?
The Adjudicating Authority shall admit or reject application within 14 days of receipt of application.
13. Who is “Interim Resolution Professional”?
Interim Resolution Professional is the Insolvency Professional proposed by the Resolution applicant
and appointed by Adjudicating Authority to manage the affairs of Corporate Debtor from the date of
such appointment till the date of appointment of Resolution Professional (the other Insolvency
Professional) by Committee of Creditors.
14. When is Interim Resolution Professional appointed?
The AA shall appoint the Interim Resolution Professional within 14 days from the insolvency
commencement date (insolvency commencement date is the date of admission of application for
insolvency resolution).
15. What is the tenure of Interim Resolution Professional so appointed?
The Interim Resolution Professional so appointed shall act as such for a maximum period of 30 days.
16. What are duties of officers, employees, managers, etc. to report to the Resolution Professional?
What are the consequences if they do not support?
 The officers and managers of the Corporate Debtor, shall report to Resolution Professional. They shall
provide him all the documents or records as required by him in the course of his duties.Where any
personnel or promoters of Corporate Debtor are not assisting or not co-operating Resolution
Professional, he may file an application to Adjudicating Authority for necessary instructions. Then,
Adjudicating Authority shall direct accordingly
17. Who will constitute the Committee of Creditors (CoC)?
Interim Resolution Professional shall constitute the Committee of Creditors, after collating all the
claims on Debtor and on determining its Financial Position. Where the Debtor Company has no
financial Creditors, then the IBBI shall specify the Constitution, Composition and Powers of CoC
18. What is the time period within which the First meeting of Committee of Creditors is conducted?
Interim Resolution Professional shall conduct the First meeting of Committee of Creditors, within
seven days of constitution of CoC.
19. What is the quorum at CoC meeting?
Quorum of CoC meeting: – Members of the committee representing at least 33% of voting rights who
are present in person or by video conferencing or other audio and visual means. However, the
committee may modify the percentage of voting rights required for quorum in respect of any future
meetings of the Committee.
20. Who will be Chairperson of the CoC meeting?
The resolution professional shall act as the Chairperson of the meeting of the Committee.
21. How are the decisions taken by CoC?
All the decisions of CoC shall be taken by vote of not less than 75% of voting share of Financial
Creditors. Related Party should be excluded in determining the 75% of voting share.
22. Who is Resolution Professional and when is he appointed?
Resolution Professional is the Insolvency Professional appointed by the Committee of Creditors in its
First Meeting. Either the Interim Resolution Professional or the other Insolvency Professional may be
appointed as Resolution Professional.
23. What is Resolution Plan?
As per section 5(26) of the IBC, “Resolution Plan” means a plan proposed by any person for
insolvency resolution of the Corporate Debtor as a going concern in accordance with Part II of IBC.
24. Who prepares the Resolution Plan?
As per section 30(1) a resolution applicant may submit a resolution plan to the resolution professional.
It is prepared on the basis of the Information Memorandum given by the resolution professionals.
25. What is Moratorium Period?
During the Corporate Insolvency Resolution process, the Adjudication authority will declare
moratorium period during which no action can be taken against the company or the assets of the
company. Key focus will be on running the Company on going concern basis. A Resolution plan
would have to be prepared and approved by the Committee of creditors
26. When Adjudicating Authority may order Liquidation and who shall act as Liquidator?
Adjudicating Authority can order liquidation if:
a. Resolution Plan is not presented in given time
b. Resolution Plan is not as per Rules
c. Committee of Creditors demands liquidation
d. Debtor violates the terms of Resolution Plan

On passing of order of liquidation, resolution professionals shall act as liquidator.

27. What is Water fall mechanism?

“Waterfall Mechanism” is the order of priority in which the proceeds from the sale of liquidation
assets are distributed. As per Sec.53 of the IBC, the order of priority is as follows:
a. The insolvency resolution process cost and the liquidation costs paid in full.
b. The following debts which shall rank equally between and among the following:
 i. workmen’s dues for the period of twenty-four months preceding the liquidation
commencement date; and
ii. debts owed to a secured creditor in the event such secured creditor has relinquished
security in the manner set out in section 52;
c. wages and any unpaid dues owed to employees other than workmen for the period of twelve
months preceding the liquidation commencement date;
d. financial debts owed to unsecured creditors;
e. the following dues shall rank equally between and among the following:—
i. any amount due to the Central Government and the State Government including the
amount to be received on account of the Consolidated Fund of India and the
Consolidated Fund of a State, if any, in respect of the whole or any part of the period
of two years preceding the liquidation commencement date;
ii. debts owed to a secured creditor for any amount unpaid following the enforcement of
security interest;
f. any remaining debts and dues;
g. preference shareholders, if any and
h. Equity shareholders or the partners as the case may be

Creditors:

28. What is Financial Debt?

As per section 5(8) of the IBC “Financial Debt” means, a debt along with interest, if any, which is
disbursed against the consideration for the time value of money and includes-
a. Money borrowed against the payment of interest
b. Any amount raised by acceptance under any acceptance credit facility or its dematerialized
equivalent;
c. Any amount raised pursuant to any note purchase facility or the issue of bonds, notes,
debentures, loan stock or any similar instrument.
d. the amount of any liability in respect of any lease or hire purchase contract which is deemed as
a finance or capital lease under the Indian Accounting Standards or such other accounting
standards as may be prescribed;
e. receivables sold or discounted other than any receivables sold on nonrecourse basis;
f. any amount raised under any other transaction, including any forward sale or purchase
agreement, having the commercial effect of a borrowing;
g. any derivative transaction entered into in connection with protection against or benefit from
fluctuation in any rate or price and for calculating the value of any derivative transaction, only
the market value of such transaction shall be taken into account;
h. any counter-indemnity obligation in respect of a guarantee, indemnity, bond, documentary
letter of credit or any other instrument issued by a bank or financial institution;
i. the amount of any liability in respect of any of the guarantee or indemnity for any of the items
referred to in sub-clauses (a) to (h) of this clause;
29. Who is Financial Creditor?
As per section 5(7) of the IBC, “Financial creditor” means any person to whom financial debt is owed
and includes a person to whom such debt has been legally assigned or transferred to.
30. What is operational debt?
As per section 5(21) of the IBC “Operational Debt” means a claim in respect of the provision of goods
or services including employment or debt in respect of the repayment of the dues arising under any law
for the time being in force and payable to central government or any state government or any local
authority.
31. Who is Operational Creditor?
As per section 5(20) of the IBC “operational creditor” means a person to whom an operational debt is
owed and includes any person to whom such debt has been legally assigned or transferred.
32. Are all the Financial Creditors secured Creditors?
No all the Financial Creditors are not secured Creditors.
33. Are all unsecured creditors operational creditors?
All unsecured creditors are not operational Creditors. However, all operational creditors are unsecured
creditors.
34. Whether workmen or employees come under operational creditor?Yes, the workmen and
employee whose past payments are due comes under the definition of operational creditor.

Others:

35. What is Information Utility?

“Information Utility” means a person who is registered with the Insolvency and Bankruptcy Board of
India as Information Utility to provide the services including Core services.
36. What is the Fast Track Insolvency Process under IBC?
Fast Track Process is available for Corporate Debtor with low income and assets, specified class of
Creditors and any other category as notified by the Government. Under Fast Track Process, 90 days is
the time limit to complete in the Resolution Process and further an extension of 45 days is allowed.
37. Is there any punishment for the defaulter under the IBC?
The code prescribed stringent punishment to defaulter. It proposes upto five year jail term to debtors
for concealment of property and debars the bankrupt individuals from holding any public office.

Relevant Facts
Financial Creditor ICICI Bank Ltd

Corporate Debtor M/s Innoventive Industries Ltd

Date of default 30th November 2016

Date of Company petition 22nd December 2016

 As per the said Act, the debts said to have been existing
against the Corporate Debtor have been suspended on
Maharashtra Relief Undertaking 18th July 2016.
(Special Provisions) Act declared  M/s Innoventive Industries Ltd, to which financial
Innoventive Industries Ltd as assistance of industrial promotion subsidy of Rs
relief undertaking. 115,36,40,000 provided by the Government of
Maharashtra under the Package Scheme of 2007
Incentive, shall for a period of one year commencing on
July 22, 2016 and ending on 21st July 2017 be conducted
to serve as a measure of preventing unemployment and
 directs that in relation to such undertaking in respect of
one year period mentioned above.
 The rights, privileges, obligations, or liability accrued or
incurred before 22nd July 2016 and any remedy for the
enforcement thereof shall remain suspended and all
proceedings relating thereto pending before any Court,
Tribunal, Officers or Authority shall be stayed.

Whether Financial Creditor (ICICI Bank) can invoke Insolvency

proceedings against Corporate Debtor (Innoventive Industries Ltd)
during which the Corporate debtor is already enjoying the relief of
Issue
one year of all the debts and liabilities as having been suspended
under another Act(Maharashtra Relief Undertaking (Special
Provisions) Act)?

Grounds for Judgement:

1. IB Code has come into existence after MRU, hence the

later Act shall prevail. Therefore, IBC 2016 shall prevail
over MRU.
2. Order passed u/s 7 of the Insolvency Code 2016, will
War of non-obstante clauses both NOT be against the interest of the employees.
under Insolvency and 3. Subject matter is liability over the company which has
bankruptcy Code 2016 Sec 238 been dealt by IBC and MRU but with different objectives,
and Maharashtra Relief under MRU, it is to protect the interest of the company
Undertaking (Special Provisions) and in IBC, it is to protect the creditors who have
Act(MRU) Sec 4. provided funds to the company.
4. Since the liability suspended under MRU Act being
inconsistent with the default occurred to the debt payable
to the creditor, this order will not be against the ratio
decided by Hon’ble Apex court in Vishal N Kalsa v Bank
of India and Others.

The Bench having not noticed any merit in the argument of the
Decision Corporate Debtor Counsel, the Application filed by Corporate
Debtor is hereby dismissed.

The question (s) involved in this appeal are: –

1. Whether a notice is required to be given to the Corporate

Debtor for initiation of Corporate Insolvency Resolution
Process under I&B Code, 2016 and if so, at what stage
Later an appeal was filed to and for what purpose?
NCLAT by Innoventive
2. Whether ‘Maharashtra Relief Undertaking (Special
Industries Ltd on 3 issues. Provisions) Act (Bombay Act XCVI of 1958)’
(hereinafter referred to as MRU Act 1958) shall prevail
over I&B Code 2016. In other words, whether a Corporate
Debtor who is enjoying the benefit of MRV Act, can be
subjected to I&B Code 2016? and
3. Whether in a case where Joint Lender Forum (JLF) have
 reached agreement and granted permission to the
Corporate Debtor prior consent of JLF is required by
financial creditor, before filing of an application under
Section 7 of the I&B Code 2016?

‘adjudicating authority’ having satisfied on all counts, including

default and that the application is complete and that there is no
disciplinary proceeding pending against the Insolvency Resolution
Decision Professional, no interference is called for against the impugned
judgment. And it does not find any merit in this appeal. It is
accordingly dismissed. However, in the facts and circumstances,
there shall be no order as to cost.

Key highlights of the Supreme Court Judgement

Both NCLT and NCLAT had views that the Code and the Maharashtra Act operate in different fields and,
therefore, are not repugnant to each other. Having recorded this, however, the NCLAT went on to hold
that the appellant cannot derive any advantage from the Maharashtra Act to stall the insolvency resolution
process under Section 7 of the Code.

 On 16th January, a second application was filed by the appellant in which a different plea was
taken. This time, the appellant pleaded that owing to non-release of funds under the MRA, the
appellant was unable to pay back its debts as envisaged. But by a separate order dated
23rd January 2017 passed by NCLT, in which a clarification application was dismissed, it was
held that the second application of 16th January 2017 was raised belatedly and would not be
maintainable for two reasons – (1) because no audience has been given to the corporate debtor in
the Tribunal by the Code; and (2) the corporate debtor has not taken the plea contained in the
second application in the earlier application. This was because a limited timeframe of only 14
days was available under the Code from the date of filing of the creditors’ petition, to decide the
application.
 In this view of the matter, Supreme Court considered view that the Tribunal and the Appellate
Tribunal were right in admitting the application filed by the financial creditor ICICI Bank Ltd.

The date of declaration of Moratorium under section 13 of IBC 2016 for Innoventive Industries Ltd is 17
January 2017, wherein the powers of the existing Board of the Company are automatically suspended and
the Insolvency Professional, Mr. Dhinal A. Shah is vested with such powers. It is interesting to note that
in the wake of such moratorium, the Insolvency Professional has signed the Results for the year ended
March 31, 2017. Whereas in case of annual results of ABG Shipyard Ltd (which is also presently facing
insolvency proceedings) are not signed and approved either the Board or Insolvency Professional during
moratorium period. Hence there are two stands taken in the same case by both the Insolvency
Professionals.

The much debated question with respect to the interpretation of what amounts to "existence of a dispute"
has been finally answered by the Supreme Court in the (Mobilox vs. Kirusa) judgment. The interpretation
of "existence of dispute" was seen in the context of initiation of CIRP of corporate debtors under the
Insolvency and Bankruptcy Code, 2016.
The Corporate Insolvency Resolution Process (CIRP) can be initiated by the operational creditor in cases
of payment default, through an application filed in the NCLT. Prior to such application, a demand notice
(demanding the payment of the amount) needs to served upon the corporate debtor under Section 8 (1) of
the Insolvency and Bankruptcy Code, 2016.

FACTS

The appellant (Mobilox) was engaged in a Star TV program "NachBaliye" conducting telephonic voting
mechanism. The appellant engaged the respondent company (Kirusa) for providing various services
relating to the TV program, and the parties also executed a non-disclosure agreement. The NDA
stipulated certain conditions such as confidentiality obligations towards Mobilox. During the time period
Kirusa raised necessary monthly invoices for the rendered services. However, Mobilox informed Kirusa
about the payments that were subsequently withheld due to breach of the NDA obligations.

Kirusa senta demand notice to Mobiloxunder Section 8 of the Insolvency and Bankruptcy Code, due to
non- payment. Mobilox's response to the demand notice stated that there was a bona fide and serious
dispute between the parties, inclusive of the breach of obligations mentioned under the NDA.

ISSUE
What is the scope and ambit of the terms “dispute” and “existence of dispute” for determining the
maintainability of an application filed by an Operational Creditor under the Code?

NCLT

Kirusa subsequently filed an application before the NCLT, Mumbai under section 9 for the initiation of
Corporate Insolvency Resolution process (CIRP) of Mobilox. NCLT rejected the application on the
grounds that Mobilox had issued a notice of dispute to the operational creditor.

NCLAT

An appeal against the order of NCLT was subsequently filed by Kirusa stating that mere dispute to the
demand notice by the operational creditor does not amount to a valid ground for rejection of application
under Section 9 of the 'I & B Code'. The question before the Appellate Tribunal was with respect to the
clarification of meaning of "dispute" and "existence of dispute" for the purposes of application under
Section 9 of the Insolvency and Bankruptcy Code.

Section 8 provides for the requirements which should be complied with prior to filing an application
under Section 9 of 'I & B Code'.

Under Section 8 (2) of the I & B Code, once the demand notice is served upon the corporate debtor by the
operational creditor, the corporate debtor needs to inform the creditor about the payment of the debt or
dispute if any, within 10 days of receiving the notice.

Section 9 enshrines the right to file an application for the initiation of corporate insolvency resolution
process after the expiry of 10 days from the date of delivery of demand notice.
 NCLAT allowed Kirusa's appeal on the groundthat the reply to the Demand Notice by the Mobilox
cannot be seen within the purview of Section 8(2) and Section 5(6) of the Insolvency and Bankruptcy
Code. It stated that the defense raised by Mobilox was vague and motivated as the debt demanded was not
in connection with the non-disclosure agreement. Further NCLAT stressed upon the interpretation of
"dispute" stating the a dispute would not be limited to only arbitration proceedings or suits but shall
include any proceedings initiated before any tribunal, consumer court, labour court etc.

JUDGMENT
The Supreme Court considered questions raised as to the triggering of the Code when it comes to debts
owed to operational creditors and as to what would constitute a ‘dispute’ entitling the debtor company to
have the Adjudicating Authority reject the application.
Legislative intent
The Supreme Court first set out to understand the object and legislative intent behind the provisions of the
Code pertaining to the issue of an ‘existence of a dispute’, and accordingly undertook a comparative study
of the Insolvency and Bankruptcy Bill 2015 (“2015 Bill”) and the various committee reports leading up to
it, with the final version of the Code to analyze the discrepancies in what was originally in the 2015 Bill
and what came to be finally included in the Code.

2015 Bill The Code Court’s Inference

Section 5(4) of the Bill annexed toSection 5 (6) In light of the fact that the
the Bankruptcy Law Reforms word “bona fide” has been
“dispute” includes a suit or
Committee Report deleted from the Code, and
arbitration proceedings relating
the fact that the word
“dispute” means a bona fide suitto – (a) the existence or the
“means” has been
or arbitration proceedings relatingamount of debt; (b) the quality
substituted with the word
to – (a) the existence or the amountof goods and service; or (c) the
“Includes”, the definition
of debt; (b) the quality of goodsbreach of a representation or
of “Dispute” was intended
and service; or (c) the breach of awarranty [Emphasis supplied]
to be an inclusive
representation or warranty
definition.
[Emphasis supplied]
Since in its present avatar,
Section 5(6) excludes the
expression “bona fide”
which is of significance, it
is difficult to import the
expression “bona fide” into
Section 8(2)(a) in order to
judge whether a dispute
exists or not

Placing reliance on various judgments, the Supreme Court went on to observe that the word “and”
occurring in Section 8(2) (a) must be read as “or” keeping in mind the legislative intent. This is
permissible when done in order to further the object of the statute and/or to avoid an anomalous situation
which would arise when:
1. If read as “and”, disputes would stave off the bankruptcy process only if they are already pending in a
suit or arbitration and not otherwise. Such a scenario would lead to great hardship; in that the dispute
may arise a few days prior to the triggering of the CIRP and that parties may not have had time to
approach an arbitral tribunal or a court yet.
2. Given that limitation periods of up to 3 years are allowed until a person actually approaches a court or
an arbitral tribunal to pursue legal remedies, such persons would fall outside the purview of Section
8(2) leading to CIRP commenced against them. Such an anomaly, the Supreme Court held, could not
have been intended by the legislature.
Threshold
The Supreme Court held that once an operational creditor has filed an Application, which is otherwise
procedurally complete, the Adjudicating Authority has to consider the following;
1. Whether there is an “operational debt”, as defined under the Code, which exceeds INR 100,000;
2. Whether the documentary evidence furnished with the application shows that the aforesaid debt is due
and payable and has not yet been paid; and
3. Whether there is existence of a dispute between the parties or the record of the pendency of a suit or
arbitration proceeding filed before the receipt of the demand notice of the unpaid operational debt in
relation to such dispute;
While determining the third point above, the Supreme Court stated that all that the Adjudicating
Authority must see is whether there is a plausible contention which requires further investigation and that
the “dispute” is not a patently feeble argument or an assertion of fact unsupported by evidence.
Interestingly, while the Court was of the view that it is important to separate the grain from the chaff and
to reject a spurious defense which is mere bluster, it held that the Adjudicating Authority need not go into
the merits and satisfy itself that the defense is likely to succeed at this stage of the proceeding.
Basis the above, the Supreme Court allowed the appeal and set aside the order of the NCLAT.

ANALYSIS
There has been a spurt of jurisprudence on the meaning of the term ‘dispute’ so far this year wherein
different Adjudicating Authorities have adopted different and sometimes conflicting interpretations,
varying from the strictest to the most liberal and inclusive forms. This is the first time the Supreme Court
has taken up the issue and provided much needed clarity to debtor companies who may have a genuine
dispute regarding the debt but may not have yet initiated legal proceedings in lieu of the same.
The Supreme Court has clarified that the object of the Code coupled with the legislative intent qua
operational debts is to ensure that the amount of such debts, which is usually smaller than that of financial
debts, does not enable operational creditors to put the debtor companies into the CIRP prematurely or for
extraneous considerations. Thus, the Court has attempted at striking a balance between the rights of an
operational creditor vis-à-vis the remedy available to the debtor company.
The Supreme Court has also taken the opportunity to reiterate the importance of strict adherence to the
timelines as set out in the Code being of essence to the insolvency resolution process.

Earlier this month, the Supreme Court of India (the "SC") passed a much-awaited judgment1 concerning
the eligibility of resolution applicants for Essar Steel India Limited ("Essar Steel"). This article discusses
the SC verdict, which not only interprets Section 29A of the Insolvency and Bankruptcy Code, 2016 (the
"Code") in depth, but also sheds light on certain ambiguities relating to its applicability.

Section 29A was introduced in the Code to broadly prevent persons whose misconduct contributed to the
default of the corporate debtor or those who were otherwise undesirable, from gaining control of the
corporate debtor.
Commentators have been divided over the intent and practicality of Section 29A, in particular, in the
context of the interpretational complexity inherent within it. Pursuant to the introduction of Section 29A,
considerable litigation has been filed in relation to the eligibility of resolution applicants, leading to
delays in the resolution process of insolvent entities, undermining the intent of the Code.

2. BACKGROUND

In this particular case, the resolution professional (the "RP") for Essar Steel, after analyzing the resolution
plans submitted by Numetal Limited ("Numetal") and Arcelor Mittal India Private Limited ("AMIL")
(collectively, the "Resolution Applicants"), disqualified both by declaring them to be ineligible in view
of Section 29A of the Code. Following the RP's decision, in April 2018, the Ahmedabad bench of the
National Company Law Tribunal (the "NCLT")2 concurred with the decision to disqualify the Resolution
Applicants.

One of the shareholders in the case of Numetal was Rewant Ruia whose father, Ravi Ruia was a promoter
of Essar Steel (the "Promoter"). It was pertinent to further note that the account of Essar Steel was
classified as a non-performing asset (an "NPA") for a period of more than 1 (one) year prior to the
commencement of the insolvency resolution process of Essar Steel. Further, the Promoter had also issued
a guarantee in favour of the creditors of Essar Steel. Therefore, Numetal was held ineligible in view of
Section 29A (c) and Section 29A (h) of the Code.

On the other hand, AMIPL was held to be ineligible under Section 29A (c) of the Code, as ArcelorMittal
Netherlands ("AM Netherlands") was found to have been the promoter or exercised control over two
companies namely, Uttam Galva Steels Limited ("Uttam Galva") and KSS Petron Limited ("KSS
Petron"), whose accounts were classified as an NPA for more than 1 (one) year prior to the
commencement of the insolvency resolution process of Essar Steel.

Contrary to the decision of the NCLT, the National Company Law Appellate Tribunal (the
"NCLAT")3 agreed with the disqualification of AMIPL, but came to a different conclusion regarding
Numetal. This was because Rewant Ruia had by then divested his interest in Numetal in favour of a third
party.

Thereafter, AMIPL approached the SC against the decision of the NCLAT. The SC, close to the heels of
the order by NCLT, held that both the Resolution Applicants were disqualified from submitting resolution
plans as the plans submitted by them were in contravention of Section 29A of the Code. However, the SC
exercised its' extraordinary power under Article 142 of the Constitution of India to give the Resolution
Applicants one final opportunity. They were asked to clear any outstanding dues regarding their NPA
accounts within 2 (two) weeks of the SC verdict.

Certain arguments advanced on behalf of AMIPL to render it eligible, included the disposal of its'
shareholding in KSS Petron and Uttam Galva, the deposit of approximately INR 7,000 crores
(approximately USD 950,000,000) into an escrow account in relation to the overdue amounts of Uttam
Galva and KSS Petron, declassification of AM Netherlands as the promoter of Uttam Galva, no appointed
director on the board of Uttam Galva and no liability under any bank guarantees in relation to
indebtedness of either entity.

On the other hand, it was argued on behalf of Numetal that it should be eligible to be a resolution
applicant, since Rewant Ruia, who was deemed to be acting in concert with the Promoter, had exited
Numetal before the submission of the second round of bids and hence, he did not fall within the ambit of
'control', 'promoter' or 'managing director', which would otherwise, disqualify Numetal from being a
bidder. However, the bank guarantee issued by the Promoter in favour of one of Numetal's creditors was
still valid, essentially disqualifying Numetal under section 29A(h) of the Code.

3. KEY ASPECTS ADDRESSED BY THE SC

3.1 Ingredients of Section 29A of the Code

(a) Lifting of the corporate veil

The SC invoked the principle of 'lifting the corporate veil' to determine the ineligibility of the applicant
submitting a resolution plan. After analyzing the jurisprudence on the principle of the corporate veil, the
SC laid down that:

"where a statute itself lifts the corporate veil, or where protection of public interest is of paramount
importance, or where a company has been formed to evade obligations imposed by the law, the court will
disregard the corporate veil. Further, this principle is applied even to group companies, so that one is
able to look at the economic entity of the group as a whole."4

Hence, applying this principle to the facts of the present case, the SC reasoned that the statute itself
contained language of wider import intending to implicate all the persons who may act arm-in-arm with
the person submitting the resolution plan.

Further, it was held that it was imperative to bring to light all the real entities or individuals who have set
up such a corporate vehicle for submission of a resolution plan. Concluding, the SC negated the
applicability of a well-settled principle: "that a shareholder is a separate legal entity from the company in
which he holds shares" as enshrined in the case of Saloman v. A. Saloman and Co. Ltd.5 to the facts of
this case.

(b) Management and control

It is pertinent to note that sub-clause (c) of Section 29A contains a specific disqualification which states
that a person is ineligible to bid for an insolvent company if:

"it has an account, or is in management or control, of a corporate debtor whose account has been
classified as a NPA for a period of at least one year from the date of such classification until the date of
commencement of the corporate insolvency resolution process."

The SC stipulated that any of the three elements, namely that: (a) the corporate debtor may be under the
management of the person mentioned in section 29A; or (b) under the control of such person; or (c) may
be a person of whom such person is a promoter needs to be established for the applicability of Section
29A (c).

In the present case, the SC engaged in a detailed discussion regarding the element of 'control' and whether
'control' referred only to positive control or whether it also included the power to block special resolutions
of a company.

In this context, the SC discussed the case of Subhkam Ventures (I) Private Limited v. Securities and
Exchange Board of India6, wherein the Securities Appellate Tribunal held that the expression 'control'
covers proactive or positive power as opposed to a mere reactive or negative control.
Accordingly, the SC concluded that the two words 'management' and 'control' take colour from each
other, based on which the principle of 'noscitur a sociis7' should be applied. In view of this, it surmised
that sub-clause (c) of Section 29A referred only to positive control, as opposed to the expansive reading of
section 2(27) of the Companies Act, 2013, which may cover negative control as well. With respect to
'management', the SC held that the expression referred to the de jure management of the corporate debtor,
which ordinarily vests in the board of directors of the company.

On that account, it becomes clear that a person is said to be exercising 'control' in cases where it creates or
commands a situation by taking an initiative, controls the management or policy decisions of a company
or appoints a majority of the directors. On the other hand, if such person prevents the company from
doing an act, that cannot be regarded as exercising 'control' within the meaning of section 29A(c).

3.2 Strict compliance of timelines under the Code

The SC in the present case, relied upon its own jurisprudence laid down in Innoventive Industries Limited
v. ICICI Bank8 and accordingly observed that the consequence of not adhering to strict timelines as
prescribed under the Code, was the liquidation of the corporate debtor. Further, it shed light on its' 3
principal conclusions discussed below.

First, the SC elaborated on the role and duties of the RP, laying down that the RP has no judicial
authority and hence, it is not its' duty to determine the legality of bids. Its' responsibility is to form
a prima facie opinion based on facts presented to it, ensuring that all the essentials of a resolution plan are
fulfilled. Further, it noted that the RP is required to prepare a due diligence report for the Committee of
Creditors (the "CoC") stating whether the resolution plan is in order. Hence, it concluded by observing
that "the role of the professional is only to 'examine' and 'confirm' that each resolution plan conforms to
what is provided in Section 30(2)".

Second, the SC made it explicit in the judgement that the NCLT or any other adjudicating
authority cannotintervene until the RP finalizes its' proposals and the CoC makes a final call on the bids.
Therefore, it becomes clear that no application by any resolution applicant before the adjudicating
authority will be considered, until the finality of the decisions by the RP and the CoC. Further, the SC
held that a writ petition filed before a High Court would also be turned down on the grounds that no right,
much less a fundamental right, is affected at this stage. Consequently, it is only after the CoC discovers
that a resolution plan contravenes section 29A, that the resolution applicant can challenge the order before
the NCLT and thereafter, the NCLAT, which may then determine the question quasi-judicially.

Third, the SC having reasonably construed the statute, observed that litigation which involves a stay
owing to a substantive issue in the corporate insolvency resolution process, ought to be excluded from the
270-day timeline as prescribed under the Code to facilitate a resolution plan. On the other hand, litigation
on procedural matters, which do not necessarily stay the insolvency resolution process, need to be
included in the 270-day timeline.

Insolvency and Bankruptcy Code, 2016

INSOLVENCY OF BINANI CEMENT - A CASE STUDY

IN THE NATIONAL COMPANY LAW APPELLATE TRIBUNAL, NEW DELHI

Binani Industries Limited VS.Bank Of Baroda And Anr.

[company appeal (at) (insolvency) no. 82 of 2018]dated: 14.11.2018

DETAIL OF APPEALS WITH NCLAT

In this case, following appeals were filed with the NCLAT:

Company Appeal No. 82, arising out of order dated 28th February, 2018, passed by NCLT, Kolkata

The NCLT referred the application back to the Resolution Professional (RP) to re-consider in accordance
with the Rules and Regulations of the IBC.

This led Binani Cement Limited to prefer an appeal.

Company Appeal No. 123, arising out of order dated 27th March, 2018, passed by NCLT, Kolkata.

Liberty was granted to the COC to consider the settlement plan proposed by the Binani Industries
Limited.

Hence, Rajputana Properties Private Limited preferred an appeal against the abovementioned order.

Company Appeal No. 188, arising out of order dated 2nd May 2018, passed by NCLT, Kolkata

The Resolution plan submitted by Rajputana Properties Pvt. Ltd. was not accepted by the NCLT for
reasons mentioned in the order.

Therefore, Rajputana Properties Private Limited preferred an appeal before the Honorable NCLAT.

Company Appeal no. 216, arising out of order dated 2nd May 2018, passed by the NCLT, Kolkata

The Adjudicating Authority refused to accept the proposal of Binani Industries Limited for repayment of
dues of the Financial Creditors and close the CIRP in on the ground that there was no jurisdiction.

This led to Binani Industries limited preferring the present appeal.

Company Appeal no. 234, arising out of order dated 4th June 2018, passed by the NCLT, Kolkata

Adverse observations were made by the NCLT against the Resolution Professional (RP) Mr. Vijay Kumar
Iyer.

The RP has thus, filed the present appeal with the NCLAT.

All the appeals were clubbed and decided together.

FACTS
The meeting was held on 14th March, 2018 with 99.43% of the Committee of Creditors (COC) approving
the Resolution plan that was submitted by Rajputana Properties Private Limited.

However, 10.53% of the COC who were forced to vote in favour of the 'Resolution Plan' recorded a
protest note. They alleged that they had not been dealt with equitably when compared with other
Financial Creditors who were the Corporate Guarantors of the Corporate Debtor.

Hence, an application was filed by the RP under Section 30 and 31 of the IBC r/w Regulation 39 of the
Insolvency and Bankruptcy Board of India Regulations, 2016 for approval of the Resolution Plan in
Binani Cement Limited.

The Resolution Plan of Rajputana Properties Pvt. Ltd. envisaged that the Financial Creditors such as,
'Edelweiss Asset Restructuring Company Limited', 'IDBI Bank Limited', 'Bank of Baroda', 'Canara Bank',
'Bank of India', State Bank of India' would be given 100% of the verified claim whereas lesser percentage
was proposed for the claims of other Financial creditors such as Export-Import bank of India (72.59%)
and State Bank of India-Hong Kong (10%).

Further with respect to the Operational Creditors (other than workmen), it was observed that 'unrelated
parties' were provided with 35% of their verified claim which is about Rs. 90 Crores. However, 'related
parties' were not made entitled to any amount.

The Tribunal agreed to the contentions that there was prima facie discrimination in the Resolution Plan
submitted by Rajputana Properties.

Therefore, the NCLT held that the Resolution Plan submitted by Rajputana Properties Pvt. Ltd was
discriminatory and contrary to the scheme of I&B Code and while rejecting the same, directed the COC to
consider other Resolution plans including the revised plan submitted by Ultratech Cement Ltd.

ISSUES BEFORE NCLAT

The issues for consideration before the Appellate Tribunal were:

 Whether the Committee of Creditors discriminated between the eligible Resolution Applicants
while considering the Resolution Plan of Rajputana Properties Private Limited.

 Whether the Resolution Plan submitted by Rajputana Properties Private Limited was
discriminatory and in contravention to the provisions of the I&B Code.

OBSERVATION

NCLAT while deciding this case, summarized the object of the I&B Code and the Object of a Resolution
Plan.

OBJECTIVE OF THE 'I&B CODE'

The main objective of the Code is of reorganisation and insolvency resolution of corporate persons in a
time bound manner for maximisation of value of assets of such persons to promote entrepreneurship,
availability of credit and balancing the interest of all stakeholders.
The recent Ordinance explicitly aims to promote resolution over liquidation.

The objective of the Code can be summarized as below:

 Resolution
 Maximisation of Value of Assets
 Promoting Entrepreneurship, availability of credit and
 Balancing the interests.

OBJECTIVE OF RESOLUTION PLAN

The I&B Code defines Resolution Plan as a plan for insolvency resolution of the Corporate Debtor as a
going concern.

A Resolution Plan must resolve insolvency i.e. should maximise the value of assets of the 'Corporate
Debtor', and should promote entrepreneurship, availability of credit, and balance the interests of all the
stakeholders.

Resolution is not a sale or an auction, or a recovery or liquidation; it is the resolution of the Corporate
Debtor as a going concern.

Therefore, while reviewing the I&B Code and under the facts & circumstances of the present case, the
NCLAT observed that a better proposal for negotiation was submitted by Ultratech Cement Limited
which was not even considered even though it was submitted on 8th March 2018, which was much prior
to the approval of the plan (14th March, 2018).

The COC, in its defence, resorted to the following pleas:

 First: The revised offer given by Ultratech Cement Limited was merely an e-mail with an offer.
 Second: The offer was not made in accordance with the 'process document' and if it would have
been considered, then it would have been a deviation from the process laid down in the 'process
document' by the COC itself.
 Third: The offer was beyond the time as stipulated under the I&B Code.

However, the NCLAT rejected the above pleas by stating that the COC failed to safeguard the interest of
the stakeholders of the Corporate Debtor while approving the Resolution plan submitted by Rajputana
Properties Private Limited.

Further, the COC erred in ignoring the revised Resolution Plan offered by Ultratech Cement Limited
which had taken care of maximization of the assets of the Corporate Debtor and also balanced the claim
of all the stakeholders of the Corporate Debtor.

The NCLAT also went on to hold that:

"Submission of revised offer is in continuation of the Resolution Plan already submitted and accepted
by the Resolution Professional."
Ultratech Cement Limited had submitted its revised plan on 12th February, 2018 i.e. within the stipulated
time. Thereafter, it was further revised and was submitted on 8th March, 2018 and therefore, the COC had
enough time to notice and scrutinize the offer.

In this case, the COC accepted the revised offer submitted by Rajputana Properties Private Limited on 7th
March, 2018 and refused to accept the revised offer submitted by Ultratech Cement Limited on 8th
March, 2018 which is clearly arbitrary on the COC's part.

Therefore, the NCLAT while reviewing the process documents and the I&B Code held that:

"all the 'Resolution Plans' which meet the requirements of Section 30(2) of the IBC are required to be
placed before the COC and the RP can review the 'Resolution Plan' and the 'Committee of Creditors' is
entitled to negotiate and modify with consent of the 'Resolution Applicant'. To apply this clause there is
no time limit prescribed except that the 'Resolution Process' should be completed within 180 days or
maximum 270 days."

NCLAT further observed that, "Non-application of mind by the COC and discriminatory behaviour in
approving the plan submitted by the 'Rajputana Properties Private Limited' is apparent."

The Authority also observed fraudulent transactions made by 'Binani Industries Limited' between 1st July
2015 to 30th November 2017 amounting to Rs. 1,187 Cr. However, these transactions have no connection
to the Ultra Tech Cement hence no issue has been raised."

CONCLUDING VIEW

The Company Appeal (AT) (Insolvency) Nos. 123 & 188 of 2018 preferred by Rajputana Properties
Private Limited and Company Appeal (AT) (Insolvency) Nos. 82 & 216 of 2018 preferred by'Binani
Industries Limited were dismissed.

The Company Appeal (AT) (Insolvency) No. 234 of 2018 preferred by RP was allowed and the
observations made against Mr. Vijay Kumar Iyer were set aside.

Records of Company Petition (IB) No. 359/KB/2017 were remitted to the Adjudicating Authority for
constitution of the monitoring committee and implementation of revised approved plan submitted by
Ultratech Cement Limited in accordance with law.

AFTER THE ORDER OF NCLAT:

The COC after duly following the orders of the Adjudicating Authority and this Appellate Tribunal
approved the plan submitted by Ultratech Cement Limited with majority vote.

Meanwhile, the Dalmia Bharat Group (of Rajputana Properties) moved to the Supreme Court
challenging the NCLAT's approval for the transfer of Binani Cement Ltd. to UltraTech Cement Ltd.

The Supreme Court on 19th November, 2018, dismissed Dalmia Bharat's plea to seek stay on Ultra
Tech's bid for Binani Cement.

AMLEGALS. REMARKS
The present case can be held as a landmark decision by NCLAT as the decision focused to extract
maximum value from resolution of stressed assets and ensure that interests of operational creditors
(who are not part of COC) are also well served.

The NCLAT ruling that has held Dalmia's plan as 'discriminatory' has simultaneously also opened up a
Pandora's Box on the grounds on which the Appellate Authority can reject a resolution plan.

We believe that the objective of the IBC was to provide a resolution process rather than to prefer
liquidation, in a time bound manner for maximization of value of assets of such persons to promote
entrepreneurship, credit availability and to balance the interest of various stakeholders.

It is equally pertinent to note that our IBC is based on the UK model and the main intention is that the
company should be pushed as a going concern during CIRP but shutting it down and opting for
liquidation is the last resort under the compulsion of IBC.

Further, there is a dire need of better mechanism and guidelines for regulating fair COC meetings and
actions as it may not only save time of CIRP and the adjudicating authority's (NCLT) efforts but also will
result into a better and efficient CIRP.

Above all, the real intent and purport of IBC should not be frustrated due to any lacuna left at any end as
after all balance has got to be maintained between all the stakeholders.

Swiss Ribbons

Introduction

“The defaulter’s paradise is lost. In its place, the economy’s rightful position has been regained.”

The Insolvency and Bankruptcy Cody, 2016 [“the Code”] received the official sanction[i]recognizing its
constitutional tryst in entirety in quite a significant verdict. We still remember the packed courtroom to
hear the amusing and intelligent arguments of the virtuoso lawyers. IBC, a landmark aspired by high-
ranked officials for improving the financial structure of the country (seeI do as I doby Raghuram G. Rajan
and Of Counselby Arvind Subramanian) has sustained the constitutional scrutiny. It is worth mentioning
that the judgment is beautifully written and structured. Though at certain places one might feel less
satisfied with the restricted reasoning of the Court, however, such concession can be granted for the
Court’s recognition of limited judicial review in economic matters at the outset of the judgment. Here, we
endeavour to present a brief overview of the judgment spiced with our critique.

The Case

The Court has tried to establish the premise behind its reasoning and exercising judicial restraint by
considering the fall of Lochnerdoctrine (practice of the US Supreme Court to declare the socio-economic
legislations as unconstitutional using the ‘due process’ clause) in the US, which initiated with the dissents
of Justice Holmes and Justice Brandeis of the U.S. Supreme Court. As per Justice Holmes’ dissenting
opinion in Lochner v. New York[198 U.S. 45 (1905)]:
“The courts do not need to substitute their social and economic beliefs for the judgment of legislative
bodies, who are elected to pass laws.”

Further, the Court relied on its own judgment in R.K. Garg v. Union of India[ii]to hold that the laws
relating to economic activities should be viewed with greater latitude as compared to laws relating to civil
rights. As there is no straitjacket formula to solve an economic problem, the legislature will employ trial
and error method to find solution of such problems. The Court, therefore, should exercise judicial restraint
in interfering with legislations like the Code, and question the constitutionality only when such
legislations are ‘palpably arbitrary, manifestly unjust and glaringly unconstitutional’.

The Court, after establishing the premise behind presuming the constitutionality of the court, delved into
the objects underlined the Code – to bring the insolvency law in India under a single unified umbrella, to
speed up the insolvency process and to ensure revival and continuation of the corporate debtor. Prior to
the Code, the insolvency matters were dealt by multiple fora under various laws such as Sick Industrial
Companies (Special Provisions) Act, 1985; the Recovery of Debts Due to Banks and Financial
Institutions Act, 1993; the Securitization and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002; and the Companies Act, 2013.

The petitioner had successfully argued that the constitution of the NCLAT, with its lone bench in Delhi,
goes against the judgment of the Court in Madras Bar Association v. Union of India[iii](2014) where it
was held that permanent benches of NCLAT have to be constituted wherever there is a seat of the High
Court, or circuit benches be constituted. The Court has ordered the Union of establish circuit benches of
NCLAT within 6 months.

Next, the petitioner argued that in Madras Bar Association v Union of India[iv](2015), it was held that the
administrative support to all the tribunals should be from the Ministry of Law and Justice; therefore, the
NCLAT should not function under the Ministry of Corporate Affairs. Though the Government cited
Article 77(3) of the Constitution and Delhi International Airport Limited v. International Lease Finance
Corporation and Ors.[v]to argue that the allocation of rules of business among various Ministries is
mandatory, the Court accepted petitioner’s claim. However, we see the existing regime, the Ministry of
Corporate Affairs deals exclusively with all the matters pertaining to the administration of companies –
the Code;[vi]the Insolvency and Bankruptcy Board of India; the Competition Commission of India; the
Companies Act, et al. Therefore, we argue that for better corporate governance, NCLT and NCLAT
should continue to function under the Ministry of Corporate Affairs only. This goes in line with the
existing setup wherein Ministries provide administrative support to their corresponding tribunals. For
instance, Department of Telecommunication administers Telecom Disputes Settlement and Appellate
Tribunal; Ministry of Environment, Forest and Climate Change administers National Green Tribunal and
Department of Revenue administers the GST Appellate Tribunal.

Next, the Court was confronted with multiple challenges related to arbitrariness, the first being the issue
of reasonable classification between financial creditors and operational creditor. At the outset, the Court
laid down a common rule of Article 14 for all such challenges – A constitutional infirmity is found in
Article 14 only when the legislation is manifestly arbitrary.The petitioners had challenged the requirement
of a demand notice to the operational debtor by the operational creditor before initiating the process under
the Code, which is absent in case of a financial debt. The Court did not uphold this argument and
distinguished the two debts as follows:

Financial Debt Operational Debt

Financial debt is given for Operational debt is generated as part
establishment of business and of a business activity owing to
keeping the business as a going exchange of goods and services,
concern in an efficient manner. including employment.
Evidence of debt is readily available
with the financial creditor and in the All operational creditors might not
records of information utilities. The have accurate account of all liabilities
information utilities are under the in verifiable form due to its recurring
duty to send notice to the debtor nature. It increases the possibility of
before recording any debt for disputed debts.
verification purposes.
It is generally given in large sum and It is given in small sum by a large
by a small number of persons. number of persons.
Sometimes, it is not secured against
It is a secured debt.
collaterals.
Here, the contracts provide a The nature of contract is different.
specified repayment schedule, Instead, defaults generally lead to
wherein defaults entitle financial initiation of dispute resolution
creditors to recall a loan in totality. process.
Due to the lack of information, the
Financial creditors are involved with
operational creditors are not in the
assessing the viability of the debtor
capacity to keep a regular check on
from the very beginning.
the viability of the business.

Additionally, the Court cited Rule 4 of the Insolvency and Bankruptcy (Application to Adjudicating
Authority) Rules, 2016; Section 420 of the Companies Act, 2013 and Rules 11, 34 and 37 of the NCLT
Rules, 2016 to establish that principles of natural justice have been upheld by obligating the creditor and
the adjudicating authority to send a notice to the debtor on acceptance of the application.

It was followed by an elegant use of interpretative mechanism to further distinguish the two. The Court
identified the meaning of the terms ‘claim’, ‘debt’ and ‘dispute’ to establish that a claim gives rise to a
debt, and a dispute occurs only when such debt becomes due and payable but is not paid by the debtor. As
the Code requires the financial creditor to prove a ‘default’, whilst the operational debtor is merely
required to prove a ‘claim’, the distinction becomes reasonable. This policy was identified as a move
away from the concept of ‘inability to pay debts’ to ‘determination of defaults’ to enable the financial
creditor to timely effectuate reconstruction based on the documentary evidences.

The next challenge of arbitrariness was regarding non-availability of voting rights to the operational
creditors in the Committee of Creditors under Section 21 of the Code. The Court upheld the provision
recognizing that as power the committee is to keep the entity as a going concern, only those persons
should be part of it who have the capability to assess the viability and willing to modify the existing terms
of liabilities, which is generally restricted to financial creditors. Alongside, the Court considered four-fold
institutional mechanism to establish that no prejudice is maintained against the operational creditors:

 The power of the significant operational creditors, whose aggregate dues is not less than 10% of
the debt, to observe the meeting;
 To be effective, the resolution plan of the Committee has to be first approved by the adjudicating
authority;
 The Code disallows implementation of any resolution plan unless it provisions for a minimum
payment to the operational creditors, being not less than the liquidation value;
 The Code mandates the payment to the operational creditors in priority to the financial creditors.
The Court considered data of 80 cases that have been resolved since the Code has been implemented to
indicate the priority given to the operational creditor.

Next up was a challenge of arbitrariness against Section 12-A of the Code which allows the withdrawal of
application from the adjudicating authority by the approval of 90% voting share of the Committee of
Creditors. The court upheld the threshold of 90% recognizing that once a proceeding is initiated, it is a
collective proceeding in rem. Therefore, any withdrawal of such proceedings has to be effectuated only
with all the financial creditors have put their heads together. Though it could be argued that ‘90%’ is a
random choice and is arbitrary, however, this does not fulfil the threshold of Article 14 – manifest
arbitrariness. The Court went on to refer to Section 60 of the Code to establish that the mechanism is free
from possibilities of unfair withdrawal as the NCLT is the final approving authority, whose decision can
be further challenged in the NCLAT.

The next challenge of the petitioners was on the information utilities itself. It was argued that they have
been established for mere profit purposes and are not properly regulated, thus, their account cannot be
treated as conclusive proof of default. The Court considered the regime of credit information companies,
followed by the information utilities to appreciate the purpose of reducing information asymmetry,
improving credit risk assessment and pace up the resolution process. The Court then considered the
Information Utilities Regulations, 2017 to appreciate the expedite mechanism for verification and
authentication of information. However, the Government conceded in favour of the petitioners, and the
Court ruled that the information is only a prima facie evidence of default, which can be rebutted.

The petitioners then challenged the adjudicatory powers of the resolution professional, a claim refuted by
the Court by the plain reading of the Code. It was held that the powers of the interim resolution
professional under Section 18 of the Code and CIRP Regulations, 2016 are merely administrative in
nature and restricted to the determination and verification of the amount of claim. It is the adjudicating
authority who can determine and effectuate the appropriate relief based on the IRP’s report. To clarify the
difference between administrative and quasi-judicial powers, the Court referred to the powers of the
liquidator under the Code. The determination of the value of claim by the liquidator is in the nature of a
‘decision’, thus an appeal lies against such determination. However, the IRP is only empowered to submit
its report for the final determination by the adjudicating authority.

It was followed by a challenge against Section 29A of the Code, which enlists certain person who are
ineligible to be a resolution applicant. The provision was inserted in the Code by the Insolvency and
Bankruptcy Code (Amendment) Ordinance, 2017 to disqualify corporate debtors, their relatives,
undischarged insolvent, one prohibited under the SEBI Act et al.from acting as resolution applicant to
facilitate effective corporate governance. The Court referred to its judgment in ArcelorMittal India
Private Limited v. Satish Kumar Gupta and Ors.[vii]to hold that the principles of Salomon v. A. Salomon
and Co. Ltd.regarding separate corporate entity cannot be applied, and all those persons who acted jointly
or in concert to drag the company to a stage of resolution, shall be disqualified from being the resolution
applicant.

The Court was then asked to analyse whether the retrospective application of some provisions of the Code
renders it unconstitutional. A statute can be construed as retrospective if its provisions operates on an
antecedent set of facts but affects a vested right. As a resolution applicant does not have any vested right
to be so appointed, the court concluded that there is no need to discuss the question of retrospectivity.

Next, the ineligibility of a corporate debtor to act as resolution applicant whose assets have been declared
as NPAs in accordance with the guidelines of the Reserve Bank of India, and remained such for the
period of one year, was challenged. The relevant guidelines declare an account as an NPA only if defaults
made by a corporate debtor are not resolved within 3 months. The Court held that if a person is unable to
service his own debt within the period of 15 months, then he cannot be allowed to allowed to become a
resolution applicant. The said grace period is a question of legislative policy, which is not worth
interfering.

The next challenge was pertaining to the restriction of related party to act as resolution professional. The
Court, applying the ‘doctrine of nexus’, held that the reason behind not allowing related parties to be a
resolution professional is the connection of such parties to the business activities or the resolution
applicant. Such connections deem them disqualified to enable the Committee of Creditors to function
independently.

Lastly, the court further held that the exemption of Micro, Small and Medium Enterprises from Section
29(A) is based on the rationale that the only interested parties in such enterprises are their promoters,
therefore, not many resolution applicants might turn up and it would lead to the liquidation of the
company. Liquidation is not in consonance with the objective of the Code.

Concluding Remarks

The judgment is a bright light in the regime of corporate governance. By upholding the constitutional
validity of the Code, the Court has validated its purpose and given more pace to the ease of doing
business-

“The objective of the Insolvency and Bankruptcy Code, 2015 is to consolidateand amend the laws relating
to reorganisation and insolvency resolution of corporate persons, partnership firms and individuals in
a time-bound mannerfor maximization of value of assetsof such person, to promote entrepreneurship,
availability of credit and balance the interests of all the stakeholders. … It would also improve Ease of
Doing Business, and facilitate more investments leading to higher economic growth and development. ”

Before parting, we appreciate the approach of the Court in drafting the judgment. The Court has resorted
to the reports of the Bankruptcy Law Reforms Committee (2016), Joint Parliamentary Committee (2016),
Insolvency Law Committee (2018) and the Statement of Objects and Reasons on multiple occasions. The
introductory speech of the Finance Minister while moving the IBC (Amendment) Ordinance, 2017 and
recommendations of the Siddiqui Working Group, 1999 on Credit Information Companies were also
resorted to once. This shows that the Court is moving from the strict interpretation mechanism to the
purposive interpretation mechanism, trying best to uphold the intentions of the legislature and increasing
synergy between the two organs of the Government. We hope that such approach continues to prevail.

[i]Swiss Ribbons Pvt. Ltd. v. Union of India, Writ Petition (Civil) No. 99 of 2018; IBC: Supreme Court Upholds Validity of
Insolvency & Bankruptcy Code,Live Law(Jan. 25, 2019).

[ii]R. K. Garg v. Union of India, (1981) 4 SCC 675.

[iii]Madras Bar Association v. Union of India, (2014) 10 SCC 1.

[iv]Madras Bar Association v. Union of India, (2015) 8 SCC 583.

[v]Delhi International Airport Ltd. v. International Lease Finance Corporation and Ors., (2015) 8 SCC 446.

[vi]Government of India (Allocation of Business Rules), 1961 as amended upto Amendment Series no. 346 dated 2 ndNov. 2018.

[vii]ArcelorMittal India Private Limited v. Satish Kumar Gupta and Ors., Civil Appeal Nos. 9402-9405/2018.
Introduction:

The five-judge Constitutional Bench of the Hon'ble Supreme Court of India vide its order dated
May 14,2015 in Madras Bar Association v. Union of India upheld the Constitutional validity of
National Company Law Tribunal (NCLT) and National Company Law Appellate Tribunal
(NCLAT). This would give a go ahead to setting up of the a Tribunal, constituted to replace the
Company Law Board (CLB), the Board for Industrial and Financial Reconstruction (BIFR) and
the Appellate Authority for Industrial and Financial Reconstruction (AAIFR).

Background and Verdict:

Vide amendment made under the erstwhile Companies Act, 1956 ("Old Act") in 2002 by
Companies (Second Amendment) Act, 2002, certain provisions relating to NCLT and NCLAT
were incorporated under Part 1B and 1C.

The constitutional validity of these provisions was challenged in a writ petition filed by the
Madras Bar Association ("MBA") in the Madras High Court. However, at the same time, the
High Court pointed out certain defects in various provisions of Part 1B and Part 1C of the Old
Act, declaring that those provisions, as existed, offended the basic constitutional scheme of
separation of powers, and it was held that unless these provisions are appropriately amended by
removing the defects which were also specifically spelled out, it would be unconstitutional to
constitute NCLT and NCLAT to exercise the jurisdiction which is being exercised by the High
Court or the CLB.

A further appeal by Union of India as well as MBA was filed against the Judgment of Madras
High Court which was decided by the Constitution Bench. The same was filed as MBA felt
aggrieved by the part of the judgment vide which establishments of NCLT and NCLAT was held
to be constitutional, whereas the Union of India felt dissatisfied by the other part judgment where
provisions contained in part 1B and 1 C of the Old Act was perceived as suffering from various
legal and constitutional infirmities. The said appeals were disposed by partly allowing them via
Union of India v. R Gandhi, President, Madras Bar Association, [2010] 11 SCC 1 popularly
known as Judgment 2010 whereby it was held that:

 Creation of Tribunal and vesting in them, the powers and jurisdiction exercised by the
High Court in regard to company law matters, were not unconstitutional.
 Parts 1B and 1C of the Act were found to be unconstitutional; however, they may be
made operational by making suitable amendments.

Though the verdict came in the year 2010, upholding the creation of NCLT and NCLAT, these
two bodies could not be created and made functional immediately thereafter.

Pursuant to the observations of the Supreme Court in the aforesaid case, the requisite changes
were introduced to the scheme of NCLT under the new Companies Act, 2013 ("Act, 2013").

However, another round of litigation ensued inter alia on the ground that notwithstanding
various directions given in Judgment 2010, the new provisions in the Act, 2013 are almost on the
same lines as were incorporated in the Act, 1956 and, therefore, these provisions suffer from the
vice of unconstitutionality.

Hence, the current ruling of the Supreme Court is essentially an effort to examine the provisions
of the 2013 Act and to consider whether it faithfully adheres to its previous ruling in Judgment
2010. While the court finds that the 2013 Act broadly does so, it also identifies some
discrepancies.

In this light, the Court pronounced its ruling on three principal issues:

1) Validity of the constitution of NCLT and NCLAT

On this issue, the Court essentially reverberates its decision in R. Gandhi on the ground that all
arguments pertaining to constitutionality were already addressed by the Court in that case and it
"specifically rejected the contention that transferring judicial function, traditionally performed by
the Courts, to the Tribunals offended the basic structure of the Constitution".

2) Qualifications and Other Terms of the President and Members of the NCLT as well as
Chairman and Members of NCLAT

In order to empower CJ H. L. Dattu's emphasis on the principles of independence of judiciary

and separation of powers, the following order was passed with respect to "Principal issues (ii)
and (iii)". The first order was to hold Section 409(3)1 (a) and (c) of the Companies Act, 2013 as
invalid, since these provisions suffered from unconstitutionality. Likewise, Section 411(3) 2,
which provided for qualifications of Technical Members, was also held invalid. Simultaneously,
para 120 of 2010 Judgment will have to be scrupulously followed in respect of the appointment
of Technical members to the NCLT.

Also, only officers who are holding the ranks of Secretaries or Additional Secretaries alone can
be considered for appointment as Technical members of the National Company Law Tribunal
and only persons having ability, integrity, standing and special knowledge and professional
experience of not less than fifteen years in industrial finance, industrial management, industrial
reconstruction, investment and accountancy, may however be considered as persons having
expertise in rehabilitation/ revival of Companies and therefore, eligible for being considered for
appointment as Technical Members.

3) Structure of the Selection Committee for appointment of President /Chairperson

/Members.

The 2013 Act provided for a 5-member committee without a casting vote to the Chief Justice of
India (or nominee) which was found at fault by the Constitution Bench in 2010 judgment. The
Court specificallyremarked that instead of 5 member Selection Committee, it should be 4member
Selection Committeeand even the composition of such aSelection Committee was mandated in
Direction No.(viii) of para 120 of 2010 Judgment.
Hence, with the new insertions and directions provided by the Court, it is observed that the
Selection Committee shall broadly be on the following lines:

(a) Chief Justice of India or his nominee – Chairperson (with a casting vote);
(b) A senior Judge of the Supreme Court or Chief Justice of High Court – Member;
(c) Secretary in the Ministry of Finance and Company Affairs - Member; and
(d) Secretary in the Ministry of Law and Justice -Member.

However, now, in the new round of litigation, more provisions have been struck down. The
present Judgment indicated that the legal hurdles for setting up the Tribunals are far from over.
While concluding the Judgment, the court observed that since the functioning of these Tribunals
has not started yet and it's high time that they start functioning now without any further delay,
therefore the government has been asked to modify the rules according to the recommendations
made in the Judgment at the earliest.

Implications

By this Judgment, the Supreme Court has not only paved the way for the establishment of the
NCLT, but it may also potentially lead to the notification of the remaining sections of the 2013
Act so as to make the entire legislation effective.

At a broader level, this development is significant as it might likely alter the face of corporate
litigation in India. While matters such as amalgamations, winding-up, and similar cases being
taken out of the regular Court system, one can expect greater efficiency in resolution of corporate
disputes. Similarly, the most-discussed class action mechanism could potentially alter corporate
behavior.The establishment and constitution of NCLT and NCLAT as exclusive Tribunals for
the administration of all matters arising out of the Companies Act will definitely reduce, if not
wipe out the grave delay involved in the company law proceedings, avoid multiplicity of
litigation before various forums, streamline the process of appeal and reduce the burden on High
Courts.

Footnotes

1. Section 409: Qualification of President and Members of Tribunal

2. Section 411: Qualifications of chairperson and Members of Appellate Tribunal

The content of this article is intended to provide a general guide to the subject matter. Specialist
advice should be sought about your specific circumstances.
 ROLE OF THE INSOLVENCY AND BANKRUPTCY BOARD OF INDIA

A. Insolvency and Bankruptcy Board of India

1. Provisions under the Insolvency and Bankruptcy Code, 2016

Board can make regulations under Section 240 of the Code.

 188- Establishment and Incorporation of the Board

[Same as elsewhere, common seal, perpetual succession, right to sue and be sued, acquire
hold dispose of property, enter into contract]
 189- Constitution of the Board
Chairperson
3 members from MoF, MoCA and MoL[not below the rank of Joint Secretary or
equivalent]- Ex officio
1 from RBI- ex officio
5 nominated by the Central Government; at least three to be WTM
[ability, integrity, standing][problems relating to insolvency or bankruptcy, law, finance
economics, accountancy or administration]
[For appointment of Chairperson and other non exofficio member selection committee-
Cabinet Secretary [chairperson], Secretary to the Govt of India to be nominated by the
Central Govt, Chairperson of the IBBI, three experts from the field of finance, law,
management, insolvency and related subjects, to be nominated by the CG]
Tenure- Chairperson and non ex officio- 5 years or 65 years of age
 190- Removal from Office
Undischarged bankrupt
Physically or mentally incapable
Offence of moral turpitude
Abuse of office against public interest
 191- Chairperson for the General direction and superintendence over the affairs of the
Board
 192- Meeting of the Board
 196- Powers and Function of the Board
- Register IPIPAIU and renew, withdraw, suspend or cancel such registration [R]
- Promote development of and regulate IPAIPIU [P]
- Minimum eligibility requirement for registration of IPAIPIU [E]
- Levy fee or other charges IPAIPIU [F]
- Standards for the functioning of IPAIPIU [S]
- Inspection and investigation on IPAIPIU [I]
- Monitor performance of IPAIPIU [M]
- Call for information and records from IPAIPIU [C]
- Constitute Committees as required
 - Collect and maintain records relating to IBC cases
- Promote transparency and best practices in its governance
- Issues necessary guidelines to IPAIPIU
-
 197- Advisory Committee or Executive Committee, etc for efficient discharge of its
functions
IBBI (Advisory Committee) Regulations, 2017
To obtain expert advice on issues relevant for the efficient discharge of its functions
Advisory Committee on Service Providers
Advisory Committee on Corporate Insolvency and Liquidation
Advisory Committee on Individual insolvency and bankruptcy
Any other committee.
Can render advice either on its own or on the request of the Board
Composition : Professional Members and General Members with ratio of 2:1
Professional members must be eminent academicians or practitioners and general
members must be eminent citizens not having direct involvement or interest in the area.
One of the General members must be the chairperson and one Board appointed Secretary
to the Committee must be present who has right to speak but no right to vote. The
Secretary shall convene the meeting and record the minutes of the meeting but the
Chairperson would preside over the meeting
Term of Members of the Committee is 3 years and are eligible for reappointment.

Grievance Redressal against IPA, IPs or IUs

 217- Complaint against insolvency professional or insolvency professional agency or

information utility to the Board
IBBI (Grievance and Complaint Handling Procedure) Regulations, 2017.
Identity, identity, conduct, details of suffering, how the conduct caused the suffering,
efforts to get the grievance redressed, how it may be redressed.
 218- Investigation of insolvency professional, insolvency professional agency or
information utility by an investigation authority to be appointed by the Board. IA to have
the powers to require, to enter any building or place and keep in the custody.
 219- Show cause notice to insolvency professional agency or its member or information
utility and carry out inspection by the Board
 220- Appointment of Disciplinary Committee to consider the reports of the Investigation
Authority submitted under 218.
Whole time members of the Board can only be the members of the Disciplinary
Committee.
May impose penalty or suspend or cancel the registration of the IP, IPA, and IUs
Penalty- 3 times the amount of the loss caused, or likely to have been caused, to persons
concerned;or
 3 times the amount of the unlawful gain made on account of such contravention
whichever is higher.
Where such loss or unlawful gain is not quantifiable the total amount of the penalty shall
not exceed more than 1 crore rupees.
Can pass order to persons not covered previously who have made unlawful gains or
averted loss to disgorge an amount equivalent to such gain or aversion of loss.
Can take such actions to provide restitution to the person who suffered loss from the
amount so disgorged.
IBBI (Grievance and Complaint Handling Procedure) Regulations deal with the above
mentioned 217-220.

2. Stuff about IBBI under BLRC Report

 Case for IBBI rests on four strands: Malleability, Two regulated industries (IPAs and
IUs) and need for Statistical System.
 Objective must be to utilize all legislative, executive and quasi-judicial functions so as to
achieve a well functioning bankruptcy process in India which includes features such as
a)high recovery rates b) low delay from start to end c)sound coverage of the widest
possible claims d)perception in the minds of persons in the economy that India has a
swift and competent bankruptcy process.
 Process for legislative functions: Regulation making process, Guidelines issuing powers
 Process for executive functions: includes inspections, investigation, enforcement of
orders and processing of complaints. The exercise of supervision and monitoring powers.
balance strong accountability and transparency to prevent abuse.
 Process for quasi judicial function: adequately complied with the provisions of the law
and in case of any detected breach they must have the power to impose appropriate
penalties. The exercise of quasi judicial functions by the Board needs to be carried out
within the bounds of a sound legal framework that ensures the separation of
administrative law powers from other powers of the regulator.

Insolvency Professional Agencies

 Section 199: No person to function as IPA without valid certificate of registration:

 Section 200: Principles governing registration of insolvency professional agencies
- Promote professional development and regulation of IPs
- Promote services of competent IPs to cater to the needs of debtors, creditors and other
persons.
- Promote good professional and ethical conduct among IPs
- Protect the interest of debtors, creditors and other persons
- Promote growth of IPAs for the effective resolution of Insolvency and Bankruptcy
Process.
 Section 201: Registration of IPAs
 Can cancel – obtained registration by making a false statement or misrepresentation or by
any other unlawful means
- It has failed to comply with the requirements of the regulations made by the Board or
bye-law made by the IPA
- Contravened any of the provisions of the Act or rules or the regulations
- Any other ground.

Eligibility requirements provided under IBBI (IPA) Regulations, 2016

Regulation 3:

- Company registered under Section 8 of the Companies Act, 2013

- Sole object is to carry out the functions of an IPA under the code
- Its bye laws and governance structure is in accordance with model bye law
regulations
- Minimum net worth of 10 Crore
- Paid up share capital of 5 Crore
- Not under the control of any person resident outside India
- Not more than 49% of its share capital is held directly or indirectly by persons
resident outside India
- Is not a subsidiary or body corporate through more than one layer
- Applicant, its promoters, directors and shareholders are fit and proper persons.
 Section 202: Appeal to NCLT
 Section 203: Governing Board of IPA
May make regulations to specify the governing board and its constitution
 Section 204: Functions of IPA
- Grant membership
- Standards of professional conduct
- Monitor performance of its members
- Safeguard the rights, privileges and interest of IPs who are its members
- Suspend or cancel the membership of IPs
- Redress grievance of consumer
 Section 205: IPA to make bye-laws

Insolvency Professionals

 Section 206: Enrolled and Registered persons to act as insolvency professionals

 Section 207: Registration of insolvency professionals
- Insolvency profession obtain the membership and register themselves with the Board
- Board may specify the categories of professionals or persons possessing such
qualifications and experience in the field of finance, law, management, insolvency or
such other field.
Eligibility under IBBI (IP) Regulations, 2016

Regulation 4:

- Should not be a minor

- Is a person resident in India
- Has qualification under regulation 5 and 9
- Convicted of an offence punishable with imprisonment for a term exceeding six
months or for an offence involving moral turpitude and a period of five years has not
elapsed
- Undischarged insolvent
- Unsound mind
- Must be fit and proper person

Regulation 5:

- Passed the Limited Insolvency Examination within 12 months before the date of his
application for enrolment with the IPA
- Has completed a pre-registration educational course as may be required by the
Board
- Successful completed NIP
- Successfully completed GIP
- 15 years of experience in management, after receiving a bachelor’s degree from a
university established or recognized by law; or
- 10 years experience as-
. CA
CS
Cost Accountant
Advocate enrolled with Bar Council.
 Section 208: Functions and Obligations of insolvency professionals
- Fresh start order process
- Individual insolvency resolution process
- Corporate insolvency resolution process
- Individual bankruptcy process
- Liquidation of a corporate debtor firm

Shall follow the code of conduct

- Take reasonable care and diligence while performing his duties

- Comply with all requirements and terms and conditions specified in the bye laws of
the IPAs
- Allow the IPAs to inspect his records
 - Submit a copy of the records of every proceeding before the adjudicating authority to
the Board as well as to the IPA of which he is a member
- Perform his functions in such manner and subject to such condition as may be
specified.

Section 25: Duties of Resolution Professional

 Preserve and protect the assets of the Corporate Debtor, including the continues business
operation
 To do so:
- Take immediate custody and control of all the assets, including the business records
of the CD
- Represent and act on behalf of the CD with third parties, exercise rights for the
benefits of the CD in judicial, quasi judicial or arbitration proceedings
- Raise interim finances subject to the approval of CoC
- Appoint accountants, legal or other professionals
- Maintain list of claims
- Convene and attend meeting of CoC
- Prepare IM
- Invite prospective resolution applicants
- Present Resolution plans at the meeting of the CoC

Section 17: Management of affairs of Corporate Debtor by IRP

 Management of affairs of CD shall vest with IRP

 Powers of the BoD, partners of the CD shall be suspended and exercised by IRP
 Officers and managers shall report to IRP
 Financial institutions mainitaing accounts of the CD shall act on the instruction of the
IRP
 IRP shall
- Act and execute in the name and on behalf of CD all deeds, receipts and other
documents
- Take such actions, in the manner and subject to such restrictions, as may be specified
by the Board
- Have the authority to access the electronic records of CD from IU
- Have the authority to access the book of accounts, records and other relevant
documents of CD
- Comply with the requirement of law

Section 18: Duties of IRP

 Collect all information relating to the finances, assets and operation of the CD for
determining the financial position of the Corporate Debtor
 Receive and collate all the claims submitted by the creditors to him
 Constitute CoC
 Monitor the assets of the CD and manage its operation till RP is appointed.
 File information collected with IU
 Take control and custody of any asset over which the Corporate Debtor has ownership
rights.
- May be located in foreign country
- Assets may not be in possession of the CD
- Tangible assets
- Intangible assets
- Securities
- Assets subject to the determination of ownership by a court or authority
Role of Adjudicating Authority according to BLRC Report

- Main function of the adjudicator is to ensure that the insolvency or bankruptcy

resolution is being performed within the framework laid down by the law.
- DRT for individual insolvency because physical infrastructure of the adjudication
institutions for individual insolvency need to be much more widespread across the
country to facilitate access to justice for the common Indian.
- Territorial Jurisdiction: Confusion was there. Previously NCLT for where the
registered office of the debtor is. Under RDDBFI and SARFAESI the place where
cause of action arose. Led to lot of cross litigation. Hence held that the registered
office of the debtor would determine the jurisdiction
-
BACKGROUND:

The genesis of The National Company Law Tribunal (NCLT) can be traced to the
recommendations of the Eradi Committee, a high level committee, which was
appointed by the Central Government in the year 1999. It recommended that the
winding up of companies should be entrusted to a specialized body like NCLT,
instead of High Courts as at present and proposed appointment of insolvency
professionals.

J.J. Irani Committee (2005) reiterated and affirmed the need for NCLT and
observed that it requires specialized expertise for addressing issues referred to it.
The setting up of NCLT and the Appellate Tribunal was first envisaged in the
Companies (Amendment) Act, 2002, but due to several legal hurdles, the same
could not materialize.

The Parliamentary Standing Committee on Finance in its 21st Report (2009-10)

also stated that the constitutional validity of setting up of NCLT was examined by
the Supreme Court and in its judgment delivered in May 2010 upheld the
legislative competence of Parliament to create NCLT and the Appellate Tribunal.

Now the setting up of The NCLT and the National Company Law Appellate
Tribunal (NCLAT) finally finds its place in the re-codified Companies Act, 2013
taking into consideration the views of the Supreme Court in its judgment delivered
on 11th May, 2010 on the composition, qualification and experience of the
members of the Tribunal.

CONSTITUTION OF THE NATIONAL COMPANY LAW TRIBUNAL (NCLT)

AND THE NATIONAL COMPANY LAW APPELLATE TRIBUNAL (NCLAT)

After a long journey of years the controversial phase has come to an end with the
constitution of the Tribunal and the Appellate Tribunal as notified by the Central
Government w.e.f. 1st June, 2016. The new judicial forum, apart from exercising
the powers of the erstwhile CLB, will also carry out the work, as currently being
carried out by High Courts with regard to company matters for over the six
decades and the same has to be done. with great care so that the Tribunal will be
efficient and effective alternate institutional forum to the High Courts and the
Company Law Board (herein after referred as ‘CLB’), Board of Industrial and
Financial Reconstruction (BIFR) under the Sick Industrial Companies (Special
Provisions) Act, 1985 (SICA Act, 1985) and for the other Authorities as well.

Powers of various authorities transferred to NCLT:

CLB (Company Law Board):

  Oppression & Mismanagement
 Compounding
 Restriction on Transferring of Securities

BIFR (Board of Industrial and Financial Reconstruction):

 Revival & Re habitation of Sick companies

New Powers:

 Class Action Suits

 Reopening of Books of Account
 Revision of book of Accounts

High Court

 Winding up
 Compromise & Arrangement
 Arbitration

Central Government:

 Conversion of Public into Private Company.

NATIONAL COMPANY LAW TRIBUNAL (NCLT)

Tribunal is a quasi-judicial body and the primary objective of constituting the

Tribunals is to provide a simpler, speedier and more accessible dispute resolution
mechanism in Company Law matter specifically apart from other laws for which it
is empowered. The Tribunal was established under Section 408 of the Companies
Act, 2013 vide Notification No. S.O.1935 (E) dated 1st June, 2016 and become
effective with the same date.

Initially, Tribunal has eleven benches, two at New Delhi (one as Principal Bench)
and one each at Ahmedabad, Bengaluru, Chandigarh, Chennai, Guwahati,
Hyderabad, Kolkata and Mumbai.

Section 434(1)(a) and (b) deals with transfer of powers from CLB to the Tribunal.
Therefore, with the constitution of Tribunal by the Central Government as
aforesaid, the CLB which was constituted under the Companies Act, 1956 stands
dissolved vide Notification No. S.O. 1936 (E) dated 1st June, 2016 w.e.f. 1st June,
2016 itself.
POWERS OF TRIBUNAL

The Tribunal has two experts i.e. Judicial and Technical members, who will
handle all the matters which were handled by C LB, Company, Court and BIFR
with much wider jurisdiction in terms of scope of the subjects. The powers of
Tribunal will be as follows:

1. Powers of the erstwhile Company Law Board under the Companies Act, 1956.
2. Powers of High Court in the matters of mergers, demergers, amalgamations, winding up,
etc.;
3. Power to order repayment of deposits accepted by Non Banking Financial Companies as
provided in Section 45QA of the Reserve Bank of India Act, 1934;
4. Powers of BIFR for revival and rehabilitation of sick industrial companies;
5. Power to wind up companies; within the provisions of Insolvency & Bankruptcy Code
2016;
6. Power to Review its own orders;
7. Power to Punish for Contempt;
8. Power to seek assistance of Chief Metropolitan Magistrate; and
9. The Bar on the exercise of Jurisdiction of Civil Courts on any matter on which Tribunal
or Appellate Tribunal has the powers

DISSOLUTION OF CLB AND CONSEQUENTIAL MATTERS -

ENFORCEMENT OF 29 PROVISIONS OF THE ACT, 2013 TO BE DEALT
WITH BY THE NCLT

Simultaneous to the setting up of the NCLT and NCLAT, on 1st June, 2016, the
Ministry of Corporate Affairs, also notified certain provisions of the Act, 2013
which confer powers on the NCLT.
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