1

Madhusudan Gordhandas &

Co. v. Madhu Woollen
Industries Pvt. Ltd.
(1972) 42 Comp. Cas. 125
 2

Facts
• The appellants (MG) are a partnership firm. The partners are the Katakias. They are three
brothers. The appellants carry on the partnership business in the name of Madhu Woollen
Spinning Mills.
• In the respondent company (MWI), the Katakia brothers had 3 shares in the company and the
remaining 1100 shares were owned by the Bombay Traders group.
• Prior to the incorporation of the company, there was an agreement between Bombay Traders and
the appellants. Bombay traders were floating a new company for the purpose of running a wool
plant. They agreed to pay about 6 Lakhs to appellants for the acquisition of machinery and
installation charges.
• The agreement provided that the construction expenses of the machinery would be treated as a
loan to the company. This was agreed to be converted into equity capital of the company. A
similar option was given to the appellants to convert the amount spent by them on construction
expenses into equity capital. The company was then incorporated in 1965.
• Later, the appellants filed a petition for winding up in 1970, alleging that the company was liable
to be wound up as the company is unable to pay the debts that it owed to the appellants.
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Facts (Continued)
 4

Facts (Continued)
• The appellants claimed that they were the creditors of the company for sums including expenses
incurred in connection with the construction of plant and machinery, interest on this amount,
commission to be paid to appellants, etc.
• It was alleged that the company was incurring massive losses, and its debts exceeded its assets. It
was also alleged that the substratum of the company disappeared and therefore there was no
possibility of the company doing any business at profit. The company was insolvent and it was
just and equitable to wind up the company.
• The company disputed most of the claims of the appellants apart from two amounts.
• The learned single judge held that the claims of the appellants were disputed save that a sum of
Rs. 72,556.01 was payable by the company to the appellants. The learned single judge refused to
wind up the company and asked the company to deposit the disputed amount in court.
 5

Decision
The High court gave four principal reasons to reject the claims of the appellants to wind up the
company as creditors.
• First, the books of accounts of the company did not show the alleged claims of the appellants
save and except the sum of Rs. 72, 556.01.
• Secondly, many of the alleged claims are barred by limitation
• Thirdly, Katakia brothers, who were directors in the company, resigned in the1969, and up to the
month of December 1969, there was not a single letter of demand to the company in respect of
any claim.
• Fourthly, one of the Katakia brothers was the chairman of the company and therefore they were
in the knowledge as to the affairs of the company and the books of accounts and they signed the
balance sheets which did not reflect any claim of the appellants.
The HC characterized the claims of the appellants as tainted by the vice of dishonesty.
 6

Decision (Continued)
• Two rules are well settled. First, if the debt is bona fide disputed and the defence is a substantial one, the court will
not wind up the company. The court has dismissed a petition for winding up where the creditor claimed a sum for
goods sold to the company and the company contended that no price had been agreed upon and the sum demanded by
the creditor was unreasonable. Again, a petition for winding up by a creditor who claimed payment of an agreed sum for
work done for the company when the company contended that the work had not been done properly was not allowed.
• Where the debt is undisputed the court will not act upon a defence that the company has the ability to pay the debt but
the company chooses not to pay that particular debt. Where, however, there is no doubt that the company owes the
creditor a debt entitling him to a winding-up order but the exact amount of the debt is disputed the court will make a
winding-up order without requiring the creditor to quantify the debt precisely.
• It is well settled that the proceedings of winding up is not a recovery proceeding. Once it is demonstrated that the debt is
subject to a bonafide dispute, the court will not order for winding up. In order for a debt to be considered bona fide debt,
the creditor/debtor must be able to show that at the time of the transaction, it had a real expectation of repayment and
intent to enforce the collection of the indebtedness.
• The principles on which the court acts are first that the defence of the company is in good faith and one of substance,
secondly, the defence is likely to succeed in point of law, and, thirdly, the company adduces prima facie proof of the
facts on which the defence depends.
 7

Innoventive Industries
Limited v.
ICICI Bank Limited
MANU/SC/1063/2017
 8

Facts
• The Appellant (Innoventive) had taken a loan from the Respondent bank (ICICI Bank) and
made defaults in repayment of the amount. The financial creditor (ICICI Bank) brought an
insolvency application under section 7 of the Code against the borrower i.e., Innoventive
Industries before National Company Law Tribunal (Adjudicating Authority), Mumbai Bench.
• Innoventive’s main contention was that no debt was legally due since all liabilities of
Innoventive and remedies for enforcement were temporarily suspended for 2 years pursuant to
the notification issued under the Maharashtra Relief Undertaking Act, 1958.
• The National Company Law Tribunal, Mumbai admitted the insolvency petition filed by ICICI
Bank and held by an order dated 17.01.2017 that under Section 238 (non-obstante clause) of
the Code, which states that Code will prevail over the Maharashtra Relief Undertakings Act
(MRU Act), 1958 and shall have effect notwithstanding anything contrary contained in any other
law.
• A non-obstante clause is added to a provision in order to uphold its enforceability over another
provision that is contradictory to it. This clause is used to clarify the intention of the legislature
in cases where two provisions appear contradictory.
 9

Facts (Continued)
• Innoventive appealed against the said order before the National Company Law Appellate
Tribunal (Appellate Authority) and same was rejected by the Appellate Authority backing the
decision of Adjudicating Authority, that the protection claim under MRU Act, 1958 cannot be
extended to any other legislations and specifically to Union legislation of Insolvency and
Bankruptcy Code, 2016 that relates to insolvency resolution.
• Aggrieved by the Appellate Authority, corporate debtor (Innoventive) appealed before the
Supreme Court of India.
 10

Decision
• The Supreme Court of India after hearing and interpreting the Code said that the only person
who can maintain an appeal on behalf of the company is an insolvency resolution professional,
who is also in management and control of the company and also gave its observations on the
issue of conflict between the Code and MRU Act, which is central and state legislation
respectively.
• Apex Court held that provisions of the Code override the provision of MRU Act under Article
254 of Constitution of India, 1950, which vividly recognises the supremacy of central
legislations over state legislations and further held that moratorium under the MRA Act would
not obstruct the proceedings under the Code.
• One has to understand the importance of the Code, which eases the exit process of distress
entities and protecting and preserving the value of assets of such entities and also makes it clear
overriding nature of Code, central legislation over state legislation in case of inconsistency.
 11

Decision (Continued)
• The scheme of the IBC is to ensure that when a default takes place, in the sense that debt becomes
due and is not paid, the insolvency resolution process begins. Default is defined in section 3(12)
in very wide terms as meaning non-payment of a debt once it becomes due and payable, which
includes non-payment of even part thereof or an instalment amount.
• It is at the stage of section 7(5), where the adjudicating authority is to be satisfied that a default
has occurred, that the corporate debtor is entitled to point out that default has not occurred in the
sense that the 'debt', which may also include a disputed claim, is not due. A debt may not be due
if it is not payable in law or in fact.
• The moment the adjudicating authority is satisfied that a default has occurred, the application
must be admitted unless it is incomplete, in which case it may give notice to the applicant to
rectify the defect within 7 days of receipt of a notice from the adjudicating authority. Under sub-
section (7), the adjudicating authority shall then communicate the order passed to the financial
creditor and corporate debtor within 7 days of admission or rejection of such application, as the
case may be.[Para 28]
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Decision (Continued)
• The scheme of section 7 stands in contrast with the scheme under section 8 where an operational
creditor is, on the occurrence of a default, to first deliver a demand notice of the unpaid debt to
the operational debtor in the manner provided in section 8(1) of the IBC. Under section 8(2), the
corporate debtor can, within a period of 10 days of receipt of the demand notice or copy of the
invoice mentioned in sub-section (1), bring to the notice of the operational creditor the existence
of a dispute or the record of the pendency of a suit or arbitration proceedings, which is pre-
existing - i.e. before such notice or invoice was received by the corporate debtor. The moment
there is an existence of such a dispute, the operational creditor gets out of the clutches of
the IBC. [Para 29]
• On the other hand, in the case of a corporate debtor who commits a default of financial debt, the
adjudicating authority has merely to see the records of the information utility or other
evidence produced by the financial creditor to satisfy itself that a default has occurred. It is
of no matter that the debt is disputed so long as the debt is 'due' i.e. payable unless interdicted by
some law or has not yet become due in the sense that it is payable at some future date. It is only
when this is proved to the satisfaction of the adjudicating authority that the adjudicating
authority may reject an application and not otherwise. [Para 30]
 13

Mobilox Innovations Private

Ltd vs Kirusa Software
Private Ltd
Civil Appeal No. 9405 of 2017
 14

Facts
• The interpretation of the term “dispute” was done in the ambit of section 8(2) of the Code.
• In this case appellant (Mobilox) was engaged in television progamme known as “Nach Baliye”
and the respondent (Kirusa) was appointed by appellate for providing various services related to
television programme. The appellant and respondent executed a non-disclosure agreement
(NDA) and parties were obligated to protect the confidentiality of the services.
• Respondent (Kirusa), who rendered services to Mobliox raised the monthly invoices and same
were denied by the Mobilox. They claimed that payments are on hold because of the breach of
the Non Disclosure Agreement. Accordingly, Kirusa sent a demand notice under section 8 of the
Insolvency and Bankruptcy Code, 2016 to Mobilox for non- payment of the dues.
• Mobilox replied to the demand notice by stating that there is serious dispute between parties
including breach of obligations stated under Non- Disclosure Agreement (NDA).
• Kirusa filed an application before NCLT, Mumbai Bench under section 9 of the Code, for
initiating Corporate Insolvency Resolution Process (CIRP) and same was rejected by NCLT,
Mumbai Bench on the ground that Mobilox had served a notice of dispute to the Operational
creditor.
 15

Facts (Continued)
• Then, Kirusa went on appeal to NCLAT against the order of NCLT and averted that rejection of
valid application under section 9 of the Code, on the dispute of issue of demand notice by the
Operational Creditor is not a valid reason. The main question before the Appellate Authority
was to throw clarity on the meaning of “dispute” and “ existence of dispute” for the
purpose of application under section 9 of the Code. (r/w s.8(2)- next slide)
• NCLAT allowed the appeal and stated that dispute would not be restricted to only arbitration
proceedings and pending suits, but also include proceedings initiated before any court or tribunal
and also denied all the averments of Mobilox and mentioned that the defense raised by the
Mobilox was vague as Non Disclosure Agreement (NDA) had not connection with debt
demanded.
• Mobilox filed an appeal before the Hon’ble Supreme Court of India against the order passed by
NCLAT.
 16

Section 8(2)
“(2) The corporate debtor shall, within a period of ten days of the receipt of the demand notice or
copy of the invoice mentioned in sub-section (1) bring to the notice of the operational creditor—
(a) existence of a dispute, if any, and record of the pendency of the suit or arbitration proceedings
filed before the receipt of such notice or invoice in relation to such dispute;
(b) the repayment of unpaid operational debt— (i) by sending an attested copy of the record of
electronic transfer of the unpaid amount from the bank account of the corporate debtor; or (ii) by
sending an attested copy of record that the operational creditor has encashed a cheque issued by the
corporate debtor.
Explanation.—For the purposes of this section, a "demand notice" means a notice served by an
operational creditor to the corporate debtor demanding repayment of the operational debt in respect
of which the default has occurred.”
 17

Decision
• The Supreme Court allowed the appeal by Mobilox, while interpreting the expression existence of a dispute
under Section 8(2) (a) of the Insolvency and Bankruptcy Code. The Supreme Court was of the opinion
that the breach of non-disclosure agreement was sufficient to construe the existence of a dispute to
invalidate the CIRP application filed by the operational creditor.
• 8(2) The corporate debtor shall, within a period of ten days of the receipt of the demand notice or
copy of the invoice mentioned in sub-section (1) bring to the notice of the operational creditor— (a)
existence of a dispute, if any, and record of the pendency of the suit or arbitration proceedings filed
before the receipt of such notice or invoice in relation to such dispute;
• 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 any anomalous situation.
• 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 the parties may not have had time to approach an arbitral
tribunal or a court yet. Further, this was not the intent of the legislation.
• Given that the limitation period of up to 3 years is 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.
 18

CoC Essar Steel v.

Satish Kumar Gupta
Civil Appeal No. 8766-67 of 2019
 19

Facts
• Essar Steel was one of India’s largest steel manufacturers. Its overdue debt was of about Rs.
55,000 crore. Pursuant to the IBC process, a joint venture between ArcelorMittal and Nippon
Steel acquired Essar Steel in December 2019.
• Insolvency proceedings were initiated against Essar Steel on August 2, 2017 by an order issued
by the NCLT admitting an application filed by the Standard Chartered Bank and the State Bank
of India.
• Initially, resolution plans were submitted by ArcelorMittal and Numetal Limited, both of whom
were found ineligible by the resolution professional under Section 29A of the IBC.
• In the legal proceedings that ensued, the SC by its order dated October 4, 2018 declared
ArcelorMittal and Numetal to be ineligible resolution applicants.. However, the SC granted
ArcelorMittal and Numetal time to cure their ineligibility. Consequently, the Committee of
Creditors (CoC) of Essar Steel was required to reconsider and vote on the resolution plans
submitted. If no plan had been accepted with the requisite majority by the CoC, Essar Steel
would have gone into liquidation.
 20

Facts
• ArcelorMittal after having made payments in accordance with the aforementioned SC order,
resubmitted its resolution plan and emerged as the successful resolution applicant for Essar Steel
when its resolution plan was approved by the CoC.
ArcelorMittal’s Resolution Plan
• The manner of distribution of funds among the secured financial creditors was left to the
discretion of the CoC.
• It provided for an upfront payment of Rs. 42,000 crore and an equity infusion of Rs. 8,000 crore.
• Unsecured financial creditors were to be paid 4% of their admitted claims.
• Operational creditors having claims less than Rs 1 crore, workmen and employees were to be paid
their dues in full.
• Operational creditors with claims of Rs. 1 crore and above were not to be paid any amount.

• NCLT conditionally approved this plan. NCLAT ordered the CoC to make a decision further to
the NCLT’s directions. CoC approved a modified plan.
 21

The NCLT by its order dated March 8, 2019 conditionally approved ArcelorMittal’s
resolution plan. The NCLT “suggested”, inter-alia, that to avoid discrimination, the CoC
reconsider the manner of distribution of funds proposed to be paid under ArcelorMittal’s
resolution plan to facilitate higher recovery for the operational creditors (having claims over
INR 1 crore) and Standard Chartered (a financial creditor). The approval of ArcelorMittal’s
resolution plan was challenged by various parties, including Standard Chartered, several
operational creditors, the suspended board of directors and former promoters of Essar Steel.

In 2019, the National Company Law Appellate Tribunal (NCLAT) cleared the CoC’s plan
but changed the financial distribution plan by ordering an equal recovery plan for all
creditors, including financial and operational creditors. This modification was challenged by
COC’s in SC.
 22

SC-Decision
• The CIRP under the IBC is based on a flexible model where market participants (as resolution
applicants) can propose solutions for revival of the corporate debtor.
• CoC is in the driver’s seat for directing the CIRP. The underlying assumption was that the
financial creditors are fully informed about the viability of the corporate debtor and feasibility of any
proposed resolution plan.
• In K. Sashidhar v. Indian Overseas Bank, it was observed – “it is the commercial wisdom of this
majority of creditors, which is to determine, through negotiation with the prospective resolution
applicant, as to how and in what manner the corporate resolution process is to take place.”
• The ultimate business decision lies with CoC, such decision should indicate adequate consideration of
the objectives of IBC. Accordingly, the adjudicating authority should ensure that the decision of the
CoC takes into account the following factors:
(1) the corporate debtor should continue as a going concern during the resolution process
(2) value of assets of the corporate debtor should be maximized
(3) interests of all stakeholders should be balanced.
• In case the factors have not been considered, the adjudicating authority may send the resolution plan
back to the CoC (but not alter the resolution plan on its own accord).
 23

Decision (Continued)
• The role of the court is limited to assessing if the law (including the IBC provision) has been
complied with and the due procedure has been followed in arriving at the decision.
Equitable treatment of all creditors
• The principle of “equality” could not be interpreted to mean that all creditors (irrespective of their
security interest or their status as an operational or financial creditor) should get equal recovery
under a resolution plan.
• Even within a class of secured financial creditors, differential treatment based on the value of
the security of such creditors would be permissible. If the security interest of the creditors was
disregarded during the CIRP, many creditors would be incentivized to vote for liquidation rather
than resolution. Any bankruptcy law that delays, weakens or de-prioritizes security on insolvency,
would destroy the purpose of creation of security in the first place.
• The court while upholding the supremacy of the CoC in deciding the distribution among the
various classes of creditors held that such financial creditors are required to protect the
interest of operational creditors.