Need of Insolvency system

An effective insolvency system is an important element of financial system stability. It is, therefore, essential to provide for a sound framework for restructuring and rehabilitation of companies along with a framework for winding up and liquidation. The company works for its creditors and those who are indulged in the business of the companies. Various interests are involved in the business of a company, it becomes an important duty of the insolvency system to work effectively and maximize the value of the assets.

Presently, IBC governs the liquidation process of a company which was enacted in 2016. The constitutional validity of IBC was challenged in Swiss Ribbons Private Ltd. v. Union of India, the major ground of challenge was that of classification of creditors into financial and operational creditors, the argument was that such classification was violative of Article 14 of the Constitution of India. The Supreme Court held that the classification of creditors is valid.

“The reason is operational creditors are not discriminated against and Article 14 of the Constitution has not been infracted either on the grounds of the equals being treated unequally or on the ground of manifest arbitrariness. Since equality is only among equals, no discrimination results if the court can be shown that there is an intelligible differentia that separates two kinds of creditors so long as there is some rational relation between the creditors so differentiated, with the object, sought to be achieved by the legislation.”

IBC, 2016 played a very important role, it removed the inability to pay debts as a ground of compulsory winding up of a company. Also, it sweeps out the part in the companies Act which dealt with the Voluntary winding up of a company.

Difference between ‘Winding up’, ‘Liquidation’ and ‘Insolvency’

The word Winding up, liquidation, and Insolvency are the most used term in IBC. Therefore, it is essential to know the meaning of all these terms, winding up is a process where assets of a company are liquidated to pay the current debts whereas insolvency is the inability of the company to pay debts.

The word ‘winding up and ‘Liquidation’ is often used interchangeably, Pennington states that winding up or liquidation is the process by which the management of a company’s affairs is taken out of its director’s hands, its assets are realized by a liquidator, and its debts and liabilities are discharged out of the proceeds of realization and any surplus of assets remaining is returned to its members or shareholders.

NCLT as ‘Adjudicating Authority’ and its role under IBC

The role of NCLT is specified in the IBC. The IBC deals with the liquidation process of a company, Individuals, and Partnership Firms. NCLT is the adjudicating authority governing the process of Winding up of a company.

Part II of the IBC, 2016 deals with the Insolvency Resolution and liquidation for corporate Persons, the Act defines its adjudicating authority as NCLT constituted under section 408 of the Companies Act, 2013. The Act provides that the application of the provisions of part II is for matters relating to insolvency and liquidation of the corporate debtor where the minimum amount is 1 Lakh rupees. Provide, Central government may by notification fixed the minimum amount which shall not be one crore rupees.

Sec. 6 of the Act that a financial creditor, an operational creditor, or the corporate debtor itself may initiate the proceedings the Act defines distinct provisions in each case. The author will focus on the role of NCLT which is the adjudicating authority for the matters of corporate insolvency. The role of NCLT can be seen under the provisions of IBC:

a)  Sec. 7 of the Act provides Initiation of corporate insolvency resolution process by financial creditor. A financial creditor either by itself or jointly or any other person on behalf of a financial creditor as may be notified by the govt. may file an application before NCLT. NCLT within fourteen days of receipt of the application, ascertain the existence of a default from the records of an information utility or on the basis of other evidence furnished by the financial creditor.

NCLT has the power to admit such application where it is satisfied that a default has occurred, and the application is complete, and no disciplinary proceedings are pending against the proposed resolution professional that is acting as interim resolution professional.

NCLT can reject the application if it is satisfied there has been no default that had occurred and the application is incomplete or any disciplinary proceeding is pending against the proposed resolution professional. Provided that the NCLT will provide the opportunity to rectify the mistake by giving 7 days prior notice before the rejection of an application. The process of corporate insolvency shall commence from the date of admission of the insolvency application.

b) Under sec. 9 and 10 of IBC, 2016 deals with the process of application of Insolvency by Operational Creditor and Corporate debtor respectively. In both situations, NCLT plays a very important role in admitting the application for CIRP.

c)  NCLT has the power to order a Moratorium and make a public announcement of the corporate insolvency resolution process. Moratorium means prohibition of institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority. It includes all such prohibitions provided under sec. 14 (1) (a) to (d) of the IBC, 2016.

d) NCLT has the power to appoint the Interim Resolution professional. In case of an application made by an operational creditor for CIRP, no proposal for IRP is given then, NCLT shall make a reference to the Board for the recommendation of an insolvency professional who may act as an interim resolution professional.

e) NCLT initiates the Liquidation process in the company and also appoints the liquidator for the same. NCLT also gives directions to the Liquidator of the company. If a creditor is not satisfied with the decision of the liquidator, they may appeal to the NCLT against the rejection of claims within fourteen days of the receipt of such decision.

f) NCLT also plays an important role in Fast Track Corporate Insolvency process, which is for small corporation, startups and unlisted company. The provision governing this is s. 55-58. Unlike normal CIRP, in this, 90 days is given to complete the corporate insolvency process.

g)  Sec. 270 of Companies Act was amended after the introduction of IBC, 2016. Sec. 255 of the Code provides that the Companies Act, 2013 shall be amended as in the manner provided in the Eleventh Schedule. Sec. 59 of IBC, 2016 which deals with voluntary winding up. The power of Voluntary winding up which was earlier vested in NCLT via Sec. 270 of Companies Act was given to IBBI.

These are the powers given under IBC, 2016 to the NCLT. It can exercise all such powers which are given under IBC, 2016. The scope of power under IBC has been explained by Supreme Court in the recent judgment of 2021.

Scope of NCLT in IBC

The scope of NCLT is stated by SC in the case of E S Krishnamurthy & Ors. v. M/s Bharath Hi-Tech Builders Pvt. Ltd., In this case there was a master agreement to sell between IDBI Trusteeship Ltd. and Karvy Realty India Ltd. to obtain a sum of Rs. 50 Crores for agricultural land development. The fund was not fulfilled through master agreement. Therefore, a separate loan agreement was entered between Respondent IDBI Trusteeship Ltd. and Facility agent engaged in a syndicate loan agreement to obtain a term loan of Rs. 18 crores from the prospective lenders for a period of 24 months.

In case of default, the respondent was liable to pay 1% extra per month. IDBI was failed to pay the amount, the financial creditors filed an application before the NCLT under sec. 7 of the IBC, 2016. The petition was dismissed by NCLT in Feb 2020 ordering the respondent to resolve the case within three months and told the petitioners that they might come back if they are dissatisfied. The petitioners appealed in NCLAT, which reiterated the decision of NCLT. The petitioners then filed an appeal before the Supreme Court challenging the order of NCLT and NCLAT.

The main issue before the Supreme Court was to decide whether the NCLT and NCLAT were correct in dismissing the appellants appeal without considering the merits of the petition under Section 7 of the IBC at the ‘pre-affirmation stage,’ and directing them to settle with the respondent within 90 days. The Supreme Court held that NCLT and NCLAT cannot compel the parties to settle their disputes. The NCLT under Sec. 7 of the IBC is only authorized to verify whether a default has happened. The NCLT must either admit or deny an application, these are only two options available to NCLT. They cannot compel parties or direct them to settlement as court of equity.

In Innoventive Industries Ltd. v. ICICI Bank, the supreme court explained the scope of NCLT under sec. 7 of IBC. The Court stated that the role of NCLT is only to determine whether a default has occurred which means the role is only to determine whether the company failed to pay its debts on time. If NCLT believes that default has occurred then it must admit the default and in case if an application is rejected on grounds of being incomplete then 7 days need to be given for rectifying the defect from the date of the notice. 

After knowing the scope of NCLT it is important to know whether judiciary can interfere in the exclusive jurisdiction by the NCLT provided in IBC. There’s an important supreme court judgment on this point in Embassy Property Development v. State of Karnataka, the facts of the case were that corporate debtor was holding a mining lease granted by Karnataka Government having its expiry on 25^th May 2018.

The Resolution Professional filed a writ before the Karnataka High Court for extension of time period. The Government rejected the extension order and prematurely terminate the lease. The Resolution Professional moved to NCLT against the government order and for grant of extension. The extension was granted by NCLT, the government approached to High Court, the HC set aside the order and issue back to NCLT for its re-consideration.

The NCLT passed the similar order, it was again appealed to HC put stay on the tribunal order. The stay was challenged in the Supreme Court. The main issue which was framed by the SC was:

Whether the High Court ought to interfere, under Article 226/227 of the Constitution, with an order passed by the NCLT in a proceeding under insolvency and Bankruptcy code, 2016, ignoring the availability of a statutory remedy of appeal to the National Company Law Appellate Tribunal and if so, under what circumstances?

Supreme Court stated that the order of tribunal was error of jurisdiction, generally, a statutory appeal could not be bypassed. However, when the order was “in excess of jurisdiction”, the HC could exercise judicial review, bypassing the statutory appeal.

Therefore, it can be said that the tribunal power is not absolute, the court can interfere where the tribunal exceeds the jurisdiction, but it is very difficult task to determine whether the tribunal actually exceeded the jurisdiction or not as court is not the specialized body to understand the changing meteors of business world.

Conclusion

NCLT has been given major power under the IBC to act as its adjudicating authority and conduct the corporate insolvency resolution program. The sec. 255 of IBC have amended certain provisions of Companies Act, 2013 to make it harmonious with companies Act, 2013. The Adjudicating authority which is NCLT has been given a plethora of power related to Corporate Insolvency Process.

The scope of NCLT is given under IBC is wide but it cannot exceed the jurisdiction, the court can interfere into the jurisdiction of the NCLT if there is error in exercising the jurisdiction. NCLT maintains check and balances and ensures that the Liquidation process is conclusively conducted. In CIRP process the NCLT is the supreme authority and the jurisdiction is provided under s. 60 of the IBC. However, the jurisdiction exercised under IBC is not absolute and free from judicial interference, despite of this, NCLT plays a huge role in Insolvency process under IBC.

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By Jeet Sinha