major case law under indian insolvency & bankruptcy code 2016

Insolvency & Bankruptcy Code, 2016Major Case Laws in May 2017

Jitender Jain, LL.B., ACS (India) & ACIS (UK)

Advocate & Insolvency ProfessionalMumbai

2Insolvency & Bankruptcy Code, 2016 © 2017 Jitender Jain, Arcindo Law, Advocates

Major Case Laws under Insolvency Code

Abbreviation Full Form

IRP Interim Resolution Professional

RP Resolution Professional

CIRP Corporate Insolvency Resolution Process

OC Operational Creditor

FC Financial Creditor

CD Corporate Debtor

Insolvency Code

Insolvency & Bankruptcy Code, 2013

CA2013 Companies Act, 2013

NCLT National Company Law Tribunal

NCLAT National Company Law Appellate Tribunal



1. Whether High Court can exercise writ jurisdiction to stay thecorporate insolvency resolution process pending appeal to NCLATu/s 61 of Insolvency Code? Held – Yes

Case – Uttam Galva Steels Ltd V/s Union of India & others [WritPetition No. 1122 of 2017, Bom High Court]

Facts - The appellant CD, instead of filing appeal u/s 61 of InsolvencyCode before the NCLAT, preferred a writ petition under article 226 ofConstitution of India before the Bombay High Court seeking twoweeks interim protection against initiation of CIRP by NCLT to fileappeal before the NCLAT.

HC Decision – HC, keeping in view the fact that no IRP is appointedand serious consequences if IRP appointed, granted two weeks stay toCD.



2. Whether NCLAT can stay the commencement of CIRPpending decision in appeal u/s 61 of Insolvency Code on theground of ongoing settlement between the parties? Held –Yes

Case – Uttam Galva Steels Ltd V/s DF Deutche Forfait AG &others [Company Appeal (AT) (Insolvency) No. 39 of 2017]

NCLAT Order – NCLAT, vide its order dated 28 April 2017,directed NCLT Mumbai not to appoint IRP to commence theCIRP as the parties were discussing settlement of dispute.



3. Whether NCLT is required to follow the principles of naturaljustice including in cases filed by FC u/s 7 of Insolvency Code?Held – Yes

Case - Innoventive Industries Ltd. v/s ICICI Bank & Anr. [CompanyAppeal (AT) (Insolvency) No. 1 & 2 of 2017]

Facts:- The appellant/CD challenged the order of NCLT, Mumbai on

various grounds including that the order was passed by NCLTwithout notice to the Appellant/ CD against the principlesnatural justice, as stipulated under Section 424 of CA2013.



- After discussion the various judgments of the apex court, NCLATnoted the following exception to the Principles of natural justice:(i) Exclusion in case of emergency,(ii) Express statutory exclusion(iii) Where discloser would be prejudicial to public interests(iv) Where prompt action is needed,(v) Where it is impracticable to hold hearing or appeal,(vi) Exclusion in case of purely administrative matters.(vii) Where no right of person is infringed,(viii) The procedural defect would have made no difference to theoutcome.(ix) Exclusion on the ground of ‘no fault’ decision maker etc.(x) Where on the admitted or undisputed fact only one conclusionis possible – it will be useless formality. [para 42]



- NCLAT said that by section 255 of the Insolvency Code, certainprovisions of CA2013 including Section 424 of CA2013 standsamended. [Para 48]- As amended section 424 of CA2013 is applicable to theproceeding under the Insolvency Code, it is mandatory for NCLTto follow the Principles of rules of natural justice while passingan order under Insolvency Code. [Para 49]- NCLAT held that Rule 4(3) of I&B (Application to AdjudicatingAuthority) Rules, 2016 mandates the applicant to dispatchforthwith, a copy of the application “filed with the AdjudicatingAuthority”. The purpose for the same being to put CD toadequate impound notice so that CD may bring to the notice ofAdjudicating Officer “mitigating factor/records before theapplication is accepted even before formal notice is received.”[Para 51]



- NCLAT further held that CIRP under Section 7 / 9 of Insolvency Codehave serious civil consequences not only on CD but also on itsdirectors and shareholders in view of the fact that once theapplication under Sections 7 / 9 is admitted it is followed byappointment of an IRP to manage the affairs of CD, instant removal ofthe board of directors and moratorium for a period of 180 days. Forthe said reason also NCLT is bound to issue limited notice to CDbefore admitting a case under section 7 and 9 of Insolvency Code.[para 52]- NCLAT held that the statute mandates NCLAT to ascertain and recordsatisfaction as to the occurrence of default before admitting theapplication. Mere claim by FC that the default has occurred is notsufficient. The same is subject to NCLAT’s summary adjudication,though limited to ‘ascertainment’ and ‘satisfaction’. [Para 58]



NCLAT Conclusion –1. NCLAT finally held that NCLT is bound to issue a limitednotice to CD before admitting a case for ascertainment of:(i) existence of default and if the application is complete or

incomplete in case of section 7 application; and(ii) the existence of dispute raised by CD and whether an

application is complete or incomplete in case of section 9application.

2. Adherence to principles of natural justice would not meanthat in every situation NCLT is required to afford reasonableopportunity of hearing to CD before passing its order. [Para63]



4. Whether NCLT can initiate two CIRP against the same CD? Held– No

Case - Meyer Apparel Ltd. [Company Appeal (AT) (Insolvency) No.33 & 34 of 2017]

Facts –- Two OC, namely, Surbhi Body Products (P) Ltd and Godolo andGodolo Exports Pvt. Ltd filed application against CD, viz., MeyerApparel Ltd before NCLT, Chandigarh.- NCLT heard both applications together and admitted both theapplications.- CD challenged order of NCLT on the ground of existing disputesthat was accepted by both OC.



- A joint petition was been filed by the parties for disposal ofboth the appeal(s) in the light of the ‘settlement’ enteredbetween the parties.

- NCLAT held the in case of exiting dispute, the application ofOC is not maintainable.

- NCLAT further held that once in a petition under Section 7or 9 of the Insolvency Code when CIRP is initiated, NCLT hasno jurisdiction to initiate another CIRP against the same veryCD, though it may allow the FC/OC to file claim pursuant tothe advertisement issued, before the ‘IRP’.



6. Whether the definition of ‘Dispute’ is inclusive and notexhaustive? Held – Yes

Case - Kirusa Software Pvt Ltd. V/s Mobilox Innovations Pvt Ltd.[Company Appeal (AT) (Insolvency) 6 of 2017]

- The definition of “Dispute” has been a contentious issue.

- NCLT Mumbai Bench said the definition of Dispute as ‘exhaustive’even though the word ‘include’ was used in the definition.

- NCLT Delhi Bench, on the other hand, said the definition of Disputeis not exhaustive but is, in fact, illustrative.



NCLAT Conclusion –- The definition of "Dispute" is "inclusive" and not"exhaustive". The same has to be given wide meaningprovided it is relatable to the existence of the amount of thedebt, quality of good or service or breach of a representationor warranty.’

- Once the term “Dispute” is given its natural and ordinarymeaning, upon reading of the Insolvency Code as a whole,the width of “dispute” should cover all disputes on debt,default etc. and not be limited to only two ways of disputinga demand made by OC, i.e. either by showing a record ofpending suit or by showing a record of a pending arbitration.



7. Whether FC’s application is maintainable if there is differencein claim amount mentioned in demand notice and applicationfiled u/s 7 of Insolvency Code? Held – No

Case - M/s. Starlog Enterprises Limited v/s ICICI Bank Limited.[Company Appeal (AT) (Insolvency) 5 of 2017]

Facts:- Appellant challenged the other of NCLT Mumbai inter alia on theground that application preferred by Respondent FC under Section7 is incomplete, misleading and being not bona-fide.- Appellant submitted that notice issued by FC on 06 February2017 claimed nearly INR 10 crores whereas the default amountmentioned in the application was nearly INR 29.81 crores.



- NCLAT held that the ascertainment of existence of default by the NCLTu/s 7(4) of Insolvency Code has to be based on the application/ otherevidence submitted by FC, suffers from non-application of mind given theapparent and conspicuous mismatch between the amount demanded bythe Respondent from the Appellant in its demand notice dated 06February 2017 and the amount stated to be in default in the saidapplication.- NCLT further held that showing an incorrect claim, moving theapplication in a hasty manner and obtaining an ex-parte order from NCLTwhich admitted such an incorrect claim, FC cannot disprove its mala fideintention by stating that the claim submitted is correct amount. TheInsolvency Code does not provide for any such mechanism where post-admission, the applicant FC can modify their claim amount. [Para 21]- NCLAT sat aside order of NCLT with cost of INR 50,000 on FC includingon ground of not following the principles of natural justice.



8. Whether submitting a certificate from financial institution byOC u/s 9(3)(c) of Insolvency Code is mandatory? Held – Yes

Case - Smart Timing Steel Ltd. v/s National Steel and Agro IndustriesLtd. [Company Appeal (AT) (Insolvency) 5 of 2017]- Foreign OC having no bank account in India requested for waiver ofcertificate from Financial Institution as it has no bank account in Indiaand presently the definition of Financial Institution includes only Indianbank.- NCLAT held that the word 'shall' used in section 9(3) of Insolvency Codeis mandatory and, thus, no waiver can be given to foreign OC.- NCLAT held that the argument that foreign companies having no officein India or no account in India with any "Financial Institution" will sufferin recovering the debt from CD cannot be accepted as apart from theInsolvency Code, there are other provisions of recovery like suit whichcan be preferred by any person.



9. Whether NCLT can reject CD’s application on ground ofincomplete disclosure or mala-file intentions of applicant CD?Held – Yes

Case - UNIGREEN GLOBAL PRIVATE LIMITED [NCLT-Delhi,COMPANY PETITION NO.IB-39 (PB)/ 2017]

Facts –- CD filed application u/s 10 of Insolvency Code wherein default ofmore than 100 crore was shown.

- NCLT asked CD to serve copy of petition on FC/banks to seek theirobjections, if any.



- Banks informed NCLT that CD and directors also beingguarantors are trying to avoid making lawful payments of thedues owed to the Bank and also thwarting the Bankers fromrealizing the securities by initiating several legal proceedingsin different courts and forums with the sole motive ofremoving their personal properties from the clutches of lawand that the instant action before NCLT is yet anotherattempt in the same direction.

- NCLT held that taking into consideration the above positionand as the petitioners have not come with clean handsbefore NCLT in bringing out the necessary facts, we areconstrained to dismiss this petition. [para 18]



10. Whether NCLT can unwind CIRP on settlement by parties?Held – No

Case - lA No.226/KB/2017 in CP 150 of 2017 of Parker HannifinIndia Pvt Ltd

- The petitioner sought withdrawal of petition after admission ofapplication.

- NCLT held that after admission of petition under Insolvency Code,the nature of petition changes to representative suit and the lisdoes not remain only between OC and Operational Debtor.Therefore, OC and Operational Debtor alone have no right towithdraw the petition after admission.



11. Whether Maharashtra Relief Undertaking (Special Provisions Act(Bombay Act XCVI of 1958) being a piece of legislation intended to giverelief to industrial undertakings will prevail over Insolvency Code, 2016?Held – No

Case - Innoventive Industries Ltd. v/s ICICI Bank & Anr. [Company Appeal(AT) (Insolvency) No. 1 & 2 of 2017]

- NCLAT held that the Schedule to Maharashtra Relief Undertaking(Special Provisions) Act (MRU Act) specifies only certain acts to which therestriction applies. Accordingly, the application of MRU Act can only beextended to such acts as specified in the Schedule and no otherlegislation. The legislations referred to in the ‘schedule’ to the MRU Actare employment welfare related which is in consonance with the objectsand purposed of the MRU Act i.e. ‘employment and unemployment’.



- The protection under the MRU Act, therefore, cannot be extended toother legislations especially to union legislation which is subsequent tothe MRU Act and related to insolvency resolution i.e. Insolvency Code.

- In light of the non-obstante provision u/s 238 of Insolvency Code (whichis a subsequent Union Law), the provisions of the Insolvency Code, 2016shall prevail over the provisions of the MRU Act and any instrumentissued under the MRU Act including the notification.

- Following the law laid down by Hon’ble Supreme Court in “YogendraKrishnan Jaiswal [2016) 3 SCC 183]” and “Madras Petrochem Limited[(2016) 4, SCC 1]”, NCLAT held that there is no repugnancy betweenInsolvency Code and the MRU Act as they both operate in different fields.The Parliament has expressly stated that the provisions of InsolvencyCode (which is a later enactment to the MRU Act) shall have effectnotwithstanding the provisions of any other law for the time being inforce. [Para 78]



12. Whether in a case where Joint Lender Forum have reachedagreement and granted permission to CD prior consent of JLF isrequired by FC before filing of an application under section 7 ofInsolvency Code 2016? Held – No

Case - Innoventive Industries Ltd. v/s ICICI Bank & Anr. [CompanyAppeal (AT) (Insolvency) No. 1 & 2 of 2017]

Facts:- The appellant/CD challenged the order of NCLT, Mumbai on

various grounds including that It was further contended that allthe parties are bound by the Master Restructuring Agreementdated 08 September 2014 (MRA).



- Appellant contended that, after MRA, a fresh agreement cameinto existence and the previous debts came to an end. UnderMRA both creditors and debtors had reciprocal obligations.Respondent No. 1 failed to fulfil its obligation under MRA. Onthe other hand Appellant has performed his obligations underMRA. Thus, a party which has defaulted its obligation cannotcomplaint about other’s alleged default.

- Appellant also contended that Respondent No. 1 has notobtained permission/consent from Joint Lender Forum (JLF) toinitiate the present proceedings even though their applicationwould adversely affect the loans of other members of JLF. Infact, Respondent No. 1 had applied for such permission but itwas not granted.



NCLAT Conclusion:1. NCLT held that Appellant cannot take advantage of MRAbecause even if it is presumed that fresh agreement cameinto existence, it does not absolve the Appellant from payingthe previous debts which are due to FC.

2. NCLT has noticed that there is a failure on the part ofAppellant to pay debts. FC has attached different records insupport of default of payment. Apart from that it is notsupposed to go beyond the question to see whether there is afailure on fulfilment of obligation by FC under one or otheragreement including MRA. Therefore, the Appellant cannotderive any advantage of MRA.

Thank You!

Jitender Jain

Arcindo LawAdvocates

Level 8, Vibgyor Towers,

G Block, C-62, Bandra Kurla Complex,

Mumbai 400 098, India

T/ +91-99207-44632

E/ [email protected] & [email protected]