With effect from December 2016, the corporate insolvency resolution provisions of the Insolvency and Bankruptcy Code, 2016 ("Code") were notified. The Code provides for a two- stage process to deal with insolvency of a corporate. In stage I, the corporate undergoes a corporate insolvency resolution process ("CIRP") and if the CIRP fails, the corporate enters stage II for its mandatory liquidation.
In December 2016, ICICI Bank Limited ("ICICI") filed an application before the National Company Law Tribunal, Mumbai bench ("NCLT") as a financial creditor under Section 7 of the Code, to initiate CIRP of Innoventive Industries Limited ("Innoventive"). The NCLT admitted the application of ICICI. Against the said order, Innoventive filed an appeal before the Hon'ble National Company Law Appellate Tribunal ("NCLAT"). On May 15, 2017, NCLAT passed an order dismissing the said appeal ("NCLAT Order"). This e-alert discusses some critical observations made by NCLAT in the NCLAT Order on interpretation of Section 7 of the Code.
FACTS OF THE CASE:
Innoventive defaulted in making payments of certain amounts due to ICICI under credit facilities availed from ICICI. ICICI filed an application before the NCLT as a financial creditor to initiate CIRP of Innoventive. The NCLT admitted the application and declared a moratorium with respect to the affairs of Innoventive and appointed an Interim Resolution Professional for Innoventive ("Impugned Order").
The Impugned Order was challenged before the NCLAT on various grounds such as:
- The Impugned Order was passed without notice to Innoventive and was against the principles of natural justice.
- The liabilities of Innoventive had been suspended pursuant to a relief order passed under Maharashtra Relief Undertaking (Special Provisions Act) ("MRU Act, 1958") and therefore there was no default in payment of debt to ICICI.
- The parties are bound by the Master Restructuring Agreement ("MRA") and ICICI had failed to fulfil its obligations under the same. Further, ICICI had not obtained consent from Joint Lender Forum ("JLF") to initiate the proceedings.
ISSUES FRAMED BY NCLAT:
- Whether a notice is required to be given to the corporate debtor for initiation of CIRP under the Code and if so, at what stage and for what purpose?
- Whether the MRU Act, 1958 shall prevail over the Code?
- Whether prior consent of JLF is required by financial creditor, before filing of an application under Section 7 of the Code?
1. On the issue of notice and principles of natural justice:
- The applicant under Section 7 and 9 of the Code is required to dispatch to the corporate, the copy of the application filed with NCLT. Thereby a post filing notice is required to be issued to the corporate (and not a notice before filing of the application).
- There is no specific provision under the Code to provide hearing to corporate debtor in a petition under Section 7 or 9 of the Code. However, NCLT plays the role of an 'adjudicating authority' and as Section 424 of the Companies Act, 2013 is applicable to the proceedings under the Code, it is mandatory for NCLT to follow the principles of rules of natural justice while passing an order under Code.
- NCLT is bound to issue limited notice to the corporate debtor before admitting a case under Section 7 or 9 of the Code.
- Section 7 of the Code mandates the NCLT to ascertain and record satisfaction as to (A) occurrence of default, (B) that the application is complete and (C) that no disciplinary proceeding is pending against the IRP. Mere claim by the financial creditor that the default has occurred is not sufficient. Further, while ascertaining, for NCLT to come to a conclusion whether there is an existence of default or there is a dispute and whether an application is complete or incomplete, it is necessary to hear the corporate debtor.
- In the present case, though no notice was issued, Innoventive was heard and therefore, the Impugned Order cannot be rendered illegal.
2. On exclusion of Code on account of MRU Act
- The provisions of the Code shall prevail over the provisions of the MRU Act and any instrument issued under the MRU Act.
- There is no repugnancy between the Code and the MRU Act as they both operate in different fields. The Parliament has expressly stated that the provisions of the Code, 2016 shall have effect notwithstanding the provisions of any other law. This stipulation does not mean that the MRU Act or any other law is repugnant to the provisions of the Code.
3. On exclusion of Code on account of MRA/JLF
- Once the NCLT is satisfied on as to the matters in Section 7, it is required to admit the case. However, in a case where there is no default or defects cannot be rectified, or the record enclosed is misleading, the application has to be rejected. Beyond this practice, the NCLT is not required to look into any other factor, including whether consent has been obtained from any authority, including the JLF.
- The NCLT has noticed that there is a failure on the part of Innoventive to pay debts. ICICI has attached different records in support of default of payment. Apart from that, the NCLT is not supposed to see whether there is a failure on fulfilment of obligation by ICICI under one or other agreement, including the MRA.
Basis above, since the NCLT was satisfied on all counts, the appeal was dismissed.
The NCLAT Order clarifies that the NCLT is required to issue a notice to and hear the corporate debtor before admitting the application of a creditor. However, in the context of application by a financial creditor, the NCLAT Order also makes it clear that the NCLT cannot go beyond the requirements of Section 7 and once it is satisfied as to the matters provided therein, it must admit the application and cannot consider any other factors. Importantly, the NCLAT Order will have far reaching implications on informal restructuring mechanisms such as CDRs/ SDRs/ JLF mechanisms as it is clear that pendency of such mechanisms will not bar the financial creditors from initiating CIRPs in case of a default (even if the financial creditor is a party to such restructuring mechanisms).
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.