Notes on Company and Insolvency & Bankruptcy laws

The Hon'ble Apex Court has held that the object of IBC is not to penalise solvent companies, temporarily defaulting in repayment of its financial debts. Section 7(5)(a) of the IBC confers discretionary powers to Adjudicating Authority to admit an application of a Financial Creditor. It further held that the Adjudicating Authority (AA) might even examine the expediency of the application so made, take into account all circumstances as well as the overall health of the Corporate Debtor (CD). The AA may not even admit such application of the Financial Creditor.

The Hon'ble Supreme Court has observed that there's a difference between the application lodged by an Operational Creditor as against the one filed by Financial Creditor, as while in case of the former, the AA doesn't have a discretion and would have to admit the application if conditions are satisfied. But such is not the case in case of an application by Financial Creditor. It also said the when Financial debts are long term credits (that are usually secured), such debts cannot be equated with Operational debts (that are usually unsecured). The impact of non-payment of dues could be far more on Operational Creditor than on a Financial Creditor. [Vidarbha Industries Power vs. Axis Bank: CA No. 4633/2021, Supreme Court of India]

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A glance at the provisions of Sections 434 and 465 of the Companies Act, 2013 makes it clear that the provisions of the erstwhile 1956 Act shall continue to govern the on-going Winding up proceedings before the Company Court (ie the concerned High Court). However, in a given situation, the High Court has also been granted the jurisdiction to transfer the said proceedings to the NCLT, if considered proper.

The difference is that of a ‘Lion’ and ‘Lioness’ (as was once referred to by Hon’ble Justice (Retd.) S. J. Mukhopadhyay, at an ASSOCHAM seminar held in 2019 in Jaipur). A ‘Lion’, as we know, can kill its prey and eat it first too; but a ‘Lioness’ though can kill its prey, but has to wait for the ‘Lion’ to eat first and be satisfied with whatever is left over. It is the same for the ‘Operational Creditor’ & a ‘Financial Creditor’. A ‘Financial’ creditor (the ‘Lion’) can initiate the CIRP (can kill) by bringing over an IBC petition against the Corporate Debtor (the prey), and stands at the top of the hierarchy of disbursement or the Committee of Creditors (eat it first too); but an “Operational’ Creditor can only initiate the CIRP (can kill), but has to wait for the ‘Financial’ creditors to resolve its debts first or to depend upon the call taken by the ‘Financial ‘ Creditors to decide upon the resolution plan (wait for the ‘Lion’ to eat first and be satisfied with the left over only).

So, whereas a ‘Financial’ Creditor can kill and eat first as well, but an ‘Operational ‘creditor can only kill but not eat first. 

Some of the most commonly seen transfer restriction (s) in any Merger & Acquisition Transaction (Or, M&A, to be precise) are ROFO and ROFR. A 'ROFO' refers to 'Right of First Offer', whereas, a 'ROFR' refers to 'Right of First Refusal'. Whereas the the former, ie. ROFO, entitles the option/ right holder to make the 'First Offer' before anyone else makes to the exiting shareholder, a 'ROFR' entitles the option/ right holder to be the 'First to Refuse' an offer of the exiting shareholder before anyone else does. Both ROFO and ROFR are used commonly in M&A with a view to afford protection to existing shareholders and promoters.

The current regime governing Insolvency & Bankruptcy laws of India (that undoubtedly forms an important part of the Commercial law as well as Corporate law) has undergone a sea change. The erstwhile law governing the Insolvency regime, ie. The Companies Act 1956,  used to see a secured creditor at the top of the disbursement hierarchy. This concept has undergone a dramatic change, for now, it is the ‘Financial Creditor’ who ‘rules the roost’, who may or may not be a secured creditor either, and who not  just tops the hierarchy, but is also in effective control of the CIRP. Such ‘Financial Creditor’ may not necessarily include a ‘Secured’ creditor, as has been held by the Hon’ble Supreme Court in Phoenix ARC v. Ketulbhai Patel, (2021) 124 Taxmann.com 90 (SC).

Time and again DB Law Offices has been advising its clients on this aspect that IBC proceedings should not be seen as a mechanism to recovery money. Now, the National Company Laws Tribunal in White n White Minerals case and Pratiksh Pramod Rai vs. Mylaw leanings case has yet again affirmed this principle, by saying, "We would like to further clarify that IBC is not intended to be a recovery forum."

On a petition moved by Union Bank of India, against the provisional attachment Order passed by the PMLA Adjudicating Authority (Dpty Director, Enforcement Directorate) under the PML Act, it has been held by the Hon'ble High Court of Delhi that such an attachment Order being passed post approval of the Resolution Plan, by the NCLT, shall prima facie be contrary to Section 32A, IBC. [Union Bank of India vs. UOI (2021) 124 Taxmann.com]. This was also held by Delhi High Court in Tata Steel vs. UOI. 

The National Company Law Appellat Tribunal (NCLAT) has held in Reliance Power vs. Raj Kumar Ralhan [2021 (164) SCL 34] that the duty of the Liquidator under Section 35 (k), IBC 2016, includes the power of the Liquidator to consciously decide whether or not to defend any particular proceeding/ suit against the Corporate Debtor.

The National Company Law Tribunal (NCLT) has held in Pramod Kumar vs. Pawan Hans [2021 (123) taxmann.com 138] that under Section 231 (b), The Companies Act 2013, any person may move the NCLT to seek investigation into the affairs of the Company provided the condition stated therein stand to be satisfied, which are:-

i. the business is being conducted in a manner to defraud its creditors, members etc. or is in any manner oppressive;

ii. the promoters are indulging in some form of fraud towards the company;

iii. the members of the company have not been provided with information related to the affairs of the Company.

The National Company Law Tribunal (NCLT) Mumbai in UOI vs. M.M. Choksi [2021 (164) SCL 44] found the statutory auditor of M/s Zen Shaving Ltd. guilty of preparing false audit certificate and hence debarred them for 05 years to be eligible for appointment as an Auditor of any Company. The Statutory Auditor was also directed to refund the remuneration received by it from the Company as per Section 147 (3), Companies Act 2013. Additionally, the order of the NCLT was sent to National Financial Reporting Authority and Institute of Chartered Accountants of India (ICA) for due consideration and appropriate action against the Statutory Authority.

The Hon'ble Supreme Court of India has upheld, in Gulabchand Jain vs. Ramchandra D. Chaudhary, that the Committee of Creditors is empowered to take a decision to liquidate the CD instead of proceeding ahead with a resolution plan it had already approved, provided such has not received the approval of the Adjudicating Authority.

'Insolvency', is a state of financial stress which an entity or an individual faces due to its inability to pay the debts. However, 'Bankruptcy' is a declaration by a Court or Tribunal that the said individual or entity is unable to pay the debts. Such declaration may happen when either the insolvency resolution process has failed or when it is immensely clear that such person is unable pay. In such a case then, the Court or Tribunal may pass further Orders for the 'Liquidation' of the said entity.