Innoventive Industries Limited v. ICICI Bank
Monday, 27 November 2017
The Supreme Court of India (Supreme Court), delivered its first detailed judgment on the Insolvency and Bankruptcy Code, 2016 (Code) on 31 August 2017 (Judgment). The Supreme Court stated that the purpose behind delivering this detailed judgment was so that Courts and Tribunals in India could take notice of the paradigm shift in law caused by the enactment of the Code.
ICICI Bank (ICICI) was a financial creditor of Innoventive Industries Limited (Innoventive). On 7 December 2016, ICICI made an application under the Code, the very first of its kind, for initiating the Corporate Insolvency Resolution Process (CIRP) against Innoventive. The application was on account of the default in payment of the financial debt owed to ICICI by Innoventive. In Innoventive reply to ICICI application, Innoventive claimed that no debt was legally due. Innoventive relied on the fact that it was a relief undertaking under the Maharashtra Relief Undertakings (Special Provisions) Act, 1958 (MRUA) and therefore all remedies for enforcement of the liabilities of Innoventive stood suspended.
The National Company Law Tribunal (NCLT) by its order dated 17 January 2017, held that in light of the non-obstante clause under section 238 of the Code, the Code would prevail over the MRUA and therefore, Innoventive could not claim exemption from the applicability of the provisions of the Code. The NCLT thereby rejected all contentions raised by Innoventive and admitted ICICI CIRP application.
Subsequently, Innoventive filed an appeal before the National Company Law Appellate Tribunal (NCLAT). The NCLAT held that while it is true the MRUA and the Code operate in different fields, Innoventive could not derive any advantage under the MRUA to stall the CIRP initiated under the Code. Accordingly, the NCLAT dismissed the appeal. Aggrieved by the decision of the NCLAT, Innoventive appealed to the Supreme Court.
The Supreme Court examined in detail: (i) The Statement of Objects and Reasons of the Code, (ii) The purpose behind enacting the Code as per Bankruptcy Law Reforms Committee Report and (iii) Conducted an in-depth examination of part II of the Code relating to insolvency resolution and liquidation for corporate persons.
The Supreme Court determined, inter alia, the following issues:
- Whether the appeal filed by Innoventive was maintainable?
- Who may file an application for initiating the CIRP?
- Whether the corporate debtor may dispute the existence of a default at the stage of admission or rejection of a CIRP application?
- What is the scope of enquiry of the NCLT at the stage of admission or rejection of a CIRP application?
- Whether the provisions of the MRUA prevail over the provisions of the Code?
The findings of the Supreme Court in respect of each of the issues are set out below:
- Maintainability of the appeal
The Supreme Court held the appeal filed by the board of directors on behalf of Innoventive was not maintainable. The reasoning of the Supreme Court is based on section 17 of the Code. As per this section, once the interim resolution professional is appointed, the management of the affairs of the company vest with such interim resolution professional and the powers of the board of directors stand suspended.
Therefore, once the insolvency professional was appointed to manage the affairs of Innoventive, the directors of Innoventive were no longer in management. As the directors were no longer in management of Innoventive, they could not maintain an appeal on behalf of the company.
- Filing an application for initiating the CIRP
The Supreme Court expanded on the explanation to section 7 of the Code. The Supreme Court held that in case of an application filed by a financial creditor, the default in repayment of the debt may be in respect of a debt owed to any financial creditor and it need not be a debt owed to the applicant financial creditor. Therefore, a financial creditor may file an application in respect of a debt owed to another financial creditor of the corporate debtor.
- Disputing the existence of a default before the NCLT
The Code does not provide any right to the corporate debtor to dispute the existence of a default before the NCLT. However, the Supreme Court has held the corporate debtor may dispute the occurrence of a default, i.e., the corporate debtor may argue that the â€œdebtâ€ has in fact, not become due.
A debt is considered not due only if: (i) Interdicted by some law or (ii) If it is to be repaid at some future date. For example, if the debt of a creditor is due to be repaid at the end of ten years and the creditor files an application for initiating CIRP within a period of five years, the NCLT will find the debt as not yet due, since the corporate debtor still has a remaining period of five years to repay the debt.
- Scope of enquiry of the NCLT
The Supreme Court highlighted the difference in the scope of enquiry the NCLT is required to make at the time of considering claims of an operational debt or a financial debt.
As per the Supreme Court, in case of an operational creditor, it is sufficient if the debt is disputed for the application to be dismissed. However, in case of a claim by a financial creditor, the application may be admitted by the NCLT, regardless of whether or not the debt is disputed. That is, even a disputed debt of a financial creditor can be admitted.
- The Code prevails over the MRUA
The NCLAT held that because the Code and the MRUA operate in different fields, the MRUA would not stand in the way of a CIRP under the Code. The Supreme Court examined the accuracy of the NCLAT decision in light of the constitutional provisions for repugnancy in various countries and the Indian case law on the subject.
Subsequently, the Supreme Court upheld the order of the NCLAT but disagreed with the reasoning adopted by the NCLAT. The Supreme Court found that the provisions of the MRUA and the Code would clash on certain matters and therefore repugnancy, did in fact, exist.
Thus, while the NCLAT was correct in ruling the MRUA would not stand in the way of the Code, it was because of the repugnancy between the MRUA and the Code and not because both the MRUA and the Code operated in different fields.
• The Judgment has the effect of resolving various ambiguities which had arisen since the enactment of the Code. This is likely to ease the application process for financial creditors seeking to initiate the CIRP against corporate debtors. Further, the Judgment recognised the supremacy of the Code over conflicting legislations. This is likely to affect corporate debtors, who will not be able to claim exemption from the applicability of the Code by placing reliance on a conflicting state legislation.
• Overall, the Supreme Court has appreciated the paradigm shift in law brought about by the Code and sought to protect the interests of stakeholders as envisaged by the Code.