This blog explores the evolution and application of the doctrine of substantial consolidation in the context of real estate insolvency, examining key cases and the potential it holds for streamlining the insolvency process and safeguarding stakeholders’ interests.
In light of this ruling of Delhi High Court, the article attempts to analyse the implications of the judgement. First section of this post will first delve into the background of the case; thereafter author will explore and discuss the different aspects of the judgement. The article will conclude by analysing the case within the broader context of IBC vis-à-vis avoidance application and the possible reasons of lower rate of adjudication of such applications.
NCLT has so far applied 60 (5) as a comprehensive remedy for all issues pertaining to a Corporate Debtor undergoing CIRP or liquidation. Through the cases discussed below, the authors argue that though the Court/Tribunal has acknowledged the limitations inherent to NCLT’s powers, several concerns surrounding Section 60 (5) require further clarification.
This decision is significant because it treats financial creditors and investors as mutually exclusive categories, which effectively means that an investor (who structures its investment using debt instruments) cannot also be a financial creditor and cannot therefore avail itself of the enforcement mechanism and remedies available to a financial creditor under the IBC. Moreover, it would also mean that such an investor would feature at a lower rung of the waterfall if the company went into liquidation. Neither of these is a desirable outcome and if this proposition is upheld by higher authorities, it may cause investors to rethink the terms on which they participate in investments.
After almost four years since the IBC came into force, the Supreme Court of India finally had the opportunity of clearing the air around treatment of third-party security claims under a CIRP. A third-party security means a security which has been created by a party over its own assets for securing the repayment of a debt disbursed in favour of a party other than the party providing such security. A consistent view on the ambit of Section 5(8) of IBC qua third-party securities was given by the Court in two judgments recently Phoenix ARC Pvt. Ltd. v. Ketulbhai Ramubhai Patel (2021) ibclaw.in 04 SC (“Phoenix ARC Case”), decided on 3 February 2021, and in the case of Anuj Jain Interim Resolution Professional for Jaypee Infratech Limited v. Axis Bank Limited Etc. Etc.  ibclaw.in 06 SC, (“Jaypee Infratech Case”) decided on 26 February 2021. This article seeks to discuss the aforementioned rulings and highlight its implications on the fate of third-party securities vis-à-vis IBC.