Innoventive Industries Ltd. v. ICICI Bank and Anr.
(2017) ibclaw.in 02 SC
31-Aug-17
Justice R.F. Nariman and Justice Sanjay Kishan Kaul
“We thought it necessary to deliver a detailed judgment so that all Courts and Tribunals may take notice of a paradigm shift in the law.”- Hon’ble Supreme Court
In this landmark judgment, Innoventive Industries Ltd. v. ICICI Bank and Anr. (2017) ibclaw.in 02 SC, Hon’ble Court found that this is the very first application that has been moved under the Code, it necessary to deliver a detailed judgment so that all Courts and Tribunals may take notice of a paradigm shift in the law.
The decision of the Hon’ble Supreme Court is summarised in the following points:
I. Objectives of the Code
- One of the important objectives of the Code is to bring the insolvency law in India under a single unified umbrella with the object of speeding up of the insolvency process.(p13)
- The Insolvency and Bankruptcy Code, 2016 is an Act to consolidate and amend the laws relating to reorganization and insolvency resolution, inter alia, of corporate persons.(p52)
- The scheme of the Code is to ensure that when a default takes place, in the sense that a debt becomes due and is not paid, the insolvency resolution process begins.(p27)
- The scheme of the Code, therefore, is to make an attempt, by divesting the erstwhile management of its powers and vesting it in a professional agency, to continue the business of the corporate body as a going concern until a resolution plan is drawn up, in which event the management is handed over under the plan so that the corporate body is able to pay back its debts and get back on its feet. (p33)
- It is settled law that a consolidating and amending act like the present Central enactment forms a code complete in itself and is exhaustive of the matters dealt with therein.(p53)
- There can be no doubt, therefore, that the Code is a Parliamentary law that is an exhaustive code on the subject matter of insolvency in relation to corporate entities, and is made under Entry 9, List III in the 7th Schedule.(p53)
II. Definitions under IBC
- Default: The scheme of the Code is to ensure that when a default takes place, in the sense that a debt becomes due and is not paid, the insolvency resolution process begins. Default is defined in Section 3(12) in very wide terms as meaning non-payment of a debt once it becomes due and payable, which includes non-payment of even part thereof or an instalment amount. (p27)
- Debt & Claim: For the meaning of “debt”, Section 3(11) tells us that a debt means a liability of obligation in respect of a “claim” and for the meaning of “claim”, Section 3(6) defines “claim” to mean a right to payment even if it is disputed. A debt may not be due if it is not payable in law or in fact.(p27-28)
- Financial Creditors and Operational Creditors: A distinction is made by the Code between debts owed to Financial Creditors and Operational Creditors. A Financial Creditor has been defined under Section 5(7) as a person to whom a financial debt is owed and a financial debt is defined in Section 5(8) to mean a debt which is disbursed against consideration for the time value of money. As opposed to this, an Operational Creditor means a person to whom an operational debt is owed and an operational debt under Section 5 (21) means a claim in respect of provision of goods or services.(p27)
III. CIRP Initiation
- When it comes to a Financial Creditor triggering the process, Section 7 becomes relevant. Under the explanation to Section 7(1), a default is in respect of a financial debt owed to any Financial Creditor of the Corporate Debtor – it need not be a debt owed to the applicant Financial Creditor.
- The speed, within which the Adjudicating Authority is to ascertain the existence of a default from the records of the information utility or on the basis of evidence furnished by the Financial Creditor, is important. This it must do within 14 days of the receipt of the application.
- It is at the stage of Section 7(5), where the Adjudicating Authority is to be satisfied that a default has occurred, that the Corporate Debtor is entitled to point out that a default has not occurred in the sense that the “debt”, which may also include a disputed claim, is not due.
- The moment the Adjudicating Authority is satisfied that a default has occurred, the application must be admitted unless it is incomplete, in which case it may give notice to the applicant to rectify the defect within 7 days of receipt of a notice from the Adjudicating Authority.
- Under sub-section (7), the Adjudicating Authority shall then communicate the order passed to the Financial Creditor and Corporate Debtor within 7 days of admission or rejection of such application, as the case may be.(p28)
IV. CIRP under Section 7 vs. Section 9
- The scheme of Section 7 stands in contrast with the scheme under Section 8 where an Operational Creditor is, on the occurrence of a default, to first deliver a demand notice of the unpaid debt to the operational debtor in the manner provided in Section 8(1) of the Code.(p29)
- Existence of a dispute: Under Section 8(2), the Corporate Debtor can, within a period of 10 days of receipt of the demand notice or copy of the invoice mentioned in sub-section (1), bring to the notice of the Operational Creditor the existence of a dispute or the record of the pendency of a suit or arbitration proceedings, which is pre-existing – i.e. before such notice or invoice was received by the Corporate Debtor. The moment there is existence of such a dispute, the Operational Creditor gets out of the clutches of the Code.(p29)
- On the other hand, as we have seen, in the case of a Corporate Debtor who commits a default of a financial debt, the Adjudicating Authority has merely to see the records of the information utility or other evidence produced by the Financial Creditor to satisfy itself that a default has occurred. It is of no matter that the debt is disputed so long as the debt is “due” i.e. payable unless interdicted by some law or has not yet become due in the sense that it is payable at some future date. It is only when this is proved to the satisfaction of the Adjudicating authority that the Adjudicating authority may reject an application and not otherwise.(p30)
V. IRP/RP and Management of the affairs of the Corporate Debtor
- Under Section 17, the erstwhile management of the Corporate Debtor is vested in an interim resolution professional who is a trained person registered under Chapter IV of the Code.
- The interim resolution professional shall be vested with the management of the Corporate Debtor and be responsible for receiving claims.
- This interim resolution professional is now to manage the operations of the Corporate Debtor as a going concern under the directions of a committee of creditors appointed under Section 21 of the Act. (p32)
VI. Can Erstwhile Directors/Suspended Management of the Corporate Debtor maintain an appeal on behalf of the Corporate Debtor?
- Hon’ble Supreme Court held that we find substance in the plea taken by Shri Salve that the present appeal at the behest of the erstwhile directors of the appellant is not maintainable. According to us, once an insolvency professional is appointed to manage the company, the erstwhile directors who are no longer in management, obviously cannot maintain an appeal on behalf of the company.
- Entrenched managements are no longer allowed to continue in management if they cannot pay their debts.
- In the present case, the company is the sole appellant. This being the case, the present appeal is obviously not maintainable.(p11)
VII. CIRP Time Limit u/s 12 of IBC
- The entire process is to be completed within a period of 180 days from the date of admission of the application under Section 12 and can only be extended beyond 180 days for a further period of not exceeding 90 days if the committee of creditors by a voting of 75% of voting shares so decides. It can be seen that time is of essence in seeing whether the corporate body can be put back on its feet, so as to stave off liquidation.(p31)
VIII. Resolution Plan
- Resolution Plan must provide for payment of insolvency resolution process costs, management of the affairs of the Corporate Debtor after approval of the plan, and implementation and supervision of the plan.
- It is only when such plan is approved by a vote of not less than 75% of the voting share of the Financial Creditors and the Adjudicating Authority is satisfied that the plan, as approved, meets the statutory requirements mentioned in Section 30, that it ultimately approves such plan, which is then binding on the Corporate Debtor as well as its employees, members, creditors, guarantors and other stakeholders.(p33)
IX. State Laws (Maharashtra Relief Undertakings (Special Provisions Act), 1958) vs. Section 238 of the IBC
- There is no doubt that by giving effect to the State law, the aforesaid plan or scheme which may be adopted under the Parliamentary statute will directly be hindered and/or obstructed to that extent in that the management of the relief undertaking, which, if taken over by the State Government, would directly impede or come in the way of the taking over of the management of the corporate body by the interim resolution professional.(p55)
- Also, the moratorium imposed under Section 4 of the Maharashtra Act would directly clash with the moratorium to be issued under Sections 13 and 14 of the Code. It will be noticed that whereas the moratorium imposed under the Maharashtra Act is discretionary and may relate to one or more of the matters contained in Section 4(1), the moratorium imposed under the Code relates to all matters listed in Section 14 and follows as a matter of course.(p55)
- In the present case it is clear, therefore, that unless the Maharashtra Act is out of the way, the Parliamentary enactment will be hindered and obstructed in such a manner that it will not be possible to go ahead with the insolvency resolution process outlined in the Code. Further, the non-obstante clause contained in Section 4 of the Maharashtra Act cannot possibly be held to apply to the Central enactment, inasmuch as a matter of constitutional law, the later Central enactment being repugnant to the earlier State enactment by virtue of Article 254 (1), would operate to render the Maharashtra Act void vis-à-vis action taken under the later Central enactment.(p55)
- It is clear that the later non-obstante clause of the Parliamentary enactment will also prevail over the limited non obstante clause contained in Section 4 of the Maharashtra Act. For these reasons, we are of the view that the Maharashtra Act cannot stand in the way of the corporate insolvency resolution process under the Code.(p55)
- It is precisely for this reason that the non-obstante clause, in the widest terms possible, is contained in Section 238 of the Code, so that any right of the Corporate Debtor under any other law cannot come in the way of the Code.(p56)
- For all these reasons, we are of the view that the Tribunal was correct in appreciating that there would be repugnancy between the provisions of the two enactments. The judgment of the Appellate Tribunal is not correct on this score because repugnancy does exist in fact.(p56)
X. Infuse funds into the Corporate Debtor
- Even otherwise, Shri Salve took us through the MRA in great detail. Dr. Singhvi did likewise to buttress his point of view that having promised to infuse funds into the appellant, not a single naya paisa was ever disbursed. According to us, one particular clause in the MRA is determinative on the merits of this case, even if we were to go into the same.
- The obligation of the Corporate Debtor was, therefore, unconditional and did not depend upon infusing of funds by the creditors into the appellant company. Also, the argument taken for the first time before us that no debt was in fact due under the MRA as it has not fallen due (owing to the default of the secured creditor) is not something that can be countenanced at this stage of the proceedings. In this view of the matter, we are of the considered view that the Tribunal and the Appellate Tribunal were right in admitting the application filed by the Financial Creditor ICICI Bank Ltd.(p58-59)
XI. Conclusion
The appeals, accordingly, stand dismissed. There shall, however, be no order as to costs.(p60)
Disclaimer: Your use of any information or materials on this website is entirely at your own risk, for which we shall not be liable. It shall be your own responsibility to ensure that any products, services or information available through this website meet your specific requirements. The judgments uploaded or facilitated on the website are for the purposes of better understanding to the users. Any of those text of judgement may have some typographical errors, inaccuracies or omissions and may differ from the original text as issued by respective authority. We suggest you to refer the judgement hosted by Government authorised website to make any legal opinion or use in legal advice. We are not liable for any loss or damage caused to any person because of text posted by us on the website. We advise you to refer the same for understanding purposes only and use the original text of the judgement or rulings for drafting legal opinion. We are not liable for any loss or damage caused to a person because of text posted by us on the website. Read full Disclaimer and Privacy Policies.
Follow for daily updates:
