Vidarbha Industries Power and Rainbow Papers judgments of Supreme Court may be nullified in incoming amendments under Insolvency and Bankruptcy Code, 2016 (IBC)

Vidarbha Industries Power and Rainbow Papers judgments of Supreme Court
may be nullified in incoming amendments under Insolvency and Bankruptcy Code, 2016 (IBC)

On January 18, 2023, Ministry of Corporate Affairs(MCA) invited public comments on various amendments/changes being considered to the Insolvency and Bankruptcy Code, 2016.

a. Mandatory to admit an application filed under section 7 where occurrence of a default is established

Section 7 of the Code provides for an application by a financial creditor for the commencement of the CIRP in respect of a Corporate Debtor(CD). Under sub-section (5) of section 7, where the Adjudicating Authority (AA) is satisfied that the CD has committed a default and other procedural requirements are fulfilled, it is required to admit the application and initiate the CIRP. The scope of the AA’s power in this regard is limited to the determination of default, and the provision does not require the AA to consider other factors or circumstances regarding the inability of the CD to repay its debts. The legislative intent, in this regard, was also clarified in the Notes on Clauses to Clause 7 of the Insolvency and Bankruptcy Code Bill, 2015, when the law was originally introduced in the Parliament.

The Supreme Court, in Vidarbha Industries Power Ltd. Vs. Axis Bank Ltd. (2022) ibclaw.in 91 SC, has interpreted the use of ‘may’ in section 7(5) to indicate that the AA has the discretion to admit or reject despite existence of a default. Consequently, it is observed that the AAs delve into detailed factors relating to the solvency and financial health of the corporate debtor, which is not required as per the original intent of the law. This has resulted in confusion in the market regarding the scope of AA’s discretion at the admission stage. To alleviate any doubts in this regard, it is proposed that section 7 may be amended to clarify that while considering an application for initiation of the CIRP by the financial creditors, the AA is only required to be satisfied about the occurrence of a default and fulfilment of procedural requirements for this specific purpose (and nothing more). Where a default is established, it is mandatory for the AA to admit the application and initiate the CIRP.(para 3 of the Notice)

Further development after Vidarbha Industries Power judgment:

There is total 16 judgments (reported in IBC Laws till 18.01.2023) were passed by various forms such NCLAT/NCLT referring Vidarbha Industries Power Ltd. Vs. Axis Bank Ltd. (2022) ibclaw.in 91 SCRecently, Hon’ble Supreme Court in Maganlal Daga HUF & Anr. Vs. Jag Mohan Daga & Ors. (2023) ibclaw.in 07 SC has issued the notice in appeal against NCLAT’s order in Mr. Jag Mohan Daga Vs. Mr. Bimal Kanti Chowdhary, IRP of M/s. Vindhya Industries Pvt. Ltd. & Anr. (2022) ibclaw.in 883 NCLAT in which NCLAT relied upon Vidarbha Industries Power Limited judgment and allowed appeal dismissing CIRP of M/s. Vindhya Industries Pvt. Ltd. (Corporate Debtor) admitted by National Company Law Tribunal, Kolkata Bench vide its order dated 14.07.2022 under Section 7 of Insolvency and Bankruptcy Code, 2016 (IBC). 

Vidarbha Industries Power judgment referred in various judgments can be accessed here.

 

b. Clarity in the treatment of security interests created by statutes

There have been several judicial opinions in favour of granting equitable distribution to OCs under the processes of the Code. The recoveries made by OCs under liquidation are seemingly inadequate, even compared to unsecured FCs. Thus, to improve their position in the priorities for distribution under a plan or in liquidation, it is being considered that all unsecured creditors (FCs, OCs and any government or authority) other than the workmen and employees shall be treated equally for distribution under section 53. The order of priority for the secured creditors, workmen and employees shall be retained as stipulated under section 53.

Section 3(30) of IBC defines a ‘secured creditor’ as a creditor in favour of whom security interest is createdIn State Tax Officer Vs. Rainbow Papers Ltd. (2022) ibclaw.in 107 SC, the Supreme Court interpreted the definition of ‘secured creditor’ to hold that any government or governmental authority shall be a secured creditor as the charge created by a statutory law can be considered as a ‘security interest’. The definition of ‘security interest’ under the Code means that a right, title or interest or a claim to property, created in favour of, or provided for a secured creditor by a transaction, which secures payment of performance of an obligation. It is intended to be restricted to ‘transactions’, which means that the security interest should be created pursuant to an agreement on the part of the asset holder while giving rights to the other party. Further, ‘transaction’, as defined under section 3(33), includes an agreement or arrangement in writing to transfer assets, funds, goods, or services from or to the CD. Thus, it is clear that the concept of security interest was intended to cover a consensual transaction between parties (and not any similar interest created through mere operation of a statute).

Thus, it is being considered that all debts owed to Central Government and the State Government, irrespective of whether they are secured creditors pursuant to a security interest created by a mere operation of statute, shall be treated equally with other unsecured creditors. Further, it will be clarified that only where the security interest is created pursuant to a transaction of the Central Government or a State Government with CD, the Government in question will continue to be treated as a secured creditor in the order of priority.(para 13 and 14 of the Notice)

Further development after Rainbow Papers Ltd. judgment:

There is total 8 judgments (reported in IBC Laws till 18.01.2023) were passed by various forms such NCLAT/NCLT referring State Tax Officer Vs. Rainbow Papers Ltd. (2022) ibclaw.in 107 SC.

Rainbow Papers Ltd. judgment referred in various judgments can be accessed here.

Suggestion/comments, if any, along with brief justification may be submitted online latest by 5:30 PM on 07.02.2023.

Click here for more changes and amendments details.

 

 

 


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