First Case Law Discussion

In our January 2017 newsletter you might have seen in detail about Insolvency and Bankruptcy Code, 2016 and its impact on professions like CA and CS (if you missed get it here https://www.zappyconsults.com/january-2017). This month, we are here with a recent case law which is the first case filed against the code filed in NCLT in India. This is also our first case law discussion in ZappyNews.

Our usual Legal terms and News Bites related to notifications by MCA, SEBI, RBI and IT Department follows the article.

 Saranya Deivasigamani,
CEO

CASE LAW ON IBC, 2016

Pursuant to notification of the provisions relating to insolvency resolution and liquidation process under the Insolvency and Bankruptcy Code, 2016 (Code), several applications have been made to the National Company Law Tribunal (NCLT) since mid‑ December by creditors and corporate debtors themselves. Keeping up with the tight timelines under the Code, the judicial response has been swift and the NCLT has begun reviewing and admitting applications in line with the provisions of the Code.

The Ministry of Corporate Affairs, by way of Notification no. S.O. 3594(E) dated 30 November 2016, has notified 1 December 2016 as the date for commencement and enforcement of certain core sections of the Insolvency and Bankruptcy Code, 2016 (“the Code”), as listed below –

1. clause (a) to clause (d) of section 2 (except with regard to voluntary liquidation or bankruptcy);
2. section 4 to section 32 [both inclusive];
3. section 60 to section 77 [both inclusive];
4. section 198;
5. section 231;
6. section 236 to section 238 [both inclusive]; and
7. clause (a) to clause (f) of sub-section (2) of section 239.

The provisions pertain to the corporate insolvency resolution process envisaged under the Code.

In this article we are going to see about Innoventive Industries, the company that lost a case under the Insolvency and Bankruptcy Code has moved the Bombay High Court questioning the constitutional validity of the law that allows banks to liquidate assets of a company whose debts are not recast within 180 days. ICICI Bank (the Applicant company) had filed a case at the National Company Law Tribunal (NCLT), the first under the new law, to initiate corporate insolvency resolution process on Innoventive Industries.

Innoventive Industries Ltd (the Respondent company) a Pune-based iron and steel product manufacturer, is struggling to survive. Its share price is languishing at about one-fifth of its listing price, its liabilities have skyrocketed, so has its loss. Before entering the capital markets, Innoventive had total revenues of .425.2 crore. Today, its annual loss is more than that. The company’s misfortune has left several investors, including institutional investors, who were lured by the ‘growth story’ of Innoventive. Hence the company which came out with an IPO three years ago and generated lots of interest among the institutional investors, lost around .400 crore (80%) of net worth over the last year, its liabilities increased significantly and opted for CDR plans. Financial institutions are waiting to recover debts from Innoventive. Shareholders, who invested in the IPO have already lost value, as Innoventive has been hitting lower circuits and is now trading around .16 on BSE. The Exchange too has now shifted the Innoventive scrip to ‘T’ group (Trade-to-trade) as a surveillance measure.

The Applicant company namely ICICI Bank Ltd. mentioned this Company Petition on 22.12.2016 stating that the Corporate Debtor namely Innoventive Industries Ltd. availed .240,74,57,388 as Term Loan facility, .221,80,00,000 as Working Capital facility, and $7 million as External Commercial Borrowing facility, but when the Respondent company later defaulted in making payments, this applicant says the default occurred on 30.11.2016 for .212,22,10,737 towards RTL facility, .27,50,05,661 towards Working Capital facility and .211,47,58,969 towards External Commercial Borrowing facility. Since the aforesaid facilities have not been recalled, the total outstanding amount payable by this corporate debtor is .21,019,177,034 as on November 30, 2016 and the Corporate Debtor is liable to pay the outstanding amount together with interest cost, expenses and other moneys which shall accrue on the contractual rate.

ICICI’s application has been filed under Section 7(1) of the Code, which enables a ‘financial creditor’ either by itself or jointly with other financial creditors to initiate the corporate insolvency resolution process. As the first of its kind case filed under the Code, this is expected to serve as a primer for the suits that follow.

ICICI Bank v/s Innoventive Industries Limited

As a first of its kind, the NCLT (Mumbai) has, on 17 January 2017, passed an order in the matter of ICICI Bank Limited v/s Innoventive Industries Limited (Innoventive Order) inter alia admitting the application under the Code filed by ICICI Bank for initiating the corporate insolvency resolution process (CIR Process). An application was filed by ICICI Bank stating that the corporate debtor i.e. Innoventive Industries Limited (Innoventive) had availed a term loan facility, a working capital facility and an external commercial borrowing and had defaulted in repayment of these amounts. Accordingly, they sought initiation of the CIR Process under provisions of the Code.

Innoventive contended that it had been declared as a ‘relief undertaking’ under the Maharashtra Relief Undertaking (Special Provisions) Act, 1958 (MRU Act) and consequently, the existing proceedings against it stand suspended until 21 July 2017. Further, the contention was also supplemented with an argument that the MRU Act has a non-obstante clause which empowers the State Government to suspend any remedy for enforcement in relation to any right or liability accrued prior to an entity being declared as a relief undertaking.

The NCLT rejected the aforesaid argument and passed an order accepting the application and declaring moratorium, observing as under:

• Section 238 of the Code also contains a non-obstante clause similar to the MRU Act, which states that the provisions of the Code shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law. Since the Code is subsequent to the MRU Act, the non-obstante clause under Section 238 of the Code prevails.
• The suspension of liability under the MRU Code is inconsistent with the ability of a creditor to initiate the CIR Process under the Code and therefore, the overriding powers under Section 238 of the Code shall render the suspension under MRU act inoperative.
• Declaration of moratorium keeps business as usual for employees without affecting their interest and therefore a declaration of moratorium would not be in conflict with the objective of the MRU Act (which is to prevent unemployment of the existing employees of a relief undertaking).

This is the first case in India filed under the Insolvency and Bankruptcy Code, 2016, and it will provide a primer on how the new law will help tackle the banking system’s nearly .6.7 trillion of bad loans. The banks are hoping that the new law will enable them to expedite recovery and revive companies within a reasonable timeframe. The code is expected to empower the judicial system to handle corporate defaults and winding-up petitions. The NCLT would be the adjudicating authority on these matters and function under strict deadlines prescribed by the code.

Legal Term

Ex Gratia

(n) Something done voluntarily and with no expectation a legal liability arising therefrom.

MCA Updates

• Investor Education and Protection fund Authority (accounting, Audit, Transfer and Refund) Amendment Rules, 2017 came into force from the 28th February, 2017.

SEBI Updates

• Gazette Notification dated 6th March, 2017 regarding Securities and Exchange Board of India (Payment of Fees and Mode of Payment) (Amendment) Regulations, 2017.

RBI Updates

• Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) (Second Amendment) Regulations, 2017.

Income Tax Updates

• The concept of POEM for deciding the residential status of a Company, other than an Indian Company, was introduced by the Finance Act, 2015 and shall come into effect from 1st April, 2017.