NUALS IBC E- NEWSLETTER[Dr. Anil R. Nair, Associate Professor, Director, CPSLR, NUALS, Kochi.] The Centre for Parliamentary Studies and Law Reforms (CPSLR) under the National University

NUALS IBC E- NEWSLETTER [1]

NUALS

IBC E- NEWSLETTER Vol. 1, June-July, 2018

* All views expressed are those of the authors. The Newsletter is for private circulation and not for sale.

CONTENTS

INSOLVENCY AND BANKRUPTCY CODE (AMENDMENT ORDINANCE) 2018

By: Manal Shah…………………………………………………………………………………………..........4.

HOME BUYERS UNDER THE IBC-PRE AND POST ORDINANCE 29A

By: Manu Sharma……………………………………………………………………………………………..5.

ANALYSIS OF THE DRAFT ON CROSS-BORDER INSOLVENCY

By: Naveen Kumar…………………………………………………………………………………………….7.

CROSS-BORDER INSOLVENCY: IMPACT ON FOREIGN CREDITORS AND ASSET

RECONSTRUCTION COMPANIES (ARCS)

By: Utkarsh Jhingan and Anjali Anil……………………………………………………………………………9.

THE INTERPLAY BETWEEN SECTION 138 OF THE NEGOTIABLE INSTRUMENTS ACT,

1938 AND THE INSOLVENCY AND BANKRUPTCY CODE, 2016.

By: Sanjana Banerjee………………………………………………………………………………………….10.

CASE UPDATES ………………………………………………………………………………………...11.

REGULATORY CHANGES…………………………………………………………………………….16.

CIRCULARS……………………………………………………………………………………………..20.

AN INITIATIVE OF CENTRE FOR PARLIAMENTARY STUDIES AND LAW REFORMS, NUALS (KOCHI).


“FOREWORD”

[Dr. Anil R. Nair, Associate Professor, Director, CPSLR, NUALS, Kochi.]

The Centre for Parliamentary Studies and Law Reforms (CPSLR) under the National University of Advanced

Legal Studies (NUALS) is an endeavour of the University to make legislation more effective for social

transformation and to achieve social justice by equitable administration of law. The CPSLR adopts an inter-

disciplinary approach to identify the inadequacies of present laws, suggest the changes required and support

the enactment of new laws to meet emerging challenges. The Centre has initiated studies on parliamentary

procedures and legislative practices to provide necessary recommendations for the rectification of defects and

to better their functioning. The CPSLR strives to guarantee public participation in the process of law making

to provide valuable inputs for the qualitative improvement of the law. It provides a point of convergence for

law makers, academicians and the general public.

The IBC E-Newsletter of the CPSLR is a tool to create public awareness of the current developments in the

realm of bankruptcy and insolvency consequent to the implementation of the IBC. It provides a platform for

publication of research in this area.

Conceived and edited by a team of very enthusiastic and bright legal minds, the first edition of the newsletter

exemplifies the effort of the editorial team with its well-researched and excellently articulated articles on the

subject. As the Director of the Centre it is my pleasure to present this first edition of the CPSLR IBC E-

Newsletter to the world with a promise of successive volumes with equally rich and updated content.

NUALS IBC E-NEWSLETTER TEAM

Sanjana Banerjee, Rohitesh Tak, Pulkit Khare, Abhijeet Singh Thakur, Ajay Krishna, Anagha Prasad,

Anuj Jain, Charchil Vijay, Chitransh Vijayvergia, P. Dharma Teja, Vaidehi Soni, Dilmrig Nayani,

Husna Fayaz, Jagriti Sanghi, Jemimah Mathews, Krishna Das Saiju, Manal Shah, Manu Sharma,

Nikhil Gupta, Priyadarsini TP, Rishabh Saxena, Sharath Chandupatla, Shashwat Bhaskar, Utkarsh

Jhingan, Vidit Goyal, Vishnu Suresh, Anand Amit, Anjali Anil, Naveen Kumar LR, Vallari

Dronamraju.


LIST OF ABBREVIATIONS

S. NO. ABBREVIATION MEANING

1. & And

2. AA Adjudicating Authority

3. ALB Allahabad Bench

4. ARCs Asset Reconstruction Companies

5. AT Appellate Tribunal

6. CA Company Appeal

7. CD Corporate Debtor

8. CIRP Corporate Insolvency Resolution Process

9. CoC Committee of Creditors

10. CPSLR The Centre for Parliamentary Studies and Law Reforms

11. ECBs External Commercial Borrowings

12. EoI Expression of Interest

13. FC Financial Creditor

14. FCCBs Foreign Currency Convertible Bonds

15. HDB Hyderabad Bench

16. HUF Hindu Undivided Family

17. IA Insolvency Application

18. IBBI Insolvency and Bankruptcy Board of India

19. IBC Insolvency and Bankruptcy Code

20. ICDR Issue of Capital and Disclosure Requirements

21. INR Indian Rupee

22. IRP Insolvency Resolution Process

23. IUs Information Utilities

24. KB Kolkata Bench

25. MAT Minimum Alternate Tax

26. MCA Ministry of Corporate Affairs

27. MSME Micro Small and Medium Enterprises

28. MTNs Medium Term Notes

29. NCLAT The National Company Law Appellate Tribunal

30. NCLT National Company Law Tribunal

31. NeSL National e-Governance Services Limited

32. NI Act Negotiable Instruments Act, 1938

33. No. Number

34. NPA Non-Performing Asset

35. PRA Potential Resolution Applicant

36. RBI Reserve Bank of India

37. RERA Real Estate (Regulation and Development) Act, 2016

38. RP Resolution Professional

39. S. Section

40. SBI State Bank of India

41. SEBI Securities and Exchange Board of India

42. u/s Under Section

43. UNCITRAL The United Nations Commission on International Trade Law

44. v. Versus

45. Vol. Volume

46. w.r.t With reference to

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INSOLVENCY AND BANKRUPTCY CODE

(AMENDMENT ORDINANCE) 2018

By: Manal Shah

INTRODUCTION

The President of India assented to promulgate the

Insolvency and Bankruptcy Code (Amendment

Ordinance) 2018 (No. 6 of 2018) on June 06, 2018.

This Amendment will supersede the Insolvency

and Bankruptcy (Amendment) Act, 2018 dated

January 18, 2018 and will be in furtherance of the

Insolvency and Bankruptcy Code (Removal of

Difficulties) Order 2017.

The new Amendment comes in the light of the

need to: firstly, to balance the interest of

stakeholders in the Code (especially, homebuyers

and promoters of micro, small and medium

enterprises); and secondly, to promote resolution

over liquidation of Corporate Debtor and thirdly, to

streamline the provisions relating to the eligibility

of resolution applicants.

HOME BUYERS ARE NOW FINANCIAL

CREDITORS

The Amendment, by introducing Explanation to

Section 5(8), deems home buyers as financial

creditors, thereby giving them representation in the

Committee of Creditors (“CoC”) and a say in the

decision-making process during the Corporate

Insolvency Resolution Process. It also enables

them to invoke Section 7 of the Code against

defaulting developers.

LEEWAY FOR MICRO SMALL AND

MEDIUM ENTERPRISES

Newly introduced Section 240A empowers the

Central Government to introduce further

exemptions from the Code to MSMEs, if required,

in public interest, considering their significance to

the economy. MSMEs are exempted from two

disqualifications applicable to resolution applicants:

(i) If the associated account being declared as Non-

Performing Asset (“NPA”) under clause (c) of

Section 29A; and (ii) if it has executed an

enforceable guarantee in favor of a creditor in

respect of corporate debt against which an

application for Insolvency resolution made by such

creditor has been admitted under this Code.

PROMOTING RESOLUTION OVER

LIQUIDATION

In order to promote Corporate Insolvency

Resolution Process, voting thresholds have been

altered as follows:

Subject Matter Before

Amendment

After

Amendment

Appointment

of Interim

Resolution

Professional

75% of

voting share

of financial

creditors

66% of

voting share

of financial

creditors

Replacement of

Resolution

Professional

75% of

voting share

of financial

creditors

66% of

voting share

of financial

creditors

Extension of

Corporate

Insolvency

Resolution

Process

75% of

voting share

of financial

creditors

66% of

voting share

of financial

creditors

Decision on

common

matters

75% of

voting share

of financial

creditors

51% of

voting share

of financial

creditors

Approval of

resolution plan

by Committee

of Creditors

75% of

voting share

of financial

creditors

66% of

voting share

of financial

creditors

Initiation of

Liquidationi

Not

Prescribed

66% of

voting share

of financial

creditors

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The Amendment lays down that, even upon the

expiry of the CIRP period after the resolution plan

under Section 30(6) has been submitted, the

Resolution Professional should continue to manage

the operations of the Corporate Debtor until an

Approval Order is passed by the Adjudicating

Authority. It also provides for one-year grace

period for the successful resolution applicant to

fulfil various statutory obligations required under

different laws.

COMMITTEE OF CREDITORS (CoC)

The Ordinance further restricts withdrawal of

applications, after admission, and permits the same

only with the backing of 90% of voting share of the

CoC. The Ordinance provides for a mechanism to

allow participation of security holders, deposit

holders and all other classes of financial creditors

that exceed a certain number, in the meetings of the

CoC, through authorised representative(s). Prior to

this Amendment, all financial creditors of the

Corporate Debtor were required to be represented

in the CoC. However, this Amendment bars a

related party (defined comprehensively by insertion

of Section 24A to the Code) to whom a Corporate

Debtor owes a financial debt from having any

representation, participation or voting rights in the

meetings.

OTHER NOTABLE CHANGES

The Ordinance has amended Section 29A of the

Code to relieve pure play financial entities from

disqualifications. Similarly, it has provided a three-

year cooling-off period from the date of such

acquisition for a resolution applicant holding NPA,

by virtue of acquiring it in the past under the Code.

In view of the wide array of disqualifications

contained in Section 29A, the Amendment now

requires the resolution applicant to submit an

affidavit certifying its eligibility to take part in the

process.

COMMENTS

Prior to this amendment, several loopholes existed

in the law. This Amendment is a step ahead in the

right direction. Interpretation of the Courts in

terms of homebuyers would further clarify their

status in the Insolvency Resolution Process.

HOME BUYERS UNDER THE IBC-PRE

AND POST ORDINANCE 29A

By: Manu Sharma

After the implementation of the Insolvency and

Bankruptcy Code 2016, the most pertinent

question that has come before the insolvency

Board and the Courts presiding over the insolvency

cases is that of classifying the claimants as per the

scheme of the code. The IBC provides for the

claimants to be either classified as ‘financial

creditors’ or ‘operational creditors’ for the purpose

of adjudication of their respective claims.

This was quite a smooth scheme as long as it did

not come across the situation of ‘home buyers’ in

the case of any residential premises construction

company not being able to meet the claims against

it and eventually submitting to the resolution

process under the IBC. It would be important to

mention that the respective definitions of both, the

financial creditors under Section 5 sub-section 7

and of operational creditors under section 5 sub

section 20 of the Insolvency and Bankruptcy Code

could not bring the claim of ‘home buyer’ under

their ambit. Multiple judgments have categorised

them as neither fitting within the definition of

‘financial’ nor ‘operational’ creditors.ii

In a particular case,iii they have been classified as

‘financial creditors’ due to the assured return

scheme in the contract, in which there was an

arrangement wherein it was agreed that the seller of

the apartments would pay ‘assured returns’ to the

home buyers till the possession of property was

given. It was held that such a transaction was in the

nature of a loan and constituted a ‘financial debt’

within the Code. A similar judgment was given in

Anil Mahindroo & Anr v. Earth Organics

Infrastructure.iv But, it must be noted that these

judgments were given considering the terms of the

contracts between the home buyers and the seller

and are fact specific. Further, the IBBI issued a

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claim form for “creditors other than financial or

operational creditors” v, which gave an indication

that home buyers are neither financial nor

operational creditors.

The differentiating aspect with respect to the

concepts of operational and financial creditors lies

in the association of operational creditors with

goods and services while that of financial creditors

with assured returns on the capital extended to the

entity. Now, analysing these two links, neither

‘home buyers’ offer any services as such nor do

they provide any capital on the promise of assured

returns. The transaction involving a ‘home buyer’ is

that of a primitive buyer-seller agreement where

they pay in differed instalments for a constructed

unit to be allotted to them at the time of

completion.

This question came up before the courts several

times during the short history of the code. Because

of legislature’s constructed view of the IBC as an

effective means to tackle the problem of rising

NPAs and their pending settlement claims before

various authorities, this concern regarding the

industry specific claimants’ case was somewhere

left in oblivion.

Finally, the courts lived up to their constitutional

duty of filing up the gaps left by the legislature and

providing proper and complete interpretation to

the provisions of the code.

There is uniqueness with respect to the industry of

residential construction, which provides the home

buyers an exclusive position at par with other

creditors under the IBC. This is due to the liquidity

driven nature of the projects in this sector that the

builders make the buyers advance the part of the

cost of the units sold at regular intervals in

exchange of a promise of complete possession at a

later date. So, in equitable terms, this money

advanced by the buyers provides a part of working

capital just like in a financial debt advanced.

Applying the principles applicable to a financial

debt in this situation results in the inception of the

concept of ‘time value of money’. Hence, extending

its applicability to ‘home buyers’. This principle

inter alia means the promise of assured return on

the capital extended under an agreement.

The interpretation to be accorded to a forward sale

or purchase agreement to have the texture of a

financial contract may be drawn from an

observation made in the case of Nikhil Mehta and

Sons (HUF) v. AMR Infrastructure Ltd.:vi

“A forward contract to sell product at the end

of a specified period is not a financial contract.

It is essentially a contract for sale of specified

goods. It is true that some time financial

transactions seemingly restructured as sale and

repurchase. Any repurchase and reverse repo

transaction are sometimes used as devices for

raising money. In a transaction of this nature

an entity may require liquidity against an asset

and the financer in return sell it back by way of

a forward contract. The difference between the

two prices would imply the rate of return to the

financer.”

Therefore, the court came to the conclusion that

not all forward sale and purchase transactions are

financial in nature but if they are structured in a way

so as to raise liquidity against an asset, there is

hardly any doubt that remains with it being a

financial transaction in nature. In Chitra Sharma

v. Union of Indiavii the amount of debts owed to

home buyers, which was paid by them as advances,

was claimed to be INR Fifteen Thousand Crore,

more than what was due to banks.viii

Further it was reported in the IBC Committee

report of March, 2018 that “The Committee also

discussed that section 30(2)(e) of the Code

provides that all proposed resolution plans

must not contravene any provisions of law in

force, and thus, the provisions of Real Estate

(Regulation and Development) Act, 2016

(“RERA”) will need to be complied with and

resolution plans under the Code should be

compliant with the said law.”

Finally, in the same report published in March,

2018, the committee concluded that the claim of

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‘home buyers’ be included as a financial debt

specifically under section 5 (8) (f). This

recommendation was implemented after the

passing of the ordinance 29A and thus amendment

in the code. With the insertion of this particular

clause, home buyers are now treated as financial

creditors and are given due priority as per the

scheme of the code.

ANALYSIS OF THE DRAFT ON CROSS-

BORDER INSOLVENCY

By: Naveen Kumar LR

Cross-Border Insolvency is a situation where the

debtor who filed for insolvency has assets in one or

more States or where a few of the creditors or the

debtors are not from the same State where the

insolvency proceeding is initiated or is ongoing.ix

Currently, under the Insolvency and Bankruptcy

code 2016 (herein referred to as “the Code”) there

is only a superficial mention of cross border

insolvency and a lack of procedural aspect

regarding the same. Sections 234 and 235 of the

Code deal with cross border insolvency in

a perfunctory manner, empowering the government

to make treaties and further empowering the

Adjudicating Authority, to issue a letter of request

to a court in such a country, with which an

agreement has been previously entered into, to deal

with the assets in a specified, pre-determined

manner (presumably, in accordance with the

provisions of the Code).

The draft primarily speaks of adopting the

UNCITRAL Model Law on Cross-border

insolvency, 1997 presently adopted by 44 countries

worldwide. This will ensure uniformity in the law

across nations in this aspect as several states have

reservations to it and may require reciprocity, in

this case a law based on the Model law. This can be

solved by having a cross-border insolvency law

based on the Model law and meeting the

requirement.

The adoption of this Model law will solve several

issues such as complexity and uncertainty for

investors when the bilateral agreements entered

into by two countries differ from country to

country. Also, in the absence of a bilateral treaty

there would be no guidance available on remedies

available and in relation to the assets of a debtor, in

a foreign jurisdiction. It also solves the issue of

recognition of foreign proceedings and judgments

in India which would be a disincentive for various

foreign creditors who may prefer assistance of

courts in India The mechanism for enforcement of

the judgments of foreign countries under the Civil

Procedure, 1908 is not broad enough to cover

orders regarding the reorganization process,

administrative and interim orders which lead to

unenforceability of several judgments and

processes in India. The Report on the Joint

Committee on Insolvency and Bankruptcy Code,

2015x and the Report of the Insolvency Law

Committeexi observed that the Code does not

properly provide for a framework which is

comprehensive for cross-border insolvency

proceedings presently in India.

Adoption of UNCITRAL Model Law shall make

India an attractive destination for investment given

the increased predictable and certain nature of

insolvency related laws in India. The Model Law

has proved to be popular in recent time and

adoption of the same will give significant positive

signals to global creditors, corporate investors,

various governments, multinational organizations

and companies such as the World bank vis-à-vis the

robustness of India’s financial sector reforms. The

Model law is also designed to be flexible to respect

the differences between various nations. All of this

enables various countries to adopt the law and

ensure uniformity throughout. There is

prominence given in the law to domestic creditors

and priority to domestic creditors.

FEATURES OF THE DRAFT PROVISIONS

Under the envisaged new law, powers will be

assigned to foreign insolvency officials and foreign

creditors to access the domestic courts and confers

upon them the ability to participate and initiate

domestic insolvency proceedings against a local

debtor. Following the judgment in Bar Council of

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India v. A.K Balaji and Ors.xii, the draft

framework deviates from the main law in so far as

allowing direct access to the proceedings to the

foreign representatives. The foreign creditors can

appoint a domestic insolvency professional as their

representative. This move aims to open up new

opportunities for insolvency professionals in India

and to ensure safety of information.

Recognition of foreign proceedings in India is done

when the domestic courts decide that the debtor’s

main interest lies in the foreign Country.

Recognition will result in automatic stay on

domestic proceedings and give more powers to the

foreign representative in handling the estate of a

company.

Sections 7, 8, 9, 10 and 11 of the Draft Chapter deal

with assistance to foreign representatives and

creditors. As per the said provisions, a foreign

representative of a foreign creditor will be treated

as a domestic one (in India) in respect of initiation

of and participation in proceedings under the IB

Code. The Model Law provides for a foreign

representative who can apply to the Adjudicating

authority and the code of conduct that he shall be

subjected to is said to be “as specified “but there is

uncertainty regarding whether the same code of

conduct that applies to the domestic insolvency

professionals will apply or whether a new code will

be passed by the Central government.

A foreign representative may also apply to the

National Company Law Tribunal (NCLT) to

recognize the foreign proceeding in which the said

representative has been appointed. The

representative has to produce certain documents as

prescribed under section 12 (2) of the Draft

Chapter for filing an application and if the NCLT

is satisfied that the application meets the criteria

prescribed under section 15 (1), it shall recognize

the proceedings within 14 days from the date of

filing of the application which is done either as a

foreign main proceeding or a foreign non-main

proceeding and the recognition of such a

proceeding depends upon the location of the

corporate debtor’s business.

Upon such recognition, the NCLT shall declare

moratorium prohibiting institution of suits or

continuation of pending suits, alienating or

disposing of any assets, transferring or

encumbering, or any action to relating to recovery,

foreclosure or enforcement of any security interest

of the company facing insolvency proceedings in

India.

On the other hand, according to the Draft, any

order passed by an Indian court will be recognized in

a foreign country which has adopted the

UNCITRAL Model Law thus solving the problem

of having a reciprocity agreement to be signed

between the nations concerned.

Rules regarding co-operation between different courts

across jurisdictions shall be put forth by the Central

Government after consulting the NCLT, as per

section 21 of the Draft.

As regards the concurrent proceedings in other

jurisdictions, the court expects co-operation from

the former. After satisfying the conditions of

having been recognized by the NCLT and of the

debtor having assets in India can the validity of

concurrent proceedings be upheld.

LOOPHOLES IN THE DRAFT

Although this draft is highly necessary in today’s

business environment, there are several aspects that

the draft has failed to look into. Currently, there is

no provision dealing with the proceedings against

personal guarantors of corporate debtors whose

assets are located under foreign jurisdictions. Also,

the Draft needs more clarity with respect to the

outcome when there are simultaneous proceedings

happening in multiple countries against the

corporate debtor. The conflict of interest that arises

therein is not addressed satisfactorily. There is also

a void regarding the discretionary powers of the

NCLT to recognize foreign proceedings occurring

simultaneously. Apparently, it has to be seen in line

with the public policy of India, the scope of which

is not defined in the draft and the aspect “public

policy” is in itself a slippery stone for courts. These

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are several aspects which have been overlooked

and which should be addressed subsequently.

CONCLUSION

To conclude, the draft is welcomed by investors

and stakeholders even after the void and

inefficiency in the area of the existing cross-border

insolvency process. There will be a notable boost in

investments in the country soon after the

implementation of the law after sufficient changes

are brought in, thereby, correcting the loopholes.

CROSS-BORDER INSOLVENCY: IMPACT

ON FOREIGN CREDITORS AND ASSET

RECONSTRUCTION COMPANIES (ARCS)

By: Utkarsh Jhingan and Anjali Anil

INTRODUCTION

Before the Insolvency and Bankruptcy Code, 2016

came into force, the winding up of companies

under the Companies Act did not include the

foreign assets of the company until and unless the

winding up order was recognized by the Foreign

Courts.

India as a globalized economy needs to have a clear

procedure to deal with cross-border insolvency

proceedings. Under the Code, the interests of

foreign creditors of Indian companies are protected

since they are allowed the same rights as domestic

creditors. However, another form that cross-

border insolvency proceedings may take is one

where the assets of an Indian creditor are located in

a foreign jurisdiction. In such cases, it is necessary

to establish lines of communication and procedures

that allow courts in various jurisdictions to

cooperate with one another. Towards this, the

Code does not do much apart from simply

empowering the Indian government, under Section

234, to enter into agreements with other countries

to enforce the provisions of the Code.

Furthermore, under Section 235, in the course of

the insolvency/ bankruptcy proceeding, a

resolution professional or liquidator may make an

application to the relevant adjudication authority

seeking evidence or action in relation to the assets

of the debtor/guarantor in a country with whom

India has entered into a reciprocal arrangement.

These provisions are insufficient as materializing

these bilateral agreements is a long and tedious

process. Moreover, in drafting these agreements,

there are several aspects that the government will

have to consider in order to strike a balance

between the jurisdiction of the NCLT with that of

the foreign courts. For instance, a choice has to be

made regarding the principles that will be used to

determine where the ‘centre of main interest’ lies

and other such issues.

STEPS TO BE TAKEN

On June 20, 2018 the Government invited

suggestions from people on Cross Boarder

Insolvency. The debate on approaches that may be

taken to recognize and enforce insolvency

proceedings has been a long-winded one with

different methods being applied by different courts

and scholars. For instance, some scholars have

expressed that the effect of insolvency proceedings

must be limited to the country where the

proceedings take place, while others are of the

opinion that the judgment passed by one main

court should be enforced across all countries.

These problems were resolved at the international

level through treaties such as the UNCITRAL

Model Law on Cross-Border Insolvency and

European Union’s Regulations on Insolvency.

Thus, one approach often suggested to solve this

problem for India is to subscribe to the

UNCITRAL Model Law on Cross-Border

Insolvency.

The UNCITRAL Model law attempts to deal with

complexities and rationalize the process of cross

border insolvency. It lays down the principles for

where insolvency proceedings should be initiated

and sets out the principle for identifying the main

proceeding and the non-main proceeding.

This UNCITRAL Model Law does not require any

country to amend its substantive insolvency laws

but to simply subscribe to a framework of

cooperation. This framework consists of multiple

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elements including systems for courts to request

information from each other, rules to determine

jurisdictional suitability, and provisions that allow

creditors to ask for interim as well as final relief.

Several experts are of the opinion that the

UNCITRAL Model Law is the way forward for

India since it is a uniform and well-understood

system that several countries are a part of.

Subscribing to this Model Law would provide

certainty to multinational businesses that are

presently skeptical of India’s insolvency regime. As

of June, 44 States have adopted the UNICITRAL

Model Law.

CONCLUSION

However, even if India were to adopt the

UNCITRAL Model Law, there are drawbacks that

the Model Law itself suffers from. For instance,

firstly, there is no real definition of ‘centre of main

interests.’ Secondly, the conditions of the Model law

are not demanding. Thirdly, there has been a

substantial amount of litigation in courts across

multiple jurisdictions on the issue of ‘centre of

main interests’. In deciding these cases, courts have

taken several different approaches resulting in

confusion and uncertainty. Therefore, to achieve

the main objective of the Insolvency and

Bankruptcy Code, 2016 the adoption of a

framework is the need of the hour.

THE INTERPLAY BETWEEN SECTION

138 OF THE NEGOTIABLE

INSTRUMENTS ACT, 1938 AND THE

INSOLVENCY AND BANKRUPTCY

CODE, 2016.

By: Sanjana Banerjee

Since the inception of the Insolvency and

Bankruptcy Code, 2016 (hereinafter, the Code) it

has been envisaged that the action of Insolvency

Resolution Process (IRP) must be carried out in a

disciplined and time bound manner. However, the

growing litigation with regard to various provisions

of the Code goes on to portray the still existing grey

areas in interpretation of what will actually

constitute a “time bound and disciplined IRP”. The

present article intends to examine one such area.

Much debate is being raged concerning the

applicability of Section 14 of the code to Section

138 of the Negotiable Instruments Act, 1938 (NI

Act). For the purpose of clarity, it may be

reinstated that Section 14 of the Code grants a

moratorium period to the corporate debtor during

the pendency of which the following actions would

be prohibited:

i. institution of suits or continuation of

pending suits or proceedings against the

corporate debtor

ii. transferring, encumbering, alienating or

disposing of by the corporate debtor of

any of its assets

iii. any action to foreclose, recover or enforce

any security interest created by the

corporate debtor in respect of its property

iv. the recovery of any property by the owner

or lessor where such property is occupied

by or in possession of the corporate holder

The focal point of the debate is whether a

proceeding under Section 138 of the NI Act, would

be an exception to the four corners of the

moratorium period stated above. The National

Company Law Appellate Tribunal (NCLAT) has

delivered its stance on the matter in the

controversial case of Shah Brothers Ispat Pvt.

Ltd. v P. Mohanraj & Ors.xiii The case concerned

two complaints filed by appellants under Section

138 – one prior to initiation of the IRP and one

thereafter. The moot question which arose was

whether the order of moratorium will cover a

criminal proceeding or pendency of proceedings

filed under section 138 of the NI Act. The Tribunal

observed that a Company cannot be ‘imprisoned’

per se and therefore, the aforesaid punishment

cannot be imposed against the Company

(Corporate Debtor in this regard).xiv However, a

fine can be imposed upon the Company by the

Adjudicating Authority if found guilty. Rejecting

the submissions by the Respondent, the Tribunal

concluded that as Section 138 is a penal provision;

imposition of fine cannot be held as a money claim

CPSLR, NUALS


or recovery against the corporate debtor and

therefore will be exempt from Section 14. In fact

no criminal proceeding would be covered under

Section 14 of the Code.xv

The NCLAT’s decision has been invariably

criticized by a large number of industry experts. At

the foremost, the NCLAT has blatantly diverted

from the law set down by the apex Court as far as

proceedings under Section 138 are concerned. The

Supreme Court has consistently held any

proceeding under Section 138 to be of a civil nature

as opposed to a penal nature. In the case of M/s

Meters and Instruments Pvt. Ltd. v Kanchan

Mehtaxvi the Court held that Section 138 can be

treated as civil suits for recovery as the object of the

provision is integrally compensatory in nature and

the punitive element was merely to enforce this

innate amercement. Prior to this also, the Supreme

Court had held in Kaushalya Devi Massand v

Roopkishore Khorexvii that the gravity of an

offence under Section 138 of the NI Act cannot be

equated with an offence under the Indian Penal

Code. The Supreme Court further went on to state

that “an offence under Section 138 NI Act is

almost in the nature of a civil wrong, which has

been given criminal overtones.” The conundrum

with regard to Section 138 still continues with the

NCLAT’s judgment errantly declaring it to be a

‘criminal proceeding’ and subsequently ‘exempting

all criminal proceedings from the clasp of Section

138’.

Assuming that at a later stage of time any

proceeding under Section 138 is resolved to be a

civil proceeding for the purposes of the Code, and

invariably falls within the ambit of Section 14,

should that happen a second question arises –

whether the Directors of the Corporate Debtor

would also be covered under the moratorium

period. A stay on all proceedings during the

moratorium period would shift the primary liability

of the corporate debtor upon its directors resulting

in opening of the floodgates. Creditors would chase

the Directors in a bid to extract the debt money and

the entire purpose of ‘disciplined and time bound

exercise for the revival of the Corporate Debtor’

will be futile. But keeping in line with the Supreme

Court’s decision in year 2012 – Aneeta Hada v

M/s Godfather Travels and Toursxviii, creditors

cannot possibly extract money from the Board of

Directors. The legal question that was answered by

the Apex Court in the above mentioned case was

whether it is possible to initiate action against

authorised signatories of the company without

impleading the company as an accused under a

petition filed u/s 138. The Court observed that the

essence of vicarious liability is inextricably

intertwined with the liability of the principal

offender and if both are treated separately, it

amounts to causing violence of the language

involved.xix Liability u/s 138 falls primarily on the

drawer company and will extend to its officers only

when conditions incorporated u/s 141 of the NI

Act stand satisfied. As understood from the above

judgment, creditors will be barred from initiating

action against the corporate debtor during the

moratorium period.

As new judgments keep coming in, it is important;

firstly, to give a definite explanation to what is

understood by a ‘moratorium period’. Judicial

assessment is still required in order to determine

which proceedings would fall under the purview of

Section 14 – or would any fall at all. With more grey

areas cropping up from time to time, the Judiciary’s

take on this subject will be quite an interesting one.

CASE UPDATES

[NCLAT]

June 29, 2018

Mr. Dinesh Kumar Bhasin v. Batliboi Impex

Limited & Anr (Company Appeal (AT)

(Insolvency) No. 318 of 2018).

Operational Creditor filed an application under

Section 9 of the Code for initiation of Insolvency

proceedings against the Corporate Debtor. NCLT

admitted the application without hearing the

corporate debtor. Applicant challenged the

impugned order of admission, which was passed in

CPSLR, NUALS


violation of the principle of natural justice stating

that if the hearing would have been given, the

‘Corporate Debtor’ could have pointed that a

settlement had already been undertaken. NCLAT

set aside the order of NCLT, holding that the

‘principles of natural justice’ cannot be construed in a

manner so as to benefit the operational creditor.

June 29, 2018

Nayan Shah v. Viral Rajarashi Mehta & Anr.

(Company Appeal (AT) (Insolvency) No. 307

of 2018)

Corporate Debtor approached NCLAT against an

application filed under Section 9 of the Code. The

appeal was against admission of the application

despite there being a dispute in existence. However

as per the facts the dispute existed prior to the

demand notice and later was settled for part

amount being paid and rest paid via cheque.

NCLAT relied on Innoventive Industries Ltd (2017

SCC Online SC 1025) wherein it was held that if

the‘debt’ had been disputed, in such cases the

question of default does not arise. NCLAT directed

to close the NCLT proceeding since dispute could

be proved through the negotiations between the

parties.

July 4, 2018

ICICI Bank Ltd. v. Oceanic Tropical Fruits

(P.) Ltd., Company Appeal (AT) (Insolvency)

Nos. 113-114 of 2018.

The question in this appeal was as to what step shall

be taken by the ‘Committee of Creditors’ if they fail to

get minimum vote of 75% of the ‘Financial

Creditors’ for appointment or replacement of

‘Insolvency Professional’. NCLAT undertook an

analysis of Sections 16, 22 and 27 of the Code and

held that the minimum 75% of the voting share as

prescribed under Sections 22 and 27 is mandatory.

In case if the ‘Committee of Creditors’ fail to obtain

75% of the voting share the matter is to be referred

to the NCLT, who is then required to request the

Insolvency and Bankruptcy Board of India to name

a ‘Resolution Professional’. In the meantime,

NCLT may direct the Interim Resolution

Professional to continue to function as the

‘Resolution Professional’.

July 2, 2018

R.B. Synthetics v. Bee Ceelene Textile Mills

(P.) Ltd., Company Appeal (AT) (Insolvency)

No. 106 of 2018.

Financial creditor approached NCLAT on grounds

of rejection of application filed under section 7 of

the Code due to failure to establish the existence of

‘financial debt’ under the Code. NCLAT observed

that an application u/s 7(1) of the Code is to be

made in accordance with the Insolvency and

Bankruptcy (Application to Adjudicating

Authority) Rules, 2016. If the application for

initiating CIRP is incomplete, the Adjudicating

Authority is mandated to allow time to the

Financial Creditor(s) to remove the defects. The

Adjudicating Authority cannot reject the

application without providing time to complete the

record. Impugned order of NCLT set aside.

July 21, 2018

SREI Infrastructure Finance Ltd. Vs. Canara

Bank & Ors, Company Appeal (AT)

(Insolvency) No. 316 and 317 of 2018.

The Resolution Professional refused to allow the

appellant as member of the Committee of

Creditors on the ground that the appellant was

a“related party” in relation to the Corporate

Debtor. The RP was of the view that the appellant

had provided a loan of 240 crores to the corporate

debtor of which 20 crores was converted into

equity, which was not recognized by the stock

exchange as it did not abide by their regulations.

The finding of the RP was upheld by the NCLT.

However, later NCLAT held that, since the Stock

Exchange and the Registrar of Companies did not

validate such transaction, the appellant could not

be held as a “related party” under Section 5 (24) of

the Act.

CPSLR, NUALS


NCLT

June 22, 2018

State Bank of India v. Orissa Manganese &

Minerals Limited, CA(IB) No. 402/KB/2018,

CA(IB) No. 398/KB/2018, CA(IB) No.

470/KB/2018 and CA(IB) No. 509/KB/2018 all

connected to CP(IB) No. 371/KB/2017.

Five Creditors of the Corporate Debtor filed a case

against the RP for violation of IBC during the

conduct of CIRP. Adjudicating Authority (AA)

admitted the application of the Financial Creditor

(SBI) against the Respondent and appointed a RP.

One of the three resolution plans, which got the

maximum voting, was submitted to the AA. This

was challenged by one of the creditors on the

grounds that: firstly, the Applicant was treated as

Operational Creditor instead of a Secured Creditor;

secondly, its claims were not admitted by RP in

violation of CIRP Regulations; and thirdly, it was

denied participation in CIRP process in violation of

S. 24 of IBC. It was decided that, the RP cannot be

declared void for non-physical presence of RP in

CoC meeting; the AA refused to intervene in the

plan supported by sufficient vote share; the third

issue was rejected because the RP provided enough

evidence to show the requisite communication.

Thus, the AA found the RP in compliance of due

process under IBC. Application was dismissed with

cost.

June 26, 2018

In the matter of CA Kannan Tiruvengadam

(Applicant/Resolution Professional), IA No.

36/2018 in C.P. (IB) No. 20/GB/2017.

Applicant was appointed as the RP to carry out the

CIRP of the Corporate Debtor, Assam Co. India

Ltd. He published an advertisement to invite bids

from prospective resolution applicants with the

object to revive the Corporate Debtor. In the

meantime, criteria qua requirement of minimum

Tangible Net Worth of INR 400 crores for

Category ‘A’ PRAs was challenged, which was

further taken to NCLAT. This resulted in a delay in

CIRP process. The RP approached the Bench

seeking an extension by 22 days on the expiry of

the previous extension of 180 days. The AA was of

the opinion that the delay was caused due to a

genuine reason. Therefore, extension was granted.

June 26, 2018

State Bank of India v. Uttam Galva Metallics

Ltd, CP (IB)/1830/(MB)/2017.

The applicant had filed for initiation of insolvency

proceedings as a Financial creditor under Section 7

of the Code against the Respondent in response to

the default in payment of 334 crore rupees to it.

Respondent challenged the proceedings stating

noncompliance with the RBI circular [30th June

2017] which asked applicant to initiate proceedings

only when efforts for restructuring of debts by the

Respondent weren’t successful. NCLT stated that

the basic requirements for filing for initiation of

CIRP were the existence of a debt and its default, both

of which were present and hence admitted the

application even though substantial compliance

wasn’t done with the Circular.

July 2, 2018

In Re: Marmagoa Steel Ltd., MA 671-2017 In

CP (IB)30-(MB)-2017.

Applicability of S. 29A of the Code to the

resolution plan was discussed in this case. It was

held that the Resolution Applicant does not come

u/s. 29A because it has not been classified as NPA

as envisaged under S. 29A(c). Also, clause 23 of the

Ordinance dated 6.6.2018 requires that eligibility

criteria under S. 29A shall apply to a Resolution

Applicant who has not submitted resolution plan

on the date of commencement of the Ordinance.

Therefore, the plan filed by the Resolution

Applicant was neither hit by S. 29A nor the

Ordinance. Hence, approval is subject only to the

already existing non-inconsistent laws. Therefore,

moratorium granted at the time of admission of

petition was vacated and the IRP was discharged

from further CIRP on submission of all the

records.

CPSLR, NUALS


July 3, 2018

Rishabh Texo Private Limited v. Shivalik

Cotsyn Pvt. Ltd., CP (IB) No. 130-ALD-2018.

The Corporate Debtor used to place purchase

orders on the Operational Creditor, but was

making substantial delay in payment. The

Corporate Debtor took money from one other

company as well. When it failed to repay the

Operational Creditor, it entered into a compromise

agreement with the two creditors under which the

directors agreed to transfer 24 bigha of land.

However, this title was not clear and was co-owned

by several people, giving rise to issue of improper

execution of compromise agreement. It was held

that the dispute was limited to the mode of

payment of the debt and the Corporate Debtor has

never disputed his liability to pay the amount.

Therefore, it was held that the dispute between two

would not fall within the definition of ‘dispute’ u/S.

5(6) of the IBC.

July 3, 2018

Pallavi Joshi Bakhru v. Universal Buildwell

Pvt. Ltd., (IB)-456 (ND)/2018.

Petitioner paid 90 lakhs towards two residential

apartments in the project to be developed by the

CD and requisite formalities were also completed.

Later, due to delay in construction work the CD

issued a cheque to the applicant in order to

surrender the allotment of flats to the applicant.

However, when the cheque was presented for

payment, it was dishonored. Thus, the petitioner

sought initiation of the CIRP process, after filing a

proceeding u/S. 138 of the NI Act. The major issue

before the AA was financial creditor’s ability to sue

and ambit of the term ‘financial debt’. Held, flat

owners are also financial creditors in situations

where a construction is delayed and the issuance of

the two cheques counted as novation of the

agreement and acceptance of a financial debt.

Further, dishonour of cheque gives right to seek

payment and falls within the definition of claim

under Section 3(6) IBC. Thus, initiation of CIRP

was mandated and moratorium period under

Section 14 of the Code was declared.

July 3, 2018

Ramsarup Industries Limited v ICICI Bank,

CA (IB) No. 116-KB-2018.

Machinery of Corporate Debtor was in the

warehouse due to non-payment of the Customs

Duty. Consequently, a notice of e-auction was

issued by the Respondents, whereby they sought to

recover the amount by selling unclaimed goods

u/S. 48 of the Customs Act read with S. 150. RP

filed an application to prevent the Respondents

from, firstly, e-auctioning the machineries, and

secondly, dealing with the assets of the Corporate

Debtor, as debt recovery proceedings were

initiated. The object was to prevent the disposing

of the machinery at a substantially lower value. It

was held that the sale transaction was in violation

of S. 14 of the Code as CIRP had already been

initiated and dealing with the assets after

application of the moratorium would be a violation.

July 9, 2018

SECO Tools India Pvt. Ltd. v AS Sales and

Exports Pvt. Ltd, C.P.(IB) No.96-KB-2018.

Application was filed u/S. 9 of the Code against the

Corporate Debtor for a default in payment. Main

issue was the admissibility of the objection raised

by the Corporate Debtor regarding quality and

performance of goods supplied by the Operational

Creditor to the Steel Authority of India. Held,

Corporate Debtor cannot escape liability once it

has accepted the performance of the Operational

Creditor. Further, the Corporate Debtor did not

bring to the notice of Operational Creditor the

dispute w.r.t. the quality of goods within 10 days, as

was required after receiving the notice u/S. 8 of the

IBC, from the Operational Creditor. Therefore, the

application was thereby admitted.

CPSLR, NUALS


July 11, 2018

Joydeep Sur Enthuse Incorporated v Lourdes

Textile Pvt. Ltd., CP (IB) No. 186/KB/2018.

In spite of repeated demands and notice u/S. 8 of

IBC, the Corporate Debtor did not make payment

of the goods delivered by the Operational Creditor.

Therefore, a petition was filed u/S. 9 of IBC. Main

issue was whether the Petitioner herein is a Creditor

of the Corporate Debtor u/S. 3(10). Test applied

was whether the Petitioner sold the goods to the

Respondent or were the goods just kept for sale at

the counter whereby the Respondent would get

commission. On perusal of facts, it was found to be

of second category. Held, Petitioner cannot be

considered as a Creditor u/S. 3(10). Therefore, the

matter cannot be covered by Ss. 8 & 9.

July 12, 2018

In Re: ALPFLY Pvt. Ltd., C.P. No. IB-

358/(ND)/2018.

Corporate Applicant, a travel company, faced

downfall in business. However, the cash outflows

kept on increasing. Consequently, various defaults

were made towards customers as well as vendors.

A petition was filed u/S. 9 of IBC whereby the

Corporate Applicant has prayed for a fast track

insolvency process. The Tribunal was of the

opinion that if the AA is satisfied that there is a debt

and default has occurred and the Corporate

Applicant is not ineligible u/S. 11 then the AA has

no other option but to admit the application. The

application was admitted on finding that there exist

defaults at least towards the customers. Therefore,

Resolution Professional was accordingly

appointed.

July 17, 2018

Mr. Joseph Philip v. Mr. Ashish Rathi & Anr,

MA No. 120 of 2018 in CP No.

665/IB/CB/2017.

Erstwhile Directors of a Corporate Debtor entered

into certain transactions with a third party after the

insolvency resolution application was admitted by

the AA. The Applicants had contested that they

didn’t have knowledge of the same. Main issue was

regarding violation of S. 14 of IBC. Held, that the

date of commencement of CIRP was completely

based on the date of admission and was in no way

connected to the date of the

pronouncement/uploading/receipt of the order by

any of the parties. Therefore, the payments made

by erstwhile directors after such period, even

though citing lack of receipt of order, was illegal

under the moratorium imposed.

July 25, 2018

Punjab National Bank v. M/s. Concord

Hospitality Pvt. Ltd & Ors, CA No.130/2018 &

131/2018 In CP (IB) No.43/Chd/Pb/2017.

One of the Financial Creditors raised certain

objections w.r.t. the approved resolution plan

submitted by an Applicant on the grounds that:

firstly, eligibility of the Resolution Applicant as he

was also a guarantor for the loan of the Corporate

Debtor, and secondly, whether the Resolution

Applicant was ineligible as his account was

classified as NPA by the FC only a month prior to

the admission of insolvency application, but the

statutory auditors had classified the same as NPA

before the required limit of one-year u/S. 29A(c).

To this the AA observed: firstly, that Resolution

Applicant is not ineligible since the guarantee was

not invoked by any of the FCs [this has been

clarified by the amendment to S. 29(h)]; and

secondly, the internal record of the Statutory

Auditors would not affect the classification of

Corporate Debtor’s accounts as NPA.

July 23, 2018

SREI Infrastructure Finance Ltd. v. Kannan

Tiruvengadam & Anr., I.A. No. 34/2018 In

CP(IB)/20/GB/2017.

CoC decided that for the purpose of determining

voting rights, the penal interest be disregarded.

While the FC accepted this, they sought to

capitalise the penal interest in their actual claims.

This was disputed by the RP who claimed that such

interest rates were extortionate. Held, under the

Code, voting share would depend on the amount

CPSLR, NUALS


under claims made by the creditors and that such

claims cannot be different for different purposes.

Further, levy of penal interest is not permissible

under the law but the Tribunal refused to interfere

with the agreement entered into by the Corporate

Debtor. Lastly, the decision of the AA qua

quantum of claim in no way comes in the way of an

IRP/RP in ascertaining the actual admissible claim.

July 26, 2018

M/s. Ashtech Buildpro India Pvt. Ltd. v. BS

Techno Construct Pvt. Ltd., CP (IB) No.

108/ALD/2018.

Corporate Debtor objected to CIRP application on

the grounds that the statutory demand notice was

not delivered to the address as mentioned in the

MCA portal. Similarly, it was sent to an e-mail id

different from the one mentioned in MCA portal.

Tribunal had to decide whether the notice was duly

served. AA denied the objection as the e-mail id to

which the mail was sent was also operated by the

Corporate Debtor. RP filed application against

accepted resolution plan stating that certain

associate entities of the Resolution Applicant were

defaulters and therefore the Resolution Applicant

is ineligible u/S. 29A of IBC. Held, the entities only

defaulted payment of interest which too was

subsequently paid. Therefore, non-disclosure was

considered not significant in nature.

July 26, 2018

State Bank of India v. Impex Metal & Ferro

Alloys Ltd., CA (IB) No. 641/KB/2018 in CP

(IB) No. 176/KB/2018.

One of the prospective Resolution Applicant had

submitted an EoI after the deadline. Additionally,

the resolution plan was also not submitted within

time as the RP was not in knowledge of the EoI

sent after the deadline. Tribunal had to analyse

IBBI (Insolvency Resolution Process for Corporate

Persons) Regulations, 2016 which provides that

EoI received after the specific date shall be rejected.

Held, there was not much substance in the reason

for delay given by the Applicant. However,

considering the objective of the process is

maximisation of value of assets and taking into

consideration the time period remaining, the

Applicant was allowed to submit the plan.

July 27, 2018

Oriental Bank of Commerce v. M/s J.R.

Agrotech Pvt. Ltd., CP (IB) No.

46/Chd/Pb/1/2018.

The CD had availed certain credit facilities from a

consortium of creditors. The FC was one of the

members of the consortium and had initiated CIRP

against the CD. One of the grounds for objection

by the CD was that under certain guidelines and

circulars issued by the RBI, a restructuring proposal

was to be considered in case of stressed assets. The

issue was whether the application for initiation of

CIRP can be dismissed in light of the RBI circulars

and guidelines. Held, the guidelines do not mandate

that restructuring be done in all cases. Further, it is

not required to look into any other factor, including

the question that whether permission or consent

has been obtained from one or the other authority.

Therefore, objections regarding maintainability and

submissions w.r.t. re-structuring proposal were

rejected.

July 31, 2018

SEI Trading India Pvt. Ltd. V. Aishwarya

Technologies and Telecom Ltd., CP(IB) No.

18/9/HDB/2018.

Operational Creditor had initiated CIRP against the

Corporate Debtor. The parties had also entered

into a Distributorship Agreement. Main objection

raised was whether the AA has jurisdiction to try

the matter in view of clauses in the Agreement

regarding territorial jurisdiction and Arbitration

Clauses therein. Held, the parties cannot confer

jurisdiction on the Judicial Forums or Code unless

a particular Forum or Code is having a territorial

jurisdiction over the subject matter of dispute. As

per the provisions of IBC, the appropriate forum

was the AA at Hyderabad and not any other forum

as proposed by parties under an Agreement.

CPSLR, NUALS


REGULATORY CHANGES

[SEBI]

August 4, 2017

CIR/CFD/CMD/93/2017

SEBI by this circular has mandated that all listed

entities which have listed any of the following:

specified securities (equity and convertible

securities), non-convertible debt securities and

non-convertible and redeemable preference shares

shall make disclosure to the stock exchanges when

the entity has defaulted in payment of interest /

instalment obligations on debt securities (including

commercial paper), Medium Term Notes (MTNs),

Foreign Currency Convertible Bonds (FCCBs),

loans from banks and financial institutions,

External Commercial Borrowings (ECBs) etc. The

circular was supposed to come into effect with

effect from October 1, 2017 but by the circular

Dated 29th Sept, 2017 the implementation of the

circular was deferred till next notification.

Securities and Exchange Board of India (Issue

of Capital and Disclosure Requirements)

(Fourth Amendment) Regulations, 2017

SEBI made the changes that were required after

coming into force of IBC to SEBI ICDR

Regulations. In Regulation 70, clause 5 and clause

6 have been substituted. It provides that the

Regulations relating to the preferential issue of

equity shares do not apply to the companies under

the scheme approved by tribunal under IBC.

According to Clause (5), provisions of such

Chapter won’t apply where the preferential issue of

equity shares is made to the consortium of banks

and financial institutions pursuant to conversion of

their debt, as part of the strategic debt restructuring

scheme in accordance with the guidelines specified

by the Reserve Bank of India subject to certain

conditions. Newly substituted Clause (6) provides

that the provisions of this Chapter shall not apply

where the preferential issue, if any, of specified

securities is made to person(s) at the time of lenders

selling their holding of specified securities or

enforcing change in ownership in favour of such

person(s) pursuant to a debt restructuring scheme

implemented in accordance with the guidelines

specified by the Reserve Bank of India, subject to

the following conditions.

Securities and Exchange Board of India

(Listing Obligations and Disclosure

Requirements) (Third Amendment)

Regulations, 2018

Amendment was made to Regulation 15 to provide

that Regulation 17 which regulates the Directors is

not applicable during the insolvency resolution

process period in respect of a listed entity which is

undergoing corporate insolvency resolution

process under the Insolvency Code, provided that

the role and responsibilities of the board of

directors as specified under regulation 17 shall be

fulfilled by the interim resolution professional or

resolution professional in accordance with sections

17 and 23 of the Insolvency Code. Clause (2B) was

added which provides that the provisions as

specified in regulations 18, 19, 20 and 21 shall not

be applicable during the insolvency resolution

process period in respect of a listed entity which is

undergoing corporate insolvency resolution

process under the Insolvency Code: Provided that

the roles and responsibilities of the committees

specified in the respective regulations shall be

fulfilled by the interim resolution professional or

resolution professional. Application of certain

other Provisions are also made limited according to

the resolution plan as approved by the Tribunal.

Under Schedule III, certain events in relation to the

corporate insolvency resolution process (CIRP) of

a listed corporate debtor under the Insolvency

Code are needed to be disclosed: such as filling of

application, admission of application by the

Tribunal, appointment of Resolution Professional

etc.

CPSLR, NUALS


Securities and Exchange Board of India (Issue

of Capital and Disclosure Requirements)

(Second Amendment) Regulations, 2018

The changes made to Regulation 70 by ICDR

Amendment 2017 was omitted and a single

consolidated provision was added as:

"(1A) The provisions of this Chapter, except the

lock-in provisions, shall not apply where the

preferential issue of specified securities is made in

terms of the rehabilitation scheme approved by the

Board of Industrial and Financial Reconstruction

under the Sick Industrial Companies (Special

Provisions) Act, 1985 [1 of 1986] or the resolution

plan approved under section 31 of the Insolvency

and Bankruptcy Code, 2016 [No. 31 of 2016]

whichever applicable."

Securities Contracts (Regulation)

(Amendment) Rules, 2018

One amendment was made. In rule 19A, after sub-

rule (4), the following sub-rule is inserted, namely:

“(5) Where the public shareholding in a listed

company falls below twenty-five per cent, as a

result of implementation of the resolution plan

approved under section 31 of the Insolvency and

Bankruptcy Code, 2016 (31 of 2016), such

company shall bring the public shareholding to

twenty-five per cent within a maximum period of

three years from the date of such fall, in the manner

specified by the Securities and Exchange Board of

India:

Provided that, if the public shareholding falls below

ten per cent, the same shall be increased to at least

ten per cent, within a maximum period of eighteen

months from the date of such fall, in the manner

specified by the Securities and Exchange Board of

India.”


(Delisting of Equity Shares) (Amendment)

Regulations, 2018.

Securities and Exchange Board of India (Delisting

of Equity Shares) (Amendment) Regulations, 2018

came into force on 31st May, 2018 vide

Notification No. SEBI/LAD-

NRO/GN/2018/23. By this amendment, an

exception has been made from the application of

these regulations to delisting of equity shares of a

listed entity made pursuant to a resolution plan

approved under the Section 31 of the Insolvency

and Bankruptcy Code 2016 subject to the plan

providing (a) a specific procedure to complete the

delisting of such shares or (b) an exit option to

existing public shareholders at a price specified in

the resolution plan.

This is subject to firstly, that such exit to

shareholders has to be higher than the liquidation

value determined under Regulation 35 of the

Insolvency and Bankruptcy Board of India

(Insolvency Resolution Process of Corporate

Persons) 2016 after paying off dues in the order of

priority as defined under Section 53 of the

Insolvency and Bankruptcy Code 2016. Secondly.,

that if existing promoters or any other shareholders

proposed to be provided an opportunity to exit

under the resolution plan at a price higher than the

price determined in terms of the above proviso, the

existing public shareholders shall also be provided

an exit opportunity at a price which shall not be less

than the price, by whatever name called, at which

such promoters or other shareholders, directly or

indirectly are provided exit.

It provides a one-day window from the day of

approval of resolution plan under Section 31, for

notifying with the details andthe justification of the

exit price in respect of the delisting proposed to the

recognized stock exchange.

After this amendment, an application for listing of

delisted equity shares may be made in respect of a

company which has undergone corporate

insolvency resolution process under the Insolvency

and Bankruptcy Code 2016.


(Substantial Acquisition of Shares and

Takeovers) (Amendment) Regulations, 2017


(Substantial Acquisition of Shares and Takeovers)

CPSLR, NUALS


(Amendment) Regulations, 2017 came into effect

on August 14, 2017 vide Notification No.

SEBI/LAD-NRO/GN/2017-18/015. It amended

Regulation 10 of the Securities and Exchange

Board of India (Substantial Acquisition of Shares

and Takeovers) Regulations 2011. Regulation 10

lays down those acquisitions which are exempted

from the obligation to make an open offer under

Regulations 3 and 4 of Takeover Regulations and

the conditions to be fulfilled in order to utilize this

exemption.

This amendment extends such exemption to

include an acquisition pursuant to approval of the

resolution plan under Section 31 of the Insolvency

and Bankruptcy Code. It also provides that the

subject to fulfilment of conditions under sub-

regulation (5) Regulation 70 of the Securities and

Exchange Board of India (Issue of Capital and

Disclosure Requirements) Regulations, 2009,

acquisition of shares by the lenders pursuant to the

conversion of their debt as a part of debt

restructuring scheme implemented in accordance

with the guidelines specified by the Reserve Bank

of India (by substituting clause (i) of Regulation

10(1).

It further extends such exemption to include

acquisition of shares by the person(s), by way of

allotment by the target company or purchase from

the lenders at the time of lenders selling their

shareholding or enforcing change in ownership in

favour of such person(s), pursuant to a debt

restructuring scheme implemented in accordance

with the guidelines specified by the Reserve Bank

of India. This is subject to the fulfilment of

conditions specified in Regulation 70(6) of the

Securities and Exchange Board of India (Issue of

Capital and Disclosure Requirements) Regulations,

2009 are complied with.

The Securities and Exchange Board of India

(Substantial Acquisition of Shares and

Takeovers) (Amendment) Regulations, 2018

The Securities and Exchange Board of India

(Substantial Acquisition of Shares and Takeovers)

(Amendment) Regulations, 2018 came into force

on May 31, 2018 vide Notification No.

SEBI/LAD-NRO/GN/2018/20. This

amendment by amending The Securities and

Exchange Board of India (Substantial Acquisition

of Shares and Takeovers) Regulations 2011

exempts acquisition pursuant to a resolution plan

approved under Section 31 of the Insolvency and

Bankruptcy Code 2016 from the obligations under

Regulation 3(2) of the 2011 Regulations.

SEBI- Information sharing between

Debenture trustees and Information Utilities

under IBBI (Information Utilities)

Regulations, 2017

Letter No. MIRSD-3/DT/IU/29468/1/2017

dated November 27, 2018 was addressed to one

Navita Yadav by the Deputy General Manager

(Market Intermediaries Regulations and

Supervision Department) of the Securities and

Exchange Board of India in reference to the

National e-Governance Services Limited (NeSL) in

capacity of a Registered Information Utilities (IUs).

It laid down that the Debenture Trustees may enter

into agreements with the IUs and share the

financial information relating to the assets in

relation to which any security interest has been

created by the Debenture Trustees subject to

sorting out the issues relating to the cost in

gathering and sharing such information, formats of

information, stamp duty and sharing of

information with multiple IUs etc.

RBI

RBI/2017-18/110

DBR. No. Leg. BC. 98/09.08.019/2017-18

SUBMISSION OF FINANCIAL INFORMATION TO

INFORMATION UTILITIES (IU) BY ALL

FINANCIAL CREDITORS REGULATED BY RBI

1. Information Utilities

a. According to the IBC 2016, “Information

utility” means a person who is registered

with the Board as an information utility

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under Section 210, which emphasizes on

the registration and application for an

information utility.

b. Financial creditor and operational creditor

shall submit this financial information and

information relating to the assets in

relation to which the security interest is

created, to the IU.

c. Section 215 of the IBC mandates the

procedure of the submission of the

financial information to the information

utilities. A certain fee is to be paid along

with the information.

d. Section 3 (13) of the Code, defines the

term “Financial information” in relation to

a person.

In that light the present regime under the Code is:

2. The first IU- National E-Governance

Services Limited (NeSL) a Union

government company has received an in-

principle approval under the regulations.

As an IU it shall:

a. act as a ‘custodian’ of all financial

information related to lending and

borrowing activities of financial

institutions.

b. store financial information that helps to

establish defaults as well as verify claims

‘expeditiously’ and thereby facilitating

completion of transactions under the

Insolvency and Bankruptcy Code, 2016 in

a time bound manner.

Hence every stakeholder shall be aware of the

compliance under the IU regulations.

3. All financial creditors regulated by RBI are

thereby advised to adhere to the relevant

provisions of the Code and IU Regulations by

putting in place the compliance mechanism

due to the overriding nature of the Code over

any other law.

CBDT

CBDT relaxes MAT provision for companies

facing insolvency

Section 115JB of income tax provides that for the

purpose of levy of minimum alternate tax in case of

company, the amount of loss brought forward or

unabsorbed depreciation, whichever is less as per

the books of accounts shall be reduced from the

book of profit.

In this regard, there has been relaxation in the

provisions relating to levy of minimum alternate tax

(MAT) for the companies against whom an

application of corporate insolvency resolution

process has been admitted by adjudicating

authorities under section 7 or Section 9 or section

10 of IBC 2016. Representations have been

received from various stakeholders that such

companies are facing hardship due to restriction in

allowance of brought forward loss for computation

of book of profit under section 115JB of the Act.

So as to minimize such hardship for a company

against whom the application for insolvency

resolution process has been admitted, with effect

from Assessment year 2018-2019, the amount of

total loss brought forward (including unabsorbed

depreciation) shall be allowed to be reduced from

the book of profit for the purposes of levy of MAT

undersection 115JB of the Act.

CIRCULARS

January 3, 2018

Circular No IP/003/2018

An insolvency professional cannot outsource any

of his duties and responsibilities cast upon him

under the Insolvency and Bankruptcy Code, 2016.

It is seen to be a common practice that a few

insolvency professionals advise the prospective

resolution applicants to submit a certificate from

another person as a document certifying their

eligibility to be resolution applicants. Such a

certification from a third person is not envisaged by

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the Code and hence, such a certificate shall not be

required.

January 3, 2018


An insolvency professional shall exercise

reasonable care and diligence and take all necessary

steps to ensure that any corporate person

undergoing insolvency resolution process, fast

track insolvency resolution process, liquidation

process or voluntary liquidation process under the

Insolvency and Bankruptcy Code, 2016 complies

with the provisions of the applicable laws during

such process. Loss suffered by the insolvency

professional on account of non-compliance of any

applicable law shall not form part of the insolvency

resolution process cost or liquidation process cost

under the Code.

January 3, 2018


An insolvency professional shall prominently state:

(1) his name, address and email, as registered with

the IBBI, (2) his Registration Number as an

insolvency professional granted by the IBBI, and

(3) the capacity in which he is communicating. This

will apply to all the communications, whether by

way of public announcement or otherwise to a

stakeholder or to an authority. Moreover, a process

specific address and email can also be used subject

to certain conditions: (1) the process specific

address and email are in addition to the basic details

required, and (2) the insolvency professional

continues to service the process specific address

and email for at least six months from conclusion

of his role in the process.

January 16, 2018


An insolvency professional and every other

professional (registered valuers, accountants, legal

professionals) appointed by him for a resolution

process shall make disclosures regarding his

relationship, if any, with (1) the Corporate Debtor,

(2) other Professional(s) engaged by him, (3)

Financial Creditor(s), (4) Interim Finance

Provider(s), and (5) Prospective Resolution

Applicant(s) to the Insolvency Professional Agency

of which he is a member. Such disclosure has to be

done within a specified time period, generally 3

days. Similar disclosure has to be made with regards

to the relationship, if any, of the other

professional(s) engaged by him with (1) himself, (2)

the Corporate Debtor, (3) Financial Creditor(s), (4)

Interim Finance Provider(s), and (5) Prospective

Resolution Applicant(s) to the Insolvency

Professional Agency of which he is a member.

‘Relationship’ shall mean any one or more of the

four kinds of relationships at any time or during the

three years preceding the appointment:

A. Where the Insolvency Professional or the

Other Professional, as the case may be, has

derived 5% or more of his / its gross revenue

in a year from professional services to the

related party

B. Where the Insolvency Professional or the

Other Professional, as the case may be, is a

Shareholder, Director, Key Managerial

Personnel or Partner of the related party.

C. Where a relative (Spouse, Parents, Parents of

Spouse, Sibling of Self and Spouse, and

Children) of the Insolvency Professional or the

Other Professional, as the case may be, has a

relationship of kind A or B with the related

party.

D. Where the Insolvency Professional or the

Other Professional, as the case may be, is a

partner or director of a company, firm or LLP,

such as, an Insolvency Professional Entity or

Registered Valuer, the relationship of kind A,

B or C of every partner or director of such

company, firm or LLP with the related party.

January 16, 2018


The fees payable to a person acting as a resolution

professional has to be included in ‘insolvency

CPSLR, NUALS


resolution process cost’ and has to be paid in

priority. Additionally, payment of fees for the

services of an insolvency professional to any person

other than the insolvency professional shall not

form part of the insolvency resolution process cost.

February 23, 2018

Circular No IP(CIPR)/007/2018

Confidentiality as mentioned under clause 21 of the

Code of Conduct appended to the First Schedule

to the Insolvency and Bankruptcy Board of India

(Insolvency Professionals) Regulations, 2016,

section 29 (2) of the Insolvency and Bankruptcy

Code, 2016 and the like provisions. Any

information which is not to be disclosed under the

provisions of the Code, shall be kept confidential

and not be disclosed or provided access to.

February 23, 2018

Circular No IP(CIPR)/007/2018

The particular circular specifies the official websites

for publishing Public Announcements and Brief

Particulars of Invitations of Resolution Plans. The

Forms under the Code also have to be sent to the

Email addresses particularly designated for the

specified purpose in the circular.

April 5, 2018

Circular No IPE/008/2018

The newly passed Insolvency and Bankruptcy

Board of India (Insolvency Professionals)

(Amendments) Regulations, 2018 (notified in the

Gazette of India dated 28th March 2018) relating to

insolvency professional entities have to be

complied with. If the compliance is not met, the

IPE may be derecognized in accordance with

regulation 14.

April 23, 2018

Circular No. LA/010/2018

The Board issued this circular providing details and

clarifications about the disciplinary action related

issues related to an Insolvency Professional. The

scheme of the code provides for the process of

show cause notice to an IP under section 219 and

the setting up of a disciplinary committee under

section 220 while the ambiguity related to the

meaning and scope of the term ‘disciplinary

committee’ remained pending. Therefore, in the

annexure associated alongside this circular, details

about this issue are provided and it is notified that

an IP under scrutiny should not take any new

assignments.

April 19, 2018

Circular No: IPA/009/2018

Board issued a detailed circular on the issue of

‘Annual Compliance Certificate for Insolvency

Professional Agencies’. “The Insolvency and

Bankruptcy Code, 2016 (Code), the IBBI

(Insolvency Professional Agencies) Regulations,

2016, the IBBI (Model Bye Laws and Governing

Board of Insolvency Professional Agencies)

Regulations, 2016 and Guidelines, Circulars, and

Directions issued there under cast several duties,

responsibilities and obligations on the registered

Insolvency Professional Agencies (IPAs).”;

therefore the circular provided for the annual

compliance certificate under annexure A of this

circular, which is to be filed within the first 45 days

of the closing financial year.

April 23, 2018

Circular No. IPA/011/2018

IBBI provided clarifications through the issue of a

circular about the Pre-registration educational

course under regulation 5(b) of the IBBI

(Insolvency Professionals) Regulations, 2016. The

successful attempt at this course is alongside other

qualifications required by an insolvency

professional for proper enrolment.

May 30, 2018

Circular No. RVO/12/ 2018

This circular was issued by the Board with the

purpose of providing the necessities required to be

followed by Registered Valuer Organisations for

their registration and by Registered Valuers for

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their enrolment. An organisation (RVO) is to get its

due recognition as per the Companies (Registered

Valuers and Valuation) Rules, 2017 (Rules).

According to rule 14(c) RVO should only consider

those individuals who satisfy the educational

qualifications for the job. This should be in

accordance with rule 4 of the Rules and as specified

in its recognition certificate, as valuer members.

Furthermore, Clause VI (9) of the Governance

Structure and Model Bye-Laws for RVO requires

that an RVO shall not enroll an individual as a

valuer member if he is not eligible to be registered

as a registered valuer with the Authority.

June 12, 2018

Circular No. IBBI/IP/013/2018

Board issued this circular in furtherance of the

discussion paper published under the title

“Regulation of fee payable to insolvency

professionals and other process costs under

Corporate Insolvency Resolution Process”. This

circular consists of annexure which contain the

details of the conduct-compliances-expenses-fees

of the Insolvency Professionals. Under the scheme

of the code, this duty to take reasonable care and

diligence is placed on the IP under Section 208 (a)

of the IBC, 2016. Furthermore, para 16 of the IBBI

Regulations sheds some light on the same,

therefore, it is in pursuance of providing details to

these provisions in the true spirit of the code that

this circular was issued.

July 13, 2018

Circular No. IBBI/CIRP/015/2018

The Insolvency Professional overseeing the

resolution process would provide the choice of

individuals for representation of creditors where

there are ten or more in a class. This is to be done

in synchronization with Section 21 (6A) (b) read

with regulation 16A (1) of the Insolvency and

Bankruptcy Code.

July 06, 2018

Circular No. IBBI/IPE/014/2018

“It has been observed that a few market

participants are seeking empanelment of IPEs and

a few IPEs are seeking empanelment with market

participants.” This was quoted from the circular

dated 06th July, 2018. An IPE gets his/her due

recognition from the provision 12 (1) of the

Insolvency and Bankruptcy Board of India

Regulations. Naturally so their limited role is to

provide for the help required by the Insolvency

Professionals only and not anyone else in order to

protect the spirit of their duty.

June 12, 2018

Circular No. IBBI/IP/013/2018

Board issued this circular in furtherance of the

discussion paper published under the title

“Regulation of fee payable to insolvency

professionals and other process costs under

Corporate Insolvency Resolution Process”. This

circular consists of annexure which contain the

details of the conduct-compliances-expenses-fees

of the Insolvency Professionals. Under the scheme

of the code, this duty to take reasonable care and

diligence is placed on the IP under Section 208 (a)

of the IBC, 2016. Furthermore, para 16 of the IBBI

Regulations sheds some light on the same,

therefore it is in pursuance of providing details to

these provisions in the true spirit of the code that

this circular was issued.

May 30, 2018

Circular No. RVO/12/ 2018

This circular was issued by the Board with the

purpose of providing the necessities required to be

followed by Registered Valuer Organisations for

their registration and by Registered Valuers for

their enrolment. An organisation (RVO) is to get its

due recognition as per the Companies (Registered

Valuers and Valuation) Rules, 2017 (Rules).

According to rule 14(c) the RVO should only

consider those individuals who satisfy the

educational qualifications for the job. This should

CPSLR, NUALS


be in accordance with rule 4 of the Rules and as

specified in its recognition certificate, as valuer

members. Furthermore, Clause VI (9) of the

Governance Structure and Model Bye-Laws for

RVO requires that an RVO shall not enroll an

ENDNOTES

i The amendment requires that continuation of interim resolution professional be subject to written consent from him whereas a written consent is also to be attached to the application to replace the interim resolution professional. ii Col. Vinod Awasthy v. AMR Infrastructure Ltd., NCLT, Principal Bench, Delhi, CP No. (IB)-10(PB)/2017, Date of decision – 20 February, 2017. iii Nikhil Mehta v. AMR Infrastructure, NCLAT, New Delhi, Company Appeal (AT) (Insolvency) No. 07/2017, Date of decision – 21 July, 2017. iv NCLAT New Delhi, Company Appeal (AT) (Insolvency) No. 74/2017, Date of decision – 02 September, 2017. v Form F, IBBI (Insolvency Resolution Process for Corporate Persons), Regulations, 2016. vi Nikhil Mehta v. AMR Infrastructure, NCLAT, New Delhi, Company Appeal (AT) (Insolvency) No. 07/2017, Date of decision – 21 July, 2017. vii Writ Petition(s) (Civil) No.744 of 2017, Supreme Court of India.

individual as a valuer member if he is not eligible to

be registered as a registered valuer with the Author.

viii Samanwaya Rautray and Sanu Sandilya, ‘Supreme Court lifts stay on insolvency move against Jaypee Infra’, (Economic Times, 12 September, 2017), ixhttp://www.uncitral.org/uncitral/en/unncitral_texts/insolvenc/1997Model.html x Report on the Joint Committee on Insolvency and Bankruptcy Code, 2015, pg 44. xi Report of the Insolvency Law Committee, Ministry of Corporate Affairs, Government of India,2018, pg.5. xii Bar Council of India v. A.K Balaji and Ors., AIR 2018 SC 1382. xiii Shah Brothers Ispat Pvt. Ltd. v P. Mohanraj & Ors. New Delhi Company Appeal (AT) (Insolvency) No. 306 of 2018. xiv Ibid at para 3. xv Ibid. at para 6. xvi M/s Meters and Instruments Pvt. Ltd. v Kanchan Mehta (2018) 1 SCC 560. xvii Kaushalya Devi Massand v Roopkishore Khore (2011) 4 SCC 593. xviii Aneeta Hada v M/s Godfather Travels and Tours (P) Ltd., (2012) 5 SCC 661. xix Ibid. at para 11(a).

Documents

NUALS IBC E- NEWSLETTER[Dr. Anil R. Nair, Associate Professor, Director, CPSLR, NUALS, Kochi.] The Centre for Parliamentary Studies and Law Reforms (CPSLR) under the National University