The corporate insolvency resolution provisions (CIRP) of the Insolvency and Bankruptcy Code (IBC) 2016 came into force on December 1, 2016. The Supreme Court has passed a detailed judgment on 31st August 2017 in the matter of M/s Innoventive Industries Ltd. vs. ICICI Bank. The insolvency proceeding was initiated by ICICI Bank for the recovery of its due as M/s Innoventive Industries Ltd. had defaulted on loan of about Rs 1,000 Crore. The application was filed by ICICI as a financial creditor of Innoventive, under Section 7 of the IBC, on account of default made by Innoventive in payment of amounts due under certain credit facilities availed from ICICI.
The National Company Law Tribunal (NCLT) order was challenged by Innoventive before the National Company Law Appellate Tribunal (NCLAT). In a seminal order passed by NCLAT, it dismissed the appeal holding that while deciding Section 7 applications, NCLT is only to look at Section 7 ingredients– i.e. presence of debt and default, CIRP application being complete and no disciplinary proceedings being pending against the Interim Resolution Professional (IRP). It also held that there is no repugnancy between Maharashtra Relief Undertaking (Special Provisions Act) 1958 (MRUA) and IBC as they both operate in different fields. However, since IBC has an overriding effect, it shall prevail over the provisions of MRUA.
Against the NCLAT order, an appeal was filed before the Hon’ble Supreme Court by Innoventive. It was argued by Innoventive that as its liabilities stood suspended pursuant to a relief order passed by the Government of Maharashtra under the MRUA no amounts were due and payable by it to ICICI and hence, Section 7 application cannot be admitted. Rejecting the argument on the basis that the IBC had an overriding effect over the MRUA, NCLT admitted ICICI’s application, declared moratorium and appointed an IRP.
The Supreme Court refused to dismiss the appeal on this aspect alone, noting that it is delivering a detailed judgment so that all Courts and Tribunals may take notice of the paradigm shift in the law. The Supreme Court undertook an in-depth examination of IBC provisions dealing with corporate insolvency resolution and laid down the following principles:
1. Section 7– Supreme Court held that for triggering Section 7 (1) of the IBC, a default could be in respect of default of financial debt owed to any financial creditor of the corporate debtor – it need not be a debt owed to the applicant financial creditor.
2. The Supreme Court contrasted the IBC provisions relating to applications by financial and operational creditors. It held that under Section 8(1), an operational creditor is required to deliver a demand notice on the occurrence of a default and under Section 8(2), the corporate debtor can bring to the notice of the creditor, existence of a dispute or the record of pendency of a suit or arbitration proceedings, which is pre-existing. Existence of such a dispute will make the application of operational creditor inadmissible.
3. On the other hand, under Section 7, the moment NCLT is satisfied that a default has occurred, the application of the financial creditor must be admitted (unless it is incomplete). The corporate debtor is entitled to point out that a default has not occurred in the sense that the “debt”, which may also include a disputed claim, is not due. A debt may not be due if it is not payable in law or in fact. Supreme Court held that it is of no matter that the debt is disputed so long as the debt is “due” i.e. payable unless interdicted by some law or has not yet become due in the sense that it is payable at some future date.
4. The Supreme Court delved into case law and constitutional principles surrounding repugnancy between Central and State laws in the context of Article 254 of the Constitution. It held that the MRUA is repugnant to IBC as under the MRUA, the State Government may take over the management of the undertaking and impose moratorium in much the same manner as that contained in the IBC. It held that by giving effect to the MRUA, the plan/ scheme which may be adopted under the IBC will directly be hindered and/or obstructed and that there would be direct clash between moratoriums under the two statutes.
5. The Supreme Court further held that the non-obstante clause of IBC will prevail over the non-obstante clause in the MRUA. On the issue of suspension of debt on account of the relief order under the MRUA, it held that on account of the non-obstante clause in the IBC, any right of the corporate debtor under any other law cannot come in the way of the IBC.