INSOLVENCY AND BANKRUPTCY ACT (A to Z)

Spoiler alert here: the title of this article is misleading. This is, by no means, a
complete alpha to omega of the Insolvency and Bankruptcy Code (IBC) and we
will merely be skimming at its surface. We call it the ‘A to Z of IBC’ because
what we have done here is – arrange the most fundamental principles of IBC law
alphabetically, like a dictionary of sorts.

Given the raised threshold to initiate insolvency and the proposed suspension of
provisions which empower creditors and the corporate debtor (CD) to do so, it is
likely that IBC is going to be on hiatus with no new insolvency resolutions to
facilitate and with the pending ones on the back-burner. This gives us the perfect
opportunity to take a step back to the basics and analyse the IBC as it was, as it
is and as it is likely to be. In trying to do so much in a short series, we are mindful
that we will be attracting the wrath of IBC enthusiasts who would complain that
we are totally missing nuance and that our analysis is too basic, reductive and
simplistic and it does not have enough academic rigor; we’d equally be trashed
by those just starting out with IBC of being too convoluted.

Totally mindful of this risk, we march on—trying to unravel the IBC and bring
about some method to all this madness, with so much happening with IBC, all the
time, and on multiple fronts— legislative, National Company Law Tribunal’s
(NCLT) and the Courts.

Through this column, which is the first in a three-part series, we will try to give
a brief overview of the primary features and actors in the IBC game and a sneak
peek into the new and latest in IBC and the challenges that lie ahead. Since we
all love lists, we walk you through these concepts alphabetically. But before we
dive deep, here are a few words in the nature of a general preface to this path-
breaking piece of legislation called the IBC:

Preface

The Indian Economy over the past few decades, to borrow the expression of
Arvind Subramanium (the former Chief Economic Advisor), has journeyed “from
socialism with limited entry to capitalism without exit.” Over the last few decades,
governments have not exactly rolled out red carpets for the setting up of new
businesses and industry, and an exit from the Chakravyuha of corporate existence
was also ridden with a massive amount of red tape. The legal regime governing
winding up prior to the IBC, was, to put it brusquely, as sick as the companies it
sought to cure.
The IBC sets out to change all of that. It endeavours to make exit easy and to
preserve maximum value for all the stakeholders involved in the winding up of a
company. Despite inheriting some very very sick zombie firms from the earlier
legal regime, IBC, in a very short span, has shown great results. Debtor’s paradise
is now lost, as Justice Nariman beautifully puts it, and decisions in relation to a
company under insolvency are taken by expert Resolution Professionals
(RP) and Committee of Creditors (CoC), whose primacy has been established
recently by way of amendments and progressive judicial decision making.

The shift from ‘debtors in possession’ to ‘creditors in possession’ helps safeguard

and preserve a company’s value and prevents mismanagement and asset
dissipation, both of which have been endemic in the Indian scenario, especially
as a company goes into the twilight zone. We have also witnessed great interest
in revival of insolvent companies, and liquidation is gradually being seen, and
rightly so, as the very last resort. All in all, the law proves that destruction can
be creative and for the larger good. With this general philosophy of this law in
mind, let’s get cracking on the specifics:

A – Adjudicating Authority (AA)

This refers to the NCLTs which have replaced Company Law Boards, as the
principal adjudication forum for all matters corporate. An NCLT, as the AA,
admits and sets the ball rolling on a Corporate Insolvency Resolution Process
(CIRP) by appointment of an Interim Resolution Professional and announcing a
moratorium, which, for those who arrived late, is an embargo against institution
of any suits/proceedings against the CD undergoing a CIRP.

An AA also reviews and approves the decisions taken by the CoC in relation to
the revival of the company, acceptance of resolution plans, etc. Currently, there
are 16 NCLTs operating as AAs and two National Company Law Appellate
Tribunals (NCLAT), one at New Delhi and the other one recently constituted at
Chennai. The newly-constituted NCLAT at Chennai will hear appeals from
NCLTs which have jurisdiction over Karnataka, Tamil Nadu, Kerala, Andhra
Pradesh, Telangana, Lakshadweep and Puducherry. The New Delhi Bench will
continue to hear appeals from NCLTs of other remaining jurisdictions. Further
appeals from the NCLATs lie to the Supreme Court, provided they involve a
question of law.

Generally, on the working of the AAs, as someone wise said, IBC has in a lot of
ways been a victim of its own success, due to which NCLTs are extremely
overburdened and almost bursting at the seams; we certainly need more of them.
In this context, the constitution of a new NCLAT bench at Chennai should go a
long way in helping ease the burden on the docket of the NCLAT at New Delhi
and further the IBC’s objective of speedy recovery.
B – Bankruptcy

Simply speaking, insolvency is a financial state of being—one that is reached

when one is unable to pay off his/her debts on time. Following this
is bankruptcy, which, on the other hand, refers to the legal process that serves
the purpose of resolving the issue of insolvency. IBC deals with both.

C – Committee of Creditors

The most significant change brought about by the IBC and its central philosophy,
is the shift from ‘debtors in possession’ to ‘creditors in control’ in relation to an
insolvent company. In other words, when a company defaults on its debt, control
of the company shifts from the erstwhile management (who have led the company
to where it is) to a CoC. This is for good reason, as creditors have the maximum
amount of skin in the game and are the most vital stakeholders in the process. A
CoC, therefore, is the primary decision maker of the fate of the company.

Amongst the many functions of CoC, the primary are:

 Approving the appointment of a RP;

 Approving a Resolution Plan (more on resolution plans a little later);
 Approving interim finance for the company, to ensure that its basic needs
are met during the process of insolvency and the functioning of the
company does not come to a grinding halt.

The question of primacy of CoC’s decisions has been a source of great

controversy. This controversy is the most heated in situations where the CoC
decides to approve one resolution plan over the other, and especially when it
caters to various creditors and stakeholders of the company. Under the scheme of
IBC, it is essentially left to the wisdom of the CoC to decide as to which plan best
serves the interests of the company. Though it is also correct that eventually it is
the AA/NCLT which finally “approves” or “rejects” a resolution plan. This
apparent dichotomy has led to a fight for primacy between CoC and NCLT and
great controversy on the extent to which the AA/NCLT can second guess the
CoC’s decision; a decision which is essentially commercial in nature and not a
legal one. We grapple with this question later in the article.

C – Cross Border Insolvency

Picture this, ‘X’ company goes into insolvency with assets spread across the
world and pending claims from various lenders. On the company becoming
unable to pay off its debts, lenders in country ‘A’ initiate an insolvency process
where the Court appoints an administrator to deal with the company’s assets.
Simultaneously, lenders of the company in country ‘B’, let’s say India, also
initiate an insolvency process where the Court kickstarts the CIRP and appoints
an Interim Resolution Professional to begin the process.

This kind of situation gives rise to many questions, none of which are too easy to
answer:

 Can these two insolvency processes proceed simultaneously?

 Which administrator/RP is to take the lead, constitute the CoC and take
control of the assets of the CD?
 Which law will govern the distribution of the proceeds of a resolution plan?
 Is there a way to consolidate these proceedings for an effective and
complete resolution?

The IBC, prima facie, does not address these questions comprehensively but
instead seeks to promote an ad-hoc framework of cross-border insolvency
through Sections 234 and 235, possibly to retain flexibility and since there’s no
one size fits all approach possible in such circumstances. These provisions
envisage a system to be created through bilateral agreements with foreign
countries and provides for an option of sending letters of request to foreign courts
for information on the CD’s assets which are located abroad.

The problem with the current position is that it involves lengthy negotiations with
individual countries to conclude treaties/agreements which will, more often than
not, have different terms and procedures. This position is far from ideal and
renders cross-border insolvency processes- agreement-dependent, which comes
at the cost of consistency and certainty. It was precisely this position that
prompted the Insolvency Law Committee in 2018 to recommend the adoption of
the UNCITRAL Model Law on Cross-Border Insolvency, 1997 as a separate part
in the IBC.[2] Adoption of the Model Law will enable India to align its insolvency
laws with the internationally accepted standards.

Presently, the Government is still considering amendments to the IBC to provide

for cross-border insolvency but this gap in the law has not prevented the NCLAT
from allowing a cross-border insolvency process for Jet Airways. In an order
given in September, 2019, the NCLAT approved a ‘Cross Border Insolvency
Protocol’ entered into between the Dutch Administrator of the company and its
RP in India.[3] The Protocol aims to promote a coordinated insolvency process for
Jet Airways by enabling coordination, communication, information sharing
between the CoC, RP and the Dutch Administrator. This makes Jet Airways the
first Indian company to undergo a cross-border insolvency treatment. In another
decision, NCLT, Mumbai has allowed the inclusion of Videocon’s foreign assets
and properties in its CIRP in India, also illustrating the fact that the lack of a legal
framework on cross-border insolvency is not deterring the Tribunals from
endorsing its principles.[4]
With everyone still celebrating this progressive decision by the NCLAT, a
decision of the US Bankruptcy Court for the Delaware District has provided
another shot in the arm for the cross-border insolvency regime for Indian
companies. On November 4, 2019, a Delaware Court recognised the insolvency
case of SBI v. SEL Manufacturing Company Limited as ‘foreign main
proceeding.’ As per the UNCITRAL Model Law, on which the US insolvency
law is modeled, a ‘foreign main proceeding’ is a proceeding which takes place
in the centre of main interest of the debtor which is the place of registration or
primary operations of the debtor.

The recognition will result in an automatic stay of any proceedings against the
CD in US and bar any transfer of its assets. It will also empower the RP to
undertake discovery into the CD’s assets and to manage its estate, including the
sale of any assets. This decision, coupled with the recommendations of the
Insolvency Law Committee, should prompt the Government of India to move
swiftly in introducing a cross-border insolvency legislative framework.

However, it appears that the Government is not rushing into a legal framework
without adequately studying the issues involved. In January this year, the
Ministry of Corporate Affairs constituted a new committee
to study and analyse the recommendations of the Insolvency Law Committee and
submit a report within three months. And in February, it expanded the terms of
reference for the Committee to include the study of the UNCITRAL Model Law
for Enterprise Group Insolvency and to make recommendations for the IBC.
Hopefully, such thorough exercises will yield a robust legal framework which is
able to cater to all situations which arise in a cross-border insolvency process.

D – Default

A ‘default’ with respect to a debt owed by the CD is a trigger for the initiation of
CIRP. The IBC defines ‘default’ in rather uncontroversial terms as : the non-
payment of debt when whole or any part or instalment of the amount of debt has
become due and payable and is not paid by the corporate debtor. The IBC does,
however, distinguish between the ‘default’ in respect of the debt owed to financial
creditors and operational creditors. The Supreme Court analysed this distinction
in Innoventive Industries Limited v. ICICI Bank[5] (Innoventive Industries) based
on Section 7 (initiation of CIRP by financial creditor) and Section 8 (initiation of
CIRP by operational creditor) of the IBC. The Court noted that scope of
determining a default of a financial debt is limited to the records of the
information utility and evidence supplied by the financial creditor. The fact that
such a debt is disputed by the CD is inconsequential as long as the debt
is due and payable, meaning that it is not interdicted by a law or is payable at a
future debt. The CD would be entitled to object to the claim of non-payment on
these grounds at the stage of inquiry into the occurrence of ‘default’ under Section
7(5). With the definition of ‘default’ as the only guide for the AA, it has no option
but to admit the application filed by a financial creditor if it comes to the
conclusion that the debt is due and payable.

In contrast to this, the CD had considerable leeway in disputing the debt owed to
an operational creditor, who does not have the luxury of applying directly to the
AA without giving notice of the unpaid debt to CD. The CD is then given ten
days, from the receipt of such notice, to claim the existence of a dispute on the
payment of the debt with the operational creditor. For instance, a defect in and
rejection of goods and consequent lack of liability to pay may be a good dispute.
The existence of a dispute with respect to a debt can, therefore, prevent the
initiation of CIRP.

The reason for allowing the CD to dispute only operational debts is two-
fold: first, the debts owed to operational creditors are usually small amounts and
a CIRP cannot be allowed to be initiated for paltry amounts, especially when there
is room for negotiation with the creditor with regard to the payment of the debt
and the capacity of the company to continue as a going concern is not under
serious question; second, the chances of raising a dispute with regard to a debt
owed to financial creditors is significantly lesser because such debts are generally
well-documented and relatively more unimpeachable, especially when registered
in information utilities. This leaves very little scope for the CD to dispute its
liability and for the AA, which has to only ascertain whether the debt
is due and payable.

D – Dispute

The language of the provisions and the Supreme Court’s decision in Innoventive
Industries clarifies the distinction between the position of financial and
operational creditors and also underlines the fact that the CD may claim
the existence of a dispute in respect of an operational debt and avoid a company
going under CIRP.

But the question that arises is—what qualifies as a dispute?

Section 8(2)(a) allowed the CD to bring to the notice of the operational creditor
– the existence of a dispute and record of the pendency of the suit or arbitration
proceedings filed before the invoice was raised by the operational creditor. This
could be used to avoid the company going into insolvency. The use of the
word ‘and’ ostensibly appeared to suggest that pendency of a suit or arbitration
proceeding with respect to a debt was the only indicia of existence of a dispute,
and it was only in cases of pendency of a suit or other arbitration proceeding that
a CIRP could be avoided. This was problematic for many reasons. This meant
that any non-payment (which may be for good reason) and perceived default
rendered an entity at the risk of being taken to CIRP. It is only in those cases
where a CD was either already defending the demand in a court/arbitration or
where it had proactively initiated litigation/arbitration to contest a possible future
demand, that it could avoid the CIRP by bringing forth the existence of that
suit/arbitration proceeding as evidence of existence of a dispute. This was absurd
as it left a CD with no option but to initiate litigation/arbitration against all those
who may have an interest in initiating the CIRP against it. Not having done this,
the CD had practically no defence and risked being thrown into the CIRP
oblivion.

Fortunately, the Supreme Court has cleared the airs on this issue in Mobilox
Innovations Private Limited v. Kirusa Software Private Limited,[6] where it has
held that the pendency of suit/proceeding is not the only evidence of existence of
a valid dispute; in other words, a demand can be considered disputed even without
there being a suit/proceeding already pending in a Court or Tribunal. The Court
has achieved this by reading the word ‘and’ as ‘or’ in Section 8(2)(a), in line with
the objective of the IBC to discourage a full-fledged CIRP based on insignificant
amounts owed to operational creditors. In order to avoid the risk of opening the
floodgates for blanket denials of liability by the CD, the Supreme Court has given
the AA some discretion in ascertaining that the dispute is not a spurious,
hypothetical, or illusory dispute, crafted merely with a view to wriggle out of
liability. In doing so, the Supreme Court has implicitly imported the ‘bona
fide’ standard which appeared in the definition of ‘dispute’ in the earlier
Insolvency and Bankruptcy Bill, 2015. The decision allows the CD to claim the
existence of a dispute on the notice of payment by the operational creditor, even
if it has not actively pursued it before the CIRP, so long as it is able to satisfy the
AA of the genuineness of the dispute.

E – Endless Delay, A Persistent Issue?

Timely Resolution and preservation of value in underlying assets is one of the

main objectives of IBC. It has always been projected as a law which promotes the
timely completion of the insolvency process, well in line with its other objective
of maximizing the assets’ value. This desire is also reflected in the provisions of
the IBC which originally envisaged the completion of the insolvency process
within 180 plus 90 days in Section 12. In practice, however, the insolvency
regime is still plagued by endless delay in completion of CIRPs. Many attribute
this to the delay which occurs at the adjudication stage, where litigation in most
cases causes the CIRP to extend beyond the time limit. This undesirable state of
affairs is what prompted the Supreme Court to exclude the time taken in litigation
from computing the 270 days limit in ArcelorMittal India Private Limited v.
Satish Kumar Gupta.[7]
Worried that the ruling would only exacerbate the situation of delays, the
Government, acting with great alacrity, amended the IBC in 2019 to provide for
an upper limit of 330 days for completion of the CIRP but clarified that this limit
would be inclusive of both the time taken in legal proceedings and any extensions
granted by the Adjudication Authorities. The failure to complete the CIRP within
this time limit would attract liquidation which was clearly an unfeasible option
for all stakeholders involved in the CIRP.

In laying down a non-derogable time limit, the Government was clearly

motivated by the desire to preserve the value of assets which naturally depletes if
the CIRP goes on indefinitely. But it possibly disregarded the fact that non-
compliance with the deadline, even inadvertently, would push the CD towards
liquidation which has an equally devastating effect on the CD. This effectively
made the remedy worse than the ailment and led to a challenge to the validity of
the provision before the Supreme Court in Committee of Creditors of Essar Steel
India Limited Through Authorised Signatory v. Satish Kumar Gupta[8] (Essar
Steel).

The central argument against the provision was premised on the well-known
maxim :actus curiae neminem gravabit— an act of Court shall prejudice no one.
Since the time limit brooked no exception for situations where the delay was
occasioned by the NCLT/NCLAT’s inability to complete the CIRP without any
fault of the litigant, it was considered to be a violation of Article 14 (right against
non-arbitrary treatment) and Article 19(1)(g) (right to carry on business).
However, instead of striking down the provision in its entirety, the Court chose
to strike down only the word ‘mandatorily’ and to read it down as ‘ordinarily.’
This was done to balance both the need for speedy disposal along with the need
to promote resolution of the CD in cases where the delay was not attributable to
it.

The effect of this judgment is that, ordinarily, a CIRP should be concluded within
the 330 days limit. But if any extension has to be granted by the AA, it can only
be granted where it is shown that a short period is left for completion of the CIRP
and that the time taken in legal proceedings is attributable to the pendency of the
action before and/or inefficiency of NCLT/NCLAT itself. While the judgment
has the merit of introducing some flexibility in what would otherwise have
become an unfair provision in practice, two issues still remain unaddressed: One,
the Court has not devoted any discussion to the standard that has to be satisfied
in convincing the NCLT/NCLAT that they themselves have occasioned the delay.
Second, it has provided little guidance on any limit to the extensions that can be
granted beyond the 330 days limit. In absence of any limit, the ruling may end up
aiding exactly what the 2019 amendment had set out to tackle.
F – Financial Creditor

One of the most important stakeholders in the CIRP are the ‘Financial Creditors.’
This is because they hold the key to unlocking a new life for the CD. This
influential status stems from the primacy that the IBC gives to them as the voting
members of the CoC and in priority of their claims. Given that it is only the
financial creditors who are capable of assessing the viability of the company and
who can place it in a long-term context of revival, the IBC accords them this
status. Since the financial creditors have lent capital, on which the company’s
existence substantially depends, they have a major say in determining its future
course of action. As members of the CoC, they wield significant influence in
decisions such as approval of the resolution plan ( it is only when 66% of the CoC
has approved a resolution plan, can it move forward to the AA for approval),
modification of the capital structure, creation of security interests and undertaking
related party transactions.

However, in 2019, a ruling of the NCLAT in Standard Chartered Bank v. Satish

Kumar Gupta, R.P. of Essar Steel Limited[9] had threatened this coveted position
of financial creditors when it treated the operational and financial creditors at par
by holding that the CoC had no role in deciding the distribution of claims from
resolution plans and had to only decide the feasibility of bids. This ruling had the
effect of diluting the cardinal principle of preference to secured creditors and
implied that there was no difference between secured and unsecured creditors in
distribution of proceeds from the resolution plan.

This immediately prompted legislative intervention in the form of an amendment

in 2019 itself, which restored the primacy of secured financial creditors by
enabling the CoC to take into account the order of priority given in Section 53
and the value of a security interest of a secured creditor in the distribution of
proceeds, in approving the resolution plan. Further, in order to prevent any
disadvantage to operational creditors, the Parliament amended Section 30(2)(b)
to state that the resolution plan had to provide the higher of the liquidation value
or resolution value to them.

This position was also affirmed by the Supreme Court decision in Essar
Steel where it held that it was only the CoC, composed entirely of financial
creditors, that could decide the feasibility and viability of resolution plans. This
is premised on the reasoning that financial creditors, who are willing to take
haircuts on their loans and place their claims in a long-term context of the
company’s revival, are better placed than operational creditors to take
commercially-sound decisions. However, this commercial wisdom of the CoC is
not immune from judicial review and the AA has to still ensure that the decision
of the CoC reflects a plan to keep the CD alive as a going concern, maximise the
value of its assets and take into account the interest of all stakeholders, even the
operational creditors. But as long as a CoCs decision in accepting one resolution
plan over the other is motivated by the objective of maximising the value of the
company and interests of operational creditors with due regard to its capacity and
needs to continue as a going concern, the AA would have its hands off and cannot
second guess the commercial decisions taken by the CoC.

In the backdrop of Covid-19, financial creditors face yet another challenge in

recovering their dues and one which is unlikely to be solved in the Courts. The
Ministry of Finance has recently announced that it plans to suspend fresh
insolvency filings under the IBC for a year and exclude Covid-19 related debt
from the definition of ‘default.’ With the minimum threshold to initiate an
insolvency already raised from one lakh rupees to one crore rupees, these
measures indicate the Government’s intention of prioritising the continuity of
businesses over resolution under IBC, in already damp market conditions. The
combined effect of this on financial creditors would be adverse, to say the least,
considering that the measures foreclose the opportunity to seek resolution under
the IBC for a significantly long time. Additionally, this may very well serve as
an escape route for undeserving debtors who may have had an impending default,
even before Covid-19, which has now been given protection from recovery. Some
see the proposed suspension of the IBC as a positive measure since the CoC
would unlikely to have received any bids for the CD, given the serious financial
pressure that companies are under. It is also being considered as a blessing in
disguise for strengthening alternatives such as pre-pack insolvencies. While
discussions on the need for a pre-pack insolvency regime have predated Covid-
19, it is likely to gain more prominence after the suspension ends and there is an
upsurge in the number of insolvencies.

Also, F- Fraudulent Transactions

“Three businessmen go for dinner, where each tries to prove his financial worth
by offering to pay the bill. One of them says that he should pay as his company
had a great financial quarter. Another one says that he has recently got a huge
amount as inheritance from a rich aunt that he never knew he had, therefore,
being cash rich, he should pay. And the last one, who also happens to be a
promoter of a company, replies, tongue-in-cheek, that he should pay since his
company is going under insolvency next week!”

With an insolvency on the horizon, unscrupulous promoters sometimes acting in

the capacity of directors of the CD may seek to misappropriate assets to the
detriment of other creditors. The IBC recognises this possible mischief and seeks
to regulate/curb the carrying-on of business which is done with an intent to
defraud the creditors of the CD or for any fraudulent purpose. Under Section 66
of the IBC, the RP is empowered to apply to the AA in case it finds the occurrence
of any fraudulent transactions. On the application, the AA may direct any persons
who were knowingly parties to such transactions to make contributions to the
assets of the CD and claw back those monies. The provision goes a step further
in enabling the AA to direct the director or the partner of the CD to make
contributions to its assets. But to what extent can the RP uncover such antecedent
actions of the directors /partners?

Section 66(2)(a) of the IBC spells out what is usually called the ‘Twilight Period,’
which is : the period before the insolvency commencement date, when the
directors knew or ought to have known that there is no reasonable prospect of
avoiding the commencement of the insolvency process for the CD. The
directors/partners are required to exercise due diligence in carrying on the
business in the twilight period in order to minimize any potential loss to the
creditors. Any failure to do so or any negligent or reckless conduct attracts the
application of the provision. It can be argued that the provision
imposes additional duties on the directors to ensure that the creditors’ interests
are protected now that the company has entered the zone of a possible
insolvency.

The reason for this protection is clear—once the company is on the verge of
insolvency, it has to cater to the interests of its creditors, who will only benefit if
there are enough assets for a prospective resolution applicant to bid for it or are
enough for satisfying their claims in case of liquidation. Thus, transactions selling
assets at an undervalue or prioritizing the interests of one creditor over the other
are some of the transactions which the provision seeks to regulate.

Apart from civil liability under Section 66, fraudulent transactions may also invite
criminal liability under Section 69 of the IBC. Like Section 66, where the
directors may escape liability by showing that they exercised due diligence in
minimizing loss to creditors, Section 69 also allows the officer to show that he
had no intent to defraud the creditors at the time of commission of the acts.
However, unlike Section 66, the provision has a look-back period of five years
before the insolvency commencement date which allows the officer to escape
liability for any acts done before this period. On the contrary, the twilight period
in Section 66 is not expressed in numerically certain terms and relies on the
‘subjective’ knowledge of a potential CIRP, that a director or partner may have
had in the build-up to the CIRP. There is, therefore, little room for disputing the
liability to contribute to the assets of the CD under the provision. Many of these
fraudulent transactions come up in forensic investigations commissioned by RPs.

G – Group Insolvency
Aristotle once famously said that the whole is more than the sum of its parts. This
cannot be more relevant than in the case of group companies where, more often
than not, the entire group as a single economic entity is more valuable than the
individual companies which make it. A question which arises here is whether this
logic can be stretched to apply to the insolvency of companies which make up the
group. Theoretically, it can. Group insolvency, as it is called, can be understood
as a consolidated insolvency process for related companies which are part of a
larger group. Practically, however, the IBC does not address this.

Seen from a jurisprudential standpoint, group insolvency seeks to balance two

important imperatives: on one hand, the separate legal personality of even those
companies which are closely inter-connected in a group, and on the other hand,
recognizing that in spite of this distinct personality, a consolidated insolvency
process is advantageous for all stakeholders.

Even though there is no legal framework supporting group insolvency, this has
not prevented NCLT benches and the NCLAT from engaging with this
issue.[10] In fact, these decisions formed the backdrop to the Report of the
Working Group on Insolvency[11] which was released in September, 2019. A
breakdown of group insolvency into ‘Procedural Co-ordination’ and ‘Substantive
Consolidation’ by the Working Group has guided both its explanation and
recommendations. ‘Procedural Co-ordination’ mechanisms aim to coordinate the
different insolvency processes of various group companies, without actually
disturbing the division of assets and substantive claims of creditors of each of the
group companies. This mechanism reduces costs and time associated with
different insolvency processes.

In going a step further than mere coordination, ‘Substantive Consolidation’ aims

to consolidate the assets and liabilities of group companies so that they can be
treated as a single economic unit for the insolvency process. This typically targets
those corporate groups where separate personality of group companies is used to
escape liability and where the assets and operations of the group companies are
otherwise inseparable.

Notwithstanding its benefits, the introduction of a framework for ‘Substantive

Consolidation’ may ruffle feathers in the market because it disregards the separate
legal personalities of the group companies and combines their asset as part of a
single insolvency, sidelining creditor expectations in the process. The Working
Group has taken note of this and has therefore recommended a phased
implementation of the recommendations with ‘Procedural Co-ordination’ and
provisions dealing with perverse behaviour of group companies to be considered
in the first phase and ‘Substantive Consolidation’ and Cross-Border Group
Insolvency in the second phase. This is a good step especially when the general
cross-border insolvency framework is still at a nascent stage. Since the recent
amendment to the IBC in 2020 has not dealt with group insolvency at all, it will
be interesting to see how the Parliament implements these suggestions in the
future.

H – Homebuyers

Home buyers constitute the major source of finance for builders in housing
projects. Much of the financial needs of builders are met by the booking
amounts/payments made by the homebuyers. With this being the position,
homebuyers clearly had an interest in the insolvency process of companies
engaged in construction of housing projects. But the IBC posed an initial hurdle:
whether such buyers qualified as ‘Operational’ or ‘Financial’ creditors and if they
constituted a separate class of creditors, what was the extent of their rights under
the IBC. There were judicial attempts to enable homebuyers to stake a claim in
the insolvency process.[12] This was also sanctified by an amendment in 2018
which conferred upon them the status of ‘financial creditors’ and treated the
amount raised by them as a ‘financial debt.’

Objections against the inclusion of homebuyers as financial creditors were quick

to be made; there was no clarity on when a ‘default’ occurred; it was also argued
that they could not be treated equally with secured financial creditors.
Additionally, real estate developers who were clearly distressed by the
amendments challenged them as violative of the Constitution. Fortunately for the
homebuyers, the Supreme Court in Pioneer Urban Land and Infrastructure
Limited v. Union of India[13] (Pioneer) rejected the challenge and upheld the
amendments allowing them to occupy a place in the CoC and to be part of the
decision-making process concerning the company’s future.

However, this amendment had an unintended and unseen consequence: it now

effectively empowered even a single homebuyer to initiate CIRP and bring an
entire project to a grinding halt. This turned the IBC to a mechanism to redress
individual grievances which it was never meant to do, especially when such a
mechanism already existed under the Real Estate (Regulation and Development)
Act, 2016 (RERA).

In light of the above, the Parliament has recently amended the IBC and introduced
a minimum numerical threshold of not less than 100 allottees or 10% of the total
number of allottees, whichever is less, of a real estate project to initiate
insolvency. This move, many homebuyers feel, sets them back and poses an
insurmountable burden to look for the requisite number of homebuyers to initiate
insolvency. Real estate developers, on the other hand, feel that the amendment
will ensure that only bona fide applications are filed and that they are not driven
to insolvency only on the basis of individual grievances.
Homebuyers are pulling out all the stops in trying to wish the amendment away.
In January this year, they approached the Supreme Court which ordered the AAs
to maintain status quo with respect to applications filed before the amendment,
till the constitutional validity of the law was decided. They could not, however,
register a success before the Standing Committee on Finance which did not
recommend dropping the clause from the Bill, despite the dissenting views of
three members.[14] All eyes are now on the Supreme Court which is going to
adjudicate the constitutional challenge this year and has rich jurisprudence from
earlier to borrow upon in deciding the validity of the amendment.

Divided opinions aside, the amendment reinforces the view that the IBC is not
meant to redress individual grievances, a remedy for which already exists under
RERA. Prescribing a minimum threshold does not in any way dilute the original
intent of the IBC which is to provide them a place in the CoC when the real estate
company goes under insolvency. Notwithstanding what actually happens in
practice, the IBC was never intended to be used as a coercive tool to compel
a company to deliver on its promises or to repay the amount taken. There are
other remedies for this. As Justice Nariman puts it in the Pioneer verdict, it is
only when a homebuyer has completely lost faith in the ability of the current
management to complete the project and wants it to be completed by a different
developer, should he invoke the remedies under IBC. Seen in this context, a
company cannot be thrust into insolvency just because a single homebuyer feels
that it should be managed by somebody else. Such a radical decision should be
the result of at least a minimum consensus among the homebuyers, especially
when the insolvency route also involves the risk of liquidation of the CD . This is
precisely what the latest amendment echoes.

In the second part, we take a closer look at the IBC’s most fundamental features
(terms starting with alphabets I-P).

I – Information Memorandum (IM)

The IM is one of the four important documents in an insolvency process along

with the evaluation matrix, request for resolution plans and the resolution plan
(RP) itself.

Put simply, the IM is nothing but a document spelling out the details of the
corporate debtor (CD) to assist the resolution applicant (RA) in preparing the RP.
Section 5(10) of the IBC defines an IM as a memorandum prepared by a
resolution professional and then directs the reader to Section 29 which spells out,
with greater granularity, what ‘relevant information’ an IM should contain.

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This information is intended to provide an all-around picture of the CD and to
help stakeholders make informed decisions w.r.t the future of the CD; broadly, it
includes information relating to CD’s financial position and disputes by or against
it. Insolvency and Bankruptcy Board of India (IBBI) is empowered to lay down
what exactly constitutes ‘relevant information.’ The IBBI has done so in
Regulation 36 of the IBBI (Insolvency Resolution Process For Corporate
Persons) Regulations, 2016 (IBBI Regulations, 2016) where it has added on to
the constituents provided in Section 29. These include : the audited financial
statements, the list of creditors and the amounts claimed by them, assets and
liabilities of the CD, details of guarantees given for the debts of the CD, the
number of workers and employees and liabilities towards them, amongst a host
of other things.

J – Judicial Review of the decision of the Committee of Creditors

This is a topic worthy of an entire article dedicated to it, but space constraints
permit us to only summarize it here. The saga began with the ruling of the
National Company Law Appellate Tribunal (NCLAT) in Standard Chartered
Bank v. Satish Kumar Gupta, R.P. of Essar Steel Limited[2] which, as we have
already highlighted in the previous part of the article, drove coach and horses
through the concept of autonomy and commercial wisdom of the CoC in deciding
the distribution of proceeds under the RP. Something that was to be left to the
CoC was appropriated by the NCLAT. This was problematic since it adversely
affected the interests of the most important creditors to the company—secured
financial creditors. Secured creditors, for the uninitiated, lend capital to
companies at low interest rates because the presence of a security mitigates their
risk in the event of a default in repayment. Since the banks’ interests are protected,
they are motivated to extend credit to companies. This entire system helps
maintain a continuous supply of credit for companies, facilitates greater economic
activity, and avoids a chilling effect on lending. In the insolvency resolution
process also, it is the CoC, which is composed of financial creditors, that has the
capacity and judgement to assess the viability of a Resolution Plan (“RP”). In
doing so, the CoC may decide to approve a RP which enables increased recovery
by the secured financial creditors, in comparison to other unsecured and
operational creditors. As we have noted before, this is only fair since it is only the
financial creditors who are willing to take haircuts on their loans and place their
claims in a long-term context of the company’s revival, something which
operational creditors may not be able to do.

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It is in this context that the Supreme Court’s judgment in Committee of Creditors

of Essar Steel India Limited Through Authorised Signatory v. Satish Kumar
Gupta[3] (Essar Steel) becomes an important precedent. The Supreme Court has
rightly held that AAs/ NCLATs cannot make a judicial determination of a
commercial decision – which is entirely within the remit of the CoC, composed
of financial creditors who are better suited to judge the feasibility and viability of
an RP. The decision draws heavily from another decision of the Supreme Court
in K. Sashidhar v. Indian Overseas Bank[4]where it was held that the commercial
wisdom of the CoC was nonjusticiable.

However, judicial review has not been completely ruled out. The AAs/NCLATs
have to still ensure that the decision of the CoC reflects a plan to maximise the
value of assets and takes into account the interest of all stakeholders, which
includes the operational creditors. In providing a narrow scope of scrutiny, the
Supreme Court has, therefore, struck a balance. This is important because any
company cannot survive merely off financial creditors; it needs a constant supply
of goods and services from operational creditors. A complete disregard of their
interests can never be in the long-term interests of the company because this may
have the effect of handicapping a newly revived company who may rendered a
pariah and left with no operational creditors to provide goods and services to it.

Even the 2019 amendment to Section 30 of the IBC, which we have discussed in
the previous part, has taken a balanced view by stipulating that the RP has
to provide a minimum pay-out to the operational creditors and that the CoC can
take into account the hierarchy between creditors in deciding the manner of
distribution from an RP. However, a vaguely worded explanation has also been
introduced to Section 30 which states that: [f]or the removal of doubts, it is
hereby clarified that a distribution in accordance with the provisions of this
clause shall be fair and equitable to such creditors.

Before the judgment of the Supreme Court in Essar Steel, there were two possible
interpretations of this explanation which rendered it ambiguous. One
interpretation was that if the RP provided for the minimum pay-out to the
operational creditors, it would be deemed to be a fair and equitable distribution
and thereby, eliminate any possibility of judicially review of the ‘fairness’ of the
distribution. If it was truly in the character of a deeming provision, that would
mean that the Parliament had omitted to insert the words ‘deemed to be.’ Another
view was that the explanation had cast a duty on the AAs/NCLATs to determine
the ‘fairness’ of the distribution to operational creditors and, thus, opened up the
floodgates for litigation on the fairness of distribution. However, the latter view
brought the IBC back to square-one and defeated the intent of the amendment
which is to limit judicial review of distribution under RPs. In Essar Steel, the
Supreme Court seems to have endorsed the first interpretation; it clarified that
Explanation 1 has been inserted to preclude the AA/NCLAT’s from entering into
the merits of the decision of the CoC, once the RP ensures the minimum pay out
to operational creditors. This means that the scope of judicial review of the CoC’s
decision is circumscribed by the IBC and can no longer be tested on untrammeled
subjective notions of just and fair.

A recent decision of the Supreme Court has thrown further light on the issue
of commercial wisdom and the limits of judicial review. In Maharasthra
Seamless Limited vs. Padmanabhan Venkatesh,[5] the Supreme Court approved a
RP where the bid amount was lower than the liquidation value (notional value of
assets if the CD was to be liquidated; more on this later). While the NCLAT had
ordered the RA to increase the upfront payment to match the liquidation value,
the Supreme Court felt that the NCLAT had overstepped its boundaries of judicial
review in doing so. It observed that NCLAT’s decision was based on an equitable
perception and, was an improper attempt to substitute its own decision for the
CoC’s commercial wisdom.

This judgment may come under fire for promoting an unquestionable use
of commercial wisdom to defeat any objections against palpably unfair RPs, such
as the one in this case, one may argue. However, a close reading of the judgment
belies this perception. The Supreme Court itself acknowledged the fact that an
RP which provides an amount lesser than the liquidation value
appeared inequitable, but also noted that the RA planned to infuse more funds
once it began running the company. In other words, the RA’s decision to invest
in a staggered manner rather than make a significant upfront payment was based
on what the CoC and the RA itself considered to be commercially viable. The
judgment reinforces the view that the seemingly impenetrable wall of commercial
wisdom is not to enable downright arbitrary RPs to pass muster but is intended to
avoid excessive intereference in what are otherwise commercially viable
decisions.

K – Kreative Destruction

Yes, creatively spelled. This is at the heart of IBC. The term ‘creative destruction’
was first devised by the economist, Joseph Schumpeter in 1942, in his work titled
‘Capitalism, Socialism, and Democracy.’ He explained it in the following words:
“. . . the same process of industrial mutation . . . that incessantly revolutionizes
the economic structure from within, incessantly destroying the old one,
incessantly creating a new one. This process of Creative Destruction is the
essential fact about capitalism.” To Schumpeter, the process of constant
evolution in the kind of technology, products and services people use, undergirds
economic growth and productivity. At its heart, creative destruction requires
challenging the status quo and introducing reformative ideas and processes to
destroy the existing ones, for the better.
Closer to home, we have our very own proponent of creative destruction in the
form of Lord Shiva (also known as Lord of Destruction), who destroys and creates
the world anew in a more perfect form.

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The idea of breaking up old structures to give way to new ones is central to the
insolvency process under the IBC. The CIRP involves the removal of the existing
management of a CD debtor which is followed by a process aimed at revitalizing
it through a RP and to enable it to continue as a going concern. RPs are typically
aimed at turning the CD around by infusing fresh capital and helping it chart a
new path, all of which is done by a different management, with a better vision
than the earlier one. The IBC leaves almost no scope for the earlier management
to bid for the CD or regain control of it (something that we will touch upon in the
next part). This ensures that a completely new management takes over the CD,
uninfluenced by the previous way of functioning and keen to introduce its own
ideas. In doing all of this, the IBC paves the path to resolution from destruction
for the CD and ends up making use, in its own way, of the theory of ‘creative
destruction.’

L – Limitation Act and IBC

As a law which is still plagued by many instances of conflict with other laws, the
IBC’s conflict with the Limitation Act, 1963 (Limitation Act) stands resolved
by a legislative amendment and reaffirmed by a judgment of the Supreme Court.
Like other puzzling questions of law which arise in the implementation of IBC,
the question of applicability and the need for judicial and legislative intervention
arose from existing jurisprudence which considered the Limitation Act to not
apply to claims under the IBC.[6] This reasoning had proceeded on the premise
that the IBC is a self-contained code which excluded the application of the
Limitation Act. This, however, did not mean that stale claims from even 30 years
ago could be admitted since the NCLAT had left it to the AAs to determine
limitation on a case-to-case basis, without imposing the requirement to take
guidance from the Limitation Act.

Even before any appeals could be made to the Supreme Court, the Parliament
added Section 238A to the IBC to apply the Limitation Act to proceedings and
appeals under the IBC. The only question, therefore, which fell before the
Supreme Court in B.K. Educational Services Private Limited v. Parag Gupta and
Associates[7] was whether the Limitation Act would apply retrospectively to
applications made on and from the commencement of the IBC on 01.12.2016 till
06.06.2018, the day on which the amendment came into effect.

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The Court answered this in the affirmative and held that the definition of ‘due and
payable’ under Section 3(12) of the IBC covered only those debts which were not
time-barred. This was itself drawn from another ruling of the Supreme Court
in Innoventive Industries Ltd. v. ICICI Bank[8] which had held that a debt would
not be a due debt if it is not payable in law or in fact. A time-barred debt was not
a due debt since it was interdicted by the law of limitation. Not holding so,
according to the Supreme Court, would allow anyone, even with a time-barred
claim from 1990, to trigger a CIRP even where it is not required and may cause
liquidation leading to ‘corporate death.’

Also, L – Liquidation Value

Regulation 2(k) of the IBBI Regulations, 2016 defines ‘liquidation value’ as

the estimated realizable value of the assets of the CD, if the CD were to
be liquidated on the insolvency commencement date. This has to be determined
by two registered valuers who have to appointed by the resolution professional
within seven days of his appointment. But what exactly is the purpose of
determining the liquidation value at a stage when the CD is commencing its
journey to recovery, something which is fundamentally opposed to the idea of
liquidation.

The answer to this lies in an understanding of the classification of creditors into

financial and operational creditors. As we have highlighted in the previous part,
the financial creditors in the CoC have wide-ranging powers to take important
decisions for the CD like the approval of a RP and deciding the manner of
distribution under the plan. Given that operational creditors have no voting rights
in the CoC, there is a possibility that the financial creditors may completely
disregard their interests. In order to prevent this from happening, the law
guarantees the payment of atleast the liquidation value to such operational
creditors so that their claims are not completely ignored under a RP. The payment
of liquidation value is also guaranteed to ‘dissenting financial creditors’ who do
not vote in favour of the RP. This was a result of the first set of amendments to
the IBC in 2019, pursuant to which Section 30(2)(b) of the IBC was amended to
provide for this payment. In fact, dissenting financial creditors were initially
entitled to the payment of liquidation value under Regulation 38 of the IBBI
Regulations, 2016, but the provision was struck down by the NCLAT as being
ultra vires of the IBC.[9] This necessitated the re-introduction of this provision.

In fact, the first set of amendments in 2019 has amended Section 30(2)(b) to
further benefit the operational creditors by mandating the payment of
the resolution value, if it is higher than the liquidation value. This is the amount
that the operational creditors are entitled to receive if the bid amount is distributed
in accordance with the order of priority under Section 53 of the IBC. In simple
terms, the amendment has pegged the value of the minimum pay-out in relation
to the amount given in RP, rather than the liquidation value, since the former is
likely to generate a higher pay out for the operational creditors. However, a
persistent difficulty continues to plague both liquidation value and the amount
given in the RP: the amount to be paid under the RP will have to be a significant
amount for it to be distributed to the operational creditors in the order of priority
under Section 53 of the IBC. This is because they are at a lower priority than other
categories of persons under the provision and the amount is likely to be exhausted
by the time their claims can be satisfied.

A reading of the IBBI Regulations, 2016 reveals another term which

accompanies liquidation value : fair value. This is the estimated realizable value
of the assets of the CD if they were to be exchanged on the insolvency
commencement date between a willing buyer and willing seller in an arm’s
length transaction, after proper marketing and with knowledge, prudence,
and without compulsion. Note that the italicized terms radically change the
circumstances of the hypothetical transactions from the ones that would have to
be taken in determining the liquidation value. The determination of fair value is
expected to yield a higher valuation than liquidation value, because the former
proceeds on the assumption that the CD will continue as a going concern and not
be liquidated. The determination of fair value became a requirement only from
2018, when it was added by way of an amendment to the IBBI Regulations, 2016.
This change was prompted by low bids being submitted by RA’s, which took
liquidation value to be the base for their bids, ignoring the fact that the assets had
to be valued in the context of revival and not liquidation.

M – Moratorium

Akin to a ‘closed door’ which does not provide any access to the assets of the
CD, the moratorium under Section 14 of the IBC is imposed to keep the CD’s
assets together so that the interests of all stakeholders can be addressed,
and piecemeal recoveries through multiple proceedings do not minimize the
value of the CD. A seemingly uncontroversial provision has, however, run into
trouble in its implementation when it comes to imposing a moratorium on legal
proceedings, in the form of suits and arbitrations, by or against the CD.

Although Section 14(1)(a) makes it amply clear that the moratorium applies to all
proceedings against the CD, the Supreme Court’s ruling in Alchemist Asset
Reconstruction Company Ltd. v. M/s. Hotel Gaudavan Pvt. Ltd.[10] seems to have
applied the moratorium to even proceedings by the CD even in absence of an
express statutory prohibition in Section 14. In spite of a moratorium on
proceedings against the CD, one ruling of the NCLAT in Jharkhand Bijli Vitran
Nigam Ltd. v. IVRCL Ltd.[11] and two rulings of the Delhi High Court in Power
Grid Corporation of India Ltd. v. Jyoti Structures Ltd.[12] and SSMP Industries
Ltd. v. Perkan Food Processors Pvt. Ltd.[13] have allowed proceedings which
are against the CD, arguably, in disregard to the statutory prohibition.

In order to overcome the statutory hurdle, these rulings have adopted, what we
call, the Impact on Assets theory where all proceedings against the CD are
allowed unless they endanger, diminish, dissipate or adversely impact the
CD’s assets.[14] This logic interdicts only recovery actions against a CD and
allows any other kind of proceedings such as a Section 34 application under the
Arbitration and Conciliation Act, 1996 (this was allowed in Power Grid by the
Delhi High Court) or even the continuation of an arbitration against the CD till
the execution stage. This is because the latter two proceedings do not impact the
assets of the CD and accordingly do not hit the moratorium. Supporting this
march towards the creative interpretation of law, the NCLAT in Jharkhand
Bijli Vitran Nigam Ltd. allowed the continuation of arbitration
proceedings against the CD because the adjudication of the CD’s claim depended
on the determination of other claims against it. The NCLAT reasoned that if the
CD was found liable to pay an amount, the counter-claimant could not recover
during the moratorium, thus protecting the CD’s assets. Presently, these rulings
which have creatively interpreted Section 14(1)(a) are good law. This is also
because the question of their incompatibility with the Supreme Court’s ruling
in Alchemist remains unclear due to the language of the SC’s order. This issue,
therefore, remains ripe for the Supreme Court’s intervention.

In the interlude between Part I of this article and the current Part, the “proposed
suspension of the IBC” has crystallised as law through the IBC (Amendment)
Ordinance, 2020, promulgated on June 5, 2020. The Ordinance has notably added
Section 10A, which has suspended insolvency filings for defaults
arising on and after March 25, 2020 for six months (this period is extendable for
up to one year). This may impair the utility of the moratorium in keeping the CD’s
assets together. This is because Section 14 of the IBC comes into play only when
an application is filed under the IBC, and not otherwise. Therefore, the
suspension of filings under IBC has now made it easier to peel off the protective
layer over the CD’s assets, both by the CD in transferring its assets and by others
in instituting legal proceedings, enforcing security interests or recovering any
property occupied by the CD.

N – Non-Obstante clause

The non-obstante clause, as it is understood in its legal sense, seeks to provide

an overriding effect to the provision in which it is
contained over other inconsistent provisions. The non-obstante clause which
gives the IBC an overriding effect is contained in Section 238. The interpretation
of Section 238 and the interaction between IBC and other statutes has been the
subject of many judgments.[15] Here, we explain two instances which still await
resolution.

The first one relates to the conflict with the Securities and Exchange Board of
India Act, 1992 (SEBI Act) which is presently pending before the Supreme Court
in SEBI v. Rohit Sehgal. The case has arisen from an illegal Collective Investment
Scheme floated by HBN Dairies Pvt. Ltd., which was being run in non-
compliance with the SEBI Act. In view of this, SEBI ordered the attachment of
properties of the company in 2017. Apart from the SEBI taking action, even the
investors who had grown impatient with the recovery process, approached the
NCLT as financial creditors to initiate the CIRP of the company. The NCLT
accepted the application and declared a moratorium under Section 14 of the IBC.
Armed with the NCLT order, the RP approached the SEBI for de-attachment of
properties which refused to budge, citing the primacy of the SEBI Act. Things
ultimately wound up at the NCLT which ordered de-attachment of the property
by reason of the overriding effect of IBC over the SEBI Act, which was
subsequently affirmed by the NCLAT. This decision has been appealed by SEBI
in the Supreme Court which has stayed the order of the NCLT directing SEBI to
hand over the title deeds to the RP and ordered SEBI to not create any
encumbrance on these properties.

The second unresolved conflict (we say this with the caveat that it remains
unresolved from the standpoint of a judicial decision) is between the IBC and the
Prevention of Money Laundering Act, 2002 (PMLA). Since the PMLA
empowers the Enforcement Directorate (ED) to provisionally attach properties
which are the proceeds of crime, it becomes a problem for a RA who has bid on
the basis of those assets, with the hope of using them once it takes over the CD.
Given the contentious nature of this issue, it was not long before it found its way
at the centre of disputes before the Courts. Two decisions of the NCLT, Mumbai
and Delhi High Court, at variance with another, hold the ground on this. While
the NCLT, Mumbai in SREI Infrastructure Finance Limited v. Sterling SEZ and
Infrastructure Limited[16] has held that the IBC prevails over PMLA in view of
Section 238 of the IBC and, therefore, no attachment under PMLA can be allowed
in derogation of the moratorium. The Delhi High Court, on the other hand, in The
Deputy Director Directorate of Enforcement Delhi v. Axis Bank[17] has taken a
different (and a more nuanced) view. It has held that there is
no inconsistency between the PMLA and the IBC since both have
distinct purposes, text and context which militates against the application of
Section 238. In fact, with this judgment, the Delhi High Court has cleared a major
misconception surrounding the application of a non-obstante clause. This is
because a view seemed to have developed that Section 238 kicks-in each and
every time another legislation had to be applied along with IBC and completely
barred the application of a co-existent legislation. However, a cardinal principle
of interpreting a non-obstante clause is that it only applies in case of
an inconsistency with another legislation and this even finds a mention in the
provision itself. This is what the Delhi High Court has considered in its judgment
while ruling that the laws operate in different spheres.

Coming back to the caveat we had inserted before we began discussing this; the
issue of an inconsistency between IBC and PMLA stands resolved, more or less,
under the Insolvency and Bankruptcy Code (Amendment) Act, 2020. The Act has
added Section 32A to the IBC which provides the CD complete immunity from
prosecution for any offence committed prior to the CIRP, once the RP is
approved. This amendment will certainly affect attempts to attach properties by
the ED under legislations like the PMLA and has impliedly given the IBC an
overriding effect over the PMLA, in that sense. However, the NCLAT’s decision,
based on the new Section 32A, to disallow the ED from attaching the assets of
Bhushan Steel and Power Limited (CD) for which JSW Steel had bid (RA), has
been appealed to the Supreme Court. This means that the IBC-PMLA conundrum,
inspite of the legislative amendment, is here to stay, atleast till the Supreme Court
endorses the NCLAT’s view on this. More on this – in the next part.

O – Operational Creditor

Section 5(20) of the IBC defines an operational creditor as a creditor to whom

an operational debt is owed and Section 5(21) of the IBC defines an operational
debt as a claim in respect of the provisions of goods or services including
employment or debt in respect of the payment of dues, including Government
dues. Operational creditors, who are mostly unsecured creditors, as a class, are
best understood in juxtaposition with financial creditors who are mostly secured
creditors. While financial creditors lend capital on a loan basis which often
involves large amounts of money, operational creditors make claims in respect
of dues which arise by virtue of the goods and services they have supplied to the
CD. For e.g. a wholesale vendor of spare parts who supplies these goods to a car
manufacturer is owed the payment of this amount or a lessor who rents out a space
to the CD is owed the rent amount; both of these are operational creditors.[18]

The IBC also reflects these differences between the two types of creditors, by
allowing only the financial creditors to be in the CoC and to vote on RP’s.
Operational creditors are not entitled to vote in the decisions of the CoC but are
allowed to attend its meetings, if their aggregate dues are not less than ten percent
of the debt. The reason for this exclusion, as clarified in Swiss Ribbons Pvt. Ltd.
v. Union of India[19] and later in the Essar Steel decision and in Pioneer Urban
Land and Infrastructure Limited v. Union of India,[20] is because the financial
creditors are, by their very nature as lenders, well-equipped to assess the
commercial viability of the CD and the RP for it, something operational creditors
cannot do.

The fact that the operational creditors do not have voting rights in the CoC does
not mean the financial creditors can ride roughshod over their interests. As we
have noted earlier, the IBC requires that the RP approved by the CoC must
provide for higher of the two amounts specified in Section 30(2)(b) of the IBC.
This protection has been affirmed by the Supreme Court in the Essar
Steel judgment, where it has held that the AA must review the RP to assess
whether it has taken the interests of operational creditors into account.

One grouse that operational creditors have always put forth is about the unfair
treatment they receive in a CIRP. RPs typically, negotiated by the financial
creditors in the CoC, are not geared towards safeguarding the interests of
operational creditors. Even the minimum statutory payment of liquidation value
(after the 2019 amendment, this is to be considered along with the resolution
value provided in Section 30(2)(b)) is often negligible for reasons we have noted
above. In fact, this was acknowledged by the Insolvency Law Committee in its
2018 report, which also discussed replacing liquidation value with fair
value or resolution value, both of which were eventually discarded for being
unsuitable. It also dismissed claims of unfair treatment for lack of empirical
evidence.[21]

Meanwhile, attempts by the NCLAT to level the field between financial and
operational creditors were thwarted by both the legislature (through the
amendment to the IBC in 2019) and the Supreme Court (through the Essar
Steel decision). But both the seemingly unpleasant changes contain elements
which work to the benefit of the operational creditors. While the Legislature has
added the payment of resolution value to the minimum pay out of liquidation
value in Section 30(2)(b), the Supreme Court in Essar Steel has tempered the
CoC’s commercial wisdom to the condition that it takes into account the interest
of all stakeholders, including operational creditors. Even the Insolvency Law
Committee’s latest report released in February, 2020 comes as a ray of hope for
operational creditors.[22] Noting the need for a fair and just CIRP, the Committee
has proposed to confer voting rights on the operational creditors, so that they too
have the opportunity to air their grievances against a RP. But the Committee is
reluctant about implementing this reform quickly. This is for two reasons: first,
the lack of technical and financial capacity in operational creditors to assess the
commercial viability of the CD and, second, the impact a larger CoC will have
on the efficiency of decision-making. The Committee has, therefore, conditioned
the proposal with the need to address these two concerns. The Committee’s
proposal has a long way to go before it is reflected in the IBC, but it is still one
of the most significant triumphs for the operational creditors since 2016.
With atleast one promising potential change to look forward to, operational
creditors have to weather another storm: one brought about by the recently added
Section 10A. As noted earlier, Section 10A suspends filings under the IBC by all
the three major stakeholders in a CIRP- financial creditors, operational creditors
and the CD itself. But it is likely to have a disproportionate impact on the
operational creditors. This is because the suspension coincides with the six-month
moratorium on repayment of loans being granted by banks, which means that
there are no chances of a default occurring, in absence of any obligation to pay
on the CD. The financial creditors, therefore, have no reason to file applications
under the IBC, atleast during the suspended period. However, operational
creditors are perpetually precluded from invoking the IBC for non-payment of
amounts due to them. The use of the word perpetually stems from the proviso to
Section 10A which bars an insolvency application for a default, in the suspension
period, forever. The proviso reads as: . . . Provided that no application shall ever
be filed for initiation of corporate insolvency resolution process of a corporate
debtor for the said default occurring during the said period. The said period is
currently to be counted for six months from March 25th, 2020. With banks
expecting repayments (and therefore possible defaults) only after the loan
moratorium is lifted, which is likely to coincide with the lapse of Section 10A, it
is the operational creditors that stand to bear the major brunt of this. Since the
amendment was always intended to benefit the Micro, Small and Medium
Enterprises (MSMEs), who are mostly operational creditors, the potential
detriment that they may suffer has turned the amendment into a double-edged
sword.

However, as alternatives to the IBC, the operational creditors still have two
options:
(i) They can either approach the civil court for recovery of their dues or they can
initiate arbitration if there is a contractual stipulation to that effect; and

(ii) Operational Creditors can also, by virtue of being considered MSMEs, seek
protection under the MSME Development Act, 2006. It entitles the operational
creditor to receive compound interest if the buyer fails to make the payment and
also provides for dispute resolution by the Micro and Small Enterprise
Facilitation Council.

P – Preferential Transactions

Normally, a completed transaction between parties is left undisturbed and

considered valid, unless it is objected-to by any of the parties to the transaction.
However, the IBC empowers the resolution professional and the liquidator to
scrutinise certain types of transactions which were entered into in the run-up to
an insolvency. Generally referred to as ‘vulnerable transactions,’ they are
subjected to an ex-post facto examination by reason of the circumstances under
which they are concluded. Preferential transactions are one type of vulnerable
transactions, apart from fraudulent (this has been covered in the previous part),
undervalued and extortionate transactions, both of which will be discussed in the
next part.

Photo by Andrea Piacquadio on Pexels.com

As the title itself suggests, preferential transactions are those transactions which
are entered into by the CD to give preference to a particular creditor or
a surety or guarantor, often to the detriment of other creditors or alike
individuals. These transactions are usually entered into in the run-up to an
insolvency and with a view to benefit a particular creditor at the cost of other
creditors. Such transactions have the effect of disturbing the parri
passu distribution intended under Section 53 on liquidation and also reduce the
value of the CD to a prospective RA.

Section 43 of the Code explains in detail when a transaction will be deemed to be

a preferential transaction by highlighting two situations: (i) when such transaction
is for the benefit of a creditor, surety or guarantor for the satisfaction of a debt
owed to such person and (ii) when the aforesaid transaction changes the pecking
order given inSection 53 in a way that the beneficiary is put in a more beneficial
position than it would have been in the event of a distribution being made in
accordance with Section 53. To illustrate, for e.g. Company ‘A’ is going to go
under insolvency pursuant to which all its assets will become part of a common
pool which can be used to satisfy the claims of all creditors, in the event of
liquidation. But just before this happens, Company ‘A’ transfers a substantial
amount of property in favour of its holding company ‘B’ which is also a creditor
of the company. This transfer has the effect of reducing the amount of assets
which can be used to satisfy the claims of other creditors and is a transaction
which gives an undue preference to Company ‘B’. It further puts Company B in
an advantageous position than it would have been under Section 53 as an
unsecured creditor.

The provision empowers the liquidator or RP to review any transactions

undertaken by the CD in the ‘look back period’ which is a period of two
years preceding the date of insolvency for transactions entered into with a related
party and a period of one year for transactions with persons other than a related
party. Section 44 empowers the AA to pass a variety of orders to restore the
position of the CD, it would have been in had the transactions not been entered
into. Not all transactions, however, in the ‘look-back’ period are hit by the
prohibition: transactions which are made in the ordinary course of
business or financial affairs of the CD or the transferee are excluded from
avoidance. Similarly, are transactions which create a security interest which
secures new value to the CD and transactions which are registered with an
information utility on or before thirty days after the CD receives possession of
such property.

A recent decision of the Supreme Court in Anuj Jain Interim Resolution

Professional for Jaypee Infratech Ltd. v Axis Bank Limited[23] has further clarified
several aspects related to preferential transactions. The Court was reviewing
whether mortgages by a subsidiary company, Jaypee Infratech Limited (CD) in
favour of the lenders of its holding company, Jayprakash Associates Limited,
could be set aside as preferential transactions. In coming to its conclusion that the
transactions were indeed preferential, the Court has described both the conceptual
and statutory underpinnings of preferential transactions, in great detail. It has laid
down the following interpretative rules for section 43:

i. So long as both the requirements of Section 43(2) along with the relevant
look back period are fulfilled, the transaction will be deemed to be a
preferential transaction, irrespective of whether it was, and whether it
was intended or anticipated to be;
ii. The look back period can be reckoned from before the commencement of
the IBC i.e. even preferential transactions undertaken before 2016 can be
scrutinised and doing so will be not be considered a retrospective
application of the law.
iii. The word ‘or’ appearing in Section 43(3)(a), which contains the ordinary
course of business exception, has to be read as ‘and’. This rule was
necessitated by an argument that in order to be excluded from the purview
of Section 43, transactions had to be made in the ordinary course of
business or financial affairs of only one of the two parties, the CD or
the transferee. This would have shifted the focus from the affairs of the CD
and saved it of justifying its unusual transactions, so long as they could be
justified from the viewpoint of the transferee’s business affairs. Mindful of
the disastrous implications of the argument, the Court has held that a
transaction has to fulfil the exclusionary requirements of Section 43(3)
from both the CD’s and the transferee’s perspectives.

In the third and final part of this series, we go back and dig a little deeper into the
roles of some actors and features that have made special appearances in the
previous two parts, while introducing you to a few new ones – towards the end.
(Here, we deal with terms starting alphabets Q to Z).

Q – Quorum in CoC meetings

Quorum, simply speaking, refers to the minimum number of voting members

that must be in attendance at a meeting for the CoC to be able to carry out its
proceedings. The IBC, by itself, does not provide any guidance on this. Instead,
one has to look towards the Insolvency and Bankruptcy Board of India (IBBI)
(Insolvency Resolution Process for Corporate Persons) Regulations, 2016
(Regulations of 2016). The Regulation in question is Regulation
22(1) which provides that a meeting of the CoC will be quorate if members
representing at least 33% of the voting rights are present. However, this is not
cast in stone and the CoC has the discretion to modify the percentage for future
meetings. It also dispenses with the requirement of physical presence and allows
presence by video conferencing, or other audio and visual means.

While the convening of the meeting, by itself, only requires members

representing 33% of the voting rights, all major decisions like the extension of
time-limit of completion of corporate insolvency resolution process (CIRP),
appointment and replacement of the resolution professional (RP), other actions
enumerated in Section 28 of the IBC, approval of the resolution plan and a
decision to liquidate the corporate debtor (CD), can only pass muster by a vote
of 66% of the voting shares. This voting percentage has replaced the earlier
voting threshold of 75%, by way of an amendment in 2018, pursuant to the
recommendations of the Insolvency Law Committee.[1] This was due to the
onerous nature of the earlier threshold which facilitated liquidation rather
than resolution, and which was right in the face of IBC’s basic purpose, i.e to
revive and resolve.

R – Resolution Professional

Simply put, a RP is the pivot around which the whole CIRP revolves. Most of the
times, the RP initially fulfills several important functions acting in the capacity
of an interim RP itself, or in some cases he takes the baton from the interim RP
to manage the business of the CD, once he has been appointed by the CoC. Once
appointed, the RP steps into the shoes of the CD’s management to conduct its
business and help it sail through the CIRP. Section 25 of the IBC lays down
several duties of the RP, the foremost of which is to preserve and protect the CD’s
assets. Most importantly, the RP has to prepare the information memorandum,
invite bids from resolution applicants (RA) and also undertake a limited review
of the resolution plans received to check their compliance with statutory
requirements.
Photo by Juhasz Imre on Pexels.com

Also, R – Resolution Applicant

In context of insolvency, a RA is the white knight who comes to the dying

company’s aid and channelizes its efforts towards revival. In response to the
invitation for bids, the RA submits a resolution plan outlining its ideas and
proposals for the CD’s revival. Earlier, Section 5(25) of the IBC defined a RA a
bit too simplistically to mean a person who submits a resolution plan to the
resolution professional. This meant that the same persons who managed the CD
earlier could now don a different hat and bid for it. The revolving doors, thus,
allowed promoters or related entities to get their company back with reduced
liabilities and to start afresh with a clean slate. This was problematic since it
allowed the very people who had led the company to insolvency, to take
advantage of their own wrong.

This prompted the Parliament to add Section 29A to the IBC which enumerates
several categories of persons who are ineligible to be RAs. This includes both
persons who have antecedents which disqualify them and persons who have
played a role in causing the CD’s insolvency. Section 29A, however, became a
catch-all provision disqualifying a wide variety of persons, who were even
remotely connected to an ineligible RA, from bidding. This prompted the
Insolvency Law Committee, in its Report in 2018, to suggest amendments to the
provision so as to limit its scope.[2] The Parliament did amend Section 29A in
2018, but did not incorporate all the suggestions of the Committee in the
amendment.

The provision came into the limelight with the decision of the Supreme Court of
India in ArcelorMittal India Private Limited v. Satish Kumar
Gupta[3] (ArcelorMittal) where it clarified several aspects of Section 29A. On the
factual front, the decision declared both Numetal and ArcelorMittal ineligible to
bid for Essar Steel, but allowed them to submit resolution plans on the condition
of curing their ineligibility under Section 29A (c). For ArcelorMittal, this required
it to clear the dues of two connected companies which were declared non-
performing assets. Numetal’s ineligibility, however, was more intractable; since
it was ultimately controlled by members of the promoter family of Essar Steel, it
now bore the burden of paying off the dues of Essar Steel and of any other
companies of the Essar group. This proved to be commercially unviable and led
the way for ArcelorMittal to win the bid for Essar Steel (this was also confirmed
by the Supreme Court in Committee of Creditors of Essar Steel India Limited
Through Authorised Signatory v. Satish Kumar Gupta[4]). The Supreme Court’s
decision in Swiss Ribbons v. Union of India[5] has further cemented Section 29A
by upholding its constitutionality.
Presently, the question which needs to be addressed is to what extent should the
revolving doors be open for RAs who want to bid for the CD. This question gains
more prominence in the aftermath of the IBC’s suspension, since one of the
concerns that drove the suspension was the inadequacy of finding RA’s who are
willing to rescue a CD. The struggle is between two positions which exist at
completely opposite ends of the spectrum— should the doors be left wide open
so that RAs, even ex-promoters, can bid for the CD at a time when the appetite
for reviving CDs is low or should there be limited access so that unscrupulous
RAs do not take advantage of the situation to take back their company. Moving
forward, striking a balance between these two competing positions should be the
objective, though this, by no means, would be easy.

S – Swiss Challenge Method of Bidding

It is often said that a competitive market promotes greater productivity,

dynamism and innovation in the goods and services that are produced. A similar
logic guides the Swiss Challenge Method of Bidding which has been a prominent
feature in awarding Government contracts. As per the method, the Government
receives an unsolicited bid to develop a particular project which is then released
in the public domain from where counter-bids are invited. If the counter-bids are
better than the original bid, the original bidder is given a chance to improve his
earlier bid. If he is unable to outdo these counter-bids, the next best counter-bid
is accepted. A sense of competition between the bidders ensures that only the best
proposal is put forth.

The Swiss Challenge Method has also made its way to the insolvency regime
where the CoC, by pitting bidders against one other, is able to command the best
price for the CD. For e.g. the RP of Company ‘A’ invites bids from RAs; RA 1
makes a bid of 4000 crores. This bid then becomes the base price for another
round of bidding where RA 2 makes a higher bid of 5000 crores. RA 1 is now
given an opportunity to reconsider its original bid and improve it to match RA
2’s bid. If RA 1 is unable to do so, RA 2’s bid is accepted. This method increases
the amount of money which the creditors receive, and additionally ensures that
the more financially well-equipped RA takes control of the CD.

T – Time Value of Money

The concept of time value of money (TVM) proceeds on the premise that an
amount of money held today is more valuable than an amount held tomorrow.
This is because the possession of money in the present time is certain as opposed
to a future possession, and also because presently-held money has the potential
to earn interest for its holder, which an amount of money receivable in the future
does not. Therefore, a person parting away with money to someone else in the
present has to be compensated for the opportunity cost he incurs in delaying the
possession of the amount to a later date, as in the case of loans. The payment of
interest on the loan, for example, is a recognition of the time-value of money of
the lender.

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In the context of the IBC, TMV is a crucial feature to identify a financial

debt (which is defined under Section 5(8) of the IBC to mean a debt disbursed
against the consideration for the TMV) and a person to whom such debt is owed,
as a financial creditor. It also helps in distinguishing between financial creditors
and operational creditors who render goods and services against a monetary
consideration. This amount is given in exchange for goods and services and not
against any disbursement of any money, which unlike the case of financial
creditors.

While the concept of TMV has figured routinely in many judgments, it became a
rather contentious topic in discussions on classifying homebuyers as financial
creditors, before they were made so in 2018. The case with which this began
was Nikhil Mehta v. AMR Infrastructure[6] where the National Company Law
Appellate Tribunal (NCLAT) ruled that a purchaser of real estate, under an
‘assured-returns’ plan, would qualify as a financial creditor for the purposes of
the IBC. This entitled the homebuyer to initiate a CIRP against the builder, in
case of non-payment of such ‘assured/committed returns’. The NCLAT
considered the ‘assured returns’, which was to be paid to the allottees till the date
of handing over of possession, as a recognition of the time-value of money.

This was followed by an amendment to the IBC in 2018, which conferred the
status of financial creditors on homebuyers by treating the amount raised from
such allottees as a financial debt. However, it did not clarify how the element of
TMV was present in transactions with homebuyers who do not
exactly lend money to real estate developers. This is because, unlike financial
transactions where the debtor is obliged to give back the money lent to him,
homebuyers do not lend money for a temporary period of time with the promise
of its return. This money for money element is replaced by a money for
apartment element, which does not qualify it as a financial transaction.

All of these concerns were put to rest by the Supreme Court of India in Pioneer
Urban Land and Infrastructure Limited v. Union of India.[7] The Supreme Court
held that the absence of a money for money element was not fatal since the real
estate developer was always obliged to give back something equivalent of
money’s worth—the apartment itself. This lent the transaction a commercial
effect of borrowing. Further, it also located the presence of TMV in such
transactions by holding that the homebuyers paid a lesser amount for an
incomplete flat, since they paid in installments, than they would have had to pay
for a complete flat. To the Supreme Court, this difference between the amount
paid by way of installments and the price they would have had to pay upfront for
a completed flat was the recognition of TMV.

U – Undervalued transactions

Section 45 of the IBC deals with the avoidance of transactions entered into by a
CD at an undervalue such as a gift or for a consideration which is significantly
lesser than the consideration provided by the CD when it purchased the asset
itself. Transacting at an undervalue lends an element of falsehood to the
transaction and indicates that it has not been entered into for a legitimate
commercial objective. For e.g. Company ‘A’ is going to go under insolvency but
its promoters are keen to retain control over some assets which will not be
available once the CIRP begins. The promoters sell these properties to related
parties for a paltry consideration, in order to lend legitimacy to the transaction.
The transaction does result in a transfer to another party, but the assets are still
effectively owned by the promoters by virtue of the relation with the transferee
(this may even amount to a Benami transaction, but more on that some other
day!). The provision treats such transactions as void, since they move the assets
out of the control of the creditors who need them the most at the insolvency stage.

Section 46 prescribes the same ‘look-back period’ to review undervalued

transactions, that Section 43 prescribes for avoidance of preferential transactions,
as we highlighted in the previous part. Section 47 also enables the creditors of the
CD to approach the Adjudication Authority (AA) to report an undervalued
transaction where such transaction has not been reported by the liquidator or the
RP. Apart from passing orders to restore the original position of the CD under
Section 48, the AA can require the IBBI to initiate disciplinary proceedings
against such errant RPs or liquidator.

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Section 49 of the IBC goes a step further in regulating undervalued transactions

if they have been deliberately entered to keep the assets beyond the control of the
creditors or to adversely affect the interest of such creditors. This provision differs
from the main provision in Section 45 in two respects: first, it requires the
transaction to have been undertaken with a mala fide intent, and second, it does
not prescribe any look-back period for a scrutiny of such transactions. The effect
of the second distinction is that every such transaction, irrespective of the time at
which it was entered into, will be hit by the provision.

V – Value thereof
For all those scanning the IBC to look for this term, it does not figure anywhere
in the bare text of the law. And no, we are not referring to ‘value’ in the hackneyed
sense of ‘maximisation of value’ of the CD’s assets. In using this term, we revisit
the IBC-Prevention of Money Laundering Act (PMLA) conflict, which we have
analysed in the previous part. As noted earlier, under the PMLA, the Enforcement
Directorate (ED) is empowered to provisionally attach properties which are
the proceeds of crime. PMLA also empowers the ED to attach the value of such
property or property of an equivalent value.

Prior to the Insolvency and Bankruptcy Code (Amendment) Act, 2020, this was
problematic for an RA who had bid for certain assets which were part of the
information memorandum, but which were later sought to be attached by the ED
as proceeds of crime. The expansive definition of ‘proceeds of crime’ under
PMLA allowed the ED to attach even untainted assets which affected the
legitimate expectations of an RA who had bid for the CD on the basis of its assets,
which were now being attached. This left an RA a severely damaged CD to tend
for and protracted litigation to look forward to.

This problem most prominently manifested itself in the insolvency of Bhushan

Steel and Power Limited (BPSL) where its assets were attached under the PMLA,
in complete disregard of its bidder, JSW Steel’s interest. Interestingly, after
winning the bid, JSW Steel had sought immunity from any prosecution since a
forensic audit of BPSL’s accounts had allowed it to anticipate attachment by the
ED. JSW Steel was successful in obtaining relief from the NCLAT which had
ordered the release of properties attached by the ED, but also stayed the
implementation of the resolution plan.

Pending the disposal of the case and prompted by it, the Government amended
the IBC, by way of an ordinance in December, 2019, to insert Section 32A (the
provision has been permanently added through the amendments to the IBC in
March, 2020). The provision immunises the CD from the prosecution for any
offence committed prior to the CIRP, once the RP is approved. It also ringfences
the CD’s assets against possible attachment in relation to any offence committed
prior to the CIRP. Here the term ‘Property’ can be read expansively to include all
kinds of property, whether in the nature of proceeds of crime or property of an
equivalent value. On the strength of Section 32A, the NCLAT held that BPSL’s
assets could not be attached by the ED and paved the way for a successful
acquisition by JSW Steel.

The amendment unmistakably intends to provide protection against prosecution

and attachment under laws like the PMLA. It seeks to preserve the legitimate
expectations of an RA in bidding for a CD and provides the latter with a clean
slate beginning. The amendment has rendered the ED almost disabled from
proceeding against the CD’s assets, once its resolution plan is accepted but has
not stripped it of all its powers. The provision should not be perceived as
providing a safety route to unscrupulous promoters since Section 32A itself
disallows such immunity and attachment, in cases where the management and
control of the CD or its assets pass to a previous promoter of the company or a
related party or to anyone who the Investigation Authority may perceive to have
abetted the crime or conspired in the commission of the offence. This seems to
have been added ex abundanti cautela, since the IBC already contains strong
disqualification provisions which prevent a promoter from bidding for his
company again by coming in through a revolving door, as we have noted earlier.

Therefore, the provision has struck a delicate balance between protecting the
RA’s interest who has bid for the CD’s assets with the assurance of acquiring
them and the authority of the ED in bringing offenders to book. The provision
will also encourage the ED to go after the assets of the ex-promoters, directors,
wrongdoers, especially when PMLA does not limit attachment to just the tainted
assets but extends it to property equivalent in value. Also, with no fear of the
Damocles Sword of attachment hanging above them, more and more RAs will
come forward to place bids for the CD and increase its chances of a turn-around.

W – Waterfall Mechanism

This term is used to refer to the order of priority followed by the IBC in
distributing the proceeds from liquidation among the various heads of creditors
and is set out in Section 53 of the IBC. At the stage of liquidation, the CoC has
no role to determine the distribution of proceeds to the creditors, instead the
manner of distribution of the proceeds from sale of the CD’s assets has to be in
strict accordance with Section 53 of the Code. But its utility extends even beyond
the unfortunate situation of liquidation—as we highlighted in the previous two
parts—it helps determine the minimum pay-out (liquidation value or resolution
value) to operational creditors under Section 30, it may be used to determine the
manner of distribution under a resolution plan and it is also a basis for inquiring
into the occurrence of any preferential transactions.

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The proceeds from the sale of the CD’s assets flow down the pecking order in the
following manner: the first priority is given to defraying the insolvency resolution
process and liquidation costs. It is only after this has been paid in full, does the
stream flow downwards to other creditors. First in line and standing together are
the workmen claiming dues for the period of 24 months preceding the liquidation
commencement date, and secured creditors who have relinquished their security
in favour of the liquidation. Upon satisfaction of these claims and if there are still
some proceeds available for distribution, the provision distributes it in the
following order: 12 months’ wages and unpaid dues owed to employees, financial
debts owed to unsecured creditors; government dues and unpaid debt to a secured
creditor who pursues individual enforcement, equally; remaining debts and dues;
and lastly preference and equity shareholders and partners, etc.

Like the workmen’s dues and claims of secured creditors, the IBC requires the
government and secured creditors who still have unsatisfied claims after
relinquishment to be paid equally. It is interesting to note that secured creditors,
who have relinquished their security but who still have an unpaid claim, have
been placed all the way down at the bottom when all the water has already dried
up. This is to, presumably, encourage them to relinquish their security for the
creditors at large, with the benefit of better recovery, rather than pursuing
individual claims against the CD and recovering only negligible amounts.

X – (e)xtortionate transactions- Section 50 of the IBC empowers the RP and

the liquidator to apply to the AA to avoid extortionate transactions, which is also
defined in Regulation 5 of the Regulations of 2016. A collective reading of
Section 50 and Regulation 5 reveals that there are three elements of an
extortionate transaction: (i) it involves the receipt of financial or operational debt
by the CD; (ii) the terms of the transaction requires the CD to make exorbitant
payments in respect of the credit provided, and (iii) the terms are unconscionable
under the principles of law of contracts. While the first two are conjunctive
elements and have to be present together in order to qualify a transaction as an
extortionate transaction, the presence of the third element may independently do
so. The provision prescribes a look-back period of two years preceding the
insolvency commencement date.

Unlike other vulnerable transactions where the CD’s ill-intentioned actions invite
scrutiny, in extortionate credit transaction, the CD itself becomes the wronged
party. This is because such transactions may require it to pay usurious rates of
interest or be a party to a contract which imposes unfair obligations on it. Since
these transactions, more often than not, affect the financial viability of the CD
and diminish its value, they become liable to be avoided. Section 51 of the IBC
enables the AA to pass a variety of orders such as restoring the position as it
existed prior to the transaction, setting aside the debt created on account of such
transaction or requiring the person to return any amount received under such
transaction.

Y – Yield

There could not have been a better placement for the term yield, than here—the
final stage of this article. This is because yield, in context of the IBC, can help us
take stock of the IBC’s performance and test the prefatory statements we had
made about the IBC in the first part. Previously, we have talked about how the
IBC has spurred interest in revival and reduced liquidation to a measure of last
resort. Let us examine whether this is evidenced in practice.

The most recent research shows that in the 3774 CIRP’s initiated since the
commencement of the IBC in 2016, 914 have yielded orders for liquidation and
221 have yielded resolution plans.[8] The average time taken in completion of the
CIRP’s yielding resolution is 415 days, including the time taken by the AA. This
is a far cry from the time limit envisaged in the IBC, which stipulated a 330-days
time limit, including the time taken in legal proceedings. This situation could only
worsen with time, as we highlighted in the first part, with the judgment of the
Supreme Court of India in ArcelorMittal which has watered down the 330-days
time limit.

Although the data reveals an inclination towards liquidation rather than resolution
and thus indicates a failure of the IBC, this should not be taken at face value. This
is because a majority of the CDs that were pushed to liquidation were entrants
from the earlier debt resolution regime or were defunct, and therefore, had little
value to offer. Further, creditors still recover their dues in a far better manner than
under any other avenues—with the IBC yielding 207% of the realizable value of
CDs assets.[9] There is another less noticeable change that the IBC has effected
through a change from the debtors in possession to creditors in
possession model. The threat of a shift in control has prompted debtors to settle
their debt with creditors, something they did not consider doing before the IBC.

Z – Zombie Companies

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The Cambridge English Dictionary defines ‘zombie’ as a frightening creature that

is a dead person who has been brought back to life, but without human qualities.
Add ‘corporate’ before ‘creature’; replace ‘person’ with ‘company’ and ‘human’
with ‘company-like’—you have the definition of a zombie company. Zombie
companies, much like undead zombies in a horror movie which refuse to die and
don’t let others live, continue to survive off financial aid, either from banks or
from governments. As living companies, however, they do very little than just
disrupting the natural interplay of demand and supply in the economy.

Since they are mostly subsidized by the Government or survive off lent capital
by banks, they have little to worry about generating profits on these investments.
This lackadaisical attitude allows them to artificially keep prices low and operate
in an uncompetitive manner, to the complete detriment of other players in the
market. By keeping prices low, zombie companies force other companies to also
lower their prices and operate at a loss, causing them to head towards insolvency.
At this stage, the IBC steps in to give such companies a second chance and
prevent their corporate death. It plays the dual role of both a zombie company
hunter and healer; by targeting them, it kills their zombie instincts and, in the
process, breaths fresh life into them.