Tuesday, May 23, 2017

NCLAT Order under Section 7 of the Insolvency & Bankruptcy Code, 2016

[Post by Diksha Jain, who is a 5th year student at the National Law University, Jodhpur]

The National Company Law Appellate Tribunal (NCLAT) in its order dated 15 May 2017 in Innoventive Industries Ltd. v. ICICI Bank has ruled on certain important requirements to be complied with while admitting an application filed under Section 7 of the Insolvency & Bankruptcy Code, 2016 (the Code). Section 7 of the Code provides for initiation of an insolvency resolution process by a financial creditor against a corporate debtor. The appeal was filed against an order passed by the National Company Law Tribunal (NCLT), Mumbai Bench (discussed here) rejecting all contentions raised by Innoventive (the corporate debtor) and admitting the application preferred by ICICI Bank (the financial creditor) by holding it complete in terms of section 7(2) of the Code. Further, it declared ‘moratorium’ with regard to the affairs of the company, appointed an ‘Interim Resolution Professional’ and passed interim orders under section 7 of the Code.

The main contentions raised by Innoventive were: firstly, the order was passed without giving notice to Innoventive and was thus against the principle of natural justice as stipulated under section 424 of the Companies Act, 2013 (the Act). It was also contended that the NCLT, being a creation of the Act, is bound by section 420 of the Act, which required ‘reasonable opportunity of being heard’ to be given to the parties before passing an order. Secondly, it was contended that the provisions of (Maharashtra Relief Undertaking (Special Provisions Act (Bombay Act XCVI of 1958) (the MRU Act, 1958), will prevail over the Code as it was a beneficial piece of legislation. Lastly, it was contended that ICICI Bank did not obtain consent from the Joint Lenders Forum (JLF) to initiate the present proceedings.

Requirement of serving notice upon corporate debtor under Section 7

The key issue for consideration before NCLAT was whether a notice is required to be given to the corporate debtor for initiation of insolvency resolution process. The NCLAT examined various decisions of the Supreme Court and also cited a recent Calcutta High Court decision in the case of “Sree Metaliks Limited & Anr. (Writ Petition 7144 (W) of 2017)”, wherein the Court held: “When the NCLT receives an application under Section 7 of the Code of 2016, it must afford a reasonable opportunity of hearing to the corporate debtor as Section 424 of the Companies Act, 2013 mandates it to ascertain the existence of default as claimed by the financial creditor in the application.” In conclusion, the NCLAT held that the Adjudicating Authority is bound to issue a limited notice to the corporate debtor before admitting a case for ascertainment of existence of default based on material submitted by the corporate debtor and to find out whether the application is complete and or there is any other defect required to be removed.

With regard to the second contention, the NCLAT held that section 238 of the Code is a non-obstante clause which overrides the operation of the MRU Act, and thus the provisions of the Code shall prevail over the provisions of the MRU Act.

Lastly, it held:

Under Section 7(5) of the Code, the 'adjudicating authority' is required to satisfy – (a) Whether a default has occurred; (b) Whether an application is complete; and (c) Whether any disciplinary proceeding is against the proposed Insolvency Resolution Professional. Once it is satisfied it is required to admit the case but in case the application is incomplete application, the financial creditor is to be granted seven days' time to complete the application.

Based on this reasoning, the NCLAT held that beyond the abovementioned factors, it is not required to look into any other factor, including the last question whether the consent of JLF has been obtained or not.

Important observations made in the case

In all, the case lays down certain important criteria to be fulfilled before admitting an application under section 7 of the Code, given the fact that the Code is silent on such procedure to be adopted under the said provision.

Adherence to Principles of Natural Justice: Initiation of insolvency resolution process may have adverse consequences on the welfare of the company and it is imperative for the "adjudicating authority" to adopt a cautious approach in admitting an insolvency application by ensuring adherence to the principle of natural justice.

Distinction between Sections 7 & 9 of the Code: While in section 7, the occurrence of default has to be ascertained and satisfaction recorded by the Adjudicating Authority, there no similar provision under section 9. Under section 7 neither a notice of demand nor a notice of dispute is relevant, whereas under sections 8 and 9 notice of demand and notice of dispute become relevant both for the purposes of admission as well as for and rejection.

Ascertainment and Satisfaction: The statute mandates the Adjudicating Authority to ascertain and record satisfaction as to the occurrence of default before admitting the application. Mere claim by the financial creditor that the default has occurred is not sufficient.

Overriding effect of the Code: Section 238 of the Code clearly mandates that the provisions of the Code shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law.

-       Diksha Jain


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