M/S Innoventive Industries Ltd. v. ICICI Bank & Anr

The case is the first ruling on the newly enacted Insolvency and Bankruptcy Code, 2016 (‘Code’). The decision provided much needed guidance on how the Code is to be interpreted including in case of a conflict with prior laws.
CITATION 
COURTSupreme Court of India
JUDGES/CORAMJustice R.F. Nariman
DATE OF JUDGEMENT31.08.2017

Introduction

In this landmark ruling Hon’ble Supreme Court passed their first ruling on the newly enacted Insolvency and Bankruptcy Code, 2016 (‘Code’). The decision provided much needed guidance on how the Code is to be interpreted including in case of a conflict with prior laws, and also opines on the ability of an erstwhile director to file an appeal once an interim resolution professional has been appointed for the company.

Facts

The facts of the case are as follows: Innoventive had proposed to implement corporate debt restructuring as they were not able to service the financial assistance provided by 19 banking entities. Subsequently, on May 23, 2014, a CDR empowered group admitted the restructuring proposal of Innoventive, which was also approved by the joint lenders forum meeting on June 24, 2014. Pursuant to the restructuring plan, a master restructuring agreement was entered into on September 9, 2014, wherein funds were to be infused by the creditors, and certain obligations were to be met by the debtors over the next two years.

Before the National Company Law Tribunal (‘NCLT’)

ICICI Bank (‘Respondents’) filed an Insolvency Application (“IA”) on December 7, 2016 against Innoventive, and prayed that the insolvency resolution process ought to be set in motion, in view of the fact that Innoventive was a defaulter under the Code.

In replication Innoventive filed an application, relying on notifications dated July 22, 2015 and July 18, 2016 under the Maharashtra Relief Undertakings (Special Provisions Act), 1958 (“Maharashtra Act”), to contend that no dues were legally due. Innoventive assailed that all liabilities, save and except certain liabilities which were not before NCLT, were temporarily suspended for a period of one year under each notification. In a second application filed on January 16, 2017, Innoventive also contended that funds had not been released under the master restructuring agreement, thereby rendering Innoventive incapable of repaying its debts.

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NCLT by an order dated 17.01.2017 held that firstly, the Code would prevail over the Maharashtra Act in view of the non-obstante clause in Section 238 of the Code; secondly, a parliamentary statute would prevail over the State statute, which meant that the IA could be admitted and moratorium declared; thirdly, negated maintainability of the second application filed by the Innoventive since (a) no audience has to be given to corporate debtors by the Tribunal under the Code; (b) the plea of funds not being available was not asserted in the earlier application by Innoventive, and in view of the fact that only 14 days were available from the date of filing of the IA to decide existence of a default, such a belated plea of Innoventive could not be considered.

An appeal was filed before the NCLAT where the NCLAT upheld the decision of the NCLT but held that the Code and the Maharashtra Act operate in different fields and are not repugnant to each other. NCLAT also held that Innoventive cannot derive any advantage from the Maharashtra Act to stall an insolvency resolution process under Section 72 of the Code. Aggrieved by the order of the NCLAT, Innoventive preferred an appeal before the Hon’ble Supreme Court.

Contentions of the Parties

Learned Counsel on behalf of the appellant contended:

  1. The moratorium imposed by the Maharashtra Act continued to be in force when the insolvency application was filed against Innoventive, and hence the Code would not apply;
  2. No repugnancy exists between the two statutes under Article 254 of the Constitution as has been correctly held by the NCLAT, as both the statues operate in their own fields; while the Maharashtra Act provides for relief against unemployment, the Code provides for a liquidation process.

The Learned Counsel on behalf of Respondent contended that:

  1. The object of the Code provides that the interests of all stakeholders, i.e. the shareholders, creditors and workmen ought to be balanced during the insolvency process, and the old notion of sick management continuing nevertheless in the management has been debunked by the Code;
  2. When an application is made under Section 7 of the Insolvency Code, the only scope of argument is that the debt is not due for any reason;
  3. After an interim resolution professional has been appointed and a moratorium is declared, the directors of the company are no longer in management and could not therefore maintain the appeal;
  4. Both the statutes are repugnant to each other; while the Maharashtra Act provides for limited moratorium after which the State Government may take over the management of the company, the Insolvency Code imposes a full moratorium automatically the moment an application is admitted by NCLT and thereafter the management of the company is taken over by insolvency professional.
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Summary of court decision and judgment

The Hon’ble Supreme Court upheld the contention of the Respondents and dismissed the appeal. While the Hon’ble Court found substance in the argument that once an insolvency professional is appointed to manage the company, the erstwhile directors (who are no longer in management) cannot maintain an appeal on behalf of the company, the appeal was not dismissed on this ground alone and in fact, a detailed judgment was delivered expounding upon the paradigm shift in the law under the Code, for the benefit of courts and tribunals.

Secondly, the Maharashtra Act was held to be repugnant with the Insolvency Code and that the non-obstante clause in Section 238 of the Insolvency Code will override any non-obstante clause under a State enactment.

While not requiring doing so, Hon’ble Supreme Court observed that the obligation of the corporate debtor was unconditional and did not depend on the infusion of funds by creditors, as was sought to be argued by Innoventive. Laying stress on the need to follow the strict timelines provided under the Code, the ld. the bench noted that this plea was taken by the Innoventive at a belated stage i.e. much after the 14-day timeline provided under the Code to determine the existence of a default under Section 7.

Analysis

This is the first decision of the Hon’ble Supreme Court under the Code, and hence this ruling analyses the key provisions and the rationale behind the enactment of the Code, the objectives of the Code, and brief comparative analysis of the insolvency and bankruptcy laws in several other jurisdictions.

An appreciable factor of the decision is liberal interpretation according to the non-obstante clause contained in Section 238 of the Code and giving impetus to the strict timelines and objects of the Code making it hard for defaulting debtors to take shelter under several prior or state legislations, in order to delay the insolvency process.

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With respect to the finding that once an insolvency application is admitted, the Code does not permit erstwhile company directors to maintain an appeal on behalf of the company contributes to an interesting debate. This judgment will shut the door on such instances. A similar contention was raised before the NCLAT in Steel Konnect (India) Pvt Ltd v M/s Hero Fincorp Ltd.[1]

Conclusion

Hon’ble Supreme Court in the instant case emphasized on expediting the insolvency process and ensuring timely recovery of debt, which contributes to the ease of doing business, and strengthens the debt markets as well as the recovery process.


[1] Steel Konnect (India) Pvt Ltd v M/s Hero Fincorp Ltd. 2017 (9) TMI 1565.