The Insolvency and Bankruptcy Board of India (IBBI) is the regulator for overseeing insolvency proceedings and entities like IPA1, IP2 and IU3 in India. It was established on 1 October 2016 and given statutory powers through the Insolvency and Bankruptcy Code. The Insolvency and Bankruptcy Code, 2016 is the bankruptcy law of India which seeks to consolidate the existing framework by creating a single law for insolvency and bankruptcy. The Insolvency and Bankruptcy Code, 2015 was introduced in Lok Sabha in December 2015. It was passed by Lok Sabha on 5 May 2016. The Code received the assent of the President of India on 28 May 2016. Certain provisions of the Act has come into force from 5 August and
19 August 2016. It covers Individuals, Companies, Limited Liability Partnerships and Partnership firms. The insolvency and bankruptcy code will speed up the resolution process for stressed assets in the country. It attempts to simplify the process of insolvency and bankruptcy proceedings. It handles the cases using two tribunals like NCLT (National company law tribunal) and Debt recovery tribunal. The process may be initiated by either the debtor or the creditors. A maximum time limit, for completion of the insolvency resolution process, has been set for corporates and individuals. For companies, the process will have to be completed in 180 days, which may be extended by 90 days, if a majority of the creditors agree. For start-ups (other than partnership firms), small companies and other companies (with asset less than ₹1 crore), resolution process would be completed within 90 days of initiation of request which may be extended by 45 days. A proper formal procedure is set and is to be followed for the same. A plea for insolvency is submitted to the adjudicating authority (NCLT in case of corporate debtors) by financial or operation creditors or the corporate debtor itself. The max time allowed to either accept or reject the plea is 14 days. If the plea is accepted, the tribunal has to appoint an Insolvency Resolution Professional (IRP) to draft a resolution plan within 180 days (extendable by 90 days). For the said period, the board of directors of the company stands suspended, and the promoters do not have a say in the management of the company. The IRP, if required, can seek the support of the company’s management for day-to-day operations.
The National Company Law Tribunal (NCLT) is a quasi-judicial body in India that adjudicates issues relating to companies in India. The NCLT was established under the Companies Act 2013 and was constituted on 1 June 2016. The NCLT has eleven benches, two at New Delhi (one being the principal bench) and one each at Ahmedabad, Allahabad, Bengaluru, Chandigarh, Chennai, Guwahati, Hyderabad, Kolkata and Mumbai. Justice M.M. Kumar, a retired judge of the Punjab and Haryana High Court has been appointed as President of the NCLT. The NCLT Bench at Bangalore began functioning on 18 July 2016.
Any decisions taken by the NCLT4 can be appealed before the ‘National Company Law Appellate Tribunal’, a body set up under the Company Act of 2013. Furthermore, any appeals relating to the decisions of the NCLAT5 may be filed before the Hon’ble Supreme Court. One such disputed case of Essar Steel India was filed against the Reserve Bank of India6 under this set tribunal, which was further transferred to the High court of Ahmedabad, Gujarat. It relates to a press note issued by the Reserve bank, making its own implications on 12 other banks to come together to form operations against NPAs.
Detailed case comment:
Essar Group is an Indian conglomerate into manufacturing, services and retails sectors. The group has the operational presence across 29 countries having 45,000 employees across the world. The Group’s core interest lies in steel and energy sector, Essar Steel being the flagship company of this group.
Reserve Bank of India (RBI) vide their press note dated 13-6-2017 had directed banks to initiate insolvency proceedings before National Company Law Tribunal (NCLT) under Section 9 of the Insolvency and Bankruptcy Code, 2016 against 12 companies including Essar Steel India Ltd. (Essar) and accordingly proceedings were initiated by consortium of banks led by State Bank of India (SBI) which is leading the consortium.
Essar challenged the aforementioned press note by filing a writ petition† before Gujarat High Court Bench at Ahmedabad, citing the failure of the consortium of banks to accept the package of debt restructuring, proposed and approved by the Board of Directors of Essar. Essar further challenged the authority of RBI to issue directions to NCLT, as the interpretation of one of the lines of the petition, which implied that NCLT is a subordinate authority to RBI, which is constitutionally wrong. RBI apologised to the Court for such poor drafting and they have issued a corrigendum dated 3-7-2017 correcting this mistake by deleting the said line which was seen to be unclear in the eyes of the tribunal. Essar accused that RBI has blindly followed a process to shortlist companies based on classification, which is in contravention of Articles 14 and 19 of the Constitution of India. It was accused that the classification on the basis of the total outstanding amount being more than Rs 5000 crores and percentage of classified NPAs to be more than 60% is arbitrary and irrational. RBI in response submitted that Essar account was a non-performing account (NPA) even prior to 31-3-2016 with total outstanding amount to the tune of an amount approximately totalling to thirty-one thousand crores and the RBI directives are reasonable which make classification valid under Article 14, because the press release and the directives to banks issued by RBI were for giving effect to the economic policy contained in the IBC i.e. Insolvency and Bankruptcy Code as well as the Ordinance and the order.
RBI further submitted that the focus was on cases which have the twin criteria of being the largest and longest standing NPAs. Such classification is based on an intelligible differentia i.e. both quantum (₹5000 crores and 60% NPA) as well as the length of outstanding (at least fifteen months i.e. from 31/3/16).
SBI i.e. Respondent 2 in response submitted in the court that they have a statutory right to proceed against any corporate debtor with or without directions from RBI if they qualify requirements under Section 7 of the IBC. SBI denied that appointment of IRPs would hamper working of the petitioner since the company is managed by executives and not their Board of Directors. SBI lead Consortium Bank denied that they had accepted any proposal from Essar and alleged that Essar has approached the court with unclean hands.
Standard Chartered Bank (SCB) i.e. Respondent 3 in response submitted that they are a company incorporated in the United Kingdom and are governed by the prudential regulatory authority of United Kingdom hence, it is not a banking company under Sections 5(c) and (d)of the Banking Regulation Act, 1949. SCB further contended that it is not a member of JLF (Joint Lenders’ Forum) and they had statutory rights to proceed against petitioners and did not need RBI’s directions. The final verdict however affirmed -The Court refused to grant any relief to Essar with respect to their prayers to quash the said proceedings filed under Section 9 of the IBC and said that NCLT may be directed to set aside all the proceedings. The Court also observed that NCLT, Respondent 4 cannot be directed to restrain from proceedings against Essar, as such writ of prohibition may be issued only in the rarest of rare cases or when inferior court exceeds its jurisdiction or proceeds under a law which is itself ultra vires or unconstitutional. Since IBC is not unconstitutional, this prayer was also rejected by the court.
This High Court decision is a major relief for financial institutions who got wary of prospects of recovery from twelve biggest loan defaulters of India. This decision also establishes the statutory right of banks to initiate proceedings against loan defaulters before the appropriate forum with or without guidelines from RBI.
For this is the most recent challenge faced by the Insolvency and bankruptcy code at the High court for the state of Gujarat, Ahmedabad.
1 Insolvency Professional Agencies
2 Insolvency Professionals
3 Information Utilities
4 National Company Law Tribunal
5 National Company Law Appellate Tribunal
About The Author:
This article is written by Anshul Bhuwalka.