By Dr. Anup P. Shah
Chartered Accountant
3
Consequences of the Process
After the corporate
insolvency resolution process commences, i.e., once the application is admitted
by the NCLT, the following three consequences immediately take place in respect
of the corporate debtor:
(i) The
NCLT would declare a moratorium prohibiting any suits against the
debtor; execution of any judgement of a Court / authority; any transfer of
assets by the debtor; recovery of any property against the debtor. The
moratorium continues till the resolution process is completed. Thus, total
protection is offered to the debtor against any suits / proceedings. Even
proceedings for enforcement of security against the debtor under the SARFAESI
Act would be put on hold. In Indus Financial Ltd. vs. Quantum Ltd., 147
SCL 332 (NCLT-Mum), it was held that two parallel proceedings, one
under the SARFAESI and the other under the Code could run side-by-side against
the same debtor. Since the life of the insolvency proceedings is only for 180
days, it does not eclipse the SARFAESI Act proceedings for an unlimited period.
An interesting Order has been given by the NCLAT in Schweitzer Systemetek
India P. Ltd.,CA (AT) (Insolvency) 129/2007, wherein it held that the
moratorium only operated against assets of the corporate debtor. If an action
was bought for enforcing the personal guarantee provided by the promoters of
the corporate
debtor, then the same would survive and can be proceeded against.
(ii) An
Interim Resolution Professional (IRP) would be appointed by NCLT to
manage the affairs of the corporate debtor within 14 days of the commencement
of the resolution process. The IRP is vested with all powers to manage the
corporate and the powers of the board of directors / designated partners stand
suspended and these powers would be exercised by the IRP. It may be noted that
there is no provision under the Companies Act, 2013 to provide for this
vacation of powers by the Board in case of appointment of an IRP. However,
section 238 of the Code provides that it would override anything inconsistent
contained in any other law. One question which arises is that, should the
Directors resign on the appointment of the IRP or should they continue but with
no powers? A Company cannot function without directors, for that would be a
violation of section149(1)(a) of the Companies Act, 2013. The Supreme Court in Innoventive
Industries Ltd. vs. ICICI Bank, CA 8337/2017 has held that once an
insolvency professional is appointed to manage the company, the erstwhile
directors who are no longer in management, cannot even maintain an appeal on
behalf of the corporate debtor. Accordingly, any appeal filed by the erstwhile
Directors challenging an order of the NCLAT is not maintainable.
The
IRP is empowered to take all actions as are necessary to manage the corporate
as a going concern and continue its operations as a going concern. An IRP is an
Insolvency Professional (IP) who has passed the examination in this
respect and is authorised to conduct the corporate insolvency proceedings. CAs
can appear for this examination and become IPs.
An
interesting order has been passed by the NCLAT in Bhash Software Ltd. vs.
Mobme Wireless Solutions Ltd., CA(AT) (Insolvency) 79/2017, where it
set aside the order of the NCLT admitting the insolvency application on grounds
of natural justice not being followed. Accordingly, it held that all actions of
the IRP were illegal and were set aside. The corporate debtor was freed from
the rigours of the Code and the powers of its Board of Directors were
reinstated. It even asked the operational creditor to bear the fee of the IRP.
(iii) A
Public Announcement would be issued by the IRP giving details of the
commencement of the process, asking all creditors to submit their claims. All
creditors must submit their claims in the prescribed form along with proof of
their claims.
Further Steps
The further steps in the corporate
insolvency resolution process are as follows:
(a) Within
30 days of his appointment, the IRP has to collate all claims of creditors and
determine the financial position of the corporate debtor and constitute a
Committee of Creditors. This shall comprise of all financial creditors.
(b) Within
7 days of its constitution, the Committee of Creditors has to meet and appoint
a Resolution Professional. It may either continue with the IRP or appoint a new
IP. The decision must be taken by a majority of at least 75% votes of the
Committee. However, in a case where the Committee could not take a decision
with 75% majority on whether the IRP should continue, the NCLT held that a
viable solution was to give a preference to the decision taken by that Financial
Creditor which had the largest percentage in the voting rights. Thus, the
wishes of the creditor having 61% vote share was preferred over the other
creditors – Raj Oil Mills Ltd., MA 362/2017 (NCLT Mum).
(c) The
Resolution Professional so appointed would act as the Chairperson of the
Committee, conduct the entire corporate insolvency resolution process and
manage the operations of the corporate debtor. He would conduct the meetings of
the Committee of Creditors. He can even raise interim finance for the corporate
debtor, appoint professionals as may be necessary, etc.
(d) Operational
Creditors may attend the meetings of the Committee of Creditors but cannot
vote.
(e) Any
creditor who is a member of the Committee of Creditors can appoint an IP as his
representative on such Committee.
(f) The
Resolution Professional can carry out certain functions only with the prior
approval of 75% of the Committee of Creditors, such as, creating any security
interest, changing the capital structure of the corporate debtor, appointing
auditors / internal auditors, etc.
(g) The
most important task for the Resolution Professional is to prepare an
Information Memorandum and a Resolution Plan. The Memorandum must contain all
financial and other details of the corporate debtor along with the liquidation
value of the assets, i.e., their realisable value if the corporate were to be
liquidated. This must be worked out by two registered valuers after physical
verification of the stock and fixed assets of the debtor.
The
resolution plan must provide for the payment of all costs associated with the
insolvency resolution, repayment of debts of operational creditors, management
of affairs, implementation and supervision of the plan, etc. It may
provide for measures such as, transfer of assets, reduction in amount payable,
issuing securities of the corporate debtor, modifying any security interest, etc.
It must provide for the specific sources of funds which would be used to pay
all costs of the insolvency resolution process, liquidation value to
operational creditors and liquidation value due to financial creditors who
dissented to the plan.
The
SEBI Regulations and the Takeover Code have been amended to permit issue of
shares and takeover of listed companies under a resolution plan. The provisions
relating to preferential allotment of listed shares and an open offer process
do not apply to a resolution plan formulated under the Code.
The
resolution plan may be likened to the Scheme prepared by an Operating Agency
before the erstwhile BIFR in relation to a sick industrial company.
(h) The
resolution plan must also be approved by a 75% vote of the financial creditors.
(i) Once
approved by the Committee, the plan must be submitted to the NCLT for its final
approval. If so approved, it becomes binding on the corporate debtor, the
creditors, the employees, etc. Further, the moratorium order shall come
to an end. However, if the plan is rejected by the NCLT, then a liquidation
process is triggered.
The
Hyderabad Bench of the NCLT pronounced the very first insolvency resolution
order under the Code in the case of Synergies-Dooray Automotive Ltd., CP(IB)
No. 01/HDB/2017 within the 180 day period provided under the Code.The
Scheme involves merging Synergies-Dooray with Synergies Casting, a creditor and
also a related party. The Order also provides for financial restructuring of
the dues of financial and operational creditors, government dues as well as
capital infusion from the promoters. The payments of creditors’ dues and
government dues would be made in instalments over 3 years and at a discount.
The Scheme also envisaged relief from the Andhra Pradesh Government in the form
of waiver of stamp duty on the merger scheme. Further, it sought that the sales
tax and service tax department waive all interest charged on the Company for
deferred payment. An interesting waiver was sought from the CBDT to exempt the
transferor sick company from the applicability of sec. 79 and sec. 72A of the
Income-tax Act, 1961, i.e., the transferee company be allowed to carry forward
and set off the accumulated losses and depreciation of the transferee company.
It even asked CBDT to exempt the transferee from the applicability of and
payment of MAT. The NCLT has approved the resolution plan as submitted with
some minor modifications. One of the creditors aggrieved by this Order has
appealed against it to the NCLAT.
Non-Obstante Clause
The Code contains a non-obstante
provision in section 238 which states that it would override all other laws.
The Supreme Court had an occasion to test this provision in Innoventive
Industries Ltd. vs. ICICI Bank, CA 8337/2017, where the issue was
whether the Maharashtra Relief Undertakings (Special Provisions Act), 1958
(‘the Maharashtra Act’), which suspended all liabilities of the corporate
debtor would impede any action under the Code? The Apex Court held that the
earlier State law was repugnant to the later Parliamentary enactment as under
the said State law, the State Government could take over the management of a
relief undertaking, after which a temporary moratorium similar to that under
the Code took place. Giving effect to the State law would directly impede or
come in the way of the taking over of the management of the corporate body by
the interim resolution professional. Also, any moratorium imposed under the
Maharashtra Act would directly clash with the moratorium to be issued under the
Code. Therefore, unless the Maharashtra Act was out of the way, the
Parliamentary enactment would be hindered and obstructed in such a manner that
it will not be possible to go ahead with the insolvency resolution process
outlined in the Code. Further, the non-obstante clause contained in the
Maharashtra Act could not possibly be held to apply to the Central enactment,
inasmuch as a matter of constitutional law, the later Central enactment being
repugnant to the earlier State enactment by virtue of Article 254 (1) of the
Constitution. It was clear that the later non-obstante clause of the
Parliamentary enactment would also prevail over the limited non-obstante clause
contained the Maharashtra Act. Accordingly, it held that the Maharashtra Act
could not stand in the way of the corporate insolvency resolution process under
the Code.
A similar question arises
as to whether the provisions and procedures specified under the Companies Act,
2013 need to be followed while implementing any plan under the Code? For
instance, would actions such as, sale of assets, preferential issue of shares, etc.,
need special resolutions? If yes, could not the promoters of the corporate
debtors defeat such resolutions? Section 30 of the Code provides that the
resolution plan must not contravene any of the provisions of the law in force.
Does that mean that the provisions of the Companies Act need to be adhered to?
However, at the same time one must also give due weightage to the non-obstante
clause u/s. 238 of the Code and the above-mentioned Supreme Court decision. It
would be a very strong argument to state that the Code overrides all other laws
including the Companies Act. Clearly, this is one area which needs to be tested
at a higher judicial forum.
Liquidation Process
If the NCLT rejects the
resolution plan or if a resolution plan has not been submitted to the NCLT
within the maximum period of 180 days + any extension, then it must order the
liquidation of the corporate debtor. Alternatively, if the Committee of
Creditors decides to liquidate the debtor, then also the NCLT must pass a
liquidation order. Once such an order is passed, the resolution professional
becomes the liquidator for the liquidation purposes provided the NCLT does not
replace him.
The liquidator has various
powers and duties under the Code and he can appoint professionals to assist him
in the discharge of his duties. He must verify all the claims of the creditor
and take custody of all assets of the debtor. He would carry on the debtor’s
business for its beneficial liquidation. He would also defend and institute all
legal proceedings for / on behalf of the debtor. He can also investigate the
affairs of the corporate debtor to determine whether there have been any
undervalued or preferential transactions which have led to one creditor being
preferred over the other. He also has the power to disclaim any onerous
property by applying to the NCLT.
He must form a liquidation
estate comprising of all assets owned by the corporate debtor and hold them in
a fiduciary capacity for the benefit of all the creditors. However, assets of a
third party possessed by the corporate, assets of any subsidiary of the
corporate, etc., would not form a part of the liquidation estate.
He must collect all
creditor claims within 30 days of the commencement of the liquidation process
and verify the same within 30 days from the last date for the receipt of
claims. He must then determine the value of the claims admitted. If the
liquidator is of the opinion that a corporate debtor has given a preference to
a particular creditor, then he must apply to the NCLT for avoiding the same.
The window of determining preferential treatment is two years before the
insolvency commencement date for related parties and one year for other
persons. Similarly, if he is of the opinion that during this window certain
transactions were undervalued, then the liquidator can apply to the NCLT for
having them set aside. He can also apply to the NCLT for setting aside any
extortionate credit transactions entered into by the corporate debtor within
two years preceding the insolvency commencement date.
The liquidator may make an
itemised sale of the assets of the liquidation estate or make a slump sale or
in parcels. The usual mode of sale of the assets is an auction, but in certain
cases he may even resort to a private sale. The Code lays down the priority for
distribution of proceeds from the sale of assets of a corporate debtor in
liquidation. It states that this priority would apply notwithstanding anything
to the contrary contained in any other Central / State law as well as any
contract to the contrary between the debtor and the recipients. The priority
schedule under the Code is as follows:
(a) the insolvency resolution process costs and
the liquidation costs in full;
(b) the following debts which shall amongst
themselves rank equally;
(i) workmen’s dues (i.e., wages / salary + accrued
holiday remuneration + compensation under Workmen’s Compensation Act +
Provident Fund, Gratuity, Pension due to the workmen) for 24 months preceding
the liquidation commencement date; and
(ii) debts owed to a secured creditor if
he has relinquished his security;
(c) wages and any unpaid dues owed to employees
other than workmen for the period of 12 months preceding the liquidation
commencement date;
(d) financial debts owed to unsecured creditors;
(e) the following dues shall rank equally between
themselves:
(i) any amount due to the Central Government and
the State Government for a period of 2 years preceding the liquidation
commencement date;
(ii) debts owed to a
secured creditor for any amount unpaid following the enforcement of security
interest;
(f) any remaining debts and dues;
(g) preference shareholders, if any; and
(h) equity shareholders or partners, as the case
may be.
The distribution should be
made within 6 months from the receipt of the proceeds after deducting the
associated costs. If certain assets cannot be sold, the liquidator may, with
the approval of the NCLT, distribute them to the stakeholders.
The liquidator is required
to submit Progress Reports to the NCLT starting from within 15 days from the
end of the quarter of his appointment and thereafter within 15 days from the
end of every quarter of his tenure. This report shall also contain an Asset
Sale Report when any assets are sold.
The NCLT Mumbai bench has
passed an order in VIP Finvest Consultancy P. Ltd. vs. Bhupen Electronic,
CP No. 03/I&BP/2017, ordering liquidation of Bhupen Electronic.
This decision was taken by the Committee of Creditors, since the company was
not a going concern and had land and building as its only valuable asset.
Completion of Liquidation
The
liquidator shall liquidate the corporate debtor within 2 years, failing which
he must apply to the NCLT to continue the process. He must submit reasons why
the additional time would be required. At the end, he must submit a Final
Report to the NCLT explaining how the liquidation was conducted and how the
assets have been liquidated.
When
the assets have been completely liquidated, the liquidator must apply to the NCLT
for dissolution of the corporate debtor. Once the NCLT passes an order, the
body corporate would be dissolved from that date.
Transfer of Winding up Pro-ceedings under
Companies Act, 1956
Earlier,
all winding up petitions against a company were heard u/s. 433 of the Companies
Act, 1956. Since the Companies Act, 1956 was superseded by the Companies Act,
2013, section 434(1)(c) of the Companies Act, 2013 provided that all
proceedings under the Companies Act, 1956, including proceedings of winding up
shall stand transferred to the NCLT. However, with the enactment and
notification of the Code, section 434 of the Companies Act, 2013 was also
amended. The amended section 434(1)(c) now provides that all proceedings under
the Companies Act, 1956 including those relating to winding up shall stand
transferred to the NCLT.
However,
it also adds a Proviso to section 434(1)(c), which states that only such
proceedings relating to winding up of companies shall be transferred to the
NCLT that are at a stage as may be prescribed by the Central Government. Thus,
if they have crossed the stage notified by the Central Government, then they
cannot be transferred to the NCLT under the Insolvency and Bankruptcy Code,
2016. They would then continue to remain with the High Court and be governed by
the provisions of section 433 of the Companies Act, 1956. The Central
Government notified the Companies (Transfer of Pending Proceedings) Rules,
2016, which provided that in order that proceedings of winding up are
transferred to the NCLT from the High Court, two conditions were a must ~ the
petition must be pending before a High Court and the petition must not have
been served on the respondent under Rule 26 of the Companies (Court) Rules,
1959.
The
above view has also been endorsed by the Bombay High Court in Ashok
Commercial Enterprises vs. Parekh Aluminex Ltd., CP No. 136/2014. It held
that it was clear that all winding up proceedings did not stand transferred to
the NCLT. If the service of the notice of the Company Petition
under Rule 26
of the Companies(Court) Rules,
1959 was not
complied before 15th December
2016, such Petitions stood transferred to NCLT, whereas all other Company
Petitions would continue to be heard and adjudicated upon only by the High
Court. The Legislative intent was thus clear that two sets of winding up
proceedings would be heard by two different forums, i.e., one by NCLT and
another by the High Court, depending upon the date of service of Petition on or
before or after 15th December 2016. There was no embargo on a High
Court to hear a Petition if the notice under Rule 26 of the Companies (Court)
Rules, 1959 was served on the respondent prior to 15th December
2016.
Conclusion
It
would be evident from this brief discussion that the Code has plenty of issues
and already in its short span it has seen several unique decisions from various
forums. While there are bound to be creases which need ironing, it is
definitely a step in the right direction. One booster shot to the Code could be
in the form of increasing the NCLT benches so that more applications can be
heard. Once the provisions relating to individuals and firms are made
operational, it is expected that industrial sickness resolution would have a
greater coverage.
However,
at the same time, the Code must be looked upon as the last frontier and not the
first form of attack by a creditor. Whether resolution professionals can
successfully run a sick company (which its promoters have not been able to) is
a matter which only time would tell? That is the reason why one of the largest
private sector banks in India looks upon the Code as the least preferred
solution unless the debtor was a wilful defaulter. Clearly, not all bankers view
the Code as the panacea for all ills!
