"Role & Functions of Insolvency & Bankruptcy Board of India"

INTRODUCTION

A financial default by a corporate entity refers to a situation where the company fails to fulfill its financial obligations, particularly the repayment of debts or meeting other contractual obligations related to financial matters. It typically occurs when a company is unable to make timely payments of principal or interest on its debt obligations or when it fails to meet other financial commitments.

Financial Debt has been defined under Section 5(8) of the Code as a debt along with interest, if any, which is disbursed against the consideration for the time value of money and includes money borrowed against the payment of interest.

As per Section 3(12)of IBC, “default” means “non-payment of debt when whole or any part or instalment of the amount of the debt has become due and payable and is not repaid by the debtor or the corporate debtor, as the case may be.” It must be noted that for the purposes of Section 7(1)of the IBC, default includes a default in respect of the financial debt owed not only to the applicant financial creditor but to any other financial creditor of the corporate debtor.

Financial defaults can take various forms, including:

• Debt default: This occurs when a company is unable to repay the principal amount or interest payments on its loans or bonds as per the agreed terms with the lenders or bondholders.
• Payment default: It refers to a situation where a company fails to make payments to its suppliers, vendors, or contractors for goods or services provided.
• Covenant default: Many debt agreements contain certain financial or operational conditions known as covenants that the borrower must comply with. A covenant default happens when a company breach one or more of these conditions.
• Lease default: If a company is unable to make lease payments for its premises or equipment, it can be considered financial default.
• Default on financial derivatives: Corporates that engage in derivative transactions, such as swaps or options, may default by failing to meet their obligations under these contracts.

Financial defaults can have serious consequences for the company, its creditors, and other stakeholders. It can lead to legal actions, such as insolvency proceedings, debt restructuring, or even bankruptcy. The specific implications and remedies depend on the jurisdiction and the contractual agreements in place.

Under the Insolvency and Bankruptcy Code (IBC) in India, financial default refers to the failure of a corporate debtor to pay its debt obligations to its creditors, which may include lenders, suppliers, employees, or any other entity to whom the corporate debtor owes a financial liability.

The IBC provides a legal framework for resolving insolvencies and facilitating the revival or orderly liquidation of corporate debtors. When a financial default occurs, the following steps may be initiated under the IBC:

• Initiation of insolvency proceedings: The creditor, either individually or jointly with other creditors, may file an application with the National Company Law Tribunal (NCLT) to initiate insolvency proceedings against the corporate debtor. The application must demonstrate that there is a default on a debt exceeding a specified threshold amount.
• Admission of the application: If the NCLT is satisfied with the application's merits, it will admit the application and initiate the corporate insolvency resolution process (CIRP). The CIRP is a time-bound process aimed at resolving the financial default of the corporate debtor.
• Appointment of the resolution professional: The NCLT appoints a resolution professional (RP) to manage the affairs of the corporate debtor during the CIRP. The RP takes control of the corporate debtor's assets and operates the business as a going concern while seeking a resolution plan.
• Submission of resolution plans: Prospective resolution applicants submit resolution plans detailing how they propose to revive the corporate debtor and repay the debts to the committee of creditors (CoC) within a specified period. The CoC evaluates the resolution plans and selects the most viable one.
• Approval and implementation of the resolution plan: The approved resolution plan is presented to the NCLT for its approval. Once approved, the resolution plan is implemented, and the corporate debtor is restructured or revived according to the terms specified in the plan.
• Liquidation: If a resolution plan is not approved within the prescribed time or fails to achieve the desired outcomes, the corporate debtor may go into liquidation. In liquidation, the assets of the corporate debtor are sold, and the proceeds are distributed among the creditors as per the priority established under the IBC.

It's important to note that the IBC has undergone amendments and continues to evolve to address various aspects of insolvency and bankruptcy proceedings. The specific procedures and implications of financial defaults under the IBC may vary based on the circumstances of each case and the relevant provisions of the law at the time.

Under the Insolvency and Bankruptcy Code (IBC) in India, several corporate entities have undergone insolvency proceedings due to financial defaults. Here are a few notable cases:

1. Essar Steel: Essar Steel, a major steel producer, faced insolvency proceedings under the IBC. The company defaulted on its debt and owed significant amounts to its creditors. The case underwent a lengthy legal process, and ultimately, ArcelorMittal emerged as the successful bidder and acquired Essar Steel.
2. Jet Airways: Jet Airways, a prominent Indian airline, encountered financial difficulties and defaulted on its debt payments. The airline's lenders initiated insolvency proceedings under the IBC, leading to its eventual liquidation.
3. Bhushan Steel: Bhushan Steel, a leading steel company, faced insolvency proceedings after defaulting on its loans. The NCLT admitted the insolvency petition against Bhushan Steel, and Tata Steel successfully acquired the company through the resolution process.
4. Alok Industries: Alok Industries, a textile manufacturer, underwent insolvency proceedings due to its financial defaults. The NCLT admitted the insolvency petition, and the company was eventually acquired by a consortium consisting of Reliance Industries and JM Financial Asset Reconstruction Company.
5. Amtek Auto: Amtek Auto, an automotive component manufacturer, faced financial distress and failed to meet its debt obligations. The company went through insolvency proceedings, and a resolution plan was approved with Liberty House Group acquiring the majority stake in Amtek Auto.

These cases highlight instances where corporate entities in India defaulted on their financial obligations, leading to the initiation of insolvency proceedings under the IBC. The IBC provides a framework for the resolution and restructuring of such defaults to ensure a fair and orderly process for all stakeholders involved.

 Vidarbha Industries Power Limited v. Axis Bank Limited (2022) ibclaw.in 91 SC]

 As per the precedents laid down under IBC and their interpretation by the Apex Court of the country, a debt and default existing on the part of the Corporate Debtor were the main ingredients to allow an application under Section 7. But in the recent case of Vidarbha Industries Power Limited v. Axis Bank Limited (2022) ibclaw.in 91 SC, the Supreme Court has interpreted Section 7(5)(a) of the Code in a way that gives a different angle to the  interpretation of  the terms, ‘debt’ and ‘default’. As per the present judgment, even if there’s an existing debt and default has accrued on the part of the corporate debtor, such debt wouldn’t necessarily allow an application for insolvency proceedings against the Corporate Debtor to be admitted. Thus, a discretionary power has been conferred on the Adjudicating Authority to in admitting such applications.

Brief Facts of the Case

Vidarbha Industries Power Limited (hereinafter referred as VIPL) is a power generating company. The regulation of its tariff is under Maharashtra Electricity Regulatory Commission (MERC) and the Appellate Tribunal for Electricity (APTEL). MERC permitted VIPL to implement a power purchase agreement with Reliance Industries Limited (RIL) according to which, VIPL had to supply electricity to RIL. During the said agreement disputes arose between the parties and the matter was taken to APTEL, which awarded VIPL a sum of INR 1,730.00 crore. VIPL sought implementation of the order passed by the APTEL before MERC. However, MERC took an appeal before the Supreme Court against the order of APTEL. In the meantime, Axis Bank Limited initiated an insolvency proceeding under section 7 of Code against VIPL. As a result of this, VIPL pleaded before the National Company Law Tribunal (NCLT) for stay on the proceedings until the proceeding before the Supreme Court was pending. However, it was refused on the ground that no extraneous matter should come in the way of expeditiously deciding insolvency proceedings.

NCLT was of the view that in order to initiate CIRP it is sufficient to show existence of a debt and default on the part of the corporate debtor. Further, the National Company Law Appellate Tribunal upheld the same view. Following the above incidents, an appeal was filed before the Hon’ble Supreme Court to ascertain the nature of Section 7(5)(a) in terms of its discretionary power.

Held

Supreme Court, inter alia, held that Section 7(5)(a) of the Insolvency and Bankruptcy Code, 2016 confers discretionary power on the Adjudicating Authority in admitting an application of a financial creditor under Section 7 of the Code for initiation of CIRP. This decision of the Court is in clear contrast with the long-settled view that as soon as the Adjudicating Authority is satisfied that a default has occurred, the application for CIRP must be admitted except when the application itself is incomplete.

In the landmark judgment, Innoventive Industries Ltd., it was held by the Apex Court that if debt and default are established and Section 7 application is defect-free, it must be admitted by the NCLT. But, the interpretation of Section 7 in the present judgment has conferred discretionary power on the Adjudicating Authority and now NCLT has the discretion even not to admit a CIRP application filed by a financial creditor.

The court in Vidarbha emphasized on the meaning and intention of Section 7(5)(a) of the Code.  It was held that the jurisprudence behind this section can be ascertained from the phraseology of this provision in the context of the nature and design of the Code. The expression ‘may admit’ confers discretion to admit. In contrast, the use of the word “shall” postulates a mandatory requirement. Had the legislative intent been that of making Section 7(5)(a) mandatory, the legislature would have used the word ‘shall’ and not ‘may’. It was further interpreted by the court that using two different phrases in two otherwise identical sections convey a different meaning. The fact that Legislature used ‘may’ in Section 7(5)(a) of the IBC and a different word, that is, ‘shall’ in Section 9(5)(a) shows that Legislature intended Section 9(5)(a) of the IBC to be mandatory and Section 7(5)(a) of the IBC to be discretionary. However, it was clarified by the Court that such discretionary power conferred on the Adjudicating Authority must not be exercised arbitrarily or capriciously. Ordinarily, the adjudicating authority should admit an application made under Section 7 and initiate CIRP on satisfaction of the existence of a financial debt and default on the part of the Corporate Debtor in payment of the debt, unless there are good reasons not to admit the petition. The grounds made out by the Corporate Debtor against admission of such petition has to be considered on merit by the Adjudicating Authority and it can exercise its discretion in not admitting the application filed under Section 7of the code. 

Conclusion

The above judgment of the Supreme Court has become a landmark and has paved way for a fresh defense that can be taken by corporate debtor to avoid initiation of insolvency proceedings against them, especially in those cases where an award or decree exceeding the default amount has already been passed in Corporate Debtor’s favour and such award or decree is either pending an execution or an appeal against such decree or award is filed by the Award-Debtor or Judgment-Debtor. The impact this ruling creates on pending petitions filed under Section 7 of the IBC before NCLTs would be noteworthy.  

The present judgment has set a completely new view point for the initiation of insolvency proceedings against the corporate debtor by the financial creditors, which seems to put the financial creditors on a backfoot.

It must be noted that IBC was enacted for reasonably expeditious, time bound insolvency resolution of corporate bodies as observed by the Supreme Court in Swiss Ribbons. It was observed in this case that timely resolution of a Corporate Debtor by an effective legal framework and process, would support the development of the credit market.

Prior to enactment of the Insolvency and Bankruptcy Code, 2016, there was no consolidated legislation in India that dealt with insolvency and bankruptcy. Provisions covering insolvency and bankruptcy for corporate bodies could be found in the Sick Industrial Companies (Special Provisions) Act (SICA), 1985, the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, and the Companies Act, 2013. The predicaments that these varied laws posed were existence of multiple fora for realization of debt and lack of harmony among them, which resulted in undue delay.

It is imperative to mention here that if the Apex Court continues to defy the main objective of the code by contradicting its own settled principles, then unfortunately the fate of IBC would be similar to that of the Sick Industrial Companies (Special Provisions) Act (SICA), 1985, the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, and would lead to flood of unnecessary litigation.