JOURNEY OF THE IBC AND ITS CRITICAL ANALYSIS AND STAMP DUTY RULES - PowerPoint Presentation

1. JOURNEY OF THE IBC AND ITS CRITICAL ANALYSIS AND STAMP DUTY RULES Pawan Jhabakh

2. INTRODUCTION

3. Lord Mishcon who said that “Insolvency is not a very thrilling or amusing subject”. However, as Edward Jenks, the noted English jurist said, “... uninteresting as it may be, it is nevertheless a very important subject area”. “Bankruptcy is the state of things which exists when, a man being unable to pay his debts, his solicitor and an accountant divide all his property between them” - Blake Odgers What is Insolvency?

4. The Insolvency and Bankruptcy Code (IBC) that was introduced by the Government in 2016, is one of the biggest economic reforms of the country. IBC brings a paradigm shift in the recovery and resolution process by introducing the concept of “creditor in control” instead of “debtor in possession”.Creditor is king, IBC is creditor driven. Creditor indirectly take control of the board/assets of the debtor through the committee of creditors;Insolvency Professionals vested with significant responsibility wherein they would take charge of the affairs of the debtor;Resolution to completed within time, failing which, liquidation would be a consequence;Introduction of the IBC

5. An efficient insolvency legislation should be premised on following five pillars:It should prioritise resolution over liquidation;Revive the Corporate Debtor by returning as a going concern;Time Bound Resolution;Claw back of transactions;Judicial Forum and Accountability of Resolution Professionals.Pillars of Insolvency Legislation

6. Number of CIRP’s Ordered5636Number of CIRP’s Closed as on June 20223637Number of Companies who came out of CIRP1934Number of cases closed basis appeal, review or settlement 774Number of cases withdrawn643Number of cases where Resolution Plan have been approved 517Number of cases where liquidation ordered 1703Basic Facts and Statistics as on 31st June 2022

7. Who Triggers CIRP?Operational Creditors 51.15%Financial Creditors 42.80%CIRP having < 1 Crore, initiated by OC’s80%CIRP having > 10 Crore, initiated by FC’s80%

8. Mode of closures of CIRP as of June 2022Commencement of Liquidation 47%Appeal/Settled/Review/Withdrawn/ Resolved53%

9. Sectoral Distribution of CIRP – Admission – June 30th 2022Transport 3%Electricity 3%Hotels 2%Retail Trade 10%Construction 11%Real Estate 20%Manufacturing 40%Others 11%

10. Sectoral Distribution of CIRP - Resolution Plans – June 30th 2022Transport 2%Electricity 5%Hotels 3%Retail Trade 6%Construction 10%Real Estate 14%Manufacturing 51%Others 9%

11. Sectoral Distribution of CIRP – A/R/S/W – June 30th 2022Transport 2%Electricity 2%Hotels 2%Retail Trade 8%Construction 13%Real Estate 26%Manufacturing 37%Others 9%

12. Sectoral Distribution of CIRP - Liquidation – June 30th 2022Transport 4%Electricity 3%Hotels 2%Retail Trade 12%Construction 7%Real Estate 17%Manufacturing 43%Others 12%

13. Reasons for withdrawal of CIRP - June 30th 2022Settlement with the Applicant 266Full Settlement with other creditors43Agreement to Settle in the future 36Other Settlement with Creditors 146Others 150Withdrawn under section 12 A643

14. Reasons for Liquidation - June 30th 2022COC decided to liquidate the Corporate Debtor 1105Adjudicating Authority did not receive any resolution plans538Adjudicating Authority rejected Resolution Plans 47Corporate Debtor contravened the terms of the Resolution Plan 13

15. Average timeline for Resolution Plans / Liquidation - June 30th 2022ICD to RP863ICD to Liquidation719

16. LATEST SUPREME COURT JUDGMENTS ON THE IBC

17. FINANICAL CREDITORS APPLICATIONS AND WHAT FACTORS CONSIDERED?

18. The Court drew comparison between the Section 7(5) and Section 9(5)[3] of the Code and determined that the former provision uses the term 'may' while the latter uses the term 'shall'. Such differentiation in otherwise almost identical provisions relating to initiation of CIRP shows that 'may' and ‘shall” in the two provisions two provisions intend to convey a different meaning. It is apparent that the legislature intended Section 9(5)(a) to be mandatory and Section 7(5)(a) to be discretionary as it was never the objective of the Code to penalize solvent companies temporarily defaulting in repayment of its financial debts, by initiation of CIRP.Vidarba Industries – Factors other than default

19. A discretionary power has been conferred under Section 7(5)(a) to the NCLT by the Legislature to admit an application of a financial creditor and initiate CIRP on satisfaction of the existence of a financial debt and default on part of the corporate debtor in payment of the debt, unless there are good reasons not to admit the petition.The present judgment now also requires to admit the application under Section 7 of the Code not only upon existence of a debt and default, but also but also upon consideration of factors which could considerably impact the financial health of the corporate debtor.Vidarba Industries – Factors other than default

20. LIMITATION AND HOW TO ESTABLISH ACKNOWLEDGEMENT ?

21. An application under Section 7 of the IBC would not be barred by limitation, on the ground that it had been filed beyond a period of three years from the date of declaration of the loan account of the Corporate Debtor as NPA, if there were an acknowledgement of the debt by the Corporate Debtor Before expiry of the period of limitation of three years. The corporate debtor's contention was that the Application under Section 7 of the IBC is hopelessly barred by limitation as the same was filed about eight/nine years after the account of the Corporate Debtor was declared NPA in 2008.The Corporate Debtor acknowledged its liabilities in its financial statements from 2008-09 till 2016-17.  Tulip Stars – Acknowledgment of Debt

22. The Supreme Court (SC) observed that the provisions of section 18 of the Limitation Act, 1963 are not alien to and are applicable to proceedings under the Code. It held that an acknowledgement of liability in a balance sheet without a qualification can furnish a legitimate basis for determining as to whether the period of limitation would stand extended, so long as the acknowledgement was within a period of three years from the original date of default. State Bank of India Vs. Krishidhan Seeds Private Limited – Balance Sheet Acknowledgment

23. Under section 60(6) of the Code, the entire period during which a moratorium was in operation has to be excluded while computing limitation in respect of a proceeding by or against a CD. The SC observed that an application under section 11(6) of the Arbitration and Conciliation Act, 1996 by the CD against another party would not be stopped by virtue of moratorium under section 14 of the Code. New Delhi Municipal Council – CIRP period excluded for the purposes of Limitation

24. The SC reiterated that the limitation period of 30 days for filing of appeal against the order of AA under section 61 of the Code must be interpreted strictly and rejected the plea that the limitation period would start running from the date of knowledge of the order of the AA. Safire Technologies Pvt. Ltd - Limitation for Filing an Appeal

25. STATUTORY AUTHORITIES AND THEIR DUES FINALLY GETTING THEIR SHARE?

26. The Supreme Court (‘SC’) dealt with the question whether the provisions of the IBC especially section 53, overrides section 48 of the Gujarat Value Added Tax Act. The SC held that if the resolution plan excludes statutory dues payable to government or a government authority, it cannot be said to be in conformity to the provisions of IBC and, as such, not binding on the government. If the Resolution Plan ignores the statutory demands payable to any State Government or a legal authority, altogether, the Adjudicating Authority is bound to reject the Resolution Plan. Rainbow Papers Limited – Statutory Dues cannot be ignored

27. If a company is unable to pay its debts, which should include its statutory dues to the Government and/or other authorities and there is no plan which contemplates dissipation of those debts in a phased manner, uniform proportional reduction, the company would necessarily have to be liquidated and its assets sold and distributed in the manner stipulated in Section 53 of the IBC.The Committee of Creditors, which might include financial institutions and other financial creditors, cannot secure their own dues at the cost of statutory dues owed to any Government or Governmental Authority or for that matter, any other dues.Delay in filing a claim cannot be the sole ground for rejecting the claim. Rainbow Papers Limited – Statutory Dues cannot be ignored

28. COMMERCIAL WISDOM ? APPLICABLE IN CIRP, LIQUIDATION AND SETTLEMENT !

29. It is trite law that ‘commercial wisdom’ of the CoC has been given paramount status without any judicial intervention, for ensuring completion of the processes within the timelines prescribed by the IBC. It has been consistently held that it is not open to the Adjudicating Authority or the Appellate Authority to take into consideration any other factor other than the one specified in Section 30 (2) or Section 61(3) of the IBC. It has been held that the opinion expressed by the CoC after due deliberations in the meetings through voting, as per voting shares, is the collective business decision and that the decision of the CoC's ‘commercial wisdom’ is non-justiciable, except on limited grounds as are available for challenge under Section 30(2) or Section 61(3) of the IBC. Panna Pragati Infrastructure – Commercial Wisdom in Resolution Plans?

30. The NCLT had originally allowed the withdraw the Resolution Plan. On the appeal, the National Company Law Appellate Tribunal had held that the application seeking to withdraw from the Resolution Plan could not have been allowed. The Supreme Court affirmed the view of the NCLAT.A resolution plan approved by the Committee of Creditors cannot be allowed to be withdrawn or modified by the successful Resolution Applicant by approaching the Adjudicating Authority; The Parliament has not introduced an explicit provision under the IBC for allowing any amendment of the Resolution Plan after approval of creditors, let alone a power to withdraw the Resolution Plan at that stage.The residual powers of the Adjudicating Authority under the Code cannot be exercised to create procedural remedies which have substantive outcomes on the process of insolvency; Ebix Singapore – Modification of a Resolution Plan

31. Any claim seeking an exercise of the Adjudicating Authority’s residuary powers under Section 60(5)(c) of the IBC, the NCLT’s inherent powers under Rule 11 of the NCLT Rules 2016 or even the powers of this Court under Article 142 of the Constitution must be closely scrutinized for broader compliance with the insolvency framework and its underlying objective. The adjudicating mechanisms which have been specifically created by the statute, have a narrowly defined role in the process and must be circumspect in granting reliefs that may run counter to the timeliness and predictability that is central to the IBC. Any judicial creation of a procedural or substantive remedy that is not envisaged by the statute would not violate the IBC.Ebix Singapore – Modification of a Resolution Plan

32. The IBC provides penalties for non-compliance with the Resolution Plan after its approval under Section 31 and forfeiture of the PBG for failing to implement the Resolution Plan or contributing to the failure of its implementation. The violation of the terms of the Resolution Plan does not give rise to a claim of damages, rather it leads to prosecution and imposition of punishment under Section 74 of the IBC. Principles of contractual construction and interpretation may serve as interpretive aids, in the event of ambiguity over the terms of a Resolution Plan. However, remedies that are specific to the Contract Act cannot be applied, de hors the over-riding principles of the IBC. Ebix Singapore –Resolution Plan a Contract?

33. It was held that approval of a resolution plan does not ipso facto discharge a personal guarantor (of a corporate debtor) of her or his liabilities under the contract of guarantee. The release or discharge of a principal borrower from the debt owed by it to its creditor, by an involuntary process, i.e. by operation of law, or due to liquidation or insolvency proceeding, does not absolve the surety/guarantor of his or her liability, which arises out of an independent contract. Lalit Kumar Jain Resolution Plan – Personal Guarantor

34. The presenting of the Resolution Plan and its approval by the Adjudicating Authority would result in absolution of the corporate debtor of any pending proceedings. However, this would not extend to the erstwhile officers who were in charge of the Corporate Debtor prior to the CIRP. The property of the Corporate Debtor is made part of the Resolution Plan and if the said Resolution Plan is approved by the Adjudicating Authority, no action would lie against such property of the Corporate Debtor post the approval of the Resolution PlanManish Kumar - Liabilities / Proceedings Pending Prior to CIRP

35. IBC Prevails over the Provisions of Custom Act;Customs cannot claim title over the goods and issue notice to sell the goods in terms of the Custom Act when the liquidation process has been initiated;The Appellate Authority “cannot don the mantle of a supervisory authority for overseeing the validity of the approach of the Liquidator in opting for a particular mode of sale of the assets of the Corporate Debtor”ABG Shipyard and Welspun – Commercial Wisdom + Powers of AA and NCLAT - Liquidation

36. Whether the provisions of the IBC would prevail over the Custom Act, and if so, to what extent? The Supreme Court held that “The IBC would prevail over The Customs Act, to the extent that once moratorium is imposed in terms of Sections 14 or 33(5) of the IBC, as the case may be, the respondent authority has a limited jurisdiction to assess/determine the quantum of custom duty and other levies. The respondent authority does not have the power to initiate recovery of the dues by means of sale/confiscation, as provided under Custom Act.” Whether the respondent could claim title over the goods and issue notice to sell the goods in terms of the Custom Act when the liquidation process has been initiated? The Supreme Court answered this in the negative and clarified that “After such assessment, the respondent authority has to submit its claims (concerning customs dues/operational debt) in terms of the procedure laid down, in strict compliance of the time periods prescribed under the IBC, before the adjudicating authority” ABG Shipyard and Welspun – Commercial Wisdom + Powers of AA and NCLAT

37. The Apex Court has applied the principal of “Commercial Wisdom” of Committee of Creditors (CoC) during Corporate Insolvency Resolution Process (CIRP) under IBC with respect to the decision taken by the Liquidator in consultation with the Stakeholder Committee (SHC).“No doubt, a public auction entails the procedure of issuing public notices. But that is not the case with a Private Sale where the procedure prescribed permits the Liquidator to directly liaise with the potential buyer and conduct the negotiations. It may be emphasized that these are commercial transactions and purely business driven decisions, which are not amenable to judicial review. The insolvency regime introduced under the IBC has placed fetters on the power of interference by the Adjudicating Authority (NCLT) and the Appellate Authority (NCLAT).” ABG Shipyard and Welspun – Commercial Wisdom + Powers of AA and NCLAT - Liquidation

38. “The powers vested, and the duties cast upon the Liquidator have been made subject to the directions of the Adjudicating Authority (NCLT) under Section 35 of the IBC. Once the Liquidator applies to the Adjudicating Authority (NCLT) for appropriate orders/directions, including the decision to sell the movable and immovable assets of the Corporate Debtor in liquidation by adopting a particular mode of sale and the Adjudicating Authority (NCLT) grants approval to such a decision, there is no provision in the IBC that empowers the Appellate Authority (NCLAT) to Suo motu conduct a judicial review of the said decision. The jurisdiction bestowed upon the Adjudicating Authority [NCLT] and the Appellate Authority [NCLAT] are circumscribed by the provisions of the IBC and borrowing a leaf from Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta and Others, they cannot act as a Court of equity or exercise plenary powers to unilaterally reverse the decision of the Liquidator based on commercial wisdom and supported by the stakeholders.” ABG Shipyard and Welspun – Commercial Wisdom + Powers of AA and NCLAT - Liquidation

39. The SC permitted withdrawal of CIRP and observed that by the Amendment Act of 2018 the provisions under section 12A have been made more stringent as compared to section 30(4) when the voting share of 75% of CoC for approval of the resolution plan was brought down to 66%. Section 12A which was brought by the same amendment, requires the voting share of 90% of CoC for approval of withdrawal of CIRP. When 90% or more of the creditors, in their wisdom after due deliberations, find that it will be in the interest of all the stakeholders to permit settlement and withdraw CIRP, the AA or the NCLAT cannot sit in an appeal over the commercial wisdom of CoC. The interference would be warranted only when the AA or the NCLAT finds the decision of the CoC to be wholly capricious, arbitrary, irrational and de hors the provisions of the statute. Siva Industries and Holdings Limited – Settlement between Promoters and the COC

40. CONSEQUENCE OF OTHER RECOVERY PROCEEDINGS?

41. The SC held that a person, who holds a recovery certificate would be a FC and would be entitled to initiate CIRP, within a period of three years from the date of issuance of the recovery certificate and made following important observations: Any recovery certificate is deemed to be a decree or order of the Court for initiation of winding up proceedings which are much severe in nature, it will be difficult to accept that the Legislature intended that such a recovery certificate could not be used for initiation of CIRP which would enable the CD to continue as a going concern and, at the same time, pay the dues of the creditors to the maximum. Kotak Mahindra Bank Limited– Recovery Certificate valid for IBC

42. IBC AND PERSONAL GUARANTORS

43. State Bank of India v Manohar Kumar:Initiation of CIRP, not a pre-requisite to institute proceedings against Personal Guarantors; Vyomesh Shah v Union of India / Sachin Manohar Deshmukh: Challenge to the provisions of the IBC Concerning Personal Guarantors – Stay on further proceedings granted – Similar practice followed by the NCLT and the PG cases are not being proceeded with in light of this order.Status of PG Cases

44. Reverse Corporate Insolvency Resolution Process

45. Under Reverse Corporate Insolvency Resolution Process, the resolution can reach finality without approval of the third party resolution plan; Suitable in cases of real estate infrastructure companies – eventually working in the interest of the allottees; survival of the real estate companies; ensure completion of projects; employment to large number of unorganized workmen. RCIRP

46. In Corporate Insolvency Resolution Process against a real estate, if allottees (Financial Creditors) or Financial Institutions/Banks (Other Financial Creditors) or Operational Creditors of one project initiated Corporate Insolvency Resolution Process against the Corporate Debtor (real estate company), it is confined to the particular project – (Umang Realtech NCLAT)RCIRP, cannot affect any other project(s) of the same real estate company (Corporate Debtor) in other places where separate plan(s) are approved by different authorities, land and its owner may be different and mainly the allottees (financial creditors), financial institutions (financial creditors, operational creditors are different for such separate project – (Umang Realtech NCLAT)RCIRP

47. Consolidation Of Corporate Insolvency Resolution Process

48. Common Control, Common Assets, Common Liabilities, Inter Dependance, Interlacing of finance, Pooling of Resources, Co-Existence of Survival, Intricate link of subsidiaries, Inter linked Accounts, Inter-Looping of Debts, Singleness of Economic Units, Cross Shareholding – Videocon Industries; In Regen Power and Regen Infrastructure dealt with this issue; Consolidation Rejected as only the RP seeking consolidation can file application; Coc, suspended directors, operational creditors were not in favour of consolidation, NCLT has no equity jurisdiction; Resolution plan of one entity already approved;Consolidation Of Corporate Insolvency Resolution Process

49. Advantages of being an MSME

50. Debate on whether the Corporate Debtor meets the MSME requirements taking the forefront; Opportunity for a Promoter to present a Resolution Plan considering the exemption given under section 240 A of the Code;Spring Filed Shelters - Initial registration as an MSME would be sufficient for the presenting of a Resolution Plan;ASIS Logistics - Requirements of an MSME certification not a criteria as long as the thresholds under the MSME Act are meet; The promoter was entitled to present a Scheme under Liquidation;Questions also raised whether a Resolution Professional has to power to say whether the Corporate Debtor is an MSME or not? MSME Requirements

51. Judgements of the NCLAT

52. The Resolution Professional preferred an Application seeking directions for refund the money equivalent to the Bank Guarantees invoked by them.The issue that arose consideration was whether a Performance Bank Guarantee and/or mobilization Advance Bank Guarantee can be invoked or encashed after imposition of under Section 14 of the Code. The Hon’ble Appellate Tribunal held that a Security Interest does not include Performance Bank Guarantee. Therefore, the same is not covered under Section 14(1).Engineering Projects (India) Ltd - Security Interest not covered under Moratorium

53. Corporate debtor failed to pay Gratuity. The NCLT dismissed Section 9 application thereby holding that the amounts due towards gratuity, leave encashment on account of superannuation will not qualify under the definition Operational Debt.The above amount is due towards salary for the service rendered by him and the object of code is not recovery and but only resolution. All such claims may be submitted in Form D under Regulation 9 of the CIRP Regulations, 2016. But seeking to initiate CIRP on the ground that service benefits/welfare benefits are not paid cannot be said to be the intent and objective of the Code.Hindustan Antibiotics Ltd – Employment benefits not an Operation al Debt

54. The NCLAT held while dismissing the application filed under Section 10 of the Code observed that in case the Company has no assets, both tangible and intangible the Petitioner shall go for voluntary liquidation of the company and no purpose shall be served in insolvency resolution.Rosoboron Services (India) Ltd – When is Voluntary Liquidation Filed?

55. Cross Border Insolvency

56. Cross Border Insolvency involves situations where the debtor has assets in more than one jurisdiction/country, or when its creditors are overseas and outside the jurisdiction of a country. With the sharp jump in the number of cases filed against large Multi-National Companies (MNC’s) seeking initiation of Corporate Insolvency Resolution Process (‘CIRP’) against them, and with the assets of these corporate debtors frequently situated overseas, or with proceedings seeking insolvency resolution already commenced outside India, the need for a CBI framework has become the need of the hour.Cross Border Insolvency – Need of the Hour

57. ‘Access’, which means access by insolvency officials and creditors of one country to the courts of another, and to be able to directly participate in the proceedings of the other country.‘Recognition and Relief’, which allows for recognition of foreign proceedings, be it final awards or interim orders, and segregation of multi-country proceedings into ‘main proceedings’ and ‘non-main proceedings’ to determine distribution of jurisdiction/ powers of courts for resolution.Framework of CBI

58. ‘Cooperation and Co-ordination’ between all stakeholders of the resolution process, inter-country viz., courts/ tribunals and insolvency professionals, and notifications with respect to commencement of insolvency proceedings; and‘Public Policy’, which allows for countries to determine the acts that goes against the public policy of their jurisdiction, and to restrain from passing any directions with respect to the same.Framework of CBI

59. The NCLT held that even though insolvency proceedings against Jet Airways had already been initiated before the Noord – Holland District Court, since there is no provision and mechanism in the Code to recognize the judgment of an insolvency court of any foreign nation, the same cannot be taken into consideration by the Tribunals in India.The bankruptcy administrator from Holland filed an application to take control of the assets of Jet Airways in India, as per the bankruptcy laws in Netherlands. However, in the absence of any reciprocal agreement between the countries, such request was held unsustainable.On appeal, via a Joint Agreement between the RP in India and the Administrator, interests of all stakeholders were balanced and maximization of the assets of the corporate debtor was sought to be achieved. Jet Airways

60. Stamp Duty Rules

61. The concept of stamp duty was introduced by the Britishers in 1899 and was applicable for all property transactionsStamp duty was to be deposited in the government treasury in accordance to the rates and procedure prescribed.The amount was collected by government-appointed stamp collectors which would be transferred to the concerned state under which the individuals are taxed.Stamp Duty

62. Stamp duty is paid on the prescribed instruments including conveyance or transfer of any movable or immovable property, such as transfer of shares or transfer of property on the instrument or document effecting the transfer of interest in any such property. Stamp duty is a documentary impost and not a transaction tax. It is payable (i) prior to or at the time of execution of the document, or (ii) within three months of the executed document first being delivered and received in that part of India where either any conditions precedent or subsequent needs to be performed, and/or where the property to which the document relates is situated.Registration Fee is also payable in addition to the stamp duty.Stamp Duty

63. The stamp paper should reflect the name of the company/individual who is a party to the instrument.An instrument cannot be stamped for an amount which is lower than the value as prescribed under the relevant legislation.The penalty applicable on an unstamped/under stamped instrument varies from state to state and maximum penalty could range from twice the deficient stamp duty to ten times the deficient stamp duty. Further, deliberate evasion of stamp duty may also attract imprisonment.Appropriate stamping of an instrument provides it with an evidentiary value in a court of law.Essentials of an Instrument

64. Thank You Email Id: kpjhabakh@gmail.com Phone No: 9176663600