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Four cases that show invoking bankruptcy code is no panacea to resolving bad loans

LiveMint logoLiveMint 15-06-2017 Jayshree P. Upadhyay

The big questions about how soon the insolvency and bankruptcy process will resolve the bad loan problem centre on the infrastructure readiness of the National Company Law Tribunal (NCLT). But even in cases where such resolution is already underway, the process is hardly smooth. Rulings of the tribunal and its appellate body, the National Company Law Appellate Tribunal (NCLAT), have left room for clarity on provisions of the Insolvency and Bankruptcy Code (IBC) such as what constitutes a dispute, principles of natural justice, and applicability of timelines.

“NCLT, NCLAT orders have invoked mixed reactions. We are not getting one view from these adjudicating authorities. The stakeholders are wondering on the implementation of this new regime. However, it is still early days. We are expecting clarity will emerge in next few months,” said Ashish Chhawchharia, partner, Grant Thornton Advisory Pvt. Ltd.

Here’s a look at four such examples, where more than the cases themselves, the precedent set by the judgments is important:

What’s a dispute?

Kirusa Software Pvt. Ltd (the creditor in this case) invoked the IBC against Mobilox Innovations Pvt. Ltd. The IBC provisions say that the creditor needs to send a notice to the debtor seeking dues before it invokes the IBC. The debtor, on its part, needs to respond within 10 days either by providing proof of payment or saying that dues are disputed. In this case, Mobilox filed a dispute claim on the grounds that Kirusa violated a non-disclosure agreement. NCLT upheld this dispute claim and dismissed the bankruptcy proceedings, prompting Kirusa to appeal. The NCLAT upheld Kirusa’s appeal. ruling that the debt was not connected to the non-disclosure agreement. Then, it went on to explain the meaning of dispute.

In its order, NCLAT said that a dispute would include any proceedings already initiated or pending or even those which are proposed to be initiated before a consumer court, tribunal, labour court etc. Earlier, disputes that had been considered were limited to arbitration proceedings or suits. This wide definition is a source of concern, say experts.

“A ‘proposed’ dispute broadens the scope of dispute and could also lead to frivolous disputes and the creditor would need to prove that it is frivolous. This order which broadens the scope of dispute will lead to the extension of the 14-day timeline (for rejecting or admitting a case) not just in exceptional cases but in many cases,” said Tine Abraham, counsel at Trilegal, a law firm.

Flexible timeline

One of the strongest points of the IBC is the timelines it prescribes: 14 days for rejecting or admitting a case and 270 days for resolution. An NCLAT order in a case involving JK Jute Ltd effectively weakens that. The appellate tribunal said the 14-day timeline for rejecting or admitting a case under the IBC was a directive: that means courts do not have to necessarily adhere to this timeline. It, however, said that once a case is admitted, the 270-day timeline for resolution is mandatory.

To admit or reject a petition “is procedural in nature, a tool of aid in expeditious dispensation of justice and is directory”, said the order passed by justice S.J. Mukhopadhaya. The NCLAT said that while ruling on whether or not an application of insolvency of a company is admissible, the tribunal is performing a judicial role and the sections of the Companies Act 2013 do not prescribe a timeline for the Tribunal to pass orders. The NCLAT ruled on this issue after different benches of the NCLT passed conflicting orders. The Mumbai and Hyderabad benches ruled that even admission or rejection was time-bound and the Allahabad bench ruled that there was flexibility on admission and rejection of a plea.

Principles of natural justice

ICICI Bank Ltd filed the first case under IBC against Innoventive Industries Ltd in January. Innoventive contested the plea of bankruptcy by ICICI, stating that it is not in default because the industries, law and labour departments of the Maharashtra government had notified a suspension of the firm’s liabilities from 22 July 2016 to 21 July 2017.

The tribunal stopped all proceedings against the company. Later, the appellate tribunal observed that the company cannot seek protection under the Maharashtra Industrial Development Act as insolvency regulation is a special Act. In response, the Pune-based steel producer challenged the constitutional validity of the bankruptcy law in the Bombay high court and also at NCLAT, stating that the company was not given adequate notice before admission. The appellate tribunal turned down the appeal.

However, in the order NCLAT also directed that the adjudicating authority should “adopt a cautious approach in admitting insolvency application by ensuring adherence to the principles of natural justice”. The NCLAT further observed that “in some cases initiation of Insolvency Resolution Process may have adverse consequences on the welfare of the company. Therefore, it will be imperative for the Adjudicating Authority to adopt a cautious approach in admitting insolvency application by ensuring adherence to the principle of natural justice.” It also stressed that the tribunal must issue a limited notice before admitting a case.

Role reversal

ICICI Bank had taken Starlog Enterprises Ltd to NCLT, which admitted the case on 17 February. The NCLT then appointed an interim insolvency resolution professional (IRP). Starlog appealed this judgment at NCLAT. In its appeal, Starlog said that ICICI Bank on 6 February had asked the company to repay an overdue amount of Rs10.02 crore but before the NCLT the lender inflated this default amount to Rs29.81 crore. Mint is awaiting ICICI Bank’s response.

In a 24 May order, the NCLAT imposed a penalty of Rs50, 000 on ICICI Bank for stating an incorrect claim amount. The appellate authority also set aside set the order given by the Mumbai bench of the tribunal, which had admitted the case against Starlog. Subsequently, the appointment of the IRP was declared illegal and the company was allowed to function independently through its board. The company had pointed out events that followed IRP taking control of the management. Star log stated that the IRP violated the code and some its action resulted in loss of business from longstanding clients.

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