2 Years of Innoventive Industries v ICICI Bank

Table of Contents

M/s Innoventive Industries v ICICI Bank and Anr

Author: Radhika Khurana,

Student-Symbiosis Law School, Pune,

Final Year, 3 Year LLB.

RESEARCH METHODOLOGY

Aim: The aim of this paper is to do critical analysis of the case, M/s Innoventive Industries v ICICI Bank and Anr.^[1]

Objective: The objective of this paper is to understand the case in hand, and to know its relevance in present jurisprudence. (Analysis)

Scope: The scope of this paper is restricted to analyze the situation in India.

Mode of citation: Blue Book, 19th Edition mode of citation has been used.

Sources: The paper has used primary sources like case laws and legislative enactments, and secondary sources like books, websites, and articles.

Style of Writing: The style of writing is both descriptive and analytical.

Introduction

Non repayment of debts by companies was a major issue which was creating hindrance in the growth of Indian economy, number of companies going into liquidation was increasing and there was no single law dealing with such a situation. Before the introduction of this code High Courts used to deal with Insolvency issues[2] which used to take 4.3 years on an average according to a survey done by World Bank.[3] To solve this problem, Insolvency and Bankruptcy code was introduced in the year 2016 under which all the earlier laws dealing with insolvency and bankruptcy problems were coupled to remove any kind of confusion and speed up the process. But whenever a new code is introduced it comes with its own problems which can only be seen when the problem actually occurs, moreover different interpretations are done by different individuals based on what they are seeking from the laws, so it becomes very important to clear such interpretation related issues. While IBC[4] was in its teething years, a case was filed by ICICI Bank before NCLT[5], Mumbai and then an appeal was filed before NCLAT[6] and again an appeal was filed before the SCI[7]. SCI while delivering the judgment said that “this code marks a paradigm shift in law.”[8] The case in hand being the first application filed under the code puts to rest certain interpretational issues that arose and is considered as a landmark judgment. In this paper the author will discuss the case in length along with all the aspects that follows.

Brief facts of the case

Innovative Industries, a Pune based multi-product company had started to suffer losses owing to labor problems. The company had taken loan from 19 banking companies to meet its losses which it could not repay and itself proposed corporate debt restructuring. The agreed restructuring plan was to be implemented over a period of 2 years according to an agreement signed in the year 2014. Finally in December 2016 ICICI Bank filed an application stating the company to be a defaulter within the meaning of this code and to start insolvency resolution plan against it.

And thus the present case.

^All the issues raised in this case will be dealt as and when they were raised in accordance with the stages involved in the particular case.

Before NCLT*

An application was filed by ICICI Bank before NCLT, Mumbai under section 7 of the Code^[9] to start insolvency resolution plan against the company as company being the defaulter under the said code, the company in reply to the above application stated that legally there is no debt due on the company according to the two notifications under Maharashtra Relief Undertakings, according to which its liabilities stand suspended for the period of one year firstly from July 2015 and then again from July 2016. On second hearing another application was filed by the company stating that the company could not repay its debts because of non-release of its funds under MRA^[10] and thus no default was committed by the company.

Issues raised before NCLT

1. Which statue would prevail over the other? i.e. whether Maharashtra Act would be applicable or the Insolvency Code?

2. Whether the reason stated in the second application filed by the company valid?

Decision of NCLT

NCLT held that the Code would supersede Maharashtra Act in lieu of non-obstante clause in Section 238^[11] of the Code and that a Central Statue would prevail over a State Statue and thus admitted the application, in respect of the second question the bench clarified that it is not maintainable as the plea taken in second application was not raised in the first application, as in the code only 14 days period is specified to decide on the application from the date of petition filed by creditors.

Before NCLAT**

Aggrieved with the decision of NCLT, Innovative industry filed an appeal before the appellate tribunal.

Issue raised before NCLAT

1. Whether or not company is a defaulter according to the code?

2. Whether the two acts are repugnant to each other or not?

3. Whether the plea filed by the directors is maintainable or not?

Decision of NCLAT

After hearing the contentions raised by both the parties, NCLAT held that both the Maharashtra Act and the Code operate in different fields and are not repugnant to each other and the plea filed by the directors is not maintainable as they do not represent the company and have filed the plea as aggrieved persons because their management right was taken away the second moratorium was declared.

Before SCI***

Aggrieved by the decision of NCLAT, Innovative Industries filed second appeal before the Supreme Court of India.

The court while delivering the judgment said that though this case does not need such a detailed judgment but being the first case under the code; the court wants to remove all the interpretational doubts and also cleared the intent of legislature behind the code.

The court first noted that this code “brings a paradigm shift in law” so because the management will be removed from the hands of corporate debtor on default.
When an application is admitted under section 7 of the said code, the authority only needs to assess the evidence produced by the financial creditor that a default has been committed.
That the concept of debt is very wide, if there is any money due to creditor and the same has not been paid by the debtor, former can initiate the proceedings, even if part payment is due and it meets eligibility criteria. Further, court observed that it is no precondition to file an application that the debt should be disputed.
Court while explaining the relevance of the code said that it is important for the Adjudicating Authority to accept or reject the application of the creditor within 14 days on the basis of evidence produced; otherwise it would destroy the essence of the code.
Throwing light on the scheme of the code, the court observed that the code has been designed in such a way so as to help the corporate debtor to continue with its business by handing over the business to a resolution professional, who then formulates a plan for smooth functioning of the business while repaying all of its debts and it has to be completed within 180 days with a maximum extension of 90 days.
Court on the question of second application filed by Innovative Industries said that NCLT and NCLAT were right to not to go into this contention because firstly the second application was made after the end of period of 14 days in which the authority has to decide on the admissibility of the application and secondly appears to be an afterthought.
Finally that the non-obstante clause of Maharashtra Relief Undertaking Act would not prevail over the non-obstante clause of Insolvency code as the latter being the Parliamentary enactment.

Relevance of the case

Being first case to be filed under the code and decided by the Supreme Court of India followed by the detailed judgment explaining the code in depth and the intention of legislature behind the enactment of the code, the judgment is of utmost relevance.

First, Quoting Hon’able court “There can be no doubt, therefore, that the Code is a Pa
rliamentary law that is an exhaustive code on the subject matter of insolvency in relation to corporate entities, and is made under Entry 9, List III in the Schedule 7”^[12]. This proves that IBC is a complete code in respect of Insolvency proceedings and its remedies and no other law overrides it.

Secondly, court clarified the difference between filing of application under section 7 and 8 of the code. That under section 7, adjudicating authority has to satisfy itself that the debt is real based on the evidence presented by financial creditor but under section 8; operational creditor is required to deliver demand notice on default to debtor.

Article 254 of the Constitution^[13] talks about repugnancy and the Court in this judgment clarified the principle of repugnancy. And held that both the laws involved in this case are repugnant to each other and moratorium can be declared under both the laws but then plan under Maharashtra Act will create hindrance to give effect to plan adopted under IBC, hence ruled that non-obstante clause of IBC will prevail over the other.

Criticism

The main point of criticism in this case is on the basis of principles of natural justice, the contention of the corporate debtor was that, that it should be given the opportunity of being heard and to represent itself before the adjudicating authority when an application is filed under section 7 of the said code. But the application was dismissed by NCLT saying that under this code the authority is not under any compulsion to hear the debtor.

Subsequently, NCLAT in the same case said that opportunity of being heard should be granted to corporate debtor. NCLAT states “that the decision of the NCLT ought to have severe impacts on the welfare and existence of a company and hence, it is imperative for the authority to adopt a cautious approach while admitting an insolvency application by ensuring adherence to the principles of natural justice. Evidently, the order is capable of delaying and slowing down the adjudication process.”^[14] Further, Supreme Court in, Falcon Tyres Limited vs. Edelweiss Asset Reconstruction Co. Limited^[15] said that opportunity of being heard should be given to corporate debtor and the courts must follow the principles of natural justice, NCLT must give the debtor this opportunity before passing any order when an application is made by financial creditor.

Comparison

In JK Jute Mills Co. Ltd. v Surendra Trading Co.^[16] the tribunal examined the nature of time limits under the code, whether they are mandatory or directory for admission or rejection of application by NCLT. The tribunal in this case held that the time limit of 14 days to admit or reject the application to start insolvency proceedings is directory and NCLT has complete power to extend the period of 14 days on case to case basis in interest of justice. If this judgment of NCLAT is compared with Innovative Industries, then the NCLAT will have free power to delay the proceedings and this will go against the interest of the creditors and will defeat the very objective of the code of speedy redressal, as observed by the SCI in Innovative Industries in following manner, “One of the important objectives of the Code is to bring the insolvency law in India under a single unified umbrella with the object of speeding up of the insolvency process.”^[17]

Apart from the above comparison, comparison can also be made between the laws of different countries, In the judgment delivered by SCI in Innovative Industries, the court has mentioned that the Insolvency law of UK is a model law for Insolvency law in India and one of the key differences between the laws prevalent in India(based on UK law) and USA, as rightly pointed by Mr.Arun Jiatley, that under USA’s law “the debtor continues to be in possession and under laws of UK and India the creditors will be in possession”. ^[18]

Analysis and Conclusion

This case arose as a result of the collision of two statues because enforcement of one statue was creating hindrance for enforcement of other. The judgment of the Supreme Court focuses more on constitutional law and also throws light on the importance of this code; giving reasons for enactment of the same. Doctrine of repugnancy as stated under Article 245^[19] states that whenever there is contradiction between central and state law, the central law will prevail. The SCI based its decision on the basis of this article only. While clarifying the law on repugnancy, the court also provides great clarity regarding the rights of a corporate debtor to contest admission of insolvency applications by financial creditors and has laid down guidelines for the NCLT’s across India for deciding insolvency applications filed by financial creditors.

After reading the said judgment and various comments and articles on the same, the author is of the opinion that this being the first case, clarification was much needed which Supreme Court did justice to, focusing on the importance of time limit in which application has to be admitted or rejected by the adjudicating authority and right of corporate debtor to be heard as a matter of principle of natural justice, while acknowledging the law as a complete code. The judiciary did a very well job by interpreting the code as the legislature intended it to be. It also, now brings in more clarity that the provisions of the Code will have supremacy over every other law, whenever and wherever any conflict arises.

But one doubt still exists in the legal scenario with respect to the operation of The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (also known as the SARFAESI Act) because while clarifying the aim and object of this code in the judgment, it was cleared that the reason this code has been enacted is to create one single remedy^[20] for insolvency problems and to shorten the time limit to dispose of such cases but SRFAESI act hasn’t been repealed^[21] by the Code and provides for an alternate remedy for secured creditors outside the Code.

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Bibliograhy

Cases

Falcon Tyres Limited vs. Edelweiss Asset Reconstruction Co. Limited, Writ Petition No. 16489/2017(GM-Res)
JK Jute Mills Co. Ltd. v Surendra Trading Co., (2017) 138 CLA 0258.
Innoventive Industries Ltd. v ICICI Bank & Anr. Company Appeal (AT) (Insolvency) No. 1 & 2 of 2017.

Statues

Indian Constitution, Article 245
Insolvency and Bankruptcy Code, 2016, No.31, Act of Parliament (India).

Internet Articles

CMA J K Budhiraja, Insolvency Resolution Process ,Liquidation and Opportunities for CMAs under IBC, 2016, http://www.ipaicmai.in/IPA/Upload/Article-IRP.pdf.
Aravind Gayam, The Insolvency and Bankruptcy Code: All you need to know, May 10, 2016, https://www.prsindia.org/theprsblog/insolvency-and-bankruptcy-code-all-you-need-know.
By L. Viswanathan & Indranil Deshmukh, Innoventive Industries Limited v. ICICI Bank Limited: Paradigm Shift in Insolvency Law, September 1, 2017, https://corporate.cyrilamarchandblogs.com/2017/09/innoventive-industries-limited-v-icici-bank-limited-paradigm-shift-insolvency-law-india/.

[1] Innoventive Industries Ltd. v ICICI Bank & Anr. Company Appeal (AT) (Insolvency) No. 1 & 2 of 2017.

[2] CMA J K Budhiraja, Insolvency Resolution Process ,Liquidation and Opportunities for CMAs under IBC, 2016, http://www.ipaicmai.in/IPA/Upload/Article-IRP.pdf.

[3] Aravind Gayam, The Insolvency and Bankruptcy Code: All you need to know, May 10, 2016, https://www.prsindia.org/theprsblog/insolvency-and-bankruptcy-code-all-you-need-know.

[4] Insolvency and Bankruptcy Code, 2016, No.31, Act of Parliament (India).

[5] National Company Law Tribunal

[6] National Company Law Appellate Tribunal.

[7] Supreme Court of India

[8]By L. Viswanathan & Indranil Deshmukh, Innoventive Industries Limited v. ICICI Bank Limited: Paradigm Shift in Insolvency Law, September 1, 2017, https://corporate.cyrilamarchandblogs.com/2017/09/innoventive-industries-limited-v-icici-bank-limited-paradigm-shift-insolvency-law-india/.

[9]*Every thing that has been mentioned under the heading has been extracted from the Judgment of the SCI.

Section 7, Insolvency and Bankruptcy Code, 2016, No.31, Act of Parliament (India).

[10] Master Restructuring Agreement

[11] Section 238, Insolvency and Bankruptcy Code, 2016, No.31, Act of Parliament (India).

** Everything that has been mentioned under the heading has been extracted from the Judgment of the SCI.

*** Everything that has been mentioned under the heading has been extracted from the Judgment of the SCI.

[12] Paragraph 53, Innoventive Industries Ltd. v ICICI Bank & Anr. Company Appeal (AT) (Insolvency) No. 1 & 2 of 2017.

[13] Indian Constitution, Article 254

[14] Paragraph 5, Innoventive Industries v ICICI Bank, Company Appeal (AT) (Insolvency) No. 1 & 2 of 2017

[15] Falcon Tyres Limited vs. Edelweiss Asset Reconstruction Co. Limited, Writ Petition No. 16489/2017(GM-Res)

[16] JK Jute Mills Co. Ltd. v Surendra Trading Co., (2017) 138 CLA 0258.

[17] Paragraph 5(13), Innoventive Industries Ltd. v ICICI Bank & Anr. Company Appeal (AT) (Insolvency) No. 1 & 2 of 2017.

[18] Paragraph 15, Innoventive Industries Ltd. v ICICI Bank & Anr. Company Appeal (AT) (Insolvency) No. 1 & 2 of 2017.

[19] Indian Constitution, Article 245

[20] Paragraph 13, Innoventive Industries Ltd. v ICICI Bank & Anr. Company Appeal (AT) (Insolvency) No. 1 & 2 of 2017.

[21] Paragraph 16, Innoventive Industries Ltd. v ICICI Bank & Anr. Company Appeal (AT) (Insolvency) No. 1 & 2 of 2017