The Insolvency and Bankruptcy Code, 2016: The advent of an era of ambiguity?

The insolvency laws in India have quite the complicated history to say the least. However, with the advent of the code, there have been unprecedented changes in the landscape of insolvency laws in India, most importantly the inclusion of the concept of 'corporate insolvency resolution process' and this is exactly what this article intends to shed some light on.

Departure from the laws existing prior to the code

The Companies Act, 1913 spoke about winding up in a voluntary manner, by court and under the supervision of a court.
 
In the 1956 Act, the provision relating to 'by court' was substituted for the phrase 'by the Tribunal' and the phrase 'under the supervision of the court' was omitted altogether, by the 2002 Amendment Act.  

The Companies Act, 2013 contained similar provisions relating to the process of winding up, which were never notified in their original form since the Insolvency and Bankruptcy Code, 2016 saw the day of light on 28th May, 2016 , only after which the relevant provisions of the Companies Act  were notified on 15th December, 2016.

A new term known as 'corporate insolvency resolution process came into existence which brought about a dramatic shift in the insolvency regime.

This departure, although initially unwelcomed by the industry and professionals alike, soon evolved into a tool to expeditiously deal with situations dealing with insolvency.

The term insolvency in its legal sense means, "such a relative condition of a man's assets and liabilities that the former, if all made immediately available, would not be sufficient to discharge the latter."  Therefore the Corporate Insolvency Resolution Proceeding is targeted only towards corporate debtors i.e. companies who are unable to pay their debts. It is to be noted at this juncture that this approach of dealing with corporate debtors is born out of the old Companies Act, 1956 and Companies Act, 2013 where inability to pay one's debts resulted in birth of a cause of action for involuntary winding up of the company.

With the advent of this new approach, the focus was somewhat shifted to balance the needs of both the company as well as the 'operational creditor' (a new term crafted to represent the erstwhile secured creditors, employees and unsecured creditors all within the fold of a single term), rather than bluntly liquidating and distributing the remains of a debt-ridden company among its creditors in order of priority. This new approach sought to curate the debt itself in such a way so as to minimize the risk of all the parties involved in the situation.

As with any change, this new approach was not without its own set of imperfections capable of being translated into legal ambiguities, each of which became a challenge in itself to resolve. The most notable one of these that was dealt with in the recent past was consolidating the procedural solidarity of the corporate insolvency resolution process.

The next part of this article deals with the alleged imperfections along with the authors' own perspective on the repercussions of the recent Mobilox Judgement which is hailed by many as the pristine standard that the new Insolvency Regime of India has set.

The Mobilox judgment and its subsequent repercussions

The Mobilox judgment helped establish the definition of 'dispute' and clear all ambiguities related to it. Before analysing the veracity of that notion, it is important to get a clear overview of the corporate insolvency resolution process.
 
The Corporate Insolvency Resolution Process

On the occurrence of a default, the operational creditor may serve notice of such default on the corporate debtor.

The corporate debtor has ten days to bring the existence of a dispute between it and the operational creditor to the notice of the latter, in order to prevent a corporate insolvency resolution process being initiated before an Adjudicating Authority.

After expiry of the ten days if no such notice of dispute has been received by the operational creditor, the process may be initiated by either the operational creditor or a corporate debtor in the form of an application to the National Company Law Tribunal (NCLT).

The Application should be accompanied by record of default along with name of the proposed resolution officer.

The Adjudicating Authority (NCLT) shall have fourteen days to ascertain existence of such default from the records of the company.

If existence of such debt is affirmed, the Adjudicating authority shall refer the matter to corporate insolvency resolution process which in turn, has to be resolved within one hundred and eighty days from the date of admission of such application.

Any order of NCLT on insolvency resolution process can be challenged to the NCLAT within 30 days and any orders of the NCLAT can be challenged before the Supreme Court within 45 days, if a substantial question of law is involved.

The Judgement

The Mobilox judgment specifically focusses on the second step of the process enumerated above. The crux of the judgement lies on a two-fold ambiguity focussed around the jurisdiction of the NCLT:

Firstly, whether the dispute in question has to be genuine or not,

And Secondly, whether the Adjudicating Authority has the power to look into such genuineness or not.

If, briefly summarised, the entire affair went something like this:

NCLT rejected the application on the ground of existence of a dispute and its notice being received by the operational creditor. NCLAT reversed the decision on the ground that the suit was not genuine. The Statutory Appeal preferred by the Petitioners warranted the judgment concerned whereas the Supreme Court quashed the judgment of the NCLAT.  

A brief reading of the Mobilox judgment shows that it attempts to ascertain the legislative intent behind the particular piece of legislation, be it a perusal of the UN Commission on the International Trade laws or the comparative analysis with respect to Australian and UK Insolvency Laws. The question that had been repeatedly echoed was whether mere existence of the dispute was enough to satisfy the statutory requirement  of the Code.

Birth of ambiguities

The Apex Court while looking at the legislative intent in order to pronounce a comprehensive answer to the same decided to look at the Insolvency and Bankruptcy Bill, 2015 where the definition of dispute included the usage of the term 'bona-fide'.

Thus the omission of the same in the final Act was interpreted by the Supreme Court to be clear indication of the legislature's intent to make the final definition an inclusive one rather than an exhaustive one i.e. to include dispute in any form rather than only disputes that exhibited merit.

The move, although sound both logically and from a judicial point of view, perhaps involved a grave oversight from the industry perspective, since, the Apex Court sought to terminate the enquiry at this point. Perhaps, stretching the enquiry a bit further to the extent of analysing why insolvency from being a mere ingredient of the liquidation process suddenly became part of a separate statutory proceeding with its own legal consequences, would have ended up in different results, or perhaps, it might just have resulted in a different standard being adopted while analysing the same question in future.

The fact remains that such a move of entirely separating insolvency from liquidation is certainly more important than a mere omission of the term 'bona-fide' and may have been a better indicator of the legislative intent thereby enabling a more accurate interpretation of the statute; especially since everything from the separate chapterisation to the rebranding of definitions exhibits the specificity and precision of well-planned stroke; much like surgery.

If precedents are anything to go by, the purpose of such amendments are to make a particular process streamlined and expedient like:

Criminal Law (Amendment) Act, 2013: The consolidation of the jurisdiction of the NCLT from erstwhile forums such as the Company Law Board, High Court, DRT etc.

This contention was affirmed in the Mobilox Judgment whereas the Apex Court held the timeline provisions to be mandatory and not directive  thereby establishing that this piece of legislation is indeed to streamline the process of restructuring of the insolvent and bankrupt entities in a most expedient manner.

Thus one cannot ignore the nagging question; how does making each and every frivolous claim of existence of a dispute, a ground for rejection of an insolvency application contribute to that expediency? Though the way the Apex Court has chosen to answer the first question exudes a most brilliant attempt to bring some clarity into the field, perhaps it still contains some aftertaste of the original ambiguity.

The ambiguities continue...

The Second ambiguity, because of its technical nature required a comparative analysis of the procedures followed in other Common Law jurisdictions as well. The crux of the pronouncement with respect to this was briefly summarised in the form a guideline to determine the existence of a dispute, which the Court was able to reach after careful perusal of the relevant laws and precedents of Australia and the United Kingdom.

The guideline  said that in order to determine whether to accept or reject an application on the ground that there is a dispute already in existence, the Adjudicating Authority cannot go into the merit but must merely see whether such a dispute is actually present or not. The dispute cannot be a figment of one's imagination which one has concocted just to delay the proceedings concerned.

Further, the Adjudicating Authority can only in certain instances examine the veracity of the dispute. These instances include "patently feeble arguments"  or "assertions unsupported by facts"  and does not require a stricter test of "plausibility of the defence's success"  i.e. instances where the existence of the dispute may be prima facie struck down.

Conclusion

It may be noted that this line of pronouncement only furthers the authors' earlier contention, that there exists an aftertaste of ambiguities since, the extent of intervention suggested by the Supreme Court seems to be in contradiction with its earlier stance of an inclusive definition whereby all disputes were part of the statutory mandate.

If we are to draw a harmonious conclusion from this pronouncement, then it would seem that the ratio actually goes on to dictate the degree to which the bona-fide nature of the dispute that may or may not be looked into by the Adjudicating Authority.

Such a move by the Apex Court is clearly a unique one in the history of Common Law pronouncements, but whether it actually upholds the spirit of the Legislation itself? That remains a question to be answered in course of time.

Disclaimer:
The article has been authored by Monish Panda, who is the founder of Monish Panda & Associates, and Amit Kumar Bhattacharyya, who is an advocate at Monish Panda & Associates. The views expressed by the authors in this article are their personal views and do not constitute as professional legal advice.