Introduction to Insolvency and Bankruptcy in India

Insolvency and bankruptcy have become central issues in India’s corporate and economic landscape, particularly over the last two decades. Historically, India lacked a consolidated mechanism to address insolvency matters, leading to fragmented processes that were inefficient and often subject to delays. The enactment of the Insolvency and Bankruptcy Code (IBC), 2016, fundamentally changed how insolvency and bankruptcy are approached, with the goal of maximizing asset value, offering debt relief, and restructuring businesses in distress. This Code unified the law and processes surrounding insolvency and bankruptcy, creating an efficient, time-bound framework. At the heart of the IBC’s functioning is the Insolvency and Bankruptcy Board of India (IBBI), established as a regulatory body responsible for overseeing, guiding, and enhancing the efficacy of insolvency processes.

This article delves into the multifaceted role of the IBBI in regulating insolvency in India, the legal framework governing it, the distinct procedures within insolvency law, and a selection of landmark judgments that have shaped this field. Additionally, the article examines current challenges and future developments likely to impact the insolvency landscape in India.

Formation and Core Objectives of the Insolvency and Bankruptcy Board of India (IBBI)

The Insolvency and Bankruptcy Board of India (IBBI) was established under the Insolvency and Bankruptcy Code in October 2016, mandated with oversight and regulatory functions that are instrumental in the effective administration of the Code. The IBBI’s responsibilities are extensive and include framing regulations, licensing and monitoring insolvency professionals (IPs), accrediting insolvency professional agencies (IPAs), and ensuring compliance with high standards of conduct and ethics across the insolvency framework. 

The primary objective of the IBBI is to oversee and regulate the process of insolvency and bankruptcy in India to ensure it is conducted transparently, professionally, and efficiently. The IBBI’s presence provides a structured approach to insolvency proceedings, protecting creditors’ interests while providing a fair avenue for debtors to seek relief or restructuring. Its regulatory powers encompass every aspect of insolvency, from the corporate insolvency resolution process (CIRP) and individual bankruptcy proceedings to liquidation and cross-border insolvency considerations.

Legal Framework and Core Provisions Governing Insolvency in India

The IBC, 2016, acts as the central legal framework governing insolvency and bankruptcy in India, replacing several fragmented laws. Prior to the IBC, India followed multiple laws like the Sick Industrial Companies Act, 1985, the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, and the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI). These laws operated independently, resulting in lengthy resolution processes and conflicting orders. 

The IBC brought about a unified law that focuses on the timely resolution of insolvency cases, encouraging better recovery rates and creating a more predictable debt recovery process. Under Section 196 of the IBC, the IBBI is vested with the authority to regulate, update, and enforce rules governing various insolvency procedures, including the CIRP, liquidation, voluntary liquidation, and the fast-track resolution process. Moreover, the IBC provides the IBBI with powers to develop regulations for insolvency professional standards, including conduct, ethics, and procedural compliance.

The Corporate Insolvency Resolution Process (CIRP)

The CIRP is one of the cornerstone mechanisms introduced by the IBC for resolving corporate insolvency. It is intended as a fast-track solution that prioritizes the restructuring and revival of financially distressed companies. The process begins with an application from either a creditor or the debtor itself, which is filed before the National Company Law Tribunal (NCLT). If the NCLT finds merit in the application, it admits the case, and a CIRP is initiated.

The CIRP is a time-bound process with strict deadlines: it is to be completed within 180 days, with a one-time extension of 90 days permitted in certain cases. This time-bound nature of the process is crucial as it encourages quicker resolution and better asset recovery. The process involves the formation of the committee of creditors (CoC), which plays a critical role in evaluating and approving the resolution plan proposed by the resolution professional (RP). The CoC’s decisions require at least a 66% majority vote, underscoring the collaborative approach taken within the framework of the IBC.

The IBBI has issued multiple regulations to guide the CIRP, including the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016. These regulations set out the procedural aspects of the CIRP, such as deadlines for the submission of claims, the conduct of CoC meetings, and the duties of RPs. In the event that no resolution plan is approved by the CoC, the company moves toward liquidation under the direction of the NCLT.

Landmark Judgments Shaping CIRP and IBBI’s Regulatory Framework

The CIRP has been shaped and refined through various judicial interpretations, which have clarified ambiguities and fortified the IBC framework. In Swiss Ribbons Pvt. Ltd. & Anr. v. Union of India & Ors. (2019), the Supreme Court upheld the constitutionality of the IBC and affirmed its objectives, including a time-bound resolution process. The judgment endorsed the IBBI’s regulatory role and recognized its efforts to create a structured insolvency environment that aligns with global standards.

Another landmark case is Essar Steel India Ltd. v. Satish Kumar Gupta (2019), in which the Supreme Court reinforced the decision-making power of the CoC and clarified that the commercial wisdom of the CoC would have primacy, with limited judicial intervention. This judgment had far-reaching implications for the CIRP, strengthening the role of creditors while emphasizing the IBBI’s regulatory role in maintaining professional standards within the resolution process.

Insolvency Professionals (IPs) and their Role in Insolvency Proceedings

Insolvency professionals (IPs) are licensed experts who play a central role in managing insolvency processes. They act as intermediaries, ensuring compliance with the IBC and overseeing corporate operations during CIRP. The IBBI licenses and regulates these professionals, enforcing standards that promote independence, ethical conduct, and competence.

IPs are responsible for taking control of the debtor’s assets, coordinating with creditors, and developing viable resolution plans. They must operate impartially, upholding the interests of all parties, including debtors, creditors, and other stakeholders. The IBBI’s stringent guidelines and periodic updates ensure that IPs adhere to the highest professional standards. Misconduct or breaches by IPs can lead to disciplinary actions by the IBBI, as seen in M/S Alok Infrastructure Ltd. v. Registrar, IBBI, where disciplinary action was upheld for IPs failing to follow due procedures.

The Role of Insolvency Professional Agencies (IPAs) and Information Utilities (IUs)

Insolvency Professional Agencies (IPAs) and Information Utilities (IUs) also play crucial roles within the IBC framework. IPAs, registered with the IBBI, are responsible for the certification and training of IPs, ensuring that IPs remain competent and act within the bounds of the Code. The major IPAs in India include the Indian Institute of Insolvency Professionals of ICAI, ICSI Institute of Insolvency Professionals, and the Insolvency Professional Agency of the Institute of Cost Accountants of India.

Information Utilities (IUs), on the other hand, are entities responsible for maintaining and authenticating financial information. These utilities provide a single-source reference for debt and default data, ensuring that creditors and other stakeholders can access reliable and verified information. The National E-Governance Services Ltd. (NeSL) is currently the primary IU in India. IUs improve transparency, facilitate data sharing, and reduce ambiguity in insolvency proceedings.

In State Bank of India v. Metenere Ltd. (2020), the National Company Law Appellate Tribunal (NCLAT) ruled that information from an IU is valuable but not mandatory for establishing insolvency. This judgment underscored the role of IUs while granting flexibility to creditors who may use alternative documentation to establish defaults.

Cross-Border Insolvency and the UNCITRAL Model Law

The IBC is still evolving, especially with respect to cross-border insolvency. Although India has yet to adopt a comprehensive cross-border insolvency framework, the IBBI is actively exploring mechanisms that align with international standards. The IBBI has recommended the adoption of the UNCITRAL Model Law on Cross-Border Insolvency, which would allow India to collaborate with other jurisdictions in handling cases involving multinational assets or foreign creditors.

One of the significant cases illustrating the relevance of cross-border insolvency principles is Jet Airways (India) Ltd. v. State Bank of India (2020), where the NCLT allowed a parallel insolvency process to take place in India and the Netherlands. This development represents an early step toward incorporating cross-border principles into Indian law, with the IBBI expected to play a leading role in formulating relevant regulations once legislative changes are introduced.

The Liquidation Process and Voluntary Liquidation

Liquidation in the IBC framework occurs when an insolvent company cannot be revived through CIRP. The liquidation process, supervised by an IP acting as a liquidator, aims to distribute the debtor’s assets to creditors according to a legally mandated hierarchy. Liquidation proceedings are governed by the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016. In a liquidation scenario, secured creditors are given priority, followed by unsecured creditors, employees, and shareholders.

Voluntary liquidation is also covered under the IBC, allowing solvent entities to wind up their affairs without going through the CIRP. This is a significant provision for companies that wish to exit the market without distress but require a legal process to settle their obligations.

The ArcelorMittal India Private Limited v. Satish Kumar Gupta case highlighted the CoC’s authority to decide on liquidation, underscoring the importance of creditor autonomy within the IBC framework. The IBBI’s regulatory role in liquidation ensures that asset sales and distributions are conducted transparently and fairly.

Insolvency Resolution for Individuals and Partnerships: Key Regulations and Judicial Interpretation

The insolvency resolution process for individuals and partnerships, although less common, is another critical component of the IBC framework. Part III of the IBC provides a mechanism for individual debtors and partnerships to seek relief, offering two distinct options: a fresh start process for low-income debtors and a structured repayment plan. 

In M/S Laxmi Pat Surana v. Union Bank of India (2021), the Supreme Court clarified the liability of personal guarantors, allowing creditors to initiate insolvency proceedings against personal guarantors of corporate debt. This case reinforced the IBBI’s authority over personal bankruptcy cases and clarified the role of personal guarantors, further strengthening India’s insolvency ecosystem.

Challenges and Future Developments in Insolvency Regulation

Despite significant strides, India’s insolvency regime faces several challenges. The CIRP has encountered procedural delays, especially in complex cases, and the time-bound resolutions envisioned by the IBC are often extended due to appeals and procedural complexities. Additionally, the lack of a full-fledged cross-border insolvency law has constrained India’s ability to handle globalized insolvency cases effectively.

The IBBI has responded to these challenges with proactive reforms. Recent amendments, such as the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019, introduced provisions to streamline processes, minimize delays, and protect the rights of resolution applicants. The IBBI is also working on regulations for a pre-packaged insolvency resolution process (PIRP), particularly for micro, small, and medium enterprises (MSMEs), offering a faster, more flexible alternative to the CIRP.

Conclusion: The Pivotal Role of IBBI in India’s Insolvency Landscape

The establishment of the Insolvency and Bankruptcy Board of India (IBBI) has been a transformative step in India’s journey toward a robust insolvency framework. By standardizing processes, establishing professional guidelines, and ensuring regulatory compliance, the IBBI has facilitated a transparent and fair approach to debt resolution. Its role in supervising insolvency professionals, overseeing IPAs and IUs, and adapting regulations to meet emerging challenges is indispensable to the effective functioning of the IBC.

India’s insolvency landscape continues to evolve, with new developments in cross-border insolvency, personal bankruptcy, and MSME restructuring on the horizon. The IBBI’s regulatory capacity, adaptability, and commitment to upholding ethical standards are expected to play a crucial role in advancing India’s economic and legal framework in the years to come.

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Introduction

The realm of insolvency and bankruptcy law in India has witnessed significant developments since the introduction of the Insolvency and Bankruptcy Code (IBC) in 2016. However, the interplay between the IBC, the Limitation Act of 1963, and other recovery mechanisms like the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002 has led to complex legal scenarios. This article delves into the specific arguments presented in an affidavit in reply to an IBC application, examining the intricate legal issues surrounding limitation periods, the applicability of Section 18 of the Limitation Act, and the precedence of SARFAESI proceedings over IBC applications.

The Bar of Limitation: A Fundamental Challenge

The cornerstone of the respondent’s defense in the affidavit is the assertion that the application is barred by limitation. This argument is rooted in the fundamental principle of law that legal actions must be initiated within prescribed time limits to ensure justice and prevent the resurrection of stale claims. In the context of IBC applications, the relevant limitation period is three years from the date of default, as per Article 137 of the Limitation Act, 1963. The affidavit meticulously constructs this argument by highlighting that the application was filed on 17.02.2024, pertaining to a default allegedly occurring on 31.03.2016. This timeline presents a delay of nearly seven years, more than double the prescribed limitation period. The respondent emphasizes that this is not a mere technical lapse but a substantial deviation that undermines the very purpose of limitation laws. 

To buttress this argument, the affidavit invokes Section 238-A of the IBC, which explicitly makes the Limitation Act applicable to proceedings before the National Company Law Tribunal (NCLT). This provision, introduced in 2018, was a legislative response to the initial uncertainty regarding the applicability of limitation periods to IBC proceedings. The respondent’s argument finds strong support in a series of Supreme Court judgments that have consistently upheld the applicability of the Limitation Act to IBC proceedings. The affidavit cites several landmark cases, including B.K. Educational Services Private Limited v. Parag Gupta and Associates (2019), which unequivocally held that the Limitation Act applies to applications filed under Sections 7 and 9 of the IBC from its inception. Further reinforcing this stance, the affidavit references Vashdeo R. Bhojwani v. Abhyudaya Co-operative Bank Ltd. & Anr. (2019), where the Supreme Court explicitly barred an application filed beyond three years from the date of declaration of the loan account as a Non-Performing Asset (NPA). Similarly, in Gaurav Hargovindbhai Dave v. Asset Reconstruction Company (India) Ltd. & Anr. (2019), the apex court reiterated that Article 137 of the Limitation Act applies to IBC applications from the Code’s inception. The respondent draws a parallel between the present case and Babulal Vardharji Gurjar v. Veer Gurjar Aluminium Industries Pvt. Ltd. (2019), where the Supreme Court dismissed an application filed in March 2018 for a default occurring in July 2011. This precedent is particularly relevant as it deals with a similar time gap between the alleged default and the filing of the application.

By presenting this comprehensive array of legal precedents, the respondent aims to establish that the consistent position of the Supreme Court leaves no room for entertaining applications filed beyond the limitation period. This argument is not merely a technical objection but goes to the root of the matter, questioning the very maintainability of the IBC application.

Inapplicability of Section 18 of the Limitation Act: Addressing Potential Counter-Arguments

Anticipating potential counter-arguments, the affidavit proactively addresses the applicability of Section 18 of the Limitation Act, which deals with the effect of acknowledgment in writing on the extension of the limitation period. This section is often invoked by creditors in an attempt to revive time-barred debts. The respondent’s argument against the applicability of Section 18 is twofold. Firstly, it contends that even if the principles of acknowledgment are considered applicable to IBC proceedings, they do not benefit the applicant in the present case. To support this, the affidavit cites the Supreme Court’s observations in Babulal Vardharji Gurjar, where the court emphasized that for Section 18 to apply, the acknowledgment must be explicitly mentioned in the application.

The respondent points out that in the present case, the application only mentions 31.03.2016 as the date of default, without any reference to subsequent acknowledgments. This absence of pleading regarding acknowledgment is crucial, as the Supreme Court has held that when a party seeks the application of any provision for extension of the limitation period, the relevant facts must be explicitly pleaded and supported by evidence. Furthermore, the affidavit highlights that even in Part-V of the application, where the applicant is required to state particulars of the financial debt with supporting documents, no mention was made of any acknowledgment or alternative date of default. This omission, according to the respondent, is fatal to any attempt to invoke Section 18 of the Limitation Act. By addressing this potential counter-argument preemptively, the respondent aims to close all avenues for the applicant to circumvent the bar of limitation. This approach demonstrates a thorough understanding of the legal landscape surrounding limitation in IBC proceedings and anticipates the strategies typically employed by creditors in such cases.

SARFAESI Proceedings as a Bar to IBC Application: The Conflict of Recovery Mechanisms

A significant portion of the affidavit is dedicated to arguing that the ongoing proceedings under the SARFAESI Act preclude the admission of the IBC application. This argument touches upon a critical issue in Indian insolvency law – the interplay between different debt recovery mechanisms and their hierarchy in application. The respondent meticulously outlines the progress of SARFAESI proceedings, including the issuance of a demand notice under Section 13(2), taking symbolic possession of properties, filing an application under Section 14 for physical possession, obtaining an order from the Additional Chief Judicial Magistrate, and finally taking physical possession of commercially secured properties. This detailed timeline serves to demonstrate that the SARFAESI proceedings are at an advanced stage. To support the argument that these advanced SARFAESI proceedings should take precedence over the IBC application, the affidavit cites several key judicial precedents. It references the Supreme Court’s observations in Swiss Ribbons vs. Union of India, emphasizing that the primary focus of the IBC is to ensure revival and continuation of the corporate debtor, not merely to act as a recovery mechanism for creditors.

The respondent further strengthens this argument by citing Anand Rao Korada v. Varsha Fabrics (P) Ltd. and Ors. (2020), where the Supreme Court elucidated the object of the SARFAESI Act as enabling banks and financial institutions to realize long-term assets and manage liquidity issues. This citation serves to highlight the specialized nature of the SARFAESI Act in dealing with secured creditors’ rights. A crucial precedent cited in the affidavit is the NCLAT’s decision in Edelweiss Asset Reconstruction Company Limited v. Abhijit Guhathakurta & Ors. (2019), which held that it would be inappropriate to interfere with SARFAESI proceedings at an advanced stage by admitting an IBC application, unless there are compelling reasons to do so. The respondent argues that no such compelling reasons exist in the present case.  The affidavit also refers to Innoventive Industries Ltd. v. ICICI Bank and Anr. (2018), where the Supreme Court emphasized that the IBC is not merely a recovery legislation for creditors but a beneficial legislation aimed at reviving the corporate debtor. This citation is strategically used to argue that the applicant’s actions appear to be an attempt to misuse the IBC for purposes other than genuine insolvency resolution. To further bolster this argument, the affidavit cites additional NCLAT decisions, such as Anil Goel v. Vivek Goel & Ors. (2020) and Axis Bank Limited v. Terre Armee Geo Systems Private Limited & Anr. (2021), which consistently held that where SARFAESI proceedings are at an advanced stage, they should be allowed to continue unless there are compelling reasons to the contrary.

The respondent’s argument regarding the precedence of SARFAESI proceedings over the IBC application is not merely based on the chronology of events but is deeply rooted in the principle of specialized legislation taking precedence over general law. By highlighting the advanced stage of SARFAESI proceedings and the specialized nature of the SARFAESI Act in dealing with secured creditors’ rights, the respondent attempts to establish that admitting the IBC application would not only interfere with ongoing recovery processes but also potentially dilute the rights of secured creditors.

Legal Precedents Supporting Dismissal: Reinforcing the Core Arguments

The final segment of the affidavit focuses on consolidating the arguments by citing additional legal precedents that support the dismissal of the IBC application. This approach serves to reinforce the respondent’s position from multiple legal angles. A key precedent cited in this section is Mobilox Innovations Private Limited v. Kirusa Software Private Limited (2018), where the Supreme Court emphasized the need to prevent abuse of the IBC process. The court’s observation that the IBC is a beneficial legislation aimed at putting the corporate debtor back on its feet, rather than being a mere recovery mechanism, is particularly relevant. The respondent uses this precedent to argue that the present application, viewed in light of the ongoing SARFAESI proceedings, appears to be an attempt to misuse the IBC process.

The affidavit also references Swiss Ribbons Pvt. Ltd. & Anr. v. Union of India & Ors. (2019), where the Supreme Court stressed the importance of procedural compliance in IBC proceedings. This citation serves a dual purpose – it underscores the significance of adhering to limitation periods and other procedural requirements, while also highlighting that these requirements are not mere formalities but serve important purposes in the insolvency resolution process. By presenting these additional precedents, the respondent aims to create a comprehensive legal framework supporting the dismissal of the application. The argument is structured to show that not only is the application barred by the limitation period, but it is also precluded by ongoing SARFAESI proceedings. This reflects the complex relationship between the Limitation Act, the SARFAESI Act, and the IBC, as admitting the application would go against the established principles of preventing abuse of the IBC process and ensuring procedural compliance.

Conclusion: The Interplay of Limitation Periods, SARFAESI Act, and IBC in the IBC Application

The affidavit in reply presents a robust and multifaceted legal challenge to the IBC application. By addressing the issues of limitation, the inapplicability of Section 18 of the Limitation Act, the precedence of SARFAESI proceedings, and supporting legal precedents, the respondent constructs a comprehensive argument for the dismissal of the application. The core strength of the respondent’s case lies in its meticulous citation of relevant and recent Supreme Court and NCLAT judgments. These citations are not merely perfunctory references but are carefully selected to address specific aspects of the case at hand. The affidavit demonstrates a nuanced understanding of the evolving jurisprudence in insolvency law, particularly the interplay between the IBC, the Limitation Act, and the SARFAESI Act.

The respondent’s arguments go beyond merely stating legal positions; they attempt to align with the broader objectives of the IBC as interpreted by the courts. By emphasizing that the IBC is not meant to be a mere recovery tool and highlighting the advanced stage of SARFAESI proceedings, the affidavit presents a case that admitting the IBC application would be contrary to the spirit and intent of insolvency laws in India. Moreover, the preemptive addressing of potential counter-arguments, particularly regarding Section 18 of the Limitation Act, showcases a strategic approach to litigation. This foresight in legal argumentation aims to close off potential avenues for the applicant to circumvent the primary challenges raised in the affidavit. In conclusion, the affidavit presents a compelling case for the dismissal of the IBC application. It argues that the application is not only time-barred but also an attempt to misuse the IBC process in the face of ongoing and advanced SARFAESI proceedings. By interweaving factual details with a plethora of legal precedents, the respondent seeks to establish that admitting this application would be contrary to established legal principles and the objectives of the insolvency resolution framework in India. The arguments presented in this affidavit reflect the complex and evolving nature of insolvency law in India. They highlight the ongoing challenges in harmonizing different debt recovery mechanisms and underscore the need for clarity in the application of limitation laws to IBC proceedings, particularly regarding the interplay of limitation periods, the SARFAESI Act, and the IBC. As such, this case, and others like it, continue to shape the landscape of insolvency and bankruptcy law in India, influencing both legal practice and policy considerations in this crucial area of commercial law.

Download Booklet on Limitation Act in India – Legal Deadlines & Case Laws

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Introduction

The relationship between insolvency law and tax enforcement has emerged as one of the most contentious areas in India’s corporate legal framework. The National Company Law Tribunal (NCLT) Kolkata Bench’s decision in Jayam Vyapaar Pvt. Ltd. stands as a watershed moment in addressing the fraudulent use of insolvency proceedings to circumvent legitimate tax obligations. [1] This judgment, delivered by Judicial Member Ms. Bidisha Banerjee and Technical Member Mr. Arvind Devanathan, represents the judiciary’s firm stance against companies attempting to weaponize the Insolvency and Bankruptcy Code, 2016 (IBC) as a shield against tax recovery efforts.

The case illuminates several critical issues at the intersection of corporate insolvency and tax compliance. It demonstrates how companies, facing substantial tax liabilities, may attempt to manipulate legal frameworks designed for genuine financial distress. The tribunal’s decision serves as both a deterrent and a guide, clarifying the boundaries within which insolvency protection operates and establishing that such protection cannot be extended to entities acting in bad faith.

What makes this case particularly significant is its timing and context. Filed eight years after the initial tax assessment and over four years after appellate rejection, the insolvency petition raised immediate red flags about the company’s true motivations. The tribunal’s analysis went beyond surface-level examination, delving into the pattern of conduct that suggested strategic manipulation rather than genuine financial distress. This approach sets an important precedent for how similar cases should be evaluated in the future.

Background and Factual Matrix

Corporate Structure and Business Operations

Jayam Vyapaar Pvt. Ltd. was incorporated on August 8, 1994, as a private limited company under the Companies Act, bearing Corporate Identification Number U51219WB1994PTC064381. [2] The company’s registered office was located at 4, Dr. Rajendra Prasad Sarani, 3rd Floor, Room No. 303, Kolkata, West Bengal. Its primary business activities centered on wholesale trading of agricultural raw materials, live animals, food, beverages, and tobacco products. This business profile placed the company in a sector requiring substantial compliance with various regulatory frameworks, including taxation laws.

The company operated in a business domain that typically involves high-volume transactions with relatively thin profit margins. Such businesses require meticulous financial record-keeping and tax compliance. However, the subsequent events would reveal significant discrepancies in the company’s tax affairs, suggesting either poor financial management or deliberate tax evasion strategies.

Tax Assessment and Appellate Proceedings

The controversy originated during the assessment year 2012-13 when the Income Tax Officer, Ward 1(2) Kolkata, conducted a detailed scrutiny of Jayam Vyapaar’s financial statements and tax returns. This examination was not a routine assessment but appeared to involve deeper investigation into the company’s financial transactions. On March 25, 2015, following this thorough examination, the tax authorities issued an assessment order that would prove pivotal to all subsequent proceedings.

The assessment order imposed a substantial tax demand of Rs. 2,86,44,540 (approximately Rs. 2.86 crores) against Jayam Vyapaar Pvt. Ltd. This amount included not only the principal tax liability but also applicable interest and penalties. The magnitude of this demand indicated serious concerns about the company’s tax compliance. Such substantial assessments typically arise from either significant underreporting of income, claiming of illegitimate deductions, or involvement in transactions designed to evade tax liabilities.

Exercising its statutory right to challenge the assessment, the company filed an appeal before the Commissioner of Income Tax (Appeals) Kolkata. This appellate process provided the company with an opportunity to present its case and challenge the findings of the assessing officer. However, on December 18, 2018, the appellate authority comprehensively rejected the company’s contentions and upheld the original tax demand in its entirety.

More significantly, the appellate authority made specific findings that fundamentally characterized the nature of the tax evasion. The authority determined that the income had escaped taxation due to money laundering activities. [3] This finding elevated the matter beyond a simple tax dispute into the realm of financial misconduct and deliberate concealment of income through illicit financial transactions. Such findings carry serious implications not only for tax liability but also for potential criminal proceedings and director liability under various statutory provisions.

The money laundering finding suggested a sophisticated scheme to disguise income through multiple layers of transactions, possibly involving shell companies or benami accounts. This aspect of the case would later become crucial in the tribunal’s assessment of the company’s bona fides when it sought insolvency protection.

Strategic Timing of Insolvency Petition

In what the tribunal would later characterize as a calculated and malicious move, Jayam Vyapaar Pvt. Ltd. filed a petition under Section 10 of the IBC on March 25, 2023. The timing of this application was particularly suspicious for several reasons. First, it came exactly eight years after the original tax assessment order, suggesting that the filing date was deliberately chosen to coincide with this anniversary. More importantly, it came over four years after the appellate authority had comprehensively rejected the company’s appeal and upheld the tax demand with findings of money laundering.

During these intervening years, the Income Tax Department would have initiated various recovery proceedings to collect the outstanding dues. These proceedings typically include attachment of bank accounts, seizure of assets, and in cases involving director liability, personal recovery proceedings against directors. The filing of the insolvency petition at this juncture appeared designed to create a legal impediment to these ongoing recovery efforts.

Section 10 of the IBC provides a mechanism for corporate debtors to voluntarily initiate insolvency proceedings against themselves. The provision is intended to enable financially distressed companies to seek structured resolution before their situation becomes irreversible. However, the legislative intent behind this self-initiated insolvency process presumes good faith and genuine financial distress. It was never designed to serve as an escape mechanism for companies seeking to avoid legitimate statutory obligations.

The tribunal noted that during the eight-year period between the tax assessment and the insolvency filing, the company had not demonstrated any genuine inability to conduct its business operations. There was no evidence of operational shutdown, inability to pay trade creditors, or other typical markers of financial distress that would justify insolvency proceedings. The application appeared to be motivated solely by the desire to frustrate tax recovery efforts rather than any genuine insolvency concerns.

Legal Framework and Statutory Provisions

Section 10 of the Insolvency and Bankruptcy Code

Section 10 of the IBC establishes the framework for corporate debtors to voluntarily initiate insolvency proceedings. The provision states: “Where a corporate debtor has committed a default, a corporate applicant thereof may file an application for initiating corporate insolvency resolution process with the Adjudicating Authority.” [4] The section mandates that the corporate applicant furnish detailed information including books of account, financial statements, and information regarding the proposed interim resolution professional.

The legislative history of Section 10 reveals important safeguards introduced through amendments. The 2018 amendment introduced a crucial requirement for approval from shareholders or partners before filing such applications. This amendment was specifically designed to prevent management from unilaterally initiating insolvency proceedings without proper corporate authorization. The amendment recognized that insolvency proceedings carry significant consequences for all stakeholders, including shareholders, creditors, and employees, and therefore should not be subject to management’s unilateral decision.

The intent behind Section 10 is to provide a lifeline to companies facing genuine financial distress, enabling them to seek structured resolution through the insolvency framework. It recognizes that early intervention, when a company first faces default, can often lead to better outcomes than waiting until the situation becomes irreversible. However, this provision presumes good faith on the part of the applicant. It is not intended to serve as a tactical tool for companies seeking to avoid legitimate financial obligations, particularly those arising from statutory compliance requirements such as tax payments.

The provision creates a temporary moratorium on recovery proceedings once insolvency is initiated, which can provide breathing space for genuine restructuring efforts. However, this moratorium protection can be misused by companies seeking to delay or avoid payment of legitimate debts. The Jayam Vyapaar case illustrates precisely this type of misuse, where the moratorium was sought not for genuine restructuring but to obstruct tax recovery.

Section 65: Penalty for Fraudulent or Malicious Initiation

Section 65 of the IBC serves as the primary deterrent against fraudulent use of insolvency proceedings. The provision states: “If any person initiates the insolvency resolution process or liquidation proceedings fraudulently or with malicious intent for any purpose other than for the resolution of insolvency, or liquidation, as the case may be, the Adjudicating Authority may impose upon such person a penalty which shall not be less than one lakh rupees, but may extend to one crore rupees.” [5]

This provision operates on the fundamental principle that insolvency law is designed for genuine resolution of financial distress and not as a tool for avoiding legitimate obligations. The terms “fraudulently” and “malicious intent” require careful judicial interpretation. “Fraudulent” typically implies deliberate deception or dishonesty in the initiation of proceedings, while “malicious intent” suggests proceedings initiated with the purpose of causing harm to creditors or other stakeholders rather than achieving genuine resolution.

Courts have consistently held that for Section 65 to be invoked, there must be clear evidence that insolvency proceedings were initiated with ulterior motives rather than for genuine resolution of insolvency. The burden of establishing fraudulent or malicious intent lies with the party making such allegations. However, once a prima facie case is established, the burden shifts to the applicant to demonstrate genuine intent.

The penalty range under Section 65—from Rs. 1 lakh to Rs. 1 crore—provides tribunals with flexibility to calibrate the punishment based on the severity of the misconduct. [6] Factors that may influence the quantum of penalty include the amount of debt sought to be evaded, the sophistication of the scheme, the harm caused to creditors, and whether the conduct involved professional advisors or was a standalone act of the company.

Section 179 of the Income Tax Act: Director Liability Framework

Section 179 of the Income Tax Act, 1961, creates a crucial mechanism for tax recovery from directors of private companies. The provision establishes that where tax due from a private company cannot be recovered, “every person who was a director of the private company at any time during the relevant previous year shall be jointly and severally liable for the payment of such tax unless he proves that the non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the company.” [7]

This provision serves multiple purposes in the tax enforcement framework. First, it prevents directors from simply allowing companies to become insolvent to avoid tax obligations. Second, it incentivizes directors to ensure proper tax compliance during their tenure. Third, it provides tax authorities with an alternative avenue for recovery when company assets prove insufficient.

The provision requires that recovery efforts against the company must first be exhausted before directors can be held personally liable. This sequencing ensures that director liability serves as a backup mechanism rather than the primary recovery tool. The provision also includes an important defense—directors can escape liability by proving that the non-recovery cannot be attributed to their gross neglect, misfeasance, or breach of duty. This defense recognizes that directors should not be held liable for tax obligations arising from circumstances beyond their control or actions taken before their appointment.

In the context of the Jayam Vyapaar case, the appellate authority’s finding of money laundering would make it extremely difficult for directors to establish the defense under Section 179. Money laundering by its very nature involves active participation and knowledge at the highest levels of management. Directors involved in or aware of money laundering activities would find it nearly impossible to prove absence of gross neglect or breach of duty.

Judicial Analysis and Tribunal Findings

Assessment of Fraudulent use of Insolvency Proceedings

The NCLT Kolkata Bench undertook a meticulous examination of the circumstances surrounding the filing of the insolvency petition. The tribunal’s analysis focused on identifying markers that distinguished genuine financial distress from strategic manipulation of the insolvency framework. Several factors collectively indicated fraudulent intent in this case.

First and foremost, the timing of the application raised immediate concerns. Filed exactly eight years after the tax assessment and well after the appellate process had concluded, the application appeared to be triggered not by any sudden financial crisis but by the intensification of tax recovery efforts. The tribunal observed that companies facing genuine insolvency typically file for protection when they first encounter financial difficulties, not years after obligations have been established and recovery proceedings initiated.

Second, the tribunal noted the complete absence of any evidence demonstrating genuine inability to meet financial obligations. The company had not shown that it was unable to pay trade creditors, that it lacked working capital, or that its business operations had become unviable. These are the typical indicators of genuine insolvency that would justify protection under the IBC. The sole “financial stress” appeared to be the tax demand, which the company was actively trying to avoid rather than resolve.

Third, the background of money laundering findings colored the tribunal’s entire assessment of the company’s bona fides. The appellate authority’s specific finding that income had escaped taxation due to money laundering indicated a pattern of deliberate non-compliance with tax obligations. This was not a case of inadvertent error or honest disagreement over tax interpretation; it involved sophisticated schemes to conceal income. Such conduct demonstrated that the company’s approach to statutory obligations was fundamentally opportunistic rather than compliant.

The tribunal also considered the behavior pattern following the tax assessment. Over the eight-year period, there was no evidence that the company had made any good faith efforts to resolve the tax dispute through legitimate channels. The company had not sought compromise settlements, proposed payment plans, or engaged in any conduct suggesting genuine intent to meet its obligations. Instead, it appeared to have simply waited until recovery pressure intensified and then sought the shield of insolvency protection.

Application of Section 65 and Penalty Imposition

Based on its comprehensive analysis, the tribunal concluded that the case fell squarely within the parameters of Section 65 of the IBC. The tribunal held that “the Applicant’s application is not for the resolution of its insolvency but rather is to scuttle the efforts of the Income tax department for recovery of its dues.” [1] This finding was crucial as it established that the primary motivation for the insolvency filing was not genuine financial distress but rather an attempt to frustrate legitimate tax recovery proceedings.

The tribunal emphasized an important jurisdictional principle in assessing the fraudulent use of insolvency proceedings: “NCLT is not a recovery Tribunal.” [1] This observation underscores the limited scope of the NCLT’s jurisdiction and the inappropriate nature of using insolvency proceedings as a substitute for proper tax dispute resolution mechanisms. The IBC framework is designed for resolution and restructuring of genuinely distressed companies, not as a forum for disputing or avoiding legitimate debts, particularly statutory obligations like taxes.

In support of its analysis, the tribunal relied on precedent established in Monotrone Leasing Private Limited vs. PM Cold Storage Private Limited. [8] This case had established important principles regarding the distinction between genuine insolvency and strategic default. The Monotrone Leasing precedent emphasized that the ability to pay debts and the willingness to pay debts are separate considerations that must be evaluated independently. A company may have resources but refuse to pay legitimate obligations—such conduct does not qualify for insolvency protection.

Having found fraudulent initiation, the tribunal proceeded to impose penalties under Section 65. The tribunal imposed a fine of Rs. 1,00,000 on Jayam Vyapaar Pvt. Ltd., representing the minimum penalty available under the provision. [3] The tribunal directed that this amount be deposited to the Prime Minister’s National Relief Fund (PMNRF) within ten days. While this represented the minimum quantum, the tribunal’s decision to impose any penalty at all sends a powerful message about the consequences of fraudulent use of insolvency proceedings.

The direction to deposit the penalty amount to the PMNRF rather than to the government exchequer reflects a thoughtful approach. It ensures that the punitive measure serves a broader public welfare purpose rather than simply augmenting government revenues. This approach also prevents any perception that penalties are being imposed primarily for revenue generation rather than as genuine deterrence.

Regulatory Framework and Compliance Mechanisms

IBC Regulations and Procedural Safeguards

The Insolvency and Bankruptcy Board of India (IBBI) has established detailed regulations governing the initiation and conduct of insolvency proceedings. The IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, prescribe specific procedural requirements for Section 10 applications. These requirements include mandatory disclosures about the company’s financial position, detailed explanations of the reasons for seeking insolvency protection, and comprehensive information about the proposed resolution strategy.

These regulations serve as the first line of defense against frivolous or malicious applications. They require applicants to provide sufficient documentation and explanation to enable adjudicating authorities to assess the genuineness of the application. However, as the Jayam Vyapaar case demonstrates, motivated applicants may still attempt to manipulate the system despite these safeguards. This necessitates vigilant judicial oversight at the admission stage itself.

The regulations also prescribe timelines and procedures that must be followed during the insolvency process. These procedural requirements are designed to ensure that the process moves efficiently toward resolution while maintaining fairness to all stakeholders. Any deviation from these prescribed procedures can result in dismissal of the application or other adverse consequences.

Interface with Tax Enforcement Mechanisms

The intersection of insolvency law with tax enforcement creates complex jurisdictional and procedural challenges. The Income Tax Act provides various mechanisms for recovery of tax dues, including attachment of assets, garnishment of bank accounts, appointment of tax recovery officers, and in extreme cases, prosecution for tax evasion. Each of these mechanisms operates under specific statutory frameworks with prescribed procedures and safeguards for taxpayers.

The initiation of insolvency proceedings can potentially interfere with these enforcement mechanisms by creating an automatic moratorium on recovery actions under Section 14 of the IBC. This moratorium prohibits creditors from taking any action to enforce their claims during the insolvency process. However, the law recognizes certain exceptions to this moratorium, particularly for government dues and certain categories of secured creditors.

The challenge lies in ensuring that genuine insolvency proceedings receive appropriate protection through the moratorium while preventing misuse of moratorium provisions to frustrate legitimate recovery efforts. Courts have grappled with this balance, developing jurisprudence that examines the underlying purpose and timing of insolvency applications to determine whether moratorium protection should be granted.

In cases like Jayam Vyapaar, where the insolvency application appears motivated primarily by desire to avoid tax payments, courts have been willing to lift the corporate veil and examine the true intent behind the filing. This approach ensures that the moratorium provisions serve their intended purpose of facilitating genuine restructuring rather than becoming a tool for avoiding statutory obligations.

Broader Implications for Corporate Governance and Tax Compliance

Enhanced Due Diligence Requirements for Directors

The Jayam Vyapaar decision reinforces the critical importance of enhanced due diligence in corporate decision-making, particularly regarding the initiation of insolvency proceedings. Directors and management must carefully evaluate the genuine necessity for insolvency protection and ensure that such decisions are not motivated by attempts to avoid legitimate obligations. This case serves as a stark reminder that decisions to file for insolvency carry significant legal and reputational consequences.

Corporate boards must implement robust governance frameworks that include independent assessment of financial distress before resorting to insolvency proceedings. This assessment should involve consulting with independent financial and legal advisors who can provide objective evaluation of the company’s financial position and available alternatives. The assessment should document the reasons why insolvency proceedings are necessary and why other alternatives, such as operational restructuring or negotiated settlements with creditors, are not viable.

Directors must also be mindful of their personal exposure under provisions like Section 179 of the Income Tax Act. In cases involving tax liabilities, directors should ensure that all legitimate efforts have been made to resolve disputes through appropriate channels before considering insolvency proceedings. Filing for insolvency to avoid tax obligations can expose directors to personal liability not only for the original tax dues but also for penalties under Section 65 of the IBC and potential prosecution for fraudulent use of Insolvency proceedings .

Impact on Tax Recovery Strategies

For tax authorities, the Jayam Vyapaar decision provides important guidance on challenging potentially fraudulent use of insolvency proceedings. The case demonstrates the effectiveness of Section 65 as a tool for preventing the misuse of insolvency law to frustrate tax recovery efforts. Tax authorities can use this precedent to argue for penalties in similar cases where companies appear to be using insolvency proceedings as a shield against tax enforcement.

The decision highlights the importance of maintaining detailed records of tax recovery efforts and documenting the specific circumstances that led to the initiation of insolvency proceedings. Such documentation can be crucial in establishing the fraudulent nature of insolvency applications. Tax authorities should be prepared to present comprehensive evidence showing the timing of insolvency filings relative to recovery proceedings, the absence of genuine financial distress indicators, and any pattern of conduct suggesting manipulation of legal processes.

The judgment also encourages tax authorities to be vigilant during insolvency proceedings and to actively oppose applications that appear motivated by tax avoidance rather than genuine financial distress. This requires coordination between different departments within the tax administration and development of expertise in insolvency law among tax officials.

Deterrent Effect and Future Conduct

The imposition of penalties under Section 65, even at the minimum level, serves an important deterrent function. The decision sends an unequivocal message to companies and their advisors that attempts to misuse the insolvency framework will be met with appropriate sanctions. This deterrent effect is enhanced by the public nature of tribunal proceedings and the permanent record created by such decisions, which can affect the reputation of companies and their promoters in future dealings.

The requirement to deposit penalty amounts to public welfare funds adds another dimension to the deterrent effect. It ensures that the consequences of fraudulent behavior extend beyond mere financial penalties to include a contribution to social welfare, emphasizing the societal harm caused by such conduct.

Looking forward, the decision is likely to make companies and their advisors more cautious about filing insolvency applications without genuine cause. Professional advisors, including lawyers and insolvency professionals, will need to conduct more thorough due diligence before agreeing to file or support such applications, knowing that they too could face professional consequences if they participate in fraudulent proceedings.

Conclusion

The NCLT Kolkata’s decision in Jayam Vyapaar Pvt. Ltd. represents a significant milestone in the maturation of India’s insolvency jurisprudence. The tribunal’s robust application of Section 65 of the IBC demonstrates the judiciary’s commitment to preserving the integrity of the insolvency framework and preventing its abuse by entities seeking to escape statutory obligations. This decision will serve as an important reference point for future proceedings involving suspected fraudulent initiation of insolvency proceedings.

The case establishes clear standards for identifying and addressing fraudulent use of insolvency proceedings. It clarifies that timing of applications, absence of genuine distress indicators, and background of financial misconduct are all relevant factors in assessing whether an application is made in good faith. The decision reinforces the principle that insolvency law is designed to facilitate genuine business rescue and debt resolution, not to provide a shield for companies seeking to avoid legitimate obligations, particularly statutory dues like taxes.

For the broader corporate community, this decision serves as both a warning and a guide. It cautions against attempts at fraudulent use of insolvency proceedings for improper purposes while providing guidance on the factors tribunals will consider in assessing the bona fides of applications. Companies facing financial difficulties must ensure that their approach to insolvency proceedings is driven by a genuine need for restructuring rather than opportunistic avoidance of obligations.

The implications extend beyond the immediate parties to encompass the entire ecosystem of corporate insolvency practice in India. As the IBC continues to evolve and mature, decisions like Jayam Vyapaar contribute to developing a robust jurisprudence that balances the needs of genuine corporate rescue with the imperative of preventing system abuse. The decision strengthens the credibility of India’s insolvency framework by demonstrating that it has adequate safeguards against misuse while remaining accessible to companies facing genuine financial distress.

References

[1] LiveLaw. (2023). NCLT Kolkata: CIRP Petition U/S 10 Avoiding Income Tax Liability Not Maintainable Under The IBC. Available at: https://www.livelaw.in/ibc-cases/nclt-kolkata-cirp-petition-us-10-avoiding-income-tax-liability-not-maintainable-under-the-ibc-243604 

[2] Zauba Corp. JAYAM VYAPAAR PVT LTD – Company Information. Available at: https://www.zaubacorp.com/company/JAYAM-VYAPAAR-PVT-LTD/U51219WB1994PTC064381 

[3] IBC Laws. (2023). CIRP application filed u/s 10 of IBC to avoid Income Tax liability is not maintainable – Jayam Vyapaar Pvt. Ltd. Available at: https://ibclaw.in/jayam-vyapaar-pvt-ltd-nclt-kolkata-bench/ 

[4] IBC Laws. Section 10 of IBC – Initiation of corporate insolvency resolution process by corporate applicant. Available at: https://ibclaw.in/section-10-initiation-of-corporate-insolvency-resolution-process-by-corporate-applicant-chapter-ii-corporate-insolvency-resolution-processcirp-part-ii-insolvency-resolution-and-liquidation-for-corp/ 

[5] IBC Laws. Section 65 of IBC – Fraudulent or malicious initiation of proceedings. Available at: https://ibclaw.in/section-65-fraudulent-or-malicious-intiation-of-proceedings/ 

[6] AZB Partners. (2023). Preventing Fraudulent and Malicious Initiation of Insolvency Proceedings in India. Available at: https://www.azbpartners.com/bank/preventing-fraudulent-and-malicious-initiation-of-insolvency-proceedings-in-india/ 

[7] TaxGuru. (2022). Liability of directors of private company under section 179 of Income Tax Act. Available at: https://taxguru.in/income-tax/liability-directors-private-company-section-179-income-tax-act.html 

[8] TaxScan. (2025). Case Digest on Rulings of NCLT under IBC. Available at: https://www.taxscan.in/complete-case-digest-on-nclt-rulings-under-the-ibc-part-2/490655/ 

[9] India Code. Section 65 – Insolvency and Bankruptcy Code, 2016. Available at: https://www.indiacode.nic.in/show-data?actid=AC_CEN_2_11_00055_201631_1517807328273&sectionId=844&sectionno=65&orderno=87

Authorized and Edited by Prapti Bhatt

The post Fraudulent Use of Insolvency Proceedings to Evade Tax Liabilities: Analysis of NCLT Kolkata’s Decision in Jayam Vyapaar Pvt. Ltd. appeared first on Bhatt & Joshi Associates.

Introduction

The complexities surrounding the approval of resolution plans by a single member Committee of Creditors (CoC) under the Insolvency and Bankruptcy Code, 2016 (IBC) present significant procedural and substantive challenges within India’s insolvency resolution framework. The National Company Law Tribunal (NCLT) Kolkata Bench has addressed these intricate legal questions, establishing important precedents that clarify the operational requirements for conducting valid Committee of Creditors meetings and the subsequent approval of resolution plans.

This comprehensive analysis examines the legal framework governing Committee of Creditors meetings under the IBC, with particular focus on the procedural requirements established under Section 24 of the Code [1]. The discussion encompasses the constitutional challenges, regulatory interpretations, and judicial precedents that define the boundaries of CoC functionality in corporate insolvency resolution processes.

Legal Framework Governing Committee of Creditors Meetings Under IBC

Section 24 of the Insolvency and Bankruptcy Code, 2016

The procedural foundation for Committee of Creditors meetings is established under Section 24 of the IBC, which provides detailed requirements for convening and conducting such meetings [1]. The section stipulates specific conditions that must be satisfied for a valid meeting to take place, including notice requirements, participation protocols, and voting procedures.

Section 24(1) states that “The members of the committee of creditors may meet in person or by such electronic means as may be specified” [1]. This provision establishes the fundamental requirement for multiple members to constitute a meeting, as the term “members” inherently implies plurality. The legislative intent behind this provision suggests that a meeting requires the participation of more than one individual, making it procedurally impossible to conduct a valid meeting with a single member.

The requirements under Section 24(2) mandate that “All meetings of the committee of creditors shall be conducted by the resolution professional” [1]. This provision places the responsibility for facilitating and managing the meeting process on the resolution professional, who must ensure compliance with all procedural requirements. The resolution professional’s role becomes particularly significant when determining whether a valid meeting can be constituted with insufficient members.

Notice Requirements and Stakeholder Participation

Section 24(3) establishes comprehensive notice requirements for CoC meetings, mandating that the resolution professional provide notice to various categories of stakeholders [1]. These include members of the committee of creditors, suspended board members or partners, and operational creditors whose aggregate dues exceed ten percent of the total debt. The notice provisions reflect the legislature’s intention to ensure broad stakeholder participation in the resolution process, even for those without voting rights.

The National Company Law Appellate Tribunal (NCLAT) has emphasized the mandatory nature of these notice requirements. In the case of Bhushan Shringapure v. B.K. Mishra, the NCLAT held that Section 24(3) is mandatory, requiring resolution professionals to serve notice to operational creditors when their aggregate dues exceed ten percent of the total debt [2]. This ruling underscores the importance of procedural compliance in maintaining the integrity of the resolution process.

Voting Procedures and Quorum Requirements

The voting mechanisms established under Section 24 create additional complexity when dealing with scenarios involving the single member Committee of Creditors under IBC. Section 24(6) provides that “Each creditor shall vote in accordance with the voting share assigned to him based on the financial debts owed to such creditor” [1]. The determination of voting shares under Section 24(7) requires the resolution professional to assign appropriate weightings based on the financial obligations owed to each creditor.

The regulatory framework under the CIRP Regulations, 2016, provides additional guidance on meeting procedures and quorum requirements. Regulation 21(3)(b) read with Regulation 25(5) establishes that no voting can take place at a meeting if even a single member of the CoC is absent[3]. This provision creates a paradoxical situation for the single member committee of creditors under IBC: the absence of the sole member would prevent any voting from occurring, while their presence would technically constitute full attendance but raise questions about the validity of a “meeting” with only one participant.

Constitutional Framework of Committee of Creditors

Composition Under Section 21 of the IBC

The fundamental structure of the Committee of Creditors is established under Section 21 of the IBC, which mandates that the committee “shall comprise all financial creditors of the corporate debtor” [4]. This provision establishes the basic principle that financial creditors form the core membership of the committee, with specific exceptions and variations provided for particular circumstances.

Section 21(2) contains important provisos that exclude related parties from participation in committee meetings. The provision states that “a related party to whom a corporate debtor owes a financial debt shall not have any right of representation, participation or voting in a meeting of the committee of creditors” [4]. These exclusions can potentially reduce the effective membership of the committee, sometimes resulting in scenarios where only one eligible financial creditor remains.

The regulatory framework addresses situations where no financial creditors exist or where all financial creditors are related parties. In such circumstances, Regulation 16 of the CIRP Regulations provides for the constitution of an alternative committee comprising the eighteen largest operational creditors, along with representatives of workmen and employees [4]. This provision ensures that a functional committee can be established even in the absence of eligible financial creditors.

Special Provisions for Single Member Committee of Creditors Under IBC 

The legal framework recognizes that certain corporate debtors may have limited creditor bases, potentially resulting in single-creditor scenarios. Section 21(6) addresses situations involving consortium arrangements or syndicated facilities where a single trustee or agent acts for multiple financial creditors [4]. In such cases, each financial creditor may authorize the trustee to act on their behalf, effectively consolidating multiple creditor interests into a single representative.

However, the NCLAT has clarified that there is no provision in the IBC for constituting a Committee of Creditors with a single operational creditor [5]. This ruling establishes an important limitation on committee formation, indicating that certain minimum thresholds must be met for a valid committee to function effectively.

Procedural Challenges in Single Member Committee Scenarios

Meeting Validity and Legal Interpretation

The core legal challenge in single member committee of creditors under IBC scenarios relates to the fundamental nature of a “meeting” under the IBC framework. The term “meeting” traditionally implies a gathering of multiple individuals for discussion and decision-making purposes. When applied to a single-member committee, this concept becomes legally and practically problematic.

The procedural requirements under Section 24 assume the presence of multiple participants. The provision for notice to various stakeholders, the establishment of voting procedures, and the requirement for resolution professional oversight all suggest a multi-party environment. The application of these provisions to a single member committee of creditors under IBC creates interpretative challenges that require careful judicial consideration.

Courts have generally recognized that the legislative framework contemplates meaningful participation by multiple stakeholders in the resolution process. The NCLT Kolkata Bench’s analysis of meeting requirements reflects this understanding, emphasizing that the procedural safeguards embedded in Section 24 are designed to facilitate genuine deliberation and decision-making among multiple parties.

Information Memorandum and Transparency Requirements

The role of information memoranda in the resolution process becomes particularly significant in single-member committee scenarios. The resolution professional’s obligation to provide comprehensive information to potential resolution applicants and committee members serves important transparency and due diligence functions. However, when dealing with a single committee member, questions arise about the scope and application of these information-sharing requirements.

The NCLT Kolkata Bench has clarified that resolution professionals are not obligated to provide information memoranda to applicants who are neither CoC members nor prospective resolution applicants [6]. This ruling establishes important boundaries around information access, ensuring that confidential corporate information is protected while maintaining transparency for legitimate stakeholders.

Resolution Plan Approval Mechanisms

Section 30 Requirements for Resolution Plan Submission

The submission and approval of resolution plans under Section 30 of the IBC involves a complex process that requires careful coordination between resolution applicants, the resolution professional, and the Committee of Creditors [7]. Section 30(1) establishes the basic framework for plan submission, requiring resolution applicants to provide comprehensive documentation and confirmations of eligibility under Section 29A.

Section 30(2) sets forth detailed requirements that resolution plans must satisfy, including provisions for payment of insolvency resolution process costs, treatment of operational creditors, and compliance with applicable laws and regulations [7]. These requirements serve as mandatory criteria that must be met before a resolution plan can be considered for approval by the Committee of Creditors.

The voting threshold for resolution plan approval has evolved through legislative amendments. Initially set at seventy-five percent, the requirement was reduced to sixty-six percent of the voting share of financial creditors through the 2018 amendments [7]. This change was intended to facilitate faster decision-making while maintaining meaningful creditor control over the resolution process.

Section 31 Approval by Adjudicating Authority

Following approval by the Committee of Creditors, resolution plans must receive final approval from the Adjudicating Authority under Section 31 of the IBC [8]. This provision establishes a two-stage approval process that provides additional safeguards and oversight over the resolution process.

Section 31(1) requires the Adjudicating Authority to satisfy itself that the approved resolution plan meets all requirements specified under Section 30(2) [8]. The Authority must also ensure that the plan contains provisions for effective implementation before granting final approval. Once approved, the resolution plan becomes binding on all stakeholders, including the corporate debtor, employees, creditors, and guarantors.

The Adjudicating Authority’s review power under Section 31(2) allows for rejection of resolution plans that do not conform to statutory requirements [8]. However, courts have clarified that this power cannot be used to substitute the commercial judgment of the Committee of Creditors with that of the judicial authority. The review is limited to ensuring compliance with legal requirements rather than assessing the commercial viability of proposed plans.

Stakeholder Rights and Participation

Operational Creditor Participation Rights

While operational creditors do not possess voting rights in Committee of Creditors meetings, the IBC framework provides specific participation rights that recognize their legitimate interests in the resolution process. Section 24(3)(c) mandates notice to operational creditors when their aggregate dues exceed ten percent of the total debt [1]. This provision ensures that significant operational creditors maintain visibility into the resolution process even without decision-making authority.

Section 24(4) permits operational creditors to attend CoC meetings as observers, though without voting rights [1]. This participation mechanism allows operational creditors to stay informed about resolution developments and to contribute information that may be relevant to the committee’s deliberations. The absence of operational creditors from meetings does not invalidate the proceedings, recognizing the primacy of financial creditors in the decision-making process.

The Supreme Court of India has emphasized the importance of fair and equitable treatment for operational creditors within the resolution framework. In Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta, the Court established that resolution plans must provide for adequate treatment of operational creditors, ensuring that their interests are not unfairly prejudiced by the resolution process [9].

Employee and Workmen Representation

The IBC framework recognizes the unique position of employees and workmen as stakeholders in the corporate insolvency resolution process. In cases where no financial creditors exist, or where alternative committee structures are required, employee representatives may be included in the Committee of Creditors with full voting rights [4].

Regulation 16 of the CIRP Regulations provides for the inclusion of one representative elected by workmen and one representative elected by employees in alternative committee structures [4]. These representatives possess voting rights proportionate to the debts owed to their respective constituencies, ensuring meaningful participation in the resolution process.

The protection of employee interests extends beyond committee participation to encompass specific provisions within resolution plans. Section 30(2) requires resolution plans to address employee-related obligations, ensuring that workforce interests are adequately considered in the resolution framework.

Confidentiality and Information Access

Pre-Approval Confidentiality Requirements

The confidentiality of resolution plans during the evaluation and approval process serves important commercial and strategic purposes. Resolution applicants invest significant resources in developing comprehensive plans, and premature disclosure could undermine competitive dynamics and reduce the quality of submitted proposals.

The NCLT Kolkata Bench has clarified that resolution plans maintain confidential status until approval by the Adjudicating Authority [6]. This ruling recognizes the legitimate commercial interests of resolution applicants while ensuring that approved plans become transparent and accessible to all stakeholders following final approval.

The balance between confidentiality and transparency reflects broader policy considerations within the IBC framework. The legislature has sought to encourage robust participation by resolution applicants while maintaining appropriate oversight and stakeholder protection mechanisms.

Post-Approval Transparency

Following approval by the Adjudicating Authority under Section 31, resolution plans lose their confidential status and become part of the public record [6]. This transparency serves important accountability functions, allowing stakeholders to understand the terms and conditions that will govern the corporate debtor’s future operations.

The transition from confidentiality to transparency marks a critical juncture in the resolution process. Approved plans become binding on all stakeholders, and their public availability ensures that implementation can be monitored and enforced by relevant parties.

Workers’ Union Standing and Debt Assignment

Limitation of Workers’ Union Authority

The legal standing of workers’ unions to challenge certain aspects of the insolvency resolution process has been subject to judicial clarification. The NCLT Kolkata Bench has determined that workers’ unions lack locus standi to question the assignment of debt by banking institutions [6]. This ruling establishes important boundaries around the types of challenges that different stakeholder categories may pursue.

The limitation on workers’ union standing reflects the structured approach to stakeholder participation under the IBC. While workers and employees possess specific rights and protections within the framework, these rights are channeled through designated mechanisms rather than through general litigation authority.

This judicial interpretation serves to maintain the efficiency and predictability of the resolution process by limiting the scope of potential challenges that could delay or complicate proceedings. The ruling recognizes that debt assignment transactions between financial institutions are primarily commercial matters that fall outside the direct interest sphere of employee representatives.

Debt Assignment and Committee Composition

The assignment or transfer of debt during the insolvency resolution process can significantly impact Committee of Creditors composition and voting dynamics. Section 21(5) addresses situations where operational creditors assign debt to financial creditors, providing that such assignees are considered operational creditors to the extent of the assignment [4].

Regulation 28 of the CIRP Regulations requires both parties to debt assignment transactions to provide detailed information to the resolution professional, including the terms of assignment and the identity of assignees [4]. The resolution professional must notify all participants and the Adjudicating Authority of any resultant changes in committee composition within two days of such changes.

These provisions ensure transparency in debt assignment transactions while maintaining the integrity of the committee structure. The regulatory framework prevents manipulation of voting dynamics through strategic debt transfers while accommodating legitimate commercial transactions.

Judicial Precedents and Interpretative Guidelines

Supreme Court Guidance on Commercial Wisdom

The Supreme Court of India has consistently emphasized the primacy of commercial wisdom exercised by Committees of Creditors in making resolution-related decisions. In K. Sashidhar v. Indian Overseas Bank, the Court held that no provision empowers the resolution professional, NCLT, or NCLAT to reverse the commercial decisions of the CoC [9].

This principle establishes important boundaries around judicial intervention in the resolution process. Courts are empowered to ensure compliance with procedural and substantive legal requirements but cannot substitute their judgment for that of creditors regarding the commercial viability or attractiveness of particular resolution proposals.

The commercial wisdom doctrine recognizes that creditors possess the strongest incentives to maximize recovery and make sound business decisions regarding distressed corporate debtors. This approach aligns with international best practices in insolvency law, which typically vest primary decision-making authority in creditor bodies.

NCLAT Interpretations on Committee Functionality

The National Company Law Appellate Tribunal has provided significant guidance on various aspects of Committee of Creditors functionality and decision-making processes. In Saravana Global Holdings Ltd. v. Bafna Pharmaceuticals Ltd., the NCLAT clarified that companies qualifying as Micro, Small and Medium Enterprises (MSMEs) are not required to follow all procedural requirements under the CIRP [9].

This ruling recognizes the unique circumstances and resource constraints that may affect smaller corporate debtors, providing flexibility in procedural compliance while maintaining core substantive protections. The NCLAT’s approach reflects a practical understanding of the diverse range of corporate debtors that may be subject to insolvency proceedings.

The tribunal has also addressed questions regarding the role of the Committee of Creditors following liquidation orders. In Punjab National Bank v. Kiran Shah, the NCLAT held that the Committee of Creditors has no role to play after liquidation and cannot move applications for removal of liquidators [9].

Regulatory Compliance and Implementation

IBBI Regulatory Framework

The Insolvency and Bankruptcy Board of India (IBBI) has issued comprehensive regulations that provide detailed operational guidance for conducting Committee of Creditors meetings and managing the resolution process. These regulations address practical aspects of meeting conduct, voting procedures, and stakeholder communication that are essential for effective implementation of the statutory framework.

The CIRP Regulations, 2016, establish specific requirements for meeting notices, agenda circulation, and minute preparation that ensure transparency and accountability in committee proceedings. Regulation 21 provides detailed guidance on notice periods, with standard requirements of five days that can be reduced to twenty-four hours in urgent circumstances [3].

The regulatory framework also addresses electronic voting mechanisms and alternative participation methods that accommodate the practical needs of geographically dispersed creditors. These provisions have become particularly important in the context of technological advances and the need for efficient resolution processes.

Enforcement and Compliance Monitoring

The enforcement of Committee of Creditors decisions and resolution plan implementation involves multiple layers of oversight and monitoring. The resolution professional bears primary responsibility for ensuring compliance with committee decisions and regulatory requirements during the resolution process.

Following approval of resolution plans, monitoring committees may be established to oversee implementation and ensure adherence to plan terms. These committees serve important accountability functions, providing mechanisms for addressing implementation challenges and ensuring that approved plans achieve their intended objectives.

The Adjudicating Authority retains jurisdiction to address implementation failures and enforcement issues that may arise following plan approval. This oversight function ensures that the resolution process achieves its fundamental objectives of corporate revival and creditor protection.

Conclusion

The procedural requirements established under Section 24 of the IBC, combined with the constitutional provisions of Section 21, create a framework that generally presupposes multi-member committees capable of genuine deliberation and decision-making. However, the functioning of a Single Member Committee of Creditors under IBC, while not explicitly prohibited, raises significant questions about the validity and effectiveness of the resolution process.

The procedural requirements established under Section 24 of the IBC, combined with the constitutional provisions of Section 21, create a framework that generally presupposes multi-member committees capable of genuine deliberation and decision-making. In this context, the role and legality of a single member committee of creditors under IBC, while not explicitly prohibited, raise significant questions about the validity and effectiveness of the resolution process.

The judicial interpretations and regulatory guidance examined in this analysis demonstrate the evolving nature of insolvency law jurisprudence in India. Courts and tribunals have consistently emphasized the importance of procedural compliance while recognizing the need for practical flexibility in addressing diverse corporate distress scenarios.

The protection of stakeholder interests, maintenance of procedural integrity, and facilitation of effective corporate rescue remain the central objectives of the IBC framework. Future developments in this area of law will likely continue to balance these objectives while addressing the practical challenges that arise in complex insolvency scenarios.

The comprehensive legal framework established under the IBC, supported by detailed regulations and evolving judicial precedents, provides a robust foundation for addressing corporate distress in India. The continued refinement of this framework through legislative amendments, regulatory updates, and judicial interpretation ensures its effectiveness in promoting economic recovery and stakeholder protection.

References

[1] Insolvency and Bankruptcy Code, 2016, Section 24. Available at: https://ca2013.com/section-24-meeting-committee-creditors/ 

[2] National Company Law Appellate Tribunal. Bhushan Shringapure v. B.K. Mishra, April 20, 2023. Available at: https://www.argus-p.com/updates/updates/it-is-mandatory-on-the-part-of-resolution-professional-to-issue-notice-of-coc-meetings-to-all-operational-creditors-in-terms-of-section-243c-of-the-ibc/ 

[3] Tax Guru. “Meeting of Committee of Creditors under IBC,” April 1, 2021. Available at: https://taxguru.in/corporate-law/meeting-committee-creditors-ibc.html 

[4] Insolvency and Bankruptcy Code, 2016, Section 21. Available at: https://ibclaw.in/section-21-committee-of-creditors/ 

[5] SCC Blog. “Corporate Debtor cannot constitute Committee of Creditors with a single Operational Creditor under IBC: NCLAT,” July 10, 2023. Available at: https://www.scconline.com/blog/post/2023/07/08/corporate-debtor-cannot-constitute-committee-of-creditors-with-a-single-operational-creditor-under-ibc-nclat/ 

[6] Ibid

[7] Insolvency and Bankruptcy Code, 2016, Section 30. Available at: https://ibclaw.in/section-30-submission-of-resolution-plan/ 

[8] Insolvency and Bankruptcy Code, 2016, Section 31. Available at: https://ibclaw.in/section-31-approval-of-resolution-plan/ 

[9] IBC Laws. “Constitution of Committee of Creditors (CoC) under Section 21.” Available at: https://ibclaw.in/constitution-of-committee-of-creditors-under-section-21-of-ibc/?print=print 

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Introduction to Section 31(4) of IBC

The Insolvency and Bankruptcy Code, 2016 (IBC) is a comprehensive legislation that aims to provide a time-bound and efficient resolution of insolvency and bankruptcy cases in India. The IBC envisages a creditor-driven process, where the Committee of Creditors (CoC) has the ultimate authority to approve or reject a resolution plan submitted by a resolution applicant. However, the IBC also mandates that certain statutory approvals, such as those from the Competition Commission of India (CCI), are required before a resolution plan can be implemented. The CCI is the regulatory body that ensures fair and healthy competition in the market and prevents anti-competitive practices. The CCI has the power to approve or reject any combination (merger, acquisition, amalgamation, etc.) that may have an appreciable adverse effect on competition in India.

The question that arises is whether the approval by the CCI is required prior to the approval of the resolution plan by the CoC, or whether it can be obtained after the CoC’s approval but before the implementation of the plan. This question has been addressed by the National Company Law Appellate Tribunal (NCLAT) in its landmark judgment in Soneko Marketing Pvt. Ltd. vs. Girish Sriram Juneja & Ors., where it held that the approval by the CCI prior to the approval of the CoC is directory and not mandatory.

Objectives of Section 31(4) of IBC and Competition Act

The main objective of the IBC is to maximise the value of assets of insolvent entities and promote entrepreneurship, availability of credit and balance the interests of all stakeholders. The IBC provides a time-bound process for resolving insolvency and bankruptcy cases, with a maximum period of 330 days for completing the corporate insolvency resolution process (CIRP). The IBC also empowers the CoC to decide the fate of the insolvent entity, by approving or rejecting a resolution plan that proposes to revive or liquidate the entity.

The main objective of the Competition Act, 2002 is to prevent practices that have an appreciable adverse effect on competition in India and to protect the interests of consumers and ensure freedom of trade. The Competition Act regulates combinations (mergers, acquisitions, amalgamations, etc.) that may cause or are likely to cause an appreciable adverse effect on competition within India. The Competition Act requires any person or enterprise proposing to enter into a combination to give notice to the CCI in the prescribed form and manner, and obtain its approval before effecting such combination.

Interplay between Section 31(4) of IBC and Competition Act

The interplay between the IBC and the Competition Act arises when a resolution plan submitted under the IBC involves a combination that requires approval from the CCI under the Competition Act. Section 31(4) of the IBC provides that if a resolution plan contemplates any merger, amalgamation or arrangement with another company, then such resolution plan shall be considered as approved by shareholders if it is approved by CoC. However, a proviso to Section 31(4) states that where such merger, amalgamation or arrangement requires any approval from any authority under any law for time being in force, then such approval shall be obtained before such merger, amalgamation or arrangement becomes effective.

The proviso to Section 31(4) implies that if a resolution plan involves a combination that requires approval from CCI under Section 6 of Competition Act, then such approval shall be obtained before such combination becomes effective. However, it does not specify whether such approval shall be obtained before or after the approval of CoC. This ambiguity has led to conflicting interpretations by different authorities and courts.

NCLAT’s Judgment over Insolvency

In Soneko Marketing Pvt. Ltd. vs. Girish Sriram Juneja & Ors., NCLAT was dealing with an appeal against an order passed by National Company Law Tribunal (NCLT), Mumbai Bench, which had rejected a resolution plan submitted by Soneko Marketing Pvt. Ltd. (Soneko) on the ground that it did not have prior approval from CCI as required under Section 31(4) proviso of IBC. Soneko had submitted its resolution plan for revival of Corporate Debtor – M/s Shree Metaliks Ltd., which was undergoing CIRP under IBC. Soneko’s resolution plan had been approved by CoC with 100% voting share. However, NCLT rejected Soneko’s resolution plan on two grounds: (i) Soneko did not have prior approval from CCI as required under Section 31(4) proviso of IBC; and (ii) Soneko did not comply with Section 29A of IBC, which disqualifies certain persons from being resolution applicants.

Soneko challenged the NCLT’s order before NCLAT on both grounds. NCLAT, after hearing both parties and considering the relevant provisions of IBC and Competition Act, passed a detailed judgment on 15th September 2023, wherein it held as follows:

• On the first ground, NCLAT held that the requirement of approval by CCI prior to the approval of CoC is directory and not mandatory under Section 31(4) proviso of IBC. NCLAT observed that the timeline provided in the IBC for completing the CIRP is very stringent and cannot be extended beyond 330 days. On the other hand, the timeline provided in the Competition Act for obtaining approval from CCI is very flexible and can be extended up to 210 days or more. NCLAT noted that if prior approval from CCI is made mandatory before CoC’s approval, then it would lead to adverse effect on the CIRP and defeat the objective of IBC. NCLAT also noted that there is no consequence provided in the IBC for non-compliance of Section 31(4) proviso, which indicates that it is not mandatory. NCLAT further noted that even if prior approval from CCI is not obtained before CoC’s approval, it does not mean that Section 31(4) proviso is not to be complied with. The approval from CCI is still mandatory before the implementation of the resolution plan and the combination becomes effective. NCLAT relied on its previous judgments in ArcelorMittal India Pvt. Ltd. vs. Satish Kumar Gupta & Ors. and Committee of Creditors of Essar Steel India Limited vs. Satish Kumar Gupta & Ors., where it had held that prior approval from CCI is directory and not mandatory.
• On the second ground, NCLAT held that Soneko did not violate Section 29A of IBC, which disqualifies certain persons from being resolution applicants. NCLAT observed that Soneko had submitted an affidavit stating that it was not disqualified under Section 29A of IBC and had also submitted a certificate from a chartered accountant confirming its eligibility. NCLAT also observed that Soneko had disclosed all its financial details and shareholding pattern in its resolution plan and had also submitted a declaration stating that it was not related to any other resolution applicant or connected person. NCLAT further observed that there was no evidence to show that Soneko was acting in concert with any other resolution applicant or connected person or had any common interest with them. NCLAT held that Soneko had complied with all the requirements of Section 29A of IBC and was eligible to be a resolution applicant.

NCLAT, therefore, allowed Soneko’s appeal and set aside the NCLT’s order rejecting its resolution plan. NCLAT directed NCLT to approve Soneko’s resolution plan subject to obtaining approval from CCI within a period of 30 days.

Conclusion

The judgment of NCLAT in Soneko Marketing Pvt. Ltd. vs. Girish Sriram Juneja & Ors. is a significant one as it clarifies the interplay between IBC and Competition Act and resolves the ambiguity regarding the requirement of prior approval from CCI under Section 31(4) proviso of IBC. The judgment upholds the objective of IBC to provide a time-bound and efficient resolution of insolvency and bankruptcy cases, while also ensuring compliance with Competition Act to protect fair and healthy competition in the market. The judgment also reaffirms the principle that prior approval from CCI is directory and not mandatory before CoC’s approval, but mandatory before implementation of resolution plan and effectiveness of combination.

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Introduction – The clean slate principle

The Supreme Court of India, in its recent judgment in Tata Power Western Odisha Distribution Ltd. & Anr. vs. Jagannath Sponge Pvt. Ltd. & Director, has upheld the clean slate principle under the Insolvency and Bankruptcy Code, 2016 (IBC) and held that the successful resolution applicant cannot be insisted to pay the arrears payable by the corporate debtor for the grant of an electricity connection in her/his name. The Supreme Court also held that the Electricity Act, 2003 does not override the provisions of the IBC and that the dues of electricity distribution companies (DISCOMs) are operational debts under the IBC.

Background

The case arose out of a corporate insolvency resolution process (CIRP) initiated against Jagannath Sponge Pvt. Ltd. (Corporate Debtor), a sponge iron manufacturing company, under the IBC. The Corporate Debtor had an electricity connection from Tata Power Western Odisha Distribution Ltd. (TPWODL), a DISCOM, and had accumulated arrears of Rs. 1,06,00,000/- towards electricity charges as on 31.03.2017. The Corporate Debtor was declared insolvent and a resolution professional (RP) was appointed to manage its affairs and invite resolution plans from prospective resolution applicants.

The RP received two resolution plans, one from Shyam Metalics and Energy Ltd. (SMEL) and another from Sarda Energy and Minerals Ltd. (SEML). The Committee of Creditors (CoC) approved the resolution plan submitted by SMEL, which offered to pay Rs. 165 crores to the financial creditors and Rs. 1 crore to the operational creditors, including TPWODL. The resolution plan also stated that SMEL would not be liable for any past liabilities or dues of the Corporate Debtor and that it would apply for a fresh electricity connection from TPWODL in its own name.

The National Company Law Tribunal (NCLT), Cuttack Bench, approved the resolution plan submitted by SMEL and directed TPWODL to provide a fresh electricity connection to SMEL without insisting on payment of arrears of the Corporate Debtor. TPWODL challenged the NCLT’s order before the National Company Law Appellate Tribunal (NCLAT), New Delhi, contending that it had a statutory right to recover its dues from SMEL under Section 56 of the Electricity Act, 2003 and that the IBC did not override the Electricity Act.

The NCLAT dismissed TPWODL’s appeal and upheld the NCLT’s order, holding that SMEL was not liable to pay the arrears of the Corporate Debtor as per the clean slate principle under Section 31 of the IBC and that TPWODL could not refuse to provide a fresh electricity connection to SMEL under Section 43 of the Electricity Act. The NCLAT also held that TPWODL was an operational creditor under the IBC and that its dues were subject to distribution as per Section 53 of the IBC.

TPWODL further challenged the NCLAT’s order before the Supreme Court, reiterating its arguments that it had a statutory right to recover its dues from SMEL under Section 56 of the Electricity Act and that the Electricity Act had an overriding effect over the IBC.

Supreme Court’s Judgment – The clean slate principle

The Supreme Court, after hearing both parties and considering the relevant provisions of the IBC and the Electricity Act, passed a detailed judgment on 23rd August 2023, wherein it held as follows:

• On the issue of whether SMEL was liable to pay the arrears of the Corporate Debtor for obtaining a fresh electricity connection, the Supreme Court held that SMEL was not liable to pay any such arrears as per Section 31 of the IBC, which provides that once a resolution plan is approved by NCLT, it is binding on all stakeholders, including DISCOMs, and that it grants a discharge to the corporate debtor from all its past liabilities and dues. The Supreme Court observed that this is based on the clean slate principle, which aims to give a fresh start to the corporate debtor and its business under new management and ownership. The Supreme Court also observed that this principle is consistent with the objective of maximising value of assets and promoting entrepreneurship under the IBC.
• On the issue of whether TPWODL could refuse to provide a fresh electricity connection to SMEL under Section 43 of the Electricity Act, which provides that every distribution licensee shall provide electricity supply on request by an owner or occupier of any premises in accordance with regulations made by State Commission, subject to such conditions as may be specified, the Supreme Court held that TPWODL could not refuse to provide a fresh electricity connection to SMEL on the ground of non-payment of arrears of the Corporate Debtor. The Supreme Court observed that Section 43 of the Electricity Act does not empower TPWODL to impose any condition that is contrary to or inconsistent with the provisions of the IBC and that TPWODL could only impose such conditions as are specified by the State Commission in its regulations. The Supreme Court also observed that Section 56 of the Electricity Act, which provides that no sum due from any consumer shall be recoverable after a period of two years from the date when such sum became first due unless such sum has been shown continuously as recoverable as arrear of charges for electricity supplied, does not apply to SMEL as it is not a consumer of TPWODL and has no privity of contract with TPWODL.
• On the issue of whether the Electricity Act overrides the IBC, the Supreme Court held that Section 238 of the IBC, which provides that the provisions of the IBC shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law, overrides the provisions of the Electricity Act, despite the latter containing two specific provisions which open with non-obstante clauses (i.e., Section 173 and 174). The Supreme Court observed that Section 173 of the Electricity Act, which provides that save as otherwise provided in Section 174, the provisions of this Act shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force, is subject to Section 174, which provides that nothing contained in this Act shall affect the provisions of Consumer Protection Act, 1986; Atomic Energy Act, 1962; and Railway Act, 1989. The Supreme Court also observed that Section 174 of the Electricity Act does not mention or exclude the IBC and therefore, it cannot be construed to override or prevail over the IBC. The Supreme Court further observed that Section 238 of the IBC is a later and special law that deals with a specific subject matter of insolvency and bankruptcy and therefore, it prevails over the Electricity Act, which is a general law that deals with a different subject matter of electricity supply and distribution.
• On the issue of whether TPWODL is an operational creditor under the IBC and whether its dues are subject to distribution as per Section 53 of the IBC, which provides for a waterfall mechanism for distribution of assets in liquidation, the Supreme Court held that TPWODL is an operational creditor under the IBC and that its dues are operational debts under the IBC. The Supreme Court observed that TPWODL provides goods or services to the Corporate Debtor in relation to its business operations and therefore, falls within the definition of operational creditor under Section 5(20) of the IBC. The Supreme Court also observed that TPWODL’s dues are claims in respect of provision of goods or services and therefore, fall within the definition of operational debt under Section 5(21) of the IBC. The Supreme Court further observed that TPWODL’s dues are subject to distribution as per Section 53 of the IBC, which gives priority to secured creditors over unsecured creditors and to government dues over residual debts.

Conclusion

The judgment of Supreme Court in Tata Power Western Odisha Distribution Ltd. & Anr. vs. Jagannath Sponge Pvt. Ltd. & Director is a significant one as it reaffirms the clean slate principle under the IBC and holds that the successful resolution applicant cannot be burdened with the past liabilities or dues of the corporate debtor for obtaining a fresh electricity connection. The judgment also clarifies the interplay between the IBC and the Electricity Act and holds that the IBC overrides the Electricity Act and that the dues of DISCOMs are operational debts under the IBC.

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Introduction

The Insolvency and Bankruptcy Code, 2016 (IBC) represents a landmark legislation in India’s commercial law landscape, designed to consolidate and streamline the insolvency resolution process for corporate entities, individuals, and partnerships. Among its various provisions, the threshold limit provision under Section 4 IBC has emerged as one of the most debated and litigated aspects of the Code. This provision establishes the minimum quantum of defaulted debt required to trigger Corporate Insolvency Resolution Process (CIRP) against a corporate debtor, serving as a crucial gatekeeping mechanism to prevent frivolous or vexatious proceedings.

The concept of  threshold limit under IBC serves multiple purposes: protecting debtors from harassment through proceedings initiated for trivial amounts, ensuring judicial resources are utilized efficiently, and maintaining the balance between creditor rights and debtor protection. The IBC’s threshold mechanism has undergone significant evolution since its inception, particularly in response to the COVID-19 pandemic’s economic disruptions.

Historical Development and Legislative Framework

Original Threshold Limit Under Section 4 of IBC

Section 4 of the Insolvency and Bankruptcy Code, 2016, originally established the threshold limit at Rs. 1,00,000 (One Lakh Rupees). The section states: “This Part shall apply to matters relating to the insolvency and liquidation of corporate debtors where the minimum amount of default is one lakh rupees: Provided that the Central Government may, by notification, specify the minimum amount of default of higher value which shall not be more than one crore rupees” [1].

This provision empowered the Central Government to modify the threshold limit through executive notification, subject to an upper ceiling of Rs. 1 crore. The relatively low initial threshold of Rs. 1 lakh was designed to ensure accessibility of the insolvency process to smaller creditors, particularly operational creditors who typically deal with smaller transaction values.

The COVID-19 Pandemic and Emergency Measures

The outbreak of COVID-19 in early 2020 necessitated extraordinary economic measures to protect businesses from insolvency proceedings during a period of unprecedented financial stress. Recognizing that the existing threshold of Rs. 1 lakh could lead to a flood of insolvency applications against businesses facing temporary liquidity constraints, the Central Government exercised its powers under the proviso to Section 4.

On March 24, 2020, the Ministry of Corporate Affairs issued Notification S.O. 1205(E), which increased the minimum threshold limit for initiating CIRP from Rs. 1,00,000 to Rs. 1,00,00,000 (One Crore Rupees) [2]. This notification was issued under the extraordinary circumstances prevailing due to the pandemic, with the objective of providing relief to corporate debtors facing financial distress due to the nationwide lockdown and economic disruption.

The notification stated: “In exercise of the powers conferred by the proviso to sub-section (1) of section 4 of the Insolvency and Bankruptcy Code, 2016, the Central Government hereby specifies the minimum amount of default as rupees one crore in place of rupees one lakh.” This represented a hundred-fold increase in the threshold limit, fundamentally altering the accessibility and scope of insolvency proceedings under the IBC.

Legal Analysis of the Threshold Enhancement

Statutory Interpretation and Scope

The dramatic increase in the threshold limit from Rs. 1 lakh to Rs. 1 crore fundamentally altered the dynamics of insolvency proceedings under the IBC. This change had several immediate implications for different classes of creditors and the overall effectiveness of the insolvency framework.

For financial creditors operating under Section 7 of the IBC, the impact was relatively limited. Financial creditors typically deal with larger loan amounts and often have the flexibility to aggregate multiple defaults or join with other financial creditors to meet the enhanced threshold. Section 7 permits financial creditors to file applications individually or collectively, providing them with strategic options to overcome the higher threshold requirement.

However, operational creditors governed by Section 9 of the IBC faced significantly greater challenges. Operational creditors, including suppliers, service providers, and contractors, typically have smaller individual exposures and cannot aggregate their claims with other operational creditors in the same manner as financial creditors. The requirement that each operational creditor individually meet the Rs. 1 crore threshold effectively excluded a vast majority of operational creditors from accessing the insolvency process.

Impact on Different Classes of Creditors

The enhanced threshold created a dichotomous effect on the creditor landscape. Large corporate creditors and major financial institutions could still effectively utilize the IBC mechanism, while smaller businesses, individual entrepreneurs, and micro, small, and medium enterprises (MSMEs) found themselves largely excluded from the process. This outcome arguably contradicted one of the IBC’s fundamental objectives of creating an inclusive and accessible insolvency resolution framework.

The differential impact on operational versus financial creditors also raised questions about the equitable treatment of different creditor classes under the Code. While the original design of the IBC sought to balance the interests of various stakeholder categories, the enhanced threshold appeared to create an inherent bias favoring financial creditors over operational creditors.

Judicial Interpretation and Prospective Application

The Landmark Arrowline Organic Products Case

The question of whether the enhanced threshold limit would apply retrospectively or prospectively became the subject of extensive litigation across various National Company Law Tribunals (NCLTs). The most significant judicial pronouncement on this issue came from the NCLT Chennai in the case of M/s Arrowline Organic Products Pvt. Ltd. v. M/s Rockwell Industries Limited [3].

In this case, the corporate debtor challenged the maintainability of insolvency proceedings initiated before March 24, 2020, arguing that the enhanced threshold should apply to all pending cases. The NCLT Chennai, however, rejected this contention and held that the notification increasing the threshold limit would apply only prospectively, not affecting cases where defaults had occurred and proceedings had been initiated before the notification date.

Constitutional and Legislative Principles

The NCLT Chennai’s decision was grounded in well-established constitutional and legislative principles governing the retrospective application of executive notifications. The tribunal relied on several Supreme Court precedents to reach its conclusion, establishing important jurisprudential principles for the application of threshold modifications under the IBC.

In the case of Bakul Cashew Co. vs. Sales Tax Officer Quilon, the Supreme Court established the fundamental principle that only the legislature possesses the inherent power to make laws with retrospective effect [4]. When legislative powers are delegated to executive authorities, such powers are limited in scope and cannot ordinarily be exercised retrospectively unless expressly authorized by the parent statute.

Applying this principle to the IBC context, the NCLT observed that the notification enhancing the threshold limit was issued by the Central Government under delegated legislative powers conferred by Section 4. Since the statute did not expressly authorize retrospective application of such notifications, the enhanced threshold could only apply prospectively to future cases.

The tribunal further strengthened its reasoning by referencing the Supreme Court’s decision in Indramaniyarelal Gupta v. W. R. Nath, which held that while the legislature has inherent powers to enact retrospective legislation, executive authorities exercising delegated powers cannot assume such retrospective authority without express statutory authorization [5].

The Kirti Kapoor Precedent

The NCLT Chennai also drew support from the Division Bench decision of the Rajasthan High Court in Kirti Kapoor v. Union of India, which dealt with similar threshold enhancement under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 [6]. Although the Rajasthan High Court did not explicitly term the notification as prospective, it applied the doctrine of conditional legislation to hold that such notifications should apply only to future applicants.

This precedent provided additional jurisprudential support for the prospective application principle, establishing a consistent judicial approach across different insolvency and debt recovery statutes in India.

Practical Implications and Implementation Challenges

Operational Creditor Disadvantage

The enhanced threshold limit under IBC created significant practical challenges for operational creditors seeking to recover debts through the IBC mechanism. Unlike financial creditors who typically maintain long-term relationships with corporate borrowers and have larger exposure limits, operational creditors often deal with smaller, transaction-specific obligations.

The requirement for individual operational creditors to meet the Rs. 1 crore threshold effectively eliminated the viability of IBC proceedings for most supplier and service provider relationships. This outcome was particularly problematic for MSMEs, which form the backbone of India’s industrial ecosystem but typically have smaller individual transaction values with their corporate customers.

Strategic Implications for Corporate Debtors

From the perspective of corporate debtors, the enhanced threshold provided significant protection against frivolous or harassment-oriented insolvency proceedings. Companies facing temporary financial distress, particularly during the pandemic period, could avoid premature insolvency proceedings initiated by smaller creditors for relatively minor defaults.

However, this protection came at the cost of potentially enabling strategic default behavior by corporate debtors who might delay payments to smaller creditors, knowing that individual creditors would be unable to initiate insolvency proceedings. This moral hazard aspect of the enhanced threshold raised concerns about the overall integrity of commercial relationships and payment disciplines in the corporate sector.

Judicial Efficiency and Resource Allocation

The enhanced threshold also had positive implications for judicial efficiency and resource allocation within the NCLT system. By filtering out smaller-value cases, the enhanced threshold helped reduce the caseload burden on NCLTs, allowing them to focus on larger, more complex insolvency matters that have greater systemic importance.

However, this efficiency gain came at the cost of access to justice for smaller creditors, raising fundamental questions about the appropriate balance between judicial efficiency and stakeholder access to legal remedies.

Contemporary Judicial Developments

NCLT Delhi’s Interpretation

Subsequent to the Chennai NCLT decision, other benches of the NCLT have generally followed the prospective application principle established in the Arrowline case. The NCLT Delhi, in the case of Udit Jain (Sole Proprietor of M/s U.J. Trading Co.) vs. Apace Builders and Contractors Pvt. Ltd, further clarified that the Rs. 1 crore threshold must be fulfilled by the applicant on the date of filing the application [7].

This interpretation added an additional layer of complexity by requiring creditors to ensure that their claim amount meets the threshold requirement at the time of filing, rather than at the time of default occurrence. This temporal distinction has important implications for cases involving interest accrual, penalty charges, and other time-dependent components of debt calculation.

High Court Interventions

The Kerala High Court’s intervention in the threshold limit controversy added another dimension to the judicial discourse. In a case involving insolvency proceedings initiated with respect to an alleged default of Rs. 31 lakhs, the Kerala High Court stayed an NCLT order that had applied the prospective application principle [8]. This intervention highlighted the ongoing judicial debate about the appropriate application of the enhanced threshold limit and suggested that the issue may require definitive resolution by higher judicial authorities.

Regulatory Framework and Current Status

Current Threshold Limit Status under IBC

As of 2025, the enhanced threshold limit of Rs. 1 crore continues to remain in effect, despite the gradual normalization of economic conditions following the pandemic. The persistence of this enhanced threshold has raised questions about whether the temporary pandemic-relief measure has effectively become a permanent feature of the IBC framework.

The continuation of the higher threshold limit suggests that the government may have determined that the enhanced threshold provides benefits beyond pandemic relief, including reduced frivolous litigation and improved judicial efficiency. However, this decision continues to be debated among insolvency practitioners and legal experts.

Regulatory Considerations for Reform

The current threshold framework under the IBC presents several regulatory considerations that may warrant future reform. The stark differential between the original Rs. 1 lakh threshold and the current Rs. 1 crore threshold suggests that an intermediate threshold level might better balance the competing interests of creditor access and debtor protection.

Some legal experts have suggested implementing a graduated threshold system that differentiates between various types of creditors or industries, similar to the approach adopted in some international insolvency jurisdictions. Such an approach could provide tailored threshold limits that reflect the specific characteristics and needs of different sectors of the economy.

Comparative Analysis with International Practices

International Threshold Practices

International insolvency regimes typically employ varying approaches to threshold limits, reflecting different policy priorities and economic contexts. The United States Bankruptcy Code, for instance, does not impose specific monetary thresholds for initiating bankruptcy proceedings but instead relies on other eligibility criteria and procedural safeguards to prevent abuse.

In contrast, the United Kingdom’s insolvency framework employs multiple threshold levels depending on the type of procedure being initiated. For company voluntary arrangements, the threshold is relatively low, while compulsory liquidation requires higher statutory demand amounts. This graduated approach provides flexibility while maintaining appropriate protective mechanisms.

Lessons for Indian Reform

The international experience suggests that threshold limit design should consider sector-specific characteristics, creditor types, and overall economic conditions. A one-size-fits-all approach, as currently employed under the IBC, may not adequately address the diverse needs of India’s complex economic landscape.

Future reforms to the IBC threshold framework could benefit from incorporating flexible mechanisms that allow for periodic adjustment based on economic conditions, inflation indices, or sector-specific considerations. Such adaptive mechanisms could provide the regulatory agility needed to respond to changing economic circumstances without requiring frequent legislative or executive interventions.

Economic Impact and Policy Considerations

Impact on Credit Markets and Commercial Relationships

The enhanced threshold limit under IBC has had significant implications for credit markets and commercial relationships in India. Suppliers and service providers have been compelled to reassess their credit policies and payment terms when dealing with corporate customers, knowing that the IBC remedy may not be available for smaller defaults.

This change has likely contributed to more cautious credit extension practices among operational creditors, potentially affecting the overall liquidity and efficiency of commercial markets. Some businesses have reportedly shifted toward advance payment requirements or shorter credit terms to mitigate the risk of irrecoverable smaller debts.

MSME Sector Implications

The enhanced threshold has disproportionately affected the MSME sector, which typically operates with smaller transaction values and limited financial resources. MSMEs serving larger corporate clients have found themselves in a particularly vulnerable position, lacking effective legal remedies for debt recovery through the IBC process.

This vulnerability has broader economic implications, as MSMEs constitute a significant portion of India’s industrial base and employment generation. The inability of MSMEs to effectively utilize insolvency proceedings for debt recovery may have contributed to increased payment delays and working capital constraints in this crucial sector.

Future Outlook and Recommendations

Need for Balanced Reform

The experience with the enhanced threshold limit under the IBC highlights the need for a more nuanced and balanced approach to threshold design. Future reforms should consider implementing a graduated threshold system that recognizes the different characteristics and needs of various creditor categories.

A potential reform approach could involve establishing different threshold limits for financial creditors, operational creditors, and different industry sectors. Such differentiation could preserve the accessibility of insolvency proceedings for smaller operational creditors while maintaining appropriate safeguards against frivolous litigation.

Technological Solutions and Alternative Mechanisms

The digital transformation of India’s legal and financial systems presents opportunities for developing alternative mechanisms for smaller debt recovery cases. Online dispute resolution platforms, automated recovery systems, and digital payment enforcement mechanisms could provide efficient alternatives to formal insolvency proceedings for smaller defaults.

Integrating such technological solutions with the IBC framework could help address the access to justice concerns raised by the enhanced threshold while maintaining the efficiency benefits of filtering smaller cases out of the formal insolvency process.

Conclusion

The threshold limit provision under the Insolvency and Bankruptcy Code represents a critical balance point between creditor access and debtor protection in India’s insolvency framework. The dramatic increase from Rs. 1 lakh to Rs. 1 crore in response to the COVID-19 pandemic has fundamentally altered the landscape of insolvency proceedings, creating both intended benefits and unintended consequences.

The judicial interpretation establishing the prospective application of the enhanced threshold has provided important jurisprudential clarity while highlighting the constitutional principles governing executive power and retrospective legislation. However, the continued application of the enhanced threshold long after the pandemic emergency raises important questions about the appropriate permanent level for the IBC threshold.

The experience with threshold modification under the IBC offers valuable lessons for future policy development in insolvency law. The need for flexible, adaptive mechanisms that can respond to changing economic conditions while maintaining appropriate stakeholder protections is evident from the challenges experienced during this transition.

As India’s economy continues to evolve and mature, the IBC framework must similarly adapt to ensure that it continues to serve its fundamental objectives of facilitating efficient insolvency resolution while protecting the legitimate interests of all stakeholders. The threshold limit provision, as a key gatekeeping mechanism, will undoubtedly continue to play a crucial role in shaping the effectiveness and accessibility of India’s insolvency regime.

Future reforms should focus on creating a more nuanced and balanced threshold framework that recognizes the diverse needs of India’s complex economic ecosystem while maintaining the efficiency and integrity of the insolvency process. Only through such thoughtful evolution can the IBC continue to serve as an effective tool for economic development and commercial confidence in India’s dynamic business environment.

References

[1] The Insolvency and Bankruptcy Code, 2016, Section 4.

[2] Ministry of Corporate Affairs, Notification S.O. 1205(E) dated March 24, 2020. 

[3] M/s Arrowline Organic Products Pvt. Ltd. v. M/s Rockwell Industries Limited, NCLT Chennai. Available at: https://ibclaw.in/m-s-arrowline-organic-products-pvt-ltd-vs-m-s-rockwell-industries-ltd-nclt/ 

[4] Bakul Cashew Co. vs. Sales Tax Officer Quilon, Supreme Court of India. 

[5] Indramaniyarelal Gupta v. W. R. Nath, Supreme Court of India. 

[6] Kirti Kapoor v. Union of India, Rajasthan High Court.

[7] Udit Jain vs. Apace Builders and Contractors Pvt. Ltd, NCLT Delhi. Available at: https://taxguru.in/corporate-law/ibc-minimum-threshold-rs-1-crore-date-filing-petition.html 

[8] Kerala High Court intervention in threshold limit case. Available at: https://www.livelaw.in/news-updates/ibc-threshold-march-24-notification-one-crore-kerala-high-court-stays-nclt-167125 

[9] Analysis of threshold limit developments. Available at: https://ibclaw.in/important-judgments-on-threshold-limit-increased-from-1-lakh-to-1-crore-for-filing-cirp-application-under-section-7-or-9-of-insolvency-and-bankruptcy-code-2016-ibc/ 

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Introduction

The significance of committee of creditors (hereinafter referred to as ‘CoC’) can be seen throughout the different stages of the Corporate Insolvency Resolution Process (‘CIRP’), in Part II (corporate persons) and Part III (individuals and partnership firms) of the IBC. However, Part II of the IBC does not explicitly define CoC for corporate persons, though CoC is a defined term for individuals and partnership firms in Part III of the IBC.

As per, Sections 18(c) read with 21, once all claims against the corporate debtor are collated the Interim Resolution Professional is duty bound to constitute a CoC. Generally, all the financial creditors make up the CoC and each financial creditor wields voting rights in proportion to the financial debt owed to them. In the situation where a corporate debtor does not have any financial creditors, the proviso to Section 21(8) contemplates and envisages that a CoC will be constituted in terms of Regulation 16 of The Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (‘2016 Regulations’).

The committee of creditors has been enabled and empowered as board of directors under the Insolvency and Bankruptcy Code ( hereinafter referred to as ‘Code’ ), to take the decisions in respect of the Corporate Debtor, during the process of the corporate insolvency resolution process. In pursuance of this enabling system, the adjudicating authority while initiating the process of CIRP for a company, appoints a resolution professional, who executes and co-ordinates all the decision making during the CIRP and thereby conducts the CIRP of the company. As per Section 28 of the code, it is mandatory for Resolution  professionals to take prior approval of the CoC.

Brief history

The primary objective of the codification of Insolvency and Bankruptcy was based on time-bound resolution of debt, maximization of asset-value and revival of the corporate debtor. In the furtherance of the aforementioned objective, the Banking Law Reforms Committee has accentuated upon the “rights of creditors” under the Code. In 2015 report BLRC emphasized on the following-

“… When default takes place, control is supposed to transfer to the creditors; equity owners have no say.”

Not only, BLRC acknowledge the weakness of creditors under the prevalent bankruptcy regime but also, they contended to vest power in the hands of the creditor at the time of financial distress. The same was upheld by the Supreme Court of India in the case of Innoventive Ind. v. ICICI Bank. Thus, further empowering the creditors of the corporate debtor; in order to promote effective resolution of debts and to ensure the revival of the company.

Recent Changes and pertinent Judgements

In the case of Innoventive Industries v. ICICI Bank, the court reiterated and upheld the viewpoint of BLRC committee stating “when the company or a corporate entity makes any kind of default, the control shall necessarily shift to the creditors and shall not remain in the hands of the management of the company.” Further, in the case of Swiss Ribbon v. Union of India, the court ruled that the Financial creditor are involved in the processes of Corporate Debtor from the beginning and hence their presence in restructuring is essential to ascertain and remove the financial stress, which is not present with the operational creditors.” In the case, Phoenix Arc Private Limited v. Spade Financial Services Ltd., the question of law involved was  Section 21 (8) of the Code regarding the creation and constitution of the CoC. The issue demurred, was whether the related party status if extended to a FC shall be as per the present status or shall be as per the time when the financial debt was incurred. In the instant case the court has taken a purposive interpretation rather than literal interpretation and held that if an FC who is a related party tries to do away with such tag of related party through any act and acts in such manner with a sole motive of entering the CoC, shall not be the part of the CoC and will be restricted through provision first of Section 21(2).

Comparison with International Scenarios

As defined under section 21(2) of the Insolvency and Bankruptcy Code, 2016, “the Committee of Creditors(CoC) shall comprise of all financial creditors of the financial debtor provided that…..” this means composition of the committee is already defined under the given code.

However, in the US bankruptcy code, the Creditor’s Committee’s  composition is not predefined, rather a US Bankruptcy trustee is in charge of choosing who will be included in the same.

In Germany, the provisional committee is taken as a compulsory committee according to Sec. 22a para. 1 of the German Insolvency Code. The appointment is resolved upon by the Creditor’s Assembly.

Therefore, the procedure for the appointment of the committee varies vastly when it comes to the appointing body.

Suggestions

There are instances where CoC exercises certain unbridled powers, such as, at the  time of change of Resolution Professional in terms of Section 27 of the IBC, CoC is not obliged to record its reasons. Additionally, the IBC does not subject the resolution plan per se to judicial scrutiny and the limits of judicial review have been circumscribed to the parameters in Section 30(2) and Section 61(3) of the IBC.  IBC has cordoned off the entire bankruptcy framework in such a way that once the Coc is constituted under  Section 21, it exercises exclusive access to negotiations and retains the final hand in dealing business decisions.

Conclusion

The recent judgements explaining the purview of appointment of committee of creditors shall certainly be a boon for the insolvency regime in the country and will lead to development of trust in the same. The above mentioned judgments clear the standpoint regarding who can be appointed in the Committee of Creditors, ensuring that the Resolution Proceedings be not only expeditious but also genuine and fair. 

Submitted by-

  ROSHI SURELE

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Introduction

The provisions of the Insolvency and Bankruptcy Code, 2016 (IBC) regulating the obligation of personal guarantors to corporate debtors were affirmed in a recent decision by the Hon’ble Supreme Court in Lalit Kumar Jain v. Union of India. With the judgement in place, creditors can now file insolvency proceedings against people such as promoters, managing directors, and chairpersons who act as personal guarantors on loans made to corporate debtors or goods and services provided to them.

A personal guarantor is a person or an organization who agrees to pay another person’s debt if the latter fails to do so. This concept of ‘guarantee’ is derived from Section 126 of the Indian Contracts Act, 1872.[1] When banks want collateral that equals the risk they are taking by lending to a company that may not be performing well, a promoter or promoter entity is most likely to provide a personal guarantee. It differs from the collateral that businesses provide to banks in order to obtain loans, because Indian corporate law stipulates that individuals, such as promoters, are distinct from businesses, and that the two are distinct entities.

Brief Legal History

The Ministry of Corporate Affairs published a Notification on November 15, 2019, bringing personal guarantors into the scope of insolvency proceedings under the IBC. The goal was to hold the promoters of the defaulting enterprises accountable for providing personal guarantees for the loans taken out by their enterprises. The lenders filed bankruptcy claims against India’s leading business tycoons, including Anil Ambani, Kapil Wadhawan, and Sanjay Singal, in accordance with the requirements. Many promoters opposed the new laws in several high courts, alleging that the promoters alone should not be held accountable for loan repayment failure.

 In October 2021, the Supreme Court reassigned to itself a slew of writ petitions contesting the IBC’s personal insolvency rules that had been pending in several high courts. When the government issued the notification on personal insolvency in December 2019, the provisions were challenged in court by as many as 19 promoters, who claimed that the company was always run by a management board and that the promoters alone should not be held liable for debt repayment default. As many as 75 promoters and guarantors had challenged the personal insolvency provisions by the time the Supreme Court moved all the cases to itself in December 2020.

Outlook of the petitioners

Firstly, the petitioners believed that the Central Government had overstepped its authority by issuing the Notification, which changed Part III of the IBC in an unjustifiable manner. . Because the legislature made the law in its entirety, leaving nothing for the executive to legislate on, it was referred to as “conditional” rather than “delegated.”[2] Further, the petitioners argued that the rules of the Notification, establish a single procedure for a personal guarantor’s insolvency resolution, regardless of whether the creditor is a financial creditor or an operational creditor. In Swiss Ribbons (P.) Ltd. v. Union of India,[3] the court determined that the nature of loan arrangements executed by a corporate debtor with financial creditors differed significantly from contracts with operational creditors for the supply of products and services. Combining financial and operational creditors equates to treating unequal’s alike and a breakdown of the categorization carefully formed by the Parliament.

Lastly, the promoters and guarantors were of the opinion that the guarantor’s obligation was co-extensive[4] with the corporate debtor’s, and if a resolution plan was approved, the personal guarantor’s responsibility would be extinguished as well. The petitioners relied on the decision in the case of Committee of Creditors of Essar Steel India Ltd. v. Satish Kumar Gupta[5] wherein the court observed that an approval of a resolution plan in respect of a corporate debtor amounted to the extinction of all outstanding claims against the debtor.

Supreme Court Judgment

The Supreme Court stated that it was clear that the mechanism used by the Central Government to implement certain provisions of the Act had a specific purpose: to achieve the IBC’s objectives in relation to the priorities. “The apex court said there was an intrinsic connection between personal guarantors and their corporate debtors and it was this “intimate” connection that made the government recognize personal guarantors as a “separate species” under the IBC.”[6]

According to the Hon’ble Supreme Court, there appeared to be compelling grounds why the forum for adjudicating insolvency processes should be common which should be through the NCLT. The NCLT would thus be able to look at the big picture, so to speak, of the nature of the assets available, whether during the corporate debtor’s insolvency proceedings or afterward. The Committee of Creditors would be better able to frame realistic resolution plans if they had a complete picture, keeping in mind the possibility of recovering some of the creditor’s dues from personal guarantors. Based on this discussion, the Court concluded that the contested notification was neither a legislative act nor an instance of improper and selective application of the IBC’s provisions.

The court also cleared up a misunderstanding among petitioners that acceptance of a resolution plan for corporate debtors would also discharge the personal guarantor’s obligations and said that The release or discharge of a principal borrower from his or her obligation by operation of law, or as a result of a liquidation or bankruptcy procedure, does not absolve the surety/guarantor of his or her duty arising from an independent contract. As a result, the Notification was found to be legal and valid, and the writ petitions, transferred cases, and transfer petitions in this case were all dismissed.

Analysis and aftermath

The government has started the procedure and currently offers a full solution for the Corporate Debtor’s CIRP as well as the individual who has supplied a guarantee for that Corporate Debtor. As a result, the gap or limitation in the IBC that had previously limited the adjudication of cases involving corporate guarantors solely has been lifted, and creditors will now be entitled to seek repayment from either of them, i.e. the Corporate Debtor or the Personal Guarantor of the Corporate Debtor. Though the obligations were always coextensive legally in accordance with established principles of law, MCA has now brought Corporate Debtor and Personal Guarantor into the same operational platform. Following that, such personal guarantors might file a claim for insolvency with NCLT.

This will be a significant boost because lenders will now be empowered to pursue funds from promoters/personal guarantors if the amount recovered from the Corporate Debtor is insufficient, and in cases where bankers initiate IBC procedures, they may have to re-evaluate the entire ground scenario. Though the development is exactly as expected, it may cause some anxiety among promoters, particularly those who are either facing IBC procedures (or are expecting to face IBC due to defaults) or who are likely to face IBC due to defaults. This may also force promoters to consider and strategize about the extent to which they might use their personal assets to obtain corporate financing.

Similarly, despite such notification, advisers’ jobs may not be easy due to unanswered questions such as how to handle dual legal cases; to what extent can a creditor collect money from a personal guarantor, and the practical challenges of pursuing both for recovery, among others. As a result, these issues may be presented in a court of law shortly, and the appropriate honorable courts will investigate these issues in accordance with the law and equity principles.

Conclusion

Many famous industrialists who are the promoters of debt-ridden enterprises would be concerned by the ruling but many creditors will breathe a sigh of relief as a result of the immediate judgement, which has opened the door to the personal guarantors’ asset pool under the IBC. Personal guarantors are more likely to “arrange” for the payment of the debt to the creditor bank in order to achieve a quick discharge if insolvency proceedings are filed against them.

Though only time will tell how such things develop and how honest courts administer justice, the government appears to be on the right track to achieve its goal of instilling financial discipline among borrowers, particularly corporate borrowers.

[1] Indian Contract act, 1872, Act No. 9, Section 126

[2] Vasu Dev Singh & Ors. v. Union of India & Ors., 2006 12 SCC 753.

[3] Swiss Ribbons (P.) Ltd. v. Union of India, 2019 4 SCC 17

[4] Kundanlal Dabriwala v. Haryana Financial Corporation, 2012 171 Comp Cas 94

[5] Committee of Creditors of Essar Steel India Ltd. v. Satish Kumar Gupta, 2019 SCC 1478

[6] Lalit Kumar Jain v. Union of India and Ors., Transfer Case (Civil) No. 245/2020

Written by: Aditya Sharma

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 Introduction: 

A creditors’ committee is a group of people who represent a company’s creditors in a bankruptcy proceeding. As such, a creditors’ committee has broad rights and responsibilities, including devising a reorganization plan for bankrupt companies or deciding whether they should be liquidated. The creditors’ committee is usually further divided between secured and unsecured creditors.

Brief Legal history: 

The Bankruptcy Law Reforms Committee (‘BLRC’) was tasked with the onerous responsibility of rewiring the insolvency and bankruptcy framework in India. The BLRC presented an exhaustive report in November 2015 (‘BLRC Report’) for crafting a comprehensive code.

The Committee of Creditors (‘CoC’) was fashioned as one of the steering bodies driving the insolvency process under the Insolvency and Bankruptcy Code, 2016. Part II of the IBC does not define CoC for corporate persons, though CoC is a defined term for individuals and partnership firms in Part III of the IBC.

Recent Changes: 

Generally, as per IBC, the COC consists of the financial creditors only. In other words, all the Creditors who have financed the corporate debtor against the consideration of time value of money are included in the Committee of Creditors. In case if there are no financial creditors, in such case eighteen largest Operational Creditors along with one representative from workmen and from employee will be the members of the COC. The powers of these members are quite akin to the powers of the members of the financial creditors. The Operational creditors will not find any place in the COC except in case if the debt of the operational creditors are more than 10%, in such case the operational creditors will participate the COC through a representative. after supreme court’s judgement on Essar Steel case, it can be concluded that the Code is moving towards achieving its intended goal of swift redeployment of productive assets trapped in insolvent companies, and discouraging the notion that big loans are the lenders’ problem, not the borrowers’. The net result is significantly positive for credit discipline in India.

Important Judgement:  

Committee of Creditors of Essar Steel India Limited through Authorized Signatory v. Satish Kumar Gupta

A petition for initiating the insolvency resolution process against Essar was admitted by the National Company Law Tribunal. ArcelorMittal was the successful resolution applicant. The resolution plan submitted by ArcelorMittal provided that the operational creditors with an exposure of above INR 1 crore would not be entitled to any distributions. The NCLT approved ArcelorMittal’s resolution plan and asked the CoC to distribute 85% of the amount under the resolution plan amongst financial creditors and the remaining 15% amongst the operational creditors. The decision of NCLT was subsequently challenged. Hon’ble supreme court upheld the primacy of the Committee of Creditors (‘CoC’) in distribution of funds of INR 42,000 crore received under the resolution plan submitted by ArcelorMittal.

Role the COC in CIPR (corporate insolvency resolution process): The Supreme Court upheld the concept of supremacy of the commercial wisdom of the CoC in approval of the resolution plan, provided they take into consideration/ account for interest of all stakeholders.

 Comparison with International Scenarios: 

The Bankruptcy Law Review Committee report 2015 pondered upon various aspects of the Code including the formation and composition of the CoC, concluding that members of the CoC have to be creditors both with the capability to assess viability, as well as be willing to modify terms of existing liabilities in negotiations. With this reasoning, operational creditors were intentionally left out of the CoC under the presumption that such creditors would neither be able to decide on matters regarding the insolvency of the entity, nor would they be willing to take the risk of postponing payments for better future prospects. This reasoning of the BLRC stands in stark contrast with the Legislative Guide on Insolvency Law (“LGIL“) proposed by The United Nations Commission on International Trade Law (“UNCITRAL“), wherein the UNCITRAL recognised that the first key objective of a resolution process is to balance the advantages of near-term debt collection through liquidation against preserving the value of the debtor’s business through reorganization.

UK Insolvency laws: Secured creditors are generally not represented on a creditor committee if they are fully secured or over-secured. Where they are under-secured, however, their interests are more likely to align with those of unsecured creditors and their participation in the committee or in voting by creditors may be appropriate, at least to the extent that they are under-secured. An example of this would be the Company Voluntary Arrangement (CVA) mechanism under UK insolvency laws, where secured creditors are entitled to vote only in specific circumstances.

Under German insolvency law: the creditors vote by groups. The consent of every group is needed. Within a group the majority of creditors (as headcount) and creditors having the majority of debt need to approve the insolvency plan.

Changes and Suggestions:

 The legislature was quick to amend the Code to protect the interests of homebuyers by according them the status of a financial creditor, allowing each and every homebuyer irrespective of the quantum of his financial debt to a vote on the CoC. it has is tilted the already lopsided scales further against operational creditors, ultimately leading to frequent challenges to resolution plans by operational creditors before courts and delaying the resolution process.

Conclusion: 

A comprehensive overhaul of the constitution of the CoC is thus urgently required to preserve the purpose and the actual intent of the Code. A reference could be made to Section 230 of the Companies Act, 2013, where certain provisions are made that secure the interests of all creditors. This security is however, contingent on the actual appointment of operational creditors to the CoC which is the primary need of the hour.

Submitted by: Purvi Goyal

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