NCLT admits the first insolvency & bankruptcy case under the Code

The National Company Law Tribunal (NCLT), Mumbai has admitted the first insolvency proceedings initiated under the Insolvency and Bankruptcy Code, 2016 (Code) by ICICI Bank, against Innoventive Industries Ltd to commence a ‘corporate insolvency resolution process’.

ICICI was represented by Cyril Amarchand Mangaldas who had briefed Zal Andhyarujina while Innoventive, the debtor company was represented by Crawford Bayley who had briefed senior counsel Ravi Kadam .

Innoventive Industries, a company, which once boasted a ?52.2 crore revenue, reported losses of ?955 crore at the end of September last year. After getting listed on the BSE in May 2011, the price of its share fluctuated between ?136 to ?76.05 for the next two years thereafter, hitting an all time high of ?147.9. After a corporate debt restructuring scheme was approved in September 2013, the stock price hit an all time low of ?9.80. And a year later, it signed a master restructuring agreement with banks which was junked later.

ICICI’s application has been filed under Section 7(1) of the Code, which enables a ‘financial creditor’ either by itself or jointly with other financial creditors to initiate the corporate insolvency resolution process. As the first of its kind case filed under the Code, this is expected to serve as a primer for the suits that follow.

Arguments for Innoventive were heard on 23 December last year; arguments for ICICI were heard on 16 January this year.

Ravi Kadam relied on a notification dated July 18, 2016 issued by Maharashtra Government’s Industries Energy & Labour Department, that ‘suspends’ its ‘liabilities’ from 22 July 2016 to 21 July 2017, thus asserting that there is in fact no ‘debt’ owed by Innoventive to ICICI.

This notification, issued under the Maharashtra Relief Undertakings (Special Provisions) Act, 1958 (MRU Act), allows the State Government to notify any industrial undertaking as a ‘relief undertaking’. On the one hand, Section 4(1)(a)(i) limits the application of the non-obstante clause to the laws mentioned in the Schedule to the Act, and on the other, Section 4(1)(a)(iv) ‘suspends’ any ‘privilege, right, obligation or liability’ against the undertaking, thereby questioning the very existence of the former provision.

Zal Andhyarujina, however, pointed out that the Code contains within itself an identical non-obstante clause as the SARFAESI, which has been the subject of similar litigation.

In the case of JM Financial Asset Reconstruction vs. the State of Maharashtra & Ors. the Bombay High Court held that actions taken under the SARFAESI Act shall override the provisions of any notifications issued under the MRU Act on account of the former being a law passed under Union List and the latter being a law passed under the Concurrent list. Thus, a secured creditor could exercise her rights under the SARFAESI Act notwithstanding the notifications issued under the MRU, which otherwise suspended enforcement of rights against a ‘relief undertaking’.

While the above mentioned judgment has been appealed against in the Supreme Court, it is unclear whether there is status quo or if judgment has been stayed.

Andhyarujina also argued that term ‘liability’ cannot be strictly applied to the case in hand since there is no mention of the word ‘debt’ in the MRU Act, much less a ‘financial debt’, which the Code speaks of.

The other case that Andhyarujina relied on is M/S Madras Petrochem vs. BIFR  wherein it was held by the Supreme Court that provisions of SARFAESI which uphold ‘creditor’s right’ will continue to apply despite the existence of a non-obstante clause in Section 22 of the Sick Industrial Companies (Special Provisions) Act, 1985, which allowed suspension of all proceedings upon declaration of a company as ‘sick’.

One important legislative void, however, which this case has put forth is with respect to the statutory timelines for initiation of a corporate insolvency resolution process. While Section 7(5) of the Code requires the Adjudicating Authority to pass an order of admission or rejection within a period of fourteen days from the date of receipt of application, this requirement was not met with. What happens when the Adjudicating Authority fails to pass such an order within fourteen days, is a point on which the Code is silent.

After Judicial Member B.S.V Prakash Kumar pronounced his order admitting the application, Ravi Kadam requested for a detailed copy of the order, exhibiting intentions of an appeal.

The detailed order of the matter is expected to be out on 19 January.