Yearly Rewind 2024: Insolvency and Restructuring

1. Statutory set-off is not applicable to Corporate Insolvency Resolution Process (January)

In ‘Bharti Airtel Limited and Another v. Vijaykumar V. Iyer and Others’, the SC ruled that creditors cannot claim set-off during the Corporate Insolvency Resolution Process (CIRP) under the Code. It held that the provisions for statutory set-off under the Code of Civil Procedure, 1908, or insolvency set-off under the IBBI (Liquidation Process) Regulations, 2016, are not applicable to CIRP. However, the Court provided two exceptions to this rule:

Contractual set-off: This exception allows for set-off if there was a pre-existing contractual agreement before the CIRP began. During the CIRP, the terms of existing contracts remain valid, and actions related to those contracts can continue.

Equitable set-off: This exception applies when there are linked claims and counterclaims arising from closely connected transactions. Here, the set-off is justified based on fairness and equity, even if not explicitly provided for by law.

2. NCLT possesses inherent authority to recall an order approving a Resolution Plan (February) (read our thoughts on the issue here)

In ‘Greater Noida Industrial Development Authority v. Prabhjit Singh Soni and Another’, the SC held that a court or tribunal, in the absence of any provisions to the contrary, has inherent power to recall an order to secure the ends of justice. Neither the Code nor its regulations prohibit the exercise of such inherent power by the NCLT. The SC cautioned that such power should be used sparingly, and not as a tool to re-hear the matter.

The SC has identified certain grounds on which a recall application is maintainable: i) the order is without jurisdiction; ii) the party aggrieved with the order is not served with notice of the proceedings in which the order under recall has been passed; and iii) the order has been obtained by misrepresentation of facts or by playing fraud upon the tribunal resulting in gross failure of justice.

3. NCLT can direct ED to release attached properties (March) (read our thoughts on the judgment here)

In ‘Shiv Charan v. Directorate of Enforcement Government of India’, the Bombay High Court upheld the NCLT’s powers to direct the Enforcement Directorate to release attached properties of a corporate debtor once a resolution plan in respect of the corporate debtor had been approved by the NCLT. The Bombay High Court affirmed that the Code supersedes the provisions of the Prevention of Money Laundering Act, 2002in case of conflict, and that the legislative intent behind the Code is to shield the corporate debtor and its assets from antecedent proceedings under other laws, contingent upon a complete change in ownership and control in favor of unrelated parties.

4. Requirement of written consent prior to the filing of the application for replacement of the liquidator is mandatory (April)

In ‘AAA Insolvency Professionals LLP v. Edelweiss Asset Reconstruction Pvt. Ltd.’, the NCLAT held that the written consent of the proposed liquidator must be recorded and is a mandatory requirement as per the process provided under IBBI Liquidation Regulations, 2016. Any instance of non-compliance in recording the written consent is not a curable defect. The NCLAT further held that the NCLT has sufficient power under the Code to remove the liquidator, if it finds the same fit, just, valid and proper, irrespective of the approval of the appointment of alternate liquidator by the stakeholder consultation committee.

5. Arbitration proceedings do not preclude the pursuit of other legal remedies, including those under the IBC (May)

In ‘Pitambar Solvex Pvt Ltd and Another v. Manju Sharma and Others’, the Delhi High Court held that by initiating arbitration proceedings, the corporate debtor is not restricted from seeking other remedies, including those under the Code. Pursuant to the same, the Delhi High Court appointed the sole arbitrator for adjudication of dispute arising out of the share purchase agreement and credit facility agreement. The Delhi High Court also clarified that the parties can resolve their disputes separately as per the arbitration clauses in the respective agreements if consolidation of the arbitration arising out of these two agreements is not possible.

6. Applicability of doctrine of necessity in the Code (July) (read our thoughts on the judgment here)

In ‘C. Sivasami v. A.R. Ramasubramania Raja and Another’, the NCLAT held that under the Code, both the NCLT and NCLAT possess the authority to invoke the ‘doctrine of necessity’ to address unavoidable circumstances and uphold the objectives of the Code. In this case, the resolution applicant was required to deposit a sum of INR 100 million as a condition for implementing the resolution plan. However, the resolution applicant defaulted, having paid only INR 10 million which led the liquidator to file for liquidation. Considering that no other resolution plan had been submitted, the NCLAT granted the resolution applicant a final opportunity to pay the outstanding balance.

9. Claim arising after CIRP commencement date cannot be admitted (September)

In ‘Gujarat Urja Vikas Nigam Limited v. Mr. Udayraj Patwardhan’, NCLAT held that no claim arising after the corporate insolvency resolution process (CIRP) commencement date can be admitted. The NCLAT upheld the strict interpretation of the provisions of the Code and stated that even the Code only allows the resolution professional to collate and verify claims submitted as on the CIRP date.

10. Parity of certified copy obtained upon payment with certified copy obtained free of cost (September) (read our thoughts on the judgment here)

In ‘State Bank of India v. India Power Corporation Ltd.’, the SC ruled that there is no distinction between a free certified copy of an order and the one obtained by paying a fee under the NCLT Rules, 2016. In case of delay in obtaining the certified copy, the time period in doing so must not be hit by limitation. This decision of the SC thereby also aligns with Section 12 of the Limitation Act, which excludes the time between the application for a certified copy of the order and its receipt for computation of the limitation period.

13. Liquidation a natural consequence of failure to implement Resolution Plan (November)

In ‘State Bank of India and Others v. The Consortium of Mr. Murari Lal Jalan and Mr. Florian Fritsch and Another’, SC held that non-implementation of a resolution plan for five years qualifies as a ‘peculiar and alarming’ situation which warrants the SC to exercise its extraordinary powers under Article 142 of the Constitution. The SC taking note of the failure to implement the resolution plan, ordered for liquidation of the corporate debtor. The SC held that if the successful resolution applicant fails to implement the Resolution Plan, the corporate debtor must undergo liquidation. The SC emphasized that while liquidation under the Code is a last resort, timely resolution is a critical component of the Code’s framework. Prolonged delays in resolution not only undermine efficiency but can also further harm the corporate debtor and diminish potential recoveries during liquidation. In the present case, where more than five years have elapsed without implementation of the Resolution Plan, the SC observed that “timely liquidation is indeed preferred over an endless resolution process.”

14. Jurisdiction of NCLT on development rights created in favor of Corporate Debtor (November)

In ‘K.H. Khan and Another. v. Art Constructions Pvt. Ltd. and Others’, the NCLAT held thatany right of development created in favor of corporate debtor would amount to ‘property’ as defined under Code and the same must be included in information memorandum by the resolution professional. The NCLAT further held that the NCLT possesses jurisdiction to decide on creation and inclusion of the said property in the corporate insolvency resolution process of the corporate debtor.

15. NCLT cannot decide issues of Labor Law (November)

In ‘Rakesh J Shah & Others v. Sanjay Kumar Agarwal and Others’, the NCLAT held that the NCLT does not have the jurisdiction to decide compliance of Industrial Disputes Act, 1947 in closure of the factory. The NCLAT held that issues related to such compliance must be raised before the relevant authority as specified under the concerned labour law and that NCLT or NCLAT is not the right forum to adjudicate on such issues.

16. Carve out for Code in SEBI Delisting Regulations is not ultra-vires of SEBI Act (December)

In ‘Harsh Mehta v. Securities and Exchange Board of India and Others’, the Bombay High Court held that the delisting of shares pursuant to the implementation of an approved resolution plan is permissible under the Code given its overriding effect on other laws. The Bombay High Court also recognized the specific exemption provided under the Securities and Exchange Board of India (SEBI) Delisting Regulations, 2021, which allows for the delisting of shares in accordance with an approved resolution plan. Therefore, this exemption is consistent with SEBI Act.

Amendments and other developments introduced by IBBI

1. Revision of CIRP Regulations to streamline Corporate Insolvency Resolution Process (February) (read our thoughts on the amendment here)

The following are the various amendments brought into effect to optimize the corporate insolvency resolution process:

1. Every real estate project of the corporate debtor should have a separate bank account which shall be operated by the Resolution Professional (RP).
2. The RP can now invite a separate resolution plan for each real estate project or group of projects of the corporate debtor.
3. The RP must convene a meeting of the committee of creditors (CoC) within 30 days of the date of the last meeting.
4. The CoC can now set the electronic voting window’s duration between a minimum of 24 hours and a maximum of seven days, with the possibility of extending it in 24-hour increments.
5. The RP is now required to place the operational status of the corporate debtor in every CoC meeting and seek approval from the CoC for all costs including going concern costs related to the corporate insolvency resolution process (CIRP).
6. The registered valuers in a CoC Meeting must explain the methodology adopted for valuation to the members of the CoC.
7. The fair value of the corporate debtor must be disclosed in the information memorandum, unless the CoC decides otherwise.
8. The CoC can provide for a monitoring committee for implementation of each resolution plan.
9. The RP is now required to continue to discharge his responsibilities till the application for extension of CIRP is decided by the NCLT.

3. Guidelines for CoC by IBBI (August) (read our thoughts on the guidelines here)

IBBI has issued guidelines providing for nine considerations to be followed by the CoC during the insolvency process. These guidelines are aimed at timely resolution of insolvency of the corporate debtor and its asset value maximization. The following are the considerations enumerated in the guidelines:

1. CoC to ensure objectivity in decisions and maintain integrity in all roles.
2. In case of any existing or potential conflict of interest, immediate disclosure to CoC or insolvency professional is required.
3. Active and constructive participation is required to be facilitated in CoC discussions and decision making.
4. Cooperate with and supervise the insolvency professional in discharging his duties including ensuring expeditious appointment of various professionals within the timelines.
5. Confidentiality of the information has to be maintained by the CoC members.
6. Decision on corporate insolvency resolution process cost, expenses of the insolvency professional and fixing liquidator’s fee must be considered.
7. Ensure regular CoC meetings are held and monitor activities of insolvency professional by seeking rationale for decisions taken.
8. provide the latest financial statements, relevant audit extracts (stock, transaction, forensic), and other pertinent information to the insolvency professional.
9. review and assess the information memorandum prepared by the IP and offer insights. 

4. Creditor representation in Corporate Insolvency Resolution Process enhanced (September) (read our thoughts on the amendment here)

Regulation 16A of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 has been amended to facilitate enhanced creditor representation in the process. Regulation 16A now provides for insolvency professional chosen by the majority of creditors in a class as per Regulation 16A (1) to serve as their interim representative until the request for their appointment in processed by the adjudicating authority.

Our Thoughts

The Code has undeniably transformed India’s corporate insolvency landscape, establishing itself as a cornerstone of economic governance and recovery. By fostering credit discipline, enabling the revival of distressed assets, and recovering over INR 3.5 trillion for creditors through resolution and INR 104.46 billion through liquidation as of September 2024, the Code has made remarkable strides toward achieving its objectives. Its impact on turning unproductive assets into contributors to economic growth is a testament to its far-reaching efficacy. Furthermore, the recovery of assets lost to fraudulent or undervalued transactions highlights the Code’s emphasis on accountability and responsible corporate governance.

However, the Code’s implementation is not without challenges. Procedural inefficiencies, excessive delays in adjudication, and legal ambiguities undermine the Code’s goal of time-bound and effective resolutions. For instance, nearly 64% CIRPs exceed the statutory 330-day limit, with delays at the NCLT level significantly eroding creditor recoveries. The competence and conduct of some key stakeholders in the CIRP remain areas of concern, with numerous investigations and show-cause notices highlighting gaps in oversight and accountability.

The judiciary has played a crucial role in shaping the Code’s trajectory, with landmark rulings clarifying principles like equitable set-off and tribunal powers, but the increasing costs of CIRPs and frequent litigation highlight the urgent need for systemic reforms. While the Code has evolved as a critical instrument of corporate governance, its potential remains constrained by delays, capacity limitations, and regulatory loopholes.

Addressing these issues requires a multifaceted approach. Recommendations in the Third Report of the Standing Committee on Finance (18th Lok Sabha) on Demands for Grants (2024-25) of the Ministry of Corporate Affairs (available here) provide a strong foundation for reform, such as prioritizing time-sensitive cases through fast-track tribunals, adopting urgent list systems, and enforcing strict timelines can significantly reduce procedural delays. Strengthening the competence and accountability of resolution professionals through rigorous certification, training, and independent reviews will enhance the quality of resolution processes.

Ultimately, the Code’s success lies in striking a balance between procedural rigor and flexibility. By addressing delays, enhancing stakeholder confidence, and embracing innovative solutions, the Code can evolve into an even more robust framework for corporate insolvency resolution. Its continued refinement will not only boost economic recovery but also solidify India’s standing as a jurisdiction committed to efficiency, transparency, and equitable resolution processes.

The information contained in this document is not legal advice or legal opinion. The contents recorded in the said document are for informational purposes only and should not be used for commercial purposes. Acuity Law LLP disclaims all liability to any person for any loss or damage caused by errors or omissions, whether arising from negligence, accident, or any other cause.