NCLAT’s Essar ruling: Notable observations on role of Creditors’ Committee

– CS Megha Mittal

[This article is intended for academic debate on the law around powers of the Committee of Creditors vis-à-vis the adjudicatory authorities, as it continues to evolve]

More than being just another matter in the list of insolvency cases in India, the Essar Steel matter has always been in the spotlight, not only for its sheer magnitude in the core sector to which the company belongs, but also  for the significant judicial principles being determined by the authorities. One amongst the “dirty dozen” cases, the SBI-initiated insolvency process of Essar Steel has now extended way beyond the statutory period of 180/270 days; with only a month left for the insolvency process to turn two, the National Company Law Appellate Tribunal (NCLAT) has finally upheld the Resolution Plan of ArcelorMittal India Private Limited (ArcelorMittal/ AMIPL), approved by National Company Law Tribunal, Ahmedabad Bench on 8th March, 2019, however, subject to modifications.

In Standard Chartered Bank v. Satish Kumar Gupta, R.P. of Essar Steel Ltd. & Ors, amidst various matters for determination, NCLAT prominently dealt with and examined these 2 issues –

(i) equitability/proportionality between the rights of financial creditors and operational creditors (intra-class as well as inter-class), echoing, with probably with much greater clarity and stress, its earlier views in Binani Industries Limited v. Bank of Baroda &Anr.; and

(ii) the dos and don’ts of the Committee of Creditors (CoC) and the ambit of the powers vested upon them, including whether the CoC can decide on the amount of distribution, inter-se.

The ruling continues to add to the evolving body of law on the delicate balance between creditors’ supremacy and the role of the adjudicatory body, also discussed in our another article. However, it seems that this is still not the last word on the subject.While examining the issues, the ruling also makes extremely interesting observations about the (ir)relevance of section 53 to the framing or prioritisation of claims in case of a resolution, propounding a completely new line of thinking.

Equitable Treatment of Similarly Situated Creditors

What seems to be one of the most prevalent principles throughout the order, is upholding the spirit of equitable treatment of the creditors. The initial Resolution Plan gives indications of an arbitrary discrimination, not only between the financial and operational creditors, but also between the various sub-classes from amongst the same category of creditors. While one class of the financial creditors was proposed to get a hefty 92.5% of their dues, the Operational creditors on the other hand were either nominally assessed at Re. 1/- or were proposed to get 0% of their dues. This plan when put before NCLT, Ahmedabad, was approved with the condition that Operational creditors who have dues below Rs. 1 Crore must be paid in full. It is for this very reason that the aggrieved Operational Creditors,filed an appeal before NCLAT for rejection of the Resolution Plan proposed by AMIPL.

CoCs consist of financial creditors only; they sit and decide on the fate of all creditors. Their interests compete with others, because the limited size of the cake will be cut and apportioned between competing claimants, in a situation of deep shortfall. The apparent question of conflict of interest has already been settled by the Apex Court in Swiss Ribbons Pvt.Ltd. &Anr v. Union of India &Ors, whereby the constitutionality of the structure of CoC was upheld. Therefore, the fact that the CoC consisting of financial creditors can arbiter on the fate of operationalcreditors is already a settled part of the Indian law. However, the NCLAT is certainly not prepared to allow the CoC the ability to conveniently leverage its position to approve a plan that was in all obvious ways, inclined in interests and favour of financial creditors. Further, there has been an interesting issue of delegation of powers to the so-called “Core-Committee” comprising of only selective members handpicked from the CoC, discussed in the ruling *

It was observed that the Financial creditors are at the same page as the Operational Creditors as “claimants” from the Corporate Debtor and hence, are in a position of conflict of interest while determining distribution amongst the creditors, especially when the maximum chunk of such distribution falls in the basket of the financial creditors. As also observed in the order and the BLRC Report, the CoC, are bestowed with the power to approve resolution plans for the very reason that members of the CoC being institutions having sound infrastructure andrisk assessing capabilities, shall be much more proficient in analysing and assessing the commercial viability and feasibility of the resolution plans, vis-à-vis theoperational creditors.

As they say, “With great power comes great responsibility”; the CoC too, owes duty to the Code to not take unfair advantage of their position as laid down in the Code; rather, they must be suitableenough to approve those resolution plans which give a fair and equitable treatment to all classes of creditors. It must be noted that the term “equitable” does not connote “equal”; rather, it means that the principles applied to determine the basis of payment to operational creditors shall be the same as that for the financial creditors.

Regulation 38 (1) (b) of the Insolvency and Bankruptcy Code (Corporate Insolvency Resolution Process), 2016 (CIRP Regulations) makes it mandatory for a resolution plan to identify sources of funds to pay to the operational creditors, a sum equivalent to the liquidation value, in priority to the FCs. This implies that a mere mandate for provision of liquidation value due to operational creditors does not rule out a value higher liquidation value for Operational Creditors.

Further, Regulation 38(1A) of the CIRP Regulations, states that a resolution plan shall include a statement as to how it has dealt with the interests of all stakeholders, including financial creditors and operational creditors, of the corporate debtor. It must however be noted that the term “shall” is to be read as “must” as it imposes on a resolution applicant, a duty to comply with the requirements as laid down by the Code in order to ensure the protection of interests of all stakeholders.

The Appellate Authority went on to remind its ruling in Binani Industries Limited v. Bank of Baroda &Anr., wherein it observed that, if the misplaced notions and misreading of section 30 of the Code lead to discrimination against the OCs, it shall act as a demotivator for all those who supply goods and services on credit, which most definitely is not what the Code seeks to achieve. Hence, it is necessary to balance the interests of the FCs and the OCs, while maximization of the assets of the Corporate Debtor. Therefore, the Appellate Authority held that, “Any ‘Resolution Plan’ if shown to be discriminatory against one or other ‘Financial Creditor’ or the ‘Operational Creditor’, such plan can be held to be against the provisions of the ‘I&B Code”

Also, for ensuring equitable treatment of similarly situated creditors, the Hon’ble Supreme Court in “Swiss Ribbons Pvt. Ltd. &Anr.” (Supra) noticed the ‘UNCITRAL Guidelines’ and observed:

      “70. Quite apart from this, the United Nations Commission on International Trade Law, in its Legislative Guide         on Insolvency Law [“UNCITRAL Guidelines”] recognizes the importance of ensuring equitable treatment to               similarly placed creditors.”

       The Hon’ble Supreme Court in the said case further observed:

       “71. The NCLAT has, while looking into viability and feasibility of resolution plans that are approved by the                committee of creditors, always gone into whether operational creditors are given roughly the same treatment          as financial creditors, and if they are not, such plans are either rejected or modified so that the operational                creditors’ rights are safeguarded. It may be seen that a resolution plan cannot pass muster under Section 30            (2)(b) read with Section 31 unless a minimum payment is made to operational creditors, being not less than              liquidation value.”

 Hence, it is clear that while looking into viability and feasibility of the ‘Resolution Plan’ it is important to note whether the ‘Operational Creditors’ should be given roughly the same treatment as ‘Financial Creditors’, and if they are not, such plans are either rejected or modified so that the ‘Operational Creditors’ rights are safeguarded.

Powers of the Committee of Creditors

On perusal of the Order, one may understand that the most significant take-away from the 116 pager order, is the regulation of powers of the Committee of Creditors. Based on the facts that have arisen in the instant matter of Essar Steel, the Appellate Tribunal has very comprehensively laid down its observations w.r.t. the powers of CoC.

Right to delegate its powers

As discussed earlier, the facts of the instant case, suggest the formation of a “Core-Committee” comprising of only selective members handpicked from the CoC. However, it must be noted neither does the Code provide for, nor does it recognize the existence of any such committee. Hence, constitution of such committee, without the backing of any substantial grounds is an act of the CoC vires its powers. Though the facts suggest that such Committee was formed for operational and technical matters like representation before the Adjudicating Authorities, the Committee has definitely acted in excess of its powers, as “resolution plans” are the very essence of the corporate insolvency process and cannot be decided upon by such committee on their own whims and choices.

It is essential to note that the quorum as provided for in Regulation 21 read with Regulation 25 of the CIRP Regulations, provide that no voting can take place and no matter can be decided upon, even if one member of the CoC is absent. Such a provision is made to ensure the application of mind by all the members so that the pros and cons of the matters, here, Resolution Plan can be effectively assessed. Hence, in such a set-up, constitution of such sub-committee, influencing the resolution plan and determination of manner of distribution, evidently frustrates the intent of the Code and is beyond the scope of powers of that the Code bestows upon the Committee of Creditors.

Determination of distribution amongst the creditors:

As discussed above, Regulation 38(1A) of the CIRP Regulations,clearly requires a resolution applicant to provide a statement as to how it has dealt with the interests of all stakeholders, including financial creditors and operational creditors, of the corporate debtor. Hence, one can draw inference that the power and the responsibility to provide distinct distribution amongst the creditors is that of the resolution applicant and not the CoC.

Hence, the Appellate Tribunal, in its order held that:

        “139. Therefore, we hold that the ‘Committee of Creditors’ has no role to play in the matter of distribution of               amount amongst the Creditors including the ‘Financial Creditors’ or the ‘Operational Creditors’. The                            ‘Committee of Creditors’ is only required to notice the viability, feasibility of the ‘Resolution Plan’, apart from             other requirements as specified by the Board and ineligibility of the ‘Resolution Applicant’ in terms of Section           29A”

It was further appreciated by the Hon’ble NCLAT that, any question of distribution amongst the creditors, and/or the amount a particular creditor is entitled to receive, is for the Resolution Applicant to decide, not the CoC. The role of CoC is limited to assessing the feasibility and viability of the plan. The CoC shall not interfere in the contents of the plan, especially into the matters of distribution.

While the Appellate Tribunal, in the matter of Darshak Enterprise Private Limited v. Chhaparia Industries Pvt. Ltd, held that in a particular case, what should be the percentage of claim amount payable to one or other Financial Creditor or the Operational Creditor or Secured Creditor or Unsecured Creditor can be looked into by the CoC based on facts and circumstances of each case. However, the aforesaid decision is not applicable in the present case, as the Appellate Tribunal held that it is the Resolution Applicant who is required to decide the manner in which the distribution to be made amongst all the stakeholders including the Financial Creditors, Operational Creditors and other creditors. It is only when such distribution is found to be discriminatory and to find out what should be the percentage of the claim amount payable to one or other Financial Creditors or Operational Creditors, the CoC, may negotiate and may ask the Resolution Applicant to prepare revised chart re-distributing the amount in favour of Creditors in a manner which is non-discriminatory by providing same treatment to all the stakeholders.

To make commercial decisions

Though the extant Code states that the CoC shall take commercial decisions, it does not explicitly lay down as to what constitutes “commercial.” In such a scenario, based on the infrastructural and evaluation capabilities of the Coc, the Appellate Tribunal in its order has enumerated four key commercial decisions which the CoC is required to take, which are:

  • To assess whether the business of corporate debtor is viable or not;
  • To visualise as to what shall be the essential ingredients of the Resolution Plan;
  • To ensure that the corporate debtor continues to be a “going-concern” during the insolvency process;
  • To consider only those resolution plans that abide by the provisions of the Code, are feasible and viable and have provision for effective implementation.

Hence, from the above discussions, it can be summarised that the role of the CoC is similar to that of a fiduciary, as all decisions taken by the CoC have a significant impact on the insolvency process and the success or failure of the insolvency process is nothing but a function of the actions taken by the CoC.

Permissibility of inter-se classifications:

NCLAT noted that the Resolution Plan proposed by AMIPL, shows that the proposed distribution amongst the creditors, not only differentiates the creditors as financial and operational, it rather percolates to the next level and provides for an inter-se classification in both the categories. However, the question that arises here is that whether such inter-se classification is permitted.

The definition of “creditors” as provided for u/s 3 (10), visibly identifies five categories of creditors viz. financial creditor; operational creditor; a secured creditor; unsecured creditor, and decree-holder. However, the definition of neither of these five classes provides for further classifications and hence there cannot be any inter-se classification that leads to differential treatment of the creditors.

One may note that the definition of “operational creditors” under section 5 (20) provides for three separate classes i.e.

  1. Those who have ‘supplied goods’ and ‘rendered services’ and thereby entitled for payment.
  2. The employees who have ‘rendered services’ for which they are entitled for payment
  3. The Central Government, the State Government or the Local Authority who has not rendered any services but derive the advantage of operation of the ‘Corporate Debtor’ pursuant to existing law (statutory dues).

However, such classification, too, does not give a leeway for differential treatment of similarly placed creditors.

Application of section 53 of the Code:

Section 53 of the Code, which provides for priority of distribution of assets during liquidation, is widely acknowledged as the basis of determining distribution of payments during CIRP too. However, the Appellate Tribunal in its order, has laid down that section 53 of the Code shall not be applied to the distribution provided for under CIRP, for the reason that Resolution Applicant proposes the distribution of debt to the Financial Creditors, Operational Creditors and other stakeholders out of the amount proposed to be paid by the ‘Resolution Applicant’, whereas, on the other hand, after liquidation, debt is distributed out of the assets of the Corporate Debtor, and hence, to treat these two as similar situations shall not be valid.

Can distribution parameters be different between insolvency and liquidation?

One of the very important principles, almost marking a watershed in the thought on the issue so far, is that the waterfall/priority order of section 53 is not relevant for a resolution plan. Of course, while doing so, the Hon’ble NCLAT has gone through the language of section 53 which refers to distribution of liquidation estate or the assets of the corporate debtor. In case of resolution, it is not a question of distribution of the liquidation estate or the assets of the corporate debtor; it is a question of distribution of the money brought by the resolution applicant.

However, the key principle is – insolvency laws are all about distributive justice; are the principles of distributive justice different in case of a resolution rather than liquidation? Bankruptcy is a situation of helplessness and therefore, terminal in nature. Resolution is a stage of helpfulness, and therefore, recuperative in nature. But the key issue in both is the same – there is a deficit of assets to meet liabilities. Can it be argued that the priorities in resolution may be different than liquidation?

Analogically, Company Voluntary Arrangement (CVA) is to UK Insolvency Act, what Resolution Plan is to IBC. Once the CVA is approved by the creditors they are provided a lump-sum payment in lieu of their debts. However, on the basis of several judicial precedents under the UK Insolvency Law[1], it is clear that a supervening liquidation under the UK Insolvency Act does not affect the distributions decided upon under the CVA. This gives a clear implication that distribution during Administration or Winding Upis based to similar rationales and principles, focusing on equitability rather than stage of insolvency.

Further, in a different context, the so-called “vertical approach” adopted under CVA[2], which provides that a creditor must be in better position as compared to when the company goes into liquidation, helps us draw inspiration that the waterfall mechanism U/s 53 of IBC shall also apply to distribution under CIRP, for the reason that if the priority is not maintained under CIRP also, creditors might be in a detrimental position during CIRP, something which the Code does not aim at.

If the priorities in liquidation are not applicable to resolution, it may be well be argued that a secured creditor, who has priority in liquidation, will not be put in the same footing in resolution. However, that will be “unfairly prejudicial” to a class of creditors, because no resolution, which is a debtor-creditor agreement, can be prejudicial as compared to what the statute promises to a secured creditor.

Of course, there is no issue in an RA promising to pay higher than the liquidation values, but the liquidation value must still be the minimum in any resolution. And liquidation values do come from so-called liquidation analysis, which has to be done according to section 53. So, whilst it may be argued that section 53 is not the only guiding factor in resolution distribution, but section 53 must form the bedrock.

Acknowledging the fact the two situations are separate events during the entire CIRP, Liquidation process, it shall not be correct to totally delink the section 53 of the Code with CIRP process. The author wishes to draw attention to the fact that section 53 acts as the basis to understand the rationality and grounds of distribution even during CIRP and hence, distribution under CIRP can be inspired from section 53 of the Code.

As the crux in both situation remains ensuring the best of interest of the creditors, the two situations have an obvious nexus and hence, to delink the two shall not be in line with the Code.

The Appellate Tribunal in its order has set another precedent, deliberating several significant issues. However, expectedly, the lenders have now approached the Apex Court appealing against the order of NCLAT.

[1]See: Re Halson Packaging Ltd [1997] BCC; Re Arthur Rathbone Kitchens Ltd [1998] BCC 450;

[2] See: Mourant& Co Trustees Limited & another v Sixty UK Ltd (in liquidation) & others [2010] EWHC 1890 (CH); Prudential Assurance Company Ltd v PRG Powerhouse Limited [2007]

RBI’s 12th February circular: The Last Word Becomes the Lost World

RBI’s 12th February circular:

The Last Word Becomes the Lost World

Abhirup Ghosh (

The 12th February 2018 circular of the Reserve Bank of India (RBI)[1] (Circular), arguably one of the sternest of measures requiring banks to stop ever-greening bad loans, and resolve them once for all, with a hard timeline of 6 months, or mandatorily push the matter into insolvency resolution, was aimed at being the last word, overriding several of the previous measures such as CDR, JLF, SSSS-A, etc. However, with the Supreme Court striking it down, in the case of Dharani Sugars and Chemicals Limited vs Union of India and Ors.[2], the mandate of the RBI in directing banks with how to deal with stressed loans has fallen apart. While the SCI has used very technical grounds to quash the 12th Feb circular, the major question for the RBI is whether it should continue to micro-manage banks’ handling of bad loans, and the major question for the banks is when will they grow up into big boys and stop expecting RBI to tell them how to clean up the mess on their balance sheet.

The judgment has received mixed reactions from various parts of the economy. This write-up will take you through how it started, and how it ended and what the way forward is.

How it started?

The inception of the entire trail dates back to 5th May, 2017 when the Banking Regulation (Amendment) Ordinance, 2017 was notified. The Ordinance was passed with the intention to empower the Central Government (CG) to authorise the RBI to issue directions to banking companies to initiate insolvency resolution process (IRP) under the provisions of Insolvency and Bankruptcy Code, 2017 (IBC). Two new sections were introduced in the Banking Regulation Act, 1949, namely, sections 35AA and 35AB. While section 35AA empowered the CG to authorise RBI to direct banks to initiate IRP proceedings, section 35AB empowered the RBI to issue directions to the banking companies for resolution of stressed assets.

Soon after the Ordinance was notified, the Ministry of Finance empowered the RBI to issue directions under section 35AA on 5th May, 2017[3].

The Ordinance was replaced by the Banking Regulation (Amendment) Act, 2017 on 25th August, 2017[4]. However, before the Ordinance could turn into an Act, the RBI issued a press release[5] conveying the following:

  1. That it has constituted an Internal Advisory Committee that will help identifying accounts for which IRP must be launched;
  2. That it is laying down criterion for referring accounts for resolution under IBC among top 500 exposures in the banking system which are either wholly or partially NPA; and that 12 accounts satisfy the conditions;
  3. That for the accounts which do not satisfy the criterion laid down by IAC, the banks must prepare a resolution plan within six months and where a valid resolution plan is not agreed upon IRP must be launched after the expiry of six months;
  4. That the RBI will issue directions, based on the recommendations of the IAC, to banks to initiate insolvency proceedings under IBC;
  5. That the RBI will subsequently issue framework for dealing with other NPAs.

Subsequently, the RBI came out with a framework for dealing with other NPAs on 12th February, 2018. The framework was notified by RBI, purportedly, deriving powers from four sections – sections 35A, 35AA and 35AB of the BR Act and section 45L of the RBI Act.

The central theme of this framework revolved around identification of stress in large ticket sized accounts, implementing a resolution plan within 180 days from the date of default and in case of failure to implement, IRP action must be initiated against the borrower under IBC, within 15 days from the date of expiry of the timeline. Large accounts for this purpose means accounts where the aggregate exposure of the lenders exceed ₹ 2,000 crores.

The salient features of the framework are as follows:

  • Identification of early signs of stress in accounts with outstanding of Rs. 5 crores or above, through SMA account classifications and filing of relevant information with the Central Repository of Information on Large Credits (CRILC).
  • Resolution plans must be worked upon for all cases of default and must be implemented within a period of 180 days from the date of default or from the reference date, that is 1st March, 2019, in case the default was subsisting as on the date of reference date. This timeline is however applicable for accounts with outstanding debt of Rs. 2000 crores. However, the reference date was accounts with outstanding of debt of less than the specified amount but more than Rs. 100 crores, for the purpose of debt resolution, has not been notified yet.
  • Independent credit rating to be obtained before implementing the RP.
  • In case of failure to implement the RP within the specified timeline, the account must be dragged into IRP under the IBC within a period of 15 days from the expiry of the time period. The reference under IBC can be made by the banks either singly or jointly.
  • In case of timely implementation of RP, if the account faces any default during the specified period, then the same must be referred for IRP under IBC by the lenders singly or jointly, within 15 days from the date of default. Specified period, in this regard means period within which at least 20 percent of the outstanding principal debt as per the RP and interest capitalisation sanctioned as part of the restructuring, if any, is supposed to be repaid.
  • Sale and leaseback transactions of any asset of the borrower will be treated as a case of restructuring for the purpose of the framework and be subject to asset classification norms applicable to restructured accounts.
  • The framework repealed all the other frameworks for dealing with stressed assets, issued earlier by the RBI, namely, Framework for Revitalising Distressed Assets, Corporate Debt Restructuring Scheme, Flexible Structuring of Existing Long Term Project Loans, Strategic Debt Restructuring Scheme (SDR), Change in Ownership outside SDR, Scheme for Sustainable Structuring of Stressed Assets (S4A), and Joint Lenders’ Forum (JLF) as an institutional mechanism for resolution of stressed accounts.

How it ended?

The framework raised several eyebrows as some felt that the RBI had categorised all defaulted accounts into one single bucket, irrespective of the kind of stress they are facing. Other felt that the framework becoming applicable even on a single day default is an unreasonable measure. However, the most important issue of contention that dragged the matter to the court was questioning the authority of RBI to issue the framework on the first place.

The ruling passed by the SCI is result of this contention and the SCI has ruled it against the RBI. The SCI declared that the issuance of the framework ultra vires the powers granted to the RBI under various statutes and that the framework shall be of no effect in law.

While building up this ruling the SCI considered the following:

  • Sections 35A, 35AA and 35AB of the BR Act – The SCI stated that the stressed assets can be resolved through the provisions of IBC or otherwise. When the measure intended is IBC, section 35AA is the only resort. However, if the RBI wishes to resolved stressed accounts other than through IBC, then it can use general powers under section 35A and 35AB. While section 35A grants wide powers to RBI to give directions when it comes to the matters specified therein, section 35AA calls for an additional requirement of “authorisation” from CG to give directions to banks to proceed under IBC.

Therefore, for exercising powers under the 35AA, the RBI requires specific authorisation from the Central Government, however, for enforcing powers granted under sections 35A and 35AB, no specific authorisation is required. Had there been no section 35AA, RBI would have needed no authorisation to give such directions, as such power could be derived from the existing section 35A, which is wide and expansive enough.

To quote SCI –

“30. The corollary of this is that prior to the enactment of Section 35AA, it may have been possible to say that when it comes to the RBI issuing directions to a banking company to initiate insolvency resolution process under the Insolvency Code, it could have issued such directions under Sections 21 and 35A. But after Section 35AA, it may do so only within the four corners of Section 35AA.

  1. The matter can be looked at from a slightly different angle. If a statute confers power to do a particular act and has laid down the method in which that power has to be exercised, it necessarily prohibits the doing of the act in any manner other than that which has been prescribed. . .”

The court pointed out that if the RBI had the power under sections 35A or 35AB of the BR Act to direct the banks to initiate proceedings under the IBC, it would obviate the necessity of the Central Government authorisation under section 35AA to do so. It noted the following:

“40. Stressed assets can be resolved either through the Insolvency Code or otherwise. When resolution through the Code is to be effected, the specific power granted by Section 35AA can alone be availed by the RBI. When resolution de hors the Code is to be effected, the general powers under Sections 35A and 35AB are to be used. Any other interpretation would make Section 35AA otiose. In fact, Shri Dwivedi’s argument that the RBI can issue directions to a banking company in respect of initiating insolvency resolution process under the Insolvency Code under Sections 21, 35A, and 35AB of the Banking Regulation Act, would obviate the necessity of a Central Government authorisation to do so. Absent the Central Government authorisation under Section 35AA, it is clear that the RBI would have no such power.”

Therefore, it becomes important to understand if the RBI acted well within its powers under section 35AA while issuing the circular. Section 35AA states the following:

‘35AA. The Central Government may, by order, authorise the Reserve Bank to issue directions to any banking company or banking companies to initiate insolvency resolution process in respect of a default, under the provisions of the Insolvency and Bankruptcy Code, 2016.

Explanation.—For the purposes of this section, “default” has the same meaning assigned to it in clause (12) of section 3 of the Insolvency and Bankruptcy Code, 2016.

As noted above, section 35AA allows the RBI to issue directions to banks to initiate IRP in respect of “a default”. The meaning of term default has been drawn from the IBC, as per which a default is non-payment of a debt when it has become due and payable by the corporate debtor. All this indicates that the default in the present context refers to a specific default and not defaults in general.

Further, the SCI also took note of the press note of the Ordinance of 5th May, 2017 which indicated that the intention of deal with resolution of “specific” stressed assets which will empower the RBI to intervene in “specific” cases of resolution of NPAs. The same was also the understanding of the Central Government when it issued the notification on 5th May, 2017 to authorise the RBI to issue directions to the banks to act against “a default” under IBC. Therefore, this made it conclusive that directions issued in relation to debtors in general, is ultra vires the powers under section 35AA.

  • Section 45L of the RBI Act – The RBI stated in the framework that it drew one of its powers from section 45L of the RBI Act. The section grants power to direct non-banking financial institutions. However, section 45(3) of the RBI Act states the following:


(3) In issuing directions to any financial institution under clause (b) of sub-section (1), the Bank shall have due regard to the conditions in which, and the objects for which, the institution has been established, its statutory responsibilities, if any, and the effect the business of such financial institution is likely to have on trends in the money and capital markets.


It was emphasised that in order to issue any direction under this section, the RBI must have due regard to the conditions in which, and the objects for which, the institutions have been established, their statutory responsibilities, and the effect the business of such financial institutions is likely to have on trends in the money and capital markets. However, the framework did not discuss anything as such. Further, since, the very intention of bringing in NBIs under this framework was to deal with cases which had joint lending arrangements between banks and NBIs, the SCI found it difficult to separate banks and NBIs and make the circular applicable on NBIs even though ultra vires for the banks.

Therefore, the entire circular was declared ultra vires as a whole.

What is the way forward?

The ruling has created an awkward situation, as the banks have already acted upon the directions issued by the RBI. They have either implemented an RP or dragged the borrower to NCLT to proceed under IBC. Now that the circular is gone, following are the probable outcomes:

  1. For cases where RPs have been implemented – the lenders may decide to go ahead as per the RP and treat the same as restructured account.
  2. For cases where the corporate debtor has been taken to the NCLT – now that the very basis for taking the account to NCLT is gone, the lenders will have to take a call whether they want to pursue the proceedings under the Code without making references to RBI Circular.

Another apparent question that arises here is what will happen to the various frameworks which were withdrawn vide the 12th February circular. As stated by the SCI, the Circular will have no effect in law, therefore, the “withdrawal” clause too has been nullified. Therefore, the old restructuring frameworks can be said to be existing as on date.

Nevertheless, the Circular played the role of a game-changer by inducing a certain degree of credit discipline or at least the fear of being dragged into IBC. Now, as the Circular goes away, RBI may have to think of new restructuring frameworks – if that is through IBC, it would surely need CG’s authorisation.






Reversibility of Liquidation Order?

By Richa Saraf (

Insolvency and Bankruptcy Code was framed with the object to provide opportunity for revival to an insolvent company, however, since the rising number of liquidation cases, as against resolution, is a cause of worry.

“After more than a year of the Insolvency and Bankruptcy Code proceedings, there have been more liquidation cases than resolution of the non-performing assets accounts. According to a data from the Insolvency and Bankruptcy Board of India, in the National Company Law Tribunal, around 78 companies got liquidation orders since February 2017[1].”- quoted in an article in Business Standard.

“An analysis of companies that have completed the Corporate Insolvency Resolution Process (CIRP) till December reveals that liquidation orders were passed for as many as 30 companies. This is three times the number of 10 cases for which resolution was approved at the culmination of the CIRP, as per latest data available with the Insolvency and Bankruptcy Board of India.[2] quoted in an article in Indian Express. Read more

Financial Creditors & Committee of Creditors: What, Why and How?

By Megha Mittal (

IBBI issues clarification w.r.t. voting powers of CoC

Brief Background:

Pursuant to the Insolvency and Bankruptcy (Amendment) Code, 2018, the crucial reduction of voting threshold from 75% to 66% for critical matters like approval of Resolution Plan, Extension of CIRP, and all matters of section 28 of the Insolvency and Bankruptcy Code, 2016 (Code), came into effect.

However, there still prevailed ambiguity as to how to determine this threshold of 66%. What shall be the fate of those financial creditors who abstained from voting?

In this background, the Insolvency and Bankruptcy Board of India (IBBI/ Board) has issued a clarification w.r.t. voting in the Committee of Creditors.

Constitution of Committee of Creditors- What, why and how?

Committee of Creditors” (Committee) is a committee consisting of the financial creditors of the Corporate Debtor. This Committee eventually forms the decision making body of the various routine tasks involved in Corporate Insolvency Resolution Process (CIRP), responsible for giving approval to the IRP/ RP to carry out actions that might affect the CIRP.

A major chunk of the dues of the Corporate Debtor is that of Financial Creditors and thus, to recognize their substantial interest, the Committee is formed. The power to ratify the managerial decisions taken by the RP vests upon the Committee; It is this Committee that approves/ rejects the Resolution Plan, extension of CIRP, decides upon liquidation of the Corporate Debtor, ratifies expenses borne by the RP etc. In short, all decisions having an impact on the Corporate Debtor shall first be approved by the Committee.

As per section 18 of the Code, it is the duty of the Interim Resolution Profession to constitute the Committee upon collation of all claims received against the corporate debtor and determination of the financial position of the corporate debtor. It shall consist all those financial creditors whose claims have been received within the time period stipulated in the public announcement.

Voting power of the Members

In the event of passing any resolution by the Committee, a minimum threshold of assent is required to be obtained. However, in light of these facts, the following questions arise w.r.t. fate of creditors who submit delayed claims or the determining the voting power of the members of the Committee

  • What happens when a financial creditor submits claims after the stipulated date as per public announcement?

Where a financial creditor submits its claim after expiry of the last date for submission, it shall form a part of the Committee for purposes after such submission. No decision taken prior to its inclusion in the Committee can be questioned later on.

  • How is it to be determined whether the requisite threshold is met?

While determining the percentage of votes received in favour, only those creditors then forming part of the Committee shall be considered as the total value of creditors and the votes of those creditors who abstain from voting shall be deemed to be dissenting votes.

These provisions can be better understood with the help of an illustration:


A corporate debtor, X Ltd. has 6 financial creditors having dues to the tune of Rs. 600 crores. By the time the last day for submission of claim expires, the claims of only 3 financial creditors being A, B and C having dues of Rs. 50 Crores, Rs. 75 crores and Rs. 125 crores, respectively have been submitted.

Thus, the IRP constitutes a committee of these 3 creditors.

After the last day for submission of claims expires, another financial creditor, D, having dues of Rs. 100 crores submits its claims. After the claim is verified, such financial creditor shall also form part of the Committee.

D, opposes a certain decision taken by the Committee prior to its inclusion. Such contention placed by D is non-maintainable as the previous resolutions passed by the Committee shall be held good because they were duly passed with requisite majority.

After D is admitted as a member of the Committee, there are a total of 4 members having total dues of Rs. 350 crores. Now, for a resolution requiring minimum 66% of the votes to be passed, members of the Committee having dues of atleast Rs. 231 crores must vote in favour of such resolution.

Assuming a situation where out of the 4 creditors, A chose to abstain from voting, A shall be deemed to be a dissenting creditor. Thus, even on such abstention, votes in favour of minimum 66% of Rs. 350 crores i.e. Rs. 231 crores shall be required and not that of Rs. 300 Crores.

Another point to be noticed is that dues of creditors not forming part of the Committee shall not be taken into account while determining the requisite percentage. In the illustration above, the remaining creditors of Rs. 250 crores shall not be taken into consideration while passing of resolutions.


Considering the above, the following can be concluded:

  1. Financial creditors not forming part of the Committee shall not have any voting power w.r.t. decisions taken by the Committee unless they become a part of the Committee.
  2. Creditors abstaining from voting shall be deemed to be dissenting shareholders.


By Richa Saraf  (

Sections 45, 49, 66, 69 of the Insolvency and Bankruptcy Code, 2016 requires and empowers the Liquidator to apply to the Adjudicating Authority for appropriate orders in case of any vulnerable transactions that the Liquidator comes across during the process of liquidation. Such transactions may either be with respect to breach of applicable law, or deleterious to the interests of creditors or stakeholders, or otherwise, not transactions designed to be in good faith. The transactions, whether being undervalued or fraudulent shall be considered vulnerable to the interest of the stakeholders of the Company.

The article hinges on the crucial question of applicability of the limitation to the aforementioned sections. In this regard, we shall discuss how the provisions were imbibed in the Code, despite there being no equivalent in the Companies Act, 2013 or previous Companies Act. The general notion is that limitation should be applicable to all transactions, including fraudulent transactions referred to in Section 49 of the Code. However, the article will explain as to how undervalued transaction, done deliberately without due compliance, partakes the nature of a fraudulent transaction, and since fraud is a nullity forever, in case of such transactions, as covered by Section 49, there is no question of any look- back period at all.

Deciphering the intent of incorporation of provisions relating to vulnerable transactions:

The concept of “fraudulent preference” existed both in Companies Act, 1956 and 2013, however, the provision pertaining to undervalued and fraudulent transaction is a unique incorporation in the Code, adopted from the UK Insolvency Act, 1986. The Bankruptcy Law Reform Committee, referring to Section 243 of UK Insolvency Act, 1986, recommended that a provision voiding transactions defrauding creditors should be included. It is further, pertinent to note that the Committee, while discussing the intent behind insertion of this provision in the statute, observed that the provision for fraudulent transactions should not have any time- bar. The relevant extract from Interim Report (page 98-99) of the Committee is reproduced below:

“In the UK, Section 423 of the IA 1986 voids transactions at undervalue if such transactions have been entered into with the intention of putting the assets beyond the reach of, or otherwise prejudicing the interests of a person who is making or may make a claim against the company. While the scope of this provision is similar to that of the provision avoiding transactions at undervalue (Section 238, IA 1986), Section 423 actions differ in that they do not have any time limit for the challenged transactions, and is available in and outside formal insolvency proceedings. The inclusion of such a provision in the CA 2013 would reinforce the protection given to creditors under avoidance law by permitting the liquidator to set aside transactions entered into prior to the one year period ending in the company’s insolvency. This is necessary to guard against the siphoning away of corporate assets by managers who have knowledge of the company’s financial affairs in cases where a long period of financial trouble, extending over a year, ends in insolvency.


A provision invalidating transactions defrauding creditors similar to Section 423 of the IA 1986 should be inserted in CA 2013. Such provision would apply without any time limits and should be available in and outside formal insolvency proceedings.

It is clear that the analogous provision in the UK law does not have any limitation period, and also, there is no limitation period with reference to Sections 49 and 66 in the language of the law itself. Here, it is relevant to cite Report of Insolvency Law Committee (March, 2018), by virtue of which an amendment was made to exclude time limit from Section 69 of the Code:

“24.1. Section 69 of the Code provides for punishment for transactions defrauding creditors by the corporate debtor or its officers “on or after the insolvency commencement date”. However, as per sub-section (a), if the transaction results in a gift or transfer or creation of a charge or the accused has caused or connived in execution of a decree or order against the property of the corporate debtor, the accused shall not be punishable if such act was committed five years before the insolvency commencement date or if she proves that she had not intended to defraud the creditors. In this respect, the pre-fixing of the offence with “on or after the insolvency commencement date” is erroneous. Further, pre-fixing the same phrase in sub-section (b) is also erroneous, as the transaction involves concealment or removal of any property within two months from the date of any unsatisfied judgement or order for payment of money. Thus, the Committee decided that the phrase “on or after the insolvency commencement date” be deleted from section 69.”

Additionally, vulnerable transactions are generally considered to be transactions of a continuing nature, having their adverse and prejudicial impact on the ongoing financial position of the Company, which has already slipped into distress, and therefore, the concept of any look-back period or claw-back period shall not be applicable, since it cannot be contended that a transaction, done with a deliberate, culpable design, becomes washed of its gullibility merely because the liquidation proceedings are initiated certain number of years after the date of commission of the relevant transaction.

Distinction between Section 45 and Section 49:

Both Sections 45 and 49 pertains to avoidance of undervalued transactions, the only difference being that Section 49 deals with undervalued transactions undertaken with malafide or wrongful intent, while for Section 45; the presence of any motive is not required. The reference in Section 49 to transactions covered by section 45 is merely for the factual ambit of transactions covered by the section, and the additional element of intent marks the crucial difference between the two sections.

Moreover, while a look- back period has been provided for undervalued transactions under Section 46, there is no limitation period for fraudulent transactions covered under Sections 49 and 66 of the Code. The intent being “once a fraud, always a fraud”, a time- honored doctrine clearly applies. The maxim “fraud vitiates every transaction into which it enters applies to judgments as well as to contracts and other transactions” is a part of common law jurisprudence, largely based upon equitable doctrines and has been has been upheld by courts repeatedly in several cases such as The People of the State of Illinois v. Fred E. Sterling, 357 Ill. 354; 192 N.E. 229 (1934), Allen F. Moore v. Stanley F. Sievers, 336 Ill. 316; 168 N.E. 259 (1929), and further, In re Village of Willow brook, 37 Ill.App.2d 393 (1962), wherein it  was observed “It is axiomatic that fraud vitiates everything.”.

Fraud destroys the validity of everything into which it enters, and that it vitiates the most solemn contracts, documents, and even judgments, is well settled, and has been time and again reiterated in various judgments in broad and sweeping language. If both the sections were to encompass a time-limit then it would defy the whole purpose, and the reason for incorporating two separate provisions in the Code would fail. The basic essence is that any person who has done any wilful act should not be allowed to get away by citing reasons such as lapse of time.

In light of the aforesaid, it can be concluded that while an undervalued transaction is a matter of fact, for which intention does not matter, however, when the intention to cause a prejudice to the creditors is embedded in such undervalued transaction, the transaction comes within the offence of Section 49. If a transaction, so imbibed with malafide intent, was subject to the same fate and the same limitation as a transaction mentioned in Section 45, then Section 49 would not have any relevance at all. On the contrary, it can be pointed out that Section 49 was inserted specifically for the so-called willful defaulters, for which the limitation of time, mentioned in Section 45, cannot be relevant at all. Thus, it will not be correct to say that there is any claw-back for willfully undervalued transactions under Section 49 and fraudulent conduct of business under Section 66.

IBBI lays down procedure for Resolution Plans -Third set of amendment in IRP-CP Regulations

By Shreya Routh (

“Tough times do not define you, they rather refine you”- is perhaps the quote which the Insolvency and Bankruptcy Code, 2016 seeks to achieve. The Insolvency and Bankruptcy Code, 2016 (“Code”) tries to refine the tough times which the corporate debtor goes though during the corporate insolvency resolution process. With an objective of bringing more clarity in the process of resolution, IBBI has come out with yet another amendment in the form of Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) (Third Amendment) Regulations, 2018, (“Amended Regulations”).

Following major amendments have been brought:

  1. Report certifying constitution of the committee of creditors
  2. Notice and voting at the meeting of the committee of creditors
  3. Invitation of Resolution Plan and Request for Resolution Plan
  4. Withdrawal of the CIRP Applications
  5. Regulations with respect to class of creditors
  6. Regulations with respect to authorised representatives of resl-estate buyers

This write up deals with the points 1 to 3.

To read about the other topics covered under the Amendment Regulations, please refer to the article,” CIRP Amendment lays focus on Class of Creditors” by my colleague Ms. Megha Mittal. Read more

The Curious Case of Home-Buyers: All is Well?

By Sikha Bansal, ( (


All the hullabaloo surrounding the inclusion of “home-buyers” in the category of financial creditors was put to rest by the promulgation of the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018 (“the Ordinance”). The Ordinance amends the definition of “financial debt” u/s 5 (8) of the Insolvency and Bankruptcy Code, 2016 (“IBC”) so as to include in clause (f):

“any amount raised from an allottee under a real estate project shall be deemed to be an amount having the commercial effect of a borrowing

The Ministry of Corporate Affairs, in a statement released in respect of the Ordinance, stated:

“The Ordinance provides significant relief to home buyers by recognizing their status as financial creditors. This would give them due representation in the Committee of Creditors and make them an integral part of the decision making process. It will also enable home buyers to invoke Section 7 of the Insolvency and Bankruptcy Code (IBC), 2016 against errant developers.”

At the outset, it might be interesting to note that the amounts raised from the allottees, in every case, might not be classifiable as financial debts in substance. For instance, where allotment/contract is cancelled by the home-buyer and there is a claim of return of principal sum with interest, the NCLT in Pawan Dubey & Another v. M/s J. B. K Developers Private Limited held that such an amount cannot be claimed as a financial debt. The Ordinance makes no distinction for these cases and creates a “deeming” provision, by using the words “deemed to be an amount having the commercial effect of a borrowing”.

Is this happy ending? A pensive thought refuses accepting that all is well.

What about the priority?

Been accorded the status of “financial creditors”, the home-buyers will get a seat on the CoC. As such, they can exercise their voting rights to decide on resolution or liquidation of the entity.

However, being a financial creditor and being a secured one, are two different things. The Code, while introducing the differentia as to operational and financial creditors has retained the conventional classification of secured and unsecured creditors too. The same is evident from the definition of “financial debt” and “secured debt” and also priority enlisted under section 53 of the Code. As such, a financial creditor need not be a secured creditor.

While the Ordinance postulates home buyers as financial creditors, there has been no clarification as to such creditors being secured or unsecured. No changes have been made in section 53 to allot a specific priority to the home-buyers. As such, the monies of home-buyers will fall under clause (d), i.e. financial debts to unsecured creditors.

A secured creditor, irrespective of whether financial or operational, occupies second priority at par with workmen’s dues. However, financial debts owed to unsecured financial creditors rank after the dues of secured creditors, workmen, employees [for specified periods].

Therefore, the benevolent Ordinance seems to have performed the job partly. The home-buyers might still be left in a dry.

Home, Sweet home?

The entire exercise will very much depend upon whether the home-buyers are keener to get their flats ready or just get refund of their money. Say, if the objective of home-buyers is to get their flats ready, the recourse under the Code will not be of much help. The only feeble way in which they can ensure this is to utilize their voting rights to stall liquidation and get the corporate debtor in resolution mode, so that their flats can be completed and handed over to them.

On the other hand, if the objective of the home-buyers is to get their money back, as stated earlier, they do not seem to be at an advantageous position. The liquidation value ascribable to them would be very low in view of their sub-ordinated priority in the waterfall. As such, whether resolution or liquidation, there are fragile chances of home-buyers regaining their hard-earned money.

Why not RERA?

Section 18 read with section 19 (4) of the Real Estate (Regulation and Development) Act, 2016 already provides for refund of amount of allottees if the promoter fails to complete or is unable to give possession of the property. Several provisions of RERA stipulate adjudication of compensation and penalty for non-compliances by promoters.

In situations where the promoter fails to deliver the flats as well as refund the said amounts, and for some reasons also goes into insolvency before NCLT; there seems no benefit for the home-buyers to be a part of CoC, for reasons cited above. That is, in any case, the monies they would get would be limited to the extent of “liquidation value”.

Hence, the home-buyers are in no better situation, so far as return of their own money is concerned.

In search of a better deal . . .

For reasons as above, it seems that IBC is not a holistic shelter for the home-buyers.

Instead of awarding the status of financial creditor to the home-buyers, a better solution would have been to define the priority of home-buyers such that they could get their refunds alongside the dues of secured creditors and workmen.

There would have been another probable solution: RERA provides for maintaining a separate account for depositing the amounts realized for the real estate project from the allottees, from time to time, to cover the cost of construction and the land cost. Such a provision, in a manner, implies that the moneys so obtained by the promoters would be in the nature of money held in trust. Applying the analogy, if the money taken from home-buyers is accorded the status of “money held in trust”, the corpus will not be a part of the “assets” or “liquidation estate” of the promoter entity, and therefore would be out of the purview of section 53.

However, for the time being, the possible solution before home-buyers is either RERA or the amendment brought in by the Ordinance. The efficacy of this amendment will be pronounced only in times to come.