SC uses ‘smoke-test’

Classifies persons as ‘related parties’ on the basis of ‘intermingled transactions’ 

-Sikha Bansal & Megha Mittal


While in general, in order to classify a transaction as a related party transaction, one needs to first determine whether the parties involved are ‘related parties’; however, in a recent case Phoenix Arc Private Limited v. Spade Financial Services Limited & Ors.[1] (‘Ruling’), the Hon’ble Supreme Court (‘SC’) has deduced ‘relationship’ between the parties on the basis of the underlying transactions.

The SC has read the definitions of ‘financial creditor’ and ‘related party’ (in relation to the corporate debtor) under sections 5(7) and section 5(24), respectively, of Insolvency and Bankruptcy Code, 2016 (‘Code’), in light of the ‘collusive arrangements’, ‘and ‘extensive history demonstrating interrelationship’ among the parties. Broadly put, it was held that the board/directors of these companies were ‘acting’ under the pervasive influence of common set of individuals, having ‘deeply entangled’ interrelationships. Besides, the SC refused to entertain the entities as financial creditors, as the debt was merely an eye-wash, arising out of sham and collusive transactions.

Therefore, the Ruling, in a way, uses ‘smoke’ to trace if there is a ‘fire’. The presence of collusion, entangled interrelationships, etc. have been seen as indicators suggesting that the parties were in fact ‘related’ and are thus ineligible to occupy seats in the committee of creditors.

This article touches upon the significant aspects of the Ruling, including how this ‘smoke-test’ used by the SC can act as a precedent in interpreting the provisions of the Code, specifically those relating to related parties.

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About time to unfreeze NPA classification and reporting

-Siddarth Goel (


The COVID pandemic last year was surely one such rare occurrence that brought unimaginable suffering to all sections of the economy. Various relief measures granted or actions taken by the respective governments, across the globe, may not be adequate compensation against the actual misery suffered by the people. One of the earliest relief that was granted by the Indian government in the financial sector, sensing the urgency and nature of the pandemic, was the moratorium scheme, followed by Emergency Credit Line Guarantee Scheme (ECLGS). Another crucial move was the allowance of restructuring of stressed accounts due to covid related stress. However, every relief provided is not always considered as a blessing and is at times also cursed for its side effects.

Amid the various schemes, one of the controversial matter at the helm of the issue was charging of interest on interest on the accounts which have availed payment deferment under the moratorium scheme. The Supreme Court (SC) in the writ petition No 825/2020 (Gajendra Sharma Vs Union of India & Anr) took up this issue. In this regard, we have also earlier argued that government is in the best position to bear the burden of interest on interest on the accounts granted moratorium under the scheme owing to systemic risk implications.[1] The burden of the same was taken over by the government under its Ex-gratia payment on interest over interest scheme.[2]

However, there were several other issues about the adequacy of actions taken by the government and the RBI, filed through several writ petitions by different stakeholders. One of the most common concern was the reporting of the loan accounts as NPA, in case of non-payment post the moratorium period. The borrowers sought an extended relief in terms of relaxation in reporting the NPA status to the credit bureaus. Looking at the commonality, the SC took the issues collectively under various writ petitions with the petition of Gajendra Sharma Vs Union of India & Anr. While dealing with the writ petitions, the SC granted stay on NPA classification in its order dated September 03, 2020[3]. The said order stated that:

In view of the above, the accounts which were not declared NPA till 31.08.2020 shall not be declared NPA till further orders.”

The intent of granting such a stay was to provide interim relief to the borrowers who have been adversely affected by the pandemic, by not classifying and reporting their accounts as NA and thereby impacting their credit score.

The legal ambiguity

The aforesaid order dated September 03, 2020, has also led to the creation of certain ambiguities amongst banks and NBFCs. One of them being that whether post disposal of WP No. 825/2020 Gajendra Sharma (Supra), the order dated September 03, 2020, should also nullify. While another ambiguity being that whether the stay is only for those accounts that have availed the benefit under moratorium scheme or does it apply to all borrowers.

It is pertinent to note that the SC was dealing with the entire batch of writ petitions while it passed the common order dated September 03, 2020. Hence, the ‘stay on NPA classification’ by the SC was a common order in response to all the writ petitions jointly taken up by the court. Thus, the stay order on NPA classification has to be interpreted broadly and cannot be restricted to only accounts of the petitioners or the accounts that have availed the benefit under the moratorium scheme. As per the order, the SC held that accounts that have not been declared/classified NPA till August 31, 2020, shall not be downgraded further until further orders. This relaxation should not just be restricted to accounts that have availed moratorium benefit and must be applied across the entire borrower segment.

The WP No. 825/2020 Gajendra Sharma (Supra) was disposed of by the SC in its judgment dated November 27, 2020[4], whereby in the petition, the petitioner had prayed for direction like mandamus; to declare moratorium scheme notification dated 27.03.2020 issued by Respondent No.2 (RBI) as ultra vires to the extent it charges interest on the loan amount during the moratorium period and to direct the Respondents (UOI and RBI) to provide relief in repayment of the loan by not charging interest during the moratorium period.

The aforesaid contentions were resolved to the satisfaction of the petitioner vide the Ex-gratia Scheme dated October 23, 2020. However, there has been no express lifting of the stay on NPA classification by the SC in its judgment. Hence, there arose a concern relating to the nullity of the order dated September 03, 2020.

The other writ petitions were listed for hearing on December 02, 2020, by the SC via another order dated November 27, 2020[5]. Since then the case has been heard on dates 02, 03, 08, 09, 14, 16, and 17 of December 2020. The arguments were concluded and the judgment has been reserved by the SC (Order dated Dec 17, 2020[6]).

As per the live media coverage of the hearing by Bar and Bench on the subject matter, at the SC hearing dated December 16, 2020[7], the advocate on behalf of the Indian Bank Association had argued that:

It is undeniable that because of number of times Supreme Court has heard the matter things have progressed. But how far can we go?

I submit this matter must now be closed. Your directions have been followed. People who have no hope of restructuring are benefitting from your ‘ don’t declare NPA’ order.

Therefore, from the foregoing discussion, it could be understood that the final judgment of the SC is still awaited for lifting the stay on NPA classification order dated September 03, 2020.

Conclusion and way forward

While the judgment of the SC is awaited, and various issues under the pending writ petitions are yet to be dealt with by the SC in its judgment, it must be reckoned that banking is a sensitive business since it is linked to the wider economic system. The delay in NPA classification of accounts intermittently owing to the SC order would mean less capital provisioning for banks. It may be argued that mere stopping of asset classification downgrade, neither helps a stressed borrower in any manner nor does it helps in presenting the true picture of a bank’s balance sheet. There is a risk of greater future NPA rebound on bank’s balance sheets if the NPA classification is deferred any further. It must be ensured that the cure to be granted by the court while dealing with the respective set of petitions cannot be worse than the disease itself.

The only benefit to the borrower whose account is not classified NPA is the temporary relief from its rating downgrade, while on the contrary, this creates opacity on the actual condition of banking assets. Therefore, it is expected that the SC would do away with the freeze on NPA classification through its pending judgment. Further, it is always open for the government to provide any benefits to the desired sector of the economy either through its upcoming budget or under a separate scheme or arrangement.









IBC Passes Another Test of Constitutionality

SC upholds the IBC Amendment Act, 2020

-Megha Mittal

Ishika Basu 


In view of the rising need to fill critical gaps in the corporate insolvency framework like last-mile funding and safeguarding the interests of resolution applicants, certain amendments were introduced by way of the Ordinance dated 28.12.2019[1], which were later on incorporated in the Insolvency Bankruptcy Code (Amendment) Act, 2020 (“Amendment Act”). The amendments inter-alia introduction of threshold for filing of application by Real-Estate Creditors, colloquially ‘Home-Buyers’ and section 32A for ablution of past offences of the corporate debtor, were made effective from 28.12.19 i.e. the date of Ordinance.

While the Ordinance introduced several amendments[2], clarificatory as well as in principles, apprehensions were raised against proviso to section 7 (1), that is, threshold for filing of application by Home-Buyers, the ablution provision introduced by way of section 32A, and clarification under section 11 dealing with the rights of a corporate debtor against another company. As such, various writ petitions were filed under Article 32 of the Constitution, alleging that the aforesaid amendments were in contravention of the fundamental rights viz.  Article 14 which deals with the equality before law and equal protection of law; Article 19(1)(g) deals with fundamental right to trade, occupation, and business; and Article 21 deals with the right to life and personal liberty.

Now, after a year of its effect, the Hon’ble Supreme Court vide it order dated 19.01.2021, in Manish Kumar V/s Union of India, upheld the constitutional validity of the third proviso to section 7(1) and section 32A, setting aside all apprehensions against their insertion.

In this article, the Authors analyses the order of the Hon’ble Supreme Court, with respect to the threshold on filing of application by real-estate creditors, and section 32A.

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Comments on Proposed Framework for Prepacks

-Sikha Bansal & Megha Mittal


While there had been murmurs of a prepack insolvency resolution framework, the Report of the Sub-Committee of the Insolvency Law Committee, on Pre-packaged Insolvency Resolution Process[1] issued on 8th January, 2021 (“Sub-Committee Report”/ “Report”) comes as the first concrete step in bringing prepacks to India. In an earlier write-up, we have discussed possible framework for bringing pre-packs in India; see here- Bringing Pre-Packs to India

Below we discuss the various facets of the Report in terms of application and feasibility, both legal and practical.

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Recent trends in IBC

Resolution Division


The field of Insolvency in India has of late seen constant change in order to adapt the ever moving global scenario. Being one of the topics that has been trending ever since its inception and with the possible introduction of several new concepts including subjects like pre pack insolvency and some recent amendments due to the pandemic, a compilation on the following topics in our presentation providing a brief glance through on the same has been made-

  1. Amendments due to COVID 19
  2. Separate Insolvency process for MSME’s
  3. Expected introduction of pre pack insolvency framework
  4. Assignment of NRRA
  5. Group Insolvency
  6. Developments in Going Concern Sale



Dissolution without Resolution- A disguised Strike-off under IBC?

Megha Mittal


In a first of its kind, the Hon’ble National Company Law Tribunal, Bengaluru Bench vide its order dated 16th November, 2020, in the matter of Synew Steel Private Limited[1], has ordered for direct dissolution from CIRP, thereby waiving off the mandatory requirement to undergo the liquidation process.

The said order was inspired by the fact that the corporate debtor had nil assets, which in turn made it certain that the liquidation process would not have been successful. Hence, to save the unfruitful costs that would have been incurred, the corporate debtor was allowed a direct dissolution.

In this article, the author makes a humble attempt to analyse this rather path-breaking order, and the implications it may carry.

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Secured Creditors under Insolvency Code : Searching for Equilibrium

This article has been published in IBBI’s annual publication named Insolvency and Bankruptcy Board of India – A Narrative, (2020). See here

Sale of Legal Entity as an Asset: A step towards value maximization

Megha Mittal 


Maximization of value of assets of the corporate debtor is one of the primary objectives of the Insolvency and Bankruptcy Code, 2016 (“Code”/ “IBC”); and it is towards this objective that the Code requires a mandatory corporate insolvency resolution process to ensue prior to liquidation. The rationale behind such specified order is that under corporate insolvency resolution process, the corporate debtor is taken over as a going concern, which as per settled economic argument attracts a much better value via-a-vis disposal of assets. It is in view of such rationale that the liquidation laws also provide sufficient flexibility to keep the corporate debtor a going-concern even after commencement of liquidation[1].

Having said so, while the Liquidation Regulations allow sale of the corporate debtor as a going-concern, one cannot overlook the fact that the likelihood of the going-concern sale is already rusted by the time the corporate debtor reaches the liquidation stage.

 It is a common economic understanding that sum of parts is better than sum of the parts; and it is by virtue of such principle that going-concern values are generally in excess of value of individual assets. The various assets, stitched together as one, constitute a much greater value than the same assets in isolation.

In this backdrop, what may be considered as a rather unexplored territory is the prospect of sale of the legal entity only, sans the other assets that the corporate debtor may have. In this note, we analyse and put forth a case for saleability of legal entity itself, without other conventional assets, under the Code.

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Desirability of Liquidation Sales at Undisclosed Reserve Price

-Megha Mittal ( As per Regulation 39 of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 (“Liquidation Regulations”), a liquidator shall endeavour to maximize recovery and realisation from all assets of and dues to the corporate debtor. Realisation from assets of the corporate debtor shall be done by way of sale as […]

Adding Strain to Injury: Amendments impose Additional procedural requirements for insolvency applications

Megha Mittal


On 24th September, 2020, the Ministry of Corporate Affairs notified the Insolvency and Bankruptcy (Application to Adjudicating Authority) (Amendment) Rules, 2020 (“Amendment Rules”)[1] in exercise of its powers under section 239 of the Insolvency and Bankruptcy Code, 2016 (“Code”), thereby requiring an advance copy of all applications filed before under section 7, 9 or 10 of the Code, to be served to the Corporate Debtor and the Insolvency and Bankruptcy Board of India (“IBBI”).

By way of the said Amendment Rules, it is now required that-

  • An application intended to be filed under section 7, 9 or 10, has to be served to the Corporate Debtor and the Board, prior to filing before the Adjudicating Authority (“AA”)
  • The application filed before the AA must contain a proof of service to the Corporate Debtor and the Board;
  • Disclosure by the Insolvency Professional (IP) with respect to the ongoing assignments at the time of filing;
  • The application to be filed by the Operational Creditor must contain a certificate by the bank/ financial institution, where the creditor has its accounts, with respect to the sums which have been received by the Operational Creditor from the Corporate Debtor.

In this Article, we analyse the Amendment Rules, more specifically the requirement of advance notice, and its implications.

Service of the Application- ensuring a fair chance to be heard

NCLT and Principles of Natural Justice

The NCLT is a quasi-judicial body, constituted under section 408 of the Companies Act, 2013, and is subject to powers and duties set out under the National Company Tribunal Rules, 2016, as well as the Companies Act- One such duty is to ensure that the Rules of Natural Justice are abided by[2].

The Rules of Natural Justice, viz, (i) Rules against bias[3]; and (ii) the right to be heard[4] are not derived from any statute or constitution- it is based on common and moral law to ensure there is no contempt of justice. One of the components of the right to be heard is a “proper notice”, which ensures that the person who would be affected upon filing of the application is given notice of such filing to show cause against the proposed action. As such, whenever an application is filed, under any statute, or before any authority, it is a pre-requisite to serve an advance copy to the respondent.

Hence, the requirement to serve an advance copy of the application, to the corporate debtor existed prior to the Amendment Rules.

Additional service upon IBBI

The Amendment Rules now provide that an advance copy of the application has to be served on the Board as well, which in the humble view of the Author, seems to be a superfluous requirement.

First, the Central Government (MCA) has failed to provide any stated objectives or purpose behind such a requirement. While it may be argued that the same is for ensuring proper records and data, it must be noted that those applications which are eventually admitted, are anyway required to be informed to Board. The extant reporting requirement under the IBBI (Insolvency Process for Corporate Persons), Regulations, 2016 (“CIRP Regulations”), inter-alia intimation to IBBI in Form A, disclosure requirements forms CIRP-1, already ensure that sufficient information is provided to the Board to execute its functions as such.

However, if the objective behind such additional requirement was merely record keeping, the same could have also been provided for by integration or a simple cross-linking process with the already existing data rooms, from where the regulatory bodies may extract information as and when required. For instance, the e-filing portal of NCLT may make necessary arrangements such that once an application is filed on the portal, the information regarding such filing is simultaneously given to the Board.

Such a set-up would not only fulfil the understandable objective behind the Amendment Rules, but only waive off this additional burden levied upon the applicants. This would also be in concurrence with consistent suggestions of stakeholders towards creation of a common repository of data related to the Code.

It further remains unanswered whether in case of any supplementary filing and/ or rectified filing upon directions of the Bench, such advance service would be required again? In absence of any stated objective behind such Amendments, it would be difficult to comment if at all such re-servicing of a copy of the application would be required.

Readers may recall that a similar requirement of impleading the MCA in all applications filed under the Code was made mandatory by an order of the Hon’ble NCLT, Principal Bench, dated 22.11.2019[5] but later on nullified by an over-ruling order of the Appellate Tribunal[6] as one leading to duplicity of information and records. Similarly, the requirement of advance notice to the Board seems to be of a similar nature, and hence, in view of the Author, should not be added as a mandate.

Other Amendments

In addition to the service requirements as discussed above, the Amendment Rules also introduce further reporting obligations on the IPs and the Operational Creditors- the same has been discussed herein below-

Reporting of ongoing assignments by IPs

The Amendment Regulations, by way of an additional clause in Form 2, now requires that while giving consent to act as an RP, the Insolvency Professional must disclose the number of ongoing assignments that s/he has undertaking as on the day of filing of application.

In view of the Author, while the same is not required as information of similar nature is already required to be provided in Form IP-1. Hence, the same may be removed for the sake of brevity.

Obtaining Certificate by Banks/ Financial Institutions

As per Form 5 under Rule 6, of the NCLT Rules, an application filed by an operational creditor, other than creditors having their account with a foreign bank/ institution, must annex a copy of the relevant accounts from the banks/financial institutions maintaining accounts of the operational creditor confirming that there is no payment of the relevant unpaid operational debt by the operational debtor,if available.

 Hence, the operational creditors could simply self-certify their bank statements and submit the same on affidavit, as being a part of the application.

However, the Amendment Rules have substituted the above requirement with a new form, namely Form 5A, which is a certificate required to be obtained from the bank/ financial institution that the amount for which the application is being filed, has not been received by the creditor.

The Author is of the view that the said requirement would only lead to needless complication and delays. This would not only impose an additional requirement upon the creditors, but would also burden the banks/ financial institutions who may receive requests for such certificate in large volumes. Hence, it is suggested that the earlier modus shall continue, and the requirement of such certificate may be done away with.

Further, it is also pertinent to note that recent amendment in section 4 of the Code, whereby the minimum default amount for filing an application under the Code, was increased from Rs. 1 lakhs to Rs. 1 crore already led to a massive sweep-out of OCs from the purview of IBC. Further procedural burden, for example requirement of a bank certificate, would only make recourse a tougher for the OCs.


From the discussion above, we can gather that a common element through-out the Amendment Rules is increased disclosure/ reporting/procedural requirements. The Author humbly states that while the consistent efforts of the Government and Board, and the common suggestions from the stakeholders has been directed towards easing the superfluous, more-than-needed reporting and disclosure requirement, the Amendment Rules come as a complete deviation.

While the objectives, purpose of advance service is neither explicitly stated not implied from the text, it must be noted that the same is not a substitution of existing regulations, but an additional requirement for concerns already covered. The Amendments infact lead to elongated procedures, which do not serve any additional purpose.

In this pretext the Author is of the humble view that the Amendment Rules do not provide any ease, clarification and/ or assistance in the filing process. As such, the Central Government may consider a roll-back of the same.


[2] Sec 424 (1) of the Companies Act, 2013

[3] Nemo judex causa in sua

[4] Audi Alteram Partem

[5] Read our views on this order, in our article-

[6] By an order dated 22.05.2020