IBBI - Facilitation / 005 / 2020 Dated 13.11.2020 - Mistakes committed by insolvency professionals in conduct of corporate insolvency resolution process.

Insolvency and Bankruptcy Board of India

7th Floor, Mayur Bhawan, Connaught Place, New Delhi-110001

 

Facilitation/005/2020                                                               13th November, 2020

Subject: Mistakes committed by insolvency professionals in conduct of corporate insolvency resolution process

Dear Madam / Sir,

The Central Government has been steering deep economic reforms to make India a great place to do business. It swiftly established a modern insolvency regime to revive companies in stress and thereby promote competition and innovation in the marketplace, and enhance entrepreneurship and credit availability in the economy.

2. The Insolvency and Bankruptcy Code, 2016 (Code) provides a market process, popularly known as called corporate insolvency resolution process (CIRP), for time bound revival of viable corporate debtors (CD) and closure of unviable ones. An insolvency professional (IP) is a key driver of CIRP - he acts as interim resolution professional (IRP) in the initial days of CIRP and then as resolution professional (RP) till its completion. He runs the operations of the CD as a going concern and assists the stakeholders to find out the best resolution plan, while protecting and preserving the value of assets of the CD and ensuring compliance with all the applicable laws to the business of the CD and the CIRP. The law facilitates and empowers the IP to discharge his responsibilities effectively.

3. The IBBI and Insolvency Professional Agencies (IPAs) have come across some mistakes being committed by some of the IPs in conduct of CIRPs. These mistakes are costs to the CD and the economy, and often amount to contravention of provisions of the law. Most of these are probably unintentional and can be avoided with a little more care and diligence. This communication lists out a few such mistakes with a hope that these will not be committed by any IP, pre-empting the IBBI/IPA to initiate any disciplinary action.

(a) Assignment without having Authorisation: Regulation 7A of the IBBI (Insolvency Professionals) Regulations, 2016 (IP Regulations) requires that an IP shall not accept or undertake any assignment, including CIRP, unless he holds an authorisation for assignment (AFA) on the date of such acceptance or commencement of such assignment, as the case may be. The bye-laws of the IPAs provide that, if the AFA is not issued, renewed or rejected by the IPA within 15 days of the date of receipt of application, the authorisation shall be deemed to have been issued or renewed, as the case may be, by the IPA. The IBBI has made available an IT facility for the IPs to apply for the issuance or renewal of AFA and the IPAs to issue or renew AFAs, as the case may be, in a time bound manner. There are, however, instances where an IP undertook CIRP without having an AFA and in some cases, without even applying for an AFA, in contravention of the provisions of law.

(b) Fee payable to IP: The Code of Conduct for IPs under the IP Regulations require that an IP must provide services for remuneration which is charged in a transparent manner, and is a reasonable reflection of the work necessarily and properly undertaken. Regulation 33 of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (CIRP Regulations) requires that the applicant shall fix the expenses to be incurred on or by the IRP. Regulation 34 requires that the committee of creditors (CoC) shall fix the expenses to be incurred on or by the RP. Regulation 39D requires the CoC to fix the fee payable to the liquidator, in the event the CD proceeds for liquidation. It is, however, observed that in a few cases, the fee payable to an IP was not fixed beforehand and the IP drew a fee on his own without approval of such fee from the competent authority, in contravention of the provisions of law.

(c) Application for cooperation: A CIRP requires cooperation of the CD, and its promoters, suspended directors, and management. However, co-operation may not be forthcoming in all cases. Section 19 of the Code, therefore, enables the IRP/RP to file an application to the Adjudicating Authority (AA) in case of non-co-operation for direction to such persons to comply with the instructions of the IRP/RP and to co-operate with him. Since time is the essence of a CIRP, the IRP /RP must act with promptitude and file the application, wherever required, without any procrastination. There are instances where the IRP / RP failed to file such applications or filed it so late that it lost its purpose and effectiveness. Any delay in filing applications despite continuing non-cooperation may reflect undue influence of promoters on the IP, and endanger the life of the CD.

(d) Public announcement: Section 15 of the Code read with regulation 6 of the CIRP Regulations requires the IRP to make a public announcement of commencement of CIRP within three days of his appointment. Such announcement is required to be made in one English and one regional language paper with wide circulation at the location of the registered office and principal office of the CD. This enables the creditors to submit claims to the IRP and consideration of such claims by the authorised stakeholders while resolving stress of the CD. There are instances where the IRP did not make public announcement promptly on his appointment, or made it later, or made it in one newspaper, or made it in one English newspaper having circulation at the location of the CD. This not only puts the CIRP at risk, but also deprives the stakeholders of their legitimate rights.

(e) Updating of list of claims: Section 25(2)(e) read with regulation 13 of the CIRP Regulations mandates that the IRP/RP shall verify every claim as per time line and maintain a list of creditors containing their names along with the amount claimed by them, the amount of their claims admitted and the security interest, if any, in respect of such claims, update the list and display it on the website, if any, of the CD. There are instances where some IRPs/RPs did not display the list of creditors on the web site of the CD and in some cases, did not update it. This increases queries and complaints about the status of claims, impacts transparency and compromises interests of stakeholders.

(f) Authority of CoC: The Code read with Regulations has specified responsibilities of an IP and of the CoC in a CIRP. These require decisions on several matters by the CoC with the required majority of voting share. No creditor, whether secured or unsecured, irrespective of its voting power or share, or no pool of creditors such as Joint Lenders’ Forum is a substitute of the CoC. It has been observed in a few cases that an IP took directions of a creditor having significant voting power or a pool of creditors. This compromises the independence of IP and amounts to contravention of the provisions of the Code.

(g) Appointment of professionals: It is the duty of the RP to preserve and protect the assets of the CD, including continuing its business operations. Section 25(2) of the Code empowers an RP to appoint accountants, legal or other professionals for this purpose. Clause 23B of the Code of Conduct under the IP Regulations prohibits an IP from engaging or appointing any of his relatives or related parties for or in connection with any work relating to any of his assignments. An IP is, therefore, required to satisfy himself that there is a need for services of a professional; such services are not available within the CD; the person is qualified to render professional service; the professional to be appointed is suitable for the purpose; the professional is not a relative or related party of the IP; the fee to be paid to the professional is reasonable; etc. He needs to apply his mind to these and other related aspects while appointing a professional. He must not appoint any person who is not a professional, or who is his relative or a related party, or who is the choice of a stakeholder. He must not appoint a professional to provide services to a stakeholder, or a professional because a stakeholder wants that professional to be appointed. There are instances where the RP appointed a professional who is the choice of a stakeholder or a person who is not a professional for professional services. This compromises the independence of the IP as well as that of the professionals and imposes avoidable cost on the CD and other stakeholders.

(h) Appointment of registered valuers: Regulation 27 of the CIRP Regulations envisages estimation of fair value and liquidation value of the assets of the CD. These values serve as reference for evaluation of choices, including liquidation, and selection of the choice that decides the fate of the CD, and consequently of the stakeholders. A wrong valuation may liquidate an otherwise viable CD, which may be disastrous for an economy. Given the importance of valuation in CIRP, the CIRP Regulations require that fair value and liquidation value of the CD shall be determined by two registered valuers (RVs) and it is the duty of the RP to appoint RVs only. There are, however, a few instances where the RP appointed persons other than RVs for conduct of valuations and in some cases, appointed only one RV instead of two. This indicates lack of due diligence and sincerity of the IP and probably demonstrates mala fide intent in some cases to get a valuation done to subserve certain interests. This potentially risks the life of the CD and adversely affects the interests of stakeholders, and drives out qualified and regulated valuation professionals out of practice.

(i) Payment for professional services: An IP and every other professional he appoints are independent professionals. They need to be paid a reasonable fee commensurate to their services and such fee must be agreed before the appointment. The IP or professional concerned must raise bills / invoices in his name towards such fees, and such fees must be credited to his bank account. Any payment of fee for the services of an IP or any other professional appointed by the IP to any person other than the IP or such other professional, as the case may be, does not form part of the insolvency resolution process cost (IRPC). There are, however, a few instances where a fee was paid to a person other than the IP or the professional concerned. This impacts transparency and cleanliness of the process while diluting professional accountability.

(j) Disclosure of fee and relationship: The CIRP Regulations require the IRP / RP to make relationship and cost disclosures in the manner required by IBBI. It is the duty of an IP to disclose the fee payable to him as well as the fee payable to professionals engaged by him while performing the duties as an IP. It is also his duty to disclose the relationship he has with the professionals engaged by him. This ensures transparency and enables the stakeholders to make informed decisions. Failure to disclose these details creates a suspicion in the mind of stakeholders about impartiality and objectivity of the IP and possibly, conflict of interests, he may have.

(k) Fee for authorised representatives: Regulation 16A of the CIRP Regulations entitles an authorised representative (AR) of creditors in a class to receive the specified amount of fee for every meeting of the CoC attended by him. It is, however, observed that ARs in a few CIRPs were paid an amount different from what is permissible under the Regulations. It is also observed that an AR engaged others, whether professionals or not, and such other persons attended the meetings of the CoC with the AR. Engagement of other persons by an AR, payment for services of such other persons, attendance of such persons in the meetings of the CoC, and payment of a different amount than permissible under the Regulations to an AR are in contravention of the law by the IRP/RP as well as of the AR.

(l) Representation in judicial proceedings: Section 25(2)(b) of the Code mandates RP to represent and act on behalf of the CD with third parties, and exercise rights for the benefit of the CD in judicial, quasi-judicial or arbitration proceedings. There are instances where the IP failed to represent the CD in judicial proceedings. Failure to do so compromises the duties of the RP to preserve and protect the interests of the CD, in addition to compromising the objective of value maximisation of the Code.

(m) Related party transactions: Section 28 of the Code requires the RP to take prior approval of the CoC before undertaking any related party transactions during the CIRP. Any such transaction without approval of the CoC is void. There are instances where the IP failed to take approval of the CoC before undertaking such transactions. This puts the transaction at risk and compromises the objective of value maximisation through CIRP and may reflect the intention of the RP to give undue advantage to a related party.

(n) Payment to creditors during CIRP: The Code requires every creditor to submit claims as on insolvency commencement date (ICD) to the IRP. Section 14 of the Code prohibits settlement of any such claim during CIRP and requires the resolution plan to deal with them together in the manner decided by the CoC subject to section 30(2) of the Code. Section 53 of the Code provides a waterfall for distribution of liquidation proceeds if the CIRP yields liquidation. Therefore, the IRP / RP cannot clear the dues of any creditor during the CIRP, as this amounts to giving preferential treatment to one creditor over others and thereby alters the priority mandated under the Code. He cannot also allow any creditor, who is having custody of funds of the CD, to appropriate it towards its own dues. There are instances where the RP allowed payment of dues outstanding as on the ICD to some creditors during CIRP. This not only impacts the interests of remaining creditors but also may be seen as compromising independence and integrity of the IP.

(o) Avoidance transactions: The Code read with the CIRP Regulations casts a duty on the RP to file applications in respect of avoidance transactions (preferential, undervalued, extortionate and fraudulent transactions) for appropriate directions with a view to claw back the value lost in these transactions. He is required to form an opinion on such transactions within 75 days of the ICD and to file applications to the AA within 135 days of the ICD. There are instances where the RP failed to independently apply mind to such transactions and file applications in respect of them. In a few cases, he allowed himself to be directed by the CoC or stakeholders. This may reflect serious dereliction of duty and breach of trust in addition to depriving the stakeholders of their legitimate dues.

(p) Supply of information: The success of CIRP largely hinges on availability of information to relevant stakeholders, particularly the CoC and the resolution applicants (RAs). Section 29 of the Code casts a duty on the RP to provide access to all relevant information to prospective RAs in physical and electronic form. Regulation 36 of the CIRP Regulations requires the RP to provide information memorandum in electronic form to each member of the CoC. However, in few instances, it has been observed that RPs did not provide the relevant information to prospective RAs and members of the CoC. This compromises the possibility of revival of the CD in contravention to the provisions of the Code.

(q) Confidentiality undertaking: The Code requires the RP to provide access to all relevant information of CD to the RA subject to the RA undertaking to comply with the confidentiality requirements. The CIRP Regulations require the RP to obtain an undertaking of confidentiality from every prospective RA and every member of the CoC before sharing the information memorandum. These also require the RP to obtain an undertaking of confidentiality from every member of the CoC before sharing with them the report of the RVs containing details of fair and liquidation value of the CD. There are instances where the RP shared the documents with the members of the CoC and/or prospective RAs without obtaining the required undertaking. This exposes the CD to risks such as insider trading or weakens its competitive position in the market. This may reflect the intention of the IP to provide privileged access to some persons at the cost of others and compromise value maximisation.

(r) Disclosure of information: The Code read with Regulations requires disclosure of certain information such as commencement of CIRP and details list of creditors in public domain. These envisage supply of certain information like information memorandum, evaluation matrix, agenda of the meetings of the CoC, etc. to entitled persons, often after taking a confidentiality undertaking. The details of valuation are required to be disclosed to every member of the CoC in electronic form, on receiving a confidentiality undertaking. Thus, information and documents need to be disclosed or supplied to entitled persons, in the specified manner, at the specified time, after meeting the specified requirements. It has been observed that in a few cases, certain information meant for entitled stakeholders were disclosed in public domain, or certain information meant for public were not disclosed in public domain, or certain information were disclosed before or after the time specified in the law.

(s) Window for views: Regulation 16A (9) of the CIRP Regulations mandates that an AR shall circulate the agenda to creditors in a class, and may seek their preliminary views on any item in the agenda to enable him to effectively participate in the meeting of the CoC. The creditors have a time window of at least 12 hours to submit their preliminary views, and the said window must open at least 24 hours after the AR has sought preliminary views. Further, regulation 25(6) of the CIRP Regulations requires the AR to circulate the minutes of the meeting to creditors in a class and announce the voting window at least 24 hours before the window opens for voting instructions and keep the voting window open for at least 12 hours. It is observed that such timelines were not adhered to in a few cases and voting window remained open for a period shorter than that is provided in the Regulations or for unusually long periods. This may create suspicion about the intention of the IP and may deprive a creditor of its right to vote.

(t) Circulation of minutes: The CoC is the authority to decide various matters in a CIRP, including approval or rejection of a resolution plan. It takes decisions through its meetings and its decisions are reflected in the minutes of its meetings. The CIRP Regulations, therefore, require the RP to circulate the minutes of the meetings by electronic means to members of CoC and ARs, if any, within 48 hours of the conclusion of the meeting. There are instances where the IRP/RP failed to record and circulate minutes promptly or did it late. This may reflect poorly on the competence and integrity of the IP and cause delay in critical decisions.

(u) Inclusion of costs in IRPC: Section 5(13) of the Code read with regulation 31 of the CIRP Regulations specifies what is included in IRPC. It includes only those costs which are necessary for a CIRP. The law does not allow inclusion of any other cost in IRPC. A member of CoC may incur costs to travel to attend the meetings of the CoC; the CoC may incur costs to obtain a legal advice or in engaging a professional; the CD may have incurred a cost before ICD; the RP may pay a penalty for non-compliance with any law during CIRP; etc. There are instances where such costs were included in the IRPC. This may reflect undue influence of beneficiaries on the IP, in addition to causing diminution of value of the CD.

(v) Compliance with applicable laws: Section 17(2)(e) of the Code mandates the IRP/RP to comply with the requirements under any law for the time being in force on behalf of the CD. Any non-compliance has a cost to the CD and its stakeholders and attracts penal consequences. For example, a listed company has several continuing obligations under the securities laws. Failure to discharge these obligations compromises the interests of investors in securities. This amounts to contravention not only of securities laws, but also of the provisions of the Code. The IRP/RP is responsible for the non-compliance of the provisions of the applicable laws if it is on account of his conduct. There are, however, instances where an IRP/RP failed to comply with requirements of various laws. This reflects lack of competence and professionalism of the IP, compromises the interests of stakeholders, and burdens the CD with the liabilities for failure of the IP to make compliances.

(w) Timeline: The Code read with Regulations specifies timeline for each task in a CIRP, as well as overall timeline. It is the duty of the IRP/RP to ensure that every task in the CIRP is completed in time unless directed otherwise by a competent authority. There are instances where the IP failed to adhere to specified timelines. This endangers the life of the CD, compromises the interests of stakeholders, and frustrates the objectives of the Code.

(x) Compliance with orders: The AA issues directions from time to time to facilitate smooth conduct of CIRP, generally based on applications by the parties. The proceedings before the AA are judicial proceedings and its directions are orders of the Court. Any non-compliance with any of their orders may amount to contempt of court. There are a few instances where the RP failed to comply with directions of the AA. Such disregard of the order of the AA may jeopardise the CIRP, impact the interests of stakeholders and drain scarce judicial resources.

(y) Maintenance of records: Regulation 39A of the CIRP Regulations requires an IRP/RP to preserve a physical as well as an electronic copy of the records relating to CIRP of the CD. Further, regulation 7(2)(g) of the IP Regulations requires an IP to maintain records of all assignments undertaken by him under the Code for at least three years from the completion of such assignment. It has been observed that in a few cases an IP failed to produce complete records in respect of CIRPs conducted by him. This suggests the possibility of failure to comply with the relevant provisions of law as well as lack of transparency.

(z) Co-operation with the Inspecting Authority: The Code enables the IBBI and the IPA to monitor conduct and performance of the IPs. Inspection is a typical means of monitoring. The IBBI appoints an Inspecting Authority (IA) to conduct an inspection of an IP. It is the duty of the IP to give all assistance to the IA, produce all records in his custody or control, and furnish all statements and information which the IA may require. There are instances where an IP failed to cooperate with the IA, did not produce documents and records promptly and prolonged inspection on some excuse or the other. This may be construed as a hindrance to the functioning of the IBBI or the IPA, as the case may be, and compromise of interests of stakeholders.

4. This communication has been prepared, in consultation with the three Insolvency Professional Agencies, with the sole purpose of sensitising the IPs about some of the mistakes committed by some of them. The observations made herein are only indicative. An IP must refer to the Code, the Rules/Regulations/Circulars under the Code and relevant case laws and / or may seek professional advice if he intends to take any action or decision, in any matter dealt with in this communication.

Yours faithfully,

Sd/-

(Mayank Mehta)

Assistant General Manger

mayank.mehta@ibbi.gov.in

Tel: 011-23462831

IBBI - Facilitation / 004 / 2020 Dated 12.09.2020 - Role of the Government and its Agencies in the Corporate Insolvency Resolution and Liquidation Processes.

   Insolvency and Bankruptcy Board of India

7th Floor, Mayur Bhawan, Connaught Place, New Delhi-110001

Facilitation/004/2020                                                                 12th September, 2020

Subject: Role of the Government and its Agencies in the Corporate Insolvency Resolution and Liquidation Processes

The Insolvency and Bankruptcy Code, 2016 (Code) consolidates and amends the laws relating to reorganisation and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximisation of the value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders. The first order objective of the Code is resolution. The second order objective is maximisation of value of assets of the firm and the third order objectives are promoting entrepreneurship, availability of credit and balancing the interests of stakeholders. This order of objectives is sacrosanct, as held in Binani Industries Ltd Vs Bank of Baroda & Anr. [CA (AT)(Ins)82/2018 & Ors].

2. The Government and its Agencies are key stakeholders of the Code as they contribute to economic growth, promote entrepreneurship and availability of credit, rehabilitate a company in distress through resolution process, and release under-utilised resources for more efficient uses through liquidation process. The Central Government has been driving the implementation of the Code. It subordinated its dues to claims of even unsecured financial creditors. It encouraged large corporates with high non-performing assets into corporate insolvency resolution process (CIRP) in the early days of implementation of the Code. The Central Government has brought in several changes in laws relating to banking, revenue, company, etc., to facilitate the smooth implementation of processes under the Code. It has piloted four Amendment Acts in the Parliament and the fifth one is under process, in the last three years, to address the challenges arising out of implementation of the Code, in sync with the emerging market realities, to further its objectives.

3. The Adjudicating Authority (AA) under the Code - the National Company Law Tribunal (NCLT), the Appellate Authority - National Company Law Appellate Tribunal (NCLAT), the High Courts and the Supreme Court have delivered numerous landmark judgments settling, clarifying and affirming the role of the Government and its Agencies in the processes under the Code. This Facilitation Note explains some aspects of this role, based on the provisions of the Code and emerging jurisprudence, and provides a rationale for the same for better appreciation by all the stakeholders. 

Primacy of the Code

4. The Code provides that its provisions shall prevail over anything inconsistent with in any other law. The Supreme Court upheld this in several matters and contexts:

• (i) In Innoventive Industries Ltd. Vs. ICICI Bank & Anr. [CA No. 8337-8338 of 2017], it held that the Code shall prevail over State enactments, including the Maharashtra Relief Undertakings (Special Provisions Act), 1958.

• (ii) In Pr. Commissioner of Income Tax Vs. Monnet Ispat And Energy Ltd. [SLP No. 6483-2018 & other petitions], it held that the Code would override anything inconsistent contained in any other enactment, including the Income-tax Act, 1961. Tax Dues

5. The Code balances the interests of all stakeholders, including the Government. It provides for a waterfall which prioritises the claims of various stakeholders for payment from the liquidation proceeds. The stakeholders placed higher in priority get paid first, and the claims of the set of stakeholders placed next in priority are considered only if there is any surplus after fully satisfying the claims of the prior set of stakeholders. The Government is placed in the waterfall after unsecured financial creditors. The Code also provides minimum entitlements for operational creditors and dissenting financial creditors under a resolution plan during CIRP. It empowers the financial creditors to decide distribution of value realised under a resolution plan among the stakeholders.

6. The definition of ‘operational debt’ in the Code makes it clear that ‘Government dues’ are operational debts and the Government is an operational creditor. Several judgments have reaffirmed this position:

• (i) In Pr. Director General of Income Tax (Admn. & TPS) Vs. M/s. Synergies Dooray Automotive Ltd. & Ors [Company Appeal (AT) (Insolvency) No. 205 of 2017 and connected matters], the NCLAT clarified that the statutory dues such as income-tax, sales tax, value added tax and various other taxes fall within the definition of 'operational debt' under section 5(21) of the Code and the statutory authorities claiming the aforesaid dues are operational creditors under the Code.

• (ii) In Leo Edibles & Fats Ltd. Vs. The Tax Recovery Officer (Central) Income Tax Department, Hyderabad and others [WP No. 8560 of 2018], while deciding upon the nature of security interest of Government dues, the High Court of Telangana and Andhra Pradesh made it clear that the Government dues like income-tax dues are unsecured creditors and do not enjoy the status of a secured creditor. The tax dues, being an input to the Consolidated Fund of India and of the States, clearly come within the ambit of section 53(1)(e) of the Code.

7. Ordinarily, the Government is an operational creditor. However, the Government or any of its Agencies could be a financial creditor if the nature of debt is such that it comes within the definition of financial debt. The Code defines the rights and duties of financial creditors and operational creditors in CIRP and secured and unsecured creditors in liquidation process. Corporate Insolvency Resolution Process

8. A threshold amount of default entitles a creditor or the CD itself to file an application to initiate CIRP of the company. If the application is admitted, the CIRP commences, the company moves away from ‘debtor-in-possession’; management of the company and its assets vest in an insolvency professional (IP), who runs the company as a going concern, and a committee of creditors (CoC) is constituted to evaluate options for the company. The IP invites claims from stakeholders, based on the same and other relevant records, prepares an information memorandum. He makes available information memorandum and invites feasible and viable resolution plans from eligible and credible resolution applicants for resolution of insolvency of the company. If the CoC approves a resolution plan within the stipulated time with 66% majority, the company continues as a going concern. If the CoC does not approve a resolution plan with such majority within this period, the company mandatorily undergoes liquidation. 

(a) Submission of Claims

9. On commencement of CIRP, the IP invites claims from creditors to ensure that the resolution plan makes provisions for such claims. A resolution applicant submits a resolution plan after considering all available relevant information, including the claims. If claims are entertained after approval of resolution plan, this would discourage prospective resolution applicants from submitting resolution plans, leading to liquidation of companies, and defeating the objective of the Code. In Committee of Creditors of Essar Steel India Limited Vs. Satish Kumar Gupta & Ors. [Civil Appeal No. 8766-67/2019 and other petitions], the Supreme Court observed that a successful resolution applicant cannot suddenly be faced with ‘undecided’ claims after the resolution plan submitted by him has been accepted, as this would throw into uncertainty in the amounts payable by him. For fear of fresh claims coming up, resolution applicants may not be willing to submit resolution plans.

10. The Code envisages submission of claims by creditors in time. Non-submission of claims in a CIRP timely may lead to loss to the State Exchequer. In State of Haryana Vs. Uttam Strips Ltd. [Company Appeal (AT) (Insolvency) No. 319/2020], the NCLAT observed that the appellant had failed to file the claim before the RP and has no right to claim its dues from the resolution applicant. It held that a successful resolution applicant cannot be burdened with past liabilities since this would make it impossible for it to run the business, ultimately defeating the  entire purpose and mechanism of the Code. The AA, in T. R. Ravichandran, RP Vs. The Asst. Commissioner (ST and 12 Ors) [MA 1298/2019 in IBA/130/2019], held that being an operational creditor, the tax authorities are at liberty to make their claims before the resolution professional (RP) instead of insisting upon him to pay the pre-admission dues before accepting the tax liabilities arising during the CIRP period.

11. In State of Haryana Vs. Uttam Strips Ltd. (supra), the NCLAT observed that the approved Resolution Plan is binding on all the stakeholders; therefore, the appellant must abide by the terms of the approved resolution plan. In Ultra Tech Nathdwara Cement Ltd. Vs. Union of India and Ors. [DB Civil Writ Petition No. 9480/2019], after implementation of resolution plan, the Central Goods and Services Tax Department issued demand notices to the corporate debtor (CD) on the ground that the RP / CoC did not pay entire dues of the Department as claimed in the resolution process and they were not heard at the time of approval of resolution plan. The High Court of Rajasthan set aside the notices issued by the Department as illegal, stating that the fresh demand notices are illegal and arbitrary.

(b) Moratorium

12. The CIRP envisages a calm period to enable the stakeholders to work out a resolution peacefully and the CD continues as a going concern. It provides for a moratorium that prohibits institution or continuation of suits or proceedings against the CD and any alienation of property. In Kitply Industries Ltd. Vs. Assistant Commissioner of Income Tax (TDS) and Anr. [IA No. 54/2018 in CP(IB)/02/GB/2018], the AA held that the proceeding before the Income-tax Department which has resulted in freezing of the bank accounts is a proceeding of quasi-judicial nature and continuation of such a proceeding during moratorium period is illegal in view of the prohibitions under section 14(1)(a) of the Code.

13. The Code prohibits recovery of any ‘property’ by an owner or lessor where such property is occupied by or in possession of the CD. In Rajendra K. Bhutta Vs. Maharashtra Housing and Area Development Authority and Anr. [Civil Appeal No. 12248 of 2018], The CD had entered into a Joint Development Agreement (JDA) with MHADA. On the CD getting into CIRP, MHADA issued notice to the CD for termination of JDA and to handover possession of the land and all structures. An application to restrain MHADA from taking possession was dismissed by the AA stating that section 14(1)(d) does not cover licences to enter upon land covered under JDA. On appeal, the NCLAT held that the land belongs to MHADA and cannot be treated as an asset of the CD under section 14(1)(d). While setting aside the order of NCLAT, the Supreme Court held that section 14(1)(d) speaks about recovery of property "occupied". It does not refer to rights or interests created in property but only actual physical occupation of the property. The JDA has granted a licence to the CD to enter upon the property, with a view to do all the things that are mentioned in it and hence the property is in possession of the CD. Therefore, the land is covered under section 14(1)(d). It reiterated that if there is any clash between the MHADA Act and the Code, the latter shall prevail.

14. The Code mandates that the Central Government or the State Government or any local authority, or any sectoral regulator shall not suspend or terminate any license, permit, registration, quota, concession, clearances or a similar grant or right given by it, on the grounds of insolvency, subject to the condition that there is no default in payment of current dues arising from their use or continuation during the moratorium period. In Aircel Limited [MA-337/2018 in CP(IB)-298/(MB)/2018] and Dishnet Wireless Limited [MA-336/2018 in CP(IB)- 302/MB/2018], the AA observed that license is essential for the business of the CD. A resolution applicant will show interest in the business of the CD if it holds licence. Since no other valuable asset is available to the CD, no resolution applicant would show interest in its business revival. Licence / spectrum is thus sine qua non for getting good resolution plan. The AA directed: “… within the scope and ambit of Insolvency and Bankruptcy Code, 2016 hereby instruct the concerned DoT authority not to make any attempt to cancel the impugned license issued in favour of the debtor company.”

15. The Code prohibits discontinuation of critical services. It provides that such goods and services, which are critical to keep the CD as a going concern, shall not be terminated, suspended or interrupted during the period of moratorium, except where such CD has not paid dues arising from such supply during the moratorium period. It also prohibits discontinuation of essential goods and services to the CD.

(c) Offences

16. The Code insulates the successful resolution applicants against the liability of the CD for any offence committed prior to commencement of insolvency proceeding. It mandates that the liability of the CD for an offence committed prior to the commencement of the CIRP shall cease, and the CD shall not be prosecuted for such an offence from the date the resolution plan has been approved by the AA, if the resolution plan results in the change in the management or control of the CD to an unrelated person. However, the persons, who were responsible to the CD for conduct of its business at the time of commission of such offence shall continue to be liable for such an offence. Similarly, no action - attachment, seizure, retention or confiscation - shall be taken against the property of the CD in relation to an offence committed prior to the commencement of the CIRP of the CD, where such property is covered under a resolution plan approved by the AA, which results in the change in control of the CD or sale of liquidation assets to an unrelated person. This protects the bona fide resolution applicant and buyer of liquidation assets from enforcement action. However, the CD shall extend all assistance and co-operation to any authority investigating an offence committed prior to the commencement of the CIRP.

17. In Tata Steel BSL Limited & Anr. Vs. Union of India & Anr. [WP(CRL) 3037/2019], the trial Court took cognizance of the offences punishable under the Companies Act, 2013 and the Indian Penal Code, 1860, based on a complaint filed by the Serious Fraud Investigation Office. The petitioner submitted that it took over the CD through a resolution plan and section 32A of the Code discharges it from the proceeding before the trial Court. The High Court held that the CD would not be liable for any offence committed prior to commencement of the CIRP. It also clarified that such an order will not affect the prosecution of the erstwhile promoters or any officers who may be responsible for committing the offences. In JSW Steel Ltd. Vs. Mahender Kumar Khandelwal & Ors. [CA(AT)(Ins)No. 957/2019 & Ors], the NCLAT observed that section 32A suggests that the ED / other investigating agencies do not have the powers to attach assets of the CD, once a resolution plan stands approved and the criminal investigations against the CD stand abated. It further observed that the intent and purpose of section 32A is to provide certainty to the resolution applicant that the assets of the CD, as represented to him, and for which he proposes to pay value / consideration in terms of the resolution plan, would be available to him in the same manner as at the time of submission of the resolution plan. Corporate Liquidation Process

18. The liquidation process commences on failure of CIRP to yield a resolution plan. The RP appointed for the CIRP typically acts as the liquidator for the purpose of liquidation. The liquidator makes a public announcement inviting claims and verify them. He takes into his custody or control of all the assets of the CD and forms a liquidation estate. He endeavours to sell the assets of the liquidation estate through public auction, in consultation with the stakeholders’ consultation committee. He distributes the sale proceeds among the stakeholders as per the waterfall. On competition of liquidation process, the liquidator submits an application with the final report to the AA for closure of the liquidation process and dissolution of the CD. 

(a) Claims

19. The liquidator invites claims from creditors to ensure that they can be paid as per waterfall from the realisation from sale of liquidation estate. In Leo Edibles & Fats Ltd. Vs. The Tax Recovery Officer (Central) Income Tax Department, Hyderabad and others [WP No. 8560 of 2018], the High Court of Telangana and Andhra Pradesh held that the Income-tax Department necessarily must submit its claim to the liquidator for consideration as and when the distribution of the assets, in terms of section 53(1) of the Code, is taken up.

20. The priority in waterfall cannot be disturbed. In Leo Edibles & Fats Ltd. (supra), the High Court held that the Income-tax Department cannot claim any priority merely because the order of the attachment was long prior to the initiation of liquidation proceedings under the Code. Even if the order of attachment constitutes an encumbrance on the property, it still does not have the effect of taking it out of the purview of section 36(3)(b) of the Code. The said order of attachment, therefore, cannot be taken to be a bar for completion of the sale under a liquidation proceeding under the Code. In Om Prakash Agarwal Vs. Tax Recovery Officer 4 & Anr. [Item No. 301, IA-992/2020 in CP/294/2018], the Income-tax Department submitted that the income tax proceedings have overriding effect against other enactments and money attached by it is no more an asset of the CD. The AA held that the monies of the CD lying in the bank accounts shall be construed to be an asset of the CD even if an attachment order is passed against the same. It noted that section 178 of the Income-tax Act, 1961 has been amended to allow the Code to have overriding effect and accordingly directed the Bank to defreeze the accounts. 

(b) Moratorium

21. The moratorium declared during CIRP ceases when the AA passes an order for liquidation of the CD. However, during the liquidation period, no suit or other legal proceedings shall be instituted by or against the CD, except by the liquidator, on behalf of the CD, with the prior approval of AA.

(c) Offences

22. The protection under section 32A is also available to sale of liquidation assets. In Mr. Anil Goel, the Liquidator appointed in respect of Varrsana Ispat Limited Vs. Deputy Director, Directorate of Enforcement, Delhi and SBER Bank Vs. Varrsana Ispat Limited [IA (IB) No. /KB/2020 in CP (IB) No. 543/KB/2017], the liquidator sought permission to sell the assets of the CD which were attached by the ED, who objected on ground that an application under section 32A can be made only after the liquidation process is over and can be filed only by the successful resolution applicant and not the liquidator. The AA held that section 32A is applicable to the assets of the CD undergoing liquidation and a liquidator can file an application like the one in hand. It further held that a liquidator can proceed with the sale of the assets even if it is under attachment by the ED, to continue the time bound process of liquidation under the Code and upon completion of the sale proceedings, the buyer can take appropriate steps to set aside the attachment. In Anil Goel, Liquidator Vs. Dy. Director, Directorate of Enforcement in the matter of REI Agro Limited [CA (IB) No. 453/KB/2018 in CP (IB) No.73/KB/ 2017], the liquidator sought orders against the ED to release the attachment of assets of the CD. The AA observed: “In any case, the Court established under PMLA Act being a criminal Court can only decide whether the properties attached during investigation from possession of the Corporate Debtor could be said to be the properties acquired by them using proceeds of the crime. It is for this Tribunal to decide as to how the properties and assets of the Corporate Debtor under liquidation can be appropriated. The Liquidator must get possession of those properties attached by the Enforcement Director, New Delhi.”

Assistance to Insolvency Professional.

23. An IP, when acting as an IRP, RP, or Liquidator, is vested with an array of statutory and legal duties. He manages operations of the company as a going concern, protects the value of its property and complies with applicable laws on its behalf in a CIRP. He takes custody of the assets of the CD and sells them in a liquidation process. As clarified in Asset Reconstruction Company (India) Pvt. Ltd. Vs. Shivam Water Treaters Pvt. Ltd. [C.P. No. (IB)1882 (MB)/2018], an IP is acting as an officer of the Court and any hindrance in the working of the CIRP amounts to contempt of court. In discharge of duties, he often does not receive required co-operation and at times encounters hostility and violence. In several such instances, the AA has directed the Police to provide protection to IRP, RP, or Liquidator to enable him to discharge his duties and the Police has been providing necessary protection. 

Facilitation

24. The following is a list of illustrative facilitations that the Government and its agencies may extend for smooth conduct of the corporate insolvency resolution and liquidation processes under the Code while protecting their interests to the extent permissible under the law: 

A. In respect of CIRP

• (a) deliver demand notice on the CD under section 8 of the Code on occurrence of default, wherever considered appropriate;

• (b) file application under section 9 of the Code for initiation of CIRP of a CD, wherever considered appropriate, when the dues are not settled despite serving demand notice under section 8;

• (c) submit claims, including contingent claims, along with proof of claim, within specified time, to the IP in response to the public announcement under section 15 of the Code in relation to a CIRP (public announcements are available on the IBBI website which  provides alerts to subscribers);

• (d) refrain from raising or submitting any claim in respect of the CD after the timelines; (e) make use of the legal remedies available under the Code in respect of claims;

• (f) refrain from insisting on payment of the pre-admission dues during moratorium period; (g) refrain from instituting or continuing suits or proceedings against the CD to the extent prohibited under sections 14 of the Code;

• (h) refrain from discontinuing essential services to the CD during moratorium;

• (i) refrain from discontinuing critical services except when the CD is not paying the dues arising from supply during the moratorium;

• (j) refrain from terminating licence, permit, registration, quota, concession, clearance or similar grant or right during moratorium on the grounds of insolvency if there is no default in payment of current dues;

• (k) receive notice of each meeting of CoC, if the aggregate operational debt is not less than 0% of total debt of the CD and attend meeting to the extent permitted in section 24(4) of the Code;

• (l) join the CoC, where there is no financial debt of the CD, in the manner provided in regulation 16(2) of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016; 

• (m) enable the IP to deposit GST for the current period without insisting on collection of past dues, to comply with his obligations under sections 17(2) (e) and 23(2) of the Code; (n) release attachments over properties of the CD undergoing CIRP;

• (o) receive the amounts due under resolution plans towards full settlement of claims as against the CD;

• (p) refrain from raising claims / issuing demand notices in respect of unpaid dues already dealt with under resolution plan, after the plan is approved;

• (q) refrain from initiating or continuing proceedings against the CD in respect of offences committed prior to commencement of CIRP, after resolution plan is approved;

• (r) seek all assistance and co-operation of the CD in investigating any offence committed prior to the commencement of the CIRP;

• (s) refrain from taking action - attachment, seizure, retention, or confiscation - against the property of the CD in relation to an offence committed prior to commencement of CIRP where such property is covered under a resolution plan approved by the AA;

• (t) initiate / continue proceedings against the persons responsible for offences committed by the CD prior to commencement of the CIRP;

• (u) honour the resolution plan approved by the Adjudicating Authority;

• (v) consider requests of the successful resolution applicant for necessary approval under section 31 of the Code;

• (w) extend police protection wherever sought by the IRP or RP;

B. In respect of Liquidation Process.

• (x) submit claims, including contingent claims, to the liquidator in response to public announcement made under section 33 (1)(b)(ii) of the Code for the liquidation process (public announcements are available on the IBBI website which provides alerts to subscribers)

• (y) refrain from raising or submitting any claim in respect of the CD after the timelines

• (z) make use of the remedies available under the Code in respect of claims

• (za) join the stakeholders’ consultation committee in the manner provided in regulation 3lA of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016;

• (zb) refrain from instituting or continuing suits or proceedings to the extent prohibited under sections 33(5) of the Code, against the CD;

• (zc) expedite refunds to the CD as claimed by the liquidator;

• (zd) demand claims relating to dues such as TDS, etc., collected by the CD on behalf of the Government, on priority;

• (ze) receive the amounts due from distribution of proceeds in liquidation process;

• (zf) release attachments over properties of the CD undergoing liquidation; and

• (zg) extend police protection wherever sought by the liquidator.

Yours faithfully,

(Sd-)

(K. R. Saji Kumar)

Executive Director