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January 28, 2019

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Object Vs Process: The Big Conundrum


- Varun Karve, Senior Manager [ Axis Bank Limited ]
- Harshit Gadiya, Assistant Manager [ Axis Bank Limited ]
- Saloni Jain, Assistant Manager [ Axis Bank Limited ]

Varun Karve, Harshit Gadiya & Saloni Jain

The Code has to maintain balance among the objectives by consistently ensuring maximization of value, promotion of entrepreneurship, availability of credit and balancing the stakeholders’ interests within a transparent and time-bound manner...

As far as adoption of new legislation in India goes, the Insolvency and Bankruptcy Code, 2016 (the “Code”) has had a good run since its inception. The Code has, in little more than two and a half years, truly showed that debtors and promoters can be stripped off of control, priority to government dues can be altered, and insolvent body corporates can be turned around in a very short period of time.

Albeit the multiple challenges encountered in the adoption of the Code (which is common for any new legislation in India), the judiciary has speedily dealt with the same, thereby demonstrating it to be justly effective and efficient towards the efficacy of the objectives, as laid down in the Code. The industry, at large, is seemingly in cheer with the functioning of the Code and its outcomes. Lately, like other legislations, few contradictions have surfaced regarding the letter of the Code. While in the legislative sense this is warranted on account of the Code’s infancy, it suffers commercial insinuations. At the outset, industries by and large prefer clear understanding and concrete foresight into the governing laws, rules and regulations, as any kind of quandary can affect, at varied degrees, the commercial viability of such industries.

Any new legislative enactment is bound to bring with it ambiguity as to its true purpose. The letter of the law often contains conflicting provisions or even grey areas which are capable of bearing many modes of constructions. In such cases, the judiciary gives a purposeful and contextual interpretation to the statute while interpreting the law in line with the object sought to be achieved. This article seeks to discuss such an interpretational issue recently faced by the judiciary, that is, the conflict between the fundamental objectives of the Code and the process which is to be adhered to, to attain the objectives.

This predicament was recently considered by the Hon’ble National Company Law Appellate Tribunal (“NCLAT”) in its judgment dated November 14, 2018 passed in the case of Binani Industries Ltd. vs Bank of Baroda & Anr., (“Binani Industries”). In this case, the importance of achieving the objective of the Code was given priority over the obligation to comply with process documents, as has been elaborated below:

Object vs Process


...The first order objective is “resolution”. The second order objective is “maximization of value of assets of the Corporate Debtor”, and the third order of objective is “promoting entrepreneurship, availability of credit and balance the interests”. This order of objective is sacrosanct
- Hon’ble Justice Shri S.J. Mukhopadhaya

The Code in the preamble enumerates its object which is “An Act to consolidate and amend the laws relating reorganization and insolvency resolution of corporate persons, partnership firms, and individuals in a time-bound manner for maximization of value assets of such persons to promote entrepreneurship, availability of credit and balance the interest of all the stakeholders including alteration in the order of priority of payment of Government dues...”.

A recent example where this was demonstrated was in the case of Bhushan Power and Steel Limited, where a late bid made by one of the resolution applicants was accepted by the Hon’ble National Company Law Tribunal beyond the deadline set by the Committee of Creditors. Thereafter, the Hon’ble NCLAT, vide an interim order dated May 9, 2018, directed that the Committee of Creditors may consider the resolution plan submitted by all the resolution applicants. This matter is pending adjudication by the Hon’ble NCLAT, and it remains to be seen whether the judiciary will strike a balance between objectives of the Code and a time-bound process.

In the case of Binani Industries, after closure of the bids in accordance with the process documents, UltraTech Cement offered a revised resolution plan. However, the Hon’ble NCLAT accepted the revised resolution plan even though the process documents did not permit its consideration by the Committee of Creditors. The Hon’ble NCLAT observed that the revised resolution plan took care of the objective of the Code that is maximization of the value of assets of the corporate debtor and also balancing the claim of all the stakeholders of the corporate debtor. Hon’ble Justice Shri S.J. Mukhopadhaya further observed that “...The first order objective is ‘resolution’. The second order objective is ‘maximization of value of assets of the Corporate Debtor’, and the third order of objective is ‘promoting entrepreneurship, availability of credit and balance the interests’.

This order of objective is sacrosanct.” The effect of this ruling was that the Committee of Creditors was in a position to consider and accept bids made after the deadline prescribed under the process documents as it resulted in maximization of value of the corporate debtor. The Supreme Court has also dismissed an appeal filed against the Hon’ble NCLAT judgment, a principle that has been followed subsequently.

The Binani Industries case sets a precedent as it allows maximization of the value of distressed assets and sets out a view at a macro level that the judiciary will not reject any resolution plans outrightly keeping in view the fundamental objectives. At the same time, if the order of objective as laid down in the case of Binani Industries is strictly followed without any harmonious construction thereof, it will create uncertainty as it may give room for an interpretation that the process to be followed in insolvency resolution cases can be compromised at the cost of achieving the fundamental objectives. Such an interpretation can hamper the prospects of effective and time-bound insolvency resolution, as it opens avenues for long time indulgence in the process and poses high risk of lengthy and costly litigations. A negative precedent seemingly is also set, that is, allowance of any low-bid resolution applicant to make a higher amount resolution plan after the highest resolution plan has been approved in coherence of the time-bound process.

However, as the Hon’ble NCLAT observed in the case of Binani Industries, the process of insolvency resolution and the approval of the resolution plan is in the domain of the Committee of Creditors. The Code does not spell out the shape, color, and texture of the resolution plan, which is left to the imagination of the stakeholders. This gives wide potential for resolution plans to be customized and the corporate insolvency resolution process to be flexible depending on the facts of each case, in order to achieve maximization of value. Accordingly, resolution plans which are received within the overall timeframe prescribed under the Code and prior to the final approval of the Committee of Creditors can always be considered, even if such approval is restricted in terms of a process document designed by the Committee of Creditors and the resolution professional.

Conclusion


Any challenge to the objectives of the Code is driven by judicial action, which, in upholding the object and avoiding the mischief caused by the conflicting or ambiguous provisions, have at multiple instances overridden the literal word of the Code. While such judicial action is essential in feeding longevity to the Code, absolute overriding action of the Courts can have numerous unfavorable consequences.

We have already seen an example where the judiciary has struck down process to protect the object of the Code. This was evident in the case of Central Bank of India vs Resolution Professional of Sirpur Paper Mills Limited & Others. The Regulations framed under the Code earlier allowed for differential treatment between operational and financial creditors (i.e., payment of liquidation value to dissenting financial creditors and a minimum of liquidation value to operational creditors) which was disregarded by the Hon’ble NCLAT by its order dated September 12, 2018. While this was limited to equal treatment of creditors with regard to distribution of resolution proceeds, this is an extension of the rule to grant equal say to all creditors when it comes to conducting insolvency resolution process. Recently, while hearing various challenges to the validity of the Code, the Hon’ble Supreme Court observed whether operational creditors should have a say in the Committee of Creditors and get voting rights proportionate to the debt owed to them. Although the Supreme Court asked the government to mull over the issues raised by operational creditors, it has given a clear indication of how the Supreme Court interprets the process should be handled, in order to achieve the objectives of the Code. However, it is yet to be observed how the position of the operational creditors vis-à-vis the financial creditors will evolve over times to come.

While the above seems to be the trend that is being followed in interpreting the Code, there are examples available where the process has been followed strictly, often to the detriment of the object, i.e., value maximization. This was seen in the case of Arcelormittal India Private Limited vs. Satish Kumar Gupta & Ors., where the Hon’ble Supreme Court vide its judgment dated October 4, 2018 allowed Arcelormittal India Private Limited and Numetal Limited to re-submit resolution plans within a fixed time, even though both were initially ineligible under Section 29A of the Code. However, a subsequent proposal from Essar Steel Asia Holdings Limited (72% shareholder of ESIL) submitted to the Committee of Creditors was rejected on the ground that it was not within the mandate of the Supreme Court’s decision and the process laid down in the Regulations, even though it provided for better value as opposed to the abovementioned resolution applicants.

Apropos, the Code has to maintain balance among the objectives by consistently ensuring maximization of value, promotion of entrepreneurship, availability of credit and balancing the stakeholders’ interests within a transparent and time-bound manner. Only then the Insolvency and Bankruptcy Code, 2016 will be utterly successful in India, ensuring speedy insolvency resolution of corporate persons.

Disclaimer – The views expressed in this Article are personal views and do not, in any manner, represent the views or stand of Axis Bank.

 

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