Judgment Summaries (Supreme Court) Innoventive Industries v. ICICI Bank

  February 27, 2022

Case Summary

Innoventive Industries Ltd. v. ICICI Bank & Anr. 1 SCC 407 (2018)

Supreme Court of India, Decided on 31.08.2017

“…this is the very first application that has been moved under the Code, we thought it necessary to deliver a detailed judgment so that all Courts and Tribunals may take notice of a paradigm shift in the law.” (Para 11)

Innoventive Industries Ltd. V. Icici Bank & Anr, is the first authoritative pronouncement on the Insolvency and Bankruptcy Code, 2016 (“the Code”), and tackles complex questions of the regime’s interaction with state legislations, erstwhile directors of the corporate debtor, and clarifies the scope of the adjudicating authority’s discretionary jurisdiction in context of the “creditor in control” mechanism.

The initiation of the insolvency resolution process in this case was preceded by a failed Master Restructuring Agreement. The initiation faced resistance, which led to the tribunals answering important questions of law. Both the National Company Law Tribunal, and the National Company Law Appellate Tribunal admitted the financial creditor’s insolvency application, but had differing views regarding certain key issues of the case. The Supreme Court upheld the admission of the insolvency application, and clarified the following issues:

The overriding effect of the Insolvency and Bankruptcy Code, 2016 on the Maharashtra Relief Undertakings (Special Provisions Act), 1958

Vide two notifications issued under the Maharashtra Relief Undertakings (Special Provisions Act), 1958, (“MRU” Act), all liabilities of the corporate debtor (save a few) were sought to be temporarily suspended for a cumulative period of two years. The corporate debtor relied on this limited moratorium to present a challenge to the financial creditor’s Section 7 application under the Code. The corporate debtor contended that since a moratorium was already in effect, it would prevent the filing of an insolvency initiation application. Further, since its debt stood suspended due to the effect of the limited moratorium, no debt was due in law.

The Supreme Court undertook a rigorous judicial exercise of ascertaining the existence of repugnancy between the MRU Act and the Code. While the MRU Act is a state act relating to social security/insurance, employment and unemployment, the Code is a central enactment consolidating laws related to reorganization and insolvency. The Court observed that the procedure prescribed under the MRU Act could not mutually co-exist with the procedure prescribed under the Code. The MRU Act facilitates taking over of a distressed enterprise by the State Government, followed by the imposition of a limited moratorium under Section 4, which was in conflict with the moratorium under Section 14 of the Code. The moratorium imposed under the MRU Act is limited and discretionary, whereas the one imposed under Section 14 is unconditional. Therefore, the Court held that the MRU Act could not be preferred over the Code.

The Court also considered the interaction of the non-obstante clauses incorporated in both the legislations. The Court opined that Section 238 of the Code prevailed over Section 4 of the MRU Act, as the Code was a later, exhaustive central enactment, and substantiated this proposition by relying upon Article 254(1) of the Constitution: “If any provision of a law made by the Legislature of a State is repugnant to any provision of a law made by Parliament which Parliament is competent to enact, or to any provision of an existing law with respect to one of the matters enumerated in the Concurrent List, then, subject to the provisions of clause (2), the law made by Parliament, whether passed before or after the law made by the Legislature of such State, or, as the case may be, the existing law, shall prevail and the law made by the Legislature of the State shall, to the extent of the repugnancy, be void.”

Can an erstwhile director maintain an appeal on behalf of the company? 

The Supreme Court noted that “once an insolvency professional is appointed to manage the company, the erstwhile directors who are no longer in management, obviously cannot maintain an appeal on behalf of the company” (Para 11). The appellants in this case were the erstwhile directors of the corporate debtor, and were deemed to have no locus standi to oppose the admission of a Section 7 insolvency application under the Code. The counsel for the appellants requested leeway to correct this technical error, by presenting the appellants as those concerned by the admission of the insolvency application; however, the Court condoned the error in favour of delivering an authoritative judgement on the Code.

Admission of a Section 7 insolvency application by the Adjudicating Authority 

The scheme of the Code differentiates between an insolvency initiation application filed by a financial creditor, and that filed by an operational creditor. If an operational creditor prefers a Section 9 insolvency application under the Code, the corporate debtor can be out of the clutches of the Code if he can demonstrate the pendency of a pre-existing dispute. However, if a financial creditor files a Section 7 application under the Code, the existence of a dispute is an irrelevant consideration to the adjudication of the application. The Court relied upon the allied rules of the Code, namely, the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016. Referring to Rule 4, the Court delineated the constituents of Form 1, which needs to accompany a Section 7 application under the Code.

The Court opined that it is at the juncture of Section 7(5) of the Code, where the Adjudicating Authority needs to be satisfied about the occurrence of a default. This “satisfaction” could also accommodate a very limited challenge to the Section 7 application, where the Corporate debtor is “entitled to point out that a default has not occurred in the sense that the “debt”, which may also include a disputed claim, is not due”(Para 28). However, if the application survives this challenge, the Adjudicating Authority should admit the application, unless it was incomplete; in which case, a seven day time period would be provided to the financial creditor to correct the errors in the application. Therefore, the Court held that the procedure which governs the admission of a financial creditor’s Section 7 application was bound by the procedure prescribed under the Code, and the scope of a corporate debtor’s challenge was also narrowly carved out.

 

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