Issue 49

INSIGHTS

The ibc: tinkered

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Legal monsoon

It’s not only been raining across the country but in the legal world as well. Several legislations have been amended. Several others have found their way to the Parliament. While few are awaiting the Presidential consent, a couple of them
have become law.

Leading the pack of legislation(s) that have been amended is the all-important and all pervasive Insolvency and Bankruptcy Code, 2016. (IBC). The Insolvency and Bankruptcy Code (Amendment) Bill, 2019 to the existing Insolvency and Bankruptcy Code has been necessitated in view of the judgment passed by the Ahmedabad bench of the NCLT in the Essar Steel case. The Supreme Court has stayed the order passed by the NCLT.

The Essar Steel case – in a nut shell

The steel giant Essar owed almost Rs. 54,500 crores to its creditors in toto – both financial creditors and operational creditors. A consortium of banks led by SBI are the financial creditors while vendors and suppliers like Bharat Petroleum, ONGC, GAIL and others form the operational creditors. A case was filed under the Insolvency and Bankruptcy before the adjudicating authority against Essar Steel for recovery of its unpaid / outstanding dues.

An insolvency resolution professional (IRP) was appointed. The Committee of Creditors (CoC) was constituted predominantly with the financial creditors. After several deliberations and legal hurdles later, the IRP submitted a resolution plan before the CoC. The CoC approved the bid by another steel giant Arcelor Mittal. Arcelor Mittal offered to take over Essar Steel for Rs. 42,000 Crores. The Ahmedabad bench of the NCLT approved the bid submitted by Arcelor Mittal for the takeover of Essar Steel. The operational creditors were up in arms as they were of the view that they were being re-paid only a pittance of their dues while more than 92% dues of the financial creditors were being paid on priority. The operational creditors approached the appellate Tribunal of the NCLT. On 16th July, 2019, the NCLAT ruled that operational creditors be treated on par with the financial creditors. As a result, creditors (both financial and operational) were to get between 60% - 65% share in the Arcelor Mittal bid (as against more than 90% in favour of only financial creditors). This effectively put the financial and operational creditors as equals in the debt recovery process.

This ruling shook financial creditors as they were of the view that the NCLAT decision is against the basic tenets of the insolvency and bankruptcy code which gives priority to the financial creditors (over operational creditors and others). It is then that the financial creditors – essentially banks that lent money to corporate debtors went on appeal against the NCLAT ruling to the Supreme Court.

On 23rd July, 2019, the Apex court has stayed the order passed by the NCLAT. As of now, the sale of Essar Steel to Arcelor Mittal will not be given effect to until all parties concerned are given a hearing before deciding on implementation of the ruling.

Government move on the IB code amendments

By the time the financial creditors approached the Supreme Court, the union cabinet, on 17th July, 2019 pro-actively approved several amendments to the IBC, 2016. A look at the seven (7) key amendments:

Presently the IB Code prescribes a total of 270 days to entirely complete the insolvency resolution process. (The CoC will appoint an IRP who will present a resolution plan within 180 days which could be extended by a maximum of up to 90 days). It is now proposed to increase / extend the timeline to a total of 330 days. This has been proposed keeping in mind the time taken in interpretation of the law and litigation over the same. However, the timeline of 330 days includes time taken for litigation as well. If not completed within the 330 day timeline, the corporate debtor will go into mandatory liquidation. For existing cases where the 330 day limit has been crossed, the same will have to be completed within 90 days from the amendment bill coming into effect. This provision has been proposed for more efficient insolvency resolution process. Besides this, the government proposes to hold NCLT responsible for delays in admitting or rejecting the NCLT applications within the stipulated 14 days. This has been done to ensure speedy initiation and recovery proceedings.
The Amendment bill seeks to introduce restructuring schemes such a mergers, de-mergers, amalgamations as part of the insolvency resolution plan / process. Such alternative methods of insolvency resolution will provided wider scope of debt recovery without resorting only to liquidation of the debt ridden company. Once such schemes are approved, then the corporate debtors may be rechristened and re-organized and need not necessarily be liquidated.
It is proposed to re-structure the voting by representatives, trustees / agents or a group of financial creditors in the meetings of the Committee of Creditors (CoC). If 50% or more from a class of financials creditors have voted for or against a resolution, it will be considered as though the entire group / class of financial creditors have voted for or against such resolution plan. This make the voting process easier and based on those present and voting. This could be particularly useful in cases where large number of home buyers or debenture holders are financial creditors.
The amendments provide for powers to the Committee of Creditors (CoC) by stating that the CoC take into account the priority amongst creditors and disburse claims based on commercial consideration. Secured creditor is given higher priority over unsecured and other operational creditors.
The previous CIRP regulations had provided for settling claims of dissenting financial creditors and other operational creditors provided that it was not less than the liquidation value of their debt. This was done away by the NCLAT on grounds of being ultra vires. The IBC (Amendment) Bill, 2019 seeks to reintroduce the same with a view to safeguard interests of various categories of creditors including the dissenting ones.
The amendment bill seeks to make the resolution plan binding on all parties including the central and state government and any authority who have claim(s) against the corporate debtor.
It is proposed to introduce another amendment where in the Committee of Creditors (CoC) is empowered to take decision on liquidating the corporate debtor at any time after the constitution of the CoC and before the preparation of the Information Memorandum. This has been done to speed up the insolvency resolution process as well as ensure no wastage of time of the NCLT and its members. It has also been proposed to impose costs for frivolous litigation mainly to act as deterrent from wasting time of the Tribunal and its adjudicating authorities.

The IBC Amendment Bill, 2019: removing speed breakers

The Insolvency and Bankruptcy Code (Amendment) Bill, 2019 was introduced in Rajya Sabha on 24th July, 2019. It was approved on 25th July, 2019. The amendments to the existing IB Code essentially seeks to put back the CoC at the helm of affairs while trying to expeditiously satisfy interests of various stake holders by prioritizing their requirements and at the same time settling claims of those who are last in the rung. By ensuring extended time lines and satisfactory claim settlements, the amendments are paving the road to insolvency resolution sans any speed breakers.

WHAT'S BREWING

The country has been witnessing a slurry of activity in parliament with the amendments and or passing of key legislations that are crucial to the development of India. A look at two legislations that have a bearing on the progress of civil society:

The RTI Act

The Right to information Act (known as the “RTI” Act) was originally enacted in October, 2005. The main objective of this Act is to enable citizens have a fundamental right under the Constitution of India to request for and obtain information from a “public authority”. Such authority is required to provide such information within 30 days from date of request. “Public authority” means all departments of the government and any instrument of the State. As a result all government departments and public authorities have digitized and computerized their records and documents to enable access information.

It covers all constitutional authorities including the executive, legislature and the judiciary. It is also defined in the Act that bodies or authorities established or constituted by order or notification of appropriate government including bodies "owned, controlled or substantially financed" by government, or non-Government organizations "substantially financed, directly or indirectly by funds". Privatized public utility companies fall within the purview of RTI as well as private institutions and NGOs receiving over 95% of their infrastructure funds from the government. Even political parties came under the ambit of the RTI Act. The intent behind the Act was to promote transparency and accountability in the working of Public Authorities and make the government corruption free.

However, in August, 2013 the government introduced amendments to the effect that no political parties would come under the ambit of the RTI Act. As a result all political parties were exempted from the RTI Act. Cases were filed in the Courts opposing this amendment.

The Right to information (Amendment) Bill, 2019 seeks to amend section 13, 16 and 27 of the RTI Act. Presently, these sections deal with the tenure of the Central and State information commissioners as well as the powers of the Central government in passing rules in carrying out the provisions of this Act.

The amendments Bill, 2019 seeks to bring the status of the Central and State information commissioners on par with the Election commissioners and Chief Secretary of the State respectively. Hitherto, the tenure of 5 years or 65 years of age “whichever is earlier” provisions stands amended. Now the central government has the power to decide the tenure of such officers. The central government now has further powers to decide on the rules for giving effect to the provisions of the RTI Act.

The amendments were passed in last week on 25th July, 2019 after negating the demand to send the amendments to a select committee for greater scrutiny.

The amendments have invoked mixed response – a section of the society is up in arms that giving more powers to the government will only dilute the intent of enacting the legislation. By letting government decide on salaries and allowances of the top brass of the RTI commission, it will make the commission reluctant in sharing information with the public. It will make them less impartial. The Opposition is of the view that the amendments have been adopted without discussion / debate as the plea for referring the same to a select committee was rejected.

The government is of the view that the amendments are routine in nature. Since the commissions are statutory bodies under the purview of the government, the central government has the right to make rules and regulations governing their functioning. Only time (and the general public) will tell if the amendments were effective in better functioning of the Commission and the RTI Act itself.

Triple Talaq Bill

On 26th July, 2019 the Lok Sabha passed the Triple Talaq bill.

Triple Talaq is a form of divorce in Islam that allows any Hanafi Sunni Muslim man to legally and irrevocably divorce his wife by uttering the word “talaq” (meaning “divorce”) three times in succession in oral, written or even electronic form.

The Muslim Women (Protection of Rights on Marriage) Bill, 2019 criminalises instant divorce given by Muslim men to their wives and also seeks jail term for such acts. Any form of instant triple talaq — spoken, in writing or by electronic means such as email, SMS and WhatsApp is illegal and void. It attracts imprisonment with a jail term upto a period of 3 years for the guilty/accused.

In Lok Sabha 303 parliamentarians voted in favour of this bill while 82 voted against it. After passage of the Bill by Rajya Sabha got the asset of the President of India and became a law with effect from 1st August, 2019.

National Medical Commission Bill, 2019

The National Medical Commission Bill, 2019 (known as the “NMC”) was introduced in the previous Lok Sabha session itself. Ever since its introduction in 2017, the Bill has created furore in the parliament as it has in the medical fraternity.

The main objective of the NMC Bill is to replace the Indian Medical Council. The Bill seeks to address issues relating to training of doctors and medical care givers, the procedures for dealing with medical education and address issues relating to re-structuring the medical regulatory authorities. The main intent being to eliminate corruption in medical regulatory and educatory bodies while providing quality medical practitioners and regulatory bodies.

The Bill seeks to replace the Medical Council of India (MCI) which has been reeling under corruption at its highest offices. The MCI will be replaced by a regulatory body whose members shall be appointed by the government. It is proposed to make an officer in the rank of cabinet secretary head such body.

One of the many provisions of the new bill includes handing out approval to non allopathic practitioners to prescribe allopathic prescriptions if they pass a “bridge course”. This has had the medical fraternity up in arms as it seemingly encourages entry of “quacks” to the medical profession. Even the alternative medical practitioners are up in arms as they believe the alternative medical therapy will take a beating. This also makes them have to register with the NCM regulatory body in addition to registration with the alternative medicine regulatory bodies.

The Bill further states that MBBS qualified medical practitioners will have to take a licentiate exam to be able to get registered with the medical council and practice.

The NMC Bill also stresses on the need to have a common unified entrance exam (NEET) across the country. It is a one stop shop examination for students to get admission into MBBS courses replacing a plethora of various state wise entrance exams. This has been severely protested especially in the state of Tamil Nadu.

The Bill was re-introduced in the Lok Sabha this session and got assent. The Rajya Sabha gave the assent to the Bill on 1st August, 2019. It awaits the Presidential nod.

Code on Wages Bill, 2019

In a bid to combine all Central and State legislations relating to labour – wages and bonus, working conditions in factories and units, industrial disputes etc, the government introduced the Code on wages Bill. Aimed at integrating all existing labour legislations for greater applicability and uniform compliance, the Bill seeks to consolidate 4 existing labour laws – (i) the Payment of Wages Act, 1936, (ii) the Minimum Wages Act, 1948, (iii) the Payment of Bonus Act, 1965, and (iv) Equal Remuneration Act, 1976 into one.

The Code which is to be made applicable to all employees seeks to fix and regulate a floor wage (including salary and allowance) and a minimum wage (which is higher than the floor wage) based on the current standard of living. It also seeks to fix the time and amount to be paid for working overtime. Such wages are proposed at least twice the normal wages.

The Code states that wages lesser than the minimum wages should not be paid. Minimum wages will be fixed based on the time, skill of the worker and the level of difficulty in producing or manufacturing a product. The Minimum wage will be notified by the central and state governments and shall be review / revised every 5 years.

The Code also promotes gender equality by prohibiting gender discrimination in matters relating to recruitment, wages and work environment. The Code proposes to constitute advisory boards consisting of employers, employees, representatives from central and state government. One third of the total strength shall be women. The advisory boards will advise governments on various issues relating to labour. The Code proposes to lay down stringent provisions for offences by employers including fine and imprisonment.

The Code was passed by the Lok Sabha on 23rd July, 2019 and in the Rajya Sabha on 2nd August, 2019. It now awaits the Presidential nod before it can become law.

UAPA

In our previous edition, we had shared about the amendments to the Unlawful Activities (Prevention) Act, 1969 (“UAPA”). One of the key amendment proposed was to include individual terrorists also in the list of “banned entities”. Therefore, the heads / chief of terrorist organizations some of whom have already been declared by the United Nations (UN) as “global terrorists” will now be declared by India as “individual terrorists”. The amendments to UAPA were passed by the Rajya Sabha amidst much opposition on 2nd August, 2019. It awaits the Presidential assent to become a law.

CIRCULARS & NOTIFICATIONS

MCA

SEBI

RBI

THE VERDICT

Power of NCLT to pass ad-interim orders before admitting insolvency application

COMPANY APPEAL (AT) (INSOLVENCY) NO. 664 OF 201

NUI Pulp and Paper Industries Pvt. Ltd. - Appellant vs

M/s. Roxcel Trading GMBH - Respondent

Facts of the case

M/s Roxcel Trading GMBH, the operational creditor filed an application under Section 9 of the Insolvency & Bankruptcy Code, 2016 (“IBC”) against the Corporate Debtor NUI Pulp and Paper Industries Pvt. Ltd. This, after the operational creditor issued a Demand Notice under section 8(1). After receipt of reply under section 8(2) of the IBC, the operational creditor filed an application under section 9 of the IBC.

When the matter came for hearing before a single bench of the NCLT, the counsel for the corporate debtor submitted that there is an existence of dispute between the parties and hence prayed for time to file the reply. The adjudicating authority allowed for time to file the reply to the corporate debtor as well as time to file rejoinder to the operational creditor.

However, while adjourning the case, the NCLT passed an interim order stating that the corporate debtor must maintain their assets and accounts till the time the application under IBC is admitted or rejected. It can only withdraw funds to the extent of carrying on its day to day operations and business expenses. It restrained the corporate debtor and its directors from alienating or encumbering or creating any third party interest in the assets of the corporate debtor till further orders.

Aggrieved, the corporate debtor preferred an appeal against such interim order before the Appellate authority – the National Company Law Appellate Tribunal (NCLAT).

Arguments

The counsel for the corporate debtor submitted that before the admission of an application under section 7 or 9 of the IBC, the adjudicating authority has no jurisdiction to pass interim orders retraining the corporate debtor and its director from dealing with the assets of the corporate debtor company. It was further argued that the inherent powers under section 11 of the IBC can be exercised by the adjudicating authority only if it comes to the notice that the corporate debtor is trying to get adjournment or seek extra time after filing the application under section 7 or 9 of the IBC. If no such ground is shown by the operational creditor, then the adjudicating authority has no jurisdiction to pass such interim order. The counsel for the operational creditor submitted that it apprehends that directors of the corporate debtor may alienate, encumber to transfer interest of assets to third party and cause wrongful losses to all operational creditors including themselves. Hence it is open to the adjudicating authority to pass interim orders to ensure the objective of the IBC is not defeated.

The Decision

The adjudicating authority ascertained from the counsel of the corporate debtor of their intention to alienate, encumber of sell assets to a third party. The counsel for the corporate debtor said they cannot give any such undertaking as it will act taking into consideration the necessity of the corporate debtor for its day-to-day functioning.

The adjudicating authority then held that section 11 which deals with “inherent powers” enables the adjudicating authority to make any such order as may be necessary to prevent abuse of the tribunal and meet the ends of justice.

Once an application is filed under sections 7 or 9 by the adjudicating authority, it is not necessary for the adjudicating authority to await hearing of parties for passing “Moratorium” orders under section 14 of the IBC. To ensure that either party does not abuse the process of the Tribunal or for meeting the ends of justice, it is always open to the Tribunal to pass appropriate interim order.

In this case, the operational creditor after filing an application under section 9, brought to the notice of the adjudicating authority of its apprehension that the corporate debtor may deny the creditors (to delete) its legitimate rights. Also the Corporate debtor did not given (to delete) any undertaking or make any specific reply and refused to say that they have no such intention. Hence it was open to the adjudicating authority to pass ad-interim order before admitting any application under section 7, 9 or 10 of the IBC.

Therefore the NCLAT invoked Rule 11 of the NCLT Rules, thereby exercising its inherent powers to make such orders as necessary to meet the ends of justice. This power has been given to the NCLT to ensure that no party can abuse the process of the Tribunal. Hence the NCLT has power to pass ad-interim orders before admitting insolvency application.

GO FIGURE

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The Journey of IBC

The FM's union budget speech contained mind boggling details and statistics of the journey of the Insolvency and Bankruptcy Code and its road ahead.

LEGAL-EASE

Abeyance

Lapse in succession during which there is no person in whom title is vested.

Badges of fraud

A circumstance or other fact accompanying a transfer of property that the courts recognize as an especially reliable indicator of the transferor’s actual intention to hinder, delay, or defraud creditors in making the transfer.

Calumny

Defamation;Slander;false accusation of a crime or offense.

De bene esse

conditionally; provisionally; in anticipation of future need. A phrase applied to proceedings which are taken ex parte or provisionally, and are allowed to stand as well done for the present, but which may be subject to future exception or challenge, and must then stand or fall according to their intrinsic merit and regularity.

INFOGRAPHIC

DIGITALLINDIA
Aadhaar and other laws Amendment Bill, 2019

(P)REVIEW

MIRACLE ON 34th STREET (1947) (Movie)

A 1947 American Christmas comedy cum legal drama, the movie was an adaptation from a book. When a Kris Kringle (Edmund Gwenn) unexpectedly replaces an intoxicated man who is playing Santa Claus at the famous Macy’s store, little does he realize that he will change the fortune of Macy’s. Slowly yet steadily Kris becomes the main attraction at Macy’s threatening. While this keeps the owners happy, the person who hires Kris to play Santa feels insecure and threatened. Then begins a string of events to get rid of him from the store on the grounds of his mental instability. A young lawyer takes up his case and successfully defends him against all odds to prove that this Santa Clause is real! A post office in New York city holds key to that. The story is a comical yet legal look at events between Thanksgiving day and Christmas day in New York City. The movie earned several Academy and Golden Globe nominations, winning Edmund Gwenn the Academy as well as the Globe for the best actor in a supporting role. The film has also been preserved by the Library of congress for being “culturally significant”. Despite spin offs being made more recently in the form of a TV show as well as a remake in mid 90’s, the original movie remains a Christmas favourite even now across the United States of America. A festive feel good movie.

THE SIMEON CHAMBER BY STEVE MARTINI (1994)(Book / Novel)

The first novel written by Lawyer turned author Steve Martini, the Simeon chamber is a story based on a seemingly routine adoption case which runs a deep murder mystery spanning a few centuries.

The central character, Sam J Bogardus is an attorney at law who runs a law firm with this former lover cum law partner. When he takes up the case of an elegant heiress to a fortune, she hands Sam a document purported to be that of the clients’ father actually contains a piece of history and art as it is hand written and signed by Francis Drake – the 16th century voyager from the Elizabethan era. When the dark art underworld gets a whiff of this, they are willing to do anything to lay their hands on the same including kidnap and kill Sam and his partner. A string of events lead the lawyer duo to San Simeon, William Randolph Hearst's castle, where he unearths a startling wartime black-market scandal. The finale – unexpected.

DAMAGES (2007) (TV Series)

An American legal thriller series on television, the show had a total of 5 season run from 2007 to 2012. The base of the show is the relationship between a non nonsense lawyer Patty Hewes (played brilliantly by Glenn Close) and her latest law firm joinee Ellen Parsons (played by Rose Byrne). The show is also known for depiction of legal cases from the view point of both the law firm and the opponent. Though it ran only for 5 seasons, it received several television award nominations

Laws too gentle are seldom obeyed; too severe seldom executed

– Benjamin Franklin