Innoventive Industries Ltd. v. ICICI Bank
Supreme Court of India, 31 August 2017, 2 judges
Upholding admission of ICICI Bank's Section 7 application, the Court held that the Maharashtra Relief Undertakings Act is repugnant to the Insolvency and Bankruptcy Code, 2016 and that a suspension of liabilities under it cannot stall insolvency resolution.
Facts
The appellant company, unable to service loans from 19 lenders, obtained a corporate debt restructuring and a master restructuring agreement (MRA) in 2014. In December 2016 ICICI Bank applied to the NCLT under Section 7 of the Code. The appellant's only reply was that, under notifications issued under the Maharashtra Relief Undertakings (Special Provisions) Act, 1958, its liabilities and remedies for their enforcement were suspended, so no debt was due. After hearings, it filed a second application pleading that the lenders had not released funds under the MRA. The NCLT held that the Code prevailed under Section 238, admitted the application and declared a moratorium, and refused to entertain the second plea. The NCLAT dismissed the appeal, though it held the two Acts were not repugnant. The company appealed.
Questions before the Court
- Whether an appeal by the company, filed through its erstwhile directors after an insolvency professional took over management, was maintainable.
- What a corporate debtor may contend, and what the adjudicating authority must decide, on a financial creditor's application under Section 7 of the Code.
- Whether the Maharashtra Relief Undertakings (Special Provisions) Act, 1958 is repugnant to the Code, so that a suspension of liabilities under it cannot bar the insolvency resolution process.
- Whether the NCLT should have examined the belated plea that the creditors' failure to disburse funds under the MRA meant no default had occurred.
What the Court held
- Once an insolvency professional is appointed to manage the company, the erstwhile directors cannot maintain an appeal on behalf of the company. The appeal was not maintainable, but the Court decided it on merits because this was the very first application moved under the Code.
- Under Section 7, the adjudicating authority must, within 14 days, satisfy itself from the information utility records or other evidence that a default has occurred. It does not matter that the debt is disputed, so long as it is due, that is, payable and not interdicted by law or deferred to a future date.
- This differs from Section 8, where a pre-existing dispute raised by the corporate debtor takes an operational creditor's claim out of the Code.
- The Code is an exhaustive Parliamentary law on corporate insolvency under Entry 9, List III. The Maharashtra Act, under Entry 23, List III, is repugnant to it, because State takeover and moratorium under Section 4 would directly obstruct the Code's moratorium and management by the interim resolution professional. Article 254(1) and Section 238 make the Code prevail.
- Suspension of liabilities under the Maharashtra Act, for up to 15 years, would defeat the Code's time-bound scheme; any vested right of the debtor under other law cannot stand in the way of the Code. The NCLAT erred in finding no repugnancy.
- The NCLT rightly declined the second plea as an afterthought filed after the 14-day period, and in any case the MRA made the debtor's obligations unconditional. The appeals were dismissed.
Why it matters
Because this was the very first application moved under the Insolvency and Bankruptcy Code, 2016, the Court delivered a detailed judgment so that all courts and tribunals would take notice of a paradigm shift in the law. It sets out the scope of inquiry on a financial creditor's Section 7 application, contrasts it with Section 8, and states ten propositions on repugnancy under Article 254. It also notes that a statement in Rajiv Sarin on pith and substance may not be correct in view of Tika Ramji.
In the Court's words
Copied from the official judgment; each passage links to its page.
“According to us, 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.”
“On the other hand, as we have seen, in the case of a corporate debtor who commits a default of a financial debt, the adjudicating authority has merely to see the records of the information utility or other evidence produced by the financial creditor to satisfy itself that a default has occurred. It is of no matter that the debt is disputed so long as the debt is “due” i.e. payable unless interdicted by some law or has not yet become due in the sense that it is payable at some future date. It is only when this is proved to the satisfaction of the adjudicating authority that the adjudicating authority may reject an application and not otherwise.”
“It is at the stage of Section 7(5), where the adjudicating authority is to be satisfied that a default has occurred, that 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. A debt may not be due if it is not payable in law or in fact.”
“It is clear that the later non-obstante clause of the Parliamentary enactment will also prevail over the limited non-obstante clause contained in Section 4 of the Maharashtra Act. For these reasons, we are of the view that the Maharashtra Act cannot stand in the way of the corporate insolvency resolution process under the Code.”
Provisions interpreted
- Section 7, Insolvency and Bankruptcy Code, 2016
- Section 8, Insolvency and Bankruptcy Code, 2016
- Section 14, Insolvency and Bankruptcy Code, 2016
- Section 17, Insolvency and Bankruptcy Code, 2016
- Section 238, Insolvency and Bankruptcy Code, 2016
- Article 254, Constitution
- Sections 3 and 4, Maharashtra Relief Undertakings (Special Provisions) Act, 1958
Case and bench
- Parties
- M/s. Innoventive Industries Ltd. v. ICICI Bank
- Case
- Civil Appeal Nos. 8337-8338 of 2017
- Decided
- 31 August 2017
- Bench
- R.F. Nariman, Sanjay Kishan Kaul
- Opinions
- Unanimous. Judgment of the Court delivered by R.F. Nariman, J.; Sanjay Kishan Kaul, J. also signed.
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