10 November 2021
The Insolvency and Bankruptcy Code, 2016 (Code) has played a significant role in rescuing financially distressed companies as compared to the former insolvency law regimes which were provided in various statues having different objectives and processes. The initial success of the Code is attributable to various factors including the manner in which the Indian judiciary interpreted the law as well as the timely amendments of the Code by the Legislature. Though the Code has performed better than its predecessors, there is headroom available to make the process under the Code more efficient by streamlining the functioning of the insolvency courts (namely, the National Company Law Tribunals (NCLT) and National Company Law Appellate Tribunals (NCLAT)) by bettering the infrastructure and increasing the capacity and capability of the benches for efficacious resolving of cases within reduced timelines.
In the present article, we discuss the recent decision of the NCLAT in the case titled Air Travel Enterprises India Ltd v. Union Bank of India & Ors. (referred to as the Judgment or Air Travel case), where one may argue that the NCLAT, by taking into account extraneous factors which seems prima facie reasonable, may unintentionally broaden the grounds on which a defaulting corporate debtor may challenge its admission into the insolvency process under the Code.
Facts of the case
Green Gateway Leisure Ltd. (GGLL) which is in the travel and tourism sector, leased a plot of land from the government for developing a resort. For availing necessary capital, GGLL obtained loans from three banks including Union Bank of India (UBI). During implementation of the project, several changes resulted in escalation in the project cost requiring additional funds, for which GGLL executed further agreements with the three banks. However, there was a twelve to eighteen months delay on the part of the banks in sanctioning the additional loan amount. Also, after delaying the sanction of the additional loan by almost two years, UBI decided to not give any further loans to GGLL.
It was the case of GGLL that on account of delay in sanctioning of the additional loan, the project cost got further enhanced which played a significant role in GGLL defaulting in loan repayment to the three banks. On occurrence of default, UBI approached NCLT, Kochi branch seeking initiation of corporate insolvency resolution process (CIRP) of GGLL. The NCLT approved UBI’s application, which was challenged in the NCLAT.
NCLAT, while coming to a conclusion that there is a default committed by GGLL, directed the parties to settle the matter within six months, on failure of which UBI would be at liberty to take appropriate actions. The NCLAT observed that GGLL had made settlement proposal to the other banks and had exhibited its willingness to settle the matter with UBI. The NCLAT also recognized the detrimental impact of the COVID-19 pandemic on the tourism sector and also the delay in sanctioning the additional loan amount from the banks to GGLL as important factors on why GGLL could not honor its repayment obligations to UBI.
Scope of ‘debt’ and ‘default’ under the Code
The Code defines ‘debt’ as “a liability or obligation in respect of a claim which is due from any person and includes a financial debt and operational debt.” When a corporate borrower defaults in repayment of debt, the creditor gets a right to initiate proceedings against such a defaulter if such conditions are met. It is pertinent to note that the objective of the Code is not recovery for individual financial creditors, but rather resolution of insolvency of corporate borrower by a collective effort of its financial creditors so that the corporate debtor can be kept alive and that the value of its assets / business can be maximized.
The Supreme Court, in its landmark judgment Innoventive Industries Limited v. ICICI Bank Ltd (referred to as Innoventive), extensively touched upon the concept of debt under the Code and how a default must be ascertained. The Supreme Court held that a default was a non-payment of debt when the same becomes due and includes non-payment of even a part thereof. The Supreme Court laid down that the moment the NCLT / NCLAT is satisfied that a default has occurred, the application must be admitted unless such application is incomplete.
Jurisdiction of the NCLT / NCLAT
In Pratap Technocrats (P) Ltd & Ors v. Monitoring Committee of Reliance Infratel Ltd and Anr (Pratap Technocrats), the Supreme Court of India was faced with the issue of whether the NCLT or NCLAT can test a resolution plan on the parameters of ‘equity’ and ‘fairness’ and held in the negative stating that Code does not provide room for NCLT / NCLAT to exercise their own discretion in matters pertaining to fairness and equity. While the issue in the Air Travel case is different, the reasoning of the Supreme Court in Pratap Technocrats was that NCLT / NCLAT must abide by the nature and extent of their jurisdiction as defined in the Code itself. So, where the jurisdiction is limited to determining whether a debt and default exists, the NCLAT cannot cloak itself with additional jurisdiction on the basis of principles of fairness and equity, as the Code does not bestow NCLAT with any equity jurisdiction.
Our thoughts
The key legal issues to be considered by NCLAT should have been limited to questioning whether there was an existing debt and whether there was a default by the borrower in repayment of the debt or any part thereof. If the responses to above are in the affirmative and the default amount is INR 10 million or more, then the corporate debtor, i.e., GGLL should undergo the rescue process of CIRP.
Further, if after such admission, GGLL desires to settle the matter, Section 12A of the Code would have come to its aid. Section 12A of the Code read with Regulation 30A of the IBBI (CIRP) Regulations, 2016 provides that the NCLT may allow withdrawal of CIRP on an application made by the applicant. Such an application can be made:
a. After admission of CIRP application, but before constitution of the committee of creditors (CoC);
b. After constitution of CoC, but before issue of invitation for expression of interest with the approval of 90% voting share of the CoC; and
c. After issue of invitation for expression of interest with the approval of 90% voting share of the CoC, along with reasons justifying withdrawal after issue of such invitation.
In view of the above, the option of settling the matter with UBI is always available to GGLL even after initiation of CIRP.
The NCLAT’s approach in the Air Travel case of basing the Judgment on extraneous factors, such as, market and economic conditions, willingness of the debtor to settle the matter, debtor’s relations vis-à-vis other creditors, possible role of the creditors in aggravating the financial condition of the debtor, etc., for determining whether CIRP should be initiated, may create confusion in interpretation of the law which has already been decided in the Innoventive case by the Supreme Court of India. Further, the Judgment may be misused by defaulting corporate debtors to challenge applications filed in the NCLT on grounds that certain external factors made the default inevitable, and they are willing to settle the matter with their creditors.
We are of the view that though the Judgement is well intentioned, the Code restricts the role of the insolvency courts to limited ascertainment of facts, i.e., whether there is a debt and whether the corporate borrower has defaulted in repayment of debt. The Code is exhaustive and complete in itself, which defines the key conditions that the insolvency courts need to take into account while admitting a corporate debtor into the rescue process. Any additional requirements, which makes financial creditors to go beyond the statutory requirements to prove debt and default should not be encouraged as it may blunt the effects of the Code and defeat the rights of financial creditors under the Code.
