CASE ANALYSIS

M/S. Innoventive Industries Ltd vs Icici Bank on 31 August, 2017

IDENTIFY WHETHER CASE IS FILED BY OC/FC/CD
THE CASE FILED BY CORPORATE DEBTOR In the case of a corporate debtor who
commits a default of a financial debt,

5 MAJOR ISSUES

ANALYZE THE ARGUMENTS BY BOTH THE PARTIES

CRTICALLY ANALYSE FINAL ORDER /DECISION ( ARE YOU IN FAVOUR

/AGAINST AND WHY DO YOU HOLD SUCH OPINION )

 M/s Innoventive Industries Ltd. vs. ICICI Bank noting the paradigm shift in law brought
about by the IBC and putting to rest certain interpretational issues that had arisen
thereunder.

The ruling has its genesis in an application filed by ICICI Bank Limited (ICICI) before
the National Company Law Tribunal, Mumbai (NCLT) to initiate corporate insolvency
resolution process (CIRP) of Innoventive Industries Limited (Innoventive). Interestingly
this was the first application filed under the IBC and has seen some twists and turns in
its journey.

The application was filed by ICICI as a financial creditor of Innoventive, under Section 7
of the IBC, on account of default made by Innoventive in payment of amounts due under
certain credit facilities availed from ICICI.

It was inter alia argued by Innoventive that as its liabilities stood suspended pursuant to

a relief order passed by the Government of Maharashtra under the Maharashtra Relief
Undertaking (Special Provisions Act) 1958 (MRUA) no amounts were due and payable
by it to ICICI and hence, Section 7 application cannot be admitted.

Rejecting the argument inter alia on the basis that the IBC had an overriding effect over
the MRUA, NCLT admitted ICICI’s application, declared moratorium and appointed
an Interim Resolution Professional (IRP).

The NCLT order was challenged by Innoventive before the National Company Law
Appellate Tribunal (NCLAT). In a seminal order passed by NCLAT, it dismissed the appeal
holding that while deciding Section 7 applications, NCLT is only to look at Section 7
ingredients– i.e. presence of debt and default, CIRP application being complete and no
disciplinary proceedings being pending against the IRP. It also held that there is no
repugnancy between MRUA and IBC as they both operate in different fields. However,
since IBC has an overriding effect, it shall prevail over the provisions of MRUA.
 Against the NCLAT order, an appeal was filed before the Hon’ble Supreme Court by
Innoventive. One of the preliminary issues addressed by the Supreme Court was whether the
appeal is maintainable as it had been filed by the erstwhile directors (in the name of
Innoventive). The Supreme Court held that once an IRP is appointed to manage the
company, the erstwhile directors, who are no longer in the management, cannot
maintain the appeal on company’s behalf – and since in the present case, Innoventive
was the sole applicant – the appeal was not maintainable.

Interestingly, the Supreme Court refused to dismiss the appeal on this score alone, noting that
it is delivering a detailed judgment so that all courts and tribunals may take notice of the
paradigm shift in the law. The Supreme Court undertook an in-depth examination of IBC
provisions dealing with corporate insolvency resolution and inter alia laid down the
following principles:

 On Section 7

Supreme Court held that for triggering Section 7 (1) of the IBC, a default could be in respect
of default of financial debt owed to any financial creditor of the corporate debtor – it need not
be a debt owed to the applicant financial creditor.

The Supreme Court contrasted the IBC provisions relating to applications by financial
and operational creditors. It held that under Section 8(1), an operational creditor is
required to deliver a demand notice on the occurrence of a default and under Section
8(2), the corporate debtor can bring to the notice of the creditor, existence of a dispute
or the record of pendency of a suit or arbitration proceedings, which is pre-existing.
Existence of such a dispute will make the application of operational creditor
inadmissible.

On the other hand, under Section 7, the moment NCLT is satisfied that a default has
occurred, the application of the financial creditor must be admitted (unless it is incomplete).
The corporate debtor is entitled to point out that a default has not occurred 8in 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. Supreme Court held that 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.

 On repugnancy

The Supreme Court delved into case law and constitutional principles surrounding
repugnancy between Central and State laws in the context of Article 254 of the Constitution.
It held that the MRUA is repugnant to IBC as under the MRUA, the State Government may
take over the management of the undertaking and impose moratorium in much the same
manner as that contained in the IBC. It held that by giving effect to the MRUA, the plan/
scheme which may be adopted under the IBC will directly be hindered and/or obstructed and
that there would be direct clash between moratoriums under the two statutes.

Supreme Court further held that the non-obstante clause of IBC will prevail over the non-
obstante clause in the MRUA. On the issue of suspension of debt on account of the relief
order under the MRUA, it held that on account of the non-obstante clause in the IBC, any
right of the corporate debtor under any other law cannot come in the way of the IBC.
Key Takeaways

The Supreme Court ruling reinforces the primacy being accorded to the IBC by various
stakeholders, including the government and the Reserve Bank of India While the NCLAT had
already opined on principles of Section 7 (which have been upheld), there are some new
principles laid down by the Supreme Court which merit attention.

Supreme Court has opined that Section 7 application can be filed by a financial creditor for
default on another financial debt. So far, such cases have not been filed in NCLTs. Given the
moratorium on recovery actions, so long as a financial creditor is being paid on time, there is
no incentive for such creditor to file for CIRP on account of default of another financial debt.
The incentive would only come if its debt is due later but the creditor fears that the company
will not be able to service the debt when the time comes. It remains to be seen whether the
Supreme Court ruling will give rise to increased applications by financial creditors for default
on another’s debt.

On account of Court’s finding that the erstwhile directors cannot maintain an appeal on
behalf of the company, appeals against admission orders of the NCLT will now need to be
filed by the erstwhile management in their individual capacity (as shareholders or erstwhile
management, aggrieved with the order). One interesting question that is likely to come up in
coming weeks is the fate of existing appeals before the NCLAT and even decided
applications where appeals have been filed by the erstwhile directors or promoters in the
name of the company.

While the ruling primarily deals with Section 7, the Court also makes certain observations on
Section 8 of the IBC. Importantly, it observes that under Section 8 (2), the corporate debtor
can bring to the notice of the operational creditor the existence of a dispute or the record of
the pendency of a suit or arbitration proceedings and that such dispute must be pre-existing,
i.e. existing before receipt of demand notice or invoice by the corporate debtor. These
observations of the Hon’ble Supreme Court can be viewed as a broad affirmation of the
NCLAT ruling in Kirusa Software Private Limited vs. Mobilox Innovations Private
Limited in which NCLAT held that a ‘dispute’ under Section 8 (2) need not be pending in a
suit or arbitration proceeding; however, the same must be ‘pending’ and cannot be raised for
the first time by the corporate debtor while replying to a demand notice.

Lastly, interestingly the Court holds that debt may not be due if it is not payable in law or in
fact and that 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. However, at the same time, it rejected
the argument of Innoventive on its debt being suspended as per MRUA on the basis that any
right of the corporate debtor under any other law cannot come in the way of the IBC on
account of the wide non-obstante clause in the IBC

5 MAJOR ISSUES
The broad issues before the Supreme Court were
(i) what is the concept of default under the Insolvency Code and how it must be
ascertained?
(ii) what is the scope and extent of enquiry at the admission of a insolvency
application;
(iii) what is the scope of hearing to be provided to a corporate debtor; and
 (iv) whether the protection granted under the Maharashtra Relief Undertaking Act
(MRU Act) renders an application under the Insolvency Code not maintainable.
(v) whether there is a failure on fulfilment of obligation by the financial creditor
under one or other agreement, including the Master Restructuring Agreement. I
According to Shri Salve, after an interim resolution professional has been appointed and a
moratorium declared, the directors of the company are no longer in management and could not,
therefore,
maintain the appeal before us. Also, according to Shri Salve, the NCLT and NCLAT were both right in
refusing to go into the plea that, since the financial creditors had not pumped in funds, the
corporate debtor could not pay back its debts in accordance with the MRA, as this plea was an after-
thought which could easily have been taken in the first reply. Further, in order to satisfy our
conscience, he has taken us through the MRA to some detail to show us that the appellant would
emerge as a defaulter under the MRA in any case.

He has also argued that it is obvious that the two Acts are repugnant to each other, inasmuch as
they cannot stand together. Under the Maharashtra Act, a limited moratorium is imposed after
which the State Government may take over management of the company

Introduction The Insolvency and Bankruptcy Code, 2016 (“IBC”) came into force on 1 December,
2016. The Supreme Court has passed a landmark judgment dated 31 August 2017 in the case of
Innoventive Industries Ltd. vs. ICICI Bank (pursuant to the first application moved under the IBC)
noting the paradigm shift in law brought about by the IBC and putting to rest certain interpretational
issues in case of conflict of statutes.

Brief Facts

1. An application was filed before the Mumbai Bench of National Company Law Tribunal (“NCLT”) by
ICICI Bank against Innoventive Industries Ltd. (“Innoventive”) for the insolvency resolution process to
be set in motion since Innoventive was stated to be a defaulter under the IBC.

2. Innoventive’s main contention was that no debt was legally due since all liabilities of Innoventive
and remedies for enforcement were temporarily suspended for 2 years pursuant to notifications[1]
issued under the Maharashtra Relief Undertaking (Special Provisions Act), 1958 (“Maharashtra
Act”).

3. The NCLT on 17 January 2017 held that the IBC would prevail against the Maharashtra Act in view
of the non-obstante clause in Section 238 of the IBC. It held that the Parliamentary statute would
prevail over the State statute and hence Innoventive had defaulted in making payments and
accordingly the application was admitted and a moratorium was declared. 4.

An appeal was filed before the NCLAT against the above order which met with the same fate and
from there an appeal was filed before the Supreme Court.

Main Contentions

1. Whether the appeal was maintainable as it had been filed by the erstwhile directors of
Innoventive after an insolvency professional was appointed to manage the company?

2. Whether there was any repugnancy in fact between the IBC and the Maharashtra Act?

3. Whether the non-obstante Clause contained in Section 238 of the IBC of the Parliamentary
enactment under IBC will prevail over the non-obstante Clause contained in Section 4 of the
Maharashtra Act?

Held The Hon’ble Supreme Court ruled as follows:

1. Once an insolvency professional is appointed to manage the company, the erstwhile directors
who are no longer in management cannot maintain an appeal on behalf of the company. Hence, in
the present case, the appeal was not maintainable.
However, the Supreme Court did not incline to dismiss the appeal on this score alone. Since this was
the very first application that was moved under the IBC, the judges thought it necessary to deliver a
detailed judgment so that all Courts and Tribunals may take notice of a paradigm shift in the law.

2. Default is defined in Section 3(12) of the IBC in very wide terms as meaning non- payment of a
debt once it becomes due and payable, which includes non-payment of even part thereof or an
instalment amount. 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.

3. Under the explanation to Section 7(1), a default is in respect of a financial debt owed to any
financial creditor of the corporate debtor - it need not be a debt owed to the applicant financial
creditor.

4. On repugnancy, the Supreme Court discussed in detail various case laws and constitutional
principles to test whether there is any repugnancy between the IBC and the Maharashtra Act and
laid down (amongst others) the following propositions:

a.The inconsistency must be clear and direct and be of such a nature as to bring the two Acts or
parts thereof into direct collision with each other, reaching a situation where it is impossible to obey
the one without disobeying the other. This happens when two enactments produce different legal
results when applied to the same facts.

b.Though there may be no direct conflict, a State law may be inoperative because the Parliamentary
law is intended to be a complete, exhaustive or exclusive code... One test of seeing whether the
subject matter of the Parliamentary law is encroached upon is to find out whether the Parliamentary
statute has adopted a plan or scheme which will be hindered and/or obstructed by giving effect to
the State law. c.If the subject matter of the State legislation or part thereof is identical with that of
the Parliamentary legislation, so that they cannot both stand together, then the State legislation will
be said to be repugnant to the Parliamentary legislation.

5. Based on the above test, the earlier State law (i.e. the Maharashtra Act) was held to be repugnant
to the later Parliamentary enactment (i.e. the IBC) as under the Maharashtra Act, the State
Government may take over the management of the relief undertaking, after which a temporary
moratorium takes place under Section 4 of the Maharashtra Act in the same manner as that
contained in Sections 13 and 14 of the IBC.

6. Unless the Maharashtra Act was out of the way, the IBC would be hindered and obstructed in such
a manner that it will not be possible to go ahead with the insolvency resolution process outlined in
the IBC.

7. It is clear that the later non-obstante Clause of the Parliamentary enactment will prevail over the
limited non-obstante Clause contained in Section 4 of the Maharashtra Act.

8. As a matter of constitutional law, the later Central enactment being repugnant to the earlier State
enactment by virtue of Article 254 (1), would operate to render the Maharashtra Act void vis-a-vis
action taken under the later Central enactment. 9. The Supreme Court was of the view that the
Tribunal was correct in appreciating that there would be repugnancy between the provisions of the
two enactments. The judgment of the Appellate Tribunal was not correct on this score because
repugnancy does exist in fact. 10.
The Supreme Court therefore held that the Tribunal and the Appellate Tribunal were right in
admitting the application filed by the financial creditor ICICI Bank Ltd.

CRTICICAL Analysis

Some of the key takeaways from the above judgement are summarised as follows:

1. Once an insolvency professional is appointed in respect of a company, the erstwhile directors

cannot file any appeal on behalf of such company.

2. The term default has been given wide interpretation in the IBC. Even non-payment of disputed
debt would be a default so long as it is “due”.

3. The Maharashtra Act cannot stand in the way of the corporate insolvency resolution process
under the Code.

4. The non-obstante clause of IBC will prevail over the non-obstante clause of the Maharashtra Act.
5. The judgement explains the importance of IBC and the reason for giving birth to a new code in
detail and to bring the insolvency law under a single umbrella with the object of speeding up the
insolvency process. The timelines and the procedure have to be properly adhered to so that the
actual outcome of IBC is achieved

Conclusion

With respect to the Code, being acknowledged as an exhaustive law on the point is definitely a very
progressive step. The judiciary deserves praise for implementing the Code with an intention it was
meant to be. It also, now brings in more clarity that the provisions of the Code will have supremacy
over every other law, whenever and wherever any conflict arises.

A similar doubt has existed in the legal fraternity with respect to the operation of The Securitization
and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (also known
as the SARFAESI Act). This law hasn’t been repealed by the Code and has an alternate remedy for
secured creditors outside the Code.