National and Trans-National Framework of Insolvency and Bankruptcy Code

Table of Contents

Index of Abbreviation

1. Chapter I: An Introduction to Pretext of Insolvency Laws
1.1 Relevance of the Study
1.2 Object of the Study
1.3 Scope of the Study
1.4 Research Methodology
1.5 Research Questions
1.6 Achievement of a Sound Bankruptcy Law — IBC, 2016
1.6.1 Avoid destruction of value
1.6.2 Drawing the line between malfeasance and business failure

2. Chapter II - Creditors - Kingpins and its power conundrum
2.1 Classification of Creditors: Discrimination or Intelligible differentia
2.1.1 International Perspective
2.1.2 Mustering the Constitutional Mandate
2.2 Classification of Creditors on the basis of nature of debt is sine qua non for insolvency laws
2.3 Economic Rationale behind treating the Operational Creditors and Financial Creditors differently
2.4 Commercial wisdom of Committee of Creditors — An Unassailable Right
2.4.1 Legislative Scheme to leave commercial decision on Committee of Creditors
2.4.2 Committee of Creditors deals with all the commercial decision of a resolution plan
2.5 Conclusion

3. Chapter Ill - Promoter/ Guarantor - Creditors - Subrogation: a Dilemma
3.1 Right of creditor vis-a-vis the guarantor
3.1.1 That the contract of guarantee is an independent contract
3.1.2 That there is no discharge of guarantor under the Indian Contract Act, 1872
3.2 Rights of guarantor vis-a-vis the corporate debtor
3.2.1 The proceedings under the IBC are not recovery proceedings
3.2.2 In any case, IBC will prevail over Contract Act
3.3 Guarantor Liability under Moratorium Period
3.4 Conclusion

4. Chapter IV - History and Evolution of Cross Border Insolvency - A measure of Global Historical development
4.1 Jurisprudence and Prominent Principle of Insolvency Law
4.1.1 Maximisation of Asset Value
4.1.2 Universalism vis-â-vis Territorialism
4.1.3 Sovereignty is too strong yet too weak
4.4 Modified Universalism and Co-operative territorialism
4.5 Forum Shopping
4.6 UNCITRAL Model Law vis-a-vis Indian Insolvency Law committee Report on Cross Border
4.7 Insolvency Law Committee submits its 2nd Report on Cross Border Insolvency
4.7.1 Arguments in Favour of Model Law
4.7.2 Intricacy involved in Cross Border Insolvency
4.8 Case Study of Insolvency proceeding related to Multi-National companies
4.9 Suggestions
4.10 Solution to the Conundrum of Group Companies’ Insolvency
4.11 Conclusion

5. Chapter V - Pre - Pack: A step forward towards Revival
5.1 The rise of the pre-pack
5.2 Advantages and concerns
5.2.1 Efficiency
5.2.2 Fairness and expertise
5.3 Controlling the pre-pack
5.3.1 The ‘managerial’ solution: a matter of expertise
5.3.2 The professional ethics solution: expertise andfairness combined
5.3.3 The regulatory answer
5.3.4 Evaluating control strategies
5.4 Pre — Pack: A Blueprint for India
5.5 Proposed pre-packaged mechanism for India:
5.6 Conclusion

6. References

ACKNOWLEDGEMENT

It may be a safe presumption to assume that this particular part of the project shall be sufficiently overlooked as it does not form a part of the Term Paper. It however shall be remiss on my part to not significantly acknowledge the contributions of those whose consistent germination of wantonly malevolent yet maddeningly beautiful ideas make this project, a labor of constrained yet considered love.

I owe gratitude and a little more in the way of appropriate adjectives for the benevolence and intellect of Dr. Shruti Goyal and Dr. Vipan Kumar both of them have but been a beacon of shimmering light during the despondency of the thematic undertones of this Project. There lie several considerations at the back of my head, and at the apex of the conscious pyramid of good deeds that they committed unto me, I must thank them for extraordinary patience. They lent to my Term Paper, the ability to be a coherent, structured document, and they lent to me, a perspective on the law that would assess each provision rightfully in the manner befitting an academic exercise. In my humble admittance of the woeful inadequacy of words in being able to tell her that they are awesome, I must for the sake of intellectual brevity, simply summarize with the laconic “Thank you” Thought the judiciously tenuous academic veil that both of them to become my interface for, I must abjectly yet momentarily lift the said veil, to thank the Rajiv Gandhi National University for all things law.

Secondly, I must thank the many gifts brought to me by superiors and peers, in particular the efforts of a certain Abhilash Pattnaik whose cursory glance at my project left me with more suggestions and reformations than countless moments of deliberations that I did in my head in front of the Project. I hope that to my peers, my betters, I would be appropriately disposed in simply saying, “Thank you, Batch of 2021“

My parents remain within the competent jurisdiction of the Supreme Court of Life where all petitions of gratitude lie for their summary disposal. With costs. In conclusion, I would like to thank God, for making me an agnostic.

INDEX OF ABBREVIATION

Abbildung in dieser Leseprobe nicht enthalten

1. CHAPTER I: AN INTRODUCTION TO PRETEXT OF INSOLVENCY LAWS

1.1 Relevance of the Study

The limited liability company is a contract between equity and debt. As long as debt obligations are met, equity owners have complete control, and creditors have no say in how the business is run. When default takes place, control is supposed to transfer to the creditors; equity owners have no say. This is not how companies in India work today. For many decades, creditors have had low power when faced with default. Promoters stay in control of the company even after default. Only one element of a bankruptcy framework has been put into place: to a limited extent, banks are able to repossess fixed assets which were pledged with them. While the existing framework for secured credit has given rights to banks, some of the most important lenders in society are not banks. They are the dispersed mass of households and financial firms who buy corporate bonds. The lack of power in the hands of a bondholder has been one (though not the only) reason why the corporate bond market has not worked. This, in turn, has far reaching ramifications such as the difficulties of infrastructure financing. Under these conditions, the recovery rates obtained in India are among the lowest in the world. When default takes place, broadly speaking, lenders seem to recover 20% of the value of debt, on an NPV basis. When creditors know that they have weak rights resulting in a low recovery rate, they are averse to lend. Hence, lending in India is concentrated in a few large companies that have a low probability of failure. Further, secured credit dominates, as creditors rights are partially present only in this case. Lenders have an emphasis on secured credit. In this case, credit analysis is relatively easy: It only requires taking a view on the market value of the collateral. As a consequence, credit analysis as a sophisticated analysis of the business prospects of a firm has shrivelled.

Creditors put money into debt investments today in return for the promise of fixed future cash flows. But the returns expected on these investments are still uncertain because at the time of repayment, the seller (debtor) may make repayments as promised, or he may default and does not make the payment. When this happens, the debtor is considered insolvent. Other than cases of outright fraud, the debtor may be insolvent because of

- Financial failure - a persistent mismatch between payments by the enterprise and receivables into the enterprise, even though the business model is generating revenues, or
- Business failure - which is a breakdown in the business model of the enterprise, and it is unable to generate sufficient revenues to meet payments. Often, an enterprise may be a successful business model while still failing to repay its creditors. A sound bankruptcy process is one that helps creditors and debtors realise and agree on whether the entity is facing financial failure and business failure. This is important to allow both parties to realise the maximum value of the business in the insolvency.

“Cross-Border Insolvency is the expression frequently employed to designate those cases of insolvency where assets, or liabilities, of an insolvent debtor are located in two or more separate jurisdictions, or where the personal circumstances of the debtor are such as to render him or it simultaneously subject to the insolvency laws of more than one country.” Due to the economic expansion through the channels of international trade, cross-border insolvency has become an inevitable matter. Wherever, the nations are engaged in trade involving international facets, the questions arise involving the commercial laws of more than one nation. To deal with the disputes arising from such matters, the nations have agreed to some uniform norms. For the case of insolvency laws, the central law for the world economy is UNCITRAL Model Laws and countries such as UK, US and Singapore have implemented these laws into their domestic laws. The necessity of international trade has created the circumstance where no country has scope to evade the common laws.

Cross-Border Insolvency Laws in India were not discussed particularly as a subject before the enforcement of Insolvency and Bankruptcy Code, 2016. The Review and Implementation Committee for the Code, 2016 recommended to the Central Government the indispensable nature of the Cross-Border Insolvency aspect. A committee was constituted to review the 1997 Model Laws and work out a draft law suiting the Indian scenario. The committee presented the report which is still pending before the legislative body to enact by official gazette notification.

1.2 Object of the Study

Earlier Insolvency laws in India were not consolidated, that has led to uncertainty amongst the creditors as well as debtors. The credit market in the country was not flourishing. India is one of the youngest economy of the world which is the house for plethora of entrepreneurs. Yet these drivers of the economy is facing the heat of the financial institution in form of nonavailability of credit. The Insolvency and Bankruptcy Code, 2016 (Code) has changed the whole dynamics and disrupted the credit market of the country. On one hand, it has brought certainty and uniformity in terms of law and legal proceeding and on the other, it has rebuild the trust of the creditors and encouraged them to infuse capital in the market. To an extent code has met its objective but it has long distance to cover and stay relevant in the changing dynamics of the global business. Thus, this study is a serious attempt to understand the impact of the code on the economy and how it has changed the relationship of corporate debtor and creditor. Besides that this study will analyse the areas which needs serious consideration by the government in national as well as international context

1.3 Scope of the Study

The research will analyse almost all the available literature, as the project encompasses the range of issues which includes the topic on which jurisprudence has already been developed but needs some amendment to meet the dynamic environment of global business ecosystem. Furthermore, the research will also venture out in the unchartered frontier where the jurisprudence is at nascent stage and often hitting roadblocks due to lack of concrete legal system and procedures. The research will put forth the perspective which weighs the interest of every stakeholder, directly or remotely related to the same.

1.4 Research Methodology

- Case Law Method

The Paper adopts the case law method to diffuse the legal principles that surround the applicability of the notion of Creditors, Corporate Debtors and Judicairy to understand the complicated scheme of Insolvency Laws that has evolved across the world in the context of company, economy and entrepreneurship. The case law method shall be used, in particular, for an exposition of the composite principles of the Insolvency Laws, which effectively become the setup for the evolvement of Insolvency Laws in India

- The Analytical Method

The Analytical Method is the primary tool of research adopted by the researcher in the context of this project. The analytical method is adopted to analyze the question of research pertaining to whether the questions of law that may arise upon the perusal of legislation, are satisfactorily answered by the authors analysis.

Within the analytical method, the tools used by the author are the following;

1. Interpretation of legislations and the legal provisions contained within those legislations.
2. Interpretation of international instruments and Reports of reputed organizations such as Word Bank, UNCITRAL, etc.
3. The Interview Method

1.5 Research Questions

National Issue

- What led to the development of unified Insolvency Law in India?
- What was its impact on the Stakeholders?
- Why were the creditors given more weightage than any other stakeholder?
- How does it change the dynamics between Creditors and Debtor?
- Why was the differentiation made between the operational creditor and financial creditor?
- What was the logic and rationale behind discriminating between the Creditors?
- What is the role of guarantor and its rights of the subrogation?

Trans-national Issue

- Why the laws pertaining to cross border insolvency is necessary for the country?
- What changes and amendment can be done before adopting it?
- What new changes can be introduced to meet the unique demands of the country?
- What shall be done to counter the group companies?
- What is Pre-Pack?
- What are the advantages and challenges of the Pre-Pack
- Why Pre-Pack is crying need of hour?

1.6 Achievement of a Sound Bankruptcy Law — IBC, 2016

The role of the law, in a formal bankruptcy process, is to lay down rules of procedure into which the conflict is channelled, and results in a solution. A sound legal framework provides procedural certainty about the process of negotiation, in such a way as to reduce problems of common property and reduce information asymmetry for all economic participants.

1.6.1 Avoid destruction of value

A sound legal process also provides flexibility for parties to arrive at the most efficient solution to maximise value during negotiations. If the enterprise is insolvent, the payment failure implies a loss which must be borne by some of the parties involved. From the viewpoint of the economy, some firms undoubtedly need to be closed down. But many firms possess useful organisational capital. Across a restructuring of liabilities, and in the hands of a new management team and a new set of owners, some of this organisational capital can be protected. The objective of the bankruptcy process is to create a platform for negotiation between creditors and external financiers which can create the possibility of such rearrangements.

1.6.2 Drawing the line between malfeasance and business failure

Under a weak insolvency regime, the stereotype of “rich promoters of defaulting entities” generates two strands of thinking:

a) the idea that all default involves malfeasance and
b) The idea that promoters should be held personally financially responsible for defaults of the firms that they control.

Some business plans will always go wrong. In a growing economy, firms make risky plans of which some plans will fail, and will induce default. If default is equated to malfeasance, then this can hamper risk taking by firms. This is an undesirable outcome, asrisk taking by firms is the wellspring of economic growth. Bankruptcy law must enshrine business failure as a normal and legitimate part of the working of the market economy.

Limited liability corporations are an important mechanism that fosters risk taking. Historically, limited liability corporations were created with the objective of taking risk. If liability was unlimited, fewer risky projects would be undertaken. With limited liability, shareholders have the ability to walk away, allowing for greater exploration of alternative business models. Since exploration benefits society through risk taking, it is important to protect the concept of limited liability, which bankruptcy law must aim to do.

The illegitimate transfer of wealth out of companies by controlling shareholders is malfeasance. When a company is sound, corporate governance ensures that the benefits obtained by every share are equal. When a company approaches default, managers may anticipate this ahead of time and illicit transfers of cash may take place. The bankruptcy process must be designed with a particular focus on blocking such behavior, which is undoubtedly malfeasance. Above all, bankruptcy law must give honest debtors a second chance, and penalise those who act with mala fide intentions in default. Clearly allocate losses in macroeconomic down.

Insolvency and Bankruptcy Code is the present law guiding this wing of Insolvency Resolution Process, but there had been plethora of laws existing prior to IBC guiding the corporations for this purpose. Prior to IBC, 2016 laws such as Sick Industrial Companies (Special provisions), Act, 1985, The Provincial Insolvency Act, 1920, The Presidency Towns Insolvency Act, 1909, The Code of Civil Procedure, 1908, Companies Act, and the SARFAESI Act, 2002 existed, but the journey of these laws had been quick and full of potholes that effusively started, however later failed to stick to the very purpose for which they were established.

In existing market structure, where countries are interdependent, having diverse system and conflicting culture, Cross-Border Insolvency has become indispensable. The companies have become borderless and sprawling to plethora of jurisdiction; it asks for co-operation amongst various countries in case of any company going for insolvency. Cross Border Insolvency, indeed, put these systems into uneasy relationship but it is better to co-operate rather than seeing the destruction of viable corporate structure and its asset. Fletcher has aptly stated “The dissimilarities are so numerous, and so substantial, as to oblige the realist to accept that the world essentially consists of separate, self-contained systems. ”I These differences demand for a greater co-operation with foreign counterparts in order to achieve the objective of the law

Cross-Border Insolvency Laws in India were not discussed particularly as a subject before the enforcement of Insolvency and Bankruptcy Code, 2016. The Review and Implementation Committee for the Code, 2016 recommended to the Central Government the indispensable nature of the Cross-Border Insolvency aspect. A committee was constituted to review the 1997 Model Laws and work out a draft law suiting the Indian scenario. The committee presented the report which is still pending before the legislative body to enact by official gazette notification.

The Code, 2016 have completed more than 3 years from the date of its enactment. This study focuses on the historical background giving rise to transnational insolvencies, evaluation of the model of the Code through comparative analysis with universal best practices. This study is also relevant as it analyses the effective implementation of the upcoming provisions of this part of the Code, the challenges faced by it, need for implementation, judicial mind-set and the role of Indian judiciary in effective implementation of the provisions of the Code. Therefore, the relevance of this study is manifold as it is not only of academic importance, but also has enormous practical relevance.

2. CHAPTER II - CREDITORS – KINGPINS AND ITS POWER CONUNDRUM

India is one of the youngest economy of the world which is the house for plethora of entrepreneurs. Yet these drivers of the economy is facing the heat of the financial institution in form of non-availability of credit. Earlier, India had one of the most tardy and expensive debt recovery process which had crippled the environment and led to grave consequences. India had some of the lowest credit available in the economy which was a bigger problem for the economy and entrepreneurs. It had severely affected the economic diversity of the country.

Speed is always play pivotal role in insolvency regime for two reasons:

i. The company become headless, as management stands suspended. Significant decisions related to the welfare of the company cannot be taken and without effective leadership company will miss out various opportunities, will tend to atrophy and fail.
ii. With passage of time, the value of asset will continuously depreciate and ultimately bring down the value of the company.

It is very necessary to understand the concern of creditors, as they place their money on the companies and put reliance on the management. It would be beneficial for the creditors, if company is sold as going concerns. Liquidation induced by delay, leads to destruction of value of assets. So, it becomes imperative to understand the delay and employ the right resources to prevent that destruction. If a company goes for the liquidation, it erodes the creditors’ money and leaves thousand unemployed. The crying need of the hour was to devise a plan which can expedite the whole process.

The availability of sound credit market in an economy is one of the condition precedent for development of entrepreneurship and it also manifest the confidence of the creditor in the economy. The creditors plays an instrumental role in ensuring the availability of credit in the market.

After the induction of Insolvency and Bankruptcy Code, 2016, creditors have been vested with power to take commercial decision and to decide the feasibility and viability of the plan. It also decides that how the money will be distributed amongst the creditors. One question which has remain bone of the contention for the creditors that whether the creditors, irrespective of any category, stands equal with other creditors or there is difference amongst the creditors. If there is any difference, whether can it muster the constitutional mandate? Matter has been decided by the apex but reason and logic on which decision has been made is an intriguing one.

2.1 Classification of Creditors: Discrimination or Intelligible differentia

The code has divided creditors into two broad categories:

i. Financial Creditors
ii. Secured Creditors

The division of the creditors is based on the nature of the transactions with the corporate debtor. The bone of contention is the treatment of the creditors, whether they are entitled to be treated identical or differently.

If we go by the provision of the Insolvency and Bankruptcy Code, 2016 [Hereinafter as Code]:

a) Section 3(10) of the Code, explicitly talks about the secured and unsecured creditors besides financial and operational creditors.
b) Section 3(30) and 3(31) of the Code, defines “Secured Creditor” and “Secured Debt”. The availability of security interest in favour of a creditor distinguishes it from other creditors.
c) Section 20(2)(c) prohibits the interim resolution professional from creating any additional charge over an encumbered property.
d) Every detail regarding the security interest shall be included in the information memorandum.

The code has itself differentiated among creditors, the legislative intent was to have an equitable treatment rather than equal treatment. Different class of creditors shall be treated differently and not all the creditors can be treated equally. Code mandates that differential and equitable treatment shall be meted out to the creditors so as to ensure that unequal are being treated unequally and not causing unfairness.¹

Existence of Security interest in favour of creditor makes it a secured creditor and a property interest is created in favour of creditor which is protected under common law and under transfer of property act². Section 77³ of the Companies Act, 2013 recognizes the right of secured creditors. Erstwhile regime that was Companies act 1956, in section 529 preferential treatment to crown debts, such preferential treatment was only vis-a-vis unsecured debts and the crown was not accorded a preferential right for recovery of its debts over a mortgagee or pledgee of goods or a secured creditor.5 Therefore, the precedence of security interest and secured creditor is inherent in the legal principles governing the existing insolvency regime. The code reinforce and reaffirms the special rights of the secured creditors.

In ICICI Bank v SIDCO Leathers6 hon’ble Court has said a statute cannot be interpreted in a manner which shall deprive a person of its legal right existing in favour of person and unless statute explicitly provides for it. Furthermore, while enacting a statute, it cannot be presumed that the statute has taken away the right to property of an individual which is a constitutional right. Right to recover money by enforcing the security is also a part of right.

Therefore, the security interest created in favour of creditor is a constitutionally protected right and cannot be altered except by a collective vote of Committee of Creditors which will be binding on all the authorities.

When an amount is allocated to the creditor in lieu of its debt, generally, security asset stands released which means the right over the property of the corporate debtor is waived off; based on the consent of the majority while keeping in the mind the differential bargain amongst different creditors.

The principle of equitable treatment is enshrined in the code which means that different creditors has struck different commercial bargains with the debtors. Therefore, it gives room for the differential treatment of creditors which are not similarly situated.7

2.1.1 International Perspective

The principle of equitable treatment which recognizes unequally placed creditors can be treated differentially and all the creditors cannot be treated equally. The idea was also elaborated in United Nations Commission on International Trade Law Legislative Guide (“UNCITRAL Legislative Guide”)8

“The objective of equitable treatment is based on the notion that, in collective proceedings, creditors with similar legal rights should be treated fairly, receiving a distribution on their claim in accordance with their relative ranking and interests. This key objective recognizes^{4 5 6 7} that all creditors do not need to be treated identically, but in a manner that reflects the different bargains they have struck with the debtor. ”

A report has been published by International Monetary Fund which underline that all the insolvency laws must aim for equitable treatment. It is necessary to understand the commercial bargain struck between the creditor and corporate debtor is always of paramount importance that was the understanding of the transaction on which the money was provided. This policy of equitable treatment does not stop here, it permeates in various aspect of the insolvency laws like the stay or suspension orders, distribution of money, and classification of claims.

“Equitable Treatment. A common feature of all insolvency proceedings is their collective nature. Unlike other laws (e.g., foreclosure laws), an insolvency law is designed to address a situation in which a debtor is no longer able to pay its debts to its creditors generally (rather than individually) and, in that context, provides a mechanism that will provide for the equitable treatment of all creditors...”⁸

It is necessary to study the practices across the globe to understand that how the insolvency regime operates and their principle of recognition of security during insolvency.

Secured creditors are considered as super priority during insolvency and security must stand up when it is needed most. Insolvency laws which de-prioritize the security and most of the time destroy it also.⁹

The commercial bargain respects the commercial transaction that takes place between the creditor and corporate debtor, it understands the economic wisdom and commercial assessment which is put by a creditor in terms of an industry while taking the loan. Hence, it is not possible to treat each creditor equally as each of the credit facility is unique in itself. There is a need to draw a distinction between them.

International community understands the same and upholds the commercial spirit while doing the business. So that the credit does not get eroded from the market and remains available in the market which can keep the economy healthy and flourishing.

2.1.2 Mustering the Constitutional Mandate

Article 1411 talks about the Right to Equality and which ensures equality for all. Arbitrariness and unreasonableness can be challenged on this ground. It also envisaged the reasonable classification which is based on sound logic and intelligible differentia and is being carried to meet the object of the code. In T.M.A. Pai Foundation the Court has stated:

“Although stated in absolute terms Article 14 proceeds on the premise that such equality of treatment is required to be given to persons who are equally circumstanced. Implicit in the concept of equality is the concept that persons who are in fact unequally circumstanced cannot be treated on par.”

The Article 14 permits rational discrimination or differentiation. Special rights and benefits can be conferred to a particular group of citizen as long as it is based on sound and rational logic and is implicit in concept of equality. Paradoxical as it may seem.

Further, SC has stated that it cannot be done micro distinction and irrelevant consideration. Besides that in Triloki Nath^{10 11}

“Classification, therefore, must be truly founded on substantial differences which distinguish persons grouped together from those left out of the group and such differential attributes must bear a just and rational relation to the object sought to be achieved.”

Therefore, it can be conclude that Art. 14 of the Constitution, requirement to treat equally those who are equally placed is inherent in the legal principle; differentiation or discrimination can be made only on the basis of sound logic and intelligible differentia and has the nexus with object thereof. Such classification must be straightforward and substantial, not based on irrelevant and micro distinctions.¹²

As demonstrated above, the classification amongst creditors has been based on differential bargain which is a sound logic and based on intelligible differentia to differentiate amongst the creditors and hence, it is does not violate Art. 14 of the Constitution.

2.2 Classification of Creditors on the basis of nature of debt is sine qua non for insolvency laws

Creation of security interest in favour of creditor is one of the integral part of the economy and serves the categorical goals of the economy. Security against the credit increase the chance of repayment and ensures the regular availability of credit in the market. It also ensures the better availability of the capital in the market which act as a fuel for the economy growth.¹³

The presence of well-defined credit market in an economy helps the debtor to understand the liability they are going to undertake in form of credit and it also helps the creditors in assessing the condition of the company as well as the health of the economy. Debtors can properly assess their own asset base and accordingly it will venture out for the credit in the market, as the cost of the credit is organized and known to the debtors.¹⁴

The insolvency regime must acknowledge the priorities of claim established under the laws prior to insolvency regime. It helps in living up to the legitimate expectation of the creditors and ensure greater predictability of commercial relationships. It is necessary to recognize the security interest while determining priorities in an insolvency law and non - recognition of same would lead to increase in the cost of debt and unpredictability in the market.¹⁵

The Code does not override the differential bargain made by the creditors with corporate debtors prior to the initiation of insolvency process. The Code itself make a clear distinctions amongst the creditors and it seeks to classify different claims differently and it is with that intent creditors who had security interest in their favour, need to declare it in for information memorandum. For example, details about the workmen and employees are uploaded separately and any details regarding the operational creditors, government dues or any other dues are uploaded separately. Differentiation has been made in the same class to ensure the equitable treatment on the basis of nature of such claim.¹⁶

The US chapter 11 Plan is a detailed legislation. It exclusively talks about the rule that must be followed while proposing the plan i.e. “absolute priority rule” (Super - priority creditors, secured creditors, administrative expenses, taxes, etc.).¹⁷ Once the plan has been confirmed the debtor is discharged of all the debts. Health of the financial sector has domino effect over the health and growth of the economy. There is convincing data available which suggest that financial sector plays a pivotal role in economic development which is supported by empirical evidence that is country as well as cross country specific. It is necessary to ensure that the health of the financial sector remains intact and unaffected. Furthermore, financial sector’s greater ability to reduce the risk with the help of risk sharing and diversifying portfolio, allows economy to absorb the shocks without any hiccup. It does not only benefit the financial creditors but also the operational creditors at different levels.¹⁸

The only purpose of having the security right is to mitigate the risk of non - payment. Generally, this right comes into action in case of corporate debtor defaulting or company is under is great financial distress. Thus ignoring the differential bargain of the creditors would lead to adverse consequence and create a disruption in the credit market. It would run contrary to the legitimate expectation of the creditors regarding the availability of security interest when company is under financial distress.

2.3 Economic Rationale behind treating the Operational Creditors and Financial Creditors differently

The hon’ble SC¹⁹ has accepted the differential treatment of operational and financial creditors as fair and just and also, upheld the economic rationale behind treating operational creditors and financial creditors differently. The court further said that most financial creditors comprise of banks and financial institutions whereas the operational creditors are unsecured which includes payments of goods and services and to workers which are not secured with mortgage and like.

- The nature of loan agreement with financial creditors is different from operational creditors. The terms of agreement of finance is well documented and formalized, mostly it is taken for working capital that enable the debtor to either setup or run its business.
- Financial creditors endow large sum of money in comparison with operational creditors. Financial creditors have specified repayment schedules, and defaults entitle creditors to financially recall the entire loan and contracts with operational creditors do not have any stipulations.
- The financial creditors get involved in the company, at the very outset and assess the viability of corporate debtor. It also helps the company in debt restructuring as well as the reorganization of the business structure when there is financial distress, which operational creditors do not and cannot do.²⁰
- Operational debt tends to be recurring in nature and possibility of dispute arising out of the contract is more than the financial creditors.
- Operational creditors have better and easy way of exiting the business, they can stop the supply as early as they sense any distress in the company and insist on clearing the pending amounts or enforce guarantee to mitigate the risk. While on the other hand, the financial creditors have to bridge the gap, so as to help company turns profitable to repay the monies advanced to the debtor. Operational creditors have shorter business cycle they understand the consequence of termination of contract as they it happens frequently due to change in technologies or availability of alternate suppliers. Whereas the financial creditors have long business cycle once the loan has been reimbursed to the corporate debtor, the termination of contract takes place after the full repayment of dues.²¹

- The finance provided by the financial creditor is either for capital expenditure or for working capital which ensures liquidity in the company whereas the operational creditors are the beneficiaries of the working capital which ensures the demand of goods and services provided by operational creditors. The working capital injected by the financial creditor has a tickle - down effect which, ultimately, benefits all the stakeholders and allow the operational creditors to unction on the strength provided by the financial creditors.²²
- Financial creditors are part of heavily regulated banking system and bound by stringent framework which is laid down by the relevant authorities on account of involvement of public money. Therefore, if the debtor shows any kind of distress or financial complications, financial creditor is required to make adequate provision which restrict its ability to lend further and reduces its ability to earn further profit.²³

It is evident form aforementioned points that the operational creditors are different from the financial creditors and there is intelligible differentia which has a direct relation to the object sought to be achieved by the code. Therefore, seeing it through the lenses of economics the prioritization of creditors seem justified and reasonable, quantum of risk and responsibility is different than what operational creditor undertakes.²⁴

2.4 Commercial wisdom of Committee of Creditors — An Unassailable Right

Resolution plan, which is presented before the Committee of Creditors, is a commercial plan which put forth the way of restructuring the financial affairs of the company and falls within the exclusive domain of commercial wisdom of Committee of Creditors. The Code, does not vest any power with the adjudicating authority to look into affairs of the committee of Creditors which includes the technical aspect of the plans, viability and feasibility of the plans and commercials therein.²⁵

The provision of the Code confers only the restricted jurisdiction with the adjudicating authority under section 61(3) with respect to an appeal filed to an approved resolution plan. That limited jurisdiction includes:

a) the approved resolution plan being in contravention of the provisions of any law for the time being in force;
b) there being a material irregularity in the exercise of powers by the resolution professional during the corporate insolvency resolution period;
c) the operational creditors not having been paid a minimum of the liquidation value due to them;
d) the insolvency resolution process costs have not been provided for repayment in priority to all other debts.²⁶

Therefore, so long as a resolution plan provides for the payment which is mandated by the Code under the provisions like the operational creditor shall get a minimum amount which it would have got at the time of liquidation or Section 53 of the Code must be respected that is waterfall mechanism while making the payment that the hierarchy which has been enlisted in the Code when payment is made according to that. After comparing the both whichever amount is the highest amount shall be given to the operational creditors.

All the technical decisions made by the Committee of Creditors like the feasibility and Viability of the plan are unassailable and once the plan has muster the minimum prescription that is mandated by law and fulfil all the obligation which has been thirsted on it via various regulation then it is binding on all the stake holders and cannot be judicially reviewed at any court.²⁷

It is also established that tribunal is the creature of the statute and cannot go beyond the four corners of the statute, whatever powers have been vested with the tribunals must be exercised judicially and within the statute.²⁸ The statute has explicitly limited the power of the tribunal while exercising the judicial mind and any transgression shall be bad in the eyes of law.

The aforementioned principle was reaffirmed by the apex court in case of K.Sashidhar²⁹ wherein the SC said:

The legislature has not vested the power with Adjudicating Authority to interfere in the commercial decision of the Committee of Creditors, it cannot analyse or evaluate the decision of Committee of Creditors. The commercial wisdom has been given paramount importance and the intent behind was to complete the process in a time bound manner. The discretion of the tribunal has been circumscribed by Section 30 and 31³⁰ which enlist the grounds on which the resolution plan can be scrutinized and can be rejected.

Additionally, the legislative intent behind it, tribunal shall be for overseeing the compliance of law and every step taken is god in eyes of law and in consonance with regulation setup by the legislature and not judicially reviewing the commercial decision of the Committee of Creditors.

The Bankruptcy Law Report Committee talks about it explicitly which makes the intent more clear:

“The Committee recommends that the Adjudicator will focus on ensuring that all parties adhere to the process of the Code. For matters of business, the Committee recommends that Adjudicator will delegate the task of assessing viability to a regulated Insolvency Professional ”³¹

Therefore, the Code evidently mandates that role of Adjudicating authoring is limited and any transgression will be bad in the eyes of the law. Adjudication Authority has ensure the compliance with the provision and the Code. Any scrutiny of the commercial wisdom is bad in the eyes of law. These are the matters which exclusively fall under the domain of the Committee of Creditors and Adjudicating Authority shall not venture out in this domain.

2.4.1 Legislative Scheme to leave commercial decision on Committee of Creditors

The Bankruptcy Law Report Committee and hon’ble SC held that in Innoventive Indisutries^{32 33 34} that legislative has not laid down any specified procedure for the insolvency process, it has deliberately left on the wisdom of Committee of Creditors to negotiate it and implement it.

“No prescriptions on solutions to resolve the insolvency. The choice of the solution to keep the entity as a going concern will be voted on by the creditors committee. There are no constraints on the proposals that the Resolution Professional can present to the creditors committee.”34

There are few more instance in the Bankruptcy Law Reform Committee where it has been talked about the process but ultimately it has been left on the wise wisdoms of the Committee of Creditors to propose a method to resolve the whole process and take it way forward.

“The Committee believes that there is only one correct forum for evaluating such possibilities, and making a decision: a creditors committee, where all financial creditors have votes in proportion to the magnitude of debt that they hold. In the past, laws in India have brought arms of the Government (legislature, executive or judiciary) into this question. This has been strictly avoided by the Committee. The appropriate disposition of a defaulting firm is a business decision, and only the creditors should make it.”35

It can be logically inferred that judgement given by hon’ble court in K. Sha shidhar explicitly talks about that Adjudicating Authority has limited jurisdiction in matters of approval of resolution plan and does not have jurisdiction beyond the section 31 of the Code read with section 30 of the Code to review the decision given by Committee of Creditors.³⁵

[...]

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¹ M/S. Ratna Commercial v. Vasu Tech Ltd. & Ors.,(2009) CS (OS) No. 850/2007.

² Transfer of Property Act, 1882, 48 &58.

³ Companies Act, 2013.

⁴ Dena Bank v. Bhikhabhai Prabhudas , AIR 2000 SC 3654; Bombay Stock Exchange v. V.S. Kandalgaonkar, (2015) 2 SCC 1.

⁵ ICICI Bank v SIDCO Leathers, AIR 2006 SC 2088.

⁶ American Congress, American Jurisprudence, Vol. 10, 2d, Thomson Reuters, 2010.

⁷ United Nation Commission on International Trade Law , Legislative Guide on Insolvency Law (2005) https://www.uncitral.org/pdf/english/texts/insolven/05-80722_Ebook.pdf (Last accessed 11 November 2019).

⁸ International Monetary Fund titled Orderly & Effective Insolvency Procedures, Legal Department, Vol. 14, 1999.

⁹ Philip Wood, Principles of International Insolvency, Sweet Maxwell, (6th ed. 1995).

¹⁰ Constitution of India, Art. 14.

¹¹ State of Jammu & Kashmir v. Triloki Nath Khosa & Ors, 1974 (1) SCC 19.

¹² M/s. One Coat Plaster In Re: One Coat Plaster and Ors, 2017 138 CLA 104 (NCLT - Principal Bench).

¹³ Working Group on Individual Insolvency Report, August 2017.

¹⁴, Pascale Boeck and Thomas IMF Paper on Development of Standards for Security Interest, Counsel, IMF Legal Department, 2006.

¹⁵ Report on Company Law by Expert Committee on Company Law, Jamshed J Irani , May31, 2005.

¹⁶ Bankruptcy Law Reforms Committee Report, Ministry of Finance, Government of India Volume 1 (November 2015).

¹⁷ Supra 10

¹⁸ Financial Sector Development, Economic Growth, and Poverty Reduction: A Literature Review”, Asian Development Bank, (October, 2009).

¹⁹ Swiss Ribbon v Union of India, AIR 2019 SC 739.

²⁰ M/s. VDS Plastics Pvt. Ltd. v. M/s. PM Electronics Pvt. Ltd., CP No. (IB)-37(ND)/2017 (NCLT - New Delhi).

²¹ K. Sashidhar v. Indian Overseas Bank, AIR 2019 SC 1329.

²² Darshak Enterprise Private Limited v. Chhaparia Industries Pvt. Ltd, Company Appeal (AT) (Insolvency.) No. 327 of 2017.

²³ L & TInfrastructure Finance Co. Ltd. v. Dineshchand Surana 2018 100 taxmann.com 87 (NCLT-Chennai).

²⁴ India Brand Equity Foundation, Ministry of Commerce and Industry, 2013.

²⁵ Punjab National Bank vs. Carnation Auto India Pvt. Ltd. & Ors, Company Appeal (AT) (Insolvency) No. 139 of 2019.

²⁶ Insolvency and Bankruptcy Code, 2016 s. 61(3).

²⁷ Section 2, 3.1 and 3.2.1 of The report of the Bankruptcy Law Reforms Committee Volume I: Rationale and Design, http://ibbi.gov.in/BLRCReportVol1_04112015.pdf (Last accessed 27 October 2019.)

²⁸ B. Himmatlal Agrawal v. Competition Commission of India and Ors, AIR 2018 SC 2804.

²⁹ K. Sashidhar v Indian Overseas Bank AIR 2019 SC 1329.

³⁰ Insolvency and Bankruptcy Code, 2016 ss 30 & 31.

³¹ Supra 28

³² Innoventive Industries v ICICI Bank, AIR 2017 SC 4084.

³³ Supra 32

³⁴ Id

³⁵ Axis Bank Ltd. v Edu Smart Services (P) Ltd., Company Appeal (AT) (Insolvency) No. 302 of 2017.