Insolvency Brief Case – February 2024

The Insolvency and Bankruptcy Board of India (IBBI), lifted restrictions and allowed the same insolvency professional for both a company and its personal guarantor, aiming for improved harmonization and coordination in the resolution process. The amendments to IBBI‘s Regulations for Bankruptcy Process for Personal Guarantors to Corporate Debtors, 2019, became effective on January 31 this year. Additionally, IBBI has modified the provision related to Committee of Creditors meetings, making them obligatory in personal guarantor insolvency cases.

Reserve Bank of India recently proposed creating a specific framework for the group insolvency mechanism and fostering a robust market for stressed assets in India to improve the Insolvency and Bankruptcy Code, 2016 (IBC). The RBI Governor highlighted the evolving group insolvency mechanism, calling for legislative changes to establish appropriate principles, and pointed out challenges like asset intermingling and cross-border aspects. Despite recoveries of Rs 3.16 lakh crore from admitted claims of Rs 9.92 lakh crore, Das acknowledged concerns regarding extended resolution times and substantial haircuts in the CIRP.

The former promoters of Indiabulls, have been constrained to relinquish control of Sinnar Thermal Power (STPL) following the order of NCLAT affirming the CIRP initiated against STPL. STPL is a subsidiary of RattanIndia Power, a major distressed power producer known for its 1,350 MW power plant in Nashik, Maharashtra.

From the Docket

The Supreme Court in DBS Bank v. Ruchi Soya Industries revisited the issue concerning the calculation of minimum liquidation value for secured dissenting financial creditors. The court held that the minimum liquidation value should be determined based on the value of the security interest held by the creditor, not their voting share in the committee of creditors. This decision, being contrary to the ratio in India Resurgence, the Supreme Court has referred the issue to a larger bench for resolution, raising questions about the applicable provisions and protection of dissenting financial creditors in insolvency proceedings.

In Bharti Airtel v. Vijaykumar V. Iyer the Supreme Court held that in order to maintain the principles of pari passu, set-off is not permissible under CIRP except in cases of Contractual set-off and Equitable or Transactional set-off. It was clarified that while statutory set-off is permissible in the Liquidation Process under IBC, it is not provided for at the CIRP stage. The Supreme Court further provided a comprehensive analysis, outlining five distinct categories of the term ‘set-off’ being: (a) statutory or legal set-off; (b) common law set-off; (c) equitable set-off; (d) contractual set-off; and (e) insolvency set-off.

In Narendrabhai v. PNB Housing Finance, the NCLAT held that offsetting Fixed Deposit receipts (FDRs) against loan EMIs by a corporate debtor does not prevent a financial creditor from filing a Section 7 application inasmuch as such adjustment does not automatically regularise the loan account. Additionally, the NCLAT highlighted that a “without prejudice” one-time settlement (OTS) offer does not diminish the acknowledgment of debt’s impact under Section 18 of the Limitation Act, 1963.

In Authum Investment v. Rajneesh Sharma, the NCLAT held that the Committee of Creditors (CoC) holds the authority to interpret the evaluation matrix and process documents for determining the Net Present Value (NPV) allocated to potential resolution applicants. The NCLAT emphasized that, while the highest NPV is significant, it should not be the exclusive determining factor in choosing a resolution applicant. Additionally, the NCLAT stated that an unsuccessful Prospective Resolution Applicant (PRA) cannot contest the score granted by the CoC based on the evaluation matrix.
The NCLAT in Manav Investments and Trading v. Pratim Bayal held that related parties are not eligible for any distribution as per the resolution plan and are not justified in alleging discrimination regarding payments compared to unrelated unsecured financial creditors.
In PNB v. Sandwoods Infratech Projects, the NCLAT held that a resolution plan allowing the release of third-party guarantees and collaterals, along with their transfer through assignment, does not violate Section 30(2)(e) of the Code. The NCLAT further noted that, as per regulation 37(b) of the CIRP Regulations, if a financial creditor files a claim and it becomes part of the CIRP process, the treatment of their security interest in the resolution plan is permissible. Such handling of securities cannot be challenged based on concerns that it might negatively impact recovery proceedings involving guarantors and collateral securities of third parties.

The NCLAT in, Sainik Industries v. Ritesh Raghunal, that a debt originating from a supply transaction does not transform into a financial debt solely due to the inclusion of a financial penalty clause in the agreement or due to the securing of advance payment through a pledge of shares.

In Jindal Power v. Dhiren Shantilal Shah, the NCLAT decided on the issue of a resolution plan from a PRA, whose name was not included in the final list of PRAs prepared in compliance of Regulation 39(1-B) and Regulation 36-B(7) of CIRP Regulations, 2016. The NCLAT rejected the contention that the objective of value maximization justifies non-compliance with statutory provisions, emphasizing that entertaining unsolicited plans from non-listed applicants could lead to an endless CIRP.

In the case of Glamour India v. Canara Bank, the NCLAT ruled that if a corporate debtor fails to honour the One Time Settlement (OTS) proposal, the resolution professional is not authorized to dismiss the financial creditor’s claim for the entire outstanding amount instead of the agreed settlement amount under the OTS proposal.


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