Justice Indira Banerjee's Code (IBC) : Development Of IBC Jurisprudence

In a recent decision in Kotak Mahindra Bank Ltd. v. Kew Precision Parts Pvt. Ltd. & Ors., it was held that an appeal being the continuation of original proceedings, the provision of Section 7(5)(b) of the IBC, of notifying the Financial Creditor before rejection of a claim, would be attracted. Hence, a Financial Creditor might get an opportunity to rectify the defects in its application under Section 7 by filing additional pleadings and/or documents even at the stage of appeal. This ruling helps in cases especially where the issue of acknowledgment of debt arising out of balance sheets or acknowledgement arises. Perhaps, documents relating to such acknowledgment can now be tendered even at an appellate stage to support a section 7 petition.

In K Parmasivam v. The Karur Vysya Bank India Ltd. & Anr., an interesting issue arose regarding the stage at which a financial creditor can initiate CIRP against a corporate guarantor. The Hon'ble Supreme Court, through Justice Banerjee has held that CIRP can be initiated against a corporate entity who has given a guarantee, in respect of the guarantee given by it, once the borrower commits default. The guarantor is then, the corporate debtor. It was open to the Financial Creditor to proceed against the guarantor without first suing the Principal Borrower.

Her ruling in Sesh Nath Singh & Anr. v. Baidyabati Sheoraphulli Co-operative bank Ltd. & Anr. is possibly the first under IBC to hold that there is no bar to exercise by the tribunal of its discretion to condone delay, in the absence of a formal application under section 5 of the Limitation Act, 1963. The decision further makes two very important points – Section 14 of the Limitation Act, 1963 is applicable to IBC & a creditor is entitled to exclusion of the period of time spent in proceedings under the SARFAESI Act.

Now by the time matters pertaining to acknowledgment of debt under IBC began to be heard regularly by the Hon'ble Supreme Court, it was fairly well settled even under the IBC jurisprudence that balance sheet would amount to acknowledgement for the purposes of extending limitation. However, Justice Banerjee in Dena Bank v. C. Shivakumar Reddy further extended the jurisprudence to construe the offer of a one-time settlement as an acknowledgement of debt. This ruling has been of great importance for banks and non-banking financing companies with whom the corporate borrowers usually enter into one-time settlements as this provides them with an extended period of limitation to initiate action under IBC. This was later followed & further explained in ARCIL v. Tulip Star Hotels Ltd. & Ors.

The above judgments have furthered the cause of having a robust & effective insolvency regime in place. Some of the questions of law were previously undecided & were subject matter of much litigation. Justice Banerjee has extensively relied upon reports of various committees, debates & previous rulings to give interpretations which uphold the intent of the law and make IBC a workable legislation. In a way she has added to the foundation of IBC in form of building & developing jurisprudence aligned with the objectives of IBC.

Having said so, Justice Banerjee has also rendered some rulings which have laid down an interesting & rather fresh jurisprudence under IBC, something which stands parallel & different from the already established body of case law.

Take for example, one of her most talked about & debated rulings under IBC in Vidarbha Industries Power Limited v. Axis Bank. Prior to this ruling, the almost well settled law was that the adjudicating authority doesn't have any discretion on the admission of a petition filed by the financial creditor once a default has been established. This was well lad down by several rulings including Innoventive Industries Ltd. v. ICICI Bank & Anr. & Swiss Ribbons Pvt. Ltd. v. UOI. However, Justice Banerjee focussed on the difference between the language of provisions under section 7 & 9 & pointed out that the words used are "may" & "shall" respectively. This point in issue was never addressed or noticed in any of the previous rulings. She thus held that the Adjudicating Authority has been conferred the discretion to admit the application of the Financial Creditor. If facts and circumstances so warrant, the Adjudicating Authority can keep the admission in abeyance or even reject the application. This was based on the fact that Section 7(5)(a) uses the word "may" instead of "shall" (as is done under section 9, in case of application by an operational creditor). This marks a change in the existing jurisprudence on the subject and can now be used by corporate debtors to delay CIRP initiation. Justice Banerjee has followed literal interpretation in the matter while also giving illustrations where such discretion can or cannot be used. The on ground impact of the decision is yet to be seen but it will surely generate more avenues of litigation.

In one of her earlier judgments, in Orator Marketing Pvt. Ltd. v. Samtex Desinz Pvt. Ltd., the issue was whether an interest free working capital loan is a financial debt. Justice Banerjee relied on the words "if any" to conclude that IBC does not expressly exclude an interest free loan. She analysed the scheme of the IBC to observe that a term loan to meet the financial requirements of a Corporate Debtor for its operation has the commercial effect of borrowing & would be covered under section 5(8) as a financial debt. This has been quite an innovative approach which is different from the generally prevalent view that an element of time value of money is necessary for a debt to qualify as financial debt. In this regard, there may appear to be some contradiction with the ruling in Anuj Jain v. Axis Bank Ltd. wherein it was held that "essential element of disbursal, and that too against the consideration for time value of money, needs to be found in the genesis of any debt before it may be treated as "financial debt""

In one of her last pronouncements before demitting office, Justice Banerjee gave an innocuous looking ruling in Ashok G Rajani v. Beacon Trusteeship Ltd. & Ors. wherein the question involved was the power of NCLAT to allow withdrawal of the CIRP when the application for the same under section 12A was pending before the NCLT. Though she has held that order of NCLAT refusing to exercise inherent powers was only an interim order & as such the NCLT has the power to allow withdrawal under Section 12A, the ruling contains certain observations which may impact the existing practise & law being followed & contended before tribunals. Many a times, at the time of withdrawal of CIRP, several other creditors object to the withdrawal on the ground that their dues are outstanding & they ought to be given similar treatment of settlement. Sometimes, the objection taken is that the withdrawal is an empty formality as the next in line lender will file a fresh application for initiating CIRP & that this will delay the resolution. Though these issues were not the subject matter of the lis decided by the Supreme Court, the bench nonetheless observed that the settlement cannot be stifled in anticipation of claims against the Corporate Debtor from third persons. The withdrawal of an application for CIRP by the applicant would not prevent any other financial creditor from taking recourse to a proceeding under IBC. The urgency to abide by the timelines for completion of the resolution process is not a reason to stifle the settlement. These observations will certainly have far reaching consequences both in the pending matters as well as litigation strategy.

In a recent interesting ruling in Maitreya Doshi v. Anand Rathi Global Finance Ltd., Justice Banerjee while allowing initiation of parallel CIRPs against co-borrowers has extended the principles applicable to a surety under a contract of guarantee to the liability of a co-borrower. The bench held that just like the resolution of principle borrower doesn't discharge the liability of a surety, in the same manner resolution in respect of one borrower cannot certainly discharge a co-borrower. While holding so, Justice Banerjee has rightly provided a safeguard against double dipping or recovery of claim twice over. This ruling also holds a prima facie view that a pledge doesn't qualify as a financial debt under section 5(8).

One last aspect concerns the nature of claims filed by the statutory authorities & departments. From Essar Steel v. Satish Kumar onwards to Ghanashyam Mishra v. EARCIL line of judgments, the well settled law has been that a successful resolution applicant cannot be faced with belated/undecided claims and that the resolution plan once approved is binding on all stakeholders including such authorities. In a very recent decision authored by Justice Banerjee in State Tax Officer v. Rainbow Papers Ltd., it has been held that a statutory charge created under an operation of law, without any act of the parties, would enable the state tax authorities to become secured creditors. It has further been held that the timeline prescribed for submission of claims is directory & not mandatory. At this stage it is important to highlight that judicial precedents have been consistent in holding tax dues as operational debt – a case in point is PCIT v. Monnet Ispat & Energy Ltd. If the tax dues are operational debt, then they feature down the order of priority in the waterfall prescribed under Section 53. Such tax dues would be paid under Section 53(1)(f), below workmen, financial creditors & secured creditors. However, with this ruling, Justice Banerjee seems to have elevated the status of tax dues to that of a secured creditor, which features higher up in the order of priority even to unsecured financial creditors, under Section 53(1)(b)(ii). This grants state tax dues a better standing than what they were previously granted under the existing jurisprudence. This issue is further made serious by seemingly broad & general observations to the effect that committee of creditors cannot secure their own dues at the cost of statutory dues & that any plan which violates this position cannot be approved by the NCLT.

A perusal of the above discussion would show that the judgments authored by Justice Indira Banerjee were either on the question of law which was related or cognate to the already well settled law or question of law which arose for the very first time. Even where the issues were largely covered, she has given her own reasons & understanding in simple & crisp language in her rulings. When faced with the daunting task of deciding complex issues which are not run of the mill kind of matters under IBC, Justice Banerjee has definitely utilised her original thinking & interpretation to mould the understanding of the IBC afresh. Her original thinking & interpretation may well be tested & debated by courts in future (for reasons evident in the discussion above). However, this doesn't deflect from the fact that Justice Banerjee is leaving IBC with a far more developed, rather interesting & original jurisprudence than she found it. Practitioners, judges & students of law will definitely gain & add to the jurisprudence in interpreting Insolvency & Bankruptcy Code (IBC) by taking help from & referring to her judgments under IBC – which I gratefully refer to as Justice Indira Banerjee's Code (IBC).

(Disclaimer: The author may have been part of the teams representing parties in some of the decisions referred to in the article.)

The author is a professional with dual qualification. He is a practising advocate and a fellow chartered accountant. He practises in the courts of Delhi. He can be contacted at mail@deepakjoshi.in. His twitter handle is @ideepakjoshi