IBC Jurisprudence Roundup: Supreme Court and Tribunals Clarify Key Insolvency Issues

NEW DELHI – In a series of significant rulings, India's Supreme Court, High Courts, and specialized tribunals have delivered crucial clarifications on the evolving landscape of the Insolvency and Bankruptcy Code, 2016 (IBC). These judgments address a wide spectrum of issues, from the enduring role of the Committee of Creditors (CoC) post-plan approval to the procedural nuances of filing applications and the liabilities of guarantors. This comprehensive legal update offers vital insights for insolvency professionals, corporate lawyers, financial institutions, and stakeholders navigating the complexities of corporate restructuring and debt resolution.

At the apex of these developments, the Supreme Court has issued directives with far-reaching implications for the insolvency framework's efficiency. In a notable observation, the Court has directed the Union Government to fill vacancies at the National Company Law Tribunals (NCLT) and the National Company Law Appellate Tribunal (NCLAT) on a “war-footing,” acknowledging the strain on the system.

Supreme Court on CoC's Enduring Role and Homebuyer Rights

The Supreme Court has decisively settled the debate on the CoC's lifespan. In the KALYANI TRANSCO Vs MS BHUSHAN POWER AND STEEL LTD. matter, the Court held that the CoC does not become functus officio immediately after a resolution plan is approved by the Adjudicating Authority. This landmark ruling establishes that the "Committee of Creditors (CoC) continues to have a role until the resolution plan is fully implemented or an order of liquidation is passed." This clarification empowers the CoC to oversee the crucial implementation phase, ensuring that the resolution applicant adheres to the approved plan and preventing a potential supervisory vacuum.

In a victory for homebuyers, the apex court, in AMIT NEHRA & ANR. VERSUS PAWAN KUMAR GARG & ORS. , ruled that homebuyers with verified and admitted claims cannot be denied possession of their flats simply because their claims were filed with a delay. The Court emphasized that a claim, once admitted by the Resolution Professional (RP), cannot be arbitrarily downgraded or dismissed, protecting the substantive rights of homebuyers who have often paid significant consideration for their properties.

NCLAT Navigates Procedural Complexities and Substantive Law

The National Company Law Appellate Tribunal (NCLAT) has been prolific in interpreting the IBC's provisions, consistently favoring substance over hyper-technical procedural objections. Multiple benches have handed down judgments that refine the understanding of debt, default, and the initiation of the Corporate Insolvency Resolution Process (CIRP).

On Initiation of CIRP & Procedural Requirements:

• Substance Over Form: The NCLAT held that an application under Section 9 cannot be rejected merely because the demand notice was issued in the wrong form (Form 3 instead of Form 4), especially when the underlying invoices were attached and undisputed. This signals the tribunal's reluctance to dismiss meritorious cases on procedural minutiae.
• Defects are Curable: Reinforcing the principle of natural justice, the NCLAT ruled that neither the NCLT nor its registry can dismiss a Section 7 petition for defects in a supporting affidavit without first providing the applicant an opportunity to rectify them.
• Acknowledgment of Debt: The tribunal clarified that a corporate debtor's statement expressing intent to enter into a One-Time Settlement (OTS) with a financial creditor serves as an admission of both debt and default, strengthening the creditor's position in Section 7 proceedings. Conversely, a simple refund of a security deposit was held not to constitute an acknowledgment of debt under the Limitation Act.

Guarantor Liability and Creditor Discretion:

The NCLAT has repeatedly affirmed the independent nature of a guarantor's liability. Key rulings establish that:

• A creditor has the discretion to proceed against any or all personal guarantors when multiple guarantees exist.
• Internal corporate adjustments like mergers or demergers among financial creditors do not affect the corporate debtor's liability as a guarantor.
• A guarantor's liability is not automatically restricted to a cap prescribed on the principal borrower's liability, as the two operate in separate spheres.

Powers and Duties of Insolvency Professionals:

• Replacement of RP: In a critical check on the powers of RPs, the NCLAT's Chennai Bench held that Section 60(5) of the IBC can be invoked to replace an RP if they deliberately avoid placing an agenda for their own replacement before the CoC.
• Fee During Stay: In a decision with significant financial implications for insolvency professionals, the NCLT Bengaluru Bench clarified that an "IRP/RP is not entitled to fees or expenses incurred during the stay of CIRP proceedings granted by NCLAT or Judicial Forum." This ruling underscores that remuneration is tied to active work performed during the CIRP, not periods of judicial stay.
• Enforcement of Awards: The NCLAT empowered RPs by holding that the NCLT has jurisdiction under Section 60(5) to entertain an application from an RP seeking the enforcement of a pre-CIRP arbitral award in favor of the corporate debtor.

Key Rulings from NCLT Benches Nationwide

Across the country, NCLT benches have been applying these principles and setting precedents on ground-level issues.

• PMLA vs. IBC: The New Delhi NCLT reiterated the established legal position that it lacks the authority to interfere with property attachments under the Prevention of Money Laundering Act (PMLA), clarifying that the IBC moratorium does not apply to PMLA proceedings.
• Dunzo Insolvency: The Bengaluru Bench admitted a CIRP petition against startup Dunzo Digital Private Limited, demonstrating that the IBC framework applies robustly to new-age companies facing financial distress.
• Settlement Discretion: The Chennai Bench held that the NCLT’s discretion under Section 7(5)(a) cannot be used to compel a financial creditor to accept a settlement offer from the corporate debtor, preserving the creditor's commercial wisdom.
• Interest During Section 10A Period: In an important clarification, the Kolkata Bench ruled that interest accrued during and after the Section 10A "blackout" period can be combined with the principal amount to meet the ₹1 crore threshold for initiating CIRP, provided the default originated before the protected period and continued thereafter.

Infrastructure Woes and a Call for Action

Beyond jurisprudence, a significant operational challenge has emerged. The NCLT Bar Association in Delhi has made an urgent representation to the Ministry of Corporate Affairs regarding an "infrastructure crisis." The closure of courtrooms due to severe roof seepage has forced benches to operate on a half-day basis, leading to a near standstill in proceedings and severely impacting access to justice. This highlights the urgent need to address the systemic issues identified by the Supreme Court concerning tribunal infrastructure and staffing.

Collectively, these judicial pronouncements provide a detailed and nuanced roadmap for navigating the IBC. The consistent theme across tribunals is a move towards practical justice, ensuring that the Code's objectives of resolution and value maximization are not defeated by procedural roadblocks, while simultaneously holding all stakeholders, including insolvency professionals, to a high standard of conduct. Legal practitioners must now absorb these precedents to effectively advise clients in an insolvency landscape that continues to be shaped and refined by the judiciary.