Supreme Court of India · 2018
Innoventive Industries Ltd v. ICICI Bank
(2018) 1 SCC 407 · Civil Appeal No. 8337-8338 of 2017
Court
Supreme Court of India
Bench
2-Judge Bench (R.F. Nariman & Sanjay Kishan Kaul JJ.)
Date
31 August 2017
Subject
IBC — Section 7 Admission & Overriding Effect
Background & Facts
Innoventive Industries Ltd v. ICICI Bank is an early Supreme Court judgment on the Insolvency and Bankruptcy Code, 2016; the Court delivered a detailed judgment because, in its words, this was "the very first application that has been moved under the Code" (para 11). ICICI Bank, a financial creditor, applied to the National Company Law Tribunal (NCLT) on 7 December 2016 under Section 7 of the IBC for initiation of the Corporate Insolvency Resolution Process (CIRP) against Innoventive Industries Ltd, a multi-product company whose debts to a consortium of 19 lenders had been restructured under a master restructuring agreement (MRA) of 2014. By its order of 17 January 2017 the NCLT admitted the application and declared a moratorium.
Before the NCLT the company's only plea was that no debt was legally due, because two notifications of 22 July 2015 and 18 July 2016 under the Maharashtra Relief Undertakings (Special Provisions) Act, 1958 (MRU Act) had temporarily suspended its liabilities and the remedies for their enforcement, for one year at a time. A second application, filed on 16 January 2017, pleaded that the lenders had not released funds under the MRA. The NCLT held that the Code prevailed over the MRU Act by virtue of Section 238 and treated the second plea as belated. The NCLAT dismissed the appeal; it held that the two Acts operate in different fields and are not repugnant, but that the company could not use the MRU Act to stall the Section 7 process. The company appealed to the Supreme Court.
Key Issues Before the Court
Holdings of the Court
Paragraph numbers refer to the judgment as pronounced by the Supreme Court; numbering in law reports may differ.
Holding 1 — Section 7 Admission: Proof of Default
The Court explained that on a financial creditor's Section 7 application the NCLT has merely to see the records of the information utility or other evidence produced by the financial creditor to satisfy itself that a default has occurred; "the moment the adjudicating authority is satisfied that a default has occurred, the application must be admitted unless it is incomplete" (paras 28, 30). It is of no matter that the debt is disputed, so long as it is "due"; the corporate debtor may point out that the debt is not due because it is not payable in law or in fact. This contrasts with the operational creditor's route, where a demand notice must first be served under Section 8 and the corporate debtor may, within 10 days, point to a pre-existing dispute (para 29).
Holding 2 — The Section 14 Moratorium Follows as a Matter of Course
On admission, the NCLT declares a moratorium under Section 14, which prohibits (a) the institution or continuation of suits or proceedings against the corporate debtor, including execution of any judgment, decree or order; (b) transfer, encumbrance, alienation or disposal of its assets; (c) any action to foreclose, recover or enforce a security interest, including under SARFAESI; and (d) recovery of property by an owner or lessor where the property is occupied by the corporate debtor. The Court contrasted this with the MRU Act: the moratorium there is discretionary, whereas "the moratorium imposed under the Code relates to all matters listed in Section 14 and follows as a matter of course" (para 55).
Holding 3 — The MRU Act is Repugnant to the IBC and Cannot Prevail
Disagreeing with the NCLAT, the Court held that repugnancy does exist in fact (para 56). The IBC is an exhaustive code on insolvency of corporate entities, made under Entry 9, List III ("Bankruptcy and insolvency") (para 53). Giving effect to the MRU Act — State take-over of management and a discretionary moratorium — would directly hinder the Code's scheme of management by the interim resolution professional and a moratorium under Sections 13 and 14; the later Central enactment therefore renders the State Act void, under Article 254(1), vis-à-vis action taken under the Code, and the non-obstante clause in Section 238 prevails over the limited non-obstante clause in Section 4 of the MRU Act (para 55). A suspension of liability for one year at a time, extendable up to 15 years, would set the Code's scheme at naught, so it did not mean that no debt was due (para 56).
Holding 4 — The Belated MRA Plea Was Rightly Rejected
The NCLT and NCLAT were right not to go into the plea that the lenders had failed to disburse funds under the MRA: the 14-day period for deciding the application was long over when it was raised, and it was an after-thought that could have been taken in the first reply (para 57). In any event, the MRA described the borrower's obligations as "direct, unconditional and general obligations", so they did not depend on the creditors infusing funds (paras 58–59). The appeals were dismissed (para 60).
Holding 5 — Management Vests in the Interim Resolution Professional; Erstwhile Directors Cannot Appeal for the Company
Under Section 17, from the date of appointment of the interim resolution professional, the management of the affairs of the corporate debtor vests in that professional (para 23). The Court therefore held that once an insolvency professional is appointed to manage the company, its erstwhile directors, no longer in management, cannot maintain an appeal on behalf of the company; the appeal, with the company as sole appellant, was not maintainable, though the Court decided it on merits because the case marked "a paradigm shift in the law" — "Entrenched managements are no longer allowed to continue in management if they cannot pay their debts" (para 11).
Practical Implications
Innoventive Industries set the foundational template for all Section 7 proceedings by financial creditors. For banks and financial institutions, the judgment confirms that the inquiry at admission is whether a default has occurred, shown from the records of an information utility or other evidence of the financial debt and its default. A dispute about the debt does not by itself defeat admission so long as the debt is due; the corporate debtor may show only that no default has occurred because the debt is not payable in law or in fact.
The moratorium holding is of daily practical significance: once a CIRP is admitted, the moratorium declared under Section 14 halts pending recovery suits, DRT proceedings, arbitration proceedings and execution petitions against the corporate debtor, and SARFAESI and other enforcement of security interests. Creditors must file their claims before the Resolution Professional within the time specified in the public announcement. Failure to file a timely claim before the IRP/RP may result in the creditor's dues not being considered in the resolution plan.
Relevant Statutory Provisions
Practical Application for Creditors & Borrowers
Financial creditors seeking to initiate CIRP under Section 7, or corporate debtors seeking to challenge a Section 7 petition, require specialist IBC counsel. Unified Chambers advises banks, NBFCs, and ARCs at every stage of the IBC process — from petition preparation to moratorium enforcement and claims filing.