If default has occured, petition must be admitted: Supreme Court

case-of-innoventive-industries-ltd-vs-icici-bank

Status as on- 04/07/2021

 Case- M/s Innoventive Industries Ltd. vs. ICICI Bank, (2018)1 SCC 407

Brief Facts of the Case

  1. ICICI Bank filed an application before the Mumbai Bench of the National Company Law Tribunal (“NCLT”) against Innoventive Industries Ltd. to initiate the insolvency resolution process because Innoventive was declared a defaulter under the IBC.
  2. Innoventive’s main argument was that no debt was legally due because all of Innoventive’s liabilities and enforcement remedies were temporarily suspended for two years under notification issued under the Maharashtra Relief Undertaking (Special Provisions Act), 1958.
  3. On 17 January 2017, the NCLT ruled that the IBC would prevail over the Maharashtra Act due to the non-obstante clause in Section 238 of the IBC. It was determined that the Parliamentary statute would take precedence over the State statute, and thus Innoventive had failed to make payments, and thus the application was granted and a moratorium was declared.
  4. An appeal was filed against the above order before the NCLAT, which was dismissed, and from there an appeal was filed before the Supreme Court.

Held

The Hon’ble Supreme Court ruled as follows:

  1. The Supreme Court ruled that, in order to trigger Section 7 (1) of the IBC, a default could be in respect of any financial debt owed to the corporate debtor – it did not have to be a debt owed to the applicant financial creditor.
  2. When the NCLT is satisfied that a default has occurred, the financial creditor’s application must be admitted (unless it is incomplete). The corporate debtor has the right to assert that there has been no default in the sense that the “debt,” which may also include a disputed claim, is not due. A debt may not be due if it is not legally or practically payable. The Supreme Court ruled that it makes no difference whether the debt is disputed or not, as long as it is “due,” that is, payable unless prohibited by law, or has not yet become due in the sense that it is payable at some future date.
  3. It held that the MRUA Maharashtra Relief Undertakings (Special Provisions) Act, 1958 is incompatible with the IBC because, under the MRUA, the State Government may take over the management of the undertaking and impose a moratorium in much the same way that the IBC does. It was held that by putting the MRUA into effect, the plan/scheme that could be adopted under the IBC would be directly hampered and/or obstructed, and that there would be a direct clash between moratoriums under the two statutes.
  4. The Supreme Court also ruled that the non-obstante clause in the IBC will take precedence over the non-obstante clause in the MRUA. On the issue of debt suspension due to a relief order under the MRUA, it was held that, due to the non-obstante clause in the IBC, any right of the corporate debtor under any other law cannot obstruct the IBC.
  5. As a matter of constitutional law, the later Central enactment being repugnant to the earlier State enactment by virtue of Article 254 (1), would operate to render the Maharashtra Act void vis-a-vis action taken under the later Central enactment.
  6. The Supreme Court ruled that a debt is not due if it is not payable in law or fact, and that a debt is “due” if it is payable unless prohibited by law or has not yet become due in the sense that it is payable at some future date. At the same time, it rejected Innoventive’s argument that its debt was suspended under MRUA on the grounds that any right of the corporate debtor under any other law cannot come in the way of the IBC due to the IBC’s broad non-obstante clause.

Impact of the case

The Insolvency Code introduces a paradigm shift in the law, including the requirement to remove the management of a corporate debtor that defaults on its debts. Thus, entrenched managements are no longer permitted to continue in the event of debt non-payment.

Once an insolvency professional is appointed to manage the company, former directors who are no longer in management are unable to file an appeal on the company’s behalf. As a result, the appeal in this case was not maintainable. However, the Supreme Court did not dismiss the appeal solely on this basis. Because this was the first application filed under the IBC, the judges felt it was necessary to deliver a detailed judgement so that all Courts and Tribunals could be aware of a paradigm shift in the law.

Conclusion

The Supreme Court of India issued its first comprehensive ruling on the operation and functioning of the Insolvency and Bankruptcy Code, 2016 in the case of Innoventive Industries Limited vs ICICI Bank Limited. The Court stated that it is issuing its detailed judgement in the very first application under the Insolvency Code in order for all Courts and Tribunals to be aware of a fundamental shift in the law.

The judgement acknowledges that the Insolvency Code has resulted in a paradigm shift in legal and economic policy. The judgement is truly progressive, forward-thinking, and ground-breaking, and it should pave the way for efficient and effective implementation of the Insolvency Code through adherence to the Insolvency Code’s timelines and the speed of the resolution process.

Disclaimer– The above article is based on the interpretation of related laws which may differ from person to person. The readers are expected to take legal advice before placing reliance on it. For more information, please reach at support@centrik.in

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