Quest for Justice

 Justice is a basic tenet of life and liberty. This statement looks very simple but has a very deep-rooted meaning. A wrong done to an individual either in commercial contracts, personal contracts, personal laws, public domain yields into a desire to set the wrong right, get compensated, and have the satisfaction that the wrong has been undone. 

We see this in the age-old litigation matter where the families generation after generation keep fighting in courts for their rights and get justice. The desire to get justice within a reasonable time is a must for a society lest it may give rise to loss of faith in the institution of judiciary and the justice delivery system and finally decay the social fabric as it is presently happening in India. 

Pendency of cases in India has been a topic in vogue for the past 40 years or so or maybe more. At any given time, the number of judges was never adequate to deal with the pending number of cases. Each time the Supreme court sees a new chief justice appointed, the first problem, promise, and the solution we hear is about the pendency of cases, but each time its different words different speaker but the crux and the result remain the same - increased pendency of cases and time period. The institution and the political establishment have to introspect as to why despite repeated promises and efforts (though half-hearted) the desired result has not come out as it is expected to be. As I see it, the answer lies in the priorities of the government and of the people.  The government never thinks justice delivery to be a priority for the people. A good justice system would have the following benefits:

(i) Early resolution of disputes reinforce the fear and respect of law leading to a better and more disciplined society;

(ii) Emotional and social satisfaction amongst the complainants and thus boosting the happiness quotient of the citizenry;

(iii) Saving of crucial time and monetary resources for the complainant and thus re-allocation of funds for better causes;

Binani Judgment: Ray of Hope for Operational Creditors

Introduction

Insolvency and Bankruptcy Code, 2016 (hereinafter referred as ‘I&B Code’) provides for the purposes of resolution of insolvency of persons in time bound manner along with maximisation of value of assets of such persons, to promote entrepreneurship, availability of credit and balance of interests of all the stakeholders. Under the I&B Code upon occurrence of default in payment, the Financial Creditors, Operational Creditors and Corporate Debtor can individually and independently approach the Adjudicating Authority for admitting the Corporate debtor to the Corporate Insolvency Resolution Process (‘CIRP’). Once admitted an interim resolution professional (IRP) is appointed who after collation of financial data constitutes a ‘Committee of Creditors’ (COC) comprising of Financial Creditors. Resolution Professional thereafter proceeds to prepare an Information Memorandum and call for Resolution Plans from resolution applicants for resolution of insolvency under the guidance and approval of the Committee of Creditors.

In the past two years of the implementation of the I&B Code, 2016, it has come to attention that the resolution plans which were submitted for consideration and approval of the COC and those where the plans were approved, maximum return or repayment of money was provided for the Financial Creditors whereas nil or minimum payment was provided for the Operational Creditors. Interestingly, I&B Code does not provide for operational creditors to be a part of the Committee of Creditors. The only involvement of the operational creditors is provided under section 24 (3)(c) wherein a notice of the COC is also to be provided for the operational creditors or their representatives if the amount of their aggregate dues is not less than 10% of the debt. Despite providing for such participation by virtue of law and judicial precedents, various classes of the financial creditors and operational creditors are discriminated against with the resolution plan heavily loaded and prejudiced in favour of the financial creditors having voting power in the COC.

Binani Industries Limited vs. Bank of Baroda & Another

National Company Law Appellate Tribunal (‘NCLAT’) has dealt with the similar issue in the matter of Binani Industries Limited vs. Bank of Baroda & Another, [1]  wherein the COC approved a resolution plan which provided for differential payment to the secured financial creditors and unsecured financial creditors & the operational creditors as below:

FINANCIAL TERMS OF RESOLUTION PLAN OF RPPL

S.NO.	PARTICULARS	VOTING SHARE	VERIFIED CLAIM (IN Rs. Crores)	PROPOSED PAYMENT (IN Rs. Crores)	PERCENTAGE
1.	Insolvency Resolution Process Costs	N.A.	114.08	114.08	100%
2.	Workmen Wages	N.A.	18	18	100%
FINANCIAL CREDITORS WITH DIRECT EXPOSURE TO CORPORATE DEBTOR
3.	Edelweiss Asset Reconstruction Company	42.9%	2775.82	2775.82	100%
4.	IDBI Bank Limited	5.2%	335.85	335.85	100%
5.	Bank of Baroda	6.6%	427.69	427.69	100%
6.	Canara Bank	5.7%	370.34	370.34	100%
7.	Bank of India	1.5%	94.66	94.66	100%
8.	State Bank of India	0.6%	36.89	36.89	100%
FINANCIAL CREDITORS TO WHOM CORPORATE DEBTOR WAS A GUARANTOR
9.	IDBI Bank Limited (Dubai Branch)	24.2%	1567	1567	100%
10	Export-Import Bank of India	9.6%	620	450	72.59%
11.	State Bank of India (Hong Kong)	0.6%	37	3.7	10%
12.	Bank of Baroda	2.7%	172	172	100%
13.	State Bank of India (Bahrain)	0.4%	25	25	100%
14.	Syndicate Bank	0.1%	7	7	100%
OPERATIONAL CREDITORS (OTHER THAN WORKMEN)
15.	Unrelated Parties	N.A.	443.23	151	35%
16.	Related Parties	N.A.	60.14	NIL	N.A.
17.	Statutory Liabilities	N.A.	177.50	33.10	19.3%
18.	Equity/Working Capital Infusion	N.A.	N.A.	350	N.A.
TOTAL			7289.05	6932.46	------

The said differential payments were challenged by the unsecured financial creditors and the operational creditors separately on the ground of discrimination being meted out to the creditors based on their voting share when no such discrimination is provided in the I&B Code. NCLAT while laying down the law on this issue held that the objective of the I&B Code is Resolution and the purpose of the resolution is for maximisation of value of assets of the ‘Corporate Debtor’ and thereby for all the creditors. It is not the maximisation of value for a ‘stakeholder’ or a ‘set of stakeholders’ such as creditors and is to promote entrepreneurship, availability of credit and balance the interests. The judgment holds that under I& B Code, 2016 the following order of objective is sacrosanct:

(i)                  Resolution,

(ii)                 Maximisation of value of assets of the ‘Corporate Debtor’, and

(iii)               Promoting entrepreneurship, availability of credit and balancing the interests.

The judgment further relying upon the report of the Bankruptcy Law Reform Committee (BLRC) and the abovesaid objectives held as follows:

(i)                  The liabilities of all creditors who are not part of ‘Committee of Creditors’ must also be met in the resolution.

(ii)                 The financial creditors can modify the terms of the existing liabilities, while other creditors cannot take risk of postponing payment for better future prospectus. That is ‘Financial Creditors’ can take haircut and can take their dues in future, while operational creditors need to be paid immediately.

(iii)               A creditor cannot maximise his own interests in view of moratorium.

(iv)               If one type of credit is given preferential treatment, the other type of credit will disappear from market. This will be against the objective of promoting availability of credit.

(v)                 The ‘I&B’ Code aims to balance the interests of all stakeholders and does not maximise value for ‘Financial Creditors’

(vi)               Therefore, the dues of ‘Operational Creditors’ must get at least similar treatment as compared to the due of ‘Financial Creditors’.

The judgment also notes that a ‘Resolution Plan’ is a plan for insolvency resolution of the corporate debtor as a going concern. It does not spell out the shape, colour and texture of ‘Resolution Plan’, which is left to the imagination of stakeholders. It is held that the ‘I&B Code’ or the Regulations framed by the Insolvency and Bankruptcy Board for India do not prescribe differential treatment between the similarly situated ‘operational creditors’ or the ‘Financial Creditors’ on one or other grounds.

The appeal preferred by the Binani Industries Limited before the Supreme Court of India in Rajputana Properties Private Limited vs. Ultratech Cements Limited and Others, CA No. 10998/2018[2] was dismissed by the Supreme Court without any detailed discussion and passing the following order:

              “Having perused the judgments of the National Company Law Tribunal (NCLT) and National Company Law Appellate Tribunal (NCLAT) and after hearing learned counsel for all the parties, we are of the opinion that there is no infirmity in the order passed by the NCLAT. The appeal is accordingly dismissed. Pending applications stand disposed of.”

Resultantly the NCLAT judgment and findings with respect to purpose of I&B Code and discrimination between Financial and Operational Creditors have attained finality for the time being.

Authors view:

The finding of the NCLAT that the dues of creditors of ‘operational creditors’ must get at least similar treatment as compared to the due of financial creditors’ cannot be applied as a straight jacket formula to all cases. The fact which cannot be ignored is that that the said judgment in Binani case was passed in a peculiar situation where a competing Resolution Applicant has offered 100% payment to the operational and financial creditors as against the COC approved resolution applicant who has discriminated against the operational and unsecured creditors. Since the Supreme Court has dismissed the appeal with limited orders, it cannot be said with certainty that this issue has settled.

In fact, as per the I&B Code it is prerogative of the Resolution Applicant to propose a Resolution Plan to resolve the insolvency of the Corporate Debtor. On the contrary, the abovesaid Binani Judgment[3] by providing equal treatment to the dues of the creditors has curtailed the free hand given to the Resolution Applicant to resolve the insolvency of the corporate debtor. The I&B Code is silent on how and in what manner a Resolution Plan has to be framed and drafted. However, Regulation 37 of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016[4] does provide an insight. As per Regulation 37 a resolution plan may provide for insolvency resolution of the corporate debtor for maximisation of value of its assets, including but not limited to:

(a)    Transfer of all or part of the assets of the corporate debtor to one or more persons;

(b)    Sale of all or part of the assets whether subject to any security interest or not;

(c)     The substantial acquisition of shares of the corporate debtor, or the merger or consolidation of the corporate debtor with one or more persons;

(d)    Cancellation or delisting of any shares of the corporate debtor, if applicable

(e)    Satisfaction or modification of security interests;

(f)      Curing or waiting of any breach of the terms of any debt due from the corporate debtor

(g)    Reduction in the amount payable to the creditors.

(h)    Extension of maturity date or a change in interest rate or other terms of a debt due form the corporate debtor;

(i)      Amendment of the constitutional documents of the corporate debtor;

(j)      Issuance of the securities of the corporate debtor, for cash, property, securities or in exchange of claims or interests or other appropriate purpose;

(k)     Change in technology used by the corporate debtor; and

(l)      Obtaining necessary approval from the central and state government and other authorities.

Therefore, a Resolution Applicant may propose to resolve the insolvency based on any of the aforesaid  actions or measures and this does not necessarily merit equal or similar treatment to the debts of the Operational Creditor or the Financial Creditors. In this regard, attention is invited for the long title of the I&B which provides that the insolvency process shall provide for ‘balance of interests of all stakeholders’. Therefore, till the time a Resolution Plan balancing the interests of all the stakeholders, which may or may not include equal or similar treatment of dues of the financial and operational creditors, the same cannot bad in law. Overall, the Binani judgment do give a ray of hope to the Operational Creditors and is step in right direction, however it will still take a while for law to settle down on this issue.

* this article is also published on www.Indiacorplaw.in

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[1] https://nclat.nic.in/Useradmin/upload/744324065bebc1bd0ef4a.pdf

[2] https://www.sci.gov.in/supremecourt/2018/42769/42769_2018_Order_19-Nov-2018.pdf

[3] Supra 2

[4]https://ibbi.gov.in/webadmin/pdf/legalframwork/2018/Oct/pdf%20copy%20%20upto%2005.10.2018%20CIRP%20Regulations%202018_2018-10-24%2014:20:10.pdf

A PLAUSIBLE VIEW: - SECTION 14 OF INSOLVENCY CODE, 2016 DOES NOT ENVISAGE DISCONTINUANCE OF ARBITRAL PROCEEDINGS

Though after the judgement of the Hon’ble Supreme Court in the matter of Alchemist Asset Reconstruction Company Limited v. M/s Hotel Gaudavan Private Limited, the issue of continuation of arbitration proceedings during the moratorium period is more or less settled. But there exists another alternative view under the scheme of the code which can be deciphered with the help of cannons of interpretations to mean that section 14 of the Insolvency Code applies only to institution of suit, continuation of pending suits and the proceedings in the said suits. Section 14 offcourse puts a moratorium on the execution of the award, decree against the corporate debtor but the intent of the legislature was not to put a complete embargo on the continuation of all proceedings during the period of moratorium. It is pertinent to note that the use of word “proceedings” in various sections of the Insolvency and Bankruptcy Code, 2016: (a)  Section 5(6) of the IBC, 2016 specifically states “dispute” includes a suit or “arbitration proceedings”. The use of the word “arbitration proceedings” clearly signifies the fact that the legislature is aware of the fact that ‘arbitration proceedings’ have to be held separately than a normal ‘proceedings’. (b)  Section 8(2) of the IBC, 2016 uses the word “arbitration proceedings” while referring to arbitration. Therefore, wherever the legislature wanted to refer to arbitration it has referred the same by name of “arbitration proceedings” and thus when proceedings are referred in section 14, the legislature was conscious of the fact that it was not for the purpose of arbitration, otherwise, it would have mentioned “arbitration proceedings” as against “proceedings”. (c)  Section 25(2) while referring the powers and duties of resolution professional, states that the resolution professional can represent and protect the interests of the Corporate Debtor before “judicial, quasi-judicial or arbitration proceedings”. Interestingly, over here as well, instead of using a general word proceedings, the legislature has used the word “judicial, quasi-judicial or arbitration proceedings”. Nothing stopped legislature to similarly use the same expression, however the same has been avoided meaning thereby the proceedings only refer to the proceedings under the suit and nothing more. Also, it is interesting to note that the word “Suit” has been omitted here as there is a specific prohibition of continuation of suit and proceedings thereunder under section 14 of the Code, therefore there was no need for any representation during the resolution process. Had it not been the case, the Resolution Professional would have been given the duty to represent in suit as well.(d)   Section 26 refers to “proceedings of the corporate insolvency resolution process”, these proceedings are also against the Corporate Debtor, therefore with the prevalent interprestation, the same shall also be prohibited under section 14 of the Code, 2016. Such kind of definition does not and cannot hold good. (e)   Section 33 (5) provides that when a liquidation order has been passed,  no suit or other legal proceedings, shall be instituted against the corporate debtor, here again the legislature has used the word “other” to distinguish between the two i.e. suit and other legal proceedings and whereas in section 14, the word ‘other’ has not been used and the word proceedings has been used in continuance and in relation to suits or continuation of pending suits only. (f)   Section 35(k) provides that the liquidator has the power and duty to institute or defend “any suit, prosecution or other legal proceedings, civil or criminal” in the name of the Corporate debtor. The use of the word “other” defines that the legislature was always conscious of the distinction between suit and other proceedings.  The forgoing paragraph clearly indicates that the legislature was always aware that there can be various proceedings, which can be instituted by and against corporate debtor and the legislature as per the need of the Act and section has used and referred different proceedings, which primarily could be referred as below: (i)             Arbitration proceedings; (ii)           Judicial and quasi judicial proceedings; (iii)         Suits and proceedings thereunder (iv)         Suits and other legal proceeding. (v)           Insolvency Proceedings. The reference to the different kind of proceedings at different places indicate that the legislature is conscious that the general word “proceedings” is of very wide import and thus cannot be used without qualifications and it is for this purpose the word “proceedings” in section 14 of the Act has to be read in accordance with principles of noscitur a sociss.

The word ‘proceedings’ is a general word and applying the principle of nositur a sociss, requires that “the meaning of a word is to be judged by the company it keeps”. In the current provision, the word ‘proceedings’ is provided as a natural extension of the words, ‘institution of suits or continuation of pending suits’, therefore the meaning which is to be attached to the word ‘proceedings’ is the proceedings related to the suits and not all kind of proceedings. As provided elsewhere, the legislature could have stated the kind of proceeding which are covered in section 14, however the intent was only to put a moratorium on suits and proceedings thereunder, and therefore the words like ‘other’, ‘judicial’, ‘quasi judicial’, ‘arbitration’ has not been used. At this juncture, it may be mentioned that the words “institution of suit”, “continuation of pending suits” will cover pleadings, evidence and arguments, whereas the word proceedings covers all the applications for various purposes which are moved by the parties in the suit. It is further interesting to note that the word ‘proceedings’ has been further restricted by the use of the word of “ ‘including’ execution of any judgement, decree or order…”. The word include may in certain contexts be a word of limitation. Privy council in the matter in Dilworth vs. Commissioner of Stamps, (1899) AC99, pg. 105, 106 has held that “the word ‘include’ is very generally used in interpretation clauses in order to enlarge the meaning of words or phrases must be construed as comprehending , not only such things, as they signify accordingly to their natural import, but also those things which the interpretation clause declares that they shall include. But the word, ‘include’ is susceptible of another construction, which may become imperative, if the context of the act is sufficient to show that it was not merely employed for the purpose of adding to the natural significance of the words or expressions used. It may be equivalent to “mean and include” and in that case it may afford an exhaustive explanation of the meaning which for the purpose of the Act must invariably be attached to those words or expressions”. Thus, the word include may in certain contexts be a word of limitation. The setting, context and object of an enactment may provide sufficient guidance for interpretation of the word “includes” for the purposes of such enactment. Reference to the judgment of Hon’ble Supreme Court in the matter of Godfrey Philips India Limited vs. State of Uttar Pradesh, 2005(2)SCC515 is invited, wherein the Hon’ble Supreme Court observed: “70. Where two or more words are susceptible of analogous meaning are clubbed together, they are understood to be used in their cognate sense. They take, as it were, their colour from and are qualified by each other, the meaning of the general word being restricted to a sense analogous to that of the less general. As said in Maxwell on the interpretation of Statues 12 th Edn. P.289. "Words, and particularly general words, cannot be read in isolation; their colour and their content are derived from their context, A-G v Prince Ernest Augustus of Hanover (1957) AC 436, per Viscount Simonds, at 461.” The court further observed “75. We are aware that the maxim of noscitur a sociis may be a treacherous one unless the 'societas' to which the 'socii' belong, are known. The risk may be present when there is no other factor except contiguity to suggest the 'societas'. But where there is, as here, a term of wide denotation which is not free from ambiguity, the addition of the words such as 'including' is sufficiently indicative of the societas. As we have said the word 'includes' in the present context indicates a commonality or shared features or attributes of the including word with the included. “ Had it been the intention of the legislature of the include all kind of proceedings, there was no need to further use the word including and specify the execution proceedings. It is needless to add that ‘execution’ of judgement, decree or order arises in the case of suits which of course has been held to be governed and instituted under the Code of Civil Procedure, 1908. Another indication to the above referred intent can be gathered from section 60(6) of the Insolvency Code which only provides exclusion of moratorium period for the purposes of limitation only for suit or application and not other proceedings. Attention is invited to Section 60(6) of IBC, 2016 which provides that where an order of moratorium has been made, while computing the period of limitation for any suit or application, such period moratorium shall be excluded. Bare reading of this clause makes it clear that period of limitation is saved for only suit or application and not any other proceeding meaning thereby all other proceedings (given the prevalent interpretation by the courts) would stand lapsed. With utmost respect and humility, that cannot be the intention of the legislature to rob off the common man his remedy of recourse to law under the garb of moratorium. The intention of the legislature has always been to put institution of suits, continuation of pending suit and the proceedings thereunder in moratorium and not all possible proceedings without defining the same. Therefore, applying the principle of noscitur a sociis, it should be interpreted that the reference of word “proceedings” under section 14 is only limited to suit and proceedings there under.