Re-Inventing the Supreme Court’s Ruling in Innoventive Industries

[Ragini Agarwal is a graduate from National Law University, Jodhpur. The author would like to thank Mayank Udhwani for his inputs on the article.]

Innoventive Industries v. ICICI Bank (2017) was the first landmark Supreme Court judgment that explained the ethos of the newly introduced Insolvency and Bankruptcy Code, 2016 (“IBC”) as a code that marked a “paradigm shift in law” (at paragraph 11) to transform the insolvency regime in India from a debtor-in-possession to a robust framework of creditor-in-possession regime with time-bound resolution process. The ruling of the Court on maintainability of the petition, i.e., erstwhile directors’ lack of locus standi to file an appeal on behalf of the company, in a case where an Insolvency Professional is appointed, has been subjected to considerable dilution  over the period of working of the IBC.

Brief Facts of the Case

Innoventive Industries (“the Appellant”) had undertaken financial debts that it was unable to service owing to labour problems. These debts were restructured through a Master Restructuring Agreement executed between a Consortium of Banks and the Appellant. However, during the term of the Agreement, notifications were issued for two years in a row, suspending the liabilities of the Appellant for consecutive periods of a year each under the Maharashtra Relief Undertakings (Special Provisions) Act, 1958 (“MRU Act”). While the second period of notification suspending the debt was still on, the IBC came into force.

The ICICI Bank Ltd. (“the Respondent”) then preferred an application under section7 of the Code to initiate the insolvency resolution process since a “default” had occurred. The Appellant claimed that it did not legally owe any ‘debt’ due to the suspension notifications under the MRU Act and hence the process under section 7 could not be initiated. The Supreme Court upheld the reasoning of the NCLT, stating that the process under the IBC could be initiated since the IBC would override the MRU Act. It also held that provisions of the MRU Act to the extent it is repugnant with the IBC would be void and dismissed the appeal.

While holding so, on the question of maintainability of the appeal, the Supreme Court stated:

“According to us, once an insolvency professional is appointed to manage the company, the erstwhile directors who are no longer in management, obviously cannot maintain an appeal on behalf of the company. In the present case, the company is the sole appellant. This being the case, the present appeal is obviously not maintainable.” (at paragraph 11)

With the purpose of giving an authoritative pronouncement on the IBC, despite holding the appeal as not maintainable, the Court went ahead with its in-depth analysis on the change in regime that was brought about through the IBC. The Court noted that the Indian regime on insolvency no longer followed a “debtor-in-possession” approach. Once a default occurred, the creditors of the company would have a say in the affairs of the company and a resolution professional would be in charge of the management of the company.

The Supreme Court also dismissed the Appellant’s plea to move an application to amend the cause title to the effect that the erstwhile directors were not representing the company, but were filing the appeal as persons aggrieved by the impugned order as their management right over the company had been taken away and they were also affected as shareholders of the company. Sections 61 and 62 of the IBC enable any “person aggrieved” by the orders of the NCLT or the NCLAT to file an appeal to the NCLAT or the Supreme Court respectively. The Court noted that the erstwhile management of the company could not be eligible as “persons aggrieved” to file an appeal.

It is this ruling on maintainability that the author analyses.

Analysis

If the Interim Resolution Professional (“IRP”) or the Resolution Professional (“RP”) is assumed to be the person made eligible to file an appeal on behalf of the company to oppose the initiation of Corporate Insolvency Resolution Process (“CIRP”), it would mean that the IRP is indirectly challenging the very process which appointed him. This is because an IRP as per section 13(1) of the IBC is appointed only after the admission of application for initiation of CIRP. Thus, there would be a conflict of interest for the IRP.

Furthermore, while the erstwhile management loses its powers and the right to manage the affairs under section 17 of the Code, the individual directors are not relieved of their duties since they are still registered as directors in the records with the Registrar of Companies. This was noted in the NCLAT decision of Steel Konnect (India) Pvt. Ltd. v. Hero Fincorp Ltd. as well, wherein section 17(1)(b) was emphasised upon to state that only the “function (of directors) as ‘board of directors’ is suspended”, not the powers of the Directors (at paragraph 22,18). It can also be argued that although directors do not have the managerial capacity to file appeals, they do have a fiduciary role to play (section 166 of Companies Act, 2013) and in that capacity, they should be allowed to file appeals.

It cannot be doubted that the IRP or the RP is the person who manages the affairs of the Corporate Debtor. This is emphasised by Insolvency and Bankruptcy Board of India (IBBI) Circular No. IP/002/2018 as well as section 17(2)(e) of the Code, whereby the IRP is made responsible for non-compliance of Corporate Debtor with applicable laws, during the time the Corporate Debtor is undergoing such process. In Cosmos Co-Op Bank Ltd. v. Crystal Clear Veg Oil Refinery Pvt. Ltd., the NCLT refused to appoint new directors for complying with procedural formalities of the Companies Act, 2013 (the existing directors had been disqualified), stating that the Resolution Professional is fully qualified to manage the Corporate Debtor, including performing the tasks of filing the Financial Statements and Annual Returns on behalf of the Corporate Debtor.

At the same time, provisions such as section 19 should not be ignored, wherein it is stated that the personnel of the corporate debtor must extend cooperation to the IRP in managing its affairs. There is thus, room for the argument that the directors can file appeals as persons aggrieved under the Code since it is only the overall governance of the Corporate Debtor that the Insolvency Professional takes over while the functional machinery of the Corporate Debtor remains intact. This view does not seem to be in line with the view professed by the Supreme Court in the Innoventive Industries case, yet it holds water.

In a few later decisions such as this, the ground of appeal being not maintainable on account of the erstwhile management having filed the case, was not even raised. As a matter of routine, Directors of corporate entities file appeals under section 61. In fact, in the recent Supreme Court decision of Babulal Vardharji Gurjar v. Veer Gurjar Aluminium Industries Pvt. Ltd. (2020), the Court observed in clear terms that the appeal had been filed by the erstwhile director opposing the admission of CIRP (at paragraphs 8 and 12).

On a careful reading of NCLAT cases such as Radius Infratel Pvt. Ltd. v. Union Bank of India (2018), Keep In Touch Clothing Pvt. Ltd. v. Noble Co-operative Bank Ltd.(2019) and K.K. Kadri Paper Mills Pvt. Ltd. v. Edelweiss Asset Reconstruction (2019), one realises that the Tribunals have evolved a very unique method of reconciling the “creditor-in-possession” regime with the right of Directors to file an appeal. The method is this: The Director/erstwhile management files an appeal in the capacity of a Director of the Corporate Debtor while impleading the Corporate Debtor represented by the RP as the Respondent. This solves the problem of conflict of interest for the IRP/RP that would come into play if the dictate of Innoventive Industries was followed literally.

Conclusion

While the IRP does take over the management of the Corporate Debtor, owing to his/ her vested interests in the continuation of CIRP, he/ she can hardly represent the company in cases where the admission of CIRP is opposed. The dubious holding in paragraph 11 of Innoventive Industries has gradually been accommodated through the inventive approach taken by the Tribunals. Directors are allowed to file appeals by making the Respondent the Corporate Debtor who is represented by the Resolution Professional. This shift in approach merits a closer look in legal discourse.

Ragini Agarwal

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