The Corporate & Commercial Law Society Blog, HNLU

Tag: NCLAT

  • RETHINKING REJECTION OF POST-LCD ADJUDICATED CLAIMS IN LIQUIDATION UNDER THE IBC

    RETHINKING REJECTION OF POST-LCD ADJUDICATED CLAIMS IN LIQUIDATION UNDER THE IBC

    BY MUSKAN JAIN, QAZI AHMAD MASOOD, FOURTH – YEAR STUDENTS AT RAJIV GANDHI NATIONAL UNIVERSITY OF LAW, PUNJAB

    INTRODUCTION

    Consider an example of a defective product in which a consumer seeks a refund before a store shuts, but the defect is detected after closing, and the refund is not given. This seems unjust since the right had existed before; it was just delayed in being confirmed. The same problem occurs with insolvency. The number of claims is usually decided on the Liquidation Commencement Date (‘LCD’), but liabilities like taxes, regulatory fines, or damages under contract are usually determined later by adjudication. This raises the key question: If the underlying right arose before the LCD but the amount was determined later, should the claim be rejected? This article examines this issue.

    The article explores whether the judicial trend to annul claims brought forward after the LCD, as observed in the recent case of SEBI v. Rajiv Bajaj, is in line with the statutory provisions of the Insolvency and Bankruptcy Code, 2016 (‘IBC’ or the ‘Code’) or not. It challenges the National Company Law Appellate Tribunal (‘NCLAT’), which focuses more on the LCD as a rigid cut-off, which does not involve claims like tax demands or regulatory penalties due to pre-liquidation activity.  The article argues that this rigidity undermines the Code’s broad definition of “claim,” the liquidator’s power to estimate unliquidated liabilities, and the continuation of proceedings during liquidation.

    RECOGNITION OF PRE-LCD CLAIMS AND POST-LCD QUANTIFICATION UNDER THE IBC

    Section 3(6) of the IBC broadly defines a claim as a right to payment, which can include disputed, contingent, or unliquidated sums. Consequently, there can be a claim even in cases where the amount remains undecided or is in the process of adjudication. The Code distinguishes between the existence of a right to payment and subsequently ascertaining its value, i.e., a liability may be incurred by pre-LCD events even though the value is determined subsequently.

    Section 33 provides that the liquidation commences following the failure of the Corporate Insolvency Resolution Process (‘CIRP’), marking the LCD. Creditors submit claims before the liquidator under Section 38, which he validates and either admits or rejects under Sections 39–40. Although the courts tend to consider the LCD as a cut-off for certainty in the distribution, the Code does not prohibit later quantification of liabilities generated out of pre-LCD obligations.

    Section 33(5) further permits the statutory proceedings to be instituted against a corporate debtor (‘CD’) in liquidation with the sanction of the adjudication authority. This reflects realism in the law as regulatory, taxation, and arbitral procedures are frequently multi-staged and cannot be terminated when liquidating. Parliament authorised the tribunals to determine the continuance of such proceedings instead of requiring termination at the LCD. The contradiction of doctrinal nature appears in the cases when the proceedings are permitted to proceed, and yet their results are not considered in the liquidation estate. This issue surfaced in SEBI v. Rajiv Bajaj, wherein the proceedings were permitted, yet their outcome had no distributive effect.

    This has two effects: the license granted in Section 33(5) turns out to be largely illusory, and jurisprudence turns inconsistent, in that the issue of liability can be established, but has no distributive effect. A logical approach involves dealing with claims on grounds of their pre-LCD nature and dealing with post-LCD quantification by use of liquidator estimation under Regulation 25, provisional admission of claims, and escrow or holdback provisions. In the absence of such harmonisation, Section 33(5) risks permitting adjudication in form and not in economic substance.

    THE NCLAT APPROACH: FREEZING LIABILITIES AS ON LCD AND THE CONCEPTUAL ERROR OF CONFUSING THE EXISTENCE OF A CLAIM

    The jurisprudential challenge with the dogmatic doctrine of LCD-freeze is that it confuses three analytically separate terms of existence, crystallisation, and quantification of liability. Liability arises due to the actions of the debtor- breach of contract, violation of the statutes, torts, or violation of regulations. Crystallisation is a process through which the liability is formally confirmed by the court or authority, whereas quantification is the process through which the numerical value of the owed amount is established. These phases can both be sequential and non-constitutive.

    Adjudication does not create liability; it acknowledges and ascertains it. A claim can thus exist even if contested, conditional, or even unquantified. Handling the absence of adjudication as the lack of liability replaces procedural timing with substantive existence. Following this logic, the amount of taxes payable, penalties, or regulatory fees based on the discovery of the LCD is exempt on the basis that the liability did not exist earlier.

    Such an approach was observed in SEBI v. Rajiv Bajaj, wherein the liquidator declined the claim by SEBI to impose a penalty of 21.80 lakh, since this penalty was imposed after the LCD. The court of appeal ruled that only claims crystallised as they were on the LCD can be admissible under Regulations 12(2)(a) and 13 of the Insolvency and Bankruptcy Board of India (‘IBBI’) (Liquidation Process) Regulations, 2016. However, this fails to appreciate a crucial distinction, which is the fact that the existence of liability and its quantification are distinct. A claim can already exist where the wrongful conduct preceded the LCD or proceedings were already started before the LCD, or the final amount was not obtained due to procedural delays.

    The equation of “unadjudicated” with “non-existent” eliminates contingency liabilities and makes legitimate pre-LCD obligations disappear, distorting the true financial status of the CD. A doctrine that ties the existence of claims to post-facto crystallisation makes insolvency a matter of procedural finality as opposed to substantive accounting of rights. The rigorous LCD crystallisation method thus favours the time of adjudication, rather than the juridical content of liability, and is conceptually limited and practically rigid.

    REASONS AGAINST THE NCLAT POSITION

    The institutional issues underlying the LCD-freeze approach cannot be dismissed on the basis of doctrinal criticism only. The need for finality is the best argument. Liquidation is a time-bound process aimed at realising and distributing assets with predictability, allowing continually changing liabilities risks to delay closure and undermine commercial certainty. Intimately linked here is the inability to estimate complex or speculative claims, including contingent tax liabilities, regulatory fines, or litigation-based damages, which might be beyond the knowledge of the liquidator and lead to arbitrary valuations or exaggerated claims.

    Another concern is the potential destabilisation of the distribution waterfall. When liabilities after LCD are recognised following interim or final distributions, the previously paid dividends may need to be recalculated, which interferes with predictability and creditor confidence. An effective administrative burden exists, as well, in the fact that the liquidator can only realise and distribute assets, and not make specialised forensic decisions as to liability.

    It is not a question of absolute finality and unrestricted uncertainty, but one of moderated inclusion and categorical exclusion. Rejection of post-LCD claims is disproportionate. The middle ground is in the estimation mechanisms under tribunal control and backed by safeguards, which is more efficient, fairer, and more practical to the institution.

    OVERLOOKING REGULATION 25: POWER TO ESTIMATE CLAIMS

    This strictness of the exclusion of claims that are measured following the Liquidation Commencement Date ignores a vital stipulation in the liquidation apparatus Regulation 25 of the IBBI (Liquidation Process) Regulations, 2016. The provision recognises that insolvency often involves liabilities whose value cannot be precisely determined and therefore requires the liquidator to estimate claims where the amount is uncertain due to contingency or other reasons. The language is significant. The regulation compels the liquidator to find a reasonable value for which no exact quantification can be made by applying the term shall estimate. It does not permit rejection just because a claim is contingent, contested, or even under adjudication.

    The provision is an assumption of the structure of the Code: liquidation should occur even in the case of uncertainty. Estimation is the institutional process by which this uncertainty is dealt with without eliminating legitimate liabilities. Practically, estimation can be based on objective references like the statutory penalty list, precedents of similar cases, the role of the proceedings, documentary evidence, or the opinion of experts. Conservative/range-based valuations can maintain distributional certainty, but they need to be sure that the liquidation estate captures the potential liabilities.

    The failure to observe Regulation 25 thus distorts the concept. The consideration of the lack of final adjudication as a reason to be rejected makes it practically impossible to make the pre-liquidation liabilities invisible. In addition, a harsh freeze of LCD can serve as a motive to take a strategic pause in the regulatory or statutory action in such a way that the liabilities do not become crystallised until the liquidation begins. Well used, Regulation 25 can prevent such a result by permitting provisional recognition of pre-LCD liabilities, which would provide a balance between procedural finality and substantive fairness.

    A targeted amendment to Sections 38 and 40 of the IBC that clearly distinguishes between the existence of a claim rooted in pre-LCD conduct and its quantification occurring post-LCD would be another structurally sound solution like Regulation 25. This strategy is supported by comparative frameworks to accommodate contingent and uncertain liabilities without sacrificing distributional certainty. Rule 14.1 of the UK Insolvency (England and Wales) Rules, 2016 anchors claim admissibility to the origin of the obligation rather than the date of its formal determination. A similar statutory clarification in the IBC would resolve the doctrinal ambiguity at its source, lending legislative backing to what Regulation 25 currently achieves only at the regulatory level.

    CONCLUSION: TO A STILL MORE SENSITIVE DOCTRINE

    Going back, lastly, to the store shop metaphor. One of the customers requested a refund for the defective product; the defect was verified after the shutters were closed. There is no defence of refusal to grant a refund in that case, amounting to refusal to serve in defence of discipline, but on refusal of fairness, as the operative condition, timely ordering, was fulfilled. The insolvency law is faced with a similar dilemma. Where the pre-liquidation conduct results in regulatory, contractual, or statutory proceedings, but does not end until the LCD, the timing of adjudication is usually institutional, as opposed to creditor-driven. The omission of these claims by the reason that they are quantified after LCD raises the distributive accident to the distributive entitlement and deforms the design of the Code.

    The answer is not a very strict exclusion but a moderate inclusion. The claims that are based on the pre-LCD conduct are to be acknowledged as the true financial status of the debtor, despite the fact that the value of the claims has not been resolved yet. The liabilities may rather be within institutional protection, as the structure already takes into consideration. Under Regulation 25, such as estimation, the liquidator is able to value a business at a reasonable amount in the event that quantification is yet to be undertaken. Correctly used, these instruments maintain both finality and equity, such that valid commitments are not killed just due to the fact that their exact worth had made it onto the stage too late in the process.

  • The CCI’s Nod for Resolution Plans: The 2025 Amendment Strikes the Right Note

    The CCI’s Nod for Resolution Plans: The 2025 Amendment Strikes the Right Note

    BY VAISHNAV M, THIRD- YEAR STUDENT AT NUALS, KERALA

    INTRODUCTION

    The Insolvency and Bankruptcy Code, 2016 (‘IBC’) ensconces a mechanism known as the Corporate Insolvency Resolution Process (‘CIRP’) that attempts to revive the Corporate Debtor (‘CD’) through restructuring and strategic resolution of debts. With the CD managed by a Resolution Professional (‘RP’), the Resolution Applicants (‘RA’) can propose restructuring plans to resolve debts and sustain the CD as a going concern.

    Where the plan involves acquisition, merger or amalgamation (collectively, ‘Combination’), it is important that the restructuring does not distort the competition in the market. This is where merger control and the Competition Commission of India (‘CCI’) step in. The Supreme Court in Independent Sugar Corporation Ltd. v. Girish Sriram & Ors (‘ISC’)dealt with the procedure to seek the CCI’s approval for combination during the insolvency process.

    The piece is not a general comment on the decision; instead, it aims to examine a particular point in the judgement that has not received the critical attention it deserves. That is, the particular stage at which the CCI-nod for the combination is to be obtained. This question is especially pertinent in the context of the recently introduced IBC (Amendment) Bill, 2025 (‘2025 Amendment’), which proposes to relax the timeline for the CCI’s approval for resolution plans.

    THE ISC CASE AND THE STATUS QUO

    In the ISC case, one of the RAs challenged the CIRP, citing many procedural laxities. One of the grounds was failure to seek approval of the CCI before placing the resolution plan before the Committee of Creditors (‘CoC’) for voting. According to Section 31(4) of the IBC, an RA has one year from the approval of the Adjudicating Authority (‘AA’) to obtain necessary clearances under other laws. But the proviso clarifies that the approval of the CCI for the combination is to be obtained before the approval of the CoC.

    Hitherto, the position was that this proviso is directory and not mandatory in nature, as laid down by the decision of the National Company Law Tribunal (‘NCLAT’) in Arcellor Mittal v Abhijit Guhakartha & Ors. The Supreme Court (‘SC’), in the ISC case, reversed the position by holding that the proviso is to be read literally, and treating it otherwise would render it obsolete. However, the proviso does not specify who seeks approval and at what stage before the CoC nod. In the scheme of CIRP, the stages preceding the CoC approval are:

    • Stage 1: Invitation for expression of interest from prospective RAs
    • Stage 2: Request for resolution plans from prospective RAs
    • Stage 3: Examination and confirmation of the plans by the RP
    • Stage 4: Voting by the CoC on the plans

    The SC in ISC clarified that the RA need not wait till submission of the plan to the RP before sending a notice to the CCI for approval. In effect, the approval of the CCI can be sought at any time, even in Stage 1 during the invitation for expression of interest at any point before Stage 4. The next section shall discuss the workability of the same.

    DETERMINING THE TRIGGER POINT FOR CCI NOTICE

    When to send the notice?

    According to Section 6 of the Competition Act, 2002, (‘the Competition Act’) an enterprise must send a notice of combination to the CCI when it executes any agreement or document for acquisition, or when the Board of Directors (‘Board’) of the enterprises involved approves the proposal for a merger or amalgamation.

    As held in ISC, an RA can send a notice to the CCI much before it submits its resolution plan to the RP. But is the requirement of an agreement or a decision for acquisition or the Board’s approval for merger met at Stages 1 and 2?

    An ‘agreement’ to acquire is a broad and liberal construct, and includes an arrangement of understanding or even an action in concert. Such an arrangement or understanding can be reflected in a formal or written form, and it need not have been formulated with the intent legal enforceability. In the case of the CIRP, the RP is tasked with managing the CD, including entering into contracts on behalf of the CD, courtesy Section 23 read with Section 20 of IBC. Resultantly, an agreement or understanding for the purpose of acquisition has to be between the RA proposing the combination on one side and the RP on the other side.

    But such an understanding or arrangement is absent at Stage 1. An agreement requires a meeting of minds of at least two parties, which is lacking when the RA is yet to share their proposal with the RP. Similarly, Stage 2 only marks a point where the RAs have prepared the plan. That does not signify an agreement as it is yet to be examined and understood by the RP.  

    At Stage 3, the RP examines the resolution plans proposed by the RAs and confirms whether they comply with the minimum essentials mandated by the law. This confirmation implies an agreement or an understanding, making Stage 3 and onwards the appropriate trigger for notice.

    Now, in the case of a merger or amalgamation, the notice is triggered only after the proposal is approved by the Board of both parties.[i]  In the case of a CD, the interim RP (‘IRP’) or the RP steps into the shoes of the management. Resultantly, the approval would have to be sought from the RP himself. Therefore, a notice for merger or amalgamation cannot be sent to the CCI before the plan is submitted to the RP and confirmed by them, which is Stage 3. So, the same conclusion follows – it is at Stage 3 that the notice is triggered.

    Who should send the notice?

    In the case of acquisition, the acquirer sends the notice.[ii] Generally, the successful RA submitting the plan acquires the target CD company, as was seen in the case of ISC. Therefore, it is the RA who is required to send the notice to the CCI. For merger or amalgamation, notice must be sent jointly by the RA and the RP.[iii]

    Suppose there are RAs intending to propose an acquisition in Stages 1 and 2, then all those RAs must send the notice to the CCI with the requisite fees,[iv] even before the plan is seen and examined by the RP. So, even RAs whose plan might not be voted in later would have to bear the cost at an early stage. Quite similarly, in the case of merger or amalgamation, the RP and the respective RA have to send the notice and pay the fees, jointly or severally.[v]Whether the RA or the RP handling the stressed CD would want to take the liability to pay the fees amid relative uncertainty is doubtful.

    WELCOMING THE 2025 AMENDMENT

    The 2025 Amendment has been appreciated for many desirable introductions, from the new ‘creditor-initiated insolvency resolution process’ to ‘group insolvency’. Clause 19(d) amends the proviso to Section 31(4), allowing the RA to obtain the CCI approval before submission to AA. So, the approval process can be deferred till the CoC votes on the plan and the Successful Resolution Applicant is identified. The minor change resolves the above-discussed problem of redundancy, while leaving room for seeking approval at an earlier stage.

    There are certain concerns regarding the amendment as well, but these can be addressed duly. One of the concerns is regarding compliance with the CIRP timeline of 330 days under Section 12 of the Code. However, 330 days is a general rule. The Court has already held, previously as well as in ISC, that the breach of the time-limit can be condoned in exceptional circumstances where any blame for such a delay cannot be attributed to any of the parties.

    In case the plan approved by the CoC is rejected by the CCI, it must be modified to address those objections. However, the successful RA cannot make any change at its own behest. So, once changes are made, the CoC must approve it again. Essentially, such a rejection need not be fatal to the CIRP, though it may elongate the process. In any case, Clause 19(b) of the 2025 Amendments allows the AA to return back the plan to the CoC for correcting any defects. What it reflects is that alterations made post first CoC approval is not doctrinally unacceptable. When CCI recommends changes, the CoC is well-equipped to accommodate it then and there. 

    Therefore, the proposed amendment to the procedure for CCI approval of the resolution plan is a pragmatic improvement as it spares the RA and the RP from the additional paperwork and costs that are characteristic of the existing position.

    CONCLUDING REMARKS

    The current position as settled in the ISC case does not gel well with reality. Even though it seems to make available a broad period for sending the notice, starting from Stage 1, it is generally not possible to send a notice until Stage 3 when the trigger for the notice under the Competition Act is activated. In rare cases with only one RA and mutual certainty as to the terms of the combination, this proposition in ISC might be of some use. Such cases are rare in the typically uncertain flow of business in the CIRP.

    The proposed change in the 2025 Amendment reflects the reality. The RAs and the RP can even wait till the CoC approval to send the notice. This improves ease of doing business and provides more leeway for the stakeholders to ensure compliance.

    [i] Competition Commission of India (Combinations) Regulations, 2024, Reg. 5(7).

    [ii] Id., Reg. 9(1).

    [iii] Id., Reg. 9(3).

    [iv] Id., Regs. 10, 11.

    [v] Id., Regs. 10(2), 9(3).

  • COMI Confusion: Can India Align With The Global Insolvency Order?

    COMI Confusion: Can India Align With The Global Insolvency Order?

    Prakhar Dubey, First- Year LL.M student, NALSAR University, Hyderabad

    INTRODUCTION

    In the contemporary global economy, where firms often operate across various countries, the growing complexity of international financial systems has made cross-border insolvency processes more complicated than ever. International trade and business have proliferated, with companies frequently possessing assets, conducting operations, or having debtors dispersed across multiple nations. In a highly interconnected environment, a company’s financial hardship in one jurisdiction may have transnational repercussions, impacting stakeholders worldwide. Consequently, addressing insolvency with equity, efficacy, and certainty is essential.

    A fundamental challenge in cross-border insolvency is establishing jurisdiction—namely, which court will manage the insolvency and which laws will regulate the resolution process. The issue is exacerbated when several nations implement disparate legal norms or frameworks for cross-border recognition and collaboration. Two fundamental concepts, forum shopping and Centre of Main Interests (‘COMI’), profoundly influence this discourse.

    Forum shopping occurs when debtors take advantage of jurisdictional differences to file in nations with more lenient rules or advantageous outcomes, such as debtor-friendly restructuring regulations or diminished creditor rights. Although this may be strategically advantageous for the debtor, it frequently generates legal ambiguity and compromises the interests of creditors in alternative jurisdictions. To mitigate such exploitation, the United Nation Commission on International Trade Law Model Law on Cross-Border Insolvency (‘UNCITRAL Model Law’) has formalised the COMI test, a principle designed to guarantee openness and predictability in cross-border procedures. It offers an impartial method to determine the most suitable forum based on the locus of a debtor’s business operations.

    Although recognising the need for cross-border bankruptcy reform, India has not yet officially adopted the Model Law. Instead, it relies on antiquated processes such as the Gibbs Principle, which asserts that a contract covered by the law of a specific country can only be terminated under that legislation, along with ad hoc judicial discretion. These constraints have led to ambiguity, uneven treatment of creditors, and prolonged cross-border remedies.

    This blog critically assesses India’s present strategy, highlights the gap in the legislative and institutional framework, and offers analytical insights into the ramifications of forum shopping and COMI. This analysis utilises the Jet Airways case to examine comparable worldwide best practices and concludes with specific measures aimed at improving India’s cross-border insolvency framework.

    INDIA’S STANCE ON ADOPTING THE UNCITRAL MODEL LAW

    The existing cross-border insolvency structure in India, as delineated in Sections 234 and 235 of the Insolvency and Bankruptcy Code ( ‘IBC’ ), 2016, is predominantly inactive. Despite the longstanding recommendations for alignment with international standards from the Eradi Committee (2000) and the N.L. Mitra Committee (2001), India has not yet enacted the UNCITRAL Model Law.

    More than 60 nations have implemented the UNCITRAL Model Law to enhance coordination and collaboration across courts internationally. India’s hesitance arises from apprehensions of sovereignty, reciprocity, and the administrative difficulty of consistently ascertaining the COMI. Adoption would include not only legislative reform but also institutional preparedness training for judges, fortifying the National Company Law Tribunal (‘NCLT’) and National Company Law Appellate Tribunal (‘NCLAT’), and establishing bilateral frameworks.

    KEY PROVISIONS OF THE UNCITRAL MODEL LAW AND IMPLICATIONS FOR INDIA

    The four fundamental principles of the UNCITRAL Model Law, Access, Recognition, Relief, and Cooperation, are designed to facilitate the efficient and fair resolution of cross-border bankruptcy matters. They facilitate direct interaction between foreign representatives and domestic courts, expedite the recognition of foreign procedures, protect debtor assets, and enhance cooperation among jurisdictions to prevent delays and asset dissipation.

    The effectiveness of these principles is evident in global bankruptcy processes, as demonstrated by the rising number of nations implementing the UNCITRAL Model Law and the more efficient settlement of complex international cases. Nonetheless, its implementation has not achieved universal acceptance, with certain countries, such as India, opting for different approaches, which may pose issues in cross-border insolvency processes.

    In the case of In re Stanford International Bank Ltd., the English Court of Appeal faced challenges in establishing the COMI due to inconsistencies between the company’s formal registration in Antigua and Barbuda and the true location of its business operations. This case underscores the imperative for a well-defined COMI standard that evaluates significant commercial operations rather than merely the jurisdiction of incorporation. The Court of Appeal finally determined that the Antiguans’ liquidation represented a foreign primary procedure, underscoring that the presumption of registered office for COMI may only be refuted by objective and verifiable elements to other parties, including creditors. This case highlights the complexity that emerges when a company’s official legal domicile diverges from its practical reality, resulting in difficulties in implementing cross-border insolvency principles.

    Moreover, India’s exclusion of a reciprocity clause hindered the global implementation of Indian rulings and vice versa. In the absence of a defined statutory mandate, ad hoc judicial collaboration often demonstrates inconsistency and unpredictability, hence compromising the global enforceability of Indian insolvency resolutions. This reflects the challenges encountered by other jurisdictions historically, as demonstrated in the European Court of Justice’s ruling in Re Eurofood IFSC Ltd. This pivotal judgment elucidated that the presumption of the registered office for the COMI can only be contested by circumstances that are both objective and verifiable by third parties, including the company’s creditors. These cases highlight the pressing necessity for a comprehensive and globally harmonised legal framework for insolvency in India, with explicitly delineated criteria to prevent extended and expensive jurisdictional conflicts.

    FORUM SHOPPING AND INSOLVENCY LAW: A DELICATE BALANCE

    Forum shopping may serve as a mechanism for procedural efficiency while simultaneously functioning as a strategy for exploitation. Although it may assist debtors in obtaining more favourable restructuring terms, it also poses a danger of compromising creditor rights and creating legal ambiguity.

    In India, reliance on the Gibbs Principle, which posits that a contract can only be discharged by the governing law, has hindered flexibility. This was seen in the Arvind Mills case, where the disparate treatment of international creditors was scrutinised, and in the Dabhol Power issue, where political and legal stagnation hindered effective settlement.

    While a certain level of jurisdictional discretion enables corporations to seek optimal restructuring, India must reconcile debtor flexibility with creditor safeguarding. An ethical framework grounded in transparency and good faith is crucial to avert forum shopping from serving as a mechanism for evasion.

    COMI IN INDIA: NEED FOR LEGAL CLARITY

    India’s judicial involvement in COMI was prominently highlighted in the Jet Airways insolvency case, which entailed concurrent processes in India and the Netherlands. The NCLT initially rejected the acknowledgement of the Dutch proceedings owing to the absence of an explicit provision in the IBC. The NCLAT characterised the Dutch process as a “foreign non-main” proceeding and confirmed India as the COMI. In a recent judgment dated November 12th, 2024, the Supreme Court ultimately ordered the liquidation of Jet Airways, establishing a precedent for the interpretation of COMI. This decision solidifies India’s position as the primary jurisdiction for insolvency proceedings involving Indian companies, even when concurrent foreign proceedings exist. It underscores the Indian judiciary’s assertive stance in determining the COMI and signals a stronger emphasis on domestic insolvency resolution, potentially influencing how future cross-border insolvency cases are handled in India.

    This case illustrates the judiciary’s readiness to adapt and the urgent requirement for legislative clarity. In the absence of a defined COMI framework, results are mostly contingent upon court discretion, leading to potential inconsistency and forum manipulation. Moreover, it demonstrates that India’s fragmented strategy for cross-border cooperation lacks the necessary robustness in an era of global corporate insolvencies.

    To address these difficulties, India must execute a set of coordinated and systemic reforms:

    Implement the “Nerve Centre” Test (U.S. Model)

    India should shift from a rigid procedure to a substantive assessment of the site of significant corporate decision-making. This showcases the genuine locus of control and decision-making, thereby more accurately representing the commercial landscape of contemporary organisations.

    Apply the “Present Tense” Test (Singapore Model)

    The COMI should be evaluated based on the circumstances at the time of insolvency filing, rather than historical or retrospective factors. This would deter opportunistic actions by debtors attempting to exploit more lenient jurisdictions.

    Presumption Based on Registered Office

    Utilising the registered office as a basis for ascertaining COMI provides predictability; nonetheless, it must be regarded as a rebuttable presumption. Judicial bodies ought to maintain the discretion to consider factors outside registration when evidence suggests an alternative operational reality.

    Institutional Strengthening

    India’s insolvency tribunals must be endowed with the necessary instruments and experience to manage cross-border issues. This encompasses specialist benches within NCLT/NCLAT, training initiatives for judges and resolution experts, and frameworks for judicial collaboration. The adoption of the UNCITRAL Model Law must incorporate a reciprocity clause to enable mutual enforcement of judgments. India should pursue bilateral and multilateral insolvency cooperation agreements to augment worldwide credibility and enforcement.

    By rectifying these legal and procedural deficiencies, India may establish a resilient insolvency framework that is internationally aligned and capable of producing equitable results in a progressively interconnected financial landscape.

    CONCLUSION

    The existing cross-border bankruptcy structure in India is inadequate to tackle the intricacies of global corporate distress. As multinational businesses and assets expand, legal clarity and institutional capacity become imperative. The absence of formal acceptance of the UNCITRAL Model Law, dependence on antiquated principles such as the Gibbs Rule, and lack of a clearly defined COMI norm have resulted in fragmented and uneven conclusions, as shown by the Jet Airways case. To promote equity, transparency, and predictability, India must undertake systemic changes, including the introduction of comprehensive COMI assessments, a reciprocity provision, and institutional enhancement. Adhering to international best practices will bolster creditor trust and guarantee that India’s bankruptcy framework stays resilient in a globalised economic landscape.

  • Settlement Agreements and Section 12A Withdrawals: A Comparison with Section 230 of the Companies Act, 2013

    Settlement Agreements and Section 12A Withdrawals: A Comparison with Section 230 of the Companies Act, 2013

    BY ARSHIA ANN JOY AND ADITI SINGH, FOURTH-YEAR STUDENTS AT NUALS, KOCHI.

    Introduction

    A liquidation order is passed as per the Insolvency and Bankruptcy Code 2016 (“IBC“)  when the Corporate Insolvency Resolution Process (“CIRP“) falls through, and the company cannot be revived within the stipulated timeline. However, courts, over time, have interpreted that issuing a liquidation order is not to be treated as a death sentence to the company and its operations. This is because the ultimate aim of the IBC is to facilitate the revival of the company if it is a feasible option. This further implies that the order permitting an entity’s liquidation can be reversed if the petition initiating CIRP proceedings is itself withdrawn. Section 12A was introduced in the IBC in 2018 to allow settlements between the Corporate Debtor (“CD“) and the creditors by allowing withdrawal of proceedings, with 1035 such withdrawals recorded till December 2023.

    This article explores the legality of allowing the withdrawal of proceedings after issuing the liquidation order, when a settlement agreement is reached. The authors also look at how the lack of procedural clarity surrounding the acceptance of the settlement agreement leads to difficulties in reviving the CIRP if the settlement agreement fails. Further, solutions are suggested through a comparison with section 230 of the Companies Act, 2013 (“CA”), which facilitates arrangements aiming at debt restructuring and thereby resolving the financial crisis of the company. The authors argue that allowing the Adjudicating Authority (“AA”) to thoroughly analyse the settlement agreements while admitting section 12A applications, similar to the procedure envisaged in section 230 of CA, would be a step in the right direction in addressing the ambiguities surrounding the withdrawal of CIRP and revival of proceedings, if need be.

    Reversibility of a Liquidation Order and Withdrawal of Proceedings Post Issuance of Liquidation Order

    The parties are said to have arrived at a settlement agreement if the CD agrees to pay the creditor an agreed sum to resolve the conflict. Once a settlement agreement is reached after a liquidation order is passed, the parties can approach the AA under section 12A and withdraw the proceedings initiating CIRP. The primary intention behind introducing section 12A is to recognise post-admission settlement cases in line with statutory provisions. 

    The NCLAT, in Navaneetha Krishnan v. Central Bank of India, settled the law on reversibility of a liquidation order. It was held that even during the liquidation period, if any person satisfies the Committee of Creditors (“CoC”) , and CoC accepts the said offer with a 90% voting share, such a person may apply for a withdrawal of the proceedings before the AA.

    In 2019, the NCLAT, in a similar case, emphasised the importance of allowing the promoters/shareholders to arrive at a settlement as per section 12A. In such cases, the application seeking initiation of CIRP can be withdrawn. The Supreme Court in Vallal RCK v. Siva Industries held that the wisdom of the CoC in approving a settlement plan must not be interfered with by the AA unless such a decision was wholly ‘capricious, arbitrary, irrational and de hors the provisions of the statute or the Rules.’ In this case, the CoC had failed to approve the proposed resolution plan with the requisite 66% majority. Subsequently, the Resolution Professional filed an application under section 33(1)(a) of IBC seeking liquidation of the entity pending which the promoter of the CD approached the AA with a settlement plan. The AA had, in turn, refused to approve it without giving due regard to the 90% majority decision of the CoC to go ahead with the settlement plan. 

    More recently, in 2022, the NCLT analysed the rationale put forth in Navaneetha Krishnan and Vallal RCK to conclude that even after the order of liquidation is passed, the application for withdrawal of proceedings may be allowed. In this case, the liquidator had received a settlement proposal from the promoter of the CD duly approved by the CoC with the requisite majority. 

    The NCLT Chennai Bench rightly noted:

    “Thus, it could be seen that even during the liquidation process, the parties have arrived at a settlement, then the application filed under Section 7, 9 and 10 can be withdrawn. Consequently, the CIRP and the liquidation initiated against the CD also stand withdrawn.”

    Thus, the order of liquidation already passed does not hinder the AA from passing an appropriate order of withdrawal as per section 12A if all the requisite conditions are satisfied.

    The Dilemma: Applying Section 12A Post Issuance of Liquidation Order

    Although the law seems to be settled regarding the impact of section 12A on a liquidation order, the lack of procedural clarity has led to contradictory results in the past few years. 

    In Jayashree Mohan v. Pathukasahasram Raghunathan, the NCLT laid down the limited scope available for reviving an entity undergoing liquidation. It was stated that once the liquidation process is initiated, the entity cannot come out of the process except through the two avenues, namely, by way of a scheme under section 230 of CA or by sale as a going concern. In this case, section 12A is not seen as a potential avenue which could result in the revival of the entity once liquidation is initiated.

    Similarly, the NCLT Chennai bench in Narayan Maheshwari disallowed the withdrawal application made under section 12A while the liquidation process was going on. It was emphasised that section 12A was inserted in Part II of the IBC, which deals exclusively with CIRP and not liquidation. Since no specific amendment is made in the liquidation process regulations, an application for withdrawal under section 12A cannot be allowed post-issuance of a liquidation order. It was further held that in Navaneetha Krishnan, the application under section 12A was never filed during liquidation and that the ex-promoter of the CD had filed an application under section 230 of CA for approving a scheme of compromise. In this case, the NCLT has voiced its concerns regarding allowing withdrawal of proceedings once the order of liquidation has been passed as it might potentially lead to every suspended Director/Promoters waiting till the liquidation order to enter into a settlement agreement at a ‘throw away price.’

    The above rationale of the tribunals could hamper the prospects of reviving a company through settlement, just because the order of liquidation has been initiated against it, thus defeating the purpose for which section 12A was included in the IBC. The application of section 12A to Part III of the IBC has to be specifically inculcated in the regulations to put a rest to these contradictory judgements.

    Revival of CIRP in case of Failure of Settlement Agreement

    In  the cases where withdrawal of proceedings was allowed after issuing the order of liquidation, the stakeholders had agreed on a one-time settlement (“OTS”) or a settlement agreement. In Sudip Dutta, the NCLT, while analysing a catena of decisions including Navaneetha Krishnan stated that:

    “In the instant case, no application was filed under Section 12A of IBC since there was no OTS that was acceptable to the Respondent No. 2 bank.”

    As noted above, the application for withdrawal under section 12A is considered after the issuance of the liquidation order only when the CoC approves a settlement agreement with the requisite majority. 

    However, the procedure for accepting or analysing such a settlement agreement is not specified in the statute or the relevant regulations. As seen above, the commercial wisdom of the CoC is given primacy and judicial intervention is permitted only if the decision of the CoC was wholly arbitrary or capricious. Analysing whether the decision itself was arbitrary or capricious would, in turn, require the settlement agreement to be on the record, which might not happen in most cases, especially when the statute/regulations fail to mandate the same, as was noted by the NCLAT in Krishna Garg. 

    In this case, the CD did not adhere to the terms of the settlement agreement after the CIRP proceedings were withdrawn. The NCLAT refused to revive the CIRP proceedings because the settlement agreement terms were not filed or brought on record before it. The NCLAT in SRLK Enterprises categorically stated that IBC is not a recovery proceeding where parties can repeatedly approach the AA owing to the non-repayment of debt. Proceedings can be revived only if the settlement agreement has been brought on record and has been made a part of the order of withdrawal. The AA can revive the CIRP proceedings, if the settlement agreement has a clause which provides for the revival of CIRP proceedings upon failure of setttlement agreement. The AA need not specifically grant the liberty to revive the proceedings in such cases. This would also imply that if there is no such clause allowing revival, the parties may be granted the liberty to do so specifically, by the AA. These recent orders suggest that the settlement agreement need not always become a part of the order allowing the withdrawal of proceedings, thus complicating the revival of proceedings under the IBC later when the parties fail to adhere to the settlement terms.

    Additionally, in Vallal RCK, the Supreme Court noted how the CoC has entered into many ‘deliberations’ before accepting the settlement plan, and stated that the CoC decision is not ordinarily subject to judicial scrutiny. The analysis done by the court gets confined to checking whether the CoC has done enough ‘deliberations’ before approving the settlement agreement. This seems to be in stark contrast to the procedure followed under section 230 of CA, where the AA is empowered to delve deeper into the actual contents of the proposed scheme.

    Comparison with Section 230 of the Companies Act, 2013

    Even after passing the order of liquidation, if a scheme of Compromise demonstrates viability, feasibility, optimisation of the CD’s assets, and equitable consideration of creditors, the liquidator may submit an application under section 230 of the CA to the AA in a bid to revive the company. As per regulation 2B of the Liquidation Process Regulations 2016, a scheme of compromise and arrangement may be completed within 90 days post the order of liquidation. 

    Furthermore, clauses (2) to (10) of section 230 puts forth the powers of the AA in overseeing the admission of the scheme of compromise and arrangement. The AA is to be made aware of the latest financial position of the entity, the creditor’s responsibility statement, the auditor’s report on the fund requirements, the valuation report on the assets of the company, etc. Further, in SREI Equipment Finance Limited, the NCLAT observed that sections 230-232 cast an obligation on the AA to ensure that the scheme is not contrary to public policy and not prejudicial to the company’screditors and members. Greater checks and balances are put in place under section 230 of the CA while admitting a proposed scheme of compromise and arrangement even after a liquidation order is passed.

    Conclusion and Recommendations

    A similar procedural clarity on the AA’s oversight is absent when it comes to the role of the AA in a section 12A application involving a settlement agreement. Section 12A must specifically be made applicable to Part III of the IBC. Further, a time period may be mentioned in section 12A, similar to section 230 of CA, for accepting and analysing the settlement agreement once the AA has issued the order for liquidation. The regulations must also specify that the settlement agreement entered into must mandatorily be brought on record while withdrawing the proceedings so that revival of the CIRP can be made possible without much hassle if the said agreement falls through at a later stage.

  • Determination of the Status of A Creditor: Artificial Wisdom of the Committee of Creditors

    Determination of the Status of A Creditor: Artificial Wisdom of the Committee of Creditors

    A 4-minute read by Arihant Jain, a fourth-year student of Nirma University

    The National Company Law Appellate Tribunal (‘NCLAT’) on 18.12.20 in the case of Rajnish Jain v. BVN Traders and ors (‘Rajnish Jain’)held that the Committee of Creditors (‘CoC’) constituted under Section 21 of the Insolvency and Bankruptcy IBC, 2016 (‘IBC’) cannot determine the status of a creditor as a financial or an operational creditor. It is a matter of applying insolvency law to the facts of each case. The judgment clarified that only the adjudicating authority has power to adjudicate the status of a creditor as a financial or an operational creditor. The author hereinafter highlights the judiciousness of the Rajnish Jain judgment in the light of the principle of equality of similarly situated creditors, commercial wisdom of the CoC & limited rights of the CoC under the IBC.

    Factual Background

    The National Company Law Tribunal, Allahabad (‘NCLT’) admitted an application under Section 9 of the IBC to initiate Corporate Insolvency Resolution Process (‘CIRP’) against the corporate debtor, Jain Mfg (India) Pvt. Ltd. BVN Traders,the Respondent in this case had extended a loan of Rs. 80,00,000 to the corporate debtor having a secured title deed of the property of corporate debtor against the consideration of 18% per annum. BVN Traders had filed FORM C as financial creditors and the insolvency resolution professional (‘IRP’) admitted the claim of BVN Traders as a financial creditor.

    Rajnish Jain, the promoter, stakeholder and managing director of the corporate debtor, filed an application for removal of BVN Traders from the status of financial creditor. The NCLT directed the resolution professional (‘RP’) of the corporate debtor to seek approval from the CoC to change the status of BVN traders from financial creditor. Pursuant to this, the CoC passed a resolution that BVN Traders is to be treated as financial creditors.  In light of this resolution, the NCLT rejected the claim of the promoter via order dated 23.01.20.

    Subsequently, in the 7th meeting of CoC, the RP again proposed the agenda to determine status of BVN Traders. The CoC passed a resolution with its majority that BVN Traders is not a financial creditor. The CoC also discussed the agenda regarding withdrawal of CIRP under Section 12A of the IBC and for the same, prior approval of 90% majority of voting shares of CoC is required. However, the withdrawal resolution did not attain the 90% majority and the same was not passed. In the 8th meeting of the CoC, withdrawal of CIRP process was again discussed and the same was passed by CoC without including BVN Traders in the CoC. An appeal was filed by Rajnish Jain against the order dated 23.01.20 of the NCLT.

    Decision of the NCLAT:

    The NCLAT observed that the CoC cannot determine the status of creditor. It is a matter of applying the applying the IBC laws to facts. It further held that CoC cannot use its commercial wisdom to determine the status of creditor. The NCLAT observed that despite the order being passed by the NCLT, the CoC proceeded to change its earlier stance and passed a resolution contrary to NCLT order, thereby undermining its authority. The NCLAT also held that the resolution passed in the 8th meeting was bad in law since it was passed after illegally reconstituting the CoC. 

    Current Position of Law 

    Financial creditor and Operational creditor are defined under Sections 5(7) and 5(20) of the IBC. Pertinently, the Supreme Court’s judgment in the case of Swiss Ribbons Pvt. Ltd v.UOI differentiated both the terms by relying on the recommendation of  BLRC Report, 2015:

    “Financial creditors are those whose relationship with the entity is a pure financial contract, such as a loan or a debt security. Operational creditors are those whose liability from the entity comes from a transaction on operations.”

    Further, in Pioneer Urban Land and Infrastructure Ltd and ors v. UOI, the Apex Court observed that financial creditors owe financial debt to meet the working capital or requirement of corporate debtor. On the other hand, operational creditors provide goods and service to the corporate person. In the instant case, the loan extended to corporate debtor is a pure financial contract to meet the working requirement. Therefore, the NCLAT has rightly denied the arbitrary decision of CoC in determining the status of creditor.

    Analysis

    • Principle of Equality – Similarly situated creditors should be treated alike

    Article 14 of Constitution of India provides that equals should be treated equally and unequal should be treated unequally. Further, in CoC of Essar Steel Limited through Authorised Signatory v. Satish Kumar Gupta and ors., the Apex Court observed that similarly situated creditors should be treated equally. Empowering the CoC to determine the status of a creditor will create inequality amongst the same class of creditors as other creditors of the CoC would determine the status of a creditor of the CoC who is in pari passu with them. In the instant case, the NCLT failed to consider the principle of equality by authorizing the CoC to determine the status of BVN Traders.

    • Commercial wisdom of the CoC – Not an absolute power

    Commercial wisdom of the CoC is not an absolute power. The Apex Court in CoC of Essar Steel Limited through Authorised Signatory v. Satish Kumar Gupta and ors has observed that commercial wisdom must be in consonance with the basic aims and objectives of IBC.  Decision of the CoC is subject to checks and balances of the IBC. In Swiss Ribbons Pvt Ltd. v. UOI, the Supreme Court has observed that the primary objective of the IBC is to balance the interests of all stakeholders. Under the IBC, an aggrieved person has the authority to challenge the constitution of CoC or categorization of creditors before the adjudicating authority. In the instant case, reclassifying the status of creditor by CoC is beyond the scope of commercial wisdom since it is in the hands of adjudicating authority to adjudicate the claims of categorization of creditors. Under Section 61(1) of the IBC, aggrieved party may challenge the order passed by NCLT before the NCLAT. However, in the instant case, the CoC sat in the position of NCLAT and gave a resolution contrary to the order passed the NCLT, which is beyond the aims and objectives of the IBC.

    •  The IBC is a complete code in itself

    Section 28(1) of the IBC which enumerates the conditions where prior approval of the CoC is required does not provide for seeking it for the determination of the status of a creditor during CIRP. Moreover, no provision under the IBC empowers the CoC to determine the status of a creditor. It is also pertinent to mention that the IBC is complete in itself. It has unambiguously laid down the powers of the CoC. 

    Further, an aggrieved party dissatisfied with the status of a creditor can submit an application to the NCLT through RP with the approval of 90% voting share of the CoC for the withdrawal of CIRP. However, in the 7th meeting of CoC in the instant case, only 66% of the CoC approved the withdrawal of CIRP. Further, a financial creditor, being a part of the CoC, cannot be excluded from taking part in the voting process of withdrawal of CIRP process. It would be violation of legal right of creditor of CoC mentioned under Section 12A of IBC.  However, in the 8th meeting of the CoC in the instant case, BVN Traders was not allowed to vote for the withdrawal of CIRP. Hence, the legal right of BVN Traders to vote under Section 12A is being defeated. 

    Judgment of Adjudicating Authority: It is a matter of applying law to the facts of each case    

     It is pertinent to mention that it is the statutory duty of court to deliver any judgment based upon the law. For clarifications, the court has the authority to take the opinion of experts. However, the judgment cannot be based solely on the expert opinion. The judgment has to be delivered by applying the law to the facts. In the instant case, the NCLT had delivered its judgment based solely on the decision of the CoC, however, the status of a creditor needs to be determined by the NCLT by applying the IBC to the facts of each case. The NCLAT has rightly clarified that the status of creditor could be determined only by applying the IBC to the facts of each case. 

    Conclusion

    The NCLAT has rightly adjudicated the matter by removing the flaws of NCLT’s decision which   would have led toimbalance by going against the purpose of commercial wisdom of the CoC. CIRP being the collective resolution process seeks parity amongst similarly situated creditors. Preference cannot be given to any similarly situated creditors. The adjudicating authority, by not providing legal reasoning for empowering the CoC to determine the status of creditor failed to consider that legal reasoning is the core of any judgment. The NCLAT has rightly adjudicated that empowering the CoC with such rights would have completely disabled the intent and purpose of the CIRP under the IBC.