The Corporate & Commercial Law Society Blog, HNLU

Tag: NCLT

  • Decoding Residuary Jurisdiction: Why NCLT cannot release PMLA Attachments

    Decoding Residuary Jurisdiction: Why NCLT cannot release PMLA Attachments

    RITURAJ KUMAR , FIFTH – YEAR STUDENT AT RMLNLU, LUCKNOW

    INTRODUCTION

    The interplay of the Insolvency and Bankruptcy Code, 2016 (‘IBC’) and the Prevention of Money Laundering Act, 2002 (‘PMLA’) has been an issue of deliberation since the introduction of the IBC. The conflict is quite natural as both statutes have a non-obstante clause suggesting each has an overriding effect. This leads to a situation where both statutes claim primacy in case of conflict. Further, they both have divergent objects. The IBC aims to maximise the asset during the Corporate Insolvency Resolution Process (‘Resolution Process’), whereas the PMLA provides for confiscating assets arising from or engaged in money laundering. This becomes a significant barrier during the resolution process.

    The discussion around the primacy of the statute and whether a moratorium imposed under Section 14 of the IBC would extend to the attachment made by the Enforcement Directorate (‘ED’) under Section 5 of the PMLA has been a concern for almost a decade.  This blog does not delve into the above issue and restricts its scope to why the National Company Law Tribunal(‘NCLT’) cannot release attachments of a corporate debtor confirmed by the Adjudicating Authority under the PMLA. The National Company Law Appellate Tribunal (‘NCLAT’) in Anil Goel for Dunar Foods v. ED recently affirmed this position that the NCLT cannot release such attachments. However, the legal position on this issue remains unsettled as the Bombay High Court in Shivcharan v. Adjudicating Authority and Anr (‘Shivcharan’) had previously authorised the NCLT to release such attachments while exercising its residuary jurisdiction. Currently, the Shivcharan judgement is pending before the Supreme Court of India for final determination of this issue. In this light, this blog examines the residuary jurisdiction provided under the IBC and argues how Shivcharan judgement disregards the established legal principle and procedure in an attempt to achieve the objects of the IBC.

    RESIDUARY JURISDICTION OF THE NCLT

    Residuary jurisdiction has been vested in the NCLT under Section 60(5)(c) of the IBC. However, it is limited to deciding matters related to the resolution or liquidation of the Corporate Debtor, and it does not provide an inherent jurisdiction. This aligns with the Embassy Property Developments Pvt. Ltd. V. State of Karnataka and Ors case, where the Supreme Court of India asserted that the NCLT cannot replace the legitimate jurisdiction of other courts or tribunals when the issue does not arise solely from or relate to the insolvency of the corporate debtor. By extension, this would equally apply to a special statute like the PMLA where the attachment was confirmed by the Adjudicating Authority under Section 8(3) of the PMLA.

    The attachment under the PMLA relates to the ‘proceeds of crime’ derived from the criminal activities associated with the scheduled offences. These crimes threaten the integrity of the financial system and affects the public at large. These offences are prosecuted by the state and are in the realm of public law. The PMLA was introduced to fulfil India’s international commitment to combat money laundering, aligning with the Vienna Convention (1988) and the United Nations Convention against Transnational Organised Crime (2000).  Such matter, being in the realm of public law, cannot be brought within the phrase “arising out of or in relation to the insolvency resolution” as enshrined under the aforementioned section.

    This position has been recently reaffirmed in Kalyani Transco v. M/s Bhushan Power and Steel Ltd. , where the division bench of the Supreme Court held that the NCLT or NCLAT does not have any authority to adjudicate upon a public law like PMLA. The NCLT, deriving its jurisdiction from the provisions of the IBC and constituted under the Companies Act 2013, is a coram non judice to direct the ED to release the attachment. 

    NCLT AUTHORITY DURING THE RESOLUTION PROCESS 

    During the resolution process, the primary duty of a Resolution Professional is to run the Corporate Debtor as a going concern.Recently, in the case of Mr Shailendra Singh, Resolution Professional of Foxdom Technologies Pvt Ltd V. Directorate of Enforcement & Anr, the Resolution Professional invoked the residuary jurisdiction to defreeze the account of the Corporate Debtor, which was frozen by the Adjudicating Authority under PMLA. The NCLT held that they do not have the power to issue directions to the ED in this regard. It reiterated the stance adopted by the NCLAT in Kiran Shah v. Enforcement Directorate Kolkata that the jurisdiction to deal with matters related to attachment and freezing of accounts under PMLA vests exclusively with the authorities designated under the PMLA. If aggrieved by any action, the Resolution Professional can seek appropriate remedies under the PMLA itself. The statute provides adequate mechanisms for resolving concerns and claims. This clear demarcation of jurisdiction ensures that the PMLA remains independent of IBC and serves its legislative object.

    NCLT AUTHORITY AFTER APPROVAL OF THE RESOLUTION PLAN 

    While the forum for releasing attachments during the resolution process is relatively clear, the situation becomes complicated after approval of the resolution plan under Section 32A of the IBC  It states that the Corporate Debtor cannot be held liable for the prior offence committed by the erstwhile promoter, and protects the property from being attached.

    In Shivcharan judgement, the Bombay High Court reinforced this interpretation that after approval of the resolution plan, the Adjudicating Authority under the PMLA must release the attachments. It also stated that this is the only means of ensuring that the right, as stipulated in Section 32A of the IBC, will start to flow. This position is supported by the Supreme Court’s decision in Manish Kumar v. Union of India which upheld the constitutionality of Section 32A. Article 141 of the Constitution of India ensures consistency in the interpretation of law and set a judicial precedent where all lower courts follow the ruling made by the Supreme Court of India. Consequently, the PMLA Court is bound to comply and give effect to the Section 32A by releasing the attachment.

    However, the Shivcharan judgement erred in empowering the NCLT to release the attached property made under the PMLA under the residuary jurisdiction. The Bombay HC read something not expressly provided in the law and authorised NCLT to adjudicate upon the issue falling into the purview of another court. Though this judgment seeks to achieve the object of the IBC, it overlooks the relevant precedents and established principles. Notably, it stands in aberration with the Gujarat Urja Vikas Nigam Ltd. v. Amit Gupta, where the Supreme Court issued a note of caution to NCLT while exercising the residuary jurisdiction. The Apex Court noted that the NCLT has jurisdiction to adjudicate disputes that arise solely from or relate to the insolvency of the corporate debtor. It has to ensure that they do not usurp the legitimate jurisdiction of other courts or tribunals when the issue extends beyond the insolvency of the corporate debtor.

    Additionally, this approach is also in conflict with the principle of harmonious construction, which is applied to reconcile conflicting provisions within a statute or two different statutes. A harmonious construction cannot extend to the limit which renders one provision completely redundant. The Shivcharan judgement makes the provisions of the PMLA nugatory by bypassing the PMLA courts, and authorises the NCLT to release the attachment.

    Moreover, allowing the NCLT to discharge the attachment practically implies that the NCLT is sitting in an appeal against the Adjudicating Authority of the PMLA, where the latter confirmed the attachment made by the ED.  This goes against the settled principle that the forum to hear the appeal is to be tested in reference to the forum which passed the original order. Since the attachments are confirmed under Section 8(3) of the PMLA by its Adjudicating Authority, it must be discharged either by the same forum or by the appellate forum under Section 26 of the PMLA constituted thereunder. In short, the Adjudicating Authority under the IBC i.e. NCLT cannot assume the role of Adjudicating Authority under the PMLA.

    A WAY AHEAD

    As the appeal of the Shivcharan judgement and related cases are pending before the Supreme Court, a clear jurisdictional boundary must be established by a conclusive ruling. The authority to discharge attached property must rest with the PMLA Court unless a legislative amendment says otherwise. The PMLA Court is a competent forum authorised by the law to deal with attachment and permitting the NCLT to adjudicate on such matters only causes jurisdictional conflict and confusion among the litigators, forcing them to move from one court to another.

    However, while adopting this approach, Section 32A of IBC must be given effect. This provision represents the last expression of the intent of the legislature, as it was introduced through an amendment in 2020. After approval of the resolution plan, the PMLA court must be mandated to release the attachment. This ensures that the protection under the said provision can take effect, and the Successful Resolution Applicant is not made liable for the prior offence. For Section 32A to operate effectively, the perquisite prescribed therein must be satisfied, namely that the new management is not related to the prior management and is not involved in the alleged offence. In practice, the PMLA Court often encounters difficulties in determining compliance with these requirements while considering the release of attachments. To address this issue, the NCLT may issue a No Objection Certificate (‘NOC’) while approving a resolution plan, specifying that the statutory conditions of Section 32A are met. Such an NOC will affirm that a promoter is not regainingcontrol or laundering assets through the resolution process. It will prevent jurisdictional conflict and will not cause unnecessary hardships to litigating parties. In effect, this will ensure that resolution applicants are not discouraged, and revival of a corporate debtor is not obstructed.     

    This conflict between the IBC and the PMLA reflect the difficulty of reconciling two statutes having divergent objects and non-obstante clause. To maintain the independence of both statutes, a consistent position has to be adopted defining a clear jurisdictional boundary ensuring the revival of a corporate debtor is not discouraged. A conclusive ruling by the Supreme Court in this regard or an appropriate legislative amendment is essential to resolve this conflict and bring much-needed clarity to relevant stakeholders.

  • Decoding NCLT’s Philips India Ruling: Evolving Judicial Reasoning & Broader Implications

    Decoding NCLT’s Philips India Ruling: Evolving Judicial Reasoning & Broader Implications

    Vaibhav Mishra and Sparsh Tiwari, Fourth- year student at Hidayatullah National Law University, Raipur

    INTRODUCTION

      Capital reduction is a salient aspect of corporate finance that is dealt with under section 66 (‘the section’) of the Companies Act of 2013 (‘2013 Act’). It entails a reduction in the issued share capital of the company. Accounting and Corporate Regulatory Authority of Singapore explains the commercial rationale for undertaking the capital reduction as including a plethora of reasons such as simplifying capital structure, and ownership structure, increasing dividend-paying capacity, etc.

      Indian  corporate jurisprudence has evolved through numerous judgments that have elucidated the scope of this section. The established position was that the company’s rationale for the invocation of the section cannot be questioned, affirming its wide application. Last year, in September 2024, a petition was filed by Phillips India Limited before National Company Law Tribunal (‘NCLT’) Kolkata (‘the tribunal’) under the section seeking permission for the reduction of capital. The company provided two reasons for the application i.e. providing liquidity to the minority & reducing administrative costs. However, the tribunal, in its order dismissing the petition, held that such a transaction fell outside the scope of capital reduction.

      Though a development in last year, the vacuum of judicial discretion under Section 66 still remains in the Indian regime. This article attempts to critically analyse NCLT’s order vis-à-vis precedents. The article also analyses relevant foreign authorities to clarify the scope of the section. Furthermore, it also delves into the possibility of effecting the takeover outside these traditional arrangements.

      NCLT’S ORDER VIS-À-VIS PRECEDENTS

        In this matter, Koninklijke Philips N. V., which held 96.13% of shares in Philips India Limited, wanted to effect capital reduction by purchasing shares of minority shareholders. For this, a two-fold reason was provided by the company, viz., firstly, providing liquidity to the shareholders who could not liquidate their holdings following the company’s delisting in 2004, and secondly, reducing the administrative costs associated with minority shareholders. However, the tribunal dismissed the petition, with the interpretation of the statutory scheme of the section playing a key role in its decision.

        Before delving into judicial reasoning, it is crucial to examine the existing precedents on this section’s interpretation. In a similar factual scenario, the Bombay High Court in Capital of Wartsila India Limited v. Janak Mathuradas, confirmed the petitioner company’s capital reduction that was undertaken to provide liquidity to minority shareholders who had no way to liquidate their holdings after the company was delisted in 2007. Similarly, the single judge bench of Delhi NCLT in Devinder Parkash Kalra & Ors. v. Syngenta India Limited allowed capital reduction as a means of providing liquidity to the minority shareholders. It is pertinent to note that NCLT confirmed the application of capital reduction even though it called for revaluation by an independent valuer. Also, in Economy Hotels India Services Private Limited v. Registrar of Companies, Justice Venugopal termed the process of capital reduction under the section as a “domestic affair”, affirming its expansive scope. These precedents reflect the traditional line of reasoning where the courts did not interfere in the application of the section except to secure certain equitable objectives, such as securing the minority’s interest.

        ASSESSING THE NCLT’S ORDER IN LIGHT OF THE STATUTORY SCHEME OF THE SECTION

          In this matter, the tribunal characterised the nature of the transaction as a buy-back and not a capital reduction. The rationale for this decision was twofold: first, the present transaction did not fall under any of the three instances outlined under the section, and second, the inapplicability of the section in light of section 66(8). As evident, the order was a departure from the established line of judicial reasoning associated with capital reduction.

          Firstly, on the rationale that the present transaction did not fall under instances provided under the section, it is pertinent to note that the tribunal failed to give any consideration to the words “in any manner” as used in the section. These words are of wide import and must be given their natural meaning. Moreover, a reference may be made to the corresponding provision of the Companies Act, 1956 (‘the Act’) for guidance. Section 100 of the now-repealed Act further clarified the generality of the provision by incorporating the words “in any manner; and in particular and without prejudice to the generality of the foregoing power”. Therefore, the incorporation of the words “in any manner”, though not the same as section 100, supports an expansive interpretation not limited to the instances mentioned under the section.

          Furthermore, an expansive interpretation could reasonably allow the present transaction to fall within the purview of section 66(b)(ii), which states that a company can “pay off any paid-up share capital which is in excess of wants of the company”.The reasoning is that one of the motivations behind the company’s decision to undertake this transaction was to reduce the administrative costs of managing around 25,000 shareholders who collectively held a minuscule 3.16% of the total share capital. This objective of reducing administrative costs can reasonably be interpreted as falling within the scope of being in “excess of wants” under section 66(b). Further support for this interpretation is provided by Ramaiya’s commentary[i], where he suggests that “a company may be in need of money so paid-up through capital in business but still may not be in want of the money through share capital”. Thus, an expansive interpretation brings this transaction within the ambit of the section.

          Secondly, section 66(8) states that “nothing in this section shall apply to buy-back of its securities under Section 68”. To clarify the scope of this provision, the tribunal referred to section 100 of the Act, highlighting that it lacked a provision like section 66(8). The tribunal interpreted this discrepancy to mean that section 66(8) restricted the buy-back of securities under the section. However, this reasoning is beset by the fact that the Act lacked any provision for buy-back of securities. It was only in 1999 that such a provision, viz. section 77A, was included. The 2013 Act creates a separate section i.e. section 68, to deal with buy-back transactions. Hence, it is contended that 66(8) is clarificatory in nature, implying that capital reduction and buy-back of shares are governed under separate sections, and does not serve to restrict the scope of capital reduction. Thus, the author opines that the tribunal has erred in its order, creating an uncertain position in a relatively established position on the applicability of the section. 

          JUDICIAL DISCRETION IN CAPITAL REDUCTION TRANSACTIONS: AN ANALYSIS

          Judgements from the UK offer critical cues on understanding capital reduction. For instance, inBritish American Trustee and Finance Corporation v. Couper, judicial discretion over the capital reduction process was affirmed by the court. The courts also laid the relevant principles like fairness and equitable process for minority shareholders, creditors, etc., to guide this ‘judicial discretion’. In Re Ranters Group PLC[ii], the court interpreted the section 135(1) of the Company Act, 1985. Interestingly, section 135, though no longer in effect, uses similar wording, like the section in the context of capital reduction i.e. “reduced in any way”. Harman J. here held that the court needs to ensure broadly three things, viz, equitable treatment of shareholders, protection of creditor’s interest and ensuring that shareholders are aware of the proposal. The NCLT’s order exceeds this ‘judicial discretion’. In the instant case, there was nothing in the order to prove inequitable treatment or violation of the creditor’s interest. Therefore, the deviation in NCLT’s order could affect the business autonomy of the company and could potentially create various challenges for the corporate sector in executing transactions.

          Thus, the situation calls for legislators to reassess the structure & statutory scheme of the section of the 2013 Act. NCLT’s order, if treated as precedent, implies that the whole process under the section becomes dependent on the tribunal’s discretion. As is evident, the section starts with ‘subject to confirmation by tribunal’. It is contended that the role of the judiciary is limited to protecting the interests of shareholders, creditors and ensuring equity in transactions.

          EXPLORING THE ALTERNATIVES TO THE TRADITIONAL WAY OF CAPITAL REDUCTION

          In this matter, Phillips was unable to effect capital reduction even after obtaining the consent of 99% of shareholders. This highlights the need for an alternative structure that allows companies to undertake capital reductions outside the bounds of the traditional arrangement. In this context, valuable insights could be drawn from section 84 of the Companies Act of Ireland, 2014, which outlines two methods of capital reduction: the Summary Approval Procedure ( SAP) and the Court-bound method. The SAP allows a company to carry out a capital reduction through a two-fold process, firstly, by passing a special resolution of the shareholders and lastly, declaration of solvency from the directors. This process avoids the need of court approval, bringing in the efficiency and flexibility that our system currently lacks.

          Another example of a highly relaxed framework can be found in section 256B of the Corporations Act, 2001 in Australia, where companies wishing to effect capital reduction may do so, provided they lodge a notice with the Australian Securities and Investments Commission (‘ASIC’) prior the meeting notice is sent to the shareholders. The shareholders hold the final authority to decide on the capital reduction, and their decision does not require any confirmation. Thus, capital reduction remains entirely within the domain of the shareholders.

          In the Indian context, section 236 of the 2013 Act, mirroring section 395 of the Act, could potentially serve as an alternate mechanism for the acquisition of minority shares. This provision allows any person or group of persons holding ninety percent or more of the issued equity capital of a company to acquire the remaining minority shareholdings. However, there are few precedents on its application, and the provision lacks clarity due to its clumsy drafting. For example, while section 236(1) & (2) allows the majority with more than 90% shareholding to buy minority shares, 236(3) dealing with minority shareholders does not obligate them to sell their shareholding. Thus, 236 offers an incomplete remedy from the perspective of the company. It is contended that this provision should be interpreted in light of its objective, well-stated in its JJ Irani Committee report. The evident intention of the committee in introducing section 395 of the Act was to create a legal framework for allowing the acquisition of minority shareholding. However, as noted above, the provision in its current form does not put an obligation on the minority shareholders while providing a ‘buy-out’ mechanism to the majority, illustrating a conservative approach of legislators.

          Therefore, it is suggested that necessary amendments be made to section 236(3) to impose a mandate on minority shareholders to divest their shareholding, while also ensuring an equitable valuation for them. Such amendments would facilitate the full realisation of the remedy provided under this provision, serving as an alternative to the section of the 2013 Act.

          CONCLUDING REMARKS

          While the NCLT’s deviation from the established precedent on capital reduction may be flawed in its reasoning, it has nonetheless sparked a debate about the necessity of exploring alternatives to traditional capital reduction methods.  The need for such alternatives is further underscored by the economic and time-related costs associated with seeking tribunal confirmation. The focus should be on identifying alternative methods that safeguard minority shareholders from exploitation, while also enabling companies to undertake capital reduction quickly and efficiently.

          [i] Ramaiya, Guide to the Companies Act, 2013, vol. 1 (25th ed. LexisNexis 2021)

          [ii] [1988] BCLC 685.

        1. 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.

        2. 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.

        3. Why Lenders are Withdrawing Applications under the IBC and Opting for One-Time Settlement?

          Why Lenders are Withdrawing Applications under the IBC and Opting for One-Time Settlement?

          By Nitya Jain, a fifth-year student at NLU, Jodhpur

          Introduction

          There has been a rising trend of the corporate debtor and the creditor settling their claims out of court after initiating a formal insolvency proceeding in the National Company Law Tribunal (“NCLT”). This has been made possible due to Section 12A of the Insolvency and Bankruptcy Code, 2016 (“IBC”) which provides for withdrawal of insolvency applications. An aggrieved party first files an insolvency application against the corporate debtor in the NCLT but thereafter realises that a private settlement is more feasible and withdraws the application. In fact, data from Insolvency and Bankruptcy Board of India (“IBBI”) shows that out of the 142 cases closed in the second-half of 2018, 63 had been withdrawn under Section 12A. This is 45 percent of the total insolvency cases closed. Thus, it is relevant to understand the laws governing withdrawal of insolvency applications.

          The withdrawal of the application can be done at various stages of the insolvency proceedings. It can be withdrawn before it’s admission by the tribunal, after its admission, before the setting up of Committee of Creditors (“CoC”) or after the CoC has been set up. It can be withdrawn even after the invitation for expression of interest has been issued and the resolution plan has been made. The laws applicable at each stage differs and the approvals required change. These can be divided into four stages.

          Stage 1: Before the admission of the application

          Before the coming of Section 12A, applicants relied on Rule 8 of the Insolvency & Bankruptcy (Adjudicating Authority) Rules, 2016 to withdraw their insolvency applications. This rule provides for “withdrawal of application on a request made by the applicant before its admission.” The term ‘before its admission’ is of relevance here. In Mother Pride Dairy India v. Portrait Advertising & Marketing , the NCLT acknowledged that a private settlement had been reached between the applicant and the corporate debtor. But it held that the application cannot be withdrawn once it has been admitted by the tribunal. The rationale for the same was that other creditors are entitled to raise their claim after the admission of the application and the proceeding has become in rem. Similarly, in Lokhandwala Kataria Construction v. Nisus Finance and Investment Managers LLP, it was held that irrespective of the settlement between the applicant and the corporate debtor, the matter cannot be closed till the claim of all the creditors is satisfied by the corporate debtor.

          Stage 2: After the admission of the application but before the constitution of CoC

          Section 12A of the IBC was introduced via an amendment to provide a mechanism for withdrawal of application after it has been admitted. In order to protect the interest of all creditors, a safeguard was added in the provision whereby such withdrawal is possible only with the approval of ninety percent voting share of the CoC. Here a doubt arises as to what will happen in a case where the application has been admitted but the CoC has not yet been set up. Can such an application be withdrawn? If yes, how?

          This riddle was solved by the Hon’ble Supreme Court in Swiss Ribbons v. Union of India in January 2019, where it stated that “We make it clear that at any stage where the committee of creditors is not yet constituted, a party can approach the NCLT directly, which Tribunal may, in exercise of its inherent powers under Rule 11 of the NCLT Rules, 2016, allow or disallow an application for withdrawal or settlement…….”

          Consequently, in July 2019, an amendment was made in the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016  (“Regulations”) to accommodate a pre-CoC situation. Accordingly, Regulation 30A (1) (a) of the Regulations provides that before the CoC has been constituted withdrawal may be made by the applicant through the interim resolution professional.

          Stage 3: After the constitution of CoC

          Section 12A will simply apply and the application can be withdrawn provided that such withdrawal is approved by ninety per cent of the CoC. This has to be read with Regulation 30A (1) (b) of the Regulations which states that withdrawal after the constitution of the CoC has to be made by the applicant through the interim resolution professional or the resolution professional, as the case may be.

          Stage 4: After the issue of invitation for expression of interest

          Once the CoC has been set up, the next stage in the insolvency proceeding is invitation for expression of interest. It is an invite to the general public whereby those interested in submitting resolution plans for the corporate debtor can do so. Initially, Regulation 30A of the Regulations did not allow withdrawal of application after issuance of invitation for expression of interest. However, the judiciary still allowed the withdrawal in various cases overlooking the regulation and acting in pragmatic economic terms.

          The Supreme Court in the case of Brilliant Alloys v. Mr. S. Rajagopal  held that the insolvency application for can be withdrawn even after issuance of invitation for expression of interest. The rationale for doing so was that the out of court settlement was more beneficial for all the stakeholders involved. It was considered prudent to ignore the Regulations in this matter to ensure maximum economic benefit to the parties.

          Eventually, the Regulations were amended and the withdrawal of insolvency application was allowed after the issuance of invitation for expression of interest provided there are reasons justifying such withdrawal.

          The judiciary went one step further in the matter of SBM Paper Mills and allowed withdrawal even after the resolution plan was accepted by the CoC. The NCLT acknowledged the value that the one-time settlement was offering the parties which was much better than the resolution plan. However, the tribunal also cautioned against such withdrawals and stated that withdrawal at such a later stage of insolvency proceedings must be discouraged.  Such withdrawals waste the time of the court as well as of the insolvency resolution machinery. Accordingly, the NCLT awarded high costs as a deterrent.

          Conclusion

          Settlement has been sought time and again by creditors in lieu of insolvency proceedings under IBC. Although IBC provides a time limit for resolution of insolvency, it is rarely followed and cases get stretched for more than 500 days which is almost double of the time limit provided in the IBC. In light of this, many lenders opt for withdrawing their application and choose to settle outside court with the debtor. For instance, in January 2020, the Union Bank of India withdrew a couple of insolvency petitions and opted for settlements with the defaulting companies for a much better realisation. The reason for the same was that the bank had not seen any successful resolution for cases referred by it to the NCLT. In a statement the MD and CEO of the United Bank stated that looking at the kind of value that lenders are getting through NCLT and the time taken for resolution, the preferred route is settlement with the corporate debtor. 

          It can be concluded that the judiciary is allowing withdrawal of applications filed under IBC where such withdrawal is economically advantageous to the parties. This practice is in line with the central theme of the IBC i.e. maximization of economic benefit for the lenders. However, it also raises an important question about the effectiveness of IBC in providing maximum fiscal relief.