Management of defaulting firms must step aside, says apex court

The Supreme Court has ruled the management of a company undergoing bankruptcy proceedings cannot continue in its role.

The court clarified a number of contentious issues, empowering the National Company Law Tribunal (NCLT) in recovering dues.

“Having heard both the learned counsel at some length, and because this is the very first application that has been moved under the Code (Insolvency and Bankruptcy Code), we thought it necessary to deliver a detailed judgment so that all courts and tribunals may take notice of a paradigm shift in the law,” Justice R F Nariman said.

“Entrenched managements are no longer allowed to continue in management if they cannot pay their debts,” he added.

This bolsters the Insolvency and Bankruptcy Code, which says once an insolvency professional is appointed by creditors, the management should step aside and let the company be run by the professional. The insolvency professional, in turn, will decide if the company must go in for liquidation after six months.

The Supreme Court was delivering its verdict in a matter between Innoventive Industries and ICICI Bank, the first case filed in December 2016 in Mumbai under the Insolvency and Bankruptcy Code.

The bank had sued Pune-based Innoventive Industries over non-payment of dues. The steelmaker owes banks over ~950 crore. After the NCLT ruled in favour of ICICI Bank, Innoventive Industries moved the Bombay High Court and the appellate tribunal, challenging the validity of the Insolvency and Bankruptcy Code and demanding borrowers be heard before creditors during insolvency proceedings.

The appellate tribunal upheld the NCLT verdict. In February, the Bombay High Court disposed of the writ petition by the company. The SC’s judgment follows this, where the apex court clarified a number of issues that could be used by defaulting companies to delay proceedings of the NCLT.

Summing up the judgment, L Viswanathan and Indranil Deshmukh, partners of law firm Cyril Amarchand Mangaldas, wrote in their blog that the broad issues before the SC were to explore what was the concept of default under the Insolvency and Bankruptcy Code and how it must be ascertained; what was the scope and extent of enquiry at the admission of an insolvency application; and what was the scope of hearing to be provided to a corporate debtor.

The court also examined whether protection granted under the Maharashtra Relief Undertaking Act rendered an application under the Insolvency and Bankruptcy Code not maintainable. Innoventive Industries had appealed that it could not be called a defaulter because the Maharashtra government had notified a suspension of its dues for a period of one year up to July 2017. The Supreme Court ruled in matters of contention between state laws and those of the Centre’s, the latter should prevail.

“The judgment is truly progressive, forward looking and path breaking, and should pave the way for efficient and effective implementation of the Insolvency and Bankruptcy Code through adherence to timelines specified,” Viswanathan and Deshmukh wrote in their blog.

Time was of essence in insolvency proceedings, Justice Nariman ruled, adding admission of default should be made by the authorities within 14 days of the receipt of the application. In case a debtor has defaulted, the adjudicating authority has to merely see the evidence produced by the creditor to satisfy itself that there was indeed a default.