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Balancing the Interests of all Stakeholders in IBC

Updated: Feb 8

*by Vinay Kella

The present article analyses how the time-bound mechanism of the Insolvency and Bankruptcy Code, 2016 (“Code”) and the interests of government authorities are getting negatively impacted due to the ignorance of their claims under the present regime of IBC. The article first explains the issue at hand, then the importance of government or statutory Claims under the Code, then the consequences of neglecting such government claims and lastly offers a conclusion.


Recently, the National Company Law Tribunal (NCLT) Mumbai directed the Insolvency resolution plan submitted by Jio for Reliance Infratel to be implemented as quickly as possible. In 2019, Jio successfully made a bid of Rs 3,720 crore in order to purchase the 43,540 mobile towers and 178,000 route kilometres of fibre optic infrastructure of the indebted subsidiary of Reliance Communications, which is Reliance Infratel in our present case.


Jio is eager to use Infratel's infrastructure for its operations as it expands its 5G network across India, but the present fate of the Insolvency proceedings still appears to be in Limbo, as it is embroiled in litigation with the Department of Telecommunications (DoT), on the aspect of ‘transfer of spectrum’. Spectrum is one of the key assets for any telecom company which is held in trust with the DoT on behalf of the Government of India (GOI). DoTin this matter argued that the Spectrum cannot be made a part of the Insolvency Proceedings, as it is not an asset owned by the Company and thus it cannot be made a part of the Insolvency Proceedings.


There is some merit to this argument, as the License is granted by DoT under a contractual arrangement to the telecom companies. Explanation to Section 18 of the Code explicates that assets owned by a third party in possession of the Corporate Debtor (“CD”) held under trust or contractual management are excluded from the definition of “asset” under Section 18 of the Code, which essentially means that a License issued by DoT cannot be made a part of the Insolvency proceedings as they are owned by a third party which is in possession of third party (DoT in the present case).


The fundamental issue which needs to be considered is the non-payment of dues owed to the Statutory Creditors by the Companies due to which such litigation arises and which delays the whole Insolvency Proceedings, which goes against the fundamental principles of the Code’s enactment.

An analogy can be seen from the case of Jio, where due to non-payment of the requisite amount to DoT, the DoT had objected to the approval of resolution plan, as they were given a meagre amount in the approved resolution plan.


A similar situation could also be found in the case of Bank of Maharashtra v. Videocon Industries, where the approved Resolution Plan was challenged by DoT and the NCLAT had stayed the Resolution plan approved by the NCLT and redirected for reconsideration by the Committee of Creditors (COC) and the plan for resolving the insolvency is still distant, again violating the principles of Code. One could possibly argue that the entire point of creating the Code was to give government authorities a back seat so that private players could use the Code to resolve their disputes. This is correct, although there are instances where the government or Statutory bodies are getting negligible amounts vis-à-vis their claims.


One example being the Videocon case, where the DoT challenged the resolution plan on account of being accepted with a 95% haircut and the negligent amount left for the DoT. Further, there is no protection for government authorities which provides for even equitable or fair treatment in Insolvency proceedings. The point which we need to understand is that the claims of Statutory authorities cannot be forsaken and such valuable assets like Spectrum cannot be transferred just for such little consideration.


Further, the money owed by the companies to the government authorities is also of the public, as these companies cannot just utilise natural resources like spectrum for free and this ultimately contributes to the economy of the country. The legitimate dues of authorities participating in the proceedings cannot be forsaken on the pre-text of insolvency proceedings. A similar understanding can be derived from the case, where the Ld. NCLAT held that- any legitimate dues should be paid by the Successful Resolution Applicant (“SRA”) and no waiver for any time period in future is permissible.


Since money loaned from creditors is essentially public money, private players cannot be allowed to waive under the garb of proceedings under the Code. Additionally, the Resolution Applicant (“RA”) at the time the plan was aware about the ground situation, assets, liabilities, and obligations. The purpose behind enactment of the code was to benefit the creditors. Government creditors of the corporate debtor may still receive the money or assets, if a minimum amount is mandated under the Code. The same is in accordance with the Code's design as it increases the credit availability in the economy and would also prevent the inordinate delay in resolving the insolvency process under the Code, inter alia maximizing the value of assets of the CD. NCLT Hyderabad in a recent case of IDBI Bank Ltd. v. Speck Systems Ltd., the NCLT had prolonged the CIRP process by 7 months to allow the petitioner to withdraw the application and to allow the Resolution Professional RP to present a new resolution plan in the interest of justice and maximized the corporate debtor's assets, ignoring the 330 days’ time limit mandated by the Code.

Further, one could argue that the recent controversial judgment of State tax officer v. Rainbow papers, have come as a relief for such creditors. But it would not benefit the government authorities in all scenarios, as the Rainbow papers judgement would be applicable only where a Statutory first charge is created, which was created by Section 48 of the Gujarat Value Added Tax Act, 2003 in the Rainbow Paper case. The next part of the article discusses the various consequences of neglecting the government claims in Insolvency Proceedings.


Consequences

Insolvency proceedings under the Code cannot be a tool for wiping off the legitimate dues owed to the public by the CD. The Code follows clean-slate approach, which means that the new entity would start with clean slate and no previous dues could be asked once the resolution plan is approved, as laid down in the landmark case of Ghanshyam Mishra v. Edelwesis Asset Reconstruction Company. Therefore, any statutory dues would not get restored once the resolution plan is approved and the whole claim of the government authority would get wiped off on the pretext of Insolvency proceedings. Further, the waterfall mechanism under Section 53 of the Code,cannot be followed when it is detrimental and causes injustice to the shareholders, as held in the case of Union of India v. Infrastructure Leasing and Financial Services Ltd. & Ors. Waterfall Mechanism is a system outlined in the Code that indicates the priority in which the payment will be dispersed to the stakeholders participating in the Resolution Process of the corporate debtor. For instance, the secured creditors are given the first preference then followed by the other creditors.


In 2020, SBI research report highlighted that payment of dues by Telecom Companies would bring down the fiscal deficit by 3.5%. Consequently, Non-clearance of the dues would cause grave drop in the revenue of the government and would frustrate the larger objective of the Code, which is also to fasten the economic growth. This would directly result in grave injustice to the citizens on account of inadequate compensation for utilizing their property.


Further, the companies could also start the Insolvency proceedings voluntarily in order to evade the dues of the statutory authorities. In the case of UOI v. Vijay Kumar, the telecom company had initiated CIRP under Section 10 of the Code and the NCLAT held that a question also arises on the nature of the proceedings initiated under the Code, as the company may sought to wriggle out their liabilities by initiating CIRP with malicious intent of withholding huge arrears payable to government and operational creditors.


All this cumulates into delay in the implementation of resolution plans, as the resolution plan gets embroiled in litigations from the government authorities involved in the insolvency process. Consequently, this further decreases the assets value of the CD, which goes against the basic principles of the Code which envisions implementing resolution plan in a time bound manner.


Conclusion

The present article contention is that not to prioritize the government creditors over any other creditor, but an attempt must be made to provide a minimum percentage to such creditors. This would only promote the timely resolution of plan under the Code and prevent the inordinate delays, which is the need of the hour. At present, for the first time ever, the liquidation value of 1,316 crore was greater than the quarterly realization of 1,288 crore in January–March. Financial creditors are undoubtedly feeling the pressure of excessive delays in the resolution process, which causes the resolution process to be delayed and lowers the asset value. Consequently, this disincentivizes the potential investors to buy stressed assets during the resolution process. As longer the resolution takes, uncertainty increases for all stakeholders, which lowers interest in the asset and lowers recovery. In addition, the poor IBC recoveries are a result of the resolution plan's being stuck in numerous lawsuits, which has slowed down the NCLT process and caused delays in resolution.


*Vinay Kella is a third year student at Institute of Law, Nirma University

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