Restructuring & Insolvency Monthly Update | May 2024

STATUTORY UPDATES

Discussion Paper on 'Strengthening the process of issuance of record of default by Information Utility' dated May 10, 2024

• The Insolvency and Bankruptcy Board of India (IBBI) has proposed amendments to the Insolvency and Bankruptcy Board of India (Information Utilities) (Amendment) Regulations, 2021 (IU Regulations) for the purposes of enhancing the effectiveness and acceptability of the Record of Default (RoD) issued by an Information Utility (IU).
• The discussion paper proposes the following 6 amendments in the existing IU Regulations to strengthen the process of issuance of RoD by the IU and enhance its credibility for the purposes of adjudication of the insolvency petition.
  • Response time to debtor: In order to provide reasonable and sufficient time to the debtors and prevent delays in the admission of a Petition for initiation of insolvency, the IBBI has proposed to allow a duration of 7 days (as against 3 days) to the debtor to respond to the information of default issued by the IU. The IBBI has further proposed that the IU shall issue reminder notices to the debtor at least 3 times, allowing a period of 7 days at each reminder, to respond to the information of default.
  • Relevant e-mail ID for service of information of default: On the premises that the e-mail address provided by the debtor/registered with MCA/CERSAI is more reliable than the email address shred by a creditor, IBBI proposes to restrict the service of information of default to the email address registered by the debtor with the IU and that registered with the MCA/CERSAI. However, the IBBI grants exemption to e-mail address shared by the banks included in the 2nd schedule of the RBI Act, 1934 as their information is based on audited books of accounts and certified copy of entries in the relevant account in the bankers' book as defined in Clause (3) of Section 2 of the Bankers' Books Evidence Act, 1891.
  • Proof of debt/security, default, and acknowledgement of debt: In order to warrant the conclusivity of the RoD issued by an IU, the IBBI proposes to make it mandatory for the creditors (except the banks included in second schedule of the RBI Act, 1934), to provide a proof of debt/security, default and latest acknowledge of debt by the debtor along with a declaration verifying the genuineness of the documents submitted.
  • Due diligence by IU – The primary function of an IU is to authenticate and verify the financial information submitted by a creditor and provide access to such information. It is therefore imperative that IU provides high quality authenticated information about debts and default. Accordingly, the IBBI has proposed to mandatorily conduct due diligence and verify all the financial information submitted with it before issuing the RoD.
  • Categorization of RoD issued by the IU: In order to minimize the frivolous disputes raised by the debtor to avoid initiation of insolvency proceedings, the IBBI proposes to make it mandatory for a debtor to upload the proof of dispute, if claimed so. The IBBI also proposes to make it mandatory for the IU to issue RoD under the authenticated category in case of availability of acknowledgement of debt by the debtor, provided by banks included in the 2nd schedule of the RBI Act, 1934. Further, in case a debtor disputes a part of the debt, the RoD for the undisputed part of the debt shall be issued under the authenticated category.
  • Additional details in the RoD: In order to assist the Adjudicating Authority to meet the timelines provided for under the IBC, the IBBI proposes to add the following additional fields in the RoD : (1) Type of Debt; (2) Schedule II Bank; (3) Date of latest acknowledgement of Debt; (4) Details of disputed remarks by debtor; (5) Date and Amount of last repayment by the debtor; (6) Date of issuance of demand notice by creditor; (7) Whether any response to the demand notice sent by the debtor; and (8) The date of invocation of guarantee, if applicable.

RECENT JUDGMENTS

Vistra ITCL (India) Ltd & Ors v. IIFL Home Finance Ltd. & Anr. – NCLAT, New Delhi and Vistra ITCL (India) Ltd & Ors v. Asset Reconstruction Company India Ltd. & Anr

National Company Law Appellate Tribunal (NCLAT) | Judgment dated April 15, 2024 | Comp App (AT)(INS) No. 1590 & 1592 of 2023

Background facts

• ▪ Both the Appeals were preferred by members of Committee of Creditors (CoC) of Satra Properties India Ltd. (SPIL), undergoing insolvency in terms of the admission order dated August 03, 2020 passed by NCLT, Mumbai Bench (NCLT). The Appeals questioned the admission of claim of IIFL Finance Ltd (later assigned to ARCIL) and IIFL Home Finance Ltd., by the NCLT.
• Briefly, IIFL Finance Ltd (IIFL) and IIFL Home Finance Ltd (IIHFL) granted loan facilities to SPIL and its group company, Satra Property Developers Pvt Ltd (SPDPL). However, both the companies failed to repay the loan granted by IIFL and IIHFL and therefore, IIFL filed a Petition under Section 7 of the IBC seeking initiation of CIRP against SPIL and SPDPL.
• During the pendency of Section 7 Petition, the parties came to a settlement and executed Consent Terms recording the terms of settlement and revised repayment schedule. The Consent Terms envisaged execution of certain documents including an Amendment Agreement to amend the terms of financing documents to the extent provided therein.
• One of the terms of the Consent Terms and the Amendment Agreement was provisioning of additional security by way of mortgage in favor of IIFL and IIHFL by SPDPL for and on behalf of SPIL. For the purposes of creation of such additional security interest, a deed of security was executed between the parties. One of the recitals in the Deed of Security read that the security provided by SPDPL is sufficient to discharge the debt of SPIL owed to IIFL and IIHFL and as such SPIL shall henceforth not be liable for the dues of IIFL and IIHFL.
• However, before the obligations under the Amendment Agreement could be completed, an application filed by another financial creditor came to be admitted and CIRP in respect of SPIL was initiated. In terms of the IBC, IIFL and IIHFL filed their claims before the RP of SPIL.
• However, the claims were rejected by the RP on the ground that the deed of security discharged SPIL from its obligations, which was challenged by IIFL and IIHFL before the NCLT and the NCLT allowed the claims of IIFL and IIHFL. This was challenged by the Appellants before the NCLAT.
• The Appellants urged before the NCLAT that the deed of security novates the previous financing documents between the parties including the Consent Terms and the Amendment Agreement and by virtue of recital in the deed of security, SPIL stands discharged of its obligations. Therefore, IIFL and IIHFL do not have a valid claim in the CIRP of SPIL.
• On the other hand, the Respondent IIFL (assigned to ARCIL) and IIHFL argued that the deed of security was executed only in furtherance of the Amendment Agreement for creation of additional and continuing security in favor of IIFL and IIHFL, for and on behalf of SPIL, and did not in any manner novate the existing financing documents or discharges SPIL of its obligation towards IIFL and IIHFL. It was further argued that the under the financing documents, both IIFL and IIHFL always had recourse to recover its dues from SPIL, in the event its dues are not paid as per the Amendment Agreement.

Issues at hand?

• Whether SPIL was discharged from its liabilities towards IIFL and IIHFL by virtue of execution of the Deed of Security?
• Whether the deed of security executed between the parties resulted in novation of previously executed financing documents?

Decision of the Tribunal

• The Tribunal took note of the following provisions in the Consent Terms, Amendment Agreement, and the deed of security.
  • The Consent Terms acknowledged the debt owed by SPIL to IIFL and IIHFL and provided for repayment schedule in respect of those debts. It also provided for the creation of additional security by SPDPL in respect of loans extended by IIFL and IIHFL to SPIL. Further, in the event the Consent Terms were not complied with, IIFL and IIHFL had recourse and actions under applicable law.
  • The Amendment Agreement also acknowledged the debt owed to IIFL and IIHFL, provided for a repayment schedule which was first recoverable from the cash flows generated by the mortgaged property. It also provided that in the event the Consent Terms, or the Amendment Agreement or the other financing documents are not complied with, IIFL and IIHFL were at liberty to pursue all actions under available law.
  • The deed of security provided for additional and continuing security in favor of IIFL and IIHFL by SPDPL for an on behalf of SPIL. It also provided for recourse under applicable laws to the lenders in case of default. The deed of security also provided that the security of SPDPL is sufficient to discharge the debt of SPIL owed to IIFL and IIHFL and as such SPIL shall henceforth not be liable for the dues of IIFL and IIHFL.
• After a coherent reading of all the financing documents executed between the parties and taking into consideration the real intent of the parties behind executing the documents, the NCLAT came to the conclusion that the parties never intended to discharge SPIL of its obligation qua IIFL and IIHFL.
• The NCLAT observed that the discharge of SPIL was premised on the discharge of total debt of SPIL by cash flows of the property mortgaged by SPDPL. Since the transaction under the Amendment Agreement did not fructify, the liability of SPIL qua IIFL and IIHFL cannot be discharged.
• The NCLAT held that the deed of security did not novate the previously existing financing documents and was only executed in furtherance of the terms of the Amendment Agreement. The only intention of the parties by executing a deed of security was to create an additional security in favor of IIFL and IIHFL and secure the repayment in terms of the Amendment Agreement.
• The Appellants challenged the judgments before the Supreme Court. However, the Supreme Court dismissed the appeals and upheld the order of the NCLAT in favor of IIFL (Assigned to ARCIL) and IIHFL.

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