Executive Summary

The modern Indian financial ecosystem operates on a dual-axis framework: the regulatory rigidity of banking norms and the restorative flexibility of insolvency laws. At the heart of this intersection lies a critical paradox affecting Micro, Small, and Medium Enterprises (MSMEs). While the Insolvency and Bankruptcy Code, 2016 (IBC) was amended—specifically through Section 240A—to allow MSME promoters to retain control of their entities post-insolvency and ensure business continuity, the credit reporting infrastructure governed by the Reserve Bank of India (RBI) often fails to reflect this revival in the MSME CIBIL score after insolvency.

This report provides an exhaustive examination of two distinct but interconnected pillars of commercial finance. First, it dissects the official mechanisms available for challenging Commercial Credit Information Reports (CCR) and CIBIL Ranks. It explores the statutory framework of the Credit Information Companies (Regulation) Act, 2005 (CICRA), detailing the granular procedures for rectifying data inaccuracies, ownership conflicts, and duplication errors. It further analyzes the recently introduced RBI compensation framework for delayed dispute resolution, positioning it as a tool for borrower leverage.

Second, the report addresses the complex legal conundrum faced by MSMEs undergoing the Corporate Insolvency Resolution Process (CIRP). When an MSME promoter successfully submits a resolution plan and retains management, they often encounter a “credit deadlock.” Banks, adhering to Income Recognition and Asset Classification (IRAC) norms, frequently refuse to upgrade the company’s account from “Non-Performing Asset” (NPA) to “Standard” because there has been no “change in ownership”—a standard prerequisite for upgradation. As a result, the legally revived MSME may have a “Written Off” or “Settled” status on their CIBIL report, restricting access to working capital and affecting the company’s MSME CIBIL score after insolvency.

Through a detailed analysis of landmark jurisprudence—principally the Ramesh D. Shah v. Vijay Pitamber Lulla and Shreenathji Rasayan judgments—this report establishes the legal remedy. It elucidates how the “Clean Slate” doctrine, when invoked through specific NCLT directions, creates a “legal fiction” of fresh management, overriding standard banking circulars and mandating the restoration of creditworthiness.

Part I: The Architecture of Credit Information and Dispute Resolution

The integrity of the financial system relies heavily on the accuracy of data maintained by Credit Information Companies (CICs). In India, four major CICs—TransUnion CIBIL, Equifax, Experian, and CRIF High Mark—act as the repositories of credit history. For commercial entities, particularly MSMEs, the Commercial Credit Report (CCR) and the CIBIL Rank (CMR) are not merely administrative records; they are determinative factors for the cost of capital and market survival.

1.1 The Legal and Regulatory Framework

To understand how to challenge a CIBIL score, one must first grasp the legal architecture that governs it. The system is underpinned by the Credit Information Companies (Regulation) Act, 2005 (CICRA), which defines the triangular relationship between the Borrower, the Credit Institution (CI), and the Credit Information Company (CIC). For MSMEs emerging from insolvency, this framework is particularly critical, as it provides the legal foundation to ensure that their CIBIL score and credit history accurately reflect approved resolution plans and repayment settlements, safeguarding access to working capital and preserving the company’s financial credibility.

1.1.1 The Principle of Data Ownership

A fundamental tenet of CICRA is that CICs like TransUnion CIBIL are custodians, not owners, of the data. Section 21 of the Act mandates that a CIC cannot unilaterally alter data in its database. The data is “furnished” by Member Credit Institutions (Banks/NBFCs).1

• Implication for Disputes: When a commercial entity challenges its CIBIL score, CIBIL acts as an intermediary platform. It does not adjudicate the dispute. It transmits the dispute to the furnishing bank, which then verifies the records against its Core Banking Solution (CBS). Only upon confirmation from the bank can CIBIL modify the record.1 This “Maker-Checker” model ensures data integrity but often prolongs the dispute resolution process if the bank is unresponsive.

1.1.2 The CIBIL Rank (CMR) and Its Impact

For MSMEs, the CIBIL Rank (CMR) is a probabilistic score ranging from CMR-1 (lowest risk) to CMR-10 (highest risk). This rank is derived from a complex algorithm that weighs repayment history, credit utilization, and the “vintage” of credit facilities.2

• Delinquency vs. Default: Data analysis indicates that a significant proportion of MSMEs may be delinquent (late on payments) without being classified as NPA. However, even minor data inaccuracies—such as a delayed reporting of a payment—can trigger a downgrade in rank, pushing the MSME into a high-risk bracket and triggering higher interest rates from lenders.2

1.2 Categorization of Commercial Disputes

Commercial disputes are far more complex than consumer disputes due to the multiplicity of credit facilities (term loans, working capital, bank guarantees, letters of credit) and the intricate structures of corporate ownership. Disputes generally fall into three primary categories.3

1.2.1 Data Inaccuracy Disputes

These are the most common disputes, arising from clerical errors, system migration issues during bank mergers, or failure to update “closed” accounts.

• Account Details: Errors in the ‘Sanctioned Amount’ or ‘Current Balance’ fields artificially inflate the company’s leverage ratio. For instance, a term loan that has been fully repaid might still show a residual balance of a few rupees due to interest calculation errors, keeping the account “Active” rather than “Closed”.5
• Status Flags: Crucial fields like “Suit Filed” or “Wilful Defaulter” have severe consequences. A “Suit Filed” tag, often left remaining after a settlement has been reached and the suit withdrawn, acts as a hard stop for automated underwriting systems.5
• Asset Classification: An account might be classified as ‘Sub-Standard’ or ‘Doubtful’ in the CIBIL report even after it has been regularized. This mismatch often occurs because the bank’s system updates the balance instantly but the asset classification flag is updated only during the quarter-end reporting cycle.5

1.2.2 Ownership and Linkage Disputes

Ownership disputes strike at the identity of the corporate entity.

• Guarantor Linkages: A major source of CMR degradation is the erroneous linkage of the MSME as a guarantor for a defaulting third party. If Company A guaranteed a loan for Company B years ago, and Company B defaults, Company A’s credit report will reflect this default. Disputes often arise when the guarantee was revoked or discharged, but the bank failed to delink the entities in the reporting format.3
• Sister Concern Mapping: Credit institutions often group companies based on common directors. If one sister concern defaults, the “Group Exposure” logic may taint the reports of profitable entities within the group. Disputing this requires proving that the entities are legally distinct and no cross-guarantee exists.4

1.2.3 Duplicate Account Errors

This is a technical error where a single credit facility is reported multiple times.

• Scenario: This frequently happens when a loan is sold to an Asset Reconstruction Company (ARC). The original bank might fail to mark the account as “Sold/Closed,” while the ARC starts reporting the same debt as a new account.
• Impact: This duplication doubles the debt burden on paper, destroying the Debt-to-Equity ratio and plummeting the CIBIL score.4

1.3 The Procedural Mechanism for Challenging Scores

The industry has standardized the dispute resolution process to ensure traceability. The procedure can be initiated through online or offline channels.

1.3.1 The Online Dispute Resolution (ODR) Process

The ‘myCIBIL’ portal is the primary interface for commercial disputes.

1. Authentication and Access: The authorized signatory must log in using the company’s credentials. The system requires authentication to ensure that only legitimate representatives can view sensitive credit data.3
2. Navigation to Dispute Center: Within the ‘Credit Reports’ section, the user navigates to the ‘Dispute Center’. The interface is segmented by data types: ‘Company Details’, ‘Account Details’, and ‘Ownership’.3
3. Initiating the Challenge: The user selects the specific line item (e.g., a specific Term Loan account). The system allows the user to flag the value that is incorrect (e.g., “Date of Last Payment reported as 01/01/2023, actual is 01/01/2024”).
4. Dispute ID Generation: Upon submission, a unique Dispute ID is generated. This ID is the legal anchor for the timeline of the dispute.3

1.3.2 The Offline Dispute Mechanism

For complex commercial cases involving legal documents (like court orders or settlement decrees), the online portal’s character limits and upload restrictions may be insufficient.

• Form Submission: The entity must download the ‘Commercial Dispute Resolution Form’ from the CIBIL website.
• Documentation: A formal letter on the company letterhead, accompanied by the Dispute Form and supporting evidence (e.g., NCLT Order, No Dues Certificate), must be physically mailed to TransUnion CIBIL’s registered office in Mumbai.5
• Verification: CIBIL digitizes this request and initiates the same verification loop with the bank as the online process.

1.3.3 The Verification Loop and Timeline

Once a dispute is raised, the clock starts ticking on a strictly regulated timeline.

• Transmission: CIBIL transmits the dispute details to the Nodal Officer of the relevant Credit Institution (CI).
• CI Action: The bank is legally obligated to verify the data against its internal ledgers. If the data is incorrect, the bank must submit a correction file (usually in the ‘CDU’ or Consumer Data Update format) to CIBIL.8
• Closure: Upon receipt of the correction, CIBIL updates the master database and sends a “Dispute Resolution Summary” to the MSME. The entire process is mandated to be completed within 30 days.4

1.4 The RBI Compensation Framework (2023)

Recognizing the rampant delays in this verification loop, the Reserve Bank of India issued a landmark circular (RBI/2023-24/72) in October 2023, operationalizing a compensation framework.

• The Penalty: If a CI or CIC fails to resolve a dispute within 30 calendar days, they are liable to pay the complainant ₹100 per day for every day of delay.9
• Mechanism: This compensation is not theoretical; it must be credited directly to the borrower’s bank account. This framework has significantly shifted the leverage in favor of the borrower, forcing banks to take CIBIL disputes seriously rather than treating them as low-priority administrative tasks.6
• Strategic Use: For MSMEs, citing this circular in the initial dispute letter can act as a powerful accelerant, signaling that the entity is aware of its rights and ready to escalate.9

Part II: The MSME Insolvency Paradox

The second dimension of this report addresses a sophisticated conflict between insolvency resolution and credit reporting, highlighting the challenges MSMEs face in ensuring their CIBIL score accurately reflects post-insolvency outcomes. To understand the remedy, we must first deeply analyze the statutory conflict that necessitates it.

2.1 The IBC and the “Fresh Start” Mandate

The Insolvency and Bankruptcy Code, 2016 (IBC) was enacted to maximize the value of assets and revive distressed entities. A central pillar of this revival is the “Clean Slate” doctrine.

• The Doctrine: Articulated by the Supreme Court in Committee of Creditors of Essar Steel India Ltd. v. Satish Kumar Gupta and reaffirmed in Ghanshyam Mishra & Sons v. Edelweiss Asset Reconstruction Company, this doctrine holds that once a Resolution Plan is approved by the Adjudicating Authority (NCLT), the Corporate Debtor is “reborn.” All past claims not part of the plan are extinguished. The successful resolution applicant (buyer) takes over the company on a “Clean Slate,” free from the “hydra head” of past liabilities.10

2.2 Section 240A: The MSME Exception

In the general corporate world, Section 29A of the IBC prohibits defaulting promoters from bidding for their own companies to prevent moral hazard. However, the legislature recognized that MSMEs are different. They are often dependent on the personal expertise and goodwill of their promoters. Excluding the promoter often means liquidation, which destroys value and jobs.

• The Amendment: Section 240A was introduced to exempt MSMEs from the disqualifications under Section 29A(c) and (h).12
• The Effect: This allows the original promoter (the old management) to submit a resolution plan. If the Committee of Creditors (CoC) approves it, the promoter retains control of the company, but the debt is restructured (often with significant “haircuts” or waivers).

2.3 The Conflict with RBI IRAC Norms

Here lies the paradox. While the IBC allows the promoter to retain control to ensure business continuity, the RBI’s banking norms penalize this continuity in the context of credit rating.

• IRAC Norms: The RBI Master Circular on Income Recognition and Asset Classification (IRAC) governs how banks classify loans. A loan classified as NPA can typically be upgraded to “Standard” only if:

1. All arrears of interest and principal are fully paid; OR
2. The account is restructured and there is a change in ownership.15

• The MSME Deadlock: In a Section 240A resolution, the debt is restructured (the plan is approved), but there is no change in ownership (the promoter remains). Therefore, strictly applying IRAC norms, banks continue to classify the account as NPA or “Sub-Standard” even after the Resolution Plan is approved.17
• Consequence: The MSME emerges from CIRP with a legally binding “Fresh Start” but a credit report that screams “Defaulter.” The CIBIL report will likely show the account as “Written Off” or “Settled” (derogatory statuses), preventing the MSME from obtaining the fresh working capital needed to implement the very resolution plan the court just approved.19

2.4 The “Zombie Entity” Problem

This regulatory mismatch creates a “Zombie Entity”—a company that is legally alive and solvent under the IBC but financially dead in the credit market.

• Written Off Status: When a resolution plan involves a haircut (e.g., paying 40% of the debt), the bank writes off the remaining 60%. In standard banking practice, a “Write Off” is a negative indicator, signaling that the bank gave up on recovery.
• The Trap: The bank, fearing RBI audits, refuses to upgrade the account to “Standard” until it sees a “satisfactory performance” over a “monitoring period” (usually 1 year). During this year, the MSME is starved of capital, increasing the likelihood of a second default.17

Part III: Legal Remedies for CIBIL Score Upgradation Post-Corporate Insolvency Resolution Process

The remedy for this deadlock is not administrative; it is judicial. Since the automated banking algorithms cannot process the nuance of a “Section 240A Fresh Start,” the MSME must obtain a specific judicial order to ensure their CIBIL score post-insolvency accurately reflects the approved resolution plan, effectively forcing the system to override the default IRAC logic.

3.1 Judicial Intervention: The “Legal Fiction” of Fresh Management

The National Company Law Tribunals (NCLTs) have recognized this conflict and have stepped in to enforce the spirit of the IBC over the letter of the IRAC norms.

3.1.1 Landmark Precedent: Ramesh D. Shah v. Vijay Pitamber Lulla

The definitive remedy stems from the judgment of the NCLT Mumbai Bench in Ramesh D. Shah vs. Vijay Pitamber Lulla & Ors. (IA No. 1100/2022 in CP(IB) No. 1111/MB/2019).18

• Case Facts: Etco Industries Pvt. Ltd. (an MSME) underwent CIRP. The promoter, Mr. Ramesh D. Shah, submitted a resolution plan under Section 240A, which was approved. The plan involved a settlement of dues. Post-approval, the Union Bank of India refused to upgrade the account status to “Standard,” citing the RBI circular requirement for a “change in ownership.”
• The Promoter’s Argument: The applicant argued that the “Clean Slate” doctrine implies a rebirth of the corporate debtor. To deny “Standard” status is to deny the “fresh start” promised by the Code.
• The Tribunal’s Ruling: The NCLT ruled in favor of the MSME, creating a legal fiction. It held:”The objective of this is to provide a clean start to the unit/Corporate Debtor. Therefore, once the resolution plan is approved by the Adjudicating Authority, the management/ownership of the Corporate Debtor shall be considered as fresh, even if the directors/promoters of the Corporate Debtor (MSME) remain the same.” 18
• The Remedy Granted: The Tribunal directed the bank to “change the asset classification of the company’s accounts to ‘Standard'” immediately, bypassing the monitoring period.

This judgment provides the blueprint for the remedy: An NCLT order declaring that the retention of management under Section 240A constitutes “fresh management” for the purposes of asset classification.

3.1.2 The Shreenathji Rasayan Confirmation

The NCLT Ahmedabad Bench in Shreenathji Rasayan Pvt Ltd v. Reliance Asset Reconstruction Company further solidified this position.23

• The applicant specifically prayed for directions to update CIBIL.
• The Tribunal directed the respondents to “inform and update all Credit Information Companies… regarding the corrected and upgraded status… so as to reflect a clean credit record.”
• Key Takeaway: This confirms that the NCLT views the CIBIL record as an integral part of the “assets” and “viability” of the Corporate Debtor, bringing it within its jurisdiction under Section 60(5) of the IBC.

3.2 Distinguishing the Madras High Court View

It is vital to address a counter-narrative to manage legal risk. The Madras High Court, in a recent ruling, held that the “Clean Slate” doctrine does not protect continuing promoters (under s. 240A) from undisclosed liabilities.10

• The Distinction: The High Court differentiated between a third-party buyer (who gets total immunity) and a continuing promoter (who cannot benefit from their own suppression of facts).
• Implication for CIBIL: While this ruling specifically targeted hidden operational debts (like electricity dues), banks might try to use it to argue that the “stigma” of default also survives for promoters.
• Rebuttal: The remedy in Ramesh D. Shah is distinct. It does not absolve the promoter of hidden crimes; it classifies the disclosed and restructured debt as “Standard” to enable business viability. The asset classification (Standard vs. NPA) is a regulatory tag, not a moral judgment, and the NCLT has jurisdiction to modify it to save the company.

3.3 The “Disjoint Sets” Argument

In some cases, banks argue that NCLT orders cannot override RBI circulars because they operate in “disjoint sets” (one governs insolvency, the other banking regulation).25

• The Override: Section 238 of the IBC contains a “non-obstante” clause, stating that the IBC prevails over any other law in force. NCLTs have consistently held that if an RBI circular prevents the implementation of a resolution plan (by starving the company of credit), the IBC’s mandate for revival overrides the circular’s mandate for classification.

Part IV: MSME CIBIL Score Upgradation (Post-Insolvency)

Based on the legal landscape analyzed above, the following is the step-by-step remedy for an MSME promoter to upgrade their CIBIL score post-Corporate Insolvency Resolution Process (CIRP).

Step 1: Embedding the Remedy in the Resolution Plan

Prevention is better than cure. The remedy should be baked into the Resolution Plan document itself before it is even voted on by the CoC.

• Drafting Requirement: The Resolution Plan must contain a specific section titled “Regulatory Compliances and Reliefs.”
• Specific Clause: “Upon the approval of this Plan, the Financial Creditors shall reclassify the account of the Corporate Debtor as ‘Standard’ in their books and report the same to all Credit Information Companies (CIBIL, Equifax, etc.). The status ‘Written Off’ or ‘Settled’ shall be removed, and the account shall reflect as ‘Standard’ with the restructured balance. The ‘Monitoring Period’ requirement under RBI Circulars is waived in light of the ‘Fresh Start’ nature of this Plan.”
• Effect: Once the NCLT approves the plan, this clause becomes a court order.

Step 2: The Post-Approval Legal Notice

If the plan was approved without such a specific clause, or if the bank ignores it:

• Action: Send a formal legal notice to the bank’s Nodal Officer and Legal Head.
• Content: Cite the NCLT Approval Order and the Ramesh D. Shah judgment. Explicitly state that maintaining an NPA status is a violation of the “Clean Slate” doctrine and constitutes “Unjust Enrichment” (taking the settlement money while denying the credit benefit).26
• Ultimatum: Give a 15-day window for rectification before initiating contempt proceedings.

Step 3: Filing the Interlocutory Application (IA)

If the bank refuses (often citing “System constraints”):

• Filing: File an IA under Section 60(5) of the IBC before the NCLT.
• Prayer: Seek a specific direction to the bank to:

1. Upgrade the account to “Standard”.
2. Remove “Written Off” remarks.
3. File a correction update with CIBIL immediately.

• Precedent: Attach the Ramesh D. Shah order as a precedent. The NCLT is likely to follow its own coordinate bench’s reasoning.

Step 4: The CIBIL Dispute with Court Order

Once the NCLT issues the specific direction:

• Direct Dispute: Raise a dispute on the CIBIL Commercial portal.
• Evidence Upload: Upload the NCLT Order.
• Mechanism: While CIBIL relies on bank confirmation, a Court Order is a “Public Record.” CIBIL’s compliance team can be compelled to act on a court order even if the bank drags its feet.
• RBI Ombudsman: Simultaneously, file a complaint with the RBI Ombudsman attaching the NCLT order. The Ombudsman can penalize the bank under the Compensation Framework (Rs 100/day) for failing to update credit information despite a court directive.9

Step 5: Handling the “Written Off” Remark

Specific attention must be paid to the “Written Off” flag.

• The Issue: Even if the score improves, a “Written Off” flag scares away future lenders.
• The Fix: The bank must file a data update changing the “Account Status” field.

• If the debt is fully settled: Status should be “Closed” or “Post-Write-Off Settled” (less ideal, but accurate).
• If debt continues (restructured): Status should be “Standard”.

• No Dues Certificate (NDC): The MSME must aggressively pursue the issuance of a “No Dues Certificate” or “Satisfaction of Charge” from the bank. This document is the golden ticket for any future offline disputes.28

4.1 The Pre-Packaged Insolvency (PPIRP) Alternative

For MSMEs currently facing stress but not yet in CIRP, the Pre-Packaged Insolvency Resolution Process (PPIRP) offers a potentially smoother path to ensuring their CIBIL score accurately reflect the restructuring, helping protect their creditworthiness even before formal insolvency proceedings

• Mechanism: PPIRP is a debtor-in-possession model where the promoter negotiates with creditors before going to court.
• Benefit: Since it is a consensual restructuring, banks are often more willing to agree to “Standard” classification terms as part of the negotiation to avoid the value destruction of a full CIRP.31
• Reporting: The resolution plan in a PPIRP can be structured to look more like a commercial restructuring than a default, potentially mitigating the damage to the CIBIL Rank compared to a Section 7 or Section 9 admission.14

Conclusion

The challenge of upgrading a CIBIL score for an MSME where the old management retains control is a battle between the static nature of banking data and the dynamic nature of insolvency law.

The “official” mechanism—the online dispute form—is necessary but insufficient for this specific problem. A standard dispute will be rejected by the bank’s automated backend because, technically, the ownership hasn’t changed.

The remedy, therefore, is to create a “legal exception” that forces the bank’s hand. This is achieved by obtaining an NCLT order that explicitly characterizes the post-resolution management as “fresh” for asset classification purposes, relying on the ratio of Ramesh D. Shah.

MSMEs must view the CIBIL report not as a post-facto scorecard, but as a core asset of the company. The fight for a “Standard” tag and for restoring their MSME CIBIL score after insolvency is as important as the fight for the haircut itself. Without a correctly updated credit record, the “revival” promised by the IBC remains a legal fiction; with it, leveraging the specific remedies outlined above, it becomes a commercial reality and ensures the company’s creditworthiness post-CIRP is fully recognized.

Summary of Key Tables

Table 1: Comparative Analysis of Dispute Types

Table 2: The MSME CIBIL Remedy Matrix

The post MSME CIBIL Score Upgradation After Insolvency: Insolvency Law, Credit Reporting Disputes, and MSME Remediation Under IBC appeared first on Bhatt & Joshi Associates.

Introduction

The Insolvency and Bankruptcy Code, 2016 (IBC) represents a watershed moment in India’s insolvency regime, fundamentally transforming how corporate distress is managed. At the heart of this transformative legislation lies a critical principle that distinguishes it from previous debt recovery mechanisms: the Interim Resolution Professional (IRP) must take actual, physical control of the corporate debtor’s assets, not merely symbolic possession. This principle was recently reinforced by the National Company Law Appellate Tribunal (NCLAT), which categorically stated that the IBC does not recognize the concept of symbolic possession during the Corporate Insolvency Resolution Process (CIRP).

The distinction between symbolic and actual possession carries profound implications for the success of insolvency resolution. Unlike the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act), which permits secured creditors to take symbolic possession of assets, the IBC mandates that the IRP must assume complete operational control over all assets of the corporate debtor. This requirement stems from the fundamental objective of the Code: to preserve the corporate debtor as a going concern and maximize the value of its assets for the benefit of all stakeholders. The NCLAT’s recent pronouncement serves as a powerful reminder that half-measures and token gestures have no place in the insolvency resolution framework established under the IBC.

The Legislative Framework Governing Asset Control Under IBC

The Insolvency and Bankruptcy Code, 2016, establishes a comprehensive framework for managing corporate insolvency in India. The Code came into force on December 1, 2016, and introduced a paradigm shift from the debtor-in-possession model to a creditor-in-control regime. Section 18 of the IBC forms the cornerstone of the IRP’s authority and delineates the duties that the professional must discharge during the CIRP.

Section 18(1)(f) of the IBC explicitly mandates that the IRP shall “take control and custody of any asset over which the corporate debtor has ownership rights, including but not limited to: (a) assets over which the corporate debtor has ownership rights which may be located in a foreign country; (b) assets of any Indian or foreign subsidiary of the corporate debtor; and (c) such other assets as may be notified by the Central Government in consultation with any financial sector regulator.”[1] This provision is unambiguous in its requirement that the IRP must assume actual custody and control, not merely nominal or symbolic possession.

The legislative intent behind this provision becomes clear when examined in the context of the IBC’s objectives. The Code was designed to consolidate and amend laws relating to insolvency resolution of corporate persons in a time-bound manner for maximization of value of assets of such persons. The moratorium under Section 14 of the IBC prohibits the institution of suits or continuation of pending suits or proceedings against the corporate debtor, including execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority. This moratorium creates a protective umbrella under which the IRP can effectively manage the corporate debtor’s assets without external interference.

Section 17 of the IBC further strengthens the IRP’s position by vesting the management of the corporate debtor in the IRP. From the date of appointment, the powers of the board of directors or the partners of the corporate debtor, as the case may be, stand suspended and are exercised by the IRP. This complete displacement of existing management is essential to ensure that the IRP can take unfettered control of all assets and operations. The corporate debtor’s personnel, officers, managers and other employees are required to report to the IRP and provide access to all documents and records of the corporate debtor.[2]

Distinguishing IBC from SARFAESI: The Symbolic Possession Debate

The concept of symbolic possession finds its genesis in the SARFAESI Act, 2002, which was enacted to enable banks and financial institutions to realize long-term assets, manage problem loans, and sustain credit delivery in the economy. Under Section 13(4) of the SARFAESI Act, secured creditors are empowered to take possession of secured assets, including the right to transfer by way of lease, assignment or sale. The courts have interpreted this provision to permit symbolic possession in certain circumstances, particularly where physical possession is impractical or where the borrower does not resist the creditor’s assertion of ownership.

However, the IBC operates on an entirely different premise. The NCLAT has repeatedly emphasized that the IBC is a complete code in itself, designed to achieve specific objectives that differ fundamentally from those of the SARFAESI Act. Where the SARFAESI Act focuses on enabling individual secured creditors to enforce their security interests, the IBC aims to resolve insolvency in a collective manner that balances the interests of all stakeholders while preserving the corporate debtor as a viable economic entity.

The distinction between symbolic and actual possession becomes particularly relevant when examining the interface between these two legislative frameworks. When CIRP is initiated against a corporate debtor, the moratorium under Section 14 comes into effect automatically. Section 14(1)(c) specifically prohibits any action to foreclose, recover or enforce any security interest created by the corporate debtor in respect of its property. This means that even if a secured creditor had taken symbolic possession under the SARFAESI Act before the commencement of CIRP, such possession must yield to the IRP’s right to take actual control under Section 18 of the IBC.

The rationale for this distinction lies in the different stages of debt recovery at which these legislations operate. The SARFAESI Act is an early-stage intervention mechanism that allows secured creditors to bypass lengthy judicial processes. Symbolic possession may suffice at this stage because the creditor’s primary objective is to assert its right over the secured asset and prevent the borrower from alienating or encumbering it. In contrast, the IBC comes into play when the corporate debtor is in severe financial distress, and piecemeal enforcement of individual securities would undermine the collective resolution process. At this stage, actual possession is non-negotiable because the IRP must actively manage the corporate debtor’s operations, preserve asset value, and explore resolution possibilities.[3]

Judicial Interpretation: Key Case Laws on IRP’s Right to Actual Possession

The Indian judiciary has developed a robust jurisprudence on the IRP’s right to take actual control of the corporate debtor’s assets. These decisions have consistently upheld the primacy of Section 18 of the IBC and rejected attempts to limit the IRP’s authority through concepts borrowed from other legislations.

One of the landmark judgments in this area is the NCLAT’s decision in Dena Bank v. C. Shivakumar Reddy. In this case, the bank had taken possession of the corporate debtor’s property under the SARFAESI Act before the initiation of CIRP. When the IRP sought to take control of the property, the bank resisted, arguing that it had already taken possession under the SARFAESI Act and that this possession should be respected. The NCLAT categorically rejected this argument and held that upon the commencement of CIRP, the IRP is entitled to take custody and control of all assets of the corporate debtor, regardless of whether any secured creditor had earlier taken possession under the SARFAESI Act. The tribunal observed that the property continued to reflect as an asset in the balance sheet of the corporate debtor, and therefore, the IRP was bound under Section 18 of the IBC to take control and custody of such property. The NCLAT further held that any action by the bank to enforce its security interest after the commencement of CIRP would be in violation of the moratorium under Section 14.[4]

The Supreme Court of India has also addressed the scope of the IRP’s authority over assets. In Phoenix ARC Private Limited v. Ketulbhai Ramubhai Patel, the Supreme Court examined whether the exclusion of assets owned by third parties but in possession of the corporate debtor applies across all provisions of the IBC. The Court held that the exclusion of assets owned by a third party but in the possession of the corporate debtor under contractual arrangements is limited to Section 18 of the IBC. This means that while the IRP cannot take control of assets that belong to third parties, the IRP has comprehensive authority over all assets that the corporate debtor owns, regardless of who may be in possession of those assets.[5]

These judicial pronouncements establish several important principles. First, the IRP’s right to take actual control of assets is not contingent upon the absence of competing claims by secured creditors. Second, the moratorium under Section 14 operates as a statutory shield that protects the IRP’s authority to assume custody and control of assets. Third, the concept of symbolic possession, which may be relevant under the SARFAESI Act, has no application in the IBC framework. Fourth, the IRP’s duty to take control of assets is mandatory, not discretionary, and flows directly from the language of Section 18.

Regulatory Framework and Practical Implementation

The Insolvency and Bankruptcy Board of India (IBBI), established under Section 188 of the IBC, serves as the principal regulator for insolvency professionals and insolvency professional agencies. The IBBI has issued detailed regulations that operationalize the provisions of the IBC and provide guidance to IRPs on the discharge of their duties. The IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, prescribe the manner in which the CIRP shall be conducted and specify the timelines within which various steps must be completed.

Regulation 7 of the IBBI Regulations requires the IRP to make a public announcement within three days of his appointment. This announcement must include details of the corporate debtor, the last date for submission of claims, and other relevant information. Following this announcement, the IRP must begin the process of taking control of the corporate debtor’s assets. This involves identifying all assets, verifying ownership rights, assessing the physical condition and location of assets, and implementing measures to secure and preserve asset value.

The practical challenges in taking actual control of assets are significant. In many cases, assets may be scattered across multiple locations, including foreign jurisdictions. Section 18(1)(f)(a) specifically contemplates this scenario by empowering the IRP to take control of assets located in foreign countries. However, enforcing this authority in foreign jurisdictions requires navigating complex issues of private international law and may necessitate cooperation from foreign courts or authorities. The IRP must also deal with situations where third parties may be using the corporate debtor’s assets under various contractual arrangements, such as leases, licenses, or bailments.

The IBBI has issued guidance notes and circulars to assist IRPs in addressing these practical challenges. For instance, the IBBI has clarified that the IRP should take physical custody of tangible assets, change passwords and access credentials for digital assets, assume control over bank accounts, and implement appropriate security measures to prevent theft, damage, or unauthorized removal of assets. The IRP must also prepare a detailed inventory of all assets, including their description, location, condition, and estimated value.[6]

Asset Identification and Valuation During CIRP

Once the IRP assumes control of the corporate debtor’s assets, one of the most critical tasks is to identify and value these assets accurately. This process forms the foundation for the preparation of the information memorandum, which is a key document that potential resolution applicants use to formulate their resolution plans. Section 29 of the IBC requires the resolution professional (who replaces the IRP after the first meeting of the committee of creditors) to prepare an information memorandum containing all relevant information about the corporate debtor.

The definition of “assets” under Section 18 is deliberately broad and includes not only tangible property like land, buildings, plant and machinery, but also intangible assets such as intellectual property rights, goodwill, contractual rights, and development rights. The NCLAT has held that development rights constitute property within the meaning of Section 3(27) of the IBC and can be included in the information memorandum by the resolution professional. This expansive interpretation ensures that all value-bearing assets are brought within the ambit of the CIRP and made available for the benefit of stakeholders.

The valuation of assets must be conducted by registered valuers in accordance with the provisions of the Companies Act, 2013, and the rules made thereunder. Regulation 27 of the IBBI Regulations mandates that the resolution professional shall appoint two registered valuers to determine the fair value and liquidation value of the corporate debtor. One valuer must estimate the fair value and liquidation value of the assets of the corporate debtor, while the other must estimate the fair value and liquidation value of the business of the corporate debtor as a going concern.

The distinction between fair value and liquidation value is crucial. Fair value represents the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Liquidation value, on the other hand, represents the estimated amount that would be realized if the assets were sold piecemeal under distress conditions. The IBC requires both valuations to establish a floor price for resolution plans, ensuring that stakeholders receive at least as much under a resolution plan as they would receive in liquidation.

Rights and Obligations of Secured Creditors During CIRP

The commencement of CIRP has profound implications for secured creditors who may have enforcement proceedings pending under the SARFAESI Act or other mechanisms. Section 14 of the IBC imposes a comprehensive moratorium that prohibits various actions against the corporate debtor, including the enforcement of security interests. This moratorium is automatic and takes effect immediately upon the admission of the insolvency application by the National Company Law Tribunal (NCLT).

The moratorium serves multiple purposes in the IBC framework. First, it provides breathing space to the corporate debtor and prevents a race among creditors to enforce their claims. Second, it preserves the corporate debtor’s assets and prevents their dissipation during the CIRP. Third, it creates a level playing field among creditors by ensuring that individual enforcement actions do not prejudice the collective resolution process. Fourth, it enables the IRP to take stock of the corporate debtor’s financial position and explore resolution possibilities without external pressures.

However, the moratorium is not absolute. Section 14(3) lists certain actions that are permitted notwithstanding the moratorium. These include proceedings under the Prevention of Money Laundering Act, 2002, or the Smugglers and Foreign Exchange Manipulators (Forfeiture of Property) Act, 1976. Additionally, the moratorium does not affect the right of a secured creditor to realize the value of its security interest after the liquidation order is passed.

Secured creditors play a crucial role in the CIRP through their participation in the committee of creditors (CoC). Section 21 of the IBC provides for the constitution of a CoC, which comprises all financial creditors of the corporate debtor. The CoC is the primary decision-making body during the CIRP and has the authority to approve or reject resolution plans, decide on the extension of the CIRP period, and take various other decisions relating to the conduct of the CIRP. Each financial creditor’s voting share in the CoC is proportionate to the financial debt owed to it.[7]

The Supreme Court has emphasized that the CoC must exercise its commercial wisdom in evaluating resolution plans. In Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta, the Supreme Court held that the CoC is the ultimate authority to approve a resolution plan and that the adjudicating authority’s role is limited to checking whether the resolution plan complies with the requirements specified in Section 30(2) of the IBC. This decision recognizes the business judgment of financial creditors and minimizes judicial interference in commercial decisions.[8]

Enforcement Mechanisms and Penalties

The IBC contains robust enforcement mechanisms to ensure compliance with its provisions and to penalize violations. Section 69 of the IBC empowers the adjudicating authority to punish any person who makes a statement that is false in material particulars or intentionally omits any material fact knowing it to be material with imprisonment for a term which may extend to two years or with fine which may extend to one crore rupees, or with both. This provision applies to all stakeholders, including the corporate debtor, its officers, creditors, and insolvency professionals.

The IBBI also has disciplinary powers over insolvency professionals. Section 220 of the IBC empowers the IBBI to impose penalties on insolvency professionals for professional misconduct, negligence, or contravention of the Code or the regulations. The penalties may include warnings, reprimands, monetary penalties, or even cancellation of registration as an insolvency professional. The IBBI has established a Disciplinary Committee to inquire into allegations of professional misconduct and recommend appropriate action.

In cases where the IRP encounters resistance in taking control of assets, the NCLT has the power to pass appropriate orders to facilitate compliance with Section 18. The NCLT may direct the corporate debtor’s officers and employees to cooperate with the IRP, order the police to assist the IRP in taking physical possession of assets, and even initiate contempt proceedings against persons who obstruct the IRP in the discharge of his duties. These coercive powers ensure that the IRP’s authority is not merely theoretical but can be enforced effectively on the ground.

Section 235 of the IBC provides for the punishment of contravention of orders of the adjudicating authority. Any person who contravenes any order of the NCLT or the NCLAT shall be punishable with imprisonment for a term which may extend to three years or with fine which may extend to one crore rupees, or with both. This provision serves as a powerful deterrent against non-compliance and reinforces the authority of the adjudicating bodies.

Challenges in Implementation and Emerging Issues

Despite the clear legislative mandate and supportive judicial precedents, IRPs continue to face practical challenges in taking actual control of corporate debtors’ assets. One recurring challenge is the lack of cooperation from the corporate debtor’s management and employees. Although Section 17 suspends the powers of the board of directors and Section 19 requires personnel to cooperate with the IRP, in practice, many corporate debtors attempt to obstruct or delay the transfer of control. This may involve withholding information, concealing assets, transferring assets to related parties, or creating artificial obstacles to the IRP’s access to premises and records.

Another challenge arises in cases involving complex corporate structures with multiple subsidiaries and holding companies. Section 18(1)(f)(b) empowers the IRP to take control of assets of Indian or foreign subsidiaries of the corporate debtor. However, determining what constitutes effective control over a subsidiary and implementing that control across different legal entities can be complex. Subsidiaries may have their own boards of directors, management teams, and operational autonomy. The IRP must navigate these organizational structures carefully to ensure that control is established without disrupting the subsidiary’s operations or violating the corporate law of the jurisdiction in which the subsidiary is incorporated.

The treatment of third-party assets in the possession of the corporate debtor presents another area of difficulty. Many corporate debtors operate using assets that they do not own, such as leased properties, licensed intellectual property, or goods held on consignment. The Supreme Court’s decision in Phoenix ARC clarified that the exclusion of third-party assets from the IRP’s control is limited to Section 18, meaning that these assets are not under the IRP’s custody and control. However, the IRP must still manage the corporate debtor’s contractual rights and obligations relating to these assets, which requires careful analysis of the underlying agreements and coordination with the asset owners.

The interface between the IBC and other regulatory regimes also creates challenges. For instance, certain industries are subject to sector-specific regulations that impose conditions on the transfer of control or ownership. The IRP must ensure compliance with these regulations while exercising authority under the IBC. Similarly, labor laws continue to apply during the CIRP, and the IRP must manage workforce issues, including payment of wages, compliance with minimum wage laws, and handling of labor disputes.[9]

Conclusion

The principle that the IRP must take actual, not symbolic, possession of the corporate debtor’s assets is fundamental to the operation of the Insolvency and Bankruptcy Code, 2016. This requirement flows directly from Section 18 of the IBC and has been consistently upheld by Indian courts and tribunals. The distinction between the IBC and the SARFAESI Act in this regard reflects the different objectives and mechanisms of these two legislative frameworks. While symbolic possession may suffice for individual enforcement actions under the SARFAESI Act, the collective and rehabilitative nature of the IBC demands that the IRP exercise actual control over all assets to preserve their value and facilitate meaningful resolution.

The judicial pronouncements discussed in this article establish that the IRP’s right to take control of assets is paramount and cannot be defeated by prior actions of secured creditors under other laws. The moratorium under Section 14 creates a statutory shield that protects this right, and the adjudicating authorities have the power to enforce compliance with Section 18. However, practical challenges remain in implementing this principle, particularly in cases involving complex corporate structures, third-party assets, and resistance from existing management.

Going forward, it will be important for stakeholders to recognize and respect the IRP’s authority from the outset of the CIRP. Secured creditors must understand that their enforcement rights under the SARFAESI Act are suspended during the CIRP and that cooperation with the IRP serves the broader goal of maximizing asset value for all stakeholders. The corporate debtor’s management and employees must similarly recognize that obstruction of the IRP’s duties is not only counterproductive but also punishable under the IBC. With greater awareness, better coordination, and continued judicial support, the principle of actual control by the IRP can be implemented effectively to achieve the IBC’s objectives of timely resolution and value maximization.

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Introduction

The Insolvency and Bankruptcy Code, 2016 (IBC), provides a structured mechanism for resolving insolvency disputes, particularly through the Corporate Insolvency Resolution Process (CIRP). A critical aspect of this framework is the concept of a pre-existing disputes under IBC, which, if established, can render an application under Section 9 non-maintainable.

A key question arises: Can disputes raised or legal proceedings initiated after the issuance of a demand notice under Section 8 of the IBC qualify as pre-existing disputes, thereby invalidating a Section 9 application? Through statutory provisions and judicial precedents, this article explores the legal position on post-notice disputes and their impact on CIRP proceedings.

Legal Framework for Pre-Existing Disputes Under IBC

Statutory Provisions: Sections 8 and 9 of the IBC

Section 8(1) of the IBC requires an operational creditor to issue a demand notice to a corporate debtor for unpaid operational debt. The corporate debtor then has 10 days to either:

• Settle the debt, or
• Notify the creditor of a pre-existing dispute under Section 8(2).

If no resolution occurs, the operational creditor may file a Section 9 application to initiate CIRP. However, under Section 9(5)(ii)(d), the adjudicating authority must reject the application if a pre-existing dispute is established.

The IBC defines a “dispute” under Section 5(6) as a legal proceeding related to:

• The existence of the amount of debt,
• The quality of goods or services, or
• The breach of a representation or warranty.

Judicial Interpretation of Pre-Existing Disputes Under IBC

The Supreme Court in Mobilox Innovations Pvt. Ltd. v. Kirusa Software Pvt. Ltd. (2017) established that a dispute qualifies as “pre-existing” only if it existed before the receipt of a Section 8 notice. The Court held:

“The word ‘and’ in Section 8(2)(a) must be read as ‘or’ to prevent corporate debtors from using frivolous disputes to stall legitimate claims. However, the dispute must have arisen prior to the notice to qualify as pre-existing.”

This principle ensures that disputes manufactured after the notice cannot derail CIRP applications.

Judicial Precedents on Post-Notice Disputes

1. G.T. Polymers v. Keshava Medi Devices Pvt. Ltd. (NCLAT)

The corporate debtor filed a commercial suit after receiving a Section 8 notice, claiming it was a pre-existing dispute. The NCLAT rejected this argument, ruling:

“A dispute raised after a demand notice, even if formalized through litigation, cannot retroactively invalidate a Section 9 application.”

2. Vaibhav Aggarwal v. Sunil Sachdeva (NCLAT, 2023)

Here, the corporate debtor failed to respond to the demand notice but later claimed a pre-existing dispute. The tribunal reaffirmed that:

“Failure to reply within 10 days does not preclude proving a pre-existing dispute, but the dispute itself must have existed before the notice.”

3. Brandy Realty Services Ltd. v. Sir John Bakeries India Pvt. Ltd. (NCLAT)

The debtor attempted to introduce post-notice evidence of service quality disputes. The tribunal held that:

“Post-notice evidence can be considered only if it substantiates a pre-notice dispute.”

Evidentiary Standards for Pre-Existing Disputes

Courts have set clear requirements for proving a pre-existing dispute:

1. Burden of Proof – The corporate debtor must provide documentary evidence (emails, invoices, legal notices) showing that the dispute existed before the Section 8 notice.
2. Timing of Arbitration or Suit Initiation – Only disputes initiated before the demand notice can be considered.
3. Frivolous Defenses – Tactical disputes raised post-notice without supporting evidence are not entertained.

For instance, in R.S. Fuel Pvt. Ltd. v. Ankit Metal & Power Ltd., emails challenging service quality before the notice were deemed sufficient to establish a pre-existing dispute.

Critical Analysis of Conflicting Interpretations

Post-Notice Communications as Evidence of Pre-Existing Disputes

Some cases, like Greymatter Entertainment Pvt. Ltd. v. Pro Sportify Pvt. Ltd., allow corporate debtors to submit post-notice evidence if it corroborates a pre-existing dispute. The tribunal stated:

“Verbal disagreements before the notice, later documented in legal responses, may qualify as pre-existing disputes.”

Exceptions for Ongoing Negotiations

In iValue Advisors Pvt. Ltd. v. Srinagar Banihal Expressway Ltd., the NCLAT ruled that ongoing discussions do not amount to a dispute unless they were formally raised before the notice.

WhatsApp Messages and Informal Communications

In Kashyap Infraprojects Pvt. Ltd. v. Hi-Tech Sweet Water Technologies Pvt. Ltd., the NCLT noted that WhatsApp messages can be considered evidence, but their weight depends on corroboration through official documents.

Distinguishing Genuine vs. Tactical Disputes

Courts have drawn a distinction between:

• Genuine pre-existing disputes – Supported by prior evidence such as emails, termination notices, or legal correspondences.
• Tactical post-notice disputes – Raised solely to delay insolvency proceedings and unsupported by pre-notice evidence.

For instance, in Shashank Keshav Kalkar v. Raychem RPG Pvt. Ltd., a post-notice arbitration notice was dismissed as irrelevant.

Conclusion: The Imperative of Temporal Specificity 

The IBC aims to streamline debt resolution by preventing frivolous delays. Courts have consistently ruled that:

• A dispute must have originated before the Section 8 notice.
• Mere post-notice litigation or arbitration does not qualify as a pre-existing dispute.
• Documentary evidence supporting pre-notice disputes is essential.

This reinforces the IBC’s objective of balancing creditor rights with safeguards against misuse by debtors.

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Introduction

In a significant judgment, the National Company Law Appellate Tribunal (NCLAT) addressed the issue of whether the Income Tax Department can set-off tax dues with refunds during the intervening period when the Corporate Insolvency Resolution Process (CIRP) timeline has expired, but a liquidation order has not yet been passed. The judgment also examined if a secured creditor could realize secured assets after the expiry of the CIRP period and before the liquidation order is issued. Additionally, it explored if the Income Tax Department, as a government authority, can be considered a secured creditor entitled to realize security interest.

Case Background

The case involves Kotak Urja Pvt Ltd, which was admitted into CIRP on November 18, 2019, with Mr. Devarajan Raman appointed as the Resolution Professional (RP). The Income Tax Department adjusted a tax refund of Rs. 90.42 lakhs against outstanding tax dues while the moratorium under Section 14 of the Insolvency and Bankruptcy Code (IBC) was in effect. The RP filed an application seeking a refund of this amount, which was dismissed by the Adjudicating Authority. The RP then appealed to the NCLAT.

Key Issues Addressed : Set-off tax After the CIRP Expired

1. Set-Off by Income Tax Dept. During Interregnum Period

   – The central question was whether the Income Tax Department could set-off tax dues with refunds during the period after the CIRP timeline had expired but before the liquidation order was passed. The NCLAT clarified that the moratorium under Section 14 of the IBC continues until the liquidation order is passed or the resolution plan is approved by the Adjudicating Authority.

 “From a bare reading of Section 14(1)(a), (b) and (c) of the IBC, the legislative intent seems to be quite clear that during the period of moratorium qua the Corporate Debtor, there shall be a stay on the commencement and continuation of all legal proceedings against the Corporate Debtor and prohibition of action whatsoever of foreclosure, recovery or enforcement of any ‘security interest’ which has been created by the corporate debtor vis-a-vis its property.”

2. Realization of Secured Assets by Secured Creditors

   – The NCLAT addressed whether a secured creditor could realize secured assets after the CIRP period had expired but before the liquidation order was passed. The tribunal held that secured creditors could only exercise their right to realize security interests after the liquidation proceedings had commenced.

   “The option to realize security interests becomes available to a secured creditor only after liquidation proceedings commence in terms of Section 33 of IBC with the passing of the liquidation order.”

3. Status of Income Tax Department as Secured Creditor

   – The NCLAT examined whether the Income Tax Department could be considered a secured creditor entitled to realize security interest. The tribunal noted that the Income Tax Department could not claim the status of a secured creditor merely by being a government authority.

   “The Respondent representing the Income Tax Department cannot be treated as a secured creditor. It was pointed out that there is no provision in the Income Tax Act which vests on them a statutory charge in respect of the tax liability.”

Conclusion: Clarifying Set-off Tax Concerns Post CIRP Expiry

The NCLAT’s judgment clarified that the moratorium under Section 14 of the IBC continues until the liquidation order is passed, preventing creditors from setting off or adjusting tax refunds against dues during this period. The tribunal also reaffirmed that the realization of security interests by secured creditors is permissible only after the commencement of liquidation proceedings. Furthermore, the Income Tax Department cannot claim the status of a secured creditor merely by virtue of being a government authority.

Key Takeaways

– The moratorium under Section 14 of the IBC remains in effect until the liquidation order is passed or the resolution plan is approved.

– Secured creditors can only realize security interests after the liquidation proceedings commence.

– The Income Tax Department does not automatically qualify as a secured creditor.

For further details, you can refer to here.

[Full Judgement]

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Introduction

Background of the Case

The dispute arose when Reward Solutions, an operational creditor, approached the National Company Law Tribunal (NCLT) seeking the initiation of a corporate insolvency resolution process (CIRP) against Dream11, a fantasy sports company. The basis of Reward Solutions’ application was a default that occurred within the timeframe covered by Section 10 A of the Insolvency and Bankruptcy Code (IBC), 2016.

Bhavit Sheth’s counsel contended that the application for CIRP initiation by Reward Solutions was grounded on a default that fell within the parameters outlined in Section 10A of the IBC. This section, introduced by the government, bars applications for CIRP initiation for defaults arising after March 25, 2020, for a period extending up to six months or, in some cases, up to one year from the specified date.

However, the counsel representing the NCLT-appointed resolution professional (RP) of Sporta Technologies countered this argument, asserting that Section 10A exclusively pertains to default and does not affect the ability to claim a debt that has matured. In this instance, while the debt in question falls within the timeframe specified by Section 10A, the default occurred subsequent to the period covered under the said section. Specifically, Dream11 received a demand notice on April 20, 2021, and the default, as per the IBC, occurred ten days after the service of the demand notice.

Interpretation of Section 10A

The crux of the dispute revolves around the interpretation of Section 10A of the IBC. While Bhavit Sheth’s counsel emphasizes that the default triggering the application for CIRP initiation occurred within the protected period delineated by Section 10A, the RP’s counsel maintains that Section 10A only shields defaults that arise within the specified timeframe and does not affect the validity of claims arising from debts that matured during that period.

The outcome of this case holds significant implications for the interpretation and application of Section 10A of the IBC. A ruling in favor of Bhavit Sheth could set a precedent for treating defaults occurring within the protected period as ineligible grounds for CIRP initiation, regardless of the maturity of the underlying debt. Conversely, a decision favoring the RP’s argument would reinforce the distinction between default and debt maturity, affirming the validity of claims arising from debts that matured during the protected period, provided the default occurred subsequently.

Conclusion: Ramifications of Dream11’s Parent Company Insolvency

The reservation of judgment by the NCLAT underscores the complexity of the legal issues at hand and the need for a thorough examination of the relevant provisions of the IBC. The outcome of this case is awaited with keen interest by stakeholders across the corporate and legal spheres, as it is likely to shape the future interpretation and application of Section 10A of the IBC, thereby impacting the dynamics of insolvency resolution proceedings in India.

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Introduction

Within the complex realm of business transactions, unsecured creditors frequently encounter a dangerous predicament when a debtor declares insolvency. This predicament becomes even more evident when a large client, who owes a substantial amount of money, declares bankruptcy, causing tiny businesses to be in a condition of uncertainty. Unsecured creditors must have a clear understanding of their rights and the proactive choices they have under the Insolvency & Bankruptcy Code (IBC).

Exploring the Function of Unsecured Creditors

Unsecured creditors, referring to individuals or businesses who lack any collateral to reclaim their debts, play a crucial role in the financial ecosystem. Contrary to a widely held belief that smaller creditors are not adequately protected, Corporate Law guarantees identical rights and safeguards for all creditors without collateral. This protection applies regardless of the magnitude of the debt or the financial status of the debtor enterprise.

Understanding the Creditors’ Spectrum

Secured creditors possess a security interest in the debtor’s property, which entitles them to recover their debts. The purpose of establishing a security interest is to secure the borrower’s compliance, albeit without a guarantee.

Financial and operational creditors can be categorized based on the type of debts they are owing. Financial creditors refer to people who are owed financial debts, while operational creditors encompass individuals or entities who are owed money, such as workers and employees. Financial creditors can be classified as either secured or unsecured, whereas operational creditors are generally unsecured. This puts them at a greater risk in insolvency scenarios, presenting them with distinct issues.

Enhancing the Authority of Creditors through the Insolvency and Bankruptcy Code (IBC)

The Corporate Insolvency Resolution Process (CIRP) is initiated in accordance with Chapter II of Part II of the IBC. It can be initiated by financial creditors, operational creditors, or the corporate debtor that has defaulted. The procedure requires a minimum debt of Rs. 1 lakh, with financial creditors submitting their claims under Section 7 and operational creditors utilising either sections 8 or 9.

Debt recovery by operational creditors is a vital aspect of the overall debt recovery process. Prior to initiating any course of action, it is imperative for them to issue a demand notice to the corporate debtor. The recipient of the debt notice is given a period of ten days to reply, furnishing comprehensive details regarding the current status of the debt. Operational creditors that possess uncontested liabilities are the only ones eligible to initiate a Corporate Insolvency Resolution Process (CIRP).

The payment of liquidation proceeds is governed by the IBC, which sets up a definitive hierarchy for dispersing these funds. This encompasses the payment of charges related to the bankruptcy resolution process, expenses associated with liquidation, and the remuneration of employees. Prioritised ahead of all other claims are the payments owing to labourers for the past two years, followed by creditors with collateral, outstanding debts of creditors without collateral, and any remaining obligations.

Conclusion: Empowering Unsecured Creditors

The implementation of the Insolvency and Bankruptcy Code in 2016, together with later modifications, has brought about a substantial change in how business-related insolvencies and bankruptcies are dealt with. This comprehensive legislation simplifies the process of resolving disputes, replacing lengthy legal conflicts with a more effective technique that can be applied to individuals, partnerships, and corporate debtors. It is vital for unsecured creditors to comprehend their rights and utilise the available remedies under the IBC. Consulting a company lawyer is crucial when dealing with the intricacies of insolvency proceedings. The IBC 2016 guarantees that unsecured creditors are not left vulnerable, enabling them to actively engage in the settlement or liquidation process and protect their interests. Ultimately, the IBC 2016 serves as a prominent symbol of transformation, offering a strong structure for dealing with economic hardship in the corporate realm. Unsecured creditors, typically considered susceptible entities, can now confidently negotiate the insolvency terrain, equipped with an understanding of their entitlements and the options at their disposal to safeguard their financial interests.

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Introduction

The Supreme Court recently delivered a landmark judgment on the principle of insolvency set-off under the IBC. The case is referred to as Bharti Airtel Ltd and Another Vs. Vijaykumar V. Iyer and Others.

The Case and Its Context

The Hon’ble Bench, presided over by Mr. Justice Sanjiv Khanna and Mr. Justice S.V.N. Bhatti, interpreted various provisions related to set-off and IBC. They described five different categories of the term ‘set-off’, namely, (a) statutory or legal set-off; (b) common law set-off; (c) equitable set-off; (d) contractual set-off; and (e) insolvency set-off.

The summary of this landmark judgment is divided into the following points:

(a) Contractual Set-off

Contractual set-off is a matter of agreement, rather than a separate application of set-off. The parties are free to mutually agree on the outcomes they desire. However, the contract should be within the bounds of legality and public policy. The right to set-off may be explicit in the words of the agreement, or can be gathered by the existence of an oral or implied agreement to set-off, reflecting an understanding to that effect. The foundation of contractual set-off is based on the same ground as in the case of equitable set-off, which is impeachment of title, albeit contractual set-off is a result of mutual agreement that permits set-off and adjustment.

(b) Statutory or Legal Set-off

Statutory or legal set-off is created by a statute. For example, Order VIII Rule 6 of the Code of Civil Procedure, 1908 states that where a suit for recovery of money is filed, the defendant can claim set-off against the plaintiff’s demand for any ascertained sum of money legally recoverable by the defendant from the plaintiff, but not exceeding the pecuniary limits of the jurisdiction of the court.

(c) Equitable Set-off

Equitable set-off can also be claimed in respect of an ascertained sum of money. However, the claim for an equitable set-off must have a connection between the plaintiff’s claim for the debt and the defendant’s claim to set-off, which would make it inequitable to drive the defendant to a separate suit. The claim for set-off should arise out of the same transaction, or transactions which can be regarded as one transaction. Equitable set-off is allowed in common law, as distinguished from legal set-off, which is allowed by the court only for an ascertained sum of money and is a statutory right.

(d) Insolvency Set-off

Rory Derham on the law of set-offs observes that insolvency set-offs should not be equated with equitable set-offs. This statement reflects the development of law in the United Kingdom, which has resulted in the enactment of special provisions on set-off in case of insolvency. Insolvency set-off under the law of the United Kingdom is permitted when there are mutual debts, mutual credits, and other mutual dealings between the parties at the relevant cut-off time, which is essentially the stage of commencement of the liquidation process.

Role of the Adjudicating Authority and the Nature of Insolvency Set-off

Section 60(5) of the IBC is an enabling provision that entitles the Adjudicating Authority to delve into several aspects to aid and assist the Corporate Insolvency Resolution Process (CIRP). However, it cannot be interpreted as allowing a creditor/debtor to claim set-off in the CIRP.

In the context of the IBC, insolvency set-off is neither automatic nor self-executing. It requires specific conditions and procedures to be met and followed.

Moratorium under Section 14 and Its Implications for Set-off under IBC

The moratorium under Section 14 of the IBC is designed to grant protection and prevent a scramble and dissipation of the assets of the Corporate Debtor. The contention that the “amount” to be set-off is not part of the corporate debtor’s assets in the present facts is misconceived and must be rejected. This underscores the importance of understanding the nature and implications of set-off in the context of insolvency proceedings.

Conclusion: Key Insights into Set-Off under IBC

This landmark judgment provides valuable insights into the principle of insolvency set-off under the IBC. It serves as a crucial reference for all stakeholders in the insolvency process to understand the concept of set-off and its various types and principles. The ruling underscores the importance of adhering to the principles and procedures laid down by the Code. It also highlights the role of the Adjudicating Authority and the implications of the moratorium under Section 14 in the context of set-off.

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Introduction

The Insolvency and Bankruptcy Code (IBC) has been a subject of intense legal scrutiny and interpretation in recent years. One of the most contentious issues pertains to the entitlement of dissenting financial creditors under the IBC.

The Contention: Security Interest of Financial Creditors

A frequently vexed question arises as to the claim of a secured financial creditor either on the basis of the security interest it holds or otherwise. Such creditors, along with workmen, are first in the order of priority under Section 53(1) of the Code. However, what the other creditors would receive also depends upon how the secured creditors are settled.

Divergent Rulings: The Need for Clarification

In Essar Steel (India) Ltd. v. Satish Kumar Gupta, the Supreme Court observed that a secured creditor would be entitled to the value of its security. On the other hand, in India Resurgence ARC (P) Ltd. v. Amit Metaliks Ltd., the Court held that the secured creditor would not be entitled to the value of its security but would receive in proportion to what the others in the same class receive. These rulings seem to contradict one another but according to some legal experts, it is not so.

The CoC’s Role: Exercising Commercial Wisdom

In both cases, the Court proceeded on the premise that in the insolvency regime, the Committee of Creditors (CoC) is entitled to exercise commercial wisdom in dealing with the revival of the ailing corporate debtor and determine what amounts were to be paid to each class of creditors.

Dissenting Financial Creditors : A Position of Compromise?

The Supreme Court in Essar Steel (India) Ltd. v. Satish Kumar Gupta has held that in a corporate insolvency resolution process, as per Section 30(2)(b), a dissenting financial creditor would be entitled to at least what it would receive under Section 53(1) in case of liquidation (i.e., minimum liquidation value). However, the position in corporate insolvency resolution process (CIRP) is much different than that in an insolvency process.

In insolvency process, there is a moratorium in place where there is a freeze on the assets of the corporate debtor and all the financial creditors come together to form the CoC. Approval to a resolution plan by the requisite majority is binding on all the stakeholders including dissenting financial creditors. It is thus, possible that under the approved resolution plan a dissenting financial creditor may not receive the value of the security held by it.

Dissenting Financial Creditors : Court’s Clarification for Larger Bench

The Court also rejected the argument of the respondent that Section 30(2)(b)(ii) is unworkable because it involves deeming fiction relating to liquidation, which is inapplicable during the CIRP period. It noted that the dissenting financial creditor has to statutorily forgo and relinquish his security interest on the resolution plan being accepted, and his position is same and no different from that of a secured creditor who has voluntarily relinquished security and is to be paid under Section 53(1)(b)(ii) of the Code.

“We wish to clarify that Section 53(1) is referred to in Section 30(2)(b)(ii) with the purpose and objective that the dissenting financial creditor is not denied the amount which is payable to it being equal to the amount of value of the security interest. The entire Section 53 is not made applicable,” the judgment authored by Justice Sanjiv Khanna stated.

Since it was taking a contrary view from a coordinate bench’s judgment, the bench said that it is proper and appropriate that the issue is referred to a larger bench. The matter be, accordingly placed before the Hon’ble the Chief Justice for appropriate orders, the judgment stated.

Conclusion: Dissenting Financial creditors under IBC

The entitlement of dissenting financial creditors under the IBC is a complex issue that requires careful consideration. The Supreme Court’s rulings provide some guidance, but the final decision often rests with the CoC. As the law continues to evolve, it will be interesting to see how these issues are resolved in the future.

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I. The Case in Context

The Applicant, having purchased an office unit in the Corporate Debtor’s project “ONE BKC” in Bandra, Mumbai, found themselves embroiled in a legal dispute due to the non-delivery of the unit. Despite paying the entire consideration amount of Rs. 12,93,60,000/-, the Corporate Debtor failed to hand over the possession of the unit by the agreed date of 30.09.2015.

II. Legal Proceedings and the Role of RERA

In response to the non-delivery, the Applicant filed a complaint before the Real Estate Regulatory Authority (RERA). However, RERA did not allow compensation to the Applicant in its Order dated 08.10.2020. This led the Applicant to appeal against the Order to the Maharashtra Real Estate Appellate Tribunal, Mumbai (MahaRERA).

III. The Appeal and the Corporate Insolvency Resolution Process (CIRP)

During the pendency of the appeal before MahaRERA, the Corporate Debtor was admitted to CIRP on 04.10.2021. Despite this, MahaRERA granted relief to the Appellant in its Order dated 30.06.2022, directing the Corporate Debtor to pay interest at the rate of State Bank of India’s highest Marginal Cost Lending Rate plus 2% on the amount paid by the Applicant from 01.10.2015 up to 30.11.2019.

IV. The Role of the Resolution Professional (RP)

Upon receipt of the Order, the Applicant informed the Resolution Professional (RP) and filed his claim in Form-B on 19.07.2022. The Applicant argued that the RP was duty-bound to disclose all legal proceedings pending against the Corporate Debtor under the Information Memorandum as per Regulation 36(2)(h) of IBBI (Insolvency of Corporate Persons) Regulations, 2016.

V. The Decision of the Adjudicating Authority

The Adjudicating Authority held that the claim of the Applicant could not be considered belated or barred by limitation, as the appeal was filed before MahaRERA prior to the initiation of CIRP proceedings. It emphasized the duty of the RP to be aware of and follow all pending proceedings against the Corporate Debtor.

VI. The Implications of the Judgment

The judgment has far-reaching implications for the insolvency resolution process in India, especially for real estate companies. It harmonizes the provisions of the Real Estate (Regulation and Development) Act, 2016, with the Insolvency and Bankruptcy Code, providing important guidelines for handling insolvency cases involving real estate entities.

VII. Conclusion

In conclusion, the case of Mysore Petro Chemicals Ltd. vs. Mrs. Vandana Garg, RP of Raghuleela Builders Pvt. Ltd., serves as a significant precedent in the realm of insolvency laws. It underscores the need for a comprehensive understanding of both real estate and insolvency laws in handling such cases. The judgment also highlights the crucial role of the RP in the insolvency resolution process. The decision is a step forward in ensuring a more effective and efficient insolvency resolution process in India.

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Introduction

In the realm of insolvency law, the National Company Law Appellate Tribunal’s (NCLAT) decision in a landmark case serves as a beacon, illuminating the procedures when asset revaluation undergo changes during insolvency proceedings.

The Central Issue

The Tribunal was confronted with a scenario where new assets were added to the Corporate Debtor’s portfolio post the initiation of the resolution process. The issuance of a fresh Form G to invite revised Expressions of Interest was emphasized, ensuring transparency and fairness in the process.

Tribunal’s Reasoning on Asset Revaluation

The Tribunal acknowledged the necessity to reissue Form G, enabling potential applicants to take into account the augmented asset value. It also referred to previous Supreme Court rulings to underscore the principles of effective and timely resolution.

Conclusion: Asset Revaluation Impact

The NCLAT’s judgment highlights the significance of modifying the resolution process in response to changing circumstances, upholding fairness, and adhering to judicial precedents in insolvency cases. This decision may pave the way for future handling of similar situations in insolvency proceedings, emphasizing the dynamic nature of asset valuation and resolution strategies.

In the ruling “Masatya Technologies Pvt. Ltd. v. Amit Agarwal & Anr.,” the Tribunal elucidated key terminologies and processes within the framework of the Insolvency and Bankruptcy Code. Here’s a simplified breakdown:

• Form G: This form is pivotal to the Corporate Insolvency Resolution Process (CIRP), as it invites expressions of interest (EOI) from potential resolution applicants.
• Fresh Start: In this context, a ‘fresh start’ was necessitated by the addition of new properties to the assets of the Corporate Debtor. The Tribunal concurred with the Adjudicating Authority’s decision to issue a fresh Form G. This was to ensure that all potential resolution applicants were cognizant of the enhanced asset revaluation, , thereby enabling them to submit revised or new EOIs.
• Relevance in Judgment: The Tribunal determined that the inclusion of valuable properties to the Corporate Debtor’s assets warranted the reissuance of Form G. This was to ensure transparency and fairness in the resolution process, affording all potential applicants an opportunity to consider the new assets in their proposals.

These components are instrumental in comprehending the judicial rationale behind ensuring a fair and transparent resolution process, particularly when the value of the Corporate Debtor’s assets undergoes significant changes during the CIRP.

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