Supreme Court Verdicts In 2023 That Reshaped India's Insolvency Law

Insolvency jurisprudence witnessed an eventful transformation in 2023 as the Supreme Court offered clarity and set precedents in key aspects of the bankruptcy law.

From laying down the contours of preferential transactions to upholding the constitutionality of various provisions of the insolvency resolution process for individuals and partnership firms, the rulings will reshape the nation's financial landscape. Other key matters that the top court dealt with included the rights of homebuyers, the discretionary powers of insolvency courts, and government's secured creditor status.

One of the biggest IBC developments came in the latter part of the year. While dealing with a batch of petitions, which challenged various provisions of the insolvency resolution process for individuals and partnership firms, the top court said the provisions under challenge do not suffer from any manifest arbitrariness.

The case dealt primarily with the role of resolution professionals in relation to personal guarantors. It was the contention of the petitioners that resolution professionals have unfettered powers, as the IBC empowers them to exercise adjudicatory functions.

Holding that a resolution professional does not exercise an adjudicatory role in relation to personal guarantors, the apex court explained that the real adjudicatory process starts when the adjudicating authority either accepts, or rejects the resolution professional's application to start the insolvency process, not at the stage when an application is made by the resolution professional to the authority.

There are 2,289 cases pertaining to personal guarantors filed before the NCLTs, as per the latest IBBI data. These involve a corporate debt to the tune of Rs 1.63 lakh crore.

The top court’s ruling paves the way for these cases to be taken up.

Payments by a company that give unfair preference to one creditor over others prior to insolvency initiation are referred to as preferential transactions and can be wound up under the IBC.

Providing clarity on how a preferential transaction must be viewed, the top court has clarified a host of concerns surrounding this issue.

The apex court has clarified that fraudulent intent isn't a prerequisite for a transaction to be classified as a preferential transaction. Further, it said that any transaction under any notice, demand, or threat shall not lose its character as a preferential transaction, merely on the basis of those alleged grounds. Whether a transaction was carried out voluntarily or not has nothing to do with it getting classified as 'preferential'.

The top court’s interpretation of preferential transactions outlines an exception for those transactions which are conducted in the ordinary course of business. To qualify, these transactions must be regular practices, untouched by unique circumstances. Notably, activities deviating from standard business operations, like sourcing funds from relatives during financial instability, fall outside this exception.

In a significant interim decision earlier this year, the top court permitted a first under the Insolvency and Bankruptcy Code by allowing project-wise resolution of an insolvent real estate company.

Irreparable injury would be caused to homebuyers if all projects of Supertech Ltd., the real estate company in question, were made part of the insolvency process, the Supreme Court said at the time. If insolvency proceedings against Supertech were admitted as a whole, then it was likely to cause immense hardship to the homebuyers, while throwing every other project into a state of uncertainty, the top court had said.

However, experts had cautioned that since this is an interim decision, it does not necessarily indicate the mind of the Supreme Court as to how the law pertaining to this issue will take course.

In another first, the top court refused to draw any kind of distinction among sub-classes of homebuyers. The court was dealing with a case, wherein a distinction was drawn between homebuyers who had opted or elected for other remedies, such as applying before the RERA and having secured orders in their favour, and those who did not do so.

The court held that the provisions of IBC do not make any distinction between different classes of financial creditors, for the purposes of drawing up a resolution plan.

This amounts to ‘hyper-classification’, which falls afoul of Article 14 of the Constitution, the apex court had said.

In a decision that put to rest the controversy behind the discretionary powers of an insolvency court to admit insolvency applications, the top court has said that once the NCLT is satisfied that a default pertaining to a financial debt has occurred, it has no other option but to admit the insolvency application.

The court clarified that it is not significant whether the debt in question is disputed, so long as the debt is "due". Only when it can be proven that a debt is not due or is payable at some future date does the adjudicating authority have the discretion to reject the application, the court said.

Owing to certain conflicting rulings of the top court, the government’s status as a secured creditor is now in a bind. 

A judgment came out last year which had cemented the government's position as a secured creditor under the IBC. This stance attained finality this year when a batch of review petitions filed against this judgment got dismissed.

However, there was another judgment which came out this year that held that dues payable to the government are placed much below those of secured creditors and even unsecured and operational creditors.

Since both of these judgments were pronounced by a division bench, experts believe that this situation can only be resolved through a judgment on this issue by a larger bench.