1. Introduction     

The longstanding debate surrounding the prioritization of crown debts vis-à-vis private debts has entered a new chapter with the advent of the Insolvency and Bankruptcy Code, 2016 (“IBC”). Prior to the IBC, the common law principle generally granted crown debts preferential status over unsecured debts. This historical primacy stemmed from the sovereign's role as the embodiment of the public good, requiring unimpeded revenue collection for the smooth functioning of the State.

The Bombay High Court recently quashed a provision of a central government office memorandum that enabled public sector banks to request issuance of look out circulars (LoCs) against wilful defaulters. In Viraj Chetan Shah v Union of India, the court held that this provision violated the fundamental right to life (Article 21) as well as the fundamental right to equality (Article 14). The government is reportedly contemplating a statutory basis for PSBs to initiate LoCs.

The original version of this article was first published in the Trilegal Quarterly Roundup

This article analyses the utility of set-off provisions in commercial contracts, especially in the context of insolvency, in light of a recent Supreme Court decision. It also provides key takeaways for ensuring the feasibility of set-off provisions and making them capable of withstanding judicial scrutiny.

The treatment and position of statutory creditors having a statutory charge in insolvency proceedings gained criticality at the first instance upon passing of the judgment by the Hon’ble Supreme Court in the matter of STATE TAX OFFICER (I) VERSUS RAINBOW PAPERS LTD. 2022 SCC ONLINE SC 1162 (Rainbow Papers Case). The issue before the Hon’ble Supreme Court was whether in terms of Section 48 of the Gujarat Value Added Tax Act, 2003, the State Government shall be treated as a “Secured creditor” of the company undergoing insolvency proceedings.

The filing of voluntary insolvency proceedings by the promoters of Go Air in May 2023, being a first of its kind, gained a lot of limelight and the National Company Law Tribunal acted swiftly to admit the insolvency proceedings within a span of 10 days from the date of filing of the insolvency plea. At the time of initiation of proceedings against Go Air, the promptness on the part of the Promoters was being considered significant to assist an ailing airline company which stood grounded as on the date of initiation of insolvency proceedings.

The Hon’ble Supreme Court of India (“Supreme Court”) in Global Credit Capital Limited & Anr Vs SACH Marketing Pvt. Ltd & Anr, has established the following principles on classification of a debt under the Insolvency and Bankruptcy Code, 2016 (“Code”):

In the recent decision of the Anjani Kumar Prashar (Suspended Director of Grandstar Realty Pvt. Limited) v. Manab Dutta1, the National Company Law Appellate Tribunal (“NCLAT”) has held that the auction purchaser would also be a financial creditor vis‐à‐vis the creditors of the entity whose assets were purchased by the auction purchaser.

The Insolvency and Bankruptcy Code, 2016 (IBC) has been at loggerheads with the Prevention of Money Laundering Act, 2002 (PMLA) on various occasions in the corporate insolvency resolution process (CIRP) of a distressed entity. Courts and tribunals have passed varying judgments, either giving primacy to the IBC or allowing the Enforcement Directorate (ED), a functionary under the PMLA, to perform its duties irrespective of the ongoing CIRP of a company.

Introduction

The Insolvency and Bankruptcy Board of India (IBBI) on 18 September 2023 notified the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) (Second Amendment) Regulations, 2023 (CIRP Amendment Regulations) amending the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (CIRP Regulations).

The key changes brought about by the CIRP Amendment Regulations are as follows:

September, 2023 For Private Circulation - Educational & Informational Purpose Only A BRIEFING ON LEGAL MATTERS OF CURRENT INTEREST KEY HIGHLIGHTS * Bombay High Court: Secured creditor may initiate recovery proceedings against secured asset owned by guarantor even if principal borrower is placed under moratorium. ⁎ Calcutta High Court: Application for removal of arbitrator must be made before the same court as envisaged in Sections 2(i)(e) and 42 of the Arbitration and Conciliation Act, 1996.