Non-compliance with the regulations and provisions of the Insolvency and Bankruptcy Code (IBC) in India can result in various legal consequences and penalties. The IBC is designed to establish a structured and time-bound framework for the resolution of insolvency and bankruptcy cases, and it imposes certain obligations and responsibilities on various stakeholders, including debtors, creditors, insolvency professionals, and corporate entities. Here are some of the consequences of non-compliance with the IBC regulations: Penalties and Fines: Non-compliance with specific provisions of the IBC can lead to monetary penalties and fines imposed on individuals, corporate debtors, or other stakeholders involved in the insolvency process. These penalties are typically intended to discourage non-compliance and ensure adherence to the code. Liability for Damages: Parties found to be in non-compliance with the IBC may be held liable for damages caused to other stakeholders. For example, if a party's actions or omissions result in financial harm to creditors or the insolvency process, they may be required to compensate the affected parties. Voidable Transactions: Certain transactions that occur prior to the initiation of insolvency proceedings can be deemed voidable under the IBC if they are found to be preferential or undervalued. Non-compliance with provisions related to such transactions may lead to their reversal, and the assets or funds may be clawed back into the insolvency estate for equitable distribution among creditors. Exclusion from Bidding: Non-compliant parties may be excluded from participating in the bidding process for the acquisition of assets during the insolvency resolution process. This can significantly impact their ability to acquire assets of distressed companies. Loss of Control for Corporate Debtors: Corporate debtors that do not comply with the IBC regulations may lose control of their businesses. The resolution professional (RP) or the committee of creditors (CoC) may take over the management of the company to ensure that the insolvency process is conducted in a fair and transparent manner. Criminal Proceedings: In cases of serious non-compliance, such as fraudulent actions or willful default, the IBC allows for criminal proceedings against individuals or entities involved. These can lead to imprisonment and other legal consequences for those found guilty. Bar on Participating in Future Insolvency Processes: Individuals or entities found to be in non-compliance with the IBC may be barred from participating in future insolvency proceedings as insolvency professionals, resolution applicants, or other roles within the process. Additional Regulatory Actions: Regulatory authorities, such as the National Company Law Tribunal (NCLT) and the Insolvency and Bankruptcy Board of India (IBBI), have the authority to take actions against non-compliant parties, including issuing warnings, suspending licenses, or imposing other regulatory measures. It's important for all parties involved in insolvency and bankruptcy proceedings to comply with the IBC's provisions and adhere to their obligations and responsibilities. Non-compliance not only results in legal consequences but can also disrupt the insolvency process, delay resolution, and potentially harm the interests of creditors and stakeholders. Legal advice and guidance from insolvency professionals and legal experts are crucial to navigate the complexities of the IBC and ensure compliance.

Dear client, A corporate debtor’s journey from admission to resolution comprises various compliances and procedures in India, as prescribed in the Insolvency and Bankruptcy Code, 2016 (IBC), and regulations. One of the key steps is implementation of a resolution plan, which requires approvals from relevant regulators under applicable law. An amendment in 2018 (sub-section (4) under section 31) mandated a resolution applicant to obtain necessary approvals within one year from the date of approval of the resolution plan, or within the timeline prescribed, whichever is later. Approval by the Competition Commission of India (CCI) under section 5 of the Competition Act, 2002 (CCI Act), was treated on a different footing; in a proviso directing that approval “shall” be obtained prior to approval of the resolution plan by the committee of creditors (COC). The interpretation of this proviso and its implication on timely resolution and value maximisation of the corporate debtor has been controversial and was recently put to the test before the National Company Law Appellant Tribunal (NCLAT) in the case of Independent Sugar Corporation Ltd v Girish Sriram Juneja & Anr, otherwise known as the INSCO case. The proviso to section 31(4) comprises two parts: (1) requirement of CCI approval for proposed combination by the resolution applicant, which undoubtedly is a mandatory requirement to examine any appreciable adverse effect on competition; and (2) the nature of the timeline of obtaining such approval, which is the main bone of contention, namely, whether to be interpreted as mandatory or directory, considering the entire scheme of the IBC. The meaning and intent of the legislature are keys to determining the directory or mandatory nature of a provision, to be ascertained not only from the phraseology of the provision, but also by considering its object, design, and the consequences that would follow from construing it one way or another. If strict interpretation is accorded to the timeline provided in the proviso, then it will have an adverse effect on the time-bound completion of the corporate insolvency resolution process (CIRP), as the timeline contemplated under the IBC (180 days, subject to further extension) is not in consonance with the timeline provided under the CCI Act (deemed approval of combination within 210 days, although approvals may come earlier). It will also undermine the purpose of the IBC, as the COC will not be able to vote on and approve the resolution plans that require CCI approval if such resolution plans do not receive CCI approval before being put to a vote. This leads to freezing the CIRP process, or disqualifying otherwise robust proposals. However, if the timeline in the proviso is interpreted as directory – in that approval of the CCI can be obtained after COC approval but prior to approval by an adjudicating authority – then it enables the COC to evaluate all resolution plans on an equal footing and approve them subject to CCI approval obtained prior to approval of resolution plans by the adjudicating authority. This interpretation is aligned in principle with the Insolvency and Bankruptcy Board of India’s discussions on the requirement to obtain an indication on the stance of the concerned regulators on the resolution plan prior to the resolution plan being approved by the adjudicating authority, which has been upheld by the NCLAT in previous judgments. Considering the implications of the proviso on the objective of the IBC – and that no consequences are provided in the IBC for non-compliance of the proviso – the NCLAT in the INSCO case held that although CCI approval was “mandatory”, the timeline for such approval prior to COC approval was “directory”. The NCLAT judgment in the INSCO case is currently being challenged before the Supreme Court. In the authors’ view, while the proviso has caused hardships, the watered down and purposive interpretation accorded by the NCLAT is a step in the right direction. It balances the objective of the IBC without compromising or undermining compliance with regulatory requirements. However, approvals cannot be treated with a “tick-box” approach. What happens when such approvals get rejected also needs due evaluation. After all, a single approval should not have the power of unravelling the entire resolution plan. Concessions accorded by an approving authority ought not to have the unintended effect of other rejected resolution applicants claiming that such concession can also make them eligible. Like everything else under the IBC this, too, shall evolve and hope remains that the pillars and principles continue to be respected. Should you have any queries, please feel free to contact us!

Dear client, Introduction Section 186 of the Companies Act, 2013 (“Act”) restricts companies from extending loan, guarantees, or acquiring securities, wherein the amount is beyond prescribed limits – 60% of its paid-up share capital, free reserves, and securities premium account, or 100% of its free reserves and securities premium account, whichever is more – absent prior authorisation via special resolution in a general meeting. The challenge arises when a company, donning the hat of “Financial Creditor” or “Corporate Debtor” under the Insolvency and Bankruptcy Code, 2016 (“IBC”), breaches this limit without the mandated special resolution. The question is whether the above transgression, despite meeting the criteria for “Financial Debt” under the IBC and having established default thereof, hinders the Financial Creditor from invoking Section 7 against the Corporate Debtor? Alternatively, can the Corporate Debtor rely on non-compliance with Section 186 of the Act as a shield against insolvency? This article navigates these questions, based on Section 186’s scheme and other legal principles. It also examines the historical (in)efficacy of the Corporate Debtor’s potential defences in resisting insolvency proceedings. Historical Effectiveness of Section 186 arguments in Section 7 Proceedings In M/s. UKG Steels Pvt. Ltd. v. Exotic Buildcon Pvt. Ltd., the National Company Law Tribunal (“NCLT”), New Delhi, confronted a scenario wherein the Financial Creditor extended an inter-corporate loan to the Corporate Debtor that exceeded 60% of the aggregate of its paid-up share capital and reserves and surplus amount, as per its balance sheet. Notably, the omission of a separate disclosure of the securities premium account in the balance sheet led to its exclusion from the computation. Additionally, the Financial Creditor ran afoul of Section 186(4) of the Act by failing to disclose the inter-corporate loan in its balance sheet. Critically, no special resolution from an extraordinary general meeting was presented, and the loan agreement remained silent on any such shareholder resolution. Consequently, the NCLT deemed the transaction ultra vires, rendering the Financial Debt unenforceable and resulting in the dismissal of the Section 7 Petition. This debatable conclusion is dealt-with below. Despite the limitations in UKG Steels, the NCLT New Delhi followed it in Jambudwip Exports and Imports Ltd. v. UP Bone Mills Pvt. Ltd. In this case, the Financial Creditor initially provided funds as an advance for goods, subsequently converting it into an inter-corporate loan through a memorandum of understanding. This amount exceeded the limit prescribed under Section 186(2) of the Act, and crucially, the Financial Creditor failed to obtain prior approval through a special resolution at a general meeting. Consequently, the NCLT dismissed the Financial Creditor’s petition, deeming the Financial Debt as unenforceable. Per contra, in Pegasus Assets Reconstruction Pvt. Ltd. v. Whiz Enterprises Pvt. Ltd., the NCLT Mumbai rejected the Corporate Debtor’s argument that its corporate guarantee should be deemed void under Section 186(2) of the Act due to an alleged excess in value. The NCLT emphasised the Corporate Debtor’s voluntary execution of the deed of corporate guarantee, duly signed by its authorised representative. Consequently, it held that any belated attempt to interpose such objections to evade payment obligations or insolvency is unacceptable. In a similar vein, the NCLT Kolkata, in Urban Infraprojects v. EDCL Infrastructure Ltd., maintained that a Corporate Debtor, enjoying the benefits of a Financial Creditor’s transgression, lacks standing to contest the breach and its ramifications. Doctrine of Election and Estoppel – Limiting Corporate Debtor’s Dual Stance Law does not permit a person to both approbate and reprobate. This is based on the common law doctrine of election. It strictly bars a person from asserting a transaction’s validity to reap certain benefits, only to later disclaim its legitimacy in pursuit of alternative benefits. Those who consciously enjoy the advantages arising from a contract are barred from subsequently contesting its validity or enforceability. This is to ensure fairness and equity. Consequently, when a Corporate Debtor admits the acquisition of a loan or issuance of a corporate guarantee, subsequently leading to a default, it is estopped from evading its responsibility or resisting insolvency proceedings under the IBC merely on the technical grounds of non-compliance with Section 186 of the Act. [See: Lakshmi Ratan Cotton Mills Co. Ltd. v. J.K. Jute Mills Co. Ltd.– The conceptual basis predates the IBC enactment and relates to money-recovery suits. However, there is no hindrance in applying this conceptual understanding to the current issue at hand.] In cases where a Corporate Debtor defaults on a Financial Debt arising out of a loan exceeding Section 186’s limits, it may attempt to invoke the doctrine of indoor management, claiming entitlement to presume that the Financial Creditor adhered to internal procedures while extending the loan. However, this line of defence has little merit. The doctrine of indoor management indeed grants the Corporate Debtor the right to diligence the Financial Creditor’s compliance with legal requirements if suspicions arise regarding propriety or validity of the transaction. But it does not grant the liberty to exploit the advantage gained from the transaction before, later challenging its validity. Protecting Shareholders: Section 186 compliance insights from Urban Infraprojects and Sarveshwar Creations Section 186 of the Act serves as a protective measure for companies. Its principal objective is to safeguard the shareholders from potential financial disasters resulting from corporate mismanagement. By prohibiting companies from exceeding specified loan limits without shareholder approval through a special resolution, it aims to mitigate the risk associated with excessive lending, exceeding the company’s financial capacity. The consequences of loan defaults or invoked guarantees fall squarely on the shareholders, with no external entities bearing the repercussion. As a result, any legal ramification/ cause of action, arising therefrom, rests solely with its shareholders. In Urban Infraprojects, the NCLT Kolkata effectively explains the above position. Further, drawing from the decision of the National Company Law Appellate Tribunal (“NCLAT”), New Delhi in Sarveshwar Creations Pvt. Ltd. v. Union Bank of India, it clarifies the self-contained nature of Section 186. This Section, establishing a comprehensive framework, mandates internal compliance by the company. Failure to adhere to these provisions trigger penalties outlined therein, encompassing monetary fine and imprisonment [See: Section 186(13)]. Such penal measures serve to avert the consequence of rendering a defaulted Financial debt arising from a loan or guarantee unenforceable, due to a transgression of Section 186. It may be noted that Sarveshwar Creations deals with the contravention of Section 185 of the Act, pertaining to loans to directors. This Section, akin to Section 186, mandates a special resolution if loans deviate from its stipulations. Shareholder Notice: Reading Section 186 with Section 129 of the Act Section 129 of the Act mandates the board of directors to lay the company’s financial statement before its shareholders at each annual general meeting. These statements, beyond being deemed to present a true and fair view of the company’s state of affairs, must disclose details such as loans or guarantees extended by the company and the outstanding debts. The provision underscores transparency and accountability in corporate reporting, underscoring the need for comprehensive financial disclosure to shareholders. If a company exceeds the prescribed limits under Section 186(2) of the Act, but records the loan or guarantee so extended in its financial statement, which is subsequently approved at the annual general meeting of the company, it may be construed as notice to shareholders. This could potentially favour the company (as a Financial Creditor) or work against it (as a Corporate Debtor), irrespective of the absence of shareholder approval via the mandated special resolution during the loan or guarantee extension under Section 186(3). The argument here is that the shareholders, albeit belatedly, have been made aware of the loan or guarantee extension and have ratified it by approving the financial statement. [See: Lakshmi Ratan Cotton Mills Co. Ltd. v. J.K. Jute Mills Co. Ltd. (1956)] While this may fortify the enforceability of the Financial Debt, it may not necessarily preclude a shareholder from invoking the penalty provision, or absolve the company or its officials from potential penalties. Conclusion Section 186 of the Act cannot serve as a tool for Corporate Debtors to evade responsibility or resist insolvency when faced with a Financial Debt. According to Section 5(8) of the IBC, for a debt to qualify as Financial Debt, two crucial conditions must be met: (i) there must be a debt, including any interest, disbursed for the time value of money; and (ii) money must be disbursed from creditor to debtor. The essence of Financial Debt remains unaffected by any (in)fraction of Section 186. Therefore, a reassessment of the NCLT New Delhi’s conclusion in UKG Steels and subsequent cases following the same is instructive. Should you have any queries, please feel free to contact us!