WHETHER ALL IS WELL UNDER IBC REGIME?

The Insolvency and Bankruptcy Code is a comprehensive framework covering all the Insolvency and Bankruptcy issues of the companies in distress, bankrupt individuals and Partnerships (other than financial firms) seeking to revive their financial viability in an expeditious manner. IBC was the result of the revelation that time is the essence in a corporate insolvency resolution, which was an invaluable lesson learnt from the failure of SICA. Hence the IBC framework envisages a time bound insolvency resolution procedure which is to be completed within a time frame of 330 days, the failure of which shall invoke the liquidation procedure inevitably under the non-intrusive oversight of the National Company Law Tribunal (NCLT). Under the earlier regime, the corporate debtor could have indefinitely continued to enjoy the protection given under Section 22 of Sick Industrial Companies Act, 1985 or under other such enactments which has now been forsaken. The intention of the introduction of the Code was to streamline and ease the process of corporate insolvency aiming for a time bound insolvency resolution thereby preventing the erosion of the enterprise value of the Corporate Debtor in distress and promote ease of doing business in the country.

By replacing the concept of ‘debtor in possession’ with the ‘creditor in control’ IBC has put its entire faith on the commercial wisdom of the Creditors and the integrity of the Insolvency Resolution professionals. Under the Code the management and control of assets of the debtor are handed over to an Insolvency Professional (IP) who is responsible for operating the debtor’s enterprise as a going concern and managing the corporate insolvency resolution process (CIRP) besides performing other crucial functions. It proceeds with an intrinsic assumption that financial creditors are fully informed about the viability of the corporate debtor and feasibility of the proposed resolution plan and hence has not provided any ground to challenge the “commercial wisdom” of the individual financial creditors or their collective decision before the adjudicating authority making it non-justiciable. IBC is being viewed as the new mantra for pulling down the NPA mound which is otherwise growing steadily like the nose of Pinocchio.

Even though the Code was enacted with an aim for a speedy resolution of the insolvency process the ground realities are telling a different story altogether. When one critically examines the progress that the IBC regime has made during the past three years it can be seen that the system has failed to meet the expectation of the financial market and the resolution process is exhibiting signs of sluggishness, which was the malady of the previous regime IBC intended to resolve. As on February 2019, i.e., within 27 months of operationalisation of the IBC, as many as 14,000 applications had been filed for initiation of CIRPs under the IBC. From the data available with IBBI, it is understood that, as on March 31, 2019, the commencement of CIRP has been ordered only with respect to 1858 Corporate Debtors.[i] As per the provisions under IBC, the NCLT should, within 14 days of receipt of an application for initiating a corporate insolvency resolution process, admit or reject the application. Due to the large number of cases pending before the NCLT, this time line stipulated under the Code is not generally being adhered to. There are several cases where the admission itself is taking more than 6 months from the date of receipt of the application.

Similarly there are scores of instances where the stipulated time period for completion of the CIRP process[ii] were stretched to more than double of the prescribed limit. For instance the Essar Steel case was pending more than 600 days after its admission before the NCLT. It is reported that about 32% of the ongoing Corporate Insolvency Resolution Process (CIRP) cases have surpassed the time ceiling of 270 days (which existed before the 2019 Amendment), with an additional 20% having crossed the six-month deadline.[iii]

The Challenge of Dual Responsibilities

 It needs to be understood that the NCLT Benches are simultaneously acting as the judicial forum for both the matters under the Code and the Companies Act 2013. The Company Law Boards (CLBs) used to receive around 4000 new cases annually[iv] which are now coming before the NCLT Benches. Further, with the formation of the NCLTs all the cases which were pending before the Company Law Boards (CLB) have been transferred to the NCLTs. As of March 2015, there were around 4,200 pending CLB cases which were transferred to NCLTs.[v] By virtue of the transitional provisions of IBC several cases which were pending before the BIFR or AAIFR for rehabilitisation have also been transferred to NCLT[vi]. In view of the same we can see that the NCLTs have started functioning with an inherited backlog of cases. It is pertinent to note here that to the exception of New Delhi and Mumbai, all other NCLT locations including Chennai, Bengaluru and Chandigarh are having only a Bench or two that may not be sufficient to give justice to the matters that come up for their consideration.[vii]

Judicial Intervention

Some of the judicial interpretations made with respect to the timelines stipulated under the Code without giving due consideration to the underlying legislative intent have also stifled the concept of time bound resolution. The NCLAT had, in one of its decisions, held that if an application is filed by the ‘Resolution Professional’ or the ‘Committee of Creditors’ or ‘any aggrieved person’ for justified reasons, it is always open to the Adjudicating Authority/Appellate Tribunal to ‘exclude certain period’ for the purpose of counting the total period of 270 days, if the facts and circumstances justify exclusion, in unforeseen circumstances[viii]. Such interpretations made by the adjudicating authorities greatly dilute and undermine the concept of timely resolution which is one of the cornerstones of the Code.

Legislative Gaps

Apart from these infrastructural handicaps, there have been certain legislative gaps under the Code leading to presumptions and interpretations beyond the legislative intent. This lack of clarity has on many occasions dragged the matters for judicial review leading to prolonging litigations. For instance the Code has originally envisaged a waterfall mechanism for distribution of proceeds from the sale of liquidation assets. However it did not provide for a similar waterfall for distribution of realisation under a resolution plan amongst the creditors. The distribution of realisation under resolution plans has been a bone of contention in several CIRPs and caused prolonged litigation and undue delay in completion of the process, occasionally disturbing pre-insolvency entitlements of creditors.

Similarly though the commercial decisions of the Committee of Creditors (CoC) are not generally open to any judicial review by the Adjudicating Authority, the question as to what is commercial and what is not has always been a debatable issue. It was not clear whether inter se distribution of realisation under resolution plans among creditors is a commercial matter or not. NCLAT had in one of their judgments^[ix] held that the CoC cannot distribute realisation amongst creditors, as the FCs constituting CoC, being claimants at par with other creditors, have a conflict of interests.

Other Infrastructural Shortfalls

The Insolvency Professionals play a key role in the insolvency proceedings as the resolution professionals (RP) and as liquidators. Their role ranges from the evaluation of the distressed company, its management during the resolution proceedings, preparation and implementation of the resolution proposal and the distribution of the realised proceeds. In performing these functions it is important that they maintain transparency and integrity in their functioning to maintain the credibility of the system. During the past two years there have been several complaints raised against the integrity and independence of the Insolvency Professionals acting as the Resolution Professionals. There have been instances of the IPs failing to record the claims of the creditors, unilateral decisions being taken keeping the CoC in dark trying to pursue the IP’s own interest.  In one of the Orders of the IBBI Disciplinary committee it has been recorded that the IP failed to act in the best interests of the corporate debtor and its creditors but has pursued his appointment as the RP and as liquidator depriving CoC of its rights to resolve the insolvency of the Corporate Debtor[x]. There have also been instances where the IP was found to be acting in collusion with the Resolution Applicant[xi] or was acting only on behalf of one of the creditors without the approval of CoC[xii].

The Information Utilities were put to place considering the fact that the asymmetric information can seriously undermine the insolvency and Bankruptcy process and a centralised database shall cut short the otherwise long-drawn process for obtaining all the relevant information and establishing its veracity. Under the provisions of the Code, a CIRP can be triggered when a default by the debtor company has taken place and the IU enables a quicker initiation of cases by providing access to irrefutable and transparent evidence of the default, along with the identity of all the creditors, the terms and conditions of all liabilities as well as the assets registered. IUs thus facilitate the formation of the creditors’ committee within the stipulated period of 14 days from the date of registration of a case.

When the IP is unable to provide such evidence to the default the NCLT will have to call for further evidence by notifying the stakeholders to evaluate as to whether a default has indeed taken place. Presently this process is contributing substantially to the delay involved in the Admission stage. It gives rise to two possible outcomes:

   i)         The delay in forming the creditors’ committee reducing the time available to agree on a resolution plan. If the committee cannot agree on a resolution plan within the specified time limit, the NCLT will order the liquidation of the company.

  ii)         The NCLT may have to exercise its judicial discretion extending the CIRP beyond the time limit specified under the Code. 

Both these outcomes have negative consequences. The former creates a liquidation bias in CIRP while the latter compromises the fundamental design of time-bound resolution in the IBC.[xiii]

Further it is always advisable to have multiple players to increase the efficiency of the performance of IUs. The Viswanathan Committee Report and the Joint Parliamentary Committee Report 2016 had envisaged that be a competitive industry of IUs should exist with an interoperable environment pointing out that in the event of centralisation there shall be problems associated with the elevated profit, low-quality work of monopolies.[xiv]  Both these reports had highlighted the fact that a multiplayer environment shall encourage competition and drive down the prices for queries and user filing charges. However currently NeSL is the only Information Utility registered under the IBC framework and concerns have been raised by many of the players of the Banking industry that the rates charged by NeSL is on a higher side justifying the views of these Reports.

Impact of Insolvency and Bankruptcy (Amendment) Act 2019

The IBC (Amendment) Act, 2019[xv] has brought the following key changes in the existing CIRP regime:

            i)         Reiterated Timeline: The Amendment has inserted a proviso to Sub Section (3) of Section 12 of the Code, whereby it is clarified that the 330 days within which the CIRP is to be mandatorily completed shall include any extension of the period of resolution process granted under Section 12 and also the time taken in legal proceedings in relation to such resolution process of the corporate debtor.

           ii)         Waterfall Distribution Mechanism under Resolution Plan: The Amendment Act provides that the Operational Creditors shall be paid not less than the amount payable to them in the event of liquidation of the Corporate Debtor or the amount payable to them if realisations under the resolution plan were distributed in accordance with the priority in the liquidation waterfall, whichever is higher. It also provides that the dissenting Financial Creditors shall be paid not less than the amount payable to them under liquidation waterfall. It clarifies that distributions made in this manner shall be fair and equitable. This provision shall apply to all ongoing CIRPs, including the ones where approved resolution plans are under litigation.

         iii)         CoC Decision on Resolution Plan: The Amendment has brought in a clear segregation between the commercial aspects of insolvency resolution from judicial aspects by making it clear that the CoC may approve a resolution plan after considering its feasibility and viability, and the manner of distribution of realisation under the plan, keeping in view priority of the creditors and their security interests.

         iv)         Voting Impasse: The Code provides for an Authorised Representative (AR) to represent a class of Financial Creditors and to vote in respect of each Financial Creditor in the committee of creditors (CoC). However, it was found difficult to secure the requisite votes where the CoC has class(es) of Financial Creditors, who are large in number, scattered all over the country and unorganised. To address the difficulty the 2019 Amendment has brought in a change to the effect that an AR shall vote for the Financial Creditors he represents in accordance with the decision taken by the class with more than 50% voting share of the Financial Creditors, who have cast their votes. This principle, however, shall not apply to voting for withdrawal of applications.

These amendments have been put to place with an intention to remove some of the legislative gaps which were being utilised to challenge the CIRP proceeds and CoC decisions leading to prolonged litigations delaying the resolution process[xvi].  However these changes are quite nascent and are yet to be subjected to any judicial scrutiny. It is hence too early to predict as to whether these changes shall continue to have the same impact which was originally intended by the Legislature.

SUGGESTIONS FOR CAPACITY BUILDING

v  Considering the increasing caseload of the NCLTs, it is necessary that Additional NCLT Benches should be established at various locations.

v  Currently NCLAT is only available in Delhi even though substantial cases are rising also from centres like Mumbai and Chennai. Hence Circuit Benches for NCLAT may also be considered.

v  The capacity of the NCLT and NCLAT may be reviewed from time to time and necessary infrastructure support must be provided.

v  The possibility of creating exclusive Benches for dealing with the matters related to the Code, considering the underlying complexities, may also be explored.

v  It must be religiously ensured that the time frame stipulated under IBC is strictly adhered to.

v  While the Economic Survey 2018-19 was published the facility for e-filing of applications, petitions, appeals, replies, etc. had been made available only at Delhi NCLT. The digitization and e filing must be expeditiously made available at other locations also.

v  Before notifying the provisions related to Insolvency Resolution and Bankruptcy for Individuals and Partnership firms it may be ensured that the DRTs are having the sufficient manpower and adequate infrastructure to efficiently handle the additional workload.

v  Sufficient regulatory measures should be put in place to ensure unbiased functioning of the IPs thereby ensuring transparency in the Resolution Process to avoid any conflict of interests.

v  There must be a robust mechanism to ensure the quality of the data available with the IU. The authentication of the financial information available with the IU needs to be duly scrutinised. Further the present technical infrastructure for preserving the data must be periodically reviewed and strengthened to prevent any loss of data and ensure the maintenance of confidentiality. It may be ensured that the IU infrastructure is sufficiently strengthened by creating a multi-player environment with interoperability.

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[i] See P.79, Chapter III ‘Monetary Management and Financial Intermediation’, Economic Survey 2018-19, Vol II, Available at https://www.indiabudget.gov.in/economicsurvey/doc/vol2chapter/echap03_vol2.pdf (Last visited 20.08.02019)

[ii] Under the Insolvency and Bankruptcy Code (Amendment) Act, 2019 the existing threshold of 270 days was modified to 330 days.

[iii] See IBBI Newsletter January-March, 2019; See also Amitabh Kant, “IBC delayed is IBC denied” available at https://economictimes.indiatimes.com/blogs/et-commentary/ibc-delayed-is-ibc-denied/ (Last visited on 20/08/2019)

[iv] Id

[v] See Crisil Report “ Strengthening of the Code”, available at https://www.crisil.com/content/dam/crisil/our-analysis/reports/Ratings/documents/2019/april/strengthening-the-code.pdf ; See also Amitabh Kant, “IBC delayed is IBC denied” available at https://economictimes.indiatimes.com/blogs/et-commentary/ibc-delayed-is-ibc-denied/ (Last visited on 20/08/2019)

[vi] As of March 2019, the CIRP for 378 companies ended in liquidation out of which 283 companies were with BIFR or already defunct. See P 85 supra note 4

[vii] See Constitution of NCLT Benches, available at https://www.ibbi.gov.in/uploads/whatsnew/Constitution_of_Benches_at_All_NCLT_Locations (Last visited on 20.08.2019)

[viii] See Quinn Logistics India P Ltd v Macksoft Tech ltd,  (08.05.2019-NCLAT). See also IDBI Bank Ltd. and Ors. v. Anuj Jain and Ors. (30.07.2019 - NCLAT) : MANU/NL/0339/2019

[ix] Judgment dated 4th July, 2019 of the NCLAT in the matter of Standard Chartered Bank v. Satish Kumar Gupta & Ors.

[x] IBBI/DC/10/2018 Order dt 15.10.2018

[xi] IBBI/DC/12/2018 dt 12.11.2018

[xii] IBBI/DC/03/2018 dt 18.04.2018

[xiii] See See Rajeswari Sengupta and Anjali Sharma, “Challenges in the Transition to the New Insolvency and Bankruptcy Code”,  available at https://thewire.in/law/insolvency-and-bankruptcy-code . (Last visited on 20.08.2019)

[xiv] See p 1171, Anirudh Wadhwa, Kapil Wadhwa et.al (eds). “Guide to the Insolvency & Bankruptcy Code - Vol I, P 1135-1137; (Wadhwa Brothers Sales Corporation, New Delhi, 1^st Edn, 2019).

[xv] The Amendment Act has been notified on 06.08.2019

[xvi] See A Resolve for Resolution, available at https://ibbi.gov.in/uploads/resources/94659461570db043622409c293e97a03.pdf (Last visited on 20.08.2019)

LENDING AGAINST INTELLECTUAL PROPERTY ASSETS IN INDIA– THE UNDERLYING CHALLENGES

The 21^st Century has seen India transforming itself to a land of young entrepreneurs and startup ventures. Securing funds for a startup is one of the toughest challenges an Entrepreneur faces while starting a new business. In this new dawn of Startups, the Government of India itself has come forward supporting them under various schemes like Startup India and Stand Up India. Banks have donned the new role of handholding these startup ventures by offering them a wide range of credit facilities including term loans or working capital or asset backed loans based on their requirements. Banks like SIDBI are offering special schemes for the startups which can be used for marketing, brand building, creation of distribution network, technical know-how, R&D and software purchase. 

The Government has brought in amendments to the Intellectual Property legal framework in India providing for a liberal fee structure for registering Patents under the Scheme for Facilitating Start-ups IntellectualProperty Protection (SIPP) thereby encouraging the startups to secure protection of the intellectual property created by them under their R&D. In a knowledge-based economy, physical assets such as property, plant and equipment dwindle in importance relative to Intellectual Property assets, which provide access to the latest and most innovative forms of technology and act as barriers to entry by competitors. The Banks can explore to secure their credit facilities by creating enforceable security interest over this intellectual property. However recent decision of the Supreme Court in Canara Bank v N G Subbaraya Setty has created apprehensions amongst the Banks as to the enforceability of security interest created over the intangible property of the borrowers.

Intellectual Property (IP) rights comprise of the underlying intangible rights such as patents, copyrights or trademarks, through which a set of exclusive rights is given to the right holder/s under which they may use the work in an unrestricted manner while others can do so only upon the permission of the right holder/s.[1] A business enterprise may have both identifiable and unidentifiable intangible assets.[2] For instance the Patents, Trademarks, Copyright, designs etc can be generally considered as identifiable intangible assets which enjoy protection as the Intellectual Property of the enterprise. The good will of the business enterprise may also contribute towards the value creation for the company but the same does not count as a protected intellectual property and may not be often quantified or identifiable.

While offering an IP right owned by a business enterprise as a collateral security, a security interest is created in favour of the Creditor over the receivables including future receivables generated from the intellectual property asset/s. Such receivables may include future royalty payments that are likely to be received through the licensing of a patent or a trademark, various rights in the music industry, such as recording rights, the future income from copyrights, distribution rights, etc.[3]

Whether An Enforceable Security Under Indian Legal Framework?

 The Banking Regulation Act, 1956, allows the Banks in India to acquire, hold and generally deal with any property or any right, title or interest in any such property forming the security or part of the security for any loans or advances. Banks can manage, sell or realise any such property that has come into its possession as a security in full or part satisfaction of any of its claims.[4] By virtue of this provision there is no bar on the Banks for accepting an intangible asset of a borrower like patent rights or trademarks for securing the credit facilities offered to the borrower. A security interest so created over an IP right can be enforced by the Banks under provisions of the SARFAESI Act or under the Insolvency and Bankruptcy Code (IBC).

By virtue of the provisions of the SARFAESI Act, a secured creditor can enforce any security interest created by the borrower in its favour, by way of a mortgage or an assignment. The Act has defined security interest to include any right, title and interest of any kind upon ‘property’ and the term property has been defined to include know-how, patent, copyright, trade mark, licence, franchise or any other business or commercial right of similar nature.

Similarly the intangible assets of a person, including any company has also been brought under the ambit of the IBC. The scope of IBC covers every description of property situated in India or outside and every description of interest including present or future or vested or contingent interest arising out of, or incidental to, property. IBC also provides for a similar but wider definition for security interest. As per the Code, security interest means right, title or interest or a claim to property, created in favour of, or provided for a secured creditor by a transaction which secures payment or performance of an obligation and includes mortgage, charge, hypothecation, assignment and encumbrance or any other agreement or arrangement securing payment or performance of any obligation of any person[5].

IBC provides for the Resolution professional to take control of the intangible assets including intellectual property of the Corporate Debtor (CD) during the Resolution process.[6] It has been further provided that the intellectual property of the CD shall also form part of the liquidation estate if the CD goes into liquidation[7].

 Legal Framework in India For Creation of Security Interest on IP

I.          Patents

For securing the credit facilities offered by a lender, the proprietor of a patent can create a valid mortgage of his right or assign the patent in favour of the Lender as per the provisions of the Indian Patent Act. In a mortgage of patents, the patent rights are wholly or partly transferred to assignee in return for a sum of money. Under such an assignment the creditor may require the proprietor of the Patent to assign the whole or part of the royalties and other receivables, including future receivables to the creditor by cross licensing or by other means. The lending banks may examine accepting of licensing agreements or royalty streams as either standalone collateral or as part of an asset package to secure a loan.

As per the provisions of the Indian Patents Act, an assignment of a patent or of a share in a patent, a mortgage, licence or the creation of any other interest in a patent shall not be valid unless the same were in writing and the agreement between the parties concerned is reduced to the form of a document embodying all the terms and conditions governing their rights and obligations and duly executed.

Whenever any mortgage or license in a patent is being created, either the mortgagee/licensee or the mortgagor/licensor has to apply in writing in the manner prescribed under the Patent Act for the registration of his title or, as the case may be of notice of his interest in the Register of Patents. Once the mortgagor/assignor repays the sum to the mortgagee/assignee, the patent rights are restored to patentee. The person in whose favour a mortgage is made is not entitled to have his name entered in the register as the proprietor, however he can get his name entered in the register of Patents as the mortgagee. The rights of a mortgagor and a mortgagee of a patent are no different from that of the mortgagor and mortgagee with respect to an immovable property[8].

II.            Trademarks

Reading the ratio in Subbaraya Setty in toto, it can be said that the Court has not barred the acceptance of trademark as a security. As it was rightly pointed out in the Judgement, unless the assignment of trademark has been made part of the loan documentation and has been registered with the Registrar of trademarks, such document/instrument evidencing the assignment will not be admissible in evidence by any Court in proof of title to the trade mark by assignment.[9] While creating the assignment as a security it must be explored and suitably defined under the instrument as to what are the receivables related to the Trademark which may be used for timely service of the credit facility availed and what shall be the right of the Lender in case of any default.

III.            Copyright

No assignment of the copyright in any work shall be valid unless it is in writing and signed by the assignor or by his duly authorised agent. The assignment of copyright should identify such work, and must specify the rights assigned and the duration of such assignment. If the period of assignment is not stated, it shall be deemed to be five years from the date of assignment. Under Section 18 of the Copyright Act, even the copyright in a future work can be assigned in accordance with Section 19, however, such assignment shall come into effect only upon date of creation of the work. It has now been added by the Amendment that no assignment shall be applied to any medium or mode of exploitation of the work, which did not exist or was not in commercial use at the time when the assignment was made, unless the assignment specifically referred to such medium or mode of exploitation of the work. For instance if any financial institution proposes to provide credit facility for production of a cinematograph film, the copy right over the future work and the receivables can be assigned as a security if the same has been specifically mentioned therein under the Deed of assignment.

Further if the borrower is a Company, it shall be required under the Companies Act, 2013 to duly create and register the said charge over its IP assets under the ROC records.

Underlying Challenges For Lenders

a)    Due Diligence and Valuation: Performing due diligence and appraising the IP assets have all along considered to be time consuming and difficult. The first step in due diligence is to ascertain the ownership and gauge the likelihood of future ownership challenges. For instance, in the case of Information Technology sector, the only protection available for the source code is under copyright law. The absence of the requirement of registration of copyrights in India makes it extremely difficult to ascertain prior instances of the work in question, which might potentially be lawsuits for copyright infringement.   

The major drawback associated with trademarks is that that they are closely associated with the goodwill enjoyed by the organization that continues to hold those intangible assets. A decline in the value of the brand would also have a corresponding negative impact on the value of the trademarks associated with that brand. A classic example in this regard is the case of Kingfisher Airlines. The proportionate security cushion that was available to the lenders based on the value of the Brand was substantially eroded to the extent that the value of the brand, being an operating asset, has declined in the market[10].

The rapid technological advancements quite often render several patents obsolete and thereby the licenses that flow from them redundant. Drawing an example from the entertainment industry, the use of cassettes/diskettes as a conventional medium of distribution was totally made obsolete with the advent of digital distribution. Such risks are more in the case of software and semiconductor industries as new versions are being released within a very short span of time, drastically reducing the shelf time of the patents in this field. Such risks will have to be foreseen by the Lenders and should be accounted for at the time of valuation. At the time of valuation the future marketability and commercial potential of the IP assets also have to be considered, by assessing their values as a going-concern and also under liquidation scenario. The IP assets are generally considered as passive assets, where the owner of the IP uses its exclusionary rights to prevent unauthorised competition[11]. While valuing IP assets as collateral, it is important and always advisable to engage an independent third-party expert to ensure the fairness of the valuation and in assessing the future returns. [12]

In the international banking scenario, the Banks have begun to move away from a purely balance-sheet analysis into looking at the cash flow generating capability of the business and to ascertain whether there is adequate, stable cash flow from the business owning the IP asset to service and repay the loan within the stipulated time period[13].

b)      Ensuring Continuing validity: If accepted as collateral, the lender will be creating a “security interest” over the IP asset, which can be seized and sold in the event of a default. During the tenure of the loan the lender will have to ensure that the Borrower has timely renewed the ownership and that he has taken necessary precautions to ensure the continuation of valid IP ownership. As per the legal framework in India the duration of validity of a Patent is Twenty Years and that of the Trademark is Ten years from the date of application. In the case of any default resulting in the Lender/s may end up managing and monitoring potential infringements, defending them from charges of infringement and administering royalty payments. This includes payment of the renewal fees periodically till the liabilities are liquidated.

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[1] See Dov Solomon & Miriam Bitton, “Intellectual Property Securitisation”

[2] See Pavri, Zareer  Price Waterhouse  Cooper, “Valuation of Intellectual PropertyAssets”

[3] See Barooah, Swaraj Paul  “Securitisation of IP” 

[4] See Section 6(1) f & g of the Banking Regulation Act, 1956

[5] See Sections 3 (27) & (31) of IBC, 2016

[6] See Section 18(f)(iv) of IBC, 2016

[7] See Section 36 (3) (d) of IBC 2016

[8] See Van Gelder, Apsimon and Co Ltd v The Sowerby Bridge Flour Society Ltd, (1890) 44 Ch 374

[9] See Section 45(2) of the Trademarks Act.

[10] See supra note 3

[11] See Jacqueline Lipton, “ Intellectual Property in the Information Age and Secured Finance Practice” EIPR, 2002, 358, 364

[12] See Kim, Sung, “IP Asset Value as Collateral : The Increasing Use of Patents asCollateral in Asset Based Lending”

[13] Supra Note 2

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THE MORATORIUM UNDER BANKRUPTCY CODE NOT A BAR ON SARFAESI ACTION AGAINST GUARANTOR’S PROPERTIES

The Insolvency and Bankruptcy Code, 2016 (IBC) has been introduced to yield faster results in the recovery of Corporate NPAs. The erstwhile SICA, was enacted to address the corporate debts and to facilitate faster recovery, rehabilitation and revival of the sick company. Contrary to this legislative intention to revive the sick companies, the provisions of SICA were used by the Corporate Debtors to weave a protective cocoon around themselves under BIFR. Thus once a company entered into BIFR, nobody could recover money from them. The need for a new legal system was necessitated by such inbuilt provisions of SICA which helped the Corporate Defaulters to thwart and delay the recovery process by the financial creditors.

 The IBC also stipulates for a moratorium period from the date of commencement of the Insolvency proceedings until the approval of a resolution plan under Section 31 of the Code. Unlike SICA , under the provisions of the new Code if at any time during the corporate insolvency resolution process period, if the Adjudicating Authority approves the resolution plan under Section 31(1) or passes an order for liquidation of corporate debtor under section 33, the moratorium shall cease to have effect from the date of such approval or liquidation order, as the case may be. Further the IBC has restricted the insolvency resolution process period to 180 days, beginning from the insolvency commencement date and ending on One Hundred and Eightieth day.

The Supreme Court in Innoventive Industries Ltd v. ICICI Bank Ltd (2017) had observed that the intent behind the moratorium was “to provide the debtors a breathing spell in which he is to seek to reorganize his business.” Section 14 (1) (c) of the IBC prohibits any action to foreclose, recover or enforce any security interest, created by the corporate debtor in respect of its property including any action under the SARFAESI Act during the moratorium period. The view of the Apex Court that this provision intends to give a “breathing spell” to corporate debtor raises a question as to whether the same breathing space was intended to be extended to the promoters and guarantors to the corporate debtor also. The question as to whether this moratorium envisaged under IBC shall give protection to the promoters/guarantors, whose personal properties have been mortgaged for securing the credit facilities availed by the Corporate Debtor, was not answered till the NCLAT decision in Alpha & Omega Diagnostics India Ltd v Asset Reconstruction Company of India Ltd.  

Without bothering to read between the lines to give a broader scope to the provision, the Appellate Tribunal had concurred with the view of the NCLT which had adopted the canons of literal interpretation in understanding the scope of the provision. The Tribunal pointed out that the language of the sub section is clearly prohibiting any action to recover or enforce any security interest created by the Corporate Debtor in respect of "its" property. It was held that the term “its” used in the language of Section 14 (1) (c) denotes the property owned by the Corporate Debtor, which is reflected in the balance sheet of the Corporate Debtor. The Tribunal had concluded that such properties which are not owned by the Corporate Debtor do not fall within the ambit of the Moratorium declared under the Code. The Appellate tribunal had further clarified that just by the mere fact that the assets, movable or immovable, of a third party (i.e., promoter or a guarantor) have been proceeded against before the Debt Recovery Tribunal, does not qualify to bring it within the scope of Moratorium envisaged under the Code.

From the language of this decision it becomes very clear that there is no bar for financial creditors/banks to proceed against the Guarantor/s or to initiate SARFAESI proceedings against the properties in the personal name of the promoters/guarantors which have been offered as a security for the credit facilities availed by a corporate debtor. 

COMPETENCY OF A POWER OF ATTORNEY HOLDER TO FILE AN APPLICATION UNDER INSOLVENCY & BANKRUPTCY CODE, 2016

In general all the Banks are in a practice of authorising its officers under a power of attorney document to initiate or defend any legal proceedings by or against the Bank in any court of law. In M/s. Palogix Infrastructure Pvt Ltd. Vs. ICICI Bank a question was raised before the NCLAT as to whether a Constituted Attorney authorised, prior to the enactment of Insolvency and Bankruptcy Code 2016, to file suits and/or proceedings against the company for recovery of the amount can file application for initiation of corporate insolvency process under Section 7 of the Insolvency and Bankruptcy Code (IBC) 2016 without having specifically authorized to lodge Application/Petition under IBC 2016.

Rule 23 (1) of NCLT Rules permits an ‘authorised representative’, to present an application or petition before the Tribunal. The issue which was debated in the case in hand was whether a power of attorney holder who was given power of attorney prior to the enactment of IBC 2016 can be treated as an ‘authorised representative’ under the NCLT Rules.

It was argued by the Corporate Debtor that a Power of Attorney is an authorization by a 'principal' to its 'agent' to do an act and that such authorisation can only be of acts which are in the contemplation and knowledge of the 'principal' as on the date when such authorisation is given. If the 'principal' itself is unaware of an eventuality, it cannot authorize its agent for such eventuality. This is more so when IBC sets in motion a very serious and irreversible process, therefore, according to the Corporate Debtor, the procedural pre-requisites under the IBC must be strictly construed.

The NCLAT, while determining the question of competency of a Power of Attorney holder, observed that as per Section 7 of the IBC, an application for initiation of 'Corporate Insolvency Resolution Process' requires to be filed by 'Financial Creditor' itself and that the IBC and the Adjudicating Authority Rules recognize that a 'Financial Creditor' being a juristic person can only act through an "Authorised Representative".

To understand the issue in full NCLAT had made a reference to the provisions of the Power of Attorney Act, 1882 related to the execution of a power of attorney and the decision of Hon’ble Supreme Court in  T C Mathai & Anr v District and Sessions Judge, Thiruvananthapuram, [(1999) 3 SCC 614]. In this case the Hon'ble Supreme Court had held that "Section 2 of the Power of Attorney Act, 1882 cannot override the specific provision of a statute which requires that a particular act should be done by a party in person.” In the light of this dicta and the view of the Apex Court expressed in  M/s Innoventive Industries Ltd v ICICI Bank & Anr  that the Insolvency and Bankruptcy Code 2016 is an exhaustive code on the subject matter of insolvency in relation to corporate entities, it was held by NCLAT that a 'Power of Attorney Holder' is not competent to file an application under Section 7 or Section 9 or Section 10 of IBC on behalf of a 'Financial Creditor' or 'Operational Creditor' or 'Corporate Applicant'.

However NCLAT made it unambiguously clear that this general view cannot be adopted in the case of an officer of a ‘Financial Creditor’ Bank who has been delegated powers under a power of Attorney by the Board of Directors of the Bank. It was pointed out by NCLAT that if general authorisation is made by any 'Financial Creditor' or 'Operational Creditor' or 'Corporate Applicant' in favour of its officers to do needful in legal proceedings by and against the 'Financial Creditor'/'Operational Creditor'/'Corporate Applicant', mere use of word 'Power of Attorney' while delegating such power will not take away the authority of such officer and for all purposes it is to be treated as an 'authorization' by the 'Financial Creditor'/'Operational Creditor'/'Corporate Applicant' in favour of its officer, which can be delegated even by designation. In such case, officer delegated with power can claim to be the 'Authorized Representative' for the purpose of filing any application under section 7 or Section 9 or Section 10 of IBC.

Further as it was clarified by NCLAT that while computing the 7 days period stipulated therein under Section 7 (5) of the IBC for rectifying the defects in the Application, apart from the date of receipt of the order for removal of defects, the holidays such as Saturdays, Sundays and other holidays of the Tribunal to be excluded.