Corporate Debtor Archives

Supreme Court July 2022 Roundup| PMLA constitutional; Bail Act; Abu Salem’s scheduled release; Unmarried women’s right to abortion; and more

Most Read Story

‘India needs a Bail Act’: Supreme Court asks Centre to consider the suggestion; lays down guidelines for disposal of Bail Application

The Court took note of the statistics that show that jails in India are flooded with undertrial prisoners with more than 2/3rd of the inmates of the prisons constituting undertrial prisoners. Of this category of prisoners, majority may not even be required to be arrested despite registration of a cognizable offense, being charged with offenses punishable for seven years or less. They are not only poor and illiterate but also would include women. Statistics also show that more than 1000 children are living in prisons along with their mothers. Granting bail in such cases is not only in the interest of the accused, but also the children who are not expected to get exposed to the prisons.

Cases Reported in SCC

2022 SCC Vol. 6 Part 1

2022 SCC Vol. 6 Part 2

2022 SCC Vol. 6 Part 3

2022 SCC Vol. 6 Part 4

2022 SCC Vol. 6 Part 5

Know Thy Judges

Explorer of the Legal Multiverse – Justice A.M. Khanwilkar retires

Justice Krishna Murari

Justice M.M. Sundresh

Case Briefs Tribunals/Commissions/Regulatory Bodies

NCLAT| Right to payment cannot be accrued when a corporate guarantee is not invoked before CIRP initiation

National Company Law Appellant Tribunal, New Delhi: The Bench of Ashok Bhushan, J., Chairperson, and Shreesha Merla, Technical Member, while dismissing a company appeal held that when a Corporate Debtor as a Guarantor has not invoked the Corporate Guarantee before the initiation of Corporate Insolvency Resolution Process (hereinafter as ‘CIRP') under the provisions of Insolvency and Bankruptcy Code, 2016 (Hereinafter as ‘IBC') then the ‘right to payment' cannot be accrued by the Corporate Debtor.

Background of the Case

The Appellant, IDBI, was appointed as a Debenture Trustee for the benefit of the Holders of certain Debentures issued by M/s. Saha Infratech Pvt. Limited (Principal Borrower) as per the Debenture Trustee Agreement dated 18-05-2016. The first Respondent, Mr. Abhinav Mukherjee, is the Homebuyer of Palm Developers Pvt. Ltd., ‘Corporate Debtor' having a claim of Rs.2,94,43,634/-; the second Respondent Mr. Krit Narayan Mishra is the Resolution Professional of the ‘Corporate Debtor', appointed vide letter dated 13-07-2021 in I.A. 1742/2021 replacing the erstwhile IRP, Mr. Manoj Kumar Singh. The Appellant, ECL Finance Limited is the original Debenture Holder which executed the Assignment Agreement dated 27-03-2020 whereby all rights regarding the Financial Assistance were assigned in favour of Assets Care and Reconstruction Enterprise Limited (‘ACRE').

The appeals were filed under Section 61 (1) of the IBC challenging the impugned order dated 14-03-2022 passed by the National Company Law Tribunal, New Delhi, wherein the application filed by a homebuyer was allowed and held that ‘IDBI Trusteeship Services Limited' and ‘ECL Finance Ltd.', the Appellants are not ‘Financial Creditors' and also observed that the Appellants are ‘Related Parties' to the ‘Corporate Debtor'.

Analysis and Decisions

Whether the NCLT, Delhi was right in applying the ratio of ‘Anuj Jain Interim Resolution Professional for Jaypee Infratech Limited v Axis Bank and holding that the Appellants are not ‘Financial Creditors' since there was no ‘direct disbursal' of the amount to the ‘Corporate Debtor'/Guarantor.

The Bench observed that a ‘Guarantee is included' as one of the illustrations which specify the definition of ‘Financial Debt' under Section 5(8)(i) of the IBC. Further, the Bench referred to the judgment given in Ascot Realty Private Limited v. Ajay Kumar .', (2020) SCC OnLine NCLAT 732, where it was held that for initiation of Insolvency Proceedings against the Corporate Guarantor, the element of disbursal for ‘Time Value of Money' is not required. Hence, the Bench opined that there was no direct disbursal of the amount to the Corporate Guarantor, any amounts released to the Principal Borrower and not to the Corporate Guarantor do constitute ‘Financial Debt' as defined under Section 5(8) of the IBC and it cannot be said that such amounts do not have consideration for ‘Time Value of Money'.

Therefore, the Bench held that the ratio of Anuj Jain Interim Resolution Professional for Jaypee Infratech Ltd v. Axis Bank, 2019 SCC OnLine SC 1775 is not applicable.

Whether the locus of the ‘Individual Homebuyer' or Financial Creditor to challenge the Constitution of the Committee of Creditors (‘CoC')?

The Bench in this regard referred to the judgment of the Supreme Court in Phoenix Arc Pvt.Ltd.' v. Spade Financial Services Ltd. (2021) 3 SCC 475, wherein it was held that ‘Financial Creditors' forming part of the CoC must be heard during proceedings which would establish the status of other ‘Financial Creditors'. Further, the Bench even referred to the judgment given in Aashray Social Welfare Society v. Saha Infratech Pvt. Ltd. & Ors., Comp. (AT) (Ins) No. 904 of 2021, wherein it was held, “It cannot be said that since the Authorised Representative has not come up before the Adjudicating Authority for filing the impleadment application, the Appellants who themselves are Homebuyers have no right to participate in the adjudication initiated by filing applications”.

Therefore, in the light of the above cases, the Bench held that the Homebuyer has every right to be heard and has the locus to challenge the Claim of the Appellants.

Whether the Appellants are ‘Related Parties' of the ‘Corporate Debtor' and were in a ‘position' to ‘control' the affairs of the ‘Corporate Debtor', to fall within the ambit of the definition of ‘Related Party' as defined under Section 5(24) of the IBC.

The Bench observed that the purpose of excluding a related party of a ‘Corporate Debtor' from the CoC is to obviate conflicts of interest that are likely to arise if a related party is allowed to become a part of the CoC. The Supreme Court in many judgments has held that the exclusion under the first proviso to Section 21(2) of the IBC was related not to the debt itself, but to the relationship existing between the related party ‘Financial Creditor' & ‘Corporate Debtor'.

Hence, the Bench relied on the judgment given in the case of Arcelormittal India Pvt. Ltd. v. Satish Kumar Gupta, (2019) 2 SCC 1, and held that the Appellants do have ‘Positive Powers'and are in a position to directly and indirectly control the management and the policy decisions of the ‘Corporate Debtor'.

Whether the Appellant can make a ‘Claim' based on the ‘Guarantee Deed' which was never invoked pre-commencement of the CIRP, and remained uninvoked even as on the date of filing of the ‘Claim', thereby meaning that ‘Right to Payment' has not yet accrued?

The Bench relied on the observation of the Supreme Court in Swiss Ribbons Pvt. Ltd. v. Union of India, (2019) 4 SCC 17, where it was observed that “Whereas a “claim” gives rise to a “debt” only when it becomes “due”, a “default” occurs only when a “debt” becomes “due and payable” and is not paid by the debtor. It is for the reason that a financial creditor has to prove “default” as opposed to an operational creditor who merely “claims” a right to payment of a liability or obligation in respect of a debt which may be due.” Therefore, the Bench opined that he Appellants cannot Claim the amounts in the CIRP of the ‘Corporate Debtor' who is a ‘Corporate Guarantor ‘based on the Deed of Guarantee which was never invoked as on the date of filing of the Claims.

Further, the Bench placed reliance on the judgment of the Supreme Court in Ghanshyam Mishra and Sons Pvt Ltd v. Edelweiss Asset Reconstruction Co. Ltd., (2021) 9 SCC 657 and held that when the ‘Corporate Debtor' is a ‘Guarantor' and the ‘Corporate Guarantee' was not invoked before the commencement of the CIRP, as on the date of filing of the Claims, the ‘Right to Payment' cannot be accrued.

Hence, the Bench dismissed the company appeals.

[IDBI Trusteeship Services Ltd. v. Abhinav Mukherjee, 2022 SCC OnLine NCLAT 267, decided on 12-07-2022]

Appearances before the tribunal

COMPANY APPEAL (AT) (INSOLVENCY) No. 356 of 2022

Dr. Abhishek Manu Singhvi, Sr. Advocate with Gaurav Mitra, Dev Roy, Himanshi Rajput, Atul Sharma, and Aditya Vashisth, Advocates, for the Appellants;

Abhijeet Sinha, and Raghavendra M. Bajaj, Advocates, for the Respondent No.1;

Milan Singh Negi, Advocate, for the New IRP.

COMPANY APPEAL (AT) (INSOLVENCY) No. 358 of 2022

Ramji Srinivasan, Sr. Advocate with Gaurav Mitra, Dev Roy, Atul Sharma, Renuka Iyer, Aditya Vashisth and Ms. Himanshi Rajput, Advocates, for the Appellants;

Abhijeet Sinha and Raghavendra M. Bajaj, Advocate for R-1;

Milan Singh Negi, Advocate, for the New IRP.

Case Briefs Tribunals/Commissions/Regulatory Bodies

NCLAT | Can the OTS proposal be an ‘acknowledgment of debt’ under S. 18 of the Limitation Act, 1963?

National Company Law Appellate Tribunal, Delhi: The Bench of Anant Bijay Singh, J., Judicial Member, and Shreesha Merla, Technical Member, dismissed a company appeal and held that a One-Time Settlement Proposal (OTS proposal) falls within the definition of ‘acknowledgment of debt' as defined the provisions of the Limitation Act, 1963.

Background of the case

Financial Creditor, Bank of Baroda, extended financial assistance to the Corporate Debtor through various term loans for an amount of Rs.9,91,00,000/-. On 01-08-2016, an OTS proposal was filed by the Corporate Debtor before the DRT, Pune, but it was not accepted by Financial Creditor. Thereafter, a new OTS proposal was proposed on 07-03-2018 which was accepted by the Financial Creditor on 27-03-2018. However, the Corporate Debtor failed to pay its repayment obligations.

The Financial Creditor filed a petition under Section 7 of the Insolvency and Bankruptcy Act, 2016 (IBC), seeking initiation of the Corporate Insolvency Resolution Process (CIRP) against the Corporate Debtor. The Adjudicating Authority admitted the application and initiated CIRP against the Corporate Debtor. The Corporate Debtor filed an appeal before the NCLAT, challenging the initiation of CIRP.

Analysis and decision

After considering the facts, the Bench relied on the Supreme Court judgment, Dena Bank v. C. Shivkumar Reddy, (2021) 10 SCC 330, where it was held that “Section 18 of the Limitation Act, 1963 gets attracted the moment acknowledgment in writing signed by the party against whom such right to initiate Resolution Process under Section 7 of IBC ensures. Section 18 of the Limitation Act would come into whenever the Principal Borrower and/or the Corporate Guarantor (Corporate Debtor), as the case may be, acknowledge their liability to pay the debt. Such acknowledgment, however, must be before the expiration of the prescribed period of limitation including the fresh period of limitation due to ‘acknowledgment of the debt', from time to time, for the institution of the proceedings under Section 7 of IBC. Further, the acknowledgment must be of a liability in respect of which the ‘Financial Creditor' can initiate action under Section 7 of IBC. Hence, the Court sees no reason why an offer of One Time Settlement of a live claim, made within the period of limitation, should not also be construed as an acknowledgment to attract Section 18 of the Limitation Act.”

In the light of the above-mentioned judgment, the Bench held that the OTS proposal dated 01-08-2016 and 27-03-2018 falls within the definition of the ambit of ‘acknowledgement of debt' as envisaged under Section 18 of the Limitation Act, 1963. Hence, dismissed the company appeal.

[Tejas Khandhar v. Bank of Baroda, Company Appeal (AT) (Insolvency) No. 371 of 2020, decided on- 12-07-2022]

Advocates who appeared in this case :

Pulkit Deora, Advocate, for the Appellant;

Mr Brijesh Kumar Tamber , Advocate, for the Bank of Baroda;

Lzafeer Ahmad B.F, Advocate, for the Resolution Professional.

Case Briefs Tribunals/Commissions/Regulatory Bodies

NCLT| Sahara Hospitality to go through Corporate Insolvency Process

National Company Law Tribunal, Mumbai: The Bench of P.N. Deshmukh, J., Judicial Member, and Shyam Babu Gautam, Technical Member admitted an application filed under Section 9 of the Insolvency and Bankruptcy Code, 2016 (IBC) for the initiation of Corporate Insolvency Resolution Process (CIRP) against Sahara Hospitality Ltd. (Sahara).

In 2018, a company petition was filed by Delta Electro Mechanical Pvt. Ltd. (Delta Electro), which got disposed of in 2021, when Sahara agreed to settle the matter for Rs 20,00,00,000 in 14 installments. Delta Electro again approached the tribunal seeking the revival of the company petition after Sahara failed to perform the commitment. A new settlement agreement was drawn up. But Sahara failed again with its commitments and tried to shrug off its liabilities stating that it entered into the settlement to maintain good business relations with Delta Electro. Further, it stated that the agreement settlement failed, and hence the company petition was disposed of. Hence, contended that the petition cannot be admitted without a prayer of restoration.

Hence, Delta Electro filed a company petition seeking to initiate the CIRP against the Sahara by invoking the provisions under Section 9 of the IBC for default of Rs 51,77,97,495/-.

The Bench stated that Delta Electro had sent a demand notice dated 25-05-2018 under Section 8 of the IBC for an unpaid amount of Rs. 32,72,03,256/-. Further, the Bench stated that Sahara in its written submissions dated 24-03-2022 submitted that rental dues or dues under a leave and license agreement cannot be considered an operational debt by relying upon the judgment in Anup Sushil Dubey v. National Agriculture Co-operative Marketing Federation of India Ltd., 2020 SCC OnLine NCLAT 674 , wherein it was held that the subject lease rentals arising out of use and occupation of a cold storage unit which is for Commercial Purpose is an ‘Operational Debt' as under Section 5(21) of the IBC. Therefore, the Bench held that Sahara is liable to pay the dues payable against the facilities extended by Delta Electro.

Hence, the Bench admitted the Company Petition and ordered to initiate CIRP against Sahara. For the process, Mamta Binani was appointed as the Insolvency Professional.

[Delta Electro Mechanical Pvt. Ltd. V. Sahara Hospitality Ltd., CP No. 2430/2018, decided on- 15-07-2022]

Advocates who appeared in this case :

Shyam Kapadia, Advocate, for the Applicant;

Sandeep Bajaj, Advocate, for the Respondent.

Case Briefs Tribunals/Commissions/Regulatory Bodies

NCLT| Can a Financial Creditor initiate Insolvency Resolution Process against a Personal Guarantor?

National Company Law Tribunal, Hyderabad: The Bench of N. Venkata Ramakrishna Badarinath, Judicial Member, and Veera Brahma Rao Arekapud, Technical Member held that a guarantor cannot enjoy the right of subrogation enunciated in the Contract Act, 1872, when the payment made by the guarantor regards the debt for which the guarantee was provided.

The company petition was filed by the financial creditor seeking to initiate the Insolvency Resolution Process against the personal guarantor by invoking the provisions under Section 95 of Insolvency Bankruptcy Code, 2016 (Hereinafter as IBC) read with Rule 7 (2) of the Insolvency & Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtor) Rules, 2019 for a resolution of Rs 208,21,65,555.24 Crores.

The issue to be decided on

Whether the approved Resolution Plan bars the financial creditor to initiate Insolvency Resolution Process against the personal guarantor?

Analysis and decision

The Bench observed that as per Section 134 of the Contract Act, 1872 a guarantor is discharged of its liability towards the creditor only if the creditor in its instance discharges the principal debtor. The main ingredient of this Section is that the debtor discharges through a voluntary act of the creditor and not due to the operation of law.

Further, the Bench opined that a Corporate Insolvency Resolution Plan does not bar a financial creditor against a guarantor, and a financial creditor can always approach an adjudicating authority as envisaged under the IBC.

At this juncture, the Bench relied on the judgment of the Supreme Court in Lalit Kumar Jain v. Union of India, (2021) 9 SCC 321, wherein it was held that approval of a resolution plan does not ipso facto discharge a personal guarantor (of a corporate debtor) of her or his liabilities under the contract of guarantee. The release or discharge of a principal borrower from the debt owed by it to its creditor is an involuntary process, i.e., by operation of law, or due to liquidation or insolvency proceeding, does not absolve the surety/guarantor of his or her liability, which arises out of an independent contract.

Therefore, the Bench applied the same principle as laid down in the aforementioned case and held that a guarantor cannot be subrogated from his liabilities towards a debt for which a guarantee is provided.

Hence, the Bench allowed the company petition, and directed to initiate an insolvency resolution process against the personal guarantor by declaring him insolvent.

[State Bank of India v. Ghanshyam Surajbali Kurmi, 2022 SCC OnLine NCLT 177, decided on- 07-07-2022]

Advocates who appeared in this case :

Shri. Amir Bavani, Advocate, for the Petitioner;

Shri. Varun Ambati, Advocate, for the Respondent;

Resolution Professional in person, for Resolution Professional.

Case Briefs Supreme Court

IBC – Section 7(5)(a) | NCLT “may” reject Financial Creditor’s CIRP application even in case of Corporate Debtor’s default in payment of debt

Supreme Court: The bench of Indira Banerjee* and JK Maheshwari, JJ has rejected the view of NCLT and NCLAT that once it is found that a debt existed, and a Corporate Debtor is in default in payment of the debt there would be no option to the Adjudicating Authority (NCLT) but to admit the petition under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC).

Going by the scheme of IBC and the legislative intent, the Court observed that the Adjudicating Authority (NCLT) would have to exercise its discretion to admit an application under Section 7 of the IBC of the IBC and initiate CIRP on satisfaction of the existence of a financial debt and default on the part of the Corporate Debtor in payment of the debt, unless there are good reasons not to admit the petition.

However, even though Section 7 (5)(a) of the IBC may confer discretionary power on the Adjudicating Authority, such discretionary power cannot be exercised arbitrarily or capriciously. If the facts and circumstances warrant exercise of discretion in a particular manner, discretion would have to be exercised in that manner.

“The object of the IBC is to first try and revive the company and not to spell its death knell. This objective cannot be lost sight of, when exercising powers under Section 7 of the IBC or interpreting the said Section.”

Stating that the Adjudicating Authority (NCLT) has to consider the grounds made out by the Corporate Debtor against admission, on its own merits, the Court explained by way of the following illustration,

“When admission is opposed on the ground of existence of an award or a decree in favour of the Corporate Debtor, and the Awarded/decretal amount exceeds the amount of the debt, the Adjudicating Authority would have to exercise its discretion under Section 7(5)(a) of the IBC to keep the admission of the application of the Financial Creditor in abeyance, unless there is good reason not to do so. The Adjudicating Authority may, for example, admit the application of the Financial Creditor, notwithstanding any award or decree, if the Award/Decretal amount is incapable of realisation.”

Facts of the case

In the case at hand, the Appellant, a Power Generating Company, was awarded the contract for implementation of a Group Power Project (GPP) by the Maharashtra Industrial Development Corporation (MIDC). The GPP was later converted into an Independent Power Project (IPP). When the appellant was disallowed the actual fuel cost for the Financial Years 2014-2015 and 2015-2016 by the Maharashtra Electricity Regulatory Commission (MERC), it approached the Appellate Tribunal for Electricity (APTEL), challenging the same.

APTEL allowed the appeal and directed MERC to allow the Appellant the actual cost of coal purchased for Unit-1, capped to the fuel cost for Unit 2 in terms of the FSA that had been executed, till such time as a FSA was executed in respect of Unit 1. The Appellant claims that a sum of Rs.1,730 Crores is due to the Appellant in terms of the said order of APTEL.

NCLT simply brushed aside the case of the Appellant that an amount of Rs.1,730 Crores was realizable by the Appellant in terms of the order passed by APTEL in favour of the Appellant, with the cursory observation that disputes if any between the Appellant and the recipient of electricity or between the Appellant and the Electricity Regulatory Commission were inconsequential.

Referring to the judgment in Swiss Ribbons v. Union of Indian, (2019) 4 SCC 17, the NCLT held that the imperativeness of timely resolution of a Corporate Debtor, who was in the red, indicated that no other extraneous matter should come in the way of expeditiously deciding a petition under Section 7 or under Section 9 of the IBC. NCLAT affirmed the NCLT’s finding while observing that NCLT was only required to see whether there had been a debt and the Corporate Debtor had defaulted in making repayment of the debt, and that these two aspects, if satisfied, would trigger the CIRP.

Ruling

The Court observed There can be no doubt that a Corporate Debtor who is in the red should be resolved expeditiously, following the timelines in the IBC. No extraneous matter should come in the way. However, the viability and overall financial health of the Corporate Debtor are not extraneous matters.

On NCLT’s finding that the dispute of the Corporate Debtor with the Electricity Regulator or the recipient of electricity would be extraneous to the matters involved in the petition, the Court observed that while the disputes with the Electricity Regulator or the Recipient of Electricity may not be of much relevance, an award of the APTEL in favour of the Corporate Debtor, cannot be completely be disregarded by the NCLT, when it is claimed that, in terms of the Award, a sum of Rs.1,730 crores, that is, an amount far exceeding the claim of the Financial Creditor, is realisable by the Corporate Debtor.

Further, the Court was of the opinion that NCLAT erred in holding that NCLT was only required to see whether there had been a debt and the Corporate Debtor had defaulted in making repayment of the debt, and that these two aspects, if satisfied, would trigger the CIRP.

“The existence of a financial debt and default in payment thereof only gave the financial creditor the right to apply for initiation of CIRP. The Adjudicating Authority (NCLT) was require to apply its mind to relevant factors including the feasibility of initiation of CIRP, against an electricity generating company operated under statutory control, the impact of MERC’s appeal, pending in this Court, order of APTEL referred to above and the over all financial health and viability of the Corporate Debtor under its existing management.”

The Court, hence, set aside the NCLAT and NCLT orders and directed NCLT to re-consider the application of the Appellant for stay of further proceedings on merits in accordance with law.

[Vidarbha Industries Power Ltd v. Axis Bank Ltd.,2022 SCC OnLine SC 841, decided on 12.07.2022]

*Judgment by: Justice Indira Banerjee

Counsels

For Financial Creditor: Senior Advocate Dhruv Mehta

For Appellant: Senior Advocate Jaideep Gupta

Case Briefs Tribunals/Commissions/Regulatory Bodies

NCLT| When can a liquidator in a liquidation process be replaced?

National Company Law Tribunal, Chennai: The Bench of S. Ramathilagam, J., Judicial Member, and Anil Kumar B, Technical Member held that the tribunal has the power to replace the liquidator of a Corporate Debtor in a liquidating process if the tribunal finds necessary grounds for such replacement.

Factual Background and Submissions made

A Corporate Insolvency Resolution Process was initiated against the Corporate Debtor, the applicant on 25-02-2019. On 29-05-2020 the liquidation process was initiated and Mr. Venkata Sivakumar was appointed as the Liquidator (respondent) for the liquidation process of the applicant.

The applicant submitted that the respondent did not process a valid Authorisation for Assignment as required under Regulation 7 A of the Insolvency and Bankruptcy Board of India (Resolution Professionals) Regulations, 2016 on the date of appointment as the liquidator, and therefore sought removal of the respondent as the liquidator.

The respondent submitted that there is no provision under the Insolvency and Bankruptcy Code, 2016 (hereinafter as IBC) to change the liquidator, and also the liquidator cannot be changed at the behest of the stakeholders unless or otherwise a serious allegation of corruption has been made.

Analysis and decision

Firstly, the Bench observed the provision under Section 16 of the General Clauses Act, 1897 which states that the power to appoint includes the power to suspend or dismiss. Therefore, the Bench opined that when Section 16 is being read with Section 33 of the IBC, the tribunal which has the power to appoint a person, equally has the power to suspend or dismiss the Liquidator, in the absence of any specific powers conferred thereto. Hence, the tribunal has the power to dismiss the liquidator under Sections 33 and 34 of the IBC.

Further, the Bench observed that the provisions of IBC do not explicitly state the grounds on which the liquidator can be removed. Therefore, in the absence of such provisions, provisions under Section 276 of the Companies Act, 2013 have to be considered to determine the removal of the Liquidator. As per the provision under the section, a liquidator may be removed or replaced on the grounds of misconduct, fraud, professional incompetence, inability to act, due care and diligence, etc.

Therefore, the bench held that in the present case, the respondent failed to exercise due care and diligence in the performance of the powers and functions while discharging his duties as a liquidator as he had shared the valuation report with the prospective scheme proponents. Therefore, he was required to be replaced.

Hence, NCLT allowed the application for the removal of the liquidator under Section 60(5) of the IBC read with Rule 11 of the National Company Law Tribunal Rules, 2016 and Section 276 of the Companies Act, 2013.

[IDBI Bank Ltd. Represented by Dy General Manager v. V. Venkata Sivakumar, 2022 SCC OnLine NCLT 212, decided on 01-07-2022]

Advocates who appeared in this case :

Varun Srinivasan, NVS & Associates, Advocates, for the Applicant;

V. Venkata Sivakumar, Party in Person, Advocate, for the Respondents.

Case Briefs Tribunals/Commissions/Regulatory Bodies

NCLAT | Can a Resolution Professional “freeze” the Bank Accounts of Corporate Debtor?

National Company Law Appellant Tribunal, Chennai: The Bench of M.V. Venugopal, J. Judicial Member, and Kanthi Narahari, Technical Member has held that a Resolution Professional under Section 18(1)(f) of the Insolvency and Bankruptcy Code, 2016 (hereinafter as IBC) is only an authority to exercise control over Bank Accounts operated by the ‘Corporate Debtor’. He cannot freeze the ‘Bank Accounts’.

Facts of the case

The Appellant, Corporate Debtor, is a Real Estate Developer. The Corporate debtor had taken a loan from a bank to complete the construction of a multi-storied housing complex at Perungudi, Chennai. A Resolution Professional was appointed as the appellant defaulted on payments against the loan amount. Resolution Professional issued a letter to the bank for freezing bank accounts belonging to the appellant that was being utilised for the real estate project. The appellant filed a company petition before the National Company Law Tribunal, Chennai (NCLT, Chennai). NCLT, Chennai ordered to release 50% of the amount available in the Bank Accounts. Therefore, the Appellant filed the present company appeal.

Analysis and Decision

The Bench observed that as per Section 18(1)(f) of the Insolvency and Bankruptcy Code, 2016 an interim resolution professional can take control and custody of the assets over which the corporate debtor has ownership rights. Therefore, the Bench held that a resolution professional under the law can only exercise authoritative rights over the bank accounts held by the corporate debtor, he cannot order the bank authorities or any other financial institution to freeze the bank accounts of corporate debtors.

Hence, the impugned order given by NCLT, Chennai was set aside.

[Beauty Etiole Pvt. Ltd. v. C. Sanjeevi, 2022 SCC OnLine NCLAT 308, decided on 07-06-2022]

Advocates who appeared in this case :

Mr. Ramakrishnan Viraraghavan, Senior Counsel, Mr. Chetan Sagar, Advocates, for the Appellant;

Ms. M. Savitha Devi, Advocate, for the Respondents.

Case Briefs Tribunals/Commissions/Regulatory Bodies

NCLT| Auction purchaser responsible for claims/ liabilities/ obligations of Corporate Debtor

National Company Law Tribunal, Mumbai: The coram of H.V. Subba Rao, Judicial Member and Chandra Bhan Singh, Technical Member, declared that the auction purchaser of the Corporate Debtor company, as a going concern is responsible for any claims/ liabilities/ obligations of the Corporate Debtor.

An interlocutory application was filed by the applicant to resolve the issue whether the sale of the Corporate Debtor as a going concern under Section 60(5) of Insolvency and Bankruptcy Code, 2016 [IBC] and Regulation 32-A of Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 [IBBI Regulations] includes both assets and liabilities or assets alone without any liabilities. The applicant prayed for not making him responsible for any claims/ liabilities/ obligations payable by the Corporate Debtor, (Gajanan Industries Limited) to the Financial Creditors (Harsh Vinimay Pvt. Ltd) or any other stakeholders including Government dues.

After becoming a successful auction purchaser, the applicant, in respect of an e-auction dated 03-03-2021 conducted by Liquidator, , he was declared as the highest bidder of the Corporate Debtor. Further, a letter of intent was issued by the liquidator as per the requirements of the banker and on the request of the applicant. On 31-05-2021, the applicant made the full payment to which the liquidator confirmed the amount of interest and communicated- “on the payment of the full amount, the sale shall stand completed, the liquidator shall execute certificate of sale or sale deed to transfer such asset and the assets shall be delivered to him in the manner specified in terms of sale”.

Further, the applicant wanted to know about the process to be followed for completion of the deal and to clarify certain issues. The liquidator in reply to this said that the procedure must be followed as per the law and indicated that the entire responsibility of the Corporate Debtor falls on the applicant.

The Tribunal relied on a similar matter in Visisth Services Limited v. S.V. Ramani, 2022 SCC OnLine NCLAT 24, where the same bench held that the sale of Corporate Debtor as a going concern as is where basis under Regulation 32-A of IBBI Regulations and the IBC includes that where the committee of creditors has not identified the assets and liabilities, the liquidator has to do the same and group the assets and liabilities.

The Tribunal held that the applicant is not entitled for the relief sorted in his prayer. Therefore, the above application was dismissed.

[Gaurav Agarwal v. CA Devang P Sampat, I.A. 1253/2021, decided on 06-05-2022]

Advocates who appeared in this case :

Nausher Kohli, Amey Hadwale and Geeta Lundwani, Advocates, for the Applicant;

Rohaan Cama, Kunal Mehta and Gauri Joshi, Advocates, for the Respondents.

Case Briefs Tribunals/Commissions/Regulatory Bodies

Can default in payment of instalments under the settlement agreement be defined as an operational debt? NCLT decides

National Company Law Tribunal, New Delhi: The bench of Abni Rajan Kumar Sinha, Judicial Member and Hemant Kumar Sarangi, Technical Member has held, that default made in payment of instalment amount as per the terms of the settlement agreement does not fall under the definition of operational debt.

Facts of the case

Operational creditor, Ahluwali Contracts (India) Pvt. Ltd. entered into a Memorandum of Understanding (MoU)/ Settlement Agreement with corporate debtor, Logix Infratech Pvt. Ltd. on 30-09-2019 for the final settlement against the work done by the operational creditor according to the ‘Work Contracts’.

The operational debtor defaulted in making payments of instalments as determined under the settlement agreement. Operational creditor filed a company petition seeking to initiate the Corporate Insolvency Resolution Process (CIRP) against corporate debtor by invoking the provisions of Section 9 r/w Rule 6 of the Insolvency and Bankruptcy Code, 2016 (IBC) for a resolution of Operational Debt of Rs 7,72,00,000.

Issue Whether the breach of terms and conditions mentioned under the settlement agreement comes within the purview of ‘operational debt’?

Analysis and decision

Firstly, the Bench noted that operational debt means a claim in respect of provision of goods and services including employment. In the present petition, the claim of the operational creditor did not fall under the category of either goods or services provided by the operational debtor. Rather, the present application was being pressed by the operational creditor only in respect of default made due to the breach of terms and conditions mentioned under the settlement agreement.

At this juncture, the bench referred to the decision of NCLT, Allahabad in Delhi Control Devices Pvt. Ltd. v. Fedders Electric and Engineering Ltd. (Company Petition (IB) No. 343/ALD/ 2018 wherein the bench held that, “unpaid instalment as per the agreement cannot be treated as operational debt a per Section 5(21) of IBC. The failure or Breach of settlement agreement can’t be a ground to trigger CIRP against corporate debtor under the provision of IBC 2016 and remedy may lie elsewhere not necessarily before the Adjudicating Authority”. A similar view was followed in the case Nitin Gupta v. International Land Developers Pvt. Ltd. (IB No. 507/ND/2020).

Hence, the bench applied the same principle as laid down in the aforementioned cases and considered that the default of payment of settlement agreement does not come under the definition of operational debt.

Therefore, the bench dismissed the application.

[Ahluwali Contracts (India) Pvt. Ltd. v Logix Infratech Pvt. Ltd., 2022 SCC OnLine NCLT 169, decided on 03-06-2022]

Advocates before the Tribunal

For the Applicant: Adv. Dhruv Rohatgi

For the Respondent: Adv. Nitish K. Sharma

Case Briefs Tribunals/Commissions/Regulatory Bodies

Logix Insolvent? NCLT initiates insolvency proceedings against Logix City Developers

National Company Law Tribunal: The Coram of Bachu Venkat Balaram Das (Judicial Member) and Narender Kumar Bhola (Technical Member) initiates insolvency proceedings against Logix City Developers due to default in payment.

The Operational Creditors, Colliers International (India) Property Services Private Limited sought an order to initiate the Corporate Insolvency Resolution Process of the Corporate Debtor viz., Logix City Developers Private Limited, declare moratorium and appoint Interim Resolution Professional.

Background

The Operational Creditor’s case was that the parties entered into an agreement for providing construction for Bloom Zest Project at Noida and appointed the operational creditor as its project manager. On providing various services, the Operational Creditor raised various invoices and against some of the invoices raised, the Corporate Debtor being unable to pay its obligations allotted a residential unit to the Operational Creditor.

Vide an email, the Corporate Debtor was requested to pay the Operational Debt. However, he failed to do so. Hence, a demand notice was issued to him.

Corporate Debtor acknowledged and admitted its liability to pay the Operational Debt. Therefore, the present petition was filed.

Corporate Debtor on realizing the prevalent real estate conditions caused due to COVID-19 pandemic, failed in paying the amounts as claimed by the Operational Creditor under Demand Notice. Further, it stated that the delay in payment of installment amounts was due to the fact that the construction of the said project was stopped due to various EPCAJ NGT Orders and thereafter unprecedented conditions created due to COVID-19 Pandemic.

Additionally, the Corporate Debtor stated that it is an indisputable fact that the Real Estate Business is going through slump whereby all the builders and promoters of the real estate projects are experiencing heavy economic losses.

Analysis and Decision

Tribunal found that the Corporate Debtor failed to discharge its liability as the admitted amount remained unpaid as on date.

“…this authority has to only satisfy itself regarding default in payment by the corporate debtor towards the operational creditor and there is no pre-existing dispute”

In the present matter, the above two conditions are fulfilled, hence it deserves to be admitted. Therefore, the Tribunal initiated the CIR Process of Corporate Debtor.

Tribunal appointed Insolvency Resolution Professional Yogesh Kumar Gupta as Interim Resolution Professional as proposed by the Operational Creditor.

Further, Moratorium was declared which shall have effect from this Order till the completion of CIRP for the purposes referred to in Section 14 of the IBC, 2016. [Colliers International (India) Property Services (P) Ltd. v. Logix City Developers (P) Ltd., 2022 SCC OnLine NCLT 37, decided on 22-3-2022]

Advocates before the Tribunal:

Operational Creditor: Adv. S. Sriranga, Adv. Balaji Srinivasan, Adv. Garima Jain and Adv. Gayatri Mohite

Corporate Debtor: Adv. Vijay Kaundal

Case Briefs Supreme Court

‘IBC’s object is not to kill the company’; Builder’s Insolvency Proceedings closed as 82 out of 128 home buyers choose possession over refund/compensation: SC

Supreme Court: In a case where out of the total 128 home buyers, 82 were against the insolvency proceedings of the Corporate Debtor of a Gurgaon based housing project, the bench of MR Shah* and BV Nagarathna, JJ has allowed the original applicants (three home buyers) to withdraw the CIRP proceedings as the same shall be in the larger interest of the home buyers who are waiting for the possession since more than eight years. The Court observed that this decision will also be in line with the object and purpose of the IBC i.e. not to kill the company and stop/stall the project, but to ensure that the business of the company runs as a going concern.

Case Trajectory

Corporate Debtor – Jasmine Buildmart Pvt. Ltd. had come out with a Gurgaon based housing project, namely, Krrish Provence Estate but could not complete the project even after a period of eight years.
Three home buyers preferred Section 7 application before the Adjudicating Authority/NCLT, Delhi seeking initiation of CIRP against the Corporate Debtor. They also sought refund of an amount of Rs.6,93,02,755/- due to an inordinate delay in the completion of the project and failure to handover possession within the stipulated time. The said application was filed on 06.12.2018, i.e., prior to the amendment to Section 7 of the IBC, which now permits 100 or 10% of the home buyers/allottees to apply under Section 7 of the IBC.
NCLT directed commencement of CIRP. NCLAT upheld the said order.
By order dated 03.12.2020, Supreme Court, while issuing notice in the appeal, stayed the operation and implementation of the impugned order, subject to the appellant depositing the amount of Rs.2,75,55,186/- plus interest at the rate of 6% per annum in the Registry of the Court within two weeks from that date.
Meanwhile, Krrish Provence Flat Buyers Association had filed a caveat apprehending that if any order is passed in the present proceedings, it may affect them as home buyers.
On 04.02.2022, it was brought to the Court’s notice that the original applicants as well as 79 other home buyers have settled the dispute with the Corporate Debtor and a settlement has been entered into, under which, it is agreed that the Corporate Debtor shall complete the entire project and hand over the possession to the home buyers (who want the possession), within a period of one year.

Analysis and Ruling

The Court noticed that although the COC was constituted on 23.11.2020, there has been a stay of CIRP proceedings on 3.12.2020 (within ten days) and no proceedings have taken place before the COC. Also, the COC comprises 91 members, of which 70% are the members of the Flat Buyers Association who are willing for the CIRP proceedings being set aside, subject to the Corporate Debtor company honouring the settlement plan.

In such facts and circumstances, where out of 128 home buyers, 82 home buyers will get the possession within a period of one year, as undertaken by the appellant and Corporate Debtor, coupled with the fact that original applicants have also settled the dispute with the appellant/Corporate Debtor, the Court was of the opinion that it was a fit case to exercise the powers under Article 142 of the Constitution of India read with Rule 11 of the NCLT rules, 2016 and to permit the original applicants to withdraw the CIRP proceedings.

Explaining the reasoning behind it’s ruling, the Court observed that if the original applicants and the majority of the home buyers are not permitted to close the CIRP proceedings, it would have a drastic consequence on the home buyers of real estate project. If the CIRP proceedings are continued, there would be a moratorium under Section 14 of the IBC and there would be stay of all pending proceedings and which would bar institution of fresh proceedings against the builder, including proceedings by home buyers for compensation due to delayed possession or refund. If the CIRP is successfully completed, the home buyers like all other creditors are subjected to the pay outs provided in the resolution plan approved by the COC.

“Most often, resolution plans provide for high percentage of haircuts in the claims, thereby significantly reducing the claims of creditors. Unlike other financial creditors like banks and financial institutions, the effect of such haircuts in claims for refund or delayed possession may be harsh and unjust on homebuyers.”

On the other hand, if the CIRP fails, then the builder-company has to go into liquidation as per Section 33 of the IBC. The homebuyers being unsecured creditors of the builder company stand to lose all their monies that are either hard earned and saved or borrowed at high rate of interest, for no fault of theirs.

The Court further explained the legislative intent behind the amendments to the IBC which is to secure, protect and balance the interests of all home buyers. The interest of home buyers is protected by restricting their ability to initiate CIRP against the builder only if 100 or 10% of the total allottees choose to do so, all the same conferring upon them the status of a financial creditors to enable them to participate in the COC in a representative capacity.

“Being alive to the problem of a single home buyer derailing the entire project by filing an insolvency application under Section 7 of the IBC, the legislature has introduced the threshold of at least 100 home buyers or 10% of the total home buyers of the same project to jointly file an application under Section 7 of the IBC for commencement of CIRP against the builder company.”

The Court, hence, held that the settlement arrived at between the home buyers and the appellant and corporate debtor – company shall be in the larger interest of the home buyers and under the settlement and as undertaken by the appellant/corporate debtor, out of 128 home buyers, 82 home buyers are likely to get possession within a period of one year, for which they are waiting since last more than eight years after they have invested their hard earned money.

Directions

(1) The entire project shall be completed within one year from 01.03.2022 and respective home buyrers shall be offered the possession;

(2) Corporate Debtor shall complete the entire project including all the apartments, common areas, amenities, etc. as specified in the ABA;

(3) all demands be raised and timely paid, strictly in terms of ABA;

(4) Company shall continue the provisions of all maintenance services as per the ABA; and

(5) Company will make the application for obtaining Occupancy Certificate within six months, before the competent authority.

[Amit Katyal v. Meera Ahuja, 2022 SCC OnLine SC 257, decided on 03.03.2022]

*Judgment by: Justice MR Shah

Counsels

For appellant: Senior Advocate Kapil Sibal,

For original applicants: Advocate Lokesh Bhola

For Impleaders: Senior Advocate K.V. Vishwanathan

For Home Buyers Association: Senior Advocate Nakul Diwan

For Resolution Professional: Advocate Yogesh Mittal

For intervenors: Advocate Radhika Gupta

Case Briefs Tribunals/Commissions/Regulatory Bodies

Can application filed under S. 95(1) read with S. 60(1) IBC be rejected on ground that no Corporate Insolvency Resolution Process was pending against Corporate Debtor? NCLAT addresses

If CIRP or Liquidation Proceeding of a Corporate Debtor is pending before a NCLT, application relating to Insolvency Process of Corporate or Personal Guarantor should be filed before same NCLT.

National Company Law Appellate Tribunal, New Delhi (NCLAT): The Coram of Justice Ashok Bhushan (Chairperson) and Dr Alok Srivastava (Technical Member) expressed that, Application having been filed under Section 95(1) and the Adjudicating Authority for application under Section 95(1) as referred in Section 60(1) being the NCLT, the Application filed will be maintainable and cannot be rejected on the ground that no CIRP or Liquidation Proceedings were pending before the NCLT.

“…when a CIRP or Liquidation Proceeding of a Corporate Debtor is pending before ‘a’ NCLT the application relating to Insolvency Process of a Corporate Guarantor or Personal Guarantor should be filed before the same NCLT.”

An appeal was filed against the order of the National Company Law Tribunal, Kolkata. The State Bank of India had filed an application under Section 95(1) of the Insolvency and Bankruptcy Code, 2016 to seek initiation of Corporate Insolvency and Resolution Process against the Guarantor. The said application was rejected by the Adjudicating Authority as premature.

Appellant’s Counsel submitted that NCLT did not correctly interpret Section 60(2) of the Code and the application was fully maintainable under Section 60(1) of the Code despite there being no pendency of any Corporate Insolvency Resolution Process in NCLT.

Let’s have a look at Section 60 (2) and (2) of the IBC:

Section 60: Adjudicating Authority for corporate persons.

*60.(1) The Adjudicating Authority, in relation to insolvency resolution and liquidation for corporate persons including corporate debtors and personal guarantors thereof shall be the National Company Law Tribunal having territorial jurisdiction over the place where the registered office of the corporate persons located.

(2) Without prejudice to sub-section (1) and notwithstanding anything to the contrary contained in this Code, where a corporate insolvency resolution process or liquidation proceeding of a corporate debtor is pending before a National Company Law Tribunal, an application relating to the insolvency resolution or[liquidation or bankruptcy of a corporate guarantor or personal guarantor, as the case may be, of such corporate debtor] shall be filed before such National Company Law Tribunal.

Section 60(2) of the IBC does not in any way prohibit filing of proceedings under Section 95 of the Code even if no proceeding are pending before the NCLT.

“…Section 60(2) was applicable only when a CIRP or Liquidation Proceeding of a Corporate Debtor is pending before NCLT.”

Coram added that Section 60(2) is applicable only when CIRP or Liquidation Proceeding of a Corporate Debtor is pending, when CIRP or Liquidation Proceeding are not pending with regard to the Corporate Debtor there is no applicability of Section 60(2).

Further, it was elaborated that Section 60(1) provides that Adjudicating Authority in relation to Insolvency or Liquidation for Corporate Debtor including Corporate Guarantor or Personal Guarantor shall be the NCLT having territorial jurisdiction over the place where the Registered Office of the Corporate Person was located.

“…substantive provision for an Adjudicating Authority is Section 60, sub-Section (1), when a particular case is not covered under Section 60(2) the Application as referred to in sub-section (1) of Section 60 can be very well filed in the NCLT having territorial jurisdiction over the place where the Registered Office of corporate Person is located.”

Hence, in the present matter, the Adjudicating Authority erred in holding that since no CIRP or Liquidation Proceeding of the Corporate Debtor were pending the application under Section 95(1) was not maintainable.

“…Application having been filed under Section 95(1) and the Adjudicating Authority for application under Section 95(1) as referred in Section 60(1) being the NCLT, the Application filed by the Appellant was fully maintainable and could not have been rejected only on the ground that no CIRP or Liquidation Proceeding of the Corporate Debtor are pending before the NCLT.”

[SBI v. Mahendra Kumar Jajodia, 2022 SCC OnLine NCLAT 58, decided on 27-1-2022]

Advocates before the tribunal:

For Appellant: Malvika Trivedi, Sr. Advocate with Mr. Akash Tandon, Mr. Ashish Chudhury, Santosh Kumar, Bhargavi Kannar, Akanksha Tripathi, Rituparna Sanyal, Mansi Chaudhary, Advocates

For Respondent: Advocate Supriyo Gole

Case Briefs Tribunals/Commissions/Regulatory Bodies

If granting exclusion of time would help Corporate Debtor from liquidation, should NCLAT allow such exclusion? Here’s what NCLAT says

National Company Law Appellate Tribunal, New Delhi (NCLAT): The Coram of Justice M. Venugopal (Judicial Member) and Dr Ashok Kumar Mishra (Technical Member) held that if granting exclusion of time helps the Corporate Debtor to revive, the basic objective of Insolvency and Bankruptcy Code will eb achieved.

An appeal was filed under Section 61 of the Insolvency and Bankruptcy Code, 2016 against the impugned order passed by the Adjudicating Authority.

Adjudicating Authority had not granted exclusion of certain period of ‘Corporate Insolvency Resolution Process’ inspite of the Resolution passed by the 100% voting share of the Committee of Creditors of the Corporate Debtor.

Counsel for the appellant submitted that the exclusion of 90 days from the CIRP of the CD would save the company from ‘Liquidation’. It was also pointed that there was a ‘Prospective Resolution Applicant’ who has submitted his ‘Resolution Plan’ & there was a likelihood for the revival of the CD.

Due to the prevalent pandemic, there was not much progress in de-attachment of property from ED at Tribunals/Courts. The CoC had also considered reissue of ‘Expression of Interest’ (EOI) and hence there was a need for exclusion of such period.

Appellant was perusing legal proceedings to get attachment of sole property of the CD lifted before various judicial forum to get the property released as early as possible and also cited the decision of Supreme Court in the case of Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta, (2020) 8 SCC 531, wherein it has held that the ‘Adjudicating Authority or the Appellate Authority has discretion to extend the time of CIRP period even beyond 330 days in certain exceptional cases’.

Analysis and Decision

Tribunal observed that the pandemic had no doubt updated the normalcy in various activities of ‘Corporate Insolvency Resolution Process’.

The Resolution Professional received a Resolution Plan for Prospective Resolution Applicant which was under the scrutiny of Resolution Professional/Committee of Creditors.

Further, Coram expressed that,

“If granting of 90 days helps the Corporate Debtor to revive, then the basic objective of the I&B Code, 2016 will be met. Liquidation is the last resort.”

Therefore, Tribunal opined that no prejudice will be caused in allowing the instant appeal to prevent an aberration of justice and to promote the substantial cause of justice.

Hence, the appeal was allowed. [Vinod Tarachand Agrawal, In Re., 2022 SCC OnLine NCLAT 82, decided on 16-2-2022]

Advocates before the Tribunal:
For Appellant: Mr. Monaal Davawala, Advocate.

Op Eds OP. ED.

To File or not to File: Understanding the Jurisdictional Dilemma in Personal Guarantor’s Insolvency Resolution Process

Background

The Indian insolvency regime had very fragmented, time-consuming, and archaic personal insolvency laws. Two major laws on personal insolvency before the enactment of the Insolvency and Bankruptcy Code, 20161 (IBC or Code) were: (i) The Presidency-Towns Insolvency Act, 19092 dealing with insolvency cases in Presidency Towns (Bombay, Madras, Calcutta), and (ii) the Provincial Insolvency Act, 19203 which was applicable elsewhere. Due to persistent and continuing issues with the provisions of this Act, the need for a more structured and updated insolvency framework was felt. Acting upon it, the enactment of IBC in 2016 came into the picture. The provisions dealing with personal insolvency are provided under Part III of the Code. The Code comprehends three categories of individuals under Part III i.e.

(i) personal guarantors to corporate debtors;

(ii) individuals with partnership firms or sole proprietorships; and

(iii) other individuals.

However, the Code notified the insolvency resolution process in respect of companies initially and up until recently, the insolvency resolution process of the personal guarantors came into the existence on the recommendations of the Report of Reconstituted Working Group on Individual Insolvency (RWG).4

Further, the RWG suggested that the phase implementation of Part III is essential as the market dynamics, stakeholders, transactions, and nature of the proceedings may not adjust under a single umbrella procedure. Thus following the suggestion, the piecemeal approach was preferred and the rules and regulations thereof for the insolvency resolution process of personal guarantors were brought into existence.

Understanding personal guarantor to corporate debtor insolvency process

Before moving on to the jurisdictional dilemma on the personal guarantor to corporate debtor, the understanding of the concept of personal guarantor as envisaged under the Code is imperative. Personal guarantor as defined under Section 5(22)5 of the Code states that a personal guarantor is an individual who is the surety in a contract of guarantee to a corporate debtor. To put it simply, any person who promises to pay a borrower’s debt in the event that the borrower defaults in respect of their obligation. Under the mechanism of the Code, the personal guarantors provide guarantees for the loan or any other type of facility availed by the corporate debtor from the principal borrower. Consequently, when a corporate debtor defaults on the payment of such facilities, the liability of the personal guarantor comes into existence.

Parallel proceedings against the personal guarantor — A distinct category

The rationale of parallel proceeding against the personal guarantors has its genesis in the fundamental principle of co-extensive liability of the surety (personal guarantor) against the creditor or principal borrower.6 As far as the applicability of this principle under the Insolvency and Bankruptcy Code, 2016 is concerned, the Supreme Court in Lalit Kumar Jain v. Union of India7 held that the approval of a resolution plan for the resolution of corporate debtor does not ipso facto discharge a personal guarantor (of a corporate debtor) of her/his liabilities under the contract of guarantee.

The scheme of the Code for the designated adjudicating authority to adjudicate matters is clear and unambiguous. For the insolvency processes under Part II of the Code which deals with the insolvency resolution and liquidation process for the corporate persons, the adjudicating authority shall be the National Company Law Tribunal8 (NCLT). Whereas, the insolvency resolution and bankruptcy process for individual and partnerships firms which includes personal guarantors will have Debts Recovery Tribunal (DRT)9 as their designated adjudicating authority.

Therefore, on a bare perusal of the statutory provisions, the distinction is discrete without any ambiguity. However, with the introduction of the Insolvency and Bankruptcy Code (Second Amendment) Act, 201810 the conflict and overlapping of the jurisdiction in the case of personal guarantor arose.

Personal guarantor by nature is classified as individual insolvency and hence is a subject- matter of Part III of the Code. However, in this amendment, a distinct category was created for personal guarantors which does not align with the scheme of the Code and their insolvency resolution plan shall be dealt with under Part II of the Code. The constitutionality of the Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rules, 201911 (the 2019 Rules) were challenged which enabled this provision was challenged in Lalit Kumar Jain v. Union of India12. The Supreme Court upheld the 2019 Rules and thus a distinct category for personal guarantor is now firmly established.

The jurisdictional anomaly on personal guarantor’s process

Therefore, the said Amendment and the Rules inter alia enabled the provisions of Section 6013 of the Code which envisaged four situations under which the exclusive jurisdiction in personal guarantor applications rests with the NCLT—

The adjudicating authority in relation to insolvency and resolution for personal guarantors shall be NCLT having territorial jurisdiction.
Instances where the corporate insolvency resolution process (CIRP) against the corporate debtor is pending.
In an instance where the CIRP is in the process against the corporate debtor, the application against the personal guarantor shall be transferred before such NCLT.
The powers provided to DRT in matters of the personal guarantor shall be vested with NCLT.

Here, we have a situation where an application against the corporate debtor is either initiated, pending, or in the process (admitted) in such a case the application for initiation of insolvency resolution process against the personal guarantor shall be the NCLT.

On a harmonious construction of Sections 9414, 9515 and Section 60 of the Code, it can be construed that special provisions have been provided to vest NCLT with the jurisdiction in personal guarantors to corporate debtors’ cases. The intent of these provisions of the Code is manifested to allow for the creditor to initiate and maintain proceedings against both the corporate debtor and the guarantor simultaneously and before the same forum.

However, different NCLTs have taken a different view on this aspect. For instance, the NCLT, New Delhi in PNB Housing Finance Ltd. v. Mohit Arora16 discussed the scope of the amendment enabling Section 60 of the Code. The NCLT stated that whenever Section 60 is attracted, the provision of Section 179(1)17 IBC, 2016 shall not be applicable and the jurisdiction shall vest with NCLT.

Further, the Tribunal held that in a situation where application(s) in relation to the corporate debtor for initiation of CIRP is pending before NCLT then, initiation of CIRP of the corporate debtor is not a prerequisite for maintainability of an application under Section 95 IBC filed for initiating insolvency resolution process against the personal guarantor of that corporate debtor before the NCLT.

The NCLT in PNB Housing Finance Ltd. v. Goldy Gupta18 held that the commencement of CIRP against the corporate debtor is not a condition precedent for maintaining an application under Section 95 of the Code filed for initiating insolvency resolution process against the personal guarantor of the corporate debtor before the NCLT.

This rationale was not taken by the NCLT, Mumbai in Insta Capital (P) Ltd. v. Ketan Vinod Kumar Shah19 where the issue for consideration is whether a financial creditor can initiate CIRP against the personal guarantor in the absence of any resolution process/liquidation process against the corporate debtor. The Tribunal held an application for insolvency for a resolution against the personal guarantor is not maintainable unless that CIRP or liquidation application is ongoing against the corporate debtor. It is further observed that filing of applications seeking resolution of personal guarantors without the corporate debtor undergoing CIRP, would tantamount to the vesting of jurisdiction on two courses, one is NCLT and another is the Debts Recovery Tribunal.

The NCLTs have a diverse opinion on the initiation of the insolvency resolution process against the personal guarantor during the initiation or pendency of CIRP application against the corporate debtor. Such a situation has not been resolved as the NCLAT (Appellate Tribunal) has not yet dealt with this anomaly.

Concurrent jurisdiction with Debts Recovery Tribunals

As pointed, the Debts Recovery Tribunals are the designed adjudicating authority in proceedings related to insolvency matters of individuals and firms, which also includes personal guarantors and having territorial jurisdiction over the place where the individual debtor actually and voluntarily resides or carries on business or personally works for gain20. It can be stated that the original jurisdiction for personal guarantors rests with the DRTs.

However, a peculiar situation which Section 60 of the Code does not comprehend is that where an application for initiation of CIRP against the corporate debtor is neither initiated, pending nor admitted in such cases who shall have the jurisdiction. This situation further builds up to the existing dilemma.

Following the strict interpretation of the provisions of the Code, in such situations, the DRTs are best suited to entertain the application. The reason being, they have the original jurisdiction to deal with personal guarantors under the Code. Further, the Amendment of 2018 and Rules thereof are the enabling provisions that created a special case for Section 60 provision. However, the amendment and rules are silent on the deprivation of jurisdiction with the DRTs.

In addition to that the RWG stated that “In cases where there a corporate insolvency process is not pending against the corporate debtor, the jurisdiction in respect of insolvency and bankruptcy of personal guarantor is Debts Recovery Tribunal.”21

DRT taking up the jurisdiction in personal guarantors insolvency proceedings

The Debts Recovery Tribunal, Chennai in KEB Hana Bank v. Rohit Nath22 has taken a step further and entertained an application under Section 95 of the Code wherein the CIRP against the corporate debtor is already initiated. The Tribunal in reply to the contention of the respondent on non-applicability of the application on grounds of lack of jurisdiction stated:

“in our view that this contention is unfounded as Section 60 deals with proceedings initiated against the corporate debtor whereas having a separate forum is clothed with the power to adjudicate. The present proceedings are against the guarantor to the corporate debtor alone. As far as the proceedings before this Tribunal is concerned under Section 60 IBC have no application.”

Conclusion

On a concurrent reading of the provisions under Sections 60 and 95 of the Code, even NCLT has concurrent jurisdiction. Therefore, the provisions here clearly outlined the anomaly where two different forums have assumed jurisdiction for overlapping matters. Unfortunately, the concrete answer and resolution to this problem are not yet provided as the higher courts or tribunals have not yet entertained this anomaly. The assumptive rationale behind that could be that both NCLT and DRT have assumed jurisdiction as per their interpretations and hence they have been filed on an appeal.

Although, it is clear from the provisions, amendments, and the Supreme Court ruling in Lalit Kumar case23 that DRT has original jurisdiction along with a special situation where CIRP is not even initiated against the corporate debtor or principal borrower. Whereas NCLT is vested with jurisdiction through an enabling Amendment. Such a jurisdiction can be termed as “exceptional jurisdiction” to streamline the CIRP process against the personal guarantor and the corporate debtors.

IBC is still in its nascent stages and its jurisprudence is evolving throughout. The anomaly highlighted in this article shall sooner be knocking on the doors of the higher courts for interpretation. Hence, a ruling with the Appellate Tribunal and ultimately the Supreme Court will settle this jurisdictional challenge.

†Graduate Insolvency Programme, Indian Institute of Corporate Affairs (2021-2023); LLM in Corporate and Financial Law and Policy, Jindal Global Law School, Sonipat; BA LLB, Hidayatullah National Law University, Raipur. Author can be reached at shivamsinghal020@gmail.com.

1 Insolvency and Bankruptcy Code, 2016.

2 Presidency-Towns Insolvency Act, 1909.

3 Provincial Insolvency Act, 1920.

4 Report of the Working Group on Individual Insolvency (Regarding strategy and approach for implementation of the provisions of the Insolvency and Bankruptcy Code, 2016 to deal with the insolvency of guarantors to corporate debtors and individuals having business).

5 Insolvency and Bankruptcy Code, 2016, S. 5(22).

6 Contract Act, 1872, S. 128.

7 (2021) 9 SCC 321 : 2021 SCC OnLine SC 396.

8 Insolvency and Bankruptcy Code, 2016, S. 5(1).

9 Insolvency and Bankruptcy Code, 2016, S. 79(1).

10 Insolvency and Bankruptcy Code (Second Amendment) Act, 2018.

11 Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rules, 2019.

12 (2021) 9 SCC 321 : 2021 SCC OnLine SC 396.

13 Insolvency and Bankruptcy Code, 2016, S. 60.

14 Insolvency and Bankruptcy Code, 2016, S. 90.

15 Insolvency and Bankruptcy Code, 2016, S. 95.

16 2021 SCC OnLine NCLT 488.

17 Insolvency and Bankruptcy Code, 2016, S. 179(1).

18 2021 SCC OnLine NCLT 487.

19 2021 SCC OnLine NCLT 486.

20 Insolvency and Bankruptcy Code, 2016, S. 179(2).

21 Report of the Working Group on Individual Insolvency (Regarding strategy and approach for implementation of the provisions of the Insolvency & Bankruptcy Code, 2016 to deal with the insolvency of Guarantors to Corporate Debtors and Individuals having business).

22 2020 SCC OnLine DRT 1.

23 (2021) 9 SCC 321 : 2021 SCC OnLine SC 396.

Case Briefs High Courts

Whether proceedings under Ss. 138 and 141 of NI Act can be initiated against corporate debtor during moratorium period? Madras HC answers

Madras High Court: N. Sathish Kumar, J., while addressing a matter with regard to the dishonour of cheques under Section 138 of Negotiable Instruments Act, 1881, held that the moratorium provision contained in Section 14 of the Insolvency and Bankruptcy Code, would apply only to corporate debtor, but the natural persons mentioned in Section 141 of Negotiable Instruments Act continue to be statutorily liable under Chapter XVII of the Negotiable Instrument Act.

Petitioner’s case was that the petitioner was arrayed as one of the accused in cases pending before the lower courts for the offences under Section 138, 141 and 142 of the Negotiable Instruments Act, 1881.

As per the request of the petitioners ‘company, the complainant company agreed to supply the “Wet Blue Cow Hides” and supplied the same. During the course of business, the accused Company was due and payable to the respondent Company for the supply made. For the said purpose 2^nd accused had issued various cheques but the said cheques were dishonoured with an endorsement of “Payment Stopped by the Drawers”. Hence, the respondent had filed the complaints before Judicial Magistrates’ Court.

Petitioners alleged that no legal notice was served by the respondent, hence the complaint under Section 138 NI Act was legally unsustainable and in view of the same while challenging the said complaint present petition was filed.

Analysis, Law and Decision

High Court reiterated a settled position of law that, the criminal liability of natural persons in case of a complaint filed under Sections 138 and 141 of the Negotiable Instruments Act, 1881 would survive, but would not be attracted against the company.

Bench noted that in the present case, the insolvency process was initiated by NCLT, and a moratorium had been declared under the Insolvency and Bankruptcy Code.

Therefore, referred to the Supreme Court decision in P. Mohanraj v. Shah Brothers Ispat (P) Ltd., (2021) 6 SCC 258, wherein it was held that the moratorium provision contained in Section 14 of the Insolvency Bankruptcy Code, would apply only to corporate debtor, the natural persons mentioned in Section 141 continuing to be statutorily liable under Chapter XVII of the Negotiable Instrument Act,

High Court expressed that, the moratorium was only in respect of the corporate debtor and not in respect of the directors/management and therefore the petitioners 2 and 3 as natural persons were liable for prosecution. However, in view of the declaration of moratorium by NCLT, the prosecution against the company cannot be allowed to continue.

In view of the above, Court quashed the proceedings in respect of 1^st petitioner and with regard to petitioners 2 and 3, Court opined that the issue was triable and required an appreciation of evidence and this Court cannot decide the same in exercise of its jurisdiction under Section 482 of CrPC.

High Court directed the petitioners and respondent to co-operate with the trial court for the early completion of trial.[Nag Leathers (P) Ltd. v. Muzain Hides, 2022 SCC OnLine Mad 205, decided on 3-1-2022]

Advocates before the Court:

For Petitioner in all Crl.O.P.s : Mr T.P. Prabakaran

For Respondent in all Crl.O.P.s : Mr M. Guruprasad

Case Briefs Tribunals/Commissions/Regulatory Bodies

EPC Construction Resolution: NCLAT allows distribution of Rs 223 crores from available cash balance among creditors and lenders

National Company Law Appellate Tribunal (NCLAT): The Bench of Justice Ashok Bhushan (Chairperson) and Dr. Alok Srivastava (Technical Member) allowed distribution of INR 223 crore from the cash balance available with EPC Construction among its creditors and lenders.

The instant appeal was filed by IDBI Bank in its capacity as a financial creditor and lead lender of EPC Construction India-Corporate debtor as well as a representative of all other lenders of the Corporate Debtor against the order of the NCLT whereby the application urging to direct the Respondent-Liquidator to permit the Financial Creditors of the Corporate Debtor to distribute an amount of INR 223 crore from the cash balance available with the Corporate Debtor in the proportion of their respective voting share in the erstwhile CoC had been dismissed.

The appellant submitted that the said application had been wrongly rejected by the Adjudicating Authority (NCLT) on the ground distribution of the cash would derogate the value of the Company, which observations were not in accordance with law.

Initially, an application was filed by the appellant-creditor before the Adjudicating Authority seeking a direction against the Respondent-Liquidator to distribute the available cash balance of the Corporate Debtor, amongst the stakeholders of the Corporate Debtor in favour of whom the same were charged, including the appellants herein, as per the waterfall mechanism set out in Section 53 of the Insolvency and Bankruptcy Code, 2016, and amongst the workmen of the Corporate Debtor as required under Section 53 (1) (b) (i) of the Code after accounting for the costs/reserving the estimated costs under Section 53(1) (a) towards Insolvency Resolution Process costs and the liquidation costs.

Noticeably, the liquidator did not raise any objection to distribution of surplus cash balance of the Corporate Debtor up to an extent of INR 220 Crores amongst the stakeholders in accordance with the order of priority and in the manner specified under Section 53 of the IBC, however, a condition was made to the extent that if there is any shortfall in meeting the requirements involved in the liquidation process, then the said amount shall be replenished by the financial creditors within a period of fifteen (15) days, from the date of demand. The said condition had been agreed by the appellants. The rationale behind the liquidator’s claim was following:

“As per records, Corporate Debtor has a balance of approximately INR 300 (three hundred) crores in its bank accounts–which includes funds received from invocation of performance bank guarantee of INR 42 (forty-two) crores. In addition, there is additional margin money of approx. INR 13 (thirteen) crores also available. The Corporate Debtor further also generates approximately INR 6-7 crores in cash every month.
Most of the business of the Corporate Debtor is non-functional. Only the equipment leasing division of the Corporate Debtor is operational. All the other division of the Corporate Debtor are being utilized for recovery of dues. The Corporate Debtor at present has a total 109 employees along with 14 employees serving notice period and superannuation. The Respondent estimates that, the process of liquidation, in all likelihood, subject to other external factors should be completed within a year. Therefore, as per the estimate of the liquidator, the cost of the liquidation process may not exceed INR 80 crores approximately – which has been computed by factoring in the receipts during liquidation period minus expenses incurred during the said period and CIRP costs.”

The liquidator contended that even after distribution of INR 223 crores, as sought in the appeal, the Corporate Debtor would have sufficient liquidity of approximately INR 80 (eighty) crores to enable him to run the liquidation process smoothly in accordance with law.

In the light of above submissions, the NCLAT reversed the decision of the Adjudicating Authority and directed for distribution of INR 223 crores as submitted by the Liquidator subject to undertaking by the members of the CoC to return the amount in the event they are paid any amount in excess to their entitlement as per waterfall mechanism under Section 53 of the Code. The impugned order was set aside.[IDBI Bank Ltd. v. Liquidator, EPC Constructions (India) Ltd., 2022 SCC OnLine NCLAT 43, decided on 27-01-2022]

Kamini Sharma, Editorial Assistant has reported this brief.

Appearance by:

For Appellant: Tushar Mehta, Sr. Advocate with Akshay Sapre, Advocate

For Respondent: Pulkit Sharma, Swarnendu Chatterjee and Shriraj H. Khambete, Advocates

Case Briefs Tribunals/Commissions/Regulatory Bodies

Attachment of Bank Accounts of a Corporate Debtor: Is it violative of S. 14 of IBC during pendency of Corporate Insolvency Resolution Process? NCLT explains

National Company Law Tribunal, Mumbai Bench: The Coram of H.V. Subba Rao, Judicial Member and Chandra Bhan Singh, Technical Member directed that attachment of bank accounts of a Corporate Debtor by tax authorities while Corporate Insolvency Resolution Process was pending is a violation of Section 14 of the Insolvency and Bankruptcy Code.

The interlocutory application was filed by the liquidator against the respondent Deputy Commissioner of State Tax (respondent 1) and Axis Bank Limited (respondent 2) seeking direction from the tribunal to unfreeze/lift the attachment on the bank account of Corporate Debtor maintained by the respondent 2.

It was submitted that the applicant had communicated to respondent 2 about the initiation of the CIRP of the Corporate debtor and further requested respondent 2 to remove the attachment/lien marked on the said bank accounts.

Analysis, Law and Decision

Tribunal noted that the applicant had appraised the officials of respondents 1 and 2.

Bench expressed that,

“…the attachment is violative of Section 14 of IBC and thus needs to be lifted.”

Elaborating further, the Tribunal stated that since the respondent 1 submitted its claims before the liquidator and the same was accepted by the liquidator, it had to be dealt with in the manner as provided under Section 53 of the IBC and hence, respondent 1 cannot continue to enforce its lien over the bank accounts of the Corporate Debtor.

Bench referred to the decision of NCLT in OM Prakash Agarwal v. Tax Recovery Officer, wherein it was held that,

“the monies of the CD lying in the bank account shall be construed to be an asset of the CD even if tan attachment order is passed against the same. It noted that section 178 of the Income-tax Act, 1961 has been amended to allow the Code to have overriding effect and accordingly directed the Bank to defreeze the account”.

Concluding the matter, the Tribunal directed respondent 1 and respondent 2 to lift its lien/attachment over the said bank accounts maintained with respondent 2 bank.

The direction was issued to respondent 2 to unfreeze the bank account of the Corporate Debtor and allow the applicant to manage its operations. [Asis Global Ltd. In re., CP (IB) 4442 (MB)/2018, decided on 28-10-2021]

Advocates before the tribunal:

Mr Nausher Kohli, counsel appearing for the liquidator, was present through a virtual hearing.

Case Briefs Supreme Court

Can NCLT entertain an arbitrable dispute? SC sets the yardsticks of residuary powers of NCLT under IBC

Supreme Court: In a landmark case the Division Bench of Dhananjaya Y Chandrachud* and A S Bopanna, JJ., clarified the residuary powers of NCLT under Insolvency and Bankruptcy Code (IBC). The Bench stated,

“In terms of Section 238 and the law laid down by this Court, the existence of a clause for referring the dispute between parties to arbitration does not oust the jurisdiction of the NCLT to exercise its residuary powers under Section 60(5)(c) to adjudicate disputes relating to the insolvency of the Corporate Debtor.”

Factual Background

The appellant and the Corporate Debtor had entered into a Build Phase Agreement followed by a Facilities Agreement whereby the Corporate Debtor was obligated to provide premises with certain specifications and facilities to the appellant for conducting examinations for educational institutions. Clause 11(b) of the Facilities Agreement states that either party is entitled to terminate the agreement immediately by written notice to the other party provided that a material breach committed by the latter is not cured within thirty days of the receipt of the notice.

Invoking the termination clause, a termination notice was issued by the appellant owing to multiple lapses in fulfilling its contractual obligations; i.e. insufficiency of housekeeping staff and their malpractices in respect of entering attendance etc. by the Corporate Debtor when the malpractices were not rectified by the Corporate Debtor despite being highlighted from time to time. The said notice came into effect immediately.

Proceedings before the NCLT and NCLAT

The Corporate Debtor instituted a miscellaneous application before the NCLT under Section 60(5)(c) of the IBC for quashing of the termination notice. The NCLT passed an order granting an ad-interim stay opining that the contract was terminated without serving the requisite notice of thirty days. In appeal, the NCLAT upheld the interim order NCLT.

Question of Law

Based on the appeal, two issues had arisen for consideration:

(i) Whether the NCLT can exercise its residuary jurisdiction under Section 60(5)(c) of the IBC to adjudicate upon the contractual dispute between the parties; and

(ii) Whether in the exercise of such a residuary jurisdiction, it can impose an ad-interim stay on the termination of the Facilities Agreement.

Is NCLT empowered to intervene where the agreement expressly provides for Arbitration?

Although, Clause 12 (d) of the Facilities Agreement provides that the disputes between the parties shall be a subject matter of arbitration, Section 238 of IBC provides that the IBC overrides other laws, including any instrument having effect by virtue of law.

While considering whether a reference to arbitration made under Section 8 of the Arbitration and Conciliation Act 1996 in terms of the agreement between the parties would affect the jurisdiction of the NCLT, the Supreme Court in Indus Biotech (P) Ltd. v. Kotak India Venture (Offshore) Fund, (2021) 6 SCC 436, had held that “even if an application under Section 8 of the 1996 Act is filed, the adjudicating authority has a duty to advert to contentions put forth on the application filed under Section 7 of IB Code, examine the material placed before it by the financial creditor and record a satisfaction as to whether there is default or not. If the irresistible conclusion by the adjudicating authority is that there is default and the debt is payable, the bogey of arbitration to delay the process would not arise despite the position that the agreement between the parties indisputably contains an arbitration clause.”

Further, Section 60(5) (c) grants residuary jurisdiction to the NCLT to adjudicate any question of law or fact, arising out of or in relation to the insolvency resolution of the Corporate Debtor. Therefore, despite Clause 12 (d) providing that any dispute between the parties relating to the agreement could be the subject matter of arbitration, the Facilities Agreement being an ‘instrument’ under Section 238 of the IBC can be overridden by the provisions of the IBC.

NCLT’s Residuary Powers under IBC

In Gujarat Urja Vikas v. Amit Gupta, (2021) 7 SCC 209, it was held that the NCLT’s jurisdiction is not limited by Section 14 of IBC in terms of the grounds of judicial intervention envisaged under the IBC. It can exercise its residuary jurisdiction under Section 60(5)(c) to adjudicate on questions of law and fact that relate to or arise during an insolvency resolution process.

Therefore, rejecting the argument of the appellant that the NCLT and NCLAT had re-written the agreement changing its nature from a determinable contract to a non-terminable contract overlooking the mandate of Section 14 of the Specific Relief Act 1963, the Bench opined that IBC is a complete code and Section 238 overrides all other laws. Therefore, the NCLT in its residuary jurisdiction is empowered to stay the termination of the agreement if it satisfies the criteria laid down in the Gujarat Urja’s case. Hence, the Bench stated,

“In any event, the intervention by the NCLT and NCLAT cannot be characterized as the re-writing of the contract between the parties. The NCLT and NCLAT are vested with the responsibility of preserving the Corporate Debtor’s survival and can intervene if an action by a third party can cut the legs out from under the CIRP.”

Factual Analysis

Noticeably, the Corporate Insolvency Resolution Process (CIRP) was initiated against the Corporate Debtor and electricity supply was disconnected for the Corporate Debtor by the Electricity Board. The Corporate Debtor in its email alleged that the appellant had failed to make the requisite payments and the electricity was disconnected as a result.

Before the initiation of the CIRP, the appellant had on multiple instances communicated to the Corporate Debtor that there were deficiencies in its services. The Corporate Debtor was put on notice that the penalty and termination clauses of the Facilities Agreement may be invoked. The termination notice dated 10 June 2019 also clearly laid down the deficiencies in the services of the Corporate Debtor.

Therefore, the Bench opined that there was nothing to indicate that the termination of the Facilities Agreement was motivated by the insolvency of the Corporate Debtor. The Bench observed,

“The trajectory of events makes it clear that the alleged breaches noted in the termination notice dated 10 June 2019 were not a smokescreen to terminate the agreement because of the insolvency of the Corporate Debtor.”

Thus, the Bench held that the NCLT did not have any residuary jurisdiction to entertain the instant contractual dispute which had arisen dehors the insolvency of the Corporate Debtor and in the absence of jurisdiction over the dispute; the NCLT could not have imposed an ad-interim stay on the termination notice.

A Cautionary Note to NCLT and NCLAT

Additionally, the Bench issued a note of caution to the NCLT and NCLAT regarding interference with a party’s contractual right to terminate a contract; i.e. even if the contractual dispute arises in relation to the insolvency, a party can be restrained from terminating the contract only if it is central to the success of the CIRP. Crucially, the termination of the contract should result in the corporate death of the Corporate Debtor. The Bench added,

“The narrow exception crafted by this Court in Gujarat Urja (supra) must be borne in mind by the NCLT and NCLAT even while examining prayers for interim relief.”

Verdict

The Bench held that the NCLT had merely relied upon the procedural infirmity on part of the appellant in the issuance of the termination notice, i.e., it did not give thirty days’ notice period to the Corporate Debtor to cure the deficiency in service but there was no factual analysis on how the termination of the Facilities Agreement would put the survival of the Corporate Debtor in jeopardy to invoke residuary powers of NCLT. Accordingly, the judgment of NCLT and NCLAT was set aside with a direction to dismiss proceedings initiated against the appellant. [TATA Consultancy Services Ltd. v. SK Wheels Pvt. Ltd., 2021 SCC OnLine SC 1113, decided on 23-11-2021]

Kamini Sharma, Editorial Assistant has put this report together

Appearance by:

For the Appellant: Advocate Fereshte D Sethna

For the Respondent: Advocate Sowmya Saikumar

*Judgment by: Justice Dhananjaya Y Chandrachud

Case Briefs Tribunals/Commissions/Regulatory Bodies

NCLT | Deducing from the acts and the tactics of the corporate debtor failing the test of legality, initiates CIRP

National Company Law Tribunal, Mumbai Bench, Mumbai- The Coram of Ashok Kumar Borah, Judicial Member, and Shyam Babu Gautam, Technical Member while allowing the company petition, ordered for initiation of Corporate Insolvency Resolution Process (CIRP). The Bench stated that,

“The Operational Creditor has successfully demonstrated and proved the debt and default in this case and has also proved that there is absolutely no reason for the Corporate Debtor to hold on to the payment of the invoices”.

In the present matter initiation of Corporate Insolvency Resolution Process (CIRP) against Prince MFG Industries Private Limited (Corporate Debtor) was sought for, alleging that the corporate debtor committed default in making payment to the operational creditor. This petition was filed by invoking the provisions of Section 9 Insolvency and Bankruptcy Code, 2016 read with Rule 6 of Insolvency & Bankruptcy (Application to Adjudicating Authority) Rules, 2016.

The Tribunal after considering the statements, acts and the submissions was of the opinion that despite giving enough chances, the corporate debtor did not file its reply, showed that the amount was due and payable. Also the acts and the tactics used also elaborated the intention. The Tribunal considering the contradicting statements where a part payments was made and then later denying any pre-existing dispute, it was of the view that,

“This bench clearly visualizes the tactic played on the part of the Corporate Debtor to delay the proceedings”.

The Tribunal was thus of the opinion, “It is observed by this bench that the part payment made by the Corporate Debtor proves that it owes the claimed amount to the Operational Creditor and hence it is deemed to be an admission on the part of the Corporate Debtor”. And further stated, “Hence this Bench is left with no option except to admit the above Company Petition, since the above Company Petition in hand satisfies all necessary legal ingredients for admission under Section 9 of the Code”.

[Amit Sangal v. Prince MFG Industries Private Ltd., IA No. 1509/2021, decided on-05-10-2021]

Agatha Shukla, Editorial Assistant has reported this brief.

Counsel for the parties:

For the Operational Creditor:

Mr. Anuj Solanki, Practicing Company Secretary, Mr. Rajesh Agarwal, Advocate

For the Corporate Debtor :

Mr. Dinesh Dubey, Advocate

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Facts of the case

*Judgment by: Justice Indira Banerjee

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Background

Analysis and Decision

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Case Trajectory

Analysis and Ruling

Directions

*Judgment by: Justice MR Shah

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Analysis and Decision

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Background

Understanding personal guarantor to corporate debtor insolvency process

Parallel proceedings against the personal guarantor — A distinct category

The jurisdictional anomaly on personal guarantor’s process

Concurrent jurisdiction with Debts Recovery Tribunals

DRT taking up the jurisdiction in personal guarantors insolvency proceedings

Conclusion

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Analysis, Law and Decision

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Analysis, Law and Decision

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Factual Background

Proceedings before the NCLT and NCLAT

Question of Law

NCLT’s Residuary Powers under IBC

Factual Analysis

A Cautionary Note to NCLT and NCLAT

Verdict

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