Corporate Debtor

Case BriefsSupreme Court

Supreme Court of India: The Bench of M.R. Shah and Aniruddha Bose, JJ., observed that,

“Appellate Tribunal has jurisdiction or power to condone the delay not exceeding 15 days from the completion of 30 days, the statutory period of limitation.”

Aggrieved and dissatisfied with impugned order passed by the National Company Law Appellate Tribunal by which NCLAT refused to condone delay of 44 days in preferring the appeal against the order passed by the National Company Law Tribunal rejecting the claim of the appellant. Appellant has preferred the present appeal.

Factual Background

State Bank of India (SBI) had initiated the insolvency proceedings before the NCLT under Section 7 of the Insolvency and Bankruptcy Code, 2016 against Dunar Foods Limited (Corporate Debtor) on the ground that Corporate Debtor had taken credit limits by hypothecating the commodities kept in the warehouses of the appellant.

It was stated that there was a delay of 44 days in preferring the appeal before NCLAT as the said appeal was required to be filed within a maximum period of 45 days (30 days + 15 days). However, there was a further delay of 44 days beyond a total period of 45 days.

Therefore, considering Section 61(2) of IBC which provides for powers to the Appellate Tribunal to condone delay of only 15 days which it can condone over the period of 30 days, if there is a sufficient cause, by impugned order, the Appellate Tribunal dismissed the appeal on the ground that the tribunal had no jurisdiction to condone the delay beyond 15 days and thereby the appeal was barred by limitation.

Analysis, Law and Decision

Bench noted that the appellant had applied for the certified copy of the order passed by the adjudicating authority after a delay of 34 days. Hence the said copy of the order was applied beyond the prescribed period of limitation i.e. beyond 30 days.

As the Appellate Tribunal can condone the delay up to a period of 15 days only, the Appellate Tribunal refused to condone the delay which was beyond 15 days from completion of 30 days, i.e., in the present case delay of 44 days and consequently dismissed the appeal.

 Hence, the appellate tribunal did not commit any error.

Further, the Court stated that in a case there may arise a situation where the applicant may not be in a position to file the appeal within a statutory period of limitation and even within the extended maximum period of appeal which could be condoned owing to genuineness, viz., illness, accident, etc. However, Parliament has not carved any exception of such a situation.

“…courts have no jurisdiction and/or authority to carve out any exception. If the courts carve out an exception, it would amount to legislate which would in turn might be inserting the provision to the statute, which is not permissible.”

In the decision of Popat Bahiru Govardhane v.  Special Land Acquisition Officer, (2013) 10 SCC 765, this Court has observed and held that it is a settled legal position that the law of limitation may harshly affect a particular party but it has to be applied with all its rigour when the Statute so prescribes.

Further, in the decision of this Court in Oil & Natural Gas Corporation Limited v. Gujarat Energy Transmission Corporation Limited, (2017) 5 SCC 42, the question was with respect to delay beyond 120 days in preferring the appeal under Section 125 of the Electricity Act and the question arose whether the delay beyond 120 days in preferring the appeal is condonable or not. After considering various earlier decisions of this Court on the point and considering the language used in Section 125 [2] of the Electricity Act which provided that delay beyond 120 days is not condonable, this Court has observed and held that it is not condonable and it cannot be condoned, even taking recourse to Article 142 of the Constitution.

Hence, Supreme Court held that delay beyond 15 days in preferring the appeal is uncondonable, the same cannot be condoned even in exercise of powers under Article 142 of the Constitution.

Conclusion 

“…considering the fact that even the certified copy of the order passed by the adjudicating authority was applied beyond the period of 30 days and as observed hereinabove there was a delay of 44 days in preferring the appeal which was beyond the period of 15 days which maximum could have been condoned and in view of specific statutory provision contained in Section 61(2) of the IB Code, it cannot be said that the NCLAT has committed any error in dismissing the appeal on the ground of limitation by observing that it has no jurisdiction and/or power to condone the delay exceeding 15 days.”

In view of the above discussion, the appeal failed and was dismissed. [National Spot Exchange Ltd. v. Anil Kohli, 2021 SCC OnLine SC 716, decided on 14-09-2021]

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Appellate Tribunal (NCLAT): The Coram of Justice Jarat Kumar Jain, Judicial Member and Dr Ashok Kumar Mishra, Technical Member while dismissing as appeal released the Corporate Debtor Company from the rigours of CIRP, and allowed the Board to function through its Board of Directors from immediate effect. The Appellate Tribunal also remitted back the matter to the Adjudicating Authority to decide the fees and costs of CIRP payable to IRP, to be borne by the Corporate Debtor.

In the instant matter, K. Srinivas Krishna, the Suspended Director of Corporate Debtor, filed an appeal against the order passed by the Adjudicating Authority before the Appellate Tribunal. Further, a civil appeal was filed before the Supreme Court challenging the Appellate Tribunal’s impugned order. The appeal was dismissed on the ground that the claim of the Operational Creditor for Rs, 50,32,028 was not tenable and other claim was paid. Further, the interim stay passed by the Tribunal was vacated and IRP was directed to take further action against the CIRP. Further, the objections raised by the Operational Creditor were rejected by the adjudicating authority on the grounds of material error, where the form FA (application for withdrawal of CIRP) was not signed by the Operational Creditor (applicant) on whose application CIRP was initiated. Therefore, the application was dismissed for not being maintainable.  Being aggrieved by the order, the Suspended Director of the Company filed an appeal where the impugned order was challenged.

The Tribunal was of the opinion that, to prevent abuse of process, setting aside the impugned order and the order of initiating CIRP against the Corporate Debtor was more conducive. Therefore, the Corporate Debtor Company was released from the rigours of the CIRP and was allowed to function through its Board of Directors from immediate effect.

Further, the Tribunal remitted back the matter to the Adjudicating Authority to decide the fees and costs of CIRP payable to IRP which shall be borne by the Corporate Debtor.[K. Srinivas Krishna v. Shyam Arora, Company Appeal (AT) (Insolvency) No. 221 of 2021, decided on 02-09-2021]

Agatha Shukla, Editorial Assistant has reported this brief.

Counsel for the Parties:

For Appellant :

Mr. P Nagesh, Sr. Advocate with Mr. Srinivas Kotni, Mr. Shantam Gorwara, Advocates and Mr. Srinivas Krishna, in person.

For Respondents :

Mr. Shyam Arora, Respondent No. 1 in person, Mr. Sharad Tyagi, Mr. K. Gayatri, Advocates for Respondent No. 1. 2

Mr. Sanjay Kapur, Mr. V M Kannan, Ms. Shubhra Kapur, and Mr. Arjun Bhatia, Advocates for Respondent No. 2.

Dr. Laxhmi Narashimha, Advocate for RP.

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Tribunal (NCLT): The Coram of H.V. Subba Rao (Judicial Member) and Chandra Bhan Singh (Technical Member) while allowing the application for the liquidation of the Corporate Debtor by the CoC, appointed Mr Santanu T Ray as the Liquidator as provided under Section 34(1) of the Insolvency and Bankruptcy Code, 2016.

In the instant matter the Resolution Professional, Ram Ratan Kanoongo, through an application had sought for liquidation of Firestar International Limited (hereinafter referred as Corporate Debtor) under Section 33(1) read with Section 60 of the Insolvency and Bankruptcy Code, 2016. The CoC had made the following observations for taking the Corporate Debtor into liquidation without going through the Resolution Plan:

  1. There are no business prospects with the Corporate Debtor;
  2. There is no substance in chasing the legal suits and cases for recovery;
  3. There is no point in spending good money to make efforts to recover bad money, having very remote chance of recovery;
  4. The assets with the Corporate Debtor are not sufficient to repay the amounts of creditors;
  5. Any resolution plan is not possible, which could enable the company to pay the entire debts.

The Tribunal while accepting the application was of the opinion,

“The reasons assigned by the applicant in the application with respect to taking the decision of liquidation of the Corporate Debtor by the CoC appears to be genuine and convincing considering the financial conditions and assets of the company”.

Also, this would be second such company to go into liquidation since February, this year.[Corporation Bank v. Firestar International Limited, 2021 SCC OnLine NCLT 362, decided on 10-08-2021]

Agatha Shukla, Editorial Assistant has reported this brief.

For the Resolution Professional: Adv. Pulkit Sharma

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Appellate Tribunal  (NCLAT): The Coram of Justice Venugopal M (Judicial Member) and V.P. Singh (Technical Member) while setting aside an appeal opined that

“…this Tribunal an irresistible, inevitable and inescapable conclusion that in respect of the loan account of the ‘Corporate Debtor’, there was an ‘Acknowledgement of Debt’ as per Section 18 and 19 of the Limitation Act, 1963”.

In the instant appeal, the Appellant was the Suspended Director of corporate debtor, controlling the majority of shareholding 100% of the paid-up capital of Saptarishi Hotels Private Limited (‘Corporate Debtor’) through its holding Company, Maha Hotels Projects Private Ltd. The appellant filed an appeal against the impugned order of the National Company Law Tribunal, Hyderabad Bench, Hyderabad wherein the Tribunal had observed that the ‘Financial Creditor’ had established the ‘debt and default’ through various documents filed along with the Applications and ultimately, admitted the ‘Application’ by declaring the ‘Moratorium’ and issued necessary directions thereto. The counsel for the appellant contended that the adjudicating authority’ had no jurisdiction to admit the ‘Corporate Debtor’ for ‘Corporate Insolvency Resolution Process’ in spite of the fact the same being barred by ‘Limitation’.

The Tribunal while taking into account the ‘acknowledgment’ so rendered stated,

“…that Section 18 of the Limitation Act, 1963 does not enjoin that an ‘acknowledgement’ has to be in any particular form or to be express. It must be borne in mind that an ‘acknowledgement’ is to be examined resting upon the attendant circumstances by an admission that the writer owes a ‘Debt’. No wonder, an ‘Unconditional Acknowledgement’ implies a promise to pay because that is the natural inference if there is no other contrary material”.

Further, to treat the writing signed by an individual as an ‘Acknowledgement’, the person acknowledging must be conscious of his liability and the commitment ought to be made in respect of that liability.

And considering the sum of Rs.15,262.75 was paid by the ‘Corporate Debtor’ after which the due amount was Rs 144,02,51,063.09,  concluded that

“…this tribunal comes to an irresistible, inevitable and inescapable conclusion that in respect of the loan account of the ‘Corporate Debtor’, there was an ‘Acknowledgement of Debt’ as per Section 18 and 19 of the Limitation Act, 1963”.

[Lakshmi Narayan Sharma v. Punjab National Bank, 2021 SCC OnLine NCLAT 155, decided on 12-05-2021]

Counsels for the Parties:

For Appellant :

Mr. Rajashekar Rao, Sr. Advocate

For Mr. Suraj Prakash, Mrinal Lotoria, Advocates

For Respondents:

Shri T.Ravichandran, Advocate

Shri T.S.N.Raja, PCA

(Interim Resolution Professional)

Case BriefsSupreme Court

Supreme Court: The Division Bench of Dr Dhananjaya Y Chandrachud and M R Shah, JJ., observed that,

Jurisdiction of the Adjudicating Authority and the Appellate Authority cannot extend into entering upon merits of a business decision made by a requisite majority of the CoC in its commercial wisdom.

Under the Indian Insolvency regime, it appears that a conscious choice has been made by the legislature to not confer any independent equity-based jurisdiction on the Adjudicating Authority other than the statutory requirements laid down under Section 30 (2) of the IBC.

The Appeal

 Present appeal arose under Section 62 of the Insolvency and Bankruptcy Code against the decision of the National Company Law Appellate Tribunal. Reliance Infratel Limited (RIL) was the corporate debtor and appellants the operational creditors.

NCLAT had upheld the decision of NCLT wherein it had approved the resolution plan formulated in the course of the insolvency resolution process of the Corporate Debtor.

Analysis, Law and Decision

Valuation of Preference Shares

The first aspect was in relation to the inclusion of realisable value from sale of preference shares held by Reliance Bhutan Limited, in Reliance Realty Limited, in determining the liquidation value of the Corporate Debtor. Earlier, it was clarified that under IBC and its regulations, the RP appointed two registered valuers to carry out the valuation of the Corporate Debtor and to determine the liquidation value and fair value.

Appellants submission that the realizable value from the preference shares was excluded from the liquidation value of the Corporate Debtor had been rebutted by a specific clarification contained in the Monitoring Committee’s affidavit.

Further, it was added that the realisable value for the Corporate Debtor on account of any proceeds realised from the preference shares held by its subsidiary (Reliance Bhutan Limited), is included in the determination of the liquidation value of the Corporate Debtor.

Hence, value of preference shares not being included in calculating the liquidation value of Corporate Debtor was factually incorrect.

Liquidation Value – To remain nil?

On this aspect, it had been clarified that the liquidation value due to the unsecured operational creditors would remain nil in all scenarios, including if the corpus of Rs 800 crores was separately considered.

Further, it was added that even if the liquidation value of the realizable value of preference shares were to be considered in isolation for distribution amongst all the operational creditors, in terms of the priority contained in Section 53 (1) of the Code, the liquidation value due to the appellants would still remain at nil.

Impact of Exclusion 

Order of NCLT in Doha Bank proceedings

It was stated that, the exclusion of certain financial debts and hence, the exclusion of certain financial creditors from the CoC, pursuant to the order of the NCLT in the Doha Bank proceedings, has no practical implication since the resolution plan continues to be approved with a 100 per cent majority even after their exclusion.

Jurisdiction to approve a Resolution Plan 

NCLT is within its jurisdiction in approving a resolution plan which accords with the IBC, there is no equity-based jurisdiction with the NCLT, under the provisions of the IBC.

Adding to the above, it was expressed that the jurisdiction which had been conferred upon the Adjudicating Authority in regard to the approval of a resolution plan was statutorily structured by Section 31 (1).

The jurisdiction is limited to determining whether the requirements which are specified in Section 30 (2) have been fulfilled. This is a jurisdiction which is statutorily defined, recognised and conferred, and hence cannot be equated with jurisdiction in equity, that operates independently of the provisions of the statute.

Ambit of the Adjudicating Authority is to determine whether the amount that is payable to the operational creditors under the resolution plan is consistent with the norms provided stipulated in clause (b) of sub-clause (2) of Section 30.

Hence, the statute indicated that once the requirements of Section 30(2)(b) are fulfilled, the distribution in accordance with its provisions is to be treated as fair and equitable to the operational creditors.

Appellants challenged the treatments of operational creditors on the ground that it had not been fair and equitable.

It was added that as long as the payment under the resolution plan is fair and equitable amongst the operational creditors as a class, it satisfies the requirements of Section 30(2)(b).

Nature of the jurisdiction exercised by the Adjudicating Authority, while approving a resolution plan under Section 31, had been interpreted in the decision of a 2-Judge Bench in K. Sashidhar v. Indian Overseas Bank, (2019) 12 SCC 150.

Elaborating the above discussion, Supreme Court stated that the submission that there had been a failure to maximise the value of the assets was not substantiated by any concrete material before the Court, apart from the reference to the preference shares which had already been clarified earlier in this judgment.

It must be borne in mind that the jurisdiction of the Adjudicating Authority is circumscribed by the terms of the provisions conferring the jurisdiction.

 “…jurisdiction of the Adjudicating Authority and the Appellate Authority cannot extend into entering upon the merits of a business decision made by a requisite majority of the CoC in its commercial wisdom. Nor is there a residual equity-based jurisdiction in the Adjudicating Authority or the Appellate Authority to interfere in this decision, so long as it is otherwise in conformity with the provisions of the IBC and the Regulations under the enactment.”

 In Court’s opinion, IBC is a complete code in itself.

IBC defines what is fair and equitable treatment by constituting a comprehensive framework within which the actors partake in the insolvency process. The process envisaged by the IBC is a direct representation of certain economic goals of the Indian economy. 

Therefore, once the requirements of the IBC have been fulfilled, the Adjudicating Authority and the Appellate Authority are duty bound to abide by the discipline of the statutory provisions.

“…neither the Adjudicating Authority nor the Appellate Authority have an unchartered jurisdiction in equity.”

Conclusion

 In the present matter, the resolution plan had been duly approved by a requisite majority of the CoC in conformity with Section 30(4).

  • Whether or not some of the financial creditors were required to be excluded from the CoC is of no consequence, once the plan is approved by a 100 per cent voting share of the CoC.
  • Jurisdiction of the Adjudicating Authority was confined by the provisions of Section 31(1) to determining whether the requirements of Section 30(2) have been fulfilled in the plan as approved by the CoC. once the requirements of the statute have been duly fulfilled, the decisions of the Adjudicating Authority and the Appellate Authority are in conformity with law.

In view of the above discussion, appeal was dismissed. [Pratap Technocrats (P) Ltd. v. Monitoring Committee of Reliance Infratel Ltd.,  2021 SCC OnLine SC 569, decided on 10-08-2021]

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Tribunal, NCLT Mumbai: Coram of Suchitra Kanuparthi, Judicial Member and Chandra Bhan Singh, Technical Member, observed that,

“…a Judicial authority ought not to pass Orders which would lead to further multiplicity of proceedings.”

The instant application was filed by the Operational Creditor who had earlier initiated the corporate insolvency resolution process against the Corporate Debtor−Rolta India Ltd. The applicant−Operation Creditor now sought withdrawal of his company petition admitted under Section 9 of the Insolvency and Bankruptcy Code, 2016.

The applicant worked as an employee of the Corporate Debtor from March 2013 to June 2019, when he was relieved from services without settlement of arrears of salary and other dues. Consequently, he filed a petition under Section 9 which was admitted by the National Company Law Tribunal, Mumbai (“NCLT”), in May 2021 and an Insolvency Resolution Professional was appointed for the Corporate Debtor.

Thereafter, further negotiations took place between the parties and they reached a settlement agreement. Consequently, the application requested the Insolvency Resolution Professional to file an application under Section 12-A (Withdrawal of application admitted under Section 7, 9 or 10). As the Insolvency Resolution Professional did not file the application immediately, the applicant preferred the Section 12-A application before the NCLT.

The withdrawal application was vehemently opposed by the Financial Creditors (a consortium of several Public Sector Banks) and some of the other ex-employees. Notably, over 75 other petitions under Sections 7 and 9 of  IBC were pending against the Corporate Debtor.

Analysis, Law and Decision

Instant application had been filed under Section 12-A of the IBC read with Rule 11 of the NCLT Rules, 2016 by an employee of the Corporate Debtor company in the capacity of Operational Creditor seeking withdrawal of the company petition in terms of Regulation 30-A of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016.

Applicant mentioned that he had approached the Insolvency Resolution Professional for filing the Application in Form FA under Regulation 30-A(1)(a) to seek withdrawal of the admitted company petition. However, he stated that the Insolvency Resolution Professional did not cooperate and, therefore, the applicant was compelled to file the present application on their own motion under Rule 11 of the NCLT Rules seeking withdrawal of the admitted company petition.

The Insolvency Resolution Professional mentioned that she had received claims/intimation of claims of about Rs 5523.81 crores from financial creditors, operational creditors and workmen employees of Rolta India Limited.

Further, the Bench noted that even under Workmen and Employees’ claim there were 567 employees whose claims had been collated by the Insolvency Resolution Professional. However, the settlement entered into by the Corporate Debtor was only with 32 employees. It was also noted that even the settlement which was proposed by the promoter on behalf of the Corporate Debtor company kept aside majority of the workmen employees’ claim which had been brought out by the Insolvency Resolution Professional. Moreover, the proposed settlement with the employees under the Joint Settlement Agreement will be done only after they withdraw the petition. The Bench observed:

“…Corporate Debtor is willing to pay the major part of the dues to the employees only subsequent to withdrawal of petition through the settlement jointly and/or severally with the employees. The Bench feels that this provides an escape route to both the promoter as well as to the Corporate Debtor Company to conveniently wriggle out of the partial mini settlement at any point of time.”

Major Issue 

The Tribunal noted the major issue:

Whether it would be proper for the Bench to allow withdrawal of corporate insolvency resolution process (“CIRP”) under Section 12-A or to exercise, its discretion to reject the present application under Section 12-A?

The Bench was fully aware that after passing the “Admission Order” dated 13-05-2021 and after the commencement of CIRP, the proceeding are in rem and therefore, any decision regarding the continuation or otherwise of CIRP has to be decided in the interest of all stakeholders and not just a handful of employees. It was reiterated:

“…under Section 53 of IBC the debts of the workmen rank equally with the financial debt owed to the secure/ unsecured creditors.”

In view of the above, it was stated that it cannot be ignored that Tribunal has to take into account the interest of all stakeholders. Before taking the discussion further, the Bench relied upon some of the prominent judgments in respect of the scope and ambit of Section 12-A of IBC. Supreme Court in the decision of Swiss Ribbons (P) Ltd. v. Union of India, (2019) 4 SCC 17, clearly directed that interest of all stakeholders have to be considered while accepting or disallowing an application for withdrawal.

Supreme Court recently in the matter of Indus Biotech (P) Ltd. v. Kotak India Venture (Offshore) Fund, 2021 SCC OnLine SC 268 has clearly observed that when a petition under Section 7 of IBC is admitted/triggered it becomes a proceeding in rem and even the creditor who has triggered the process would also lose control of the proceedings as corporate insolvency resolution process is required to be considered through the mechanism provided under IBC.

Further, the Tribunal noted that in the present matter, there were several Financial Creditors and total financial claim collated by the Insolvency Resolution Professional in the matter of Rolta India Ltd. was upward of Rs 5000 crore. Thus, this itself would be an enough ground to disallow the present application for withdrawal under Section 12-A. The Tribunal said:

“…even in the event of the original creditor [and] the Corporate Debtor settling their disputes prior to the constitution of the CoC, the Tribunal has sufficient jurisdiction to reject an application under Section 12-A of the IBC if the facts and circumstances of the case warrants such rejection.”

Tribunal in view of the above, expressed that, even if withdrawal was permitted, it is a fact that all the dues of all the employees of the Corporate Debtor company were not being settled. About more than 100 employees had lodged their claims against the Corporate Debtor. However, only some employees’ claims were being settled by the ex-management/promoter of the company. Therefore, the purported settlement lacked bona fide.

Moreover, the interest of the employees would be taken care of during the CIRP of the Corporate Debtor and they being operational creditors will be entitled to their rights as provided for under the IBC. Concluding, the Bench said that it had no doubt in its mind that considering that CIRP proceedings are in rem, the substantial claims of Financial Creditors cannot be disregarded or ignored in view of the purported settlement of certain employees of the Corporate Debtor.

In view of the above, the Bench dismissed the application filed under Section 12-A of the IBC and the CIRP against the Corporate Debtor company would continue. [Dinesh Gupta v. Rolta India Ltd., MA No. 1196 of 2021, decided on 6-08-2021]

Advocates before the Tribunal:

For the Promoter: Mr. Prateek Seksaria, Advocate.

For the IRP: Ms. Ranjana Roy Gawai, Mr. Pervinder, Mr. Vineet Kumar, Advocates a/w Ms. Vandana Garg, IRP.

For the Financial Creditor: Mr. Rohit Gupta, Mr. Nausher Kohli, Advocates.

For the Operational Creditor: Mr. Nausher Kohli and Mr. Rohit Gupta, Advocates

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Tribunal (NCLT): Coram of H.V. Subba Rao (Judicial Member) and Chandra Bhan Singh (Technical Member) held that ‘Working Capital’ provided by an investor cannot be considered as ‘Financial Debt’.

Instant company petition was filed seeking to initiate Corporate Insolvency Resolution Process against the Corporate Debtor alleging that the Corporate Debtor committed default in making payment to the Financial Creditor.

Petition was filed by invoking the provisions of Section 7 of Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016.

Since the Corporate Debtor failed to make payment of a sum of Rs 7,02,682, a petition was filed before the Adjudicating Authority.

Financial Creditor submitted that a Restaurant Operation and Services Agreement (ROSA) was signed between the parties on, as per which the investor would finance furnish and equip restaurants whereas the respondent operating partner was to provide day to day Operations and Management Services for the running of the business.

Analysis, Law and Decision

Bench noted that the total claim of the petitioner was based on Article 2 Section 4 of the Agreement regarding working capital.

Article 2, Section 4: Capital Expenditure

“…The Capital Expenditure to be incurred by the Investor with respect to each of the Restaurants is capped at Rs. 35,00,000/-, excluding goods and service tax. Provided however, the Operating Partner shall use reasonable endeavours to minimize the actual Capital Expenditure for each Restaurant. In the event the Capital Expenditure exceeds the aforesaid amount, the Investor may, at its discretion, approve and incur the same…”

 Financial Creditor submitted that it provided a loan of Rs 7.02 lakhs.

Bench noted that all the three premises from where the restaurants were operating was rented in the name of the Financial Creditor under Leave and License Agreement and the Corporate Debtor was not a party.

Further, the total claim mentioned was a claim to Rent Commission and Maintenance, none of which amounted to a Financial Debt.

Adding to the above, Tribunal noted that there was no disbursement to the respondent and all the payments were related to the third party.

Hence, no money was received by the Corporate Debtor in its account. The Petitioner failed to produce any bank statement showing that the said amount had gone into the respondent’s account.

Therefore, about Rs. 7.02 lakhs did not come into the account of the Corporate Debtor but were paid by the Financial Creditor.

Bench even opined that Article 2 Section 4 never mentions that it is a working capital loan, it only says that in the event of Operating Partners requires the Working Capital for the initial period till a Restaurant has achieved break even, the Investor shall provide the same in a manner as may be mutually agreed between the parties.

Hence, the Tribunal stated that,

“…it was not a loan and till the achievement of the ‘break even’ the investor was to provide the Working Capital.”

 Further, it was also noted that the petitioner was trying to make out a case not as an Investor in the restaurant project but as a creditor which was contrary to the documents executed between the parties.

Corporate Debtor clearly brought out that the said restaurants never ‘broke even’ and therefore, there was no obligation on the part of the respondent to pay an amount which had been provided by way of working Capital.

Therefore, while concluding the matter, Bench held that the amount which was being claimed as Financial Debt was not a Debt at all and at best was a payment due after the restaurant business ‘breaks even’.

Hence, the amount claimed of Rs 7,02,682/- does not qualify as a Financial Debt under Section 5(8) of the Code and is not default under Section 3(12) of the Code. [Plutusone Hospitality (P) Ltd. v. Busabong & Co. (P) Ltd., CP No. 4395/IBC/MB/2019, decided on 26-7-2021]

Advocates before the Tribunal:

For the Applicant: Mr Shyam Kapadia, Advocate

For the Respondent: Mr Nausher Kohli, Advocate

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Appellate Tribunal (NCLAT): The Division Bench of Justice Anant Bijay Singh, Judicial Member and Shreesha Merla, Technical Member held that the Banks cannot freeze accounts, nor can they prohibit the ‘Corporate Debtor’ from withdrawing the amount as available on the date of the moratorium for its day-to-day functioning.

Instant appeal was filed by Bank of India, Central Bank of India, Syndicate Bank and State Bank of India against the National Company Law Tribunal’s decision wherein the Adjudicating Authority allowed the application filed by the Resolution Professional under Section 14 read with Section 17 and Section 60(5) of the Insolvency and Bankruptcy Code, 2016.

Resolution Professional had sought a direction against the appellant Banks and Financial Institutions to reimburse the amounts appropriated by them after Insolvency Commencement Date, together with the amount appropriated towards interest payments and further to resume the working capital limits as available to the ‘Corporate Debtor’ as on the Insolvency Commencement Date.

Analysis, Law and Decision

Tribunal noted that the main case of the Appellant Banks was that this Tribunal vide an Order dated 09-08-2017 passed an interim order directing the Company to be run as a going concern, engaging all Banks where the Company had accounts, to co-operate with the IRP for the operation of the accounts.

Further, the IRP requested the banks to make available the limits which were subsisting as on the date of commencement of the process of Resolution. The LC facility was continued on request of the erstwhile RP and the LC Bills negotiated by the beneficiary Banks were retired by the ‘Corporate Debtor’. The amount was paid by the Company into their Cash Credit Account so that fresh LCs could be opened within the sanctioned limits to purchase necessary raw materials to keep the Company a going concern.

Section 17(1)(d) of the Insolvency and Bankruptcy Code states that the Financial Institutions maintaining the accounts of the ‘Corporate Debtor’ have to act on the instructions of the Interim Resolution Professional in relation to such accounts and furnish all information relating to ‘Corporate Debtor’.

Bench reiterated that Banks cannot debit any amounts from the account of the ‘Corporate Debtor Company’ after the Order of moratorium, as it amounts to the recovery of the amount.

 Moratorium Period

Tribunal expressed that Section 14 of the I&B Code overwrites any other provision contrary to the same and any amount due prior to the date of CIRP cannot be appropriated during the period of moratorium.

Keeping in view the above discussion, Bench opined that merely because the ‘Corporate Debtor’ had enough liquidity to run the Company as a going concern, the act of the Appellant Banks to adjust the credit balance in the Cash Credit Account towards the debit balance after CIRP commenced, cannot be justified.

Present appeal failed and hence was dismissed.

Further, the new management of the ‘Corporate Debtor Company’ sought the release of the title deeds of the Immovable Properties of the Company which were in possession of Bank of India.

Applicant stated that the non-applicant Bank declined to release the title deeds as conformation from Canara Bank was pending. Though vide an email Bank of India had cited ‘Issuance of No objection Certificate by Canara Bank’ as the ground for non-release of the title deeds.

Further, Section 31 of the Insolvency and Bankruptcy Code was referred which provided that the terms of the ‘Resolution Plan’ are binding on the Company, its employees, creditor and stakeholders. Clauses 3(c)(vii) and 3(c)(viii) of the Plan contemplate that title deeds are required to be released immediately upon distribution of Resolution Process.

Therefore, Bench held that since the debt had been legally extinguished, therefore withholding the title deeds and preventing the Company from being able to create security interest for securing the non-convertible Debentures issued to the Debenture Holders, in terms of the Plan would be unjustifiable.

Tribunal allowed the release of title deeds for effective implementation of the terms of the ‘Resolution Plan’.[Bank of India v. Bhuban Madan, 2021 SCC OnLine NCLAT 189, decided on 28-05-2021]

Advocates before the Court:

Appellants:

Mr Rajiv Ranjan, Sr. Advocate alongwith Dr Sudhir Bisla and Mr Rahul Adlakha, Advocates.

Respondents:

Mr Abhinav Vashisht, Sr. Advocate alongwith Mr Rajat Bector and Ms Charu Bansal, for R-1.

Ms Malak Bhatt, Mr Saurav Panda and Ms Anannya Ghosh, Advocates.

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Appellate Tribunal (NCLAT): A Division Bench of Justice Venugopal M. (Judicial Member) and V.P. Singh (Technical Member) dismissed an appeal filed against the order of the National Company Law Tribunal, Hyderabad (“NCLT”), whereby the NCLT had admitted an application filed by the Financial Creditor−Punjab National Bank under Section 7 of the Insolvency and Bankruptcy Code, 2016 (“IBC”) for initiation the Corporate Insolvency Resolution Process (“CIRP”) against the Corporate Debtor−Saptarishi Hotels (P) Ltd. The appellant was the promoter/suspended director of Saptrishi Hotels (P) Ltd.

The Corporate Debtor is a ”special purpose vehicle” incorporated to undertake a certain public-private partnership project with Government of Telangana. The Corporate Debtor availed of a loan facility from a ‘consortium’ which included Punjab National Bank (“PNB”). Having defaulted in repaying the loan amount within time, PNB filed a Section 7 IBC application which was admitted by the NCLT.

Corporate Debtor’s Argument

The Corporate Debtor raised the issue of limitation. It was contended that the NCLT erred in admitting the application since it was barred by limitation. The Corporate Debtor took a stand that the ‘date of default’ for all facilities extended by PNB was 30-3-2016, whereas the Section 7 application was filed by PNB only on or after 18-7-2019. According to the Corporate Debtor, the period of limitation (3 years) for filing the Section 7 application expired on 29-6-2019. Therefore, PNB’s application, having been filed beyond the 3 years’ period of limitation, was liable to be rejected.

Financial Creditor’s Argument

The Punjab National Bank refuted Corporate Debtor’s argument by stating that the Corporate Debtor has not filed two a vital documents, viz. ‘Balance and Security Confirmation Letter’ dated 20-2-2018 executed by the Corporate Debtor, which amount to an ‘acknowledgment of debt’ as contemplated under Sections 18 and 19 of the Limitation Act, 1963.

Discussion

Insolvency and Bankruptcy Code, 2016

For deciding the appeal, the Appellate Tribunal referred to certain provisions of IBC, including:

(i) Section 3(6)(a), which defines “claim” meaning a right to payment, whether or not such right is reduced to judgment, fixed, disputed, undisputed, legal, equitable, secured or unsecured.

(ii) Section 3(8), which defines “Corporate Debtor” meaning a Corporate person who owes a debt to any person.

(iii) Section 3(10), which defines “Creditor” meaning any person to whom a debt is owed and includes a financial creditor, an operational creditor, a secured creditor, an unsecured creditor and a decree-holder.

(iv) Section 3(11), which defines “debt” meaning ‘a liability or obligation in respect of a claim which is due from any person and includes a financial debt and operational debt.

(v) Section 3(12), which defines “default” meaning non-payment of debt when whole or any part or installment of the amount of debt has become due and payable and is not paid by the debtor or the corporate debtor, as the case may be.

Acknowledgment − Limitation Act, 1963

The Appellate Tribunal noted that Section 18 (Effect of acknowledgment in writing) of the Limitation Act does not enjoin that an ‘acknowledgement’ has to be in any particular form or to be express. The Appellate Tribunal further said that it must be borne in mind that an ‘acknowledgement’ is to be examined resting upon the attendant circumstances by an admission that the writer owes a ‘debt’. No wonder, an ‘unconditional acknowledgement’ implies a promise to pay because that is the natural inference if there is no other contrary material.

“Further, to treat the writing signed by an individual as an ‘acknowledgement’, the person acknowledging must be conscious of his liability and the commitment ought to be made in respect of that liability.“

Decision

After a careful consideration of respective contentions projected on either side, the Appellate Tribunal held that considering the prime fact that the ‘guarantors’ in respect of the Corporate Debtor had executed a Balance and Security Confirmation Letter (confirming the correctness of debit balance) and keeping in mind yet another fact that a certain part payment was made by the Corporate Debtor on 15-10-2018 towards its liability to Punjab National Bank, the irresistible conclusion was that there was an acknowledgment of debt as per Sections 18 and 19 of the Limitation Act in respect of the loan account of the Corporate Debtor.

Therefore, the Appellate Tribunal dismissed the appeal filed by the Corporate Debtor holding that the NCLT rightly admitted the Section 7 application filed by the Financial Creditor. [Lakshmi Narayan Sharma v. Punjab National Bank, 2021 SCC OnLine NCLAT 155, decided on 12-5-2021]

Case BriefsSupreme Court

Supreme Court: The bench of Dr. DY Chandrachud* and MR Shah, JJ has held that under Insolvency and Bankruptcy Code, 2016 (IBC), NCLT has jurisdiction to adjudicate disputes which arise solely from or which relate to the insolvency of the Corporate Debtor. The Court, however, issued a note of caution to the NCLT and NCLAT to ensure that “they do not usurp the legitimate jurisdiction of other courts, tribunals and fora when the dispute is one which does not arise solely from or relate to the insolvency of the Corporate Debtor. The nexus with the insolvency of the Corporate Debtor must exist.”

Jurisdiction of the NCLT/NCLAT over contractual disputes

“NCLT owes its existence to statute. The powers and functions which it exercises are those which are conferred upon it by law, in this case, the IBC.”

The NCLT has been constituted under Section 408 of the Companies Act, 2013 ―to exercise and discharge such powers and functions as are, or may be, conferred on it by or under this Act or any other law for the time being in force.

Sub-section (1) of Section 60 provides the NCLT with territorial jurisdiction over the place where the registered office of the corporate person is located. NCLT shall be the adjudicating authority ―in relation to insolvency resolution and liquidation for corporate persons including corporate debtors and personal guarantors.

The institutional framework under the IBC contemplated the establishment of a single forum to deal with matters of insolvency, which were distributed earlier across multiple fora. In the absence of a court exercising exclusive jurisdiction over matters relating to insolvency, the corporate debtor would have to file and/or defend multiple proceedings in different fora. These proceedings may cause undue delay in the insolvency resolution process due to multiple proceedings in trial courts and courts of appeal.

“A delay in completion of the insolvency proceedings would diminish the value of the debtor‘s assets and hamper the prospects of a successful reorganization or liquidation. For the success of an insolvency regime, it is necessary that insolvency proceedings are dealt with in a timely, effective and efficient manner.”

Residuary jurisdiction of the NCLT under section 60(5)(c)

The residuary jurisdiction conferred by statute may extend to matters which are not specifically enumerated under a legislation. While a residuary jurisdiction of a court confers it wide powers, its jurisdiction cannot be in contravention of the provisions of the concerned statute.

The residuary jurisdiction of the NCLT under Section 60(5)(c) of the IBC provides it a wide discretion to adjudicate questions of law or fact arising from or in relation to the insolvency resolution proceedings.

“If the jurisdiction of the NCLT were to be confined to actions prohibited by Section 14 of the IBC, there would have been no requirement for the legislature to enact Section 60(5)(c) of the IBC. Section 60(5)(c) would be rendered otiose if Section 14 is held to be the exhaustive of the grounds of judicial intervention contemplated under the IBC in matters of preserving the value of the corporate debtor and its status as a ‘going concern’. “

Ruling on facts 

In the present case, NCLT stayed the termination by the Gujarat Urja Vikas Nigam Limited of its Power Purchase Agreement (PPA) with Astonfield Solar (Gujarat) Private Limited on the ground of insolvency. The order of the NCLT was passed in applications moved by the Resolution Professional of the Corporate Debtor and Exim Bank under Section 60(5) of the Insolvency and Bankruptcy Code, 2016. On 15 October 2019, the NCLAT dismissed the appeal by Gujarat Urja Vikas Nigam Limited under Section 61 of the IBC.

The PPA was terminated solely on the ground of insolvency, since the event of default contemplated under Article 9.2.1(e) was the commencement of insolvency proceedings against the Corporate Debtor. Hence, the NCLT was empowered to restrain the appellant from terminating the PPA. In the absence of the insolvency of the Corporate Debtor, there would be no ground to terminate the PPA. The termination is not on a ground independent of the insolvency. The present dispute solely arises out of and relates to the insolvency of the Corporate Debtor.

“The PPA has been terminated solely on the ground of insolvency, which gives the NCLT jurisdiction under Section 60(5)(c) to adjudicate this matter and invalidate the termination of the PPA as it is the forum vested with the responsibility of ensuring the continuation of the insolvency resolution process, which requires preservation of the Corporate Debtor as a going concern. In view of the centrality of the PPA to the CIRP in the unique factual matrix of this case, this Court must adopt an interpretation of the NCLT‘s residuary jurisdiction which comports with the broader goals of the IBC.”

The Court further explained that the adjudication of disputes that arise dehors the insolvency of the Corporate Debtor, the RP must approach the relevant competent authority. For instance, if the dispute in the present matter related to the non-supply of electricity, the RP would not have been entitled to invoke the jurisdiction of the NCLT under the IBC. However, since the dispute in the present case has arisen solely on the ground of the insolvency of the Corporate Debtor, NCLT is empowered to adjudicate this dispute under Section 60(5)(c) of the IBC.

The Court took further care to clarify that,

“Judicial intervention should not create a fertile ground for the revival of the regime under section 22 of SICA which provided for suspension of wide-ranging contracts. Section 22 of the SICA cannot be brought in through the back door. The basis of our intervention in this case arises from the fact that if we allow the termination of the PPA which is the sole contract of the Corporate Debtor, governing the supply of electricity which it generates, it will pull the rug out from under the CIRP, making the corporate death of the Corporate Debtor a foregone conclusion.”

Conclusion

“NCLT‘s jurisdiction shall always be circumscribed by the supervisory role envisaged for it under the IBC, which sought to make the process driven by trained resolution professionals.”

The jurisdiction of the NCLT under Section 60(5)(c) of the IBC cannot be invoked in matters where a termination may take place on grounds unrelated to the insolvency of the corporate debtor. Even more crucially, it cannot even be invoked in the event of a legitimate termination of a contract based on an ipso facto clause, if such termination will not have the effect of making certain the death of the corporate debtor. As such, in all future cases, NCLT would have to be wary of setting aside valid contractual terminations which would merely dilute the value of the corporate debtor, and not push it to its corporate death by virtue of it being the corporate debtor‘s sole contract.

Section 60(5)(c) of the IBC vests the NCLT with wide powers since it can entertain and dispose of any question of fact or law arising out or in relation to the insolvency resolution process. However,

“NCLT‘s residuary jurisdiction, though wide, is nonetheless defined by the text of the IBC. Specifically, the NCLT cannot do what the IBC consciously did not provide it the power to do.”

The Court, however, made it clear that it’s finding on the validity of the exercise of residuary power by the NCLT is premised on the facts of the case at hand and that it was not laying down a general principle on the contours of the exercise of residuary power by the NCLT. However, it is pertinent to mention that the NCLT cannot exercise its jurisdiction over matters dehors the insolvency proceedings since such matters would fall outside the realm of IBC.

[Gujarat Urja Vikas Nigam Limited v. Amit Gupta,  2021 SCC OnLine SC 194, decided on 08.03.2021]

*Judgment by: Justice Dr. DY Chandrachud

Know Thy Judge| Justice Dr. DY Chandrachud

Appearances before the Court by”

For appellant: Senior Advocate Shyam Diwan and Advocate Ranjitha Ramachandran

For Respondent: Senior Advocate C U Singh and Nakul Dewan

Case BriefsSupreme Court

Supreme Court: The 3-judge bench of RF Nariman*, Navin Sinha and KM Joseph, JJ has, analysing various provisions under the Negotiable Instruments Act, the Court concluded that the proceedings under Section 138 are “quasi-criminal” in nature.

The Court held that

“a Section 138/141 proceeding against a corporate debtor is covered by Section 14(1)(a) of the IBC.”

In a 120-pages long verdict, the Supreme Court tackled the following issues to reach at the aforementioned conclusion:

OBJECT AND INTERPRETATION OF SECTION 14 OF THE IBC

The expression “institution of suits or continuation of pending suits” is to be read as one category, and the disjunctive “or” before the word “proceedings” would make it clear that proceedings against the corporate debtor would be a separate category.

“What throws light on the width of the expression “proceedings” is the expression “any judgment, decree or order” and “any court of law, tribunal, arbitration panel or other authority”. Since criminal proceedings under the Code of Criminal Procedure, 1973 are conducted before the courts mentioned in Section 6, CrPC, it is clear that a Section 138 proceeding being conducted before a Magistrate would certainly be a proceeding in a court of law in respect of a transaction which relates to a debt owed by the corporate debtor.”

A quasi-criminal proceeding which would result in the assets of the corporate debtor being depleted as a result of having to pay compensation which can amount to twice the amount of the cheque that has bounced would directly impact the corporate insolvency resolution process in the same manner as the institution, continuation, or execution of a decree in such suit in a civil court for the amount of debt or other liability.

“Judged from the point of view of this objective, it is impossible to discern any difference between the impact of a suit and a Section 138 proceeding, insofar as the corporate debtor is concerned, on its getting the necessary breathing space to get back on its feet during the corporate insolvency resolution process.”

Hence, the width of the expression “proceedings” cannot be cut down so as to make such proceedings analogous to civil suits.

THE INTERPLAY BETWEEN SECTION 14 AND SECTION 32A OF THE IBC

“A section which has been introduced by an amendment into an Act with its focus on cesser of liability for offences committed by the corporate debtor prior to the commencement of the corporate insolvency resolution process cannot be so construed so as to limit, by a sidewind as it were, the moratorium provision contained in Section 14, with which it is not at all concerned.”

If the expression “prosecution” in the first proviso of Section 32A(1) refers to criminal proceedings properly so-called either through the medium of a First Information Report or complaint filed by an investigating authority or complaint and not to quasi-criminal proceedings that are instituted under Sections 138/141 of the Negotiable Instruments Act against the corporate debtor, the object of Section 14(1) of the IBC gets subserved, as does the object of Section 32A, which does away with criminal prosecutions in all cases against the corporate debtor, thus absolving the corporate debtor from the same after a new management comes in.

NATURE OF PROCEEDINGS UNDER CHAPTER XVII OF THE NEGOTIABLE INSTRUMENTS ACT

“Section 138 contains within it the ingredients of the offence made out. The deeming provision is important in that the legislature is cognizant of the fact that what is otherwise a civil liability is now also deemed to be an offence, since this liability is made punishable by law.”

It is important to note that the transaction spoken of is a commercial transaction between two parties which involves payment of money for a debt or liability. The explanation to Section 138 makes it clear that such debt or other liability means a legally enforceable debt or other liability. Thus, a debt or other liability barred by the law of limitation would be outside the scope of Section 138. This, coupled with fine that may extend to twice the amount of the cheque that is payable as compensation to the aggrieved party to cover both the amount of the cheque and the interest and costs thereupon, would show that it is really a hybrid provision to enforce payment under a bounced cheque if it is otherwise enforceable in civil law.

Further, as the proviso gives an opportunity to the drawer of the cheque, stating that the drawer must fail to make payment of the amount within 15 days of the receipt of a notice, it becomes clear that the real object of the provision is not to penalise the wrongdoer for an offence that is already made out, but to compensate the victim.

Under Section 139, a presumption is raised that the holder of a cheque received the cheque for the discharge, in whole or in part, of any debt or other liability. To rebut this presumption, facts must be adduced which, on a preponderance of probability (not beyond reasonable doubt as in the case of criminal offences), must then be proved.

Section 140 states that it shall not be a defence in a prosecution for an offence under Section 138 that the drawer had no reason to believe when he issued the cheque that the cheque may be dishonoured on presentment for the reasons stated in that Section, thus making it clear that strict liability will attach, mens rea being no ingredient of the offence.

Section 141 makes Directors and other persons statutorily liable, provided the ingredients of the section are met. Interestingly, for the purposes of this Section, explanation (a) defines “company” as meaning any body corporate and includes a firm or other association of individuals.

A cursory reading of Section 142 makes clear that the procedure under the CrPC has been departed from. First and foremost, no court is to take cognizance of an offence punishable under Section 138 except on a complaint made in writing by the payee or the holder in due course of the cheque – the victim. Further, the language of Section 142(1) (b) would again show the hybrid nature of these provisions inasmuch as a complaint must be made within one month of the date on which the “cause of action” under clause (c) of the proviso to Section 138 arises.

“The expression “cause of action” is a foreigner to criminal jurisprudence, and would apply only in civil cases to recover money. Chapter XIII of the CrPC, consisting of Sections 177 to 189, is a chapter dealing with the jurisdiction of the criminal courts in inquiries and trials. When the jurisdiction of a criminal court is spoken of by these Sections, the expression “cause of action” is conspicuous by its absence.”

Under Section 143, it is lawful for a Magistrate to pass a sentence of imprisonment for a term not exceeding one year and a fine exceeding INR 5,000/- summarily. Hence,

“… the payment of compensation is at the heart of the provision in that a fine exceeding INR 5000/-, the sky being the limit, can be imposed by way of a summary trial which, after application of Section 357 of the CrPC, results in compensating the victim up to twice the amount of the bounced cheque.”

Under Section 144, the mode of service of summons is done as in civil cases, eschewing the mode contained in Sections 62 to 64 of the CrPC. Likewise, under Section 145, evidence is to be given by the complainant on affidavit, as it is given in civil proceedings, notwithstanding anything contained in the CrPC. Most importantly, by Section 147, offences under this Act are compoundable without any intervention of the court, as is required by Section 320(2) of the CrPC.

CONCLUSION

“The gravamen of a proceeding under Section 138, though couched in language making the act complained of an offence, is really in order to get back through a summary proceeding, the amount contained in the dishonoured cheque together with interest and costs, expeditiously and cheaply.”

The Court, hence, concluded that a quasi-criminal proceeding that is contained in Chapter XVII of the Negotiable Instruments Act would, given the object and context of Section 14 of the IBC, amount to a “proceeding” within the meaning of Section 14(1)(a), the moratorium therefore attaching to such proceeding.

[P. Mohanraj v. Shah Brother Ispat Pvt. Ltd., 2021 SCC OnLine SC 152, decided on 01.03.2021]

*Judgment by: Justice RF Nariman

Know Thy Judge| Justice Rohinton F. Nariman

Appearances before the Court by:

For Appellants: Senior Advocate Jayanth Muth Raj

For Respondent: Advocate Jayant Mehta

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Tribunal, Mumbai Bench: The Coram of Janab Mohammed Ajmal (Judicial Member) and V. Nallasenapathy (Technical Member),  decided the issue of whether the Resolution Plan could be shared with the employees of Jet Airways.

Who all are the applicants?

Pilots of Jet Airways (Corporate Debtor) were represented by a Union named National Aviators’ Guild, Maintenance Engineers of the Corporate Debtor under the umbrella of Jet Aircraft Maintenance Engineers’ Welfare Association, Bhartiya Kamgar Sena (BKS) and Jet Airways Cabin Crew Association (JACCA) respectively representing 70% of the ground staff and the majority of the Cabin Crew of the Corporate Debtor and All India Jet Airways Officers’ and Staff Association, they all sought a direction to Respondent (Resolution Professional) to furnish each of the entities/applicants a full copy of the entire Resolution Plan approved by the CoC.

Reasoning | Why do the applicants want to know the details of Resolution plan?

Applicants state that they are unaware of the details of the Resolution Plan and hence they needed to know what was provided under the RP for its members and employees.

Vital concern of the applicants is with regard to the terms and conditions of the Resolution Plan. Further, it has been added that any revival plan, for that matter, both in terms of employment and provision for outstanding wages/dues, is vital for their sustenance and mutual benefit.

Some of the employees have lingered on the rolls of the Corporate Debtor despite the financial hardships and difficulty it entailed.

Adding to the above, it has also been stated that natural justice demands that the applicants remain aware of the Plan and how it is going to take care of their interests or adversely affects them.

Applicants would be the most affected by the orders of this Authority approving or rejecting the Resolution Plan. Thus, it becomes imperative that the Applicants are made privy to the Resolution Plan before it is considered.

Further, the applicants claimed that the Resolution Plan could not be held to be confidential as far as the employees of the Corporate Debtor were concerned.

It is settled law that the interest of the Corporate Debtor is of utmost importance and should be scrupulously protected. 

In view of the above stated, the present application has been filed.

Respondent submitted that the IP Regulations mandate the Resolution Professional to ensure and maintain the confidentiality of the information related to the Insolvency Resolution Process since it contains sensitive information and could only be presented to the CoC.

Analysis, Law and Decision

Bench observed that the applicants interest in the Resolution Plan revolves around the payment/recovery of their dues such as remuneration/wages, other perquisites including terminal benefits if any.

What does Regulations 9 & 22 of the CIRP Regulation lay down?

The stated provision lays down the procedure for the workmen and employees to submit their claims before the IRP/RP.

Regulation 22 of the IP Regulations mandates that an Insolvency Professional must ensure that the confidentiality of the information relating to the insolvency resolution process, liquidation or bankruptcy process is maintained at all time.

Hence, Tribunal held that in view of the above-discussed provisions, the reluctance and refusal of the respondent in sharing the copy of the Resolution Plan with the applicants cannot be faulted.

Natural Justice

Recourse to principles of natural justice and audi alteram partem can be taken when the provisions made in a statute fall short of the requirement and the constitutional validity of the Code has been upheld by the Supreme Court in Swiss Ribbons v. Union of India (2019) 4 SCC 17.

Adjudicating Authority cannot digress from the express provisions of the Statute and act in the manner not provided thereunder or sanctioned by the statute.

Tribunal further explained that in view of express provisions in relation to the Resolution Plan, it is clear that the statutory mandate requires that the Resolution Plan can only be presented to the CoC for its approval and presented before the Adjudicating Authority for its satisfaction in approving the same.

Code or the Regulations thereunder do not contemplate presentation or supply of the Resolution Plan or a copy thereof to any other body or entity. 

Bench agreed with the decision in Anil N. Surwade v. Prashant Jain (IA No. 1033 of 2020 in C.P. (IB) No. 1799 of 2018 decided on 28-09-2020).

“…workmen being at par with the secured creditors are also entitled to privileges of a member of CoC would be fallacious and would go against the grain of the intent and purpose of the Code. “

Bench also added that the applicants are Operational Creditors and the Supreme Court has observed that the role of the Operational Creditors is very limited and confined to the satisfaction of their claims.

Therefore after a wholesome discussion, Tribunal denied any relief to the applicants with a reasoned order.[National Aviators’ Guild v. Ashish Chhawchharia, 2021 SCC OnLine NCLT 50, decided on 22-02-2021]

Image credits of the aircraft: Business Today

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Appellate Tribunal (NCLAT): The Division Bench of Venugopal M (Judicial Member) and Alok Srivastava (Technical Member) held that a demand notice is a forerunner to the commencement of insolvency proceedings against a corporate debtor. Unpaid demand notice is good enough to exhibit the debtor’s inability to pay its debts for bankruptcy proceedings. If a bonafide dispute is established then an ‘Insolvency’ petition is not the appropriate proceeding to determine the validity of a disputed debt.

On being aggrieved with the decision of National Company Law Tribunal, Mumbai, the present Company Appeal was preferred by the appellant.

Appellant submitted that no ‘Demand Notice’ was ever served on the Corporate Debtor/Second Respondent as per Section 8 of the Insolvency and Bankruptcy Code.

Tribunal’s Assessment

Tribunal noted that the appellant’s plea stated that the alleged Demand Notice of the respondent 1 was sent to an address and the same was not registered address of the ‘Corporate Debtor’ as per the master data of the ‘Corporate Debtor’ on MCA website.

Further, it was submitted by the appellant that the Demand Notice was knowingly addressed to the wrong address of the ‘Corporate Debtor’ by respondent 1.

Tribunal expressed that:

As per Section 8 of the I&B Code an Operational Creditor is required to deliver a demand notice on the occurrence of the default within ten days from the receipt of the demand notice, the Corporate Debtor shall bring to the notice of the Operational Creditor ‘the existence of the dispute’, if any, and the record of the pendency of the suit or arbitration proceedings before the receipt of such notice or invoice in relation to such dispute.

While proceeding with discussion in the above matter, Bench also stated that a change in address of the registered office of the ‘Corporate Debtor’ cannot be a ruse for the failure of the party concerned to send/issue a ‘Demand Notice’ as per Section 8 of the I&B Code. In fact, serving the demand notice to the corporate debtor is mandatory.

“If a demand notice payment under the code is issued, the ‘Corporate Debtor’ will appreciate in right earnest the consequences flowing on account of failure to pay the ‘operational debt’. Also, that . after transfer of the case form High Court to Tribunal (in respect of winding up petition) an Operational Creditor is required to submit all information including the details of the proposed Insolvency Professional.”

Tribunal opined that service of ‘Demand Notice’ to the second respondent is mandatory as per Section 8 of the Code.

Further the Bench while making observations in the present matter also added that it cannot be forgotten that the proceedings under Section 138 NI Act pertain to criminal liability for dishonour of cheques issued and do not bar an application under Section 9 of the Code. Likewise, the pendency of proceedings under Order 37 of the civil Procedure Code will not prohibit an application under Section 9 of the Code.

While concluding, the Tribunal held that:

Since the ‘Service of notice’ at the registered address of the ‘Corporate Debtor’ was not established to the subjective satisfaction of the Tribunal and the admitted fact being that the notice sent to the second respondent at its registered office got returned, the said admission of debt and the reference with regard to NI Act that a holder of cheque received the cheque for the discharge either in whole or in part of any debt or other liability will not in any way heighten or improve the case of appellant.

Since the notice as per Section 8 of I&B Code was not served upon the corporate debtor and the same got returned, NCLT’s decision is to be set aside.

Hence NCLT’s order is to be declared as illegal in appointing the ‘Interim Resolution Professional’ declaring moratorium and all other orders passed.  Corporate Debtor is therefore released from all the rigour of law and is allowed to function independently through its Board of Directors.

Before parting, Tribunal granted liberty to the Operational Creditor to issue a fresh notice under Section 8 of I&B Code and on receipt of such notice of service if there is ‘Debt and Default’ to file a fresh application under Section 9 IBC. [Shailendra Sharma v. Ercon Composites, 2021 SCC OnLine NCLAT 3, decided on 13-01-2021]

Op EdsOP. ED.

The preamble of the Insolvency and Bankruptcy Code, 2016 (IBC) states that, the purpose of IBC is to provide a mechanism for the insolvency resolution of debtors in a time-bound manner in order to enable maximisation of the value of their assets, thereby promoting availability of credit and balance the interests of all the stakeholders. In order to achieve this, Section 14 of IBC has been incorporated, which provides for moratorium, which is a period where no judicial proceedings for recovery, enforcement of security interest, sale or transfer of assets, or termination of essential contracts can be instituted or carried on against the corporate debtor. But since the enactment of IBC, moratorium under Section 14(1) (a) of IBC has come under scrutiny and the courts have laid down multiple interpretations and exceptions to the same.

It is in light of the objectives of IBC and the interpretations to Section 14(1) (a) of IBC, that the notice issued by the Supreme Court of India in Malayan Banking Berhad v. Ushdev International Ltd[1]. is of vital importance. In the present case, the counsel of Malayan Banking Berhad submitted that, the point of contention before the Supreme Court of India was that the moratorium imposed under Section 14(1) (a) of IBC would only be applicable in civil suits filed “against the Corporate Debtor” and as the suit before the Bombay High Court was filed “by the Corporate Debtor i.e. Ushdev International Ltd.”, therefore, the Moratorium under Section 14(1) (a) of IBC would not be applicable.

Brief Facts Leading up to the SLP

Malayan Banking Berhad had filed a review petition before the Bombay High Court titled, Malayan Banking BHD v. Ushdev International Ltd.[2] seeking review of the order dated 07th July, 2019 passed by the Bombay High Court in Notice of Motion filed by Malayan Banking Berhadin, a suit initiated by Ushdev International Ltd. During the pendency of the Notice of Motion, a petition against Ushdev International Ltd. under IBC was admitted by the NCLT, Mumbai, thereby initiating CIRP against Ushdev International Ltd. and imposing Moratorium. In lieu of the same, the Bombay High Court vide order dated 07th July, 2019, adjourned the proceedings under the Notice of Motion, sine die.

Malayan Banking Berhad, challenged the order dated 07th July, 2019 vide the aforesaid review petition, wherein the Bombay High Court vide order dated 16th September, 2019 held that, the Notice of Motion would fall within the term “proceeding” as contemplated under Section 14(1) (a) of IBC, as it is a proceeding seeking rejection of the Suit filed by the corporate debtor, which is under CIRP and Moratorium. It was also observed that, the submission of Malayan Banking Berhad that, moratorium does not stay all the proceedings is erroneous. Hence, the Bombay High Court upheld the order dated 07th July, 2019. The order dated 16th September, 2019 passed in the review petition was challenged before the Supreme Court of India and the Supreme Court of India was pleased to issue notice.

Ambiguity in the Legal Position

The contentions of Malayan Banking Berhad as noted in the notice issued by the Supreme Court of India, sheds light on the fact that there exists an ambiguity in the legal position relating to the applicability of Moratorium upon the adjudication of proceedings filed by the Corporate Debtor, as the judicial trend reflects a conflicting and divergent view.

When majority of the petition(s) filed under Section(s) 7, 9 or 10 of IBC before the NCLT, are admitted, moratorium under Section 14(1) (a) of IBC is always imposed, against the proceedings filed or to be instituted by or against the corporate debtor. It is to be noted that, Section 14(1)(a) of IBC specifically states that proceedings “against the Corporate Debtor” are to be stayed, despite the same proceedings filed “by the Corporate Debtor” are also stayed. It was with regards to this ambiguous legal position that Malayan Banking Berhad had filed the SLP before the Supreme Court of India.

This question had come up for interpretation before the Delhi High Court in Power Grid Corporation of India Ltd. v. Jyoti Structures Ltd.[3] , wherein the Single Judge laid down the factors needed to determine the applicability of moratorium to proceedings filed by the Corporate Debtor. The factors were:

  1. “The nature of the proceedings has to be considered; and
  2. it has to be observed whether such proceedings are in the favor of the Corporate Debtor or against the Corporate Debtor.[4]

If the answers to the factors are in favor of the Corporate Debtor then staying such proceedings during moratorium would cause harm to the Corporate Debtor and would also be against the objectives of IBC. The Single Judge was of the considered view that the application of moratorium should not be used to impose a blanket stay on all proceedings, rather in proceedings initiated by the Corporate Debtor, it should be considered if the continuation of the proceeding would benefit the Corporate Debtor. It was also observed that, a proceeding would not be prohibited under Section 14(1) (a) of IBC, unless it has the effect of endangering, diminishing, dissipating or adversely impacting the assets of Corporate Debtor.

The Single Judge was of the opinion that, the legislative intent was to restrict the meaning and applicability of moratorium under Section 14(1)(a) of IBC to proceedings filed against the Corporate Debtor and not to proceedings filed by the Corporate Debtor, which is evident from the narrow construction of the phrase “against the Corporate Debtor” in Section 14(1)(a) of IBC as compared to the wider phrase “by or against the Corporate Debtor” as under Section 33(5) of IBC.

Recently, the Delhi High Court in SSMP Industries Ltd. v. Perkan Food Processors Pvt. Ltd.[5] was called upon to decide on whether the adjudication of a suit filed by the Corporate Debtor and counter-claim filed in the same could be carried on during moratorium imposed under Section 14(1) (a) of IBC. The Single Judge relied upon the reasoning of the  Delhi High Court in Power Grid Corporation of India (Supra) and did not stay the adjudication of the suit and counter-claim, holding that the assets of the Corporate Debtor were not under any threat till the adjudication of the counter-claim and Section 14 of IBC can only be triggered at the stage when the counter-claim is adjudicated upon and the amount to be paid/recovered has been determined or when the execution proceedings are filed against the Corporate Debtor and these were subject to the prevalent situation. The Single Judge was also of the considered opinion that, with regards to the applicability of moratorium on proceedings filed by the corporate debtor, it has to be observed, whether the purpose and intent behind the imposition of moratorium is being satisfied or defeated and a blinkered approach cannot be followed, whereby the Court stays the proceedings and refers the defendant to the NCLT/RP for filing its claims.

A similar reasoning is also found in Jharkhand Bijli Vitran Nigam Ltd. v. IVRCL Ltd. (Corporate Debtor)[6] , wherein the NCLAT was called upon to adjudicate on the issue, whether a claim filed by the Corporate Debtor and a counter-claim filed in the same arbitral proceedings could be heard, during the Moratorium period. The NCLAT allowed the claim of the Corporate Debtor along with the counter claim to be heard by the arbitral, as there is no bar regarding the same under IBC and held that, if it is found that the Corporate Debtor is liable to pay a certain amount, then in such case, no recovery can be made during the period of moratorium.

From the aforesaid cases, it can be observed that, there is an ambiguity with regards to the proceedings filed by the corporate debtor and their adjudication during moratorium, where one school of thought is of the opinion that the moratorium covers all proceedings filed by or against the corporate debtor, but on the other hand the other school of thought is of the view that due to the restrictive wordings of Section 14(1) (a) of IBC and due to the objectives of moratorium, it is only applicable upon proceedings filed against the corporate debtor and when it comes to proceedings filed by the corporate debtor, moratorium should be applicable only after considering the benefit to the corporate debtor.

The Balancing Act

The interpretation put forward by the Delhi High Court and the NCLAT in the aforesaid cases, does raise a pertinent issue with regards to the interpretation and applicability of the phrase “against the corporate debtor” as under Section 14(1)(a) of IBC. Upon prima facie reading it would appear that the legislative intent was to restrict the applicability and meaning of moratorium as under Section14(1) (a) of IBC and this interpretation would also benefit the Corporate Debtor, its corpus and the creditors. Despite the clear advantages to this interpretation, there are a few drawbacks too, which are:

  1. If the proceedings filed by the corporate debtor are allowed to continue, it might delay the entire process and the statutorily mandated time lines;
  2. if the proceedings are allowed to continue, it could cause financial stress in the form of additional litigation expenses; and
  3. if the Courts are called upon to observe whether a proceeding is in favour or against the Corporate Debtor, it is as good as pronouncing an assessment based on a preliminary understating of the proceeding, which could be detrimental to the parties involved and might lead to situations of overlapping of judicial powers and functions.

If the interpretation is to be carried out and applied, certain stringent checks/factors would be needed to be put in place, such as the factors delineated by the Delhi High Court and in addition to those some other factors such as, the status/stage of the proceeding should also be considered and a stringent timeline should be imposed for completion of adjudication of the pending proceedings, etc. Thereby balancing the positives and the drawbacks.

Conclusion

The interpretation would definitely help the corporate debtor and would also be in line with the objectives of IBC, but without stringent judicial guidelines to determine which proceedings should be stayed and which shouldn’t, it could be detrimental to everyone involved. A balanced approach with stringent guidelines to be followed to determine whether the proceedings filed by the corporate debtor can be adjudicated upon during the moratorium period is needed, as the same would have a positive impact on the corporate debtor, its creditors and related parties. It remains to be seen how the Supreme Court of India deals with the issue and settles the position. But, for now, the interpretation of staying all the proceedings filed by or against the corporate debtor, seems to be the way.

† Advocate at Bombay High Court and National Company Law Tribunal, Mumbai.

[1] 2020 SCC OnLine SC 1068

[2] 2016 SCC OnLine Bom 6962 

[3] 2017 SCC Online Del 12729

[4] ibid

[5] 2019 SCC Online Del 9339

[6] 2018 SCC Online NCLAT 296.

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Appellate Tribunal (NCLAT): The Bench of Justice Venugopal M. (Judicial Member) and V.P. Singh (Technical Member) and Shreesha Merla (Technical Member), while addressing the present Company Appeal observed that:

No penalty can be saddled either under Section 65(1) or (2) of the Code without recording an opinion that a prima facie case is established to suggest that a person ‘fraudulently’ or with malicious intent for the purpose other than the resolution of Insolvency or Liquidation or with an intent to defraud any person has filed the Application.

The instant appeal emanates from the Order passed by National Company Law Tribunal Delhi whereby application under Section 7 of the Insolvency and Bankruptcy Code 2016 was admitted.

Factual Matrix

Corporate Debtor is a builder of High-End Project wherein a flat was booked for a total sale consideration of Rs 3,80,10,000. 

Respondents were the second purchasers of the above-stated flat booked vide Agreement Buyer Agreement. As per Agreement, the completion period was 36 months plus six months as a grace period, i.e. February 2015.

Appellant contended that after adjusting the payments made by the Original buyer, the respondent paid a total sum of Rs 2,75,55,186 as against the total cost of the flat as Rs 3,80,10,000. The last payment was made by the respondents on 26-08-2013, and after that, despite several reminders, no payment was made.

Respondents opted for a Construction linked plan but failed to pay the instalments on time.

Appellants submitted that the respondents are defaulters. Therefore, Corporate Debtor was constrained to cancel their allotment.

Respondents initiated the proceedings under Section 7 of the Insolvency and Bankruptcy Code against the appellant.

Appellant pleaded that the proceedings initiated by respondents 1 and 2 are against the provisions of the Code and have been done so, to pressurise the Corporate Debtor.

Further, respondent 1/Homebuyer submitted that as per the Agreement, possession was to be handed over within 36 months from the date of commencement of the construction or execution of the Agreement, whichever is later.

Despite the assurances, the Appellant failed to deliver the possession of the said unit to the Respondents. Therefore, the Respondents/Financial Creditor had filed the Application under Section 7 of the Code.

NCLT observed that the Corporate Debtor did not hand over the possession of the flat to the Financial Creditor as the construction work could not be completed within the stipulated time and there was no proof of extension of time by the Authority concerned. A debt of more than Rs 1 lakh was due and payable, which the Corporate Debtor failed to pay.

In view of the above circumstances, application wad admitted by NCLT and the same has been challenged in the instant appeal.

Issues for Consideration:

  1. Whether the Corporate Debtor has committed default in not completing the Construction of the flat in time and handing over possession of the same in terms of Agreement?
  2. Whether Financial Creditor/Home Buyer committed default in making payment of the instalments as per ‘ABA’ under construction link Plan?
  3. Whether the Application under Section 7 of the Code is filed fraudulently with malicious intent for the purposes other than for the Resolution of Insolvency or liquidation, as defined under Section 65 of the I&B Code, 2016?
  4. Whether the application is barred by limitation?

Analysis and Decision

On considering the above-stated issues, Bench observed that the Corporate had committed default in completing the construction work of the flat n time and failed to deliver the possession on the stipulated date as per the Agreement.

In a reply to a notice, Corporate Debtor himself admitted that unlike other builders who have abandoned the project and stopped the work, it is completing the Project which is at the final stage where flooring and finishing work is underway.

It was observed from the Agreement that under the Construction linked payment plan, it is mandatory to issue demand notice for instalments in the commencement of respective stages of Construction by speed post or courier.

In the instant case, there was no evidence to show that the demand notice at the respective stages of Construction was ever sent to the Allottee. Whereas, Clause 2.18 of the Agreement makes it mandatory to send the Notice to the Allottee under Construction linked plan. No compliance of conditions of Clause 2.17 and 2.18 were made in the instant case.

Hence, in the present case, it is difficult to ascertain as to when Instalment became due, at the start of the respective stage of the Construction.

Bench observed that:

Mandatory condition of issuing Notice through speed post or courier to the Allottee, at every stage of Construction as per Agreement has not been followed.

Hence, it cannot be concluded that the allotted committed any default in paying the instalment when due and the fact that the flat was to be delivered latest by 2nd week of February 2016, but construction work was still going on in the year 2018 also cannot be denied.

Justification for Invoking Section 65 of the Code

In accordance with the Supreme Court decision in Pioneer’ Urban Land Infrastructure v. Union of India, (2019) 8 S SCC 416, Corporate Debtor has the responsibility to furnish the details of default. It was held that:

“Under Section 65 of the Code, the real estate developer can also point out that the insolvency resolution process under the Code has been invoked fraudulently, with malicious intent, or for any purpose other than the resolution of Insolvency. The Allottee does not, in fact, want to go ahead with its obligation to take possession of the flat/Apartment under RERA, but wants to jump ship and really get back, by way of this coercive measure, monies already paid by it. The Allottee does not, in fact, want to go ahead with its obligation to take possession of the flat/Apartment under RERA, but wants to jump ship and really get back, by way of this coercive measure, monies already paid by it.”

Bench stressed upon the point that Section 65 of the Code is not meant to negate the process under Section 7 or 9 of the Code. Penal action under Section 65 can be taken only when the provision of the Code has been invoked fraudulently, with malicious intent.

In the Supreme Court decision of Swiss Ribbons (P) Ltd. v. Union of India, (2019) 4 SCC 17, it was held that:

“…in order to protect the corporate debtor from being dragged into the corporate insolvency resolution process mala fide, the Code prescribes penalties.”

Hence, from the above discussion, it is clear that

the Code provides stringent action under Section 65 against the person who initiates proceedings under the Code fraudulently or with malicious intent, for the purpose other than the resolution of Insolvency or liquidation under the Code.

Requirement for levying penalty under Section 65 IBC is that a ‘prima facie’ opinion is required to be arrived at that a person has filed the petition for initiation of proceedings fraudulently or with malicious intent.

While parting with the decision, Tribunal held that the Real Estate Developer failed to prove that Allottee is a speculative Investor and is not genuinely interested in purchasing the flat and initiated proceeding under the Code to pressurise the Corporate Debtor.

Thus, Tribunal found no justification to invoke Section 65 of the I&B Code against the Allottee.

Decision

NCLT’s order requires no interference. [Amit Katyal v. Meera Ahuja, 2020 SCC OnLine NCLAT 748, decided on 09-11-2020]

Legislation UpdatesRules & Regulations

The Insolvency and Bankruptcy Board of India (IBBI) notified the following Amendment Regulations, 2020:

(a) the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) (Fifth Amendment) Regulations, 2016

(b) the Insolvency and Bankruptcy Board of India (Liquidation Process) (Fourth Amendment) Regulations, 2020

(c) the Insolvency and Bankruptcy Board of India (Information Utilities) (Amendment) Regulations, 2020

2. The Insolvency and Bankruptcy Code, 2016 (Code) enables a financial creditor (FC), among others, to initiate corporate insolvency resolution process (CIRP) against a corporate debtor (CD). The FC, along with the application, is required to furnish “record of the default recorded with the information utility or such other record or evidence of default as may be specified”. In exercise of this power, the IBBI amended the Regulations to specify two ‘other record or evidence of default’, namely, (a) certified copy of entries in the relevant account in the bankers’ book, and (b) order of a court or tribunal that has adjudicated upon the non-payment of a debt.

3. The Code defines financial information to mean certain records and ‘such other information as may be specified’. In exercise of this power, the IBBI amended the Regulations to specify public announcement made under the Code as financial information. It mandated the Information Utilities to disseminate the public announcement to its registered users, who are creditors of the CD undergoing insolvency proceeding. This is in addition to publishing the public announcement in the newspapers and websites as required in the Regulations.

4. The Regulations provide that the Interim Resolution Professional (IRP) / Resolution Professional (RP) shall verify every claim and thereupon maintain a list of creditors and update it. He is required to file the list of creditors with the Adjudicating Authority (AA) and display it on the website, if any, of the CD. The IBBI amended the Regulations to require the IRP/RP to submit the list of creditors on an electronic platform for dissemination on its website. This will improve transparency and enable stakeholders to ascertain the details of their claims at a central place.

5. The resolution plan usually provides payment of debts to the creditors of the CD. In the interest of transparency, the IBBI amended the Regulations to require the RP to intimate each claimant the principle or formulae for payment of debts under a resolution plan, within 15 days of the order of the AA approving such resolution plan.

6. The Code envisages early closure of the liquidation process so that the assets of the CD are released for alternate uses expeditiously. However, the process takes longer where the liquidation estate includes a ‘not readily realisable asset’. To facilitate quick closure of the liquidation process, the IBBI amended the Regulations to enable the liquidator to assign or transfer a ‘not readily realisable asset’ to any person in consultation with the stakeholders’ consultation committee. For this purpose, “not readily realisable asset” means any asset included in the liquidation estate which could not be sold through available options and includes contingent or disputed assets, and assets underlying proceedings for preferential, undervalued, extortionate credit and fraudulent transactions. Thus, a liquidator shall attempt to sell the assets at the first instance, failing which he may assign or transfer an asset to any person, in consultation with the stakeholders’ consultation committee, and failing which he may distribute the undisposed of assets amongst stakeholders, with the approval of the AA.

7. There may be a creditor who may not be willing to wait for the completion of the liquidation process for realisation of his debt. The IBBI amended the Regulations to enable a creditor to assign or transfer the debt due to it to any other person in accordance with the laws for the time being in force dealing with such assignment or transfer.

Insolvency and Bankruptcy Board of India

[Press Release dt. 13-11-2020]

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Appellate Tribunal (NCLAT): The Bench of Justice Bansi Lal Bhat (Acting Chairperson) and Justice Anant Bijay Sing (Judicial Member) and Kanthi Narahari (Technical Member) set aside the Adjudicating Authorities decision while establishing whether a pre-existing dispute existed between the parties.

The instant appeal was filed against the order of the National Company Law Tribunal, New Delhi wherein the application filed under Section 9 of the Insolvency and Bankruptcy Code, 2016 by the respondent was admitted.

Pre-Existing Dispute

Aggrieved by the above, suspended director of the Corporate Debtor filed the present appeal challenging the admission and initiation of Corporate Insolvency Resolution Process against the Corporate debtor for the reason that there is a pre-existing dispute between the Corporate Debtor and the Operational Creditor.

Brief facts

Corporate Debtor invited tender in carrying out electrical works and respondent/Operational Creditor was assigned the same. In terms of the agreement and Letter of Intent, the payment terms were specifically incorporated therein.

In terms of LOI, a specific mention the time of completion is the essence of the contract and milestones were accordingly incorporated. The work was to be completed within 120 days. However, the work was delayed and the same was communicated by the Operational Creditor.

Further, it was submitted that the Operational Creditor has not completed the work and the Corporate Debtor time and again reminded Operational Creditor to complete the work by pointing out the defects.

Issue for Consideration

Whether there is an existence of dispute prior to the issuance of Demand Notice dated 11-04-2019 or not?

Bench noted that various email were exchanged between the parties. Respondent addressed to the appellant whereby it had been stated that the project was delayed much beyond the original schedule leading to enhanced overheads and stated that they needed funds to source materials with respect to work progress.

Deficiency in Service

Tribunal opined that the Adjudicating Authority instead of taking technical objection that the email dated 29-04-2019 may not be a response to the demand notice issued by respondent, however, the contents raised by the appellant should have been taken into consideration for the purpose of deciding the issue to elucidate any pre-existing dispute keeping in view of the trail of exchange of e-mails regarding deficiency in service.

Letters/e-mails of respondent dated 29-12-2018:

“Dear Sir,

We are handing over Electrical Works, Documents Details at Triumph Resort 336/1A, village Calwaddo, Benaulim, Goa- 403716.”

From the perusal of correspondences between the Appellant and Respondent, Appellant/Corporate Debtor submitted that the Respondent did not complete the project in time thereby the Project got delayed thereby they suffered losses. On the other side, the stand of Respondent/Operational Creditor that they completed the project and handed over to the Appellant/Corporate Debtor, however, Appellant/Corporate Debtor failed to pay bills even after completion of the project.

Bench stated that it is unequivocal that there exists a dispute between the parties prior to the issuance of Demand Notice dated 11-04-2019.

Adjudicating Authority instead of taking a technical objection that the Appellant/Corporate Debtor did not respond to the Demand Notice issued by the Respondent/Operational Creditor within the statutory period of 10 days as contemplated under Section 8(2) of IBC, should have analysed the documents placed before it, before taking such objection.

Tribunal observed that it is bound by the Supreme Court decision in, Mobilox Innovations (P) Ltd. v. Kirusa Software (P) Ltd., (2018) 1 SCC 353, wherein it was held that:

“…Within a period of 10 days of the receipt of such demand notice or copy of invoice, the corporate debtor must bring to the notice of the operational creditor the existence of a dispute and/or the record of the pendency of a suit or arbitration proceeding filed before the receipt of such notice or invoice in relation to such dispute [Section 8(2)(a)]. What is important is that the existence of the dispute and/or the suit or arbitration proceeding must be pre-existing i.e. it must exist before the receipt of the demand notice or invoice, as the case may be.”
Another Supreme Court decision was referred to, Innoventive Industries Ltd. v. ICICI Bank, (2018) 1 SCC 407, wherein it was decided that the dispute must exist before the receipt of the Demand Notice or Invoices as the case may be.
In Gajendra Parihar v. Devi Industrial Engineers,  2020 SCC OnLine NCLAT 274, Bench was of the view that existence of dispute prior to the issuance of Demand Notice, the Application under Section 9 IBC is not maintainable and once there is the existence of such dispute, the Operational Creditor gets out of the clutches of the Code.

Decision

Bench held that in view of the email/letters there existed a dispute prior to the Demand Notice.

Exchange of e-mails/correspondences, as referred above, clearly establishes that there is a pre-existing dispute between the parties regarding completion of the work and the Appellant/Corporate Debtor continuously made complaints regarding non-completion of work and deficiency in services, thereby loss caused to the Appellant/Corporate Debtor.

Hence, the Adjudicating Authority ought not to have admitted the application under Section 9 of IBC filed by the respondent.

Bench reiterated that,

Code is a beneficial legislation intended to put the Corporate Debtor on its feet and it s not a mere money recovery legislation for the Creditors.

In view of the above discussion, initiation of Corporate Insolvency Resolution Process is quashed and set aside.

While remitting back the matter to Adjudicating Authority, the tribunal directed Interim Resolution Professional/ Resolution Professional will hand over the assets and records to the Corporate Debtor/Promotor/Board of Director. [Umesh Saraf v. Tech India Engineers (P) Ltd.,  2020 SCC OnLine NCLAT 677, decided on 19-10-2020]

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Appellate Tribunal (NCLAT): Full Bench of Justice Bansi Lal Bhat (ACJ) and Justice Anant Bijay Singh (Judicial Member) and Dr Ashok Kumar Mishra (Technical Member), while addressing the present application observed that,

A Resolution Applicant whose Resolution Plan stands approved by Committee of Creditors cannot be permitted to alter his position to the detriment of various stake holders after pushing out all potential rivals during the bidding process.

Appellant emerged as the Successful Resolution Applicant in the Insolvency Resolution Process of Astonefield Solar (Gujarat) Pvt Ltd. (Corporate Debtor) assailed the impugned order rejecting the withdrawal application of its resolution plan and cancellation/ revocation/ return/ refund of the Performance Bank Guarantee, on the ground that there is no legal basis or justification for holding that an application for withdrawal of a Resolution Plan post-approval is not maintainable.

Withdrawal of Resolution Professional

Resolution Professional submitted that the appeal is not maintainable in view of the same being squarely covered by the decision of the Appellate Tribunal in

Committee of Creditors of Educomp Solutions Ltd. v. Ebix Singapore Pte. Ltd., Company Appeal (AT) (Insolvency) No. 653 of 2020, wherein it was held that after approval of the resolution plan by the committee of creditors, the adjudicating authority has no jurisdiction to entertain the application withdrawal filed by the resolution applicant and that adjudicating authority cannot enter into the arena of majority decision of the CoC.

Analysis & Decision

Adjudicating Authority was of the view that it had no jurisdiction to permit the withdrawal of a Resolution Plan, which had been duly approved by the Committee of Creditors. Issue of similar nature was sub-judice before the Supreme Court.

Resolution Plan

Before approval of a Resolution Plan by the Committee of Creditors, the Corporate Insolvency Resolution Process passes through various stages.

I&B Code provides for insolvency resolution in a time-bound manner, the object sought to be achieved, inter alia, being maximization of value of assets of corporate persons and balancing the interests of all stakeholders.

Commercial Wisdom

Further, the bench also stated that primacy is given to the Committee of creditors empowered to take a business decision in regard to the feasibility and viability of a Resolution Plan based on their commercial wisdom.

CIRP Process | Bidding Process

This process is in the nature of a bidding process where, based on consideration of the provisions of a Resolution Plan with regard to the financial matrix, the capacity of the Resolution Applicant to generate funds, infusion of funds, upfront payment, the distribution mechanism and the period over which the claims of various stakeholders are to be satisfied besides the feasibility and viability of the Resolution Plan, a Resolution Applicant emerges as the highest bidder (H1) eliminating the Resolution Plans of Resolution Applicants, which are ranked H2 and H3.

Further, approval of a Resolution Plan by CoC would be binding on the corporate debtor and all the stakeholders only after the Adjudicating Authority passes an order under Section 31 of the I&B Code approving the said plan, it does not follow that the Successful Resolution Applicant would be at liberty to withdraw the Resolution Plan sabotaging the entire Corporate Insolvency Resolution Process.

The said move of Resolution Applicant may push the Corporate Debtor into disastrous consequences wherein the Corporate debtor may be liquidated.

There is no express provision in the I&B Code allowing a Successful Resolution Applicant to stage a U-turn and frustrate the entire exercise of Corporate Insolvency Resolution Process.

“Provision for submission of a Performance Bank Guarantee by a resolution applicant while submitting its resolution plan, as required under the amended provisions of IBBI [Insolvency Resolution Process of Corporate Persons] Regulations, 2016 is a step in this direction, but may not be deterrent enough to prevent a Successful Resolution Applicant from taking a U-turn.”

Tribunal opined that the sanctity of the resolution process needs to be maintained and the Resolution Applicant whose Resolution Plan is approved by the CoC cannot be permitted to withdraw the same.

In view of the above, the appeal was dismissed. [Kundan Care Products Ltd. v. Amit Gupta, 2020 SCC OnLine NCLAT 670, decided on 30-09-2020]

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Appellate Tribunal (NCLAT): A Bench of Justice Venugopal M., Member (Judicial) and Balvider Singh and Ashok Kumar Mishra, Members (Technical) dismissed an appeal filed against the order of the National Company Law Tribunal. Chandigarh, whereby the resolution plan submitted by the appellant was rejected and liquidation of the Corporate Debtor was directed to be initiated.

The Corporate Debtor had filed a petition under Section 10 of the Insolvency and Bankruptcy Code, 2016, for initiation of the corporate insolvency resolution process. The application was submitted by the NCLT and Resolution Professional was appointed. On the expiry of the period for completion of the insolvency resolution process, the Resolution Professional filed an application seeking liquidation of the Corporate Debtor. The appellant (Resolution Applicant) submitted before the NCLT that the resolution plan submitted by them was not duly considered. Per contra, the Resolution Professional submitted that no resolution plan was approved by the Committee of Creditors.

After hearing both the parties, the NCLT order liquidation of the Corporate Debtor. Aggrieved thereby, the appellant preferred the instant appeal.

The Appellant Tribunal noted certain facts including that the suspended Director of the Corporate Debtor has been operating the bank accounts of the Resolution Applicant as authorised signatory. The Resolution Applicant also had various transactions with the Corporate Debtor such as transfer of assets, sale of goods and rental income from the Resolution Applicant. Considering these facts, the Appellate Tribunal held that it was established that the appellant (Resolution Applicant) was a related party and was not eligible as per Section 29-A of the Insolvency and Bankruptcy Code.

Accordingly, the Appellate Tribunal found no merit in the appeal filed by the Resolution Applicant and dismissed the same. [Global Business Corpn. v. Punjab National Bank, 2020 SCC OnLine NCLAT 95, decided on 23-01-2020]

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Appellate Tribunal (NCLAT): The Bench of Justice A.I.S Cheema, Member (Judicial), Kanthi Narahari, Member (Technical) and V.P. Singh, Member (Technical), allowed an appeal filed against the order of the National Company Law Tribunal, New Delhi, whereby it had admitted the petition under Section 9 of the Insolvency and Bankruptcy Code, 2016 (for initiation of Corporate Insolvency Resolution Process), filed by the Operational Creditor  against the Flywheel Logistics Solutions (P) Ltd. (Corporate Debtor).

The material fact to note is the Operational Creditor provided freight services to the Corporate Debtor and dues were pending which were not paid by the Corporate Debtor. Hence, the Operational Creditor issued a Demand Notice under Section 8 and, subsequently, initiated the corporate insolvency resolution process. The appellant (shareholder) of the Corporate Debtor) contended that the Demand Notice served by the Operational Creditor relates to a separate corporate entity.

The question of law that arose for consideration was: “Whether the demand notice issued under Section 8 of the I & B Code 2016, against the corporate debtor, for the dues of sister concern/group company, can be treated as a valid notice?

On perusal of record, the Appellate Tribunal noted as admitted that the invoices were issued by the Operational Creditor against “Flywheel Logistics (P) Ltd.”. which was different from the Corporate Debtor, “Flywheel Logistics Solutions (P) Ltd.”. It was on record that two were different corporate entities, having different CIN Number and different registered addresses. The Appellate Tribunal observed: “It is also on record that the mandatory primary requirement for filing a petition under Section 9 of the ‘Insolvency and Bankruptcy Code, 2016’ is the service of the Demand Notice under Section 8 of the Code. The demand notice should have been served along with the copy/bill(s) / invoice(s) on the ‘Corporate Debtor’. But in the present case, the Bill / Invoice was raised against, Flywheel Logistics Private Limited, having CIN No. U60200DL2009PTC192531, whereas the mandatory demand notice under Section 8 of the ‘IBC’ has been served against the ‘Flywheel Logistics Solutions Pvt. Ltd.’ having CIN No. U60232DL2015PTC288609.”

In such circumstances, the Appellate Tribunal held that the Demand Notice issued against the Corporate Debtor was not a valid notice under Section 8 IBC. Accordingly, the appeal was allowed and the impugned order passed by the NCLT, New Delhi was set aside. [Anil Syal v. Sanjeev Kapoor, 2019 SCC OnLine NCLAT 630, decided on 08-11-2019]