Case BriefsSupreme Court

Supreme Court: The Division Bench of M. R. Shah* and Sanjiv Khanna, JJ., held that  the entire liability outstanding against the borrower could not be discharged on making the payment i.e. Rs.65.65 lakhs against the total dues Rs.1,85,37,218.80 and that the Division Bench of the High Court had erred in directing to release the mortgaged property/secured property and to handover the possession along with the original title deeds to the borrower on payment of a total sum of Rs.65.65 lakhs only.

Factual Matrix

The appellant bank had granted term loan of Rs.100 lakhs and cash credit limit of Rs.95 lakhs to the respondent–borrower against the security of two mortgaged properties namely; an industrial plot measuring 500 Sq.Mtrs. and a residential/housing property measuring 198 Sq.Mtrs. That the borrower failed to repay the term loan and his account became NPA. A notice under Section 13(2) of the SARFAESI Act, 2002 was served upon the borrower demanding a sum of Rs.1,85,37,218.80. Later on, the bank took possession of the residential house and issued a sale notice by public auction for the same for the reserve price was fixed at Rs.48.65 lakhs.

Findings of DRT and DRAT

The borrower challenged the auction by filing Securitization Application under Section 17 of the SARFAESI Act, 2002 before the DRT. The DRT by an interim order held that if the borrower deposits Rs.48.65 lakhs with the bank on or before 27-01-2014, the bank shall deliver the possession of the secured asset along with the original title deeds of the property in question. The order of the DRT was challenged by the bank before the DRAT (Debt Recovery Appellate Tribunal). Observing that the reserve price was Rs.48.65 lakhs which the borrower deposited and the bank had received the bids ranging from Rs. 61.50 lakhs to Rs.71 lakhs and the alleged bidders failed to deposit the earnest money, the DRAT held that when the borrower was ready to purchase the said property for Rs.71 lakhs no fault can be found with the order passed by DRT.

Impugned Order of the High Court

In appeal the Single Judge of the Rajasthan High Court set aside both the orders of DRT and DRAT primarily for the reason that the said orders were in contravention of Section 13(8) of the SARFAESI Act, 2002. However, by the impugned judgment and order the Division Bench of the High Court had reversed the judgment and order of the Single Judge and had directed the bank to release the secured property (residential house) on the borrower depositing a further sum of Rs.17 lakhs to the bank and handover the possession along with the title deeds to the borrower.

Analysis and Observation

The Court observed that when the auction proceedings were initiated under Section 13 of the SARFAESI Act and after the bank took over the possession under Section 14 of the SARFAESI Act as per Subsection (8) of Section 13 of the SARFAESI Act the secured asset should not be sold and/or transferred by the secured creditor, where the amount dues of the secured creditor together with all costs, charges and expenses incurred by him is tendered by the borrower or debtor to the secured creditor at any time before the date of publication of notice for public auction or inviting quotations or tender from public or private treaty for transfer by way of lease assignment or sale of the secured assets.

Though as on 07-01-2013 the dues were Rs. 15 Rs.1,85,37,218.80 and without the secured property was sold in a public auction the Division Bench of the High Court had directed to release the mortgaged property and handover the possession along with original title deeds to the borrower on the borrower depositing/paying a total sum of Rs.65.65 lakhs only.

Noting that Rs.65.65 lakhs was not the amount realized by selling the mortgaged property in a public auction; it was only a highest bid received and the DRT passed an interim order directing to handover the possession and handover the original title deeds on payment of Rs.48.65 lakhs which was the base price, the Bench observed,

“…the borrower did not deposit and was not ready to deposit the entire amount of dues with secured creditor with all costs, charges and expenses incurred by the secured creditor.”

Even as per the Division Bench of the High Court the borrower made an offer to deposit/pay Rs.71 lakhs as a purchaser and not by way of redeeming the mortgaged property. Therefore, the Bench held that the impugned judgment and order passed by the Division Bench of the High Court directing to release the mortgaged property/secured property and to handover the possession as well as the original title deeds to the borrower on payment of a total sum of Rs.65.65 lakhs only was contrary to Subsection (8) of Section 13 of the SARFAESI Act.

Even otherwise, the Bench opined that on making the payment i.e. Rs.65.65 lakhs against the total dues the entire liability outstanding against the borrower could not be said to have been discharged and the liability of the borrower to pay the balance amount would still continue.

Findings and Conclusion

In the light of above, the Bench reached to following findings:

  1. The DRT in its interim order was not justified in directing to release the mortgaged property and handover the possession along with the original title deeds to the borrower on payment of Rs.48.65 lakhs only which was the base price/ reserve price, which the Division Bench of the High Court had increased to Rs.65.65 lakhs on the ground that the highest bid received was Rs.71 lakhs.
  2. Unless and until the borrower was ready to deposit/pay the entire amount payable together with all costs and expenses with the secured creditor, the borrower could not be discharged from the entire liability outstanding.
  3. The Single Judge had rightly set aside the orders passed by the DRT as well as by the DRAT considering Section 13(8) of the SARFAESI Act. The Division Bench of the High Court had erred in interfering with the order passed by the Single Judge.

Consequently, the Bench concluded, since the DRT’s order was an interim order, even if it is set aside the appeal/application will have to be decided and disposed of on merits and on whatever grounds which may be available to the borrower. However, at the same time the bank cannot be restrained from selling the mortgaged property by holding the public auction and realize the amount and recover the outstanding dues, unless the borrower deposits/pays the entire amount due and payable along with the costs incurred by the secured creditor as per Section 13(f) of the SARFAESI Act.

The impugned judgment and order was quashed and set aside and the order passed by the Single Judge quashing and setting aside the order passed by the DRT and confirmed by the DRAT was hereby restored.

[Bank of Baroda v. Karwa Trading Co., 2022 SCC OnLine SC 169, decided on 10-02-2022]


*Judgment by: Justice M. R. Shah

Appearance by:

For the Appellant: Praveena Gautam, Advocate

For the Respondent: Christi Jain, Advocate


Kamini Sharma, Editorial Assistant has put this report together 


 

Case BriefsSupreme Court

Supreme Court: In a case were the Division Bench of Sanjay Kishan Kaul and M.M. Sundresh*, JJ., was sought to provide judicial interpretation of Section 29A(h) of the IBC, as amended by the Act, 2018, the Bench held that ineligibility has to be seen from the point of view of the resolution process. It can never be said that there can be ineligibility qua one creditor as against others. Rather, the ineligibility is to the participation in the resolution process of the corporate debtor. The Bench remarked,

“…what is required to earn a disqualification under the said provision is a mere existence of a personal guarantee that stands invoked by a single creditor, notwithstanding the application being filed by any other creditor seeking initiation of insolvency resolution process subject to further compliance of invocation of the said personal guarantee by any other creditor.”

An application was filed by RBL Bank under Section 7 of the Insolvency and Bankruptcy Code, 2016 to initiate corporate insolvency resolution process (CIRP) against Respondent 1. Pursuant to which a resolution plan, after certain modifications was submitted by the respondent 3 on 22-11-2017. Meanwhile, by way of the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2017, Section 29A was introduced to the Code. It was specifically under 29A (h) that the CoC held a meeting to deliberate upon the impact of the amendment qua the eligibility of the Respondent 3 in submitting a resolution plan in the CIRP proceedings.

It was in the above backdrop that respondent 3 approached the NCLT praying for a declaration that he was not disqualified from submitting a resolution plan under sub-section (c) and (h) of Section 29A of the Code. NCLT, vide its order held that the Respondent 3 was eligible to submit a resolution plan, notwithstanding the fact that he did extend his personal guarantees on behalf of the Respondent 1 which were duly invoked by some of the creditors, on it. It was against the order; the Punjab National Bank approached the NCLAT. However, the Bank later sought to withdraw its appeal to change in circumstances, i.e.  the resolution plan gathered 78.50% vote share. The NCLAT allowed the withdrawal request without any liberty to challenge the same very impugned order.

Consequently, the NCLT approved the resolution plan submitted to it inter alia holding that there is a marked difference between extension and exclusion and therefore, the rigor of Section 12(1) of the Code would not get attracted on the facts of the case particularly when there were pending proceedings with interim orders, notably an interim order was issued by the NCLAT directing the adjudicating authority not to act on resolution plan until the final order of NCLAT. Further, the plan having received 75% vote share, having considered the techno-economic viability and feasibility of the plan, the application filed for approval of the resolution plan was allowed with a direction that the approved resolution plan shall come into force with immediate effect. The appeals against the said order of NCLT were dismissed on the ground that it cannot sit in appeal over the decision of the adjudicating authority or the CoC in the absence of any apparent discrimination.

Grounds for Challenge

Noticeably, the appellant had approached before NCLAT seeking to be impleaded as a party to the proceedings initiated by Punjab National Bank with an intention to continue the lis, however, the same was not favourably considered. The appellant even raised its objection to the withdrawal of appeal. The appellant had approached the Court with the following grievances:

  • The respondent 3, a promoter of the corporate debtor, was ineligible to submit a resolution plan under Section 29A(h) of the Code, as several personal guarantees executed by the Respondent 3 in favour of various creditors of the Respondent 1-corporate debtor stood invoked, prior commencement of CIRP.
  • The law which was prevailing on the date of the application has to be seen, therefore, the disqualification gets attracted on the date of filing of the application and on the same analogy not only Section 29A(h) but also Section 30(4) has to be interpreted.
  • The approval of the resolution plan was made after the mandatory period of 270 days, i.e. after the expiry of the CIRP period. Since there is clear infraction of Section 12, the 12 orders passed are liable to be interfered with.

Hence, the instant case was filed for seeking judicial interpretation of Section 29A(h) of the Insolvency and Bankruptcy Code, 2016, as amended by the Act, 2018.

Interpretation of Section 29A (h) of the Code

The idea of the Insolvency and Bankruptcy Code, 2016 being to facilitate a process of rehabilitation and revival of the corporate debtor with the active participation of the creditors, the Bench opined that there are two principal actors in the entire process, viz., (i) the committee of creditors and, (ii) the corporate debtor. Therefore, there can never be any other interest than that of the committee of creditors and the corporate debtor.

Observing that the objective behind Section 29A of the Code is to avoid unwarranted and unscrupulous elements to get into the resolution process while preventing their personal interests to step in, and to prevent certain categories of persons who may not be in a position to lend credence to the resolution process by virtue of their disqualification, the Bench relied on Ebix Singapore Pvt. Ltd. vs. COC of Educomp Solutions Ltd., 2021 SCC OnLine 707, to hold that the CoC even with the requisite majority, while approving the Resolution Plan must consider the feasibility and viability of the Plan and the manner of distribution proposed, which may take into account the order of priority amongst creditors as laid down in sub-section (1) of section 53 of the IBC. And that the CoC cannot approve a Resolution Plan barred under Section 29A of the IBC.

Rejecting the contention of the respondents that Section 29A(h) had to be literally interpreted to the extent that a personal guarantor is barred from submitting a resolution plan only when the creditor invoking the jurisdiction of the adjudicating authority has invoked a personal guarantee executed in favour of said creditor by the resolution applicant and no personal guarantee stood invoked by RBL Bank at the time of application to the adjudicating authority under Section 7 of the Code, the Bench emphasised that ineligibility has to be seen from the point of view of the resolution process. It can never be said that there can be ineligibility qua one creditor as against others. Rather, the ineligibility is to the participation in the resolution process of the corporate debtor. The manner of invocation can never be a factor for the adjudicating authority to adjudge, as against its existence. Adequate importance will have to be given to the latter part of the provision which also disqualifies a person whose liability under the personal guarantee executed in favour of a creditor, remains unpaid in full or in part for the amount due from him, upon invocation.

Difference between Extension and Exclusion

On the question of limitation, the Bench affirmed the views of adjudicating authority as confirmed by the appellate tribunal, noticing that there were earlier rounds of litigation with the interim orders. Therefore, the Bench held that delay of 106 days had been rightly condoned and excluded by the adjudicating authority by invoking Section 12(3) of the Code.

Hence, the Bench opined, the adjudicating authority was right in holding that there is a marked difference between extension and exclusion. Exclusion would come into play when the decision is challenged before a higher forum. Extension is one which is to be exercised by the authority constituted.

Factual Analysis

Admittedly, the Respondent 3 had executed personal guarantees which were invoked by three of the financial creditors even prior to the application filed. Therefore, the Bench held that rigor of Section 29A(h) of the Code obviously got attracted and the plan submitted by the Respondent 3 ought not to have been entertained. Accordingly, the Bench concluded, the adjudicating authority and the appellate tribunal were not right in rejecting the contentions of the appellant on the ground that the earlier appeals having been withdrawn without liberty, the issue qua eligibility cannot be raised for the second time, particularly when the appellant was not a party to the decision of the adjudicating authority on the first occasion.

Though the resolution plan submitted by the Respondent 3 was held ineligible and not maintainable, the Bench opined that much water had flown under the bridge as the requisite percentage of voting share had been achieve, majority of the creditors had given their approval to the resolution plan and the plan was also put into operation since 18-04-2018. The Bench remarked,

“We need to take note of the interest of over 23,000 shareholders and thousands of employees of the Respondent 1. Now, about Rs. 300 crores has also been approved by the shareholders to be raised by the Respondent 1. It is stated that about Rs. 63 crores has been infused into the Respondent No.1 to make it functional. There are many on-going projects of public importance undertaken by the Respondent No.1 in the nature of construction activities which are at different stages.”

Conclusion

Hence, considering the ultimate object of the Code, i.e. to put the corporate debtor back on the rails, and noticing that no prejudice would be caused to the dissenting creditors as their interests would otherwise be secured by the resolution plan itself, which permits them to get back the liquidation value of their respective credit limits, the Bench refused to disturb the resolution plan leading to the on-going operation of the Respondent 1. The appeal was dismissed.

[Bank of Baroda v. Mbl Infrastructures Ltd., 2022 SCC OnLine SC 48, decided on 18-01-2022]


*Judgment by: Justice M.M. Sundresh


Appearance by:

For the Appellant: Tushar Mehta, Solicitor General and Bishwajit Dubey, Advocate

For Respondent 1: Ranjit Kumar, Senior Advocate

For Respondent 3: Parag P. Tripathi, Senior Advocate


Kamini Sharma, Editorial Assistant has put this report together 


 

Case BriefsTribunals/Commissions/Regulatory Bodies

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

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

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

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

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

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

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

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


Kamini Sharma, Editorial Assistant has reported this brief.


Appearance by:

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

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

Case BriefsSupreme Court

Supreme Court: The Division Bench of M.R. Shah* and Sanjiv Khanna, JJ., directed to speed up the insolvency resolution process of Amtek Auto Ltd., one of the largest integrated automotive component manufacturers in India. Pointing at the long litigation delay, the Bench stated that any further delay would defeat the very object and purpose of providing specific time limit for completion of the insolvency resolution process, as mandated under Section 12 of the IBC.

Initiation of Insolvency Process

Pursuant to an application made under Section 7 of the Insolvency and Bankruptcy Code, 2016, the corporate insolvency resolution process was initiated against Amtek Auto Limited – Corporate Debtor. Accordingly, the resolution professional invited prospective resolution applicants to submit a Resolution Plan. The Resolution Plans submitted by Deccan Value Investor LP (DVI) and M/s Liberty House Group Private Limited (Liberty) were considered by the Committee of Creditors of Amtek (COC). However, DVI withdrew its Resolution Plan and therefore the revised plan of Liberty was considered.

DVI’s attempt to Renege

Subsequently, Liberty did not acted as per the approved plan and a prayer was made by the COC before the Adjudicating Authority to grant 90 days to the resolution professional to make another attempt for a fresh process. The Adjudicating Authority, though granted liberty to the COC and the resolution professional to approach the appropriate authority under the IBC for the determination of the wilful default by Liberty, it did not accede to the request for carrying out a fresh process by inviting the plans again but directed the reconstitution of the COC for re-consideration of the Resolution Plan submitted by DVI. The appeal of COC got rejected by NCLAT as well and the NCLAT virtually ordered the liquidation of the Corporate Debtor.

Noticeably, the liquidation proceeding was stayed by the Supreme Court’s interim order dated 06-09-2019. Similarly, the Court permitted the resolution professional to invite fresh offers within a period of 21 days. DVI also submitted the fresh resolution plan which was approved by the COC with 70% majority.  Later on, DVI tried to withdraw from resolution plan, which was disallowed by the Court.

Since the approved resolution plan submitted by the DVI was not acted upon, the COC filed Contempt Petition before the Supreme Court. Similarly, DVI also filed an application for rectification of the earlier order dated 18-06-2020 by which the Supreme Court had rejected  DVI’s prayer for withdrawal of the offer. The Supreme Court rejected both the application observing that DVI’s application for rectification was an attempt to renege from the resolution plan which it submitted and to resale from its obligations.

Grievances of the Parties

The appellant contended that was not acting as per the approved resolution plan.  Under the Resolution Plan, the one of the steps to be undertaken by the DVI was to deposit Rs.500 crores “Upfront Cash Amounts” but the same was not done.

The submission on behalf of the DVI was that the said amount was lying in a deposit account in India with their custodian Standard Chartered Bank and was ready for disbursement to lenders but unless and until the other steps were undertaken as per the Resolution Plan, the aforesaid amount of Rs.500 crores would not be transferred to Amtek Auto Limited.

Findings and Decision

Considering that that contentions of the respective parties was that the obligations be performed mutually and simultaneously, the Bench held that the Corporate Debtor had also to perform its obligations simultaneously so that the amount of Rs.500 crores be transferred to the financial creditors/lenders of the Corporate Debtor.

The Bench reminded the parties that the approved resolution plan had to be implemented at the earliest and that is the mandate under the IBC. As per Section 12 of the IBC, subject to sub-section (2), the corporate insolvency resolution process shall be completed within a period of 180 days from the date of admission of the application to initiate such process, which can be extended by a further period of 180 days.

Thus, the Bench stated that entire resolution process had to be completed within the period stipulated under Section 12 of the IBC and any deviation would defeat the object and purpose of providing such time limit. Therefore, the Bench directed the parties concerned to the approved resolution plan and/or connected with implementation of the approved resolution plan to complete the implementation of the plan within a period of four weeks, without fail.

[Committee of Creditors of Amtek Auto Ltd. v. Dinkar T. Venkatsubramanian, 2021 SCC OnLine SC 1151, decided on 01-12-2021]


Kamini Sharma, Editorial Assistant has put this report together


*Judgment by: Justice M. R. Shah

Know Thy Judge | Justice M. R. Shah

Case BriefsHigh Courts

Delhi High Court: Asha Menon, J., emphasized the law on territorial jurisdiction while addressing the present matter.

Present petition was filed impugning the order of Additional District Judge.

Petitioner was the defendant before the Trial Court. Respondent had filed a suit against the petitioner/defendant for the recovery of a sum of Rs 28, 43, 209.68/.

The claim of the respondent was that it was a well-known manufacturer providing a portfolio of solutions for packaged power, diversified generation, electrical control and safety and energy optimization.

Petitioner/defendant was the regional stockists and distributors, who were appointed to procure/buy goods being traded by the respondent/plaintiff and supply them to wholesalers and retailers of the respondent/plaintiff in the market, who, in turn, would sell the same to the consumers.

Further the respondent/plaintiff claimed that a running current account was maintained with the petitioner/defendant against which a statement of account/ledger was regularly maintained by it in the normal course of business.

A sum of Rs 28,43, 209.68 was due and payable by the petitioner/defendant. Hence the present suit was filed.

Petitioner/Defendant’s counsel, Deepika Mishra submitted that Trial Court had fallen into error in determining its jurisdiction as it relied on English case law that the ‘debtor must seek the creditor’, whereas it was bound to follow Section 20 of the Civil Procedure Code, 1908.

Section 20 clearly provides that a Court within whose local limits the cause of action, “wholly or in part”, arises, would have territorial jurisdiction to try the suit.

The registered office of the petitioner/defendant was in West Bengal.

Petitioner/Defendant’s counsel submitted that the invoice itself recorded a Kolkata address. The warehouse was also stated to be located in West Bengal and therefore, the goods were neither dispatched from Delhi nor the invoices were raised at Delhi. counsel for the respondent/plaintiff pointed to the “subject to jurisdiction of court of Delhi only” clause in the invoices. There does not appear to have been any demurrer by the petitioner/defendant against this clause.

Hence, in light of Section 20 of CPC, the Court found some strength in the contention of respondent/plaintiff that on the basis of the ‘place of work’ of the petitioner/defendant, as well as the part cause of action of supply of goods, both reflected jurisdiction of the West Bengal courts.

However, the respondent/plaintiff has also claimed that payments were to be received in Delhi and therefore, part cause of action has arisen in Delhi and as such, the clause in the invoices referred to hereinabove did not confer jurisdiction at a place which had no jurisdiction.

In Court’s opinion, the suit could be filed at Delhi and Trial Court had not committed any error in answering the preliminary issue.

Bench stated that, when the part cause of action had arisen on account of the payments made by the petitioner/defendant directly into the bank account of respondent/plaintiff, even if these were not on regular basis, and there is nothing to show that the place of payment had been fixed, even without following the principle that the ‘debtor must seek out the creditor’, it was clear that the Delhi Courts have jurisdiction to try the suit and the invoice does not vest jurisdiction in a court which had no jurisdiction at all.

In view of the foregoing discussion, the High Court found no merit in the petition. [Auto Movers v. Luminous Power Technologies (P) Ltd.,  2021 SCC OnLine Del 4387, 16-09-2021]


Advocates before the Court:

For the petitioner: Deepika Mishra, Advocate

For the respondent: Pallav Saxena, Deepak Chawla, Aruj Dhingra and Neeraj Malik, Advocates

Case BriefsHigh Courts

Delhi High Court: Jayant Nath, J., held that,

Exception 3 to Section 28 of the Contract Act deals with curtailment of the period for the creditor to approach the court/tribunal to enforce his rights. It does not in any manner deal with the claim period within which the beneficiary is entitled to lodge his claim with the bank/guarantor.

In the present petition, the dispute centred around the interpretation of Section 28 of the Indian Contract Act, 1872.

Petitioner submitted that based on an erroneous interpretation of Section 28 of the Indian Contract Act, 1872 respondent bank forced a mandatory and unalterable claim period of a minimum of 12 months for the bank guarantee.

Further, it was stated that the claim period is a time period contractually agreed upon between the creditor and principal debtor, which provided a grace period beyond the validity period of the guarantee to make a demand on the bank for a default, which occurred during the validity period. Adding to the said, it was stated that the said claim period may or may not even exist in a bank guarantee.

As per respondent PNB, a claim period in a bank guarantee which was less than 12 months would render the claim period void and would effectively increase the claim period under the bank guarantee to 3 years under the Limitation Act, 1963.

Respondent 2 stated that it would be open for the banks to stipulate as a condition precedent that if the claim was not lodged before a stipulated time, the bank guarantee shall be revoked or terminated but the stipulated date cannot be less than one year in any event.

Petitioner 1’s case was that it had a number of contracts with Government Bodies and Public Sector Undertakings. Petitioner used to normally issue ‘Performance Bank Guarantee’ or ‘Advance Bank Guarantee’ in the course of performance of the contract.

It was pleaded that on a complete misinterpretation of Section 28 of the Contract Act, respondent 1 bank insisted that the claim period should be 12 months. Adverse fallout for the petitioner of such interpretation was that the petitioner was unnecessarily made liable to pay commission charges for such extended bank guarantee when as per the contract between the principal debtor and the creditor, the claim period would be much shorter.

The extended claim period affected the petitioners’ capability to do business by entering into new contracts and affected the fundamental rights of the petitioners under Article 19(1)(g) of the Constitution of India. 

Analysis, Law and Decision

Bench stated that under Article 226 (2) of the Constitution of India, order or writ can be issued by a High Court in relation to territories within which the cause of action wholly or in part arises.

Whether a high court has territorial jurisdiction to entertain a writ petition? 

Court stated that while entertaining a writ petition, the doctrine of forum convenience and nature of the cause of action are also required to be scrutinized by the High Court.

Since the part of the cause of action arose within the territory of this Court, it would have territorial jurisdiction to adjudicate the instant petition.

High Court held that limiting the time within which the rights are to be enforced is void provided the rights to be enforced under the Contract continue to exist even beyond the shorter agreed period for enforcing the rights.

Further, the Court added that, if beyond the shorter period agreed between the parties, the rights under the contract are not kept alive, no limiting of the time to enforce the rights under the contract arises and such an agreement putting a time limit to sue will not be hit by Section 28 of the Act.

Section 28 prior to the amendment

Bench noted that Section 28 of the Contract Act prior to the amendment provided that a clause limiting the time within which the rights are to be enforced, is void, if the right to be enforced under the Contract continued to exist even beyond the shorter period agreed for enforcing the rights.

If beyond the shorter period agreed between the parties for enforcing the rights, the rights under the contract are not kept alive, then such an agreement putting a time limit to sue was not hit by Section 28 of the Contract Act. 

Why was the newly added Section 28 of the Contract Act enacted?

The said was enacted to do away with the earlier distinction between remedy and rights i.e., a clause barring the remedy only was void but a clause extinguishing a right was valid.

Adding to the above, Bench stated that the said clause now provides that the beneficiary of the bank guarantee i.e. creditor would have time to approach the appropriate court for enforcement of his rights under the bank guarantee in terms of the provision of the Limitation Act i.e. 3 years for private parties and 30 years for government parties.

Later, the T.R. Andhyarujina Committee recommended that the said period be reduced to one year for enforcing the rights under the bank guarantee. Thereafter, Exception 3 to Section 28 of the Contract was added in 2013.

Hence,

Exception 3 to section 28 of the Contact Act deals with the rights of a creditor to enforce his rights under the bank guarantee after happening of a specified event. 

Respondent in its counter-affidavit admitted that, Exception 3 to section 28 of the Contract Act deals with a clause in a bank guarantee to the effect that in case no claim is filed before the court of law within a period which is not less than 12 months from the date of occurring or non- occurring of the specified event, the liability of the bank shall get extinguished. Such a term is not contrary to law.

While concluding the matter, the Court stated that respondent 1 erred in taking the view that they were in law mandated to stipulate a claim period of 12 months in the bank guarantee failing which the clause shall be void under Section 28 of the Contract Act.

Section 28 deals with right of the creditor to enforce his rights under the bank guarantee in case of refusal by the guarantor to pay before an appropriate court or tribunal.

Therefore, all the communications issued by respondent 1 reproduced erroneous interpretation of Exception 3 to Section 28 of the Contract Act and were clearly vitiated.

Issue of prescribing the bank charges and the period for retention of security

Court held that the above-stated issue were matters of contract and this Court cannot interfere in such contractual matters.

In view of the above discussion, petition was disposed of. [Larsen & Toubro Limited v. Punjab and National Bank, 2021 SCC OnLine Del 3827, decided on 28-07-2021]


Advocates before the Court:

For the Petitioners: Mr Neeraj Kishan Kaul, Sr. Adv. with Mr Rishi Agrawala, Mr Karan Luthra, Ms Megha Bengani, Mr Deepak Joshi and Mr Aakash Lamba, Advs.

For the Respondents: Mr Dhruv Mehta, Sr. Adv. with Mr Rajesh Gautam, Mr Anant Gautam and Mr Nipun Sharma, Advs. for R-1/PNB.

Dr Lalit Bhasin, Ms Nina Gupta, Ms Ananya Marwah, Ms Ruchika Joshi and Mr Ajay Pratap Singh, Advs. for R- 2/IBA.

Mr Ramesh Babu, Ms Nisha Sharma and Ms Tanya Chowdhary, Advocates for RBI/R-3

Case BriefsSupreme Court

Supreme Court: The 3-judge bench of RF Nariman, BR Gavai* and Hrishikesh Roy, JJ has held that any creditor including the Central Government, State Government or any local authority is bound by the Resolution Plan once it is approved by an adjudicating authority under sub­-section (1) of Section 31 of the Insolvency and Bankruptcy Code, 2016.

Resolution Plan – When becomes binding?

After taking note of Section 31 of IBC, the Court observed that once the resolution plan is approved by the Adjudicating Authority, after it is satisfied, that the resolution plan as approved by CoC meets the requirements as referred to in sub-section (2) of Section 30, it shall be binding on the Corporate Debtor and its employees, members, creditors, guarantors and other stakeholders.

“Such a provision is necessitated since one of the dominant purposes of the I&B Code is, revival of the Corporate Debtor and to make it a running concern.”

The Court explained one of the principal objects of IBC is, providing for revival of the Corporate Debtor and to make it a going concern. Here’s the scheme of the Code:

  • Upon admission of petition under Section 7, there are various important duties and functions entrusted to RP and CoC. RP is required to issue a publication inviting claims from all the stakeholders. He is required to collate the said information and submit necessary details in the information memorandum.
  • The resolution applicants submit their plans on the basis of the details provided in the information memorandum.
  • The resolution plans undergo deep scrutiny by RP as well as CoC. In the negotiations that may be held between CoC and the resolution applicant, various modifications may be made so as to ensure, that while paying part of the dues of financial creditors as well as operational creditors and other stakeholders, the Corporate Debtor is revived and is made an on-going concern.
  • After CoC approves the plan, the Adjudicating Authority is required to arrive at a subjective satisfaction, that the plan conforms to the requirements as are provided in sub-section (2) of Section 30 of the IBC. Only thereafter, the Adjudicating Authority can grant its approval to the plan.
  • It is at this stage, that the plan becomes binding on Corporate Debtor, its employees, members, creditors, guarantors and other stakeholders involved in the resolution Plan.

“The legislative intent behind this is, to freeze all the claims so that the resolution applicant starts on a clean slate and is not flung with any surprise claims. If that is permitted, the very calculations on the basis of which the resolution applicant submits its plans, would go haywire and the plan would be unworkable.”

2019 Amendment – Nature and effect of  

After the 2019 amendment, any debt in respect of the payment of dues arising under any law for the time being in force including the ones owed to the Central Government, any State Government or any local authority, which does not form a part of the approved resolution plan, shall stand extinguished.

The mischief, which was noticed prior to amendment of Section 31 of IBC was, that though the legislative intent was to extinguish all such debts owed to the Central Government, any State Government or any local authority, including the tax authorities once an approval was granted to the resolution plan by NCLT; on account of there being some ambiguity the State/Central Government authorities continued with the proceedings in respect of the debts owed to them.

In order to remedy the said mischief, the legislature thought it appropriate to clarify the position, that once such a resolution plan was approved by the Adjudicating Authority, all such claims/dues owed to the State/Central Government or any local authority including tax authorities, which were not part of the resolution plan shall stand extinguished.

Further, the word “other stakeholders” would squarely cover the Central Government, any State Government or any local authorities. The legislature, noticing that on account of obvious omission, certain tax authorities were not abiding by the mandate of IBC and continuing with the proceedings, has brought out the 2019 amendment so as to cure the said mischief.

Therefore, the 2019 amendment is declaratory and clarificatory in nature and   therefore retrospective in operation.

“Creditor” and “Other Stakeholders” – If includes Central Government, State Governments or local authorities

“Creditor” – If covers Government

“Creditor” has been defined to mean ‘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’.

“Operational creditor” has been defined to mean a person to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred.

“Operational debt” has been defined to mean a claim in respect of the provision of goods or   services including employment or a debt in respect of the payment of dues arising under any law for the time being in force and payable to the Central Government, any State Government or any local authority

Harmonious construction of subsection (10) of Section 3 of the IBC read with subsections (20) and (21) of Section 5 thereof would reveal, that even a claim in respect of dues arising under any law for the time being in force and payable to the Central Government, any State Government or any local authority would come within the ambit of ‘operational debt’.

The Central Government, any State Government or any local authority to whom an operational debt is owed would come within the ambit of ‘operational creditor’ as defined under sub¬section (20) of Section 5 of the IBC.  Consequently, a person to whom a debt is owed would be covered by the definition of ‘creditor’ as defined under sub-section (10) of Section 3 of the IBC.

“As such, even without the 2019 amendment, the Central Government, any State Government or any local authority to whom a debt is owed, including the statutory dues, would be covered by the term ‘creditor’ and in any case, by the term ‘other stakeholders’ as provided in subsection (1) of Section 31 of the IBC.”

Key findings

(i) Once a resolution plan is duly approved by the Adjudicating Authority under subsection (1) of   Section 31 of Insolvency and Bankruptcy Code, 2016, the claims as provided in the resolution plan shall stand frozen and will be binding on the Corporate Debtor and its employees, members, creditors, including the Central Government, any State Government or any local authority, guarantors and other stakeholders.

Further, on the date of approval of resolution plan by the Adjudicating Authority, all such claims, which are not a part of resolution plan, shall stand extinguished and no person will be entitled to initiate or continue any proceedings in respect to a claim, which is not part of the resolution plan;

(ii) 2019 amendment to Section 31 of the IBC is clarificatory and declaratory in nature and therefore will be effective from the date on which IBC has come into effect;

(iii) Consequently all the dues including the statutory dues owed to the Central Government, any State Government or any local authority, if not part of the resolution plan, shall stand extinguished and no proceedings in respect of such dues for the period prior to the date on which the Adjudicating Authority grants its approval under Section 31 could be continued.

[Ghanshyam Mishra and Sons Pvt. Ltd. v. Edelweiss Asset Reconstruction Company Limited, 2021 SCC OnLine SC 313, decided on 13.04.2021]


*Judgment by Justice BR Gavai

Know Thy Judge| Justice B.R. Gavai

For Appellants: Senior Advocates Dr. A.M. Singhvi, Neeraj Kishan Kaul

For respondents: Senior Advocate Gurukrishna Kumar, Advocate Prashant Bhushan

For State Authorities: Advocate V. Shekhar

 

 

Case BriefsSupreme Court

Supreme Court: The 3-judge bench of SA Bobde, CJ and AS Bopanna and V. Ramasubramanian*, JJ has held that the proceedings for winding up of a company are actually proceedings in rem to which the entire body of creditors is a party and the words “party  or parties” appearing in the 5th proviso to Clause (c) of Sub-section(1) of Section 434 the Companies Act, 2013 would take within its fold any creditor of the company in liquidation.

Scheme of Section 434

  • For the purpose of transfer, Section 434 classifies the winding up proceedings pending before the High Courts into two categories namely:

(a)Proceedings for voluntary winding up where notice of resolution by advertisement has been given under Section 485(1) of the Companies Act, 1956, but the company has not been dissolved before 01.04.2017; and

(b) Other types of winding up proceedings.

  • The first of the above 2 categories of cases are covered by the fourth proviso under Clause (c) of Sub­section (1) of Section 434, which states:

“Provided also that proceedings relating to cases of voluntary winding up of a company where notice of the resolution by advertisement has been given under subsection (1) of section 485 of the Companies Act, 1956 but the company has not been dissolved before the 1st  April, 2017 shall continue to be dealt with in accordance with provisions of the Companies Act, 1956 and the Companies (Court) Rules, 1959”.

  • Such cases of voluntary winding up covered by the above proviso shall continue to be dealt with by the High court. It is only (i) cases of voluntary winding up falling outside the scope of the 4th Proviso and (ii) other types of winding up proceedings, that can be transferred by the High Courts to the Tribunal, subject however to the Rules made by the Central Government under Section 434 (2).
  • The transferability, by operation of law, of winding up proceedings, other than those covered by the 4th Proviso, depends upon the stage at which they are pending before the Company Court. But this is left by the law makers to be determined through subordinate legislation, in the form of Rules.
  • Apart from providing for the transfer of certain types of winding up proceedings by operation of law, Section 434 (1)(c) also gives a choice to the parties to those proceedings to seek a transfer of such proceedings to the NCLT. This is under the fifth proviso to Clause (c).
  • The 5th proviso uses the words “any party or parties to any proceedings relating to the winding up of companies pending before any Court. Hence, the right to invoke the 5th proviso is specifically conferred only upon the parties to the proceedings. Therefore, on a literal interpretation, such a right should be held to be confined only to “the parties to the proceedings.”

Scheme of Companies (Transfer of Pending Proceedings) Rules, 2016

The pending proceedings for winding up are classified into three types namely:

  • proceedings for voluntary winding up covered by the fourth proviso to Clause (c) of Subsection (1) of Section 434, which shall continue to be dealt with in accordance with the provisions of the 1956 Act;
  • proceedings for winding up on the ground of inability to pay debts; and
  • proceedings for winding up on grounds other than inability to pay debts.

The transferability of a winding up proceeding, both under Rule 5 as well as under Rule 6, is directly linked to the service of the winding up petition on the respondent under Rule 26 of the Companies (Court) Rules, 1959. The normal requirement of Rule 26 is that the copy of the petition under the Act shall be served on the respondent along with the notice of the petition, unless otherwise ordered. The notice of the petition, required under Rule 26 to be served along with the copy of the petition, should be in Form No.6, due to the mandate of Rule 27.

If the winding up petition has already been served on the respondent in terms of Rule 26 of the 1959 Rules, the proceedings are not liable to be transferred. But if service of the winding up petition on the respondent in terms of Rule 26 had not been completed, such winding up proceedings, whether they are under Clause (c) of Section 433 or under Clauses (a) and (f) of Section 433, shall peremptorily be transferred to the NCLT.

“Rules 5 and 6 of the Companies (Transfer of Pending Proceedings) Rules 2016, fix the stage of service of notice under Rule 26 of the Companies (Court) Rules, 1959, as the stage at which a winding up proceeding can be transferred. This is because the first proviso under Clause (c) of Sub-section (1) of Section 434 enables the Central Government to prescribe the stage at which proceedings for winding up can be transferred and subsection (2) of section 434 confers rule making power on the Central Government.”

Further, the restriction under Rules 5 and 6 of the 2016 Rules relating to the stage at which a transfer could be ordered, has no application to the case of a transfer covered by the 5th proviso to clause (c) of sub-section (1) of Section  434.

Who can be a “party to the proceedings”?

There are certain clues inherently available in the Companies Act, 1956, to indicate who can be a “party to the proceedings”. The provisions which contain such clues are as follows:

(i) Section 447 of the Companies Act, 1956, which is equivalent to Section 278 of the Companies Act, 2013 states that an order for winding up shall operate in favour of all the creditors and of all the contributories of the company as if it has been made on the joint petition of a creditor and of a contributory. There is a small change between the wording of Section 278 of the 2013 Act and the wording of Section 447 of the 1956 Act. Section 278 of the 2013 Act shows that any petition by a single creditor or contributory is actually treated as a joint petition of creditors and contributories, so that the order of winding up operates in favour of all the creditors and all the contributories.

(ii) Under Section 454(6) of the 1956 Act, any person stating himself in writing to be a creditor shall be entitled to inspect the statement of affairs submitted to the official liquidator. If the claim of such a person to be a creditor turns out to be untrue, such a person is liable to be punished under Section 454(7) of the 1956 Act.

(iii) The powers of the liquidator are enumerated in Section 457 of the 1956 Act. Section 457 actually divides the powers of a liquidator into two categories namely (i) those available with the sanction of the Tribunal and (ii) those generally available to the liquidator. But Section 290 of the 2013 Act has done away with such a distinction. However, the 1956 Act, as well as 2013 Act make the exercise of the powers by the liquidator, subject to the overall control of the Tribunal. This is made clear by Section 457(3) of the 1956 Act and Section 290(2) of the 2013 Act. Additionally, Section 457(3) of the 1956 Act enables any creditor or contributory to apply to the Court with respect to the exercise by the Liquidator, of any of the powers conferred by Section 457.

(iv) Section 460 of the 1956 Act and Section 292 of the 2013 Act make it clear that in the administration of the assets of the   Company   and   the   distribution   thereof   among   its creditors, the liquidator should have regard to any directions given by resolution of creditors at any general meeting. If the liquidator does something, in exercise of his powers, any person aggrieved by such Act or decision of the liquidator, is entitled to apply to the Company Court, under Section 460(6) of the 1956 Act and Section 292(4) of the 2013 Act.

(v) Section 466(1) of the 1956 Act enables any creditor to apply for stay of all proceedings in relation to the winding up. This right can be exercised by any creditor at any time after the making of a winding up order.

Hence, the proceedings for winding up of a company are actually proceedings in rem to which the entire body of creditors is a party. Such proceeding might have been initiated by one or more creditors, but by a deeming fiction the petition is treated as a joint petition. The official liquidator acts for and on behalf of the entire body of creditors. Therefore, the word “party” appearing in the 5th proviso to Clause (c) of Sub-section (1) of section 434 cannot be construed to mean only the single petitioning creditor or the company or the official liquidator.

Hence,

“If any creditor is aggrieved by any decision of the official liquidator, he is entitled under the 1956 Act to challenge the same before the Company Court. Once he does that, he becomes a party to the proceeding, even by the plain language of the section. Instead of asking a party to adopt such a circuitous route and then take recourse to the 5th proviso to section 434(1)(c), it would be better to recognise the right of such a party to seek transfer directly.”

[Kaledonia Jute and Fibres Pvt. Ltd v. Axis Nirman and Industries Ltd, 2020 SCC OnLine SC 943, decided on 19.11.2020]


*V. Ramasubramanian has penned this judgment

Advocates who appeared in the matter

For appellant: Senior Advocate Huzefa Ahmadi,

For 1st respondent: Senior Advocate A.N.S. Nadkarni

For Official Liquidator: Advocate-on-Record Gp. Capt. Karan Singh Bhati