Rajasthan High Court
Case BriefsHigh Courts

Rajasthan High Court: In a case where the secured creditors like Unit Trust of India (‘UTI’) and a workman have preferred their petitions way back in the year 2000 and 2014 respectively, and are awaiting result of the winding up, Pushpendra Bhati, J. held that they cannot be allowed to suffer merely because some subsequent proceedings in the DRT would consume all the assets of the company and give away the auction proceeds to Kotak Mahindra Bank which is a late entrant to the dispute.

Factual Background

A company named Derby Textiles Limited (‘respondent company’) was incorporated on 22-05-1980 as a Public Limited Company, limited by shares. It requested the UTI (petitioner in Company Petition 07 of 2000) to subscribe for Secured Redeemable Non-Convertible Debentures (‘SRNCD’) of the face value of Rs.4.00 crores, which was thereby agreed and disbursed. On deviation from payments agreed recall notices were issued for payment of outstanding debt along with interest.

Company Petition 07/ 2000

A winding up petition was preferred under Sections 433, 434 and 439, Companies Act, 1956, seeking winding up of the company and appointment of an official liquidator regarding all the assets and properties of the respondent-Company, since the respondent-Company was unable to pay the outstanding debt amount. As the proceedings were pending, the respondent-Company meanwhile made an application that it has been registered as sick company with Board of Industrial and Financial Reconstruction. The company kept dilly-dallying on some or the other issues thereafter in the Court and the matter kept on getting adjourned, even when the Court cautioned the parties that no further adjournments would be given.

Application No.2 of 15 in Company Petition No.9 of 2014

The Company petition was filed for liquidation proceedings to begin and while such adjudication was going on, an application was filed by a workman, i.e. Application No. 2 of 2015 in company petition No. 9 of 2014, contending, as the auction proceedings had already taken place, and unless an official liquidator is appointed to secure the debts of the petitioner, the petitioner’s rights shall be permanently prejudiced being a prioritized creditor.

As no one appeared for the respondent company an interim order was passed by the Court on 28-03-2022, “Despite service, none appears for the respondent-Company. In the interest of justice, further proceedings in case No.144/2004 before the Debt Recovery Tribunal, Jaipur shall remain stayed.”

Challenging the aforesaid order, an SLP was filed before Supreme Court which upheld the stay order. Consequently, vide another application Kotak Mahindra Bank Limited was impleaded as party respondent. Thus, application No.01 of 2022 (in company petition No.7 of 2000) was filed on behalf of Kotak Mahindra Bank Limited seeking vacation of the interim order dated 28-03-2022 and one another application No. 4 of 2022 (in company petition No.9 of 2014) was filed by Mr. Anil Vyas, Advocate (on behalf of the auction purchaser- M/s. Noble Art & Craft House, Jodhpur) seeking modification of the aforementioned interim order dated 28-03-2022.

It was contended by Kotak Mahindra Bank Limited as well as the auction purchaser, that their proceedings under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (‘RDDB Act’) is on a stronger footing, and that, leave of the Company Court is not necessary under Sections 537 or 446 of the Companies Act, 1956 is a settled proposition and there cannot be any second thought in the mind of the Court.

The Court noted that the jurisdiction of the Tribunal and the Recovery Officer, in terms of the RDDB Act, is exclusive, in respect of the debts payable to Banks and Financial Institutions, and the Company Court cannot use its powers under Section 442 read with Section 537 or under Section 446 of the Companies Act, 1956, against the Tribunal/recovery officer, and thus, Sections 442, 446 and 537 cannot be applied against the Tribunal, is a settled proposition.

The Court further observed that merely because the company was not cooperating and the adjudication of the matter took a long time, the company petitioner cannot be rendered remediless by this Court on account of the complete assets being disbursed by the DRT in a separate proceeding under the RDDB Act. Thus, in the present case, one of the secured creditors UTI and workman have preferred their petitions way back in the year 2000 and 2014 respectively, and are awaiting result of the winding up and the protection of their respective interests, and thus, they cannot be allowed to suffer merely because some subsequent proceedings in the DRT would consume all the assets of the company and give away the auction proceeds to the Kotak Mahindra Bank Limited and the auction purchaser, who are subsequent entrants in the dispute.

Placing heavy reliance on Bank of Nova Scotia v. RPG Transmission Limited, 2004 SCC OnLine Del 1048, the Court did not allow application No.1 of 2022 in company petition No.7 of 2000 filed on behalf of the Kotak Mahindra Bank Limited seeking vacation of the interim order dated 28-03-2022 and application No. 4 of 2022 in company petition No.9 of 2014 filed on behalf of the auction purchaser seeking modification of the said interim order.

[The Specified Undertaking Of the UTI v. Derby Textiles Limited, SB Company Petition 7 of 2000, decided on 27-07-2022]


Advocates who appeared in this case :

Mr. Manoj Bhandari Sr. Advocate assisted by Mr. Aniket Tater. Mr. Siddarth Tatiya and Mr. Shailendra Gwala, Advocates, for the Petitioner(s);

Mr. Sanjay Jhanwar Sr. Advocate assisted by Mr. Rajat Sharma & Mr. Pranav Bafna. Mr. Sanjay Nahar Mr. Anil Vyas Mr. Sanjeet Purohit with Mr. Surendra Thanvi Mr. Naman Mohnot Mr. Pushkar Taimini, Advocates, for the Respondent(s).


*Arunima Bose, Editorial Assistant has reported this brief.

NCLAT
Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Appellate Tribunal, Mumbai: The Bench of Ashok Bhushan, J., Chairperson, M. Satyanarayana Murthy, Judicial Member, and Naresh Salecha, Technical member has dismissed a company appeal and has held that interest on delayed payment is also a form of debt and therefore, would form a part of the operational debt under Insolvency and Bankruptcy Code, 2016.

Background of the case

Operational Creditor supplies different types of yarns and has supplied goods to Bombay Rayons Fashions Ltd., Corporate Debtor. The Operational Creditor raised invoices between March, 2017 and January 2020, wherein, Operational Creditor supplied goods for Rs. 2,02,26,017/- under nine invoices. The Corporate Debtor paid three invoices with substantial delay; for one invoice part payment made and remaining five invoices, Corporate Debtor failed to make any payment.

Operational Creditor filed an application under Section 9 seeking to initiate the Corporate Insolvency Resolution Process (CIRP) against Corporate Debtor. The Adjudicating Authority admitted the application and approved initiation of CIRP along with appointment of Insolvency Resolution Professional. The company appeal was filed against the order passed by the Adjudicating Authority dated 07-06-2022.

Analysis and decision

First, the Bench referred to the definition of debt, as per Section 3(11) of the IBC, “a debt means a liability or obligation in respect of a claim which is due from any person and includes a financial debt and operational debt.” Therefore, the Bench observed that the definition of debt includes ‘claim’ which is being defined under Section 3(6) of the IBC. As per the provision of IBC a claim means-

“(a) a right to payment, whether or not such right is reduced to judgment, fixed, disputed, undisputed, legal, equitable, secured or unsecured;

(b) right to remedy for breach of contract under any law for the time being in force, if such breach gives rise to a right to payment, whether or not such right is reduced to judgment, fixed, matured, unmatured, disputed, undisputed, secured or unsecured.”

Further, the Bench observed that vide the Notification No S.O. 1205 (E) dated 24.03.2020, issued by the Ministry of Corporate Affairs, the threshold Limit to initiate a CIRP has increased from Rupees 1 Lakh to Rupees 1 Crore.

Therefore, in the light of the above analysis, the Bench held that the total amount for maintainability of claim will include both principal debt amount as well as interest on delayed payment which was clearly stipulated in the invoice. Thus, in light of this the outstanding debt amounts to Rs. 1,60,87,838/- (principal debt amount of Rs. 97,87,220/- plus interest @18% p.a.).

Hence, as the total debt outstanding was above Rs. 1 crore as per requirement of Section 4 IBC read with notification No. S.O 1205 (E), the present Application was maintainable.

[Prashat Agarwal v. Vikash Parasrampuria, Company Appeal (AT) (Ins) No. 690 of 2022, decided on- 15-07-2022]


Advocates who appeared in this case :

Abhijeet Sinha, Sunil Vyas, Nausher Kohli, Palzer Moktan, Dipti Das, Deep Morabia, and Aditya Shukla, Advocates, for the Appellant;

Saurabh Pandya, Viraj Parikh, Mahur Mahajan, Advocates, for R-1;

Rubina Khan & Rohit Gupta, Advocates, for R-2.

NCLAT
Case BriefsTribunals/Commissions/Regulatory Bodies

   

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

Background of the case

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

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

Analysis and decision

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

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

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


Advocates who appeared in this case :

Pulkit Deora, Advocate, for the Appellant;

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

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

Case BriefsSupreme Court

Supreme Court: The 3-judge bench of L. Nageswara Rao, BR Gavai* and AS Bopanna, JJ has held that a liability in respect of a claim arising out of a Recovery Certificate would be a “financial debt” within the   meaning of clause (8) of Section 5 of the IBC. Consequently, the holder of the Recovery Certificate would be a financial creditor within the meaning of clause (7) of Section 5 of the IBC. As such, the holder of such certificate would be entitled to initiate CIRP, if initiated within a period of three years from the date of issuance of the Recovery Certificate.

The Court explained that the words “means a debt along with interest, if any, which is disbursed against the consideration for the time value of money” are followed by the words “and includes”. By employing the words “and includes”, the Legislature has only given instances, which could be included in the term “financial debt”.  However, the list is not exhaustive but inclusive.

“The legislative intent could not have been to exclude a liability in respect of a “claim” arising out of a Recovery Certificate from the definition of the term “financial debt”, when such a liability in respect of a “claim” simpliciter would be included in the definition of the term “financial debt”.”

Observing that the trigger point for initiation of CIRP is default of claim, the Court further explained that “default” is non-payment of debt by the debtor or the Corporate Debtor, which has become due and payable, as the case may be, a “debt” is a liability or obligation in respect of a claim which is due from any person, and a “claim” means a right to payment, whether such a right is reduced to judgment or not. It could thus be seen that unless there is a “claim”, which may or may not be reduced to any judgment, there would be no “debt” and consequently no “default” on non-payment of such a “debt”.

“When the “claim” itself means a right to payment, whether such a right is reduced to a judgment or not, we find that if the contention of the respondents, that merely on a “claim” being fructified in a decree, the same would be outside the ambit of clause (8) of Section 5 of the IBC, is accepted, then it would be inconsistent with the plain language used in the IBC.”

Hence, taking into consideration the object and purpose of the IBC, the legislature could never have intended to keep a debt, which is crystallized in the form of a decree, outside the ambit of clause (8) of Section 5 of the IBC.

[Kotak Mahindra Bank Ltd. v. A. Balakrishnan, 2022 SCC OnLine SC 706, decided on 30.05.2022]


*Judgment by: Justice BR Gavai

Case BriefsDistrict Court

Dwarka Courts, New Delhi: Deeksha Sethi, MM (NI Act)—06, reiterated that, even a blank cheque leaf, voluntarily signed and handed over by the accused, which is towards some payment, would attract presumption under Section 139 of the Negotiable Instruments Act, 1881.

In the present matter, Raj Singh was referred to as ‘complainant’ and the accused were relatives as the marriage of the son of the complainant and daughter of the brother of the accused was solemnized.

The complainant’s case was that in the second week of April 2015 accused along with his brother approached him and requested a sum of Rs 12 lakhs and 8 lakhs respectively as they were in dire need of money. It was assured to the complainant that they would return the money within 12 months along with interest @ 2% per month.

It was stated that, the accused and his brother paid the interest only on two occasions and thereafter neither paid the interest nor principal amount despite repeated requests.

Thereafter, in the discharge of their liability accused’s brother gave a cheque amounting to Rs 8 lakhs as part payment and accused Yashpal Singh also gave a cheque amounting to Rs 12 lakhs.

Both the above cheques were dishonoured with the remarks ‘Insufficient Funds’.

The complainant had informed about the dishonouring of the cheque by the accused and his brother, however, the accused and his brother refused to return the amount and threatened the complainant with dire consequences.

Later, since the accused failed to make payment despite the notice, therefore liability to be tried and punished for an offence under Section 138 NI Act.

Analysis, Law and Decision

Court noted that the accused had admitted the fact that the cheque in question had his signatures and in such scenario, a presumption was raised under Section 139 read with Sections 118/20 of the NI Act, that cheque was issued in discharge of debt or liability.

With regard to the contention of the accused regarding certain particulars of the cheque were not filled by the accused and hence it was difficult to believe the complainant’s version, Court expressed that, even it was admitted for the sake of argument that blank cheque was given by the accused to the complainant, it is a well-settled principle of law that,

“…even a blank cheque leaf, voluntarily signed and handed over by the accused, which is towards some payment, would attract presumption under Section 139 of the Negotiable Instruments Act, 1881, in the absence of any cogent evidence to show that the cheque was not issued in discharge of a debt.”

Hence, the contention of the accused could not be accepted.

Misuse of Cheque

The Bench noted that the accused neither placed on record any complaint made to the police or bank in the said regard nor led any other evidence in support of the misuse of the cheque.

Further, the Bench added that, it is well settled that bare statements and story-telling would not help the accused to rebut the presumption raised under Sections 118 and 139 of the NI Act.

Whether the accused had been able to shake the version given by the complainant in his evidence affidavit and had been able to point out discrepancies or contradictions which may throw doubt on his version?

The only suggestion that had been given was that a blank signed cheque was issued by the accused to the complainant as it was agreed in Panchayat that the accused and his brother would give the cheque in question and the complainant’s son would take back the accused’s niece. Thus, no discrepancy had emerged out of the cross-examination which may demolish the complainant’s version even on the touchstone of preponderance of probabilities.

The Court concluded that the accused was not able to prove any probable defence and had failed to rebut the presumption raised under Sections 118/139 of the NI Act.

Therefore, Yashpal Singh was held guilty and convicted for the commission of an offence punishable under Section 138 of the NI Act in respect of the cheque in question. [Raj Singh v. Yashpal Singh Parmar, 2022 SCC OnLine Dis Crt (Del) 16, decided on 25-4-2022]

Case BriefsDistrict Court

Dwarka Courts, Delhi: Rahul Jain, Metropolitan Magistrate, while addressing a matter regarding dishonour of cheque, held that mere assertion of non-receipt of legal notice cannot help the accused in escaping liability under Section 138 Negotiable Instruments Act, 1881.

It was alleged in complaint that accused had approached the complainant to purchase a car. It was sold vide an agreement for Rs 7 lakhs only to be paid in 35 EMIs of Rs 20,000.

After default in the instalments, the accused issued a cheque which was returned dishonoured with remark “funds insufficient”. Thereafter, the complainant approached the accused repeatedly about the dishonour of the cheque and then the accused agreed to repay the consideration at one time and issue one cheque which was dishonoured.

Since no response was made within the statutory period regarding the demand notice, the present complaint was filed.

Analysis, Law and Decision


Legal Notice

The Court stated that the assertion of non-receipt of legal notice cannot help the accused in escaping liability under Section 138 NI Act, especially keeping in mind that firstly the accused has admitted his address mentioned on legal demand notice to be correct and secondly that the accused entered appearance in the court pursuant to service upon the same address as was mentioned in the legal demand notice.

It was settled in the decision of the Supreme Court in C.C. Alavi Haji v. Palapetty Muhammed, (2007) 6 SCC 555,  that an accused who claimed that he did not receive legal notice, can within 15 days on receipt of summons from the Court, make payment of the cheque amount, and an accused who does not make such payment cannot contend that there was no proper service of notice as required under Section 138, by ignoring statutory presumption to the contrary under Section 27 of the General Clauses Act and Section 114 of the Evidence Act.

Legal Enforceable Debt

Bench noted that the initial defence of the accused had been that he had not purchased any car from the complainant and denied his signatures on the vehicle agreement. Further, he stated that car was purchased by his brother from the complainant, and he had just stood as a guarantor in the transaction and issued the cheque as security. The said defence was not even a defence but rather an admission to the liability to pay the cheques.

Liability of Guarantor under Section 138 NI Act

Section 138 NI Act uses the words “where any cheque” and therefore, the cheque could be drawn for whatever reason and the drawer would be liable if it is drawn on an account maintained by him with a banker in favour of another person for the discharge of any debt or other liability.

“The cheque could be issued for the discharge of the debt or liability of the drawer or of any other person including a guarantor.”

Section 128 of the Indian Contract Act provides that the liability of the surety is coextensive with that of the principal debtor, unless it is otherwise provided in the contract.

Hence, as per the Indian Contract Act, the liability of the guarantor is coextensive with that of the borrower which means that lender can enforce his right against either the principal borrower or the guarantor of the principal borrower.

Therefore,

On a joint reading of section 138 of Negotiable Instruments Act and Section 128 of Indian Contract act, it is now crystal clear that the liability of the guarantor of a loan fall within the provisions of Section 138 NI Act.

Court added that, with the presumption under Section 139 NI Act raised in the favour of the complainant as the accused admitted his signatures on the cheque, the burden of proof was on the accused to raise a probable defence.

Such burden is only to the extent of the preponderance of probabilities but mere verbal denial won’t discharge even this burden. The onus was on the accused to prove that the signatures on the agreement were not his.

In the absence of evidence for the above, Court used its power under Section 73 of the Evidence Act to compare his signatures on the vehicle agreement with the admitted signatures on the cheque.

In view of the above discussion, a presumption existed in the favour of the complainant, and it was the accused who had to discharge the onus, but he miserably failed to do so.

Therefore, the complainant duly proved his case against the accused for offence punishable under Section 138 NI Act, 1881 beyond the shadow of any reasonable doubt. [Anju Devi v. Mukesh, 2022 SCC OnLine Dis Crt (Del) 19, decided on 9-5-2022]

Case BriefsHigh Courts

Bombay High Court: A very interesting question was considered by G.S. Kulkarni, J., the question being, whether mere filing of a proceeding under Section 7 of the Insolvency and Bankruptcy Code, 2016 would amount to an embargo on the Court considering an application under Section 11 of the Arbitration and Conciliation Act, 1996, to appoint an arbitral tribunal?

Factual Background


 In the present matter, the respondent provided financial assistance to the applicant of an amount of Rs 4,50,00,000 for which a loan agreement was entered between the applicant and the respondent, referred to as Agreement 1.

Due to a change in the business scenario, another Agreement was executed referred to as Agreement 2, under which the date of repayment of the borrowing was extended.

There were defaults on the part of the applicant in the payment of the loan instalments.

Applicant’s case was that in the discharge of its liability towards the respondent under the above-stated agreements, the applicant issued a cheque to the respondent, of an amount of Rs 31,08,33,457 being the repayment of the respondent’s dues, which was in accordance with the terms and conditions of the loan agreement.

Respondent had approached the NCLT by initiating proceedings against the applicant under Section 7 of the Insolvency and Bankruptcy Code, 2016.

Though, so far, no order had been passed by the NCLT admitting the petition as per the provisions of Section 7(5) of the IBC.

Analysis and Decision


High Court observed that there was no dispute in regard to the arbitration agreements between the parties and there was a dispute in regard to the invocation of the arbitration agreement.

Thus, the primary considerations for this Court to exercise jurisdiction under Section 11(6) were certainly present.

The Bench stated that, even if an application under Section 8 of the ACA is filed, the adjudicating authority has a duty to advert to the contentions put forth under an application filed under Section 7 of the IBC by examining the material placed before it by the financial creditor and record a satisfaction as to whether there is default or not.

“…if the irresistible conclusion of the adjudicating authority (NCLT) is that there is default and the debt is payable, the bogey of arbitration to delay the process would not arise despite the position that the agreement between the parties contains an arbitration clause.”

The Bench observed that,

“…mere filing of the proceedings under Section 7 of the IBC cannot be treated as an embargo on the Court exercising jurisdiction under Section 11 of the ACA, for the reason that only after an order under sub-section (5) of Section 7 of the IBC is passed by the NCLT, the Section 7 proceedings would gain a character of the proceedings in rem, which would trigger the embargo precluding the Court to exercise jurisdiction under the ACA, and more particularly in view of the provisions of Section 238 of IBC which would override all other laws.”

Hence, as noted in the present case, the Corporate Insolvency Resolution Process initiated by the respondent is yet to reach a stage of the NCLT passing an order admitting the said proceedings, the Court would not be precluded from exercising its jurisdiction under Section 11 of the ACA, when admittedly, there was an arbitration agreement between the parties and invocation of the arbitration agreement had been made, which was met with a refusal on the part of the respondent to appoint an arbitral tribunal.

While concluding the matter, Bench held that, the Court would be required to allow the present application by appointing an arbitral tribunal for adjudication of the disputes and differences which arose between the parties under the agreements in question.

Though the Court added that a formal order appointing an arbitral tribunal was not required to be made as after the judgment was reserved, the parties just two days back, settled the disputes stating that arbitration was not warranted. [Jasani Realty (P) Ltd. v. Vijay Corpn., 2022 SCC OnLine Bom 879, decided on 25-4-2022]


Advocates before the Court:

Dr. Birendra Saraf, Senior Advocate a/w. Anshul Anjarlekar i/b. Raval- Shah & Co., Advocate for the Applicant.

Mr.Yusuf Iqbal Yusuf i/b. Y. and A Legal, Advocate for the Respondent.

Case BriefsSupreme Court

Supreme Court: The Division Bench of L. Nageswara Rao and Vineet Saran*, JJ., quashed the confiscation order of Customs and Central Excise Commission confiscating land, building, plant and machinery of Rathi Ispat Ltd. for lacking statutory backing. The Bench observed that the existing law only permit confiscation of goods and no land, building can be confiscated under the Central Excise Rules, 2017.

Chronology of Events

  • The Commissioner, Customs and Central Excise, Ghaziabad (Commissioner) had imposed a penalty of Rs.7,98,03,000 and confiscated the land, building, plant and machinery of Rathi Ispat Ltd. (RIL) under Rule 173Q(2) of the Central Excise Rules, 1944 on 25-11-1997.
  • However, the said order was set aside by the Customs, Excise & Gold (Control) Appellate Tribunal (now CESTAT) for being contrary to principles of natural justice, and the matter was remanded back for de novo proceedings.
  • Subsequently, subrule 2 of Rule 173Q of the Central Excise Rules, 1944, came to be omitted by a notification dated 12-05-2000.
  • In 2005, RIL availed credit from the consortium of banks with the Appellant/Punjab National Bank being the lead bank, and mortgaged all its movable and immovable properties for securing the loan.
  • By the order dated 26-03-2007, the Commissioner confirmed the demand of excise duty of Rs.7,98,02,226 and a penalty of Rs.7,98,03,000 on RIL. The Commissioner also ordered, under rule 173Q(2) of the 1944 Rules, for the confiscation of all the land, building, plant, machinery and materials used in connection with manufacture and storage.
  • Similarly, the Central Excise Commissioner, vide order dated 29-03-2007, confirmed a demand of central excise duty amounting to Rs.2,67,00,348 and Rs.74,24,332 from RIL and also imposed a penalty of Rs.3,41,24,68 and further, under rule 173Q(2) of the 1944 Rules, ordered confiscation of land, building, plant, machinery, material, conveyance etc.

RIL’s Default in Clearing the Loan

Since RIL defaulted in clearing the loan amount and had failed to liquidate outstanding dues, the Appellant bank issued notice to RIL under section 13(2) of the SARFAESI Act, 2002, however, Commissioner, Customs and Central Excise had already confiscated the property by virtue of Rule 173Q(2) of Rules, 1944. Aggrieved, the appellant bank approached the Allahabad High Court with its grievances, however dismissing the petition, the High Court held that if any property has been confiscated it vests in the state and no person can claim any right, title, or interest over it, further the High Court opined that the bank had no locus standi to challenge the order as RIL had already preferred an appeal against confiscation.

Question of Law

  1. Whether the Commissioner could have invoked the powers under Rule 173(Q)(2) of Central Excise Rules, 1944 on 26-03-2007 and 29-03-2007 when on such date, the rule 173Q(2) was not on the Statue Book having been omitted w.e.f. 17-05-2000?
  2. Whether in the absence of any provisions providing for First Charge in relation to Central Excise dues in the Central Excise Act, 1944, the dues of the Excise department would have priority over the dues of the Secured Creditors or not?

Validity of Confiscation Order

The Bench noted that in the impugned order, the High Court had not considered that on the date of the confiscation orders Rule 173Q(2) stood omitted from the statute books. Rejecting the contention of the respondent that notwithstanding the omission of Section 173Q(2) from the 1944 Rules the proceedings were entitled to continue on account of Section 38A(c) and Section 38A(e) of the Central Excise Act, 1944, read along with Section 6 of the General Clauses Act, 1897 as misplaced and lacking statutory backing, the Bench opined that the proceedings initiated under the erstwhile Rule 173Q(2) would come to an end on the repeal of the said Rule 173Q(2).

The Bench followed the decision of Kolhapur Canesugar Works Ltd. v. Union of India, (2000) 2 SCC 536, wherein it had been held that Section 6 of the General Clauses Act, 1897 is applicable where any Central Act or Regulation made after commencement of the General Clauses Act repeals any enactment. It is not applicable in the case of omission of a “Rule”. Secondly, Section 38A(c) and 38A(e) of the Central Excise Act, 1944, are attracted only when “unless a different intention appears”.

Noticeably, in the instant case the legislature had clarified its intent to not restore/revive the power of confiscation of any land, building, plant machinery etc., after omission of the provisions which could be inferred from the fact that power to confiscate any land, building, plant, machinery etc. after omission had not been introduced in the subsequent Central Excise Rules, 2001, Central Excise Rules, 2002 and Central Excise Rules, 2017.

Additionally, this intent was also fortified by the fact that the newly enacted Rule 28 of the Rules of 2001, Rule 28 of the Rules of 2002 and Rule 28 of the Rules of 2017, did not provide for confiscation of any land, building, plant, machinery etc. and their consequent vesting in the Central Government, as Rule 28 only provided for vesting in the Central Government of the “Goods” confiscated by the Central Excise Authorities under the Excise Act, 1944.

Whether the dues of the Excise department create a First Charge?

In UTI Bank Ltd. v. Commissioner Central Excise, 2006 SCC Online Madras 1182, it had been held that since there is no specific provision claiming “first charge” in the Central Excise Act and the Customs Act, the claim of the Central Excise Department cannot have precedence over the claim of secured creditor, viz., the petitioner Bank. Similarly, in Union of India v. SICOM Ltd., (2009) 2 SCC 121, it was observed that prior to insertion of Section 11E in the Central Excise Act, 1944 w.e.f. 08-04-2011, there was no provision in the Act inter alia, providing for First Charge on the property of the assessee or any person under the Act of 1944.

Further, section 35 of the SARFAESI Act, 2002 inter alia, provides that the provisions of the SARFAESI Act shall have overriding effect on all other laws. Therefore, the provisions of Section 11E of the Central Excise Act, 1944 are subject to the provisions contained in the SARFAESI Act, 2002. Therefore, the Bench held that the Secured Creditor-Bank would have a First Charge on the Secured Assets.

Verdict

In the light of above, the Bench concluded that the Commissioner of Customs and Central Excise could not have invoked the powers under Rule 173Q(2) of the Central Excise Rules, 1944 on 26-03-2007 and 29-03-2007 for confiscation of land, buildings etc., when on such date, the said Rule 173Q(2) was not in the Statute books, having been omitted by a notification dated 12-05-2000. Secondly, the dues of the secured creditor, i.e. the bank, would have priority over the dues of the Central Excise Department. Accordingly, the appeal was allowed and the confiscation orders were quashed.

[Punjab National Bank v. Union of India, 2022 SCC OnLine SC 227, decided on 24-02-2022]


*Judgment by: Justice Vineet Saran 


Appearance by:

For the Appellant: Dhruv Mehta, Senior Counsel

For Union of India: K.M. Nataraj, Additional Solicitor General


Kamini Sharma, Editorial Assistant has put this report together

Case BriefsHigh Courts

Delhi High Court: While addressing a matter revolving around Section 138 of the Negotiable Instruments Act, 1881, Subramonium Prasad, J., held that Courts should primarily proceed on the averments in the complaint, and the defence of the accused cannot be looked at the stage of issuing summons unless it can be shown on admitted documents which the Supreme Court described as “unimpeachable in nature and sterling in quality” to substantiate that there was no debt due and payable by the person who has issued the cheque or that the cheque amount is large than the debt due.

Petitioner sought to call for record and quash complaint about the offence under Section 138 of the Negotiable Instruments Act, 1881.

Averments made in the complaint were:

Petitioner had approached the complainant/respondent and requested for a friendly loan of Rs 9,00,000, later after a few months he again approached for a loan of Rs 6,00,000 and in the said amount, Rs 4,90,000 was given through RTGS and Rs 1,10,000 was given in cash.

Further, while returning the amount, the petitioner issued a cheque, which was returned by the bank with the remark “Exceeds Arrangement”. Even after notice, the petitioner did not pay the amount, hence a complaint under Section 138 of the NI Act was registered.

Petitioner submitted that he had given instructions to his nephew who deposited a sum of Rs 2,69,000 through UP in the bank account of the wife of the complainant, hence the cheque of Rs 15,00,000 presented by the complainant was greater than the amount due, hence the complaint shall be quashed.

Analysis, Law and Decision

High Court expressed that the purpose of inserting Chapter XVII in the Negotiable Instruments Act, 1881 was to bring out sanctity in commercial transactions.

In the present matter, it was noted the petitioner had issued a cheque for a sum of Rs 15,00,000.

Section 139 of the Negotiable Instrument Act, 1881, creates a presumption that unless contrary is proved, the holder of a cheque has received the cheque for discharge in whole or in part of any debt or other liability.

The Supreme Court’s decision in Bir Singh v. Mukesh Kumar, (2019) 4 SCC 197, was also cited.

Petitioner contended that the cheque deposited by the complainant was for a greater amount as a sum of Rs 2,69,000 had already been paid.

Further, it was stated that the details of the UPI (Unified Payment Interface), which has been filed by the petitioner, show that the amounts deposited in the bank account of the wife of the complainant by the nephew of the petitioner cannot be taken as evidence which is unimpeachable in nature and sterling in quality so as to demolish the case of the respondent and to substantiate the contention of the petitioner that the proceedings initiated under Section 138 of the Negotiable Instrument Act, 1881 is a complete abuse of the process of law.

The Bench stated that the Courts should primarily proceed on the averments in the complaint, and the defence of the accused cannot be looked at the stage of issuing summons unless it can be shown on admitted documents which the Supreme Court described as “unimpeachable in nature and sterling in quality”.

“It is well settled that the inherent powers should be exercised sparingly, with circumspection and in the rarest of rare cases when the Court is convinced, on the basis of material on record, that allowing the proceedings to continue would be an abuse of process of law or if the ends of justice is required that the proceedings ought not to be quashed.”

Hence, High Court denied accepting that the amounts deposited by the nephew of the petitioner in the bank account of the wife of the complainant was towards the debt incurred by the petitioner.

Therefore, no case for quashing the complaint was made out. [Satinderjeet Singh v. Sameer Sondhi, 2022 SCC OnLine Del 635, decided on 28-2-2022]


Advocates before the Court:

For the Petitioner: Deepak Kohli, Advocate

For the Respondent: None

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 


 

National Company Law Tribunal
Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Tribunal, Mumbai: The Coram of H.V. Subba Rao, Judicial Member addressed the relevancy of insufficiency of stamp duty under Section 7 proceedings of Insolvency and Bankruptcy Code, 2016

“…a Section 7 application under the IBC can be filed in a simple form prescribed in the Code even without any pleadings.”

Point of Reference:

Whether the Debenture Trust Deed dated 1st March, 2014 and Redeemable Non-Convertible Debenture Subscription Agreement dated 1st March, 2014, shall be impounded and be sent for payment of requisite stamp duty in accordance with the Maharashtra Stamp Act?

Background

Main company petition was filed by M/s Vistara ITCL (India) Limited as Financial Creditors against M/s Satra Properties (India) Limited who was the Corporate Debtor under Section 7 of the Code for initiation of insolvency proceedings against the Corporate Debtor.

During the pendency of the above-stated Company Petition, the Corporate Debtor filed a Miscellaneous Application.

Petitioner/Corporate Debtor contended that the (i) Secured Redeemable Non-Convertible Debenture Subscription Agreement dated 1st March 2014 and the (ii) Debenture Trust Deed dated 1st March 2014 filed in the Company Petition cannot be looked into nor relied upon by the Financial Creditors till the deficit stamp duty payable on the above two instruments is paid in accordance with the provisions of the Maharashtra Stamp Act.

Both the members of the tribunal had ordered initiation of CIRP against the Corporate Debtor vide an order concurring with each other and by observing that the ‘debt’ and ‘default’ stood proved even without relying on the Debenture Trust Deed and NCD Subscription Agreement.

Judicial Member went ahead and partially allowed the Miscellaneous Application while holding that the Debenture Trust Deed and Redeemable Non-Convertible Debenture Subscription Agreement shall be impounded and be sent for payment of requisite Stamp Duty in accordance with Maharashtra Stamp Act and issued necessary directions to the Registrar.

Whereas, the Technical Member without expressing any opinion on the issue of stamp duty directed the Registry to immediately place the record before the President for constituting appropriate Bench for an opinion so that the order in M.A is rendered in accordance with the majority opinion.

Hence, the above M.A. was referred for independent opinion of the third member.

Core Issues:

  • Whether the pleas of deficit stamp duty, non-payment of stamp duty can be raised by a Corporate Debtor in a Section 7 application more so when the ‘debt’ and ‘default’ are proved even without relying on those documents?
  • If so at what stage and before whom?

Coram expressed that a Section 7 application under the IBC can be filed in a simple form prescribed in the Code even without any pleadings. Similarly, the ‘debt’ and ‘default’ can be proved through the records of ‘debt’ and ‘default’ maintained by the “information utility” even without filing any documents by the party.

When once the Adjudicating Authority is satisfied with these two legal requirements and if the application is complete in accordance with the Code, the Adjudicating Authority has no option except to admit the Company Petition without going into any other trivial technical issues raised by the Corporate Debtor.

Hence, the Tribunal opined that the plea of Stamp Duty in the present matter is not available to the Corporate Debtor when once the debt and default are proved without looking into the documents.

“…as per the terms and conditions of the NCD Subscription Agreement it is the Petitioner/Corporate Debtor that shall bear all documentation charges (including stamp duty) legal and valuation charges.”

Since it was the very case of the petitioner that the documents upon which the Financial Creditors were relying were novated and the respondent stood discharged of the liability in view of the larger understanding and overall settlement. Hence, the petitioner had no legal right to insist on impounding the above document.

When and before whom the issue of stamp duty will be raised?

From the provisions of the Maharashtra Stamp Act and Indian Stamp Act, it is clear that a duty is cast upon the authority before whom the document is sought to be used as evidence by the party for the purpose of enforcing the contractual rights and obligations.

Therefore, proper course of action needs to be adopted to the Miscellaneous Application without getting into the issue of stamp duty as it was irrelevant and uncalled for in a Section 7 application more so when the ‘debt’ and ‘default’ are proved otherwise without looking into those documents.

In view of the above M.A was dismissed. [Vistra ITCL (India) Ltd. v. Satra Properties (India) Ltd., 2022 SCC OnLine NCLT 15, decided on 10-2-2022]


Appearance:

For the Applicant: Mr. Nausher Kohli, Advocate

For the Respondents: Mr. Pulkit Sharma, Advocate

Case BriefsSupreme Court

Supreme Court: While dealing with a case involving two controversial terms; “operational debt” and “operational creditor” of IBC, the 3-judge Bench of Dr Dhananjaya Y Chandrachud* Surya Kant and Vikram Nath, JJ., explained that the appellant would be an operational creditor under the IBC, since an ‘operational debt’ will include a debt arising from a contract in relation to the supply of goods or services from the corporate debtor. The Bench expressed,

“…no doubt that a debt which arises out of advance payment made to a corporate debtor for supply of goods or services would be considered as an operational debt.”

Factual Conspectus

The genesis of the case related to following undisputed facts:

  • the Consolidated Construction Consortium Ltd.-appellant and the Proprietary Concern; i.e. Hitro Energy Solutions entered into a contract for supply of light fittings, since the appellant had been engaged for a project by Chennai Metro Rail Corpn. (CMRL);
  • CMRL, on the appellant’s behalf, paid a sum of Rs 50 lakhs to the Proprietary Concern as an advance on its order with the appellant;
  • CMRL cancelled its project with the appellant;
  • The Proprietary Concern encashed the cheque for Rs 50 lakhs anyways; and
  • The appellant paid the sum of Rs 50 lakhs to CMRL.

Impugned Order

It was when the proprietary concerned refused to pay the aforesaid sum despite several notices and demands, the appellant approached NCLT under Section 9 of the IBC for initiation of the Corporate Insolvency Resolution Process (CIRP) against the respondent, Hitro Energy Solutions (P) Ltd. The NCLT allowed the application holding that the respondent’s Memorandum of Association (MoA) proved that it took over the proprietary concern; and that the Proprietary Concern did owe the appellant an outstanding operational debt. Further, the NCLT declared a moratorium under Section 14 of the IBC and appointed an Interim Resolution Professional.

In appeal, the NCLAT set aside the NCLT’s decision, dismissed the application filed under Section 9 of the IBC and released the respondent from ongoing CIRP on the following grounds:

  • The appellant was a ‘purchaser’, and thus did not come under the definition of ‘operational creditor’ under the IBC since it did not supply any goods or services to the Proprietary Concern/respondent;
  • There was nothing on record to suggest that the respondent had taken over the Proprietary Concern; and
  • The appellant could not move an application under Sections 7 or 9 of the IBC since all purchase orders were issued on 24 June 2013 and advance cheques were issued subsequently. Hence, there was unjustified delay.

However, by an interim order, the Supreme Court had stayed the operation of NCLAT’s judgment.

Whether the appellant was an operational creditor

The NCLAT, sought to narrowly define operational debt and operational creditors under the IBC to only include those who supply goods or services to a corporate debtor and exclude those who receive goods or services from the corporate debtor. Rejecting the stand taken by NCLAT, the Bench observed the following:

Firstly, Section 5(21) defines ‘operational debt’ as a “claim in respect of the provision of goods or services”. The operative requirement is that the claim must bear some nexus with a provision of goods or services, without specifying who is to be the supplier or receiver.

Secondly, Section 8(1) of the IBC read with Rule 5(1) and Form 3 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules 2016 and Regulation 7(2)(b)(i) and (ii) of the CIRP Regulations 2016 make it abundantly clear that an operational creditor can issue a notice in relation to an operational debt either through a demand notice or an invoice. As such, the Bench opined,

“…the presence of an invoice (for having supplied goods or services) is not a sine qua non, since a demand notice can also be issued on the basis of other documents which prove the existence of the debt.”

Finally, in Pioneer Urban Land and Infrastructure Ltd. v. Union of India, (2019) 8 SCC 416, in comparing allottees in real estate projects to operational creditors, the Supreme Court had noted that the latter do not receive any time value for their money as consideration but only provide it in exchange for goods or services.

Therefore, the Bench opined that the phrase “in respect of” in Section 5(21) has to be interpreted in a broad and purposive manner in order to include all those who provide or receive operational services from the corporate debtor, which ultimately lead to an operational debt. In the instant case, the appellant clearly sought an operational service from the Proprietary Concern when it contracted with them for the supply of light fittings. Further, when the contract was terminated but the Proprietary Concern nonetheless encashed the cheque for advance payment, it gave rise to an operational debt in favor of the appellant, which remained unpaid.

Whether the respondent took over the debt from Proprietary Concern

The MoA of the respondent unequivocally stated that one of its main objects was to take over the Proprietary Concern. However, the respondent had produced a resolution dated 01-09-2014 passed by its Board of Directors, purportedly resolving to not take over the Proprietary Concern. In this regard, the Bench observed,

“Admittedly, there was no reference to the resolution in the counter-statement dated 18 January 2018 and additional counter-statement dated 9 March 2018 filed by the respondent before the NCLT. However, in their appeal filed before the NCLAT, the respondent states that the resolution was, in fact, brought to the notice of the NCLT.”

Additionally, the NCLT made no mention of that resolution or the auditor’s certificate in its judgment. Therefore, the Bench opined that the conduct of the respondent in bringing up the resolution for the first time before the NCLAT would lead to an adverse inference against them for having suppressed the document earlier, if at all it was in existence.

Even otherwise, Section 13 of CA 2013 provides that where the object clause is amended in MoA, it requires the Registrar to register the Special Resolution filed by the company. However, the respondent had provided no proof that the purported resolution was a Special Resolution, it was filed before the Registrar and that the Registrar ultimately did register that. Thus, the purported amendment to the MOA would not have any legal effect. Consequently, the Bench held that the MOA of the respondent still stands and the presumption would continue to be in favour of the appellant.

Whether the application under Section 9 of IBC was barred by limitation

Rejecting the respondent’s submission that limitation commenced from 07-11-2013, when the cheque was issued by CMRL to the Proprietary Concern and that considering three years limitation period under Article 137 of the Limitation Act 1963, the period would expire on 07-11-2016, while the application under Section 9 was only filed on 01-11-2017, the Bench observed, in its application under Section 9, the appellant had mentioned 07-11-2013 as the date on which the debt became due.

However, in B.K. Educational Services (P) Ltd. v. Parag Gupta & Associates, (2019) 11 SCC 633, it was held that limitation does not commence when the debt becomes due but only when a default occurs. As noted, default is defined under Section 3(12) of the IBC as the non-payment of the debt by the corporate debtor when it has become due. Hence, it was only on 27-02-2017 that the final letter was addressed by the appellant to the Proprietary Concern demanding the payment on or before 04-03-2017 and Proprietary Concern replied on 02-03-2017, finally refusing to make re-payment to the appellant. Consequently, the application under Section 9 would not be barred by limitation.

Conclusion

Hence, the appeal was allowed and the impugned judgment and order were set aside.  Since the CIRP in respect of the respondent was ongoing due to the Court’s order dated 18-11-2020, no further directions were issued.

[M/s Consolidated Construction Consortium Ltd. v. M/s Hitro Energy Solutions (P) Ltd., 2022 SCC OnLine SC 142, decided on 04-02-2022]


*Judgment by: Justice Dhananjaya Y Chandrachud


Appearance by:

For the Appellant: M P Parthiban, Advocate

For the Respondent: K Parameshwar, Advocate


Kamini Sharma, Editorial Assistant has put this report together


 

Akaant MittalExperts Corner

In the previous column, we had covered how the position of law was inconsistent with respect to a decree as a foundation for a financial debt. The same is now finally put to rest by the ruling of the Supreme Court in Dena Bank v. C. Shivakumar Reddy[1].

 

While a decree can now be the basis of a financial debt, we will proceed with the position of law with respect to an arbitral award or a decree forming the basis for an operational debt.

 

The position here seems aligned with what the Supreme Court had held in the above-discussed ruling in Dena Bank[2]. In Usha Holdings LLC v. Francorp Advisors (P) Ltd.[3], an issue arose if a debt is based on a decree which was passed by a foreign court. In such circumstances, while it was held that an adjudicating authority cannot decide the legality and viability of such a decree, the NCLAT further held that the same does not mean that the need for establishing a relation between operational creditor and the corporate debtor is waived off. The NCLAT required that such decree must pertain to or relate to supply of goods or services, and the failure to establish such link led to the rejection of the application under Section 9, IB Code.[4]

 

The NCLAT then presented even a clearer picture on this issue in Ashok Agarwal v. Amitex Polymers (P) Ltd.,[5] when the issue of whether a consent decree falls under the definition of operational debt was raised. The NCLAT herein relied upon the definition of a creditor as stated in Section 3(10) to conclude that a “decree-holder” cannot be excluded from the definition of an “operational creditor” under Section 5(20) of the IB Code. Resultantly, the order of the adjudicating authority was set aside and the claim of the appellant — operational creditor based on the consent decree was found to be an operational debt.

 

By doing so, the NCLAT ended up distinguishing its own ruling in Digamber Bhondwe v. JM Financial Asset Reconstruction Co. Ltd. [6], wherein in a case under Section 7, it was held that a decree-holder does not fall under the definition of a financial creditor. The NCLAT in Digamber Bhondwe case[7] had held:

  1. 22. [W]e further reject the submission that because in Section 3(10) of I&B Code in definition of “creditor” the “decree-holder” is included it shows that decree gives cause to initiate application under Section 7 of I&B Code. Section 3 is in Part I of I&B Code. Part II of I&B Code deals with “insolvency resolution and liquidation for corporate person”, and has its own set of definitions in Section 5. Section 3(10) definition of “creditor” includes “financial creditor”, “operational creditor” “decree-holder”, etc. But Section 7 or Section 9 dealing with “financial creditor” and “operational creditor” do not include “decree-holder” to initiate corporate insolvency resolution process (CIRP) in Part II.

 

The opinion in Ashok Agarwal[8] seems to be supported by Form V of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016, which expressly directs, under the heading “particulars of operational debt (documents, records and evidence of default)”, the operational creditor to disclose before the adjudicating authority the particulars of an order of a court, tribunal or arbitral panel adjudicating on the default, if any.

 

Part-V

Particulars of Operational Debt (Documents, Records and Evidence of Default)

1.

Particulars of security held, if any, the date of its creation, its estimated value as per the creditor

Attach a copy of a certificate of registration of charge issued by the Registrar of Companies (if the corporate debtor is a company)

 

2.

Details of reservation/retention of title arrangements (if any) in respect of goods to which the operational debt refers  

3.

Particulars of an order of a court, tribunal or arbitral panel adjudicating on the default, if any (attach a copy of the order)  

4.

Record of default with the information utility, if any (attach a copy of such record)  

5.

Details of succession certificate, or probate of a will, or letter of administration, or court decree (as may be applicable), under the Succession Act, 1925 (10 of 1925) (attach a copy)  

6.

Provision of law, contract or other document under which operational debt has become due  

7.

A statement of bank account where deposits are made or credits received normally by the operational creditor in respect of the debt of the corporate debtor (attach a copy)  

8.

List of other documents attached to this application in order to prove the existence of operational debt and the amount in default  

Therefore, a legal provision itself stipulates that an order of a court/tribunal/arbitral panel with regard to a default committed by a debtor could show the particulars of an “operational debt”.

 

In G. Shivramkrishna v. Isgec Covema Ltd.,[9] the NCLAT specifically calculated the limitation to file an application under Section 9 of the IB Code by taking into account the relevant dates of the arbitral award.[10] The arbitral award was passed on 30-5-2013, and the application for setting aside the award under Section 34 of the Arbitration law was dismissed on 27-1-2016 and the time to file the appeal under Section 37 lapsed on 27-4-2016. The application under Section 9 was filed on 3-4-2019. The NCLAT taking this relevant dates concluded that the application was within limitation. The argument that an application under Section 9 could not be filed for the purposes of execution of the arbitral award was rejected to hold :

by passing award by the learned sole arbitrator, the amount has been crystalised and by default in payment and by not honouring the award, the amount became due and payable. Respondent 1 had rightly invoked jurisdiction of the adjudicating authority under Section 9 of the IBC after issuance of demand notice as prescribed under Section 8 of IBC…”

 

The fundamentals, however, must remain that the decree or the award must be on account of an operational debt i.e. on account of providing a good or a service. In G. Shivramkrishna[11], the underlying debt pertained to a work order.

 

The only practical issue with basing the claim for an operational debt on an arbitral award or a decree is the fact that any challenge to an arbitral award (be it under Section 34 or Section 37 of the Arbitration and Conciliation Act, 1996) or any appeal against a decree may end up showing that there is a pre-existing dispute between the parties.[12] Otherwise, it is submitted that there is no general bar on relying on an arbitral award or decree to establish an operational debt. The Supreme Court in its ruling in K. Kishan v. Vijay Nirman Co. (P) Ltd.[13] had clarified that in cases where the creditor could show that a petition under Section 34 challenging an arbitral award is barred by limitation, in only such circumstances, the insolvency process may then be put into operation. As seen in the facts and circumstances in G. Shivramkrishna,[14] the same could still be achievable.


Akaant Kumar Mittal is an advocate at the Constitutional Courts, and National Company Law Tribunal, Delhi and Chandigarh. He is the author of the commentary “Insolvency and Bankruptcy Code – Law and Practice”.

[1] (2021) 10 SCC 330.

[2] (2021) 10 SCC 330.

[3] 2018 SCC OnLine NCLAT 792.

[4] 2018 SCC OnLine NCLAT 792, paras 12 and 13.

[5] 2021 SCC OnLine NCLAT 49.

[6] 2020 SCC OnLine NCLAT 399.

[7] 2020 SCC OnLine NCLAT 399.

[8] 2021 SCC OnLine NCLAT 49.

[9] 2020 SCC OnLine NCLAT 909.

[10] In this case, the limitation was calculated in the following manner:

  1. [E]ven the award was passed on 30-5-2013….

*                                   *                                   *

  1. the learned XXIV Additional Chief Judge, City Court, Hyderabad, dismissed the petition [under Section 34 of the Arbitration and Conciliation Act, 1996] on 27-1-2016 and the statutory period for filing appeal under Section 37 of Arbitration and Conciliation Act is 90 days in case of decree. The appeal under Section 37 of the Arbitration and Conciliation Act excludes the limitation from 27-4-2016 i.e. 90 days from 27-1-2016 as per Article 116 of the Limitation Act and if three years is taken from 27-1-2016, following the judgment of the Supreme Court in the above decision (B.K. Educational … supra) and as per Article 137 of the Limitation Act, three years’ period would expire on 27-4-2019. Whilst, the application under Section 9 of the IBC filed on 3-4-2019. Accordingly, it is well within the period of limitation. (Additions supplied)

[11] 2020 SCC OnLine NCLAT 909.

[12] See for instance Jai Balaji Industries v. D.K. Mohanty, Civil Appeal No. 5899 of 2021, decided on 1-10-2021(SC). Where pending appeal under Section 37 of the Arbitration and Conciliation Act, 1996 was held to show pre-existing dispute.

[13] (2018) 17 SCC 662, para 19.

[14] 2020 SCC OnLine NCLAT 909.

Akaant MittalExperts Corner

In this three – part series, I shall be discussing the if a decree or an arbitral award or a settlement deed can form the basis of a financial or operational debt under the IB Code.

 

The Insolvency and Bankruptcy Code, 2016 took effect on 1-12-2016, and the Government of India has since enforced most of the sections of the Code pertaining to corporate insolvency through numerous notifications. The Code has resulted in a paradigm shift in India’s insolvency and bankruptcy law, both for corporate entities and for individuals.

 

The IB Code differentiates between financial creditors and operational creditors. Financial creditors are those having a relationship with the corporate debtor that is purely a financial contract, such as a loan or a debt security. Whereas, operational creditors are those who have due from the debtor on account of transactions made for the operational working of the debtor.[1] In order to seeking a resolution process against a corporate debtor, therefore, a creditor must either have a claim of a financial debt or an operational debt against such debtor.

 

Now issues have arisen when such creditors have sought to base their claims on

(i) a decree by a court; or an arbitral award; or

(ii) settlement agreement between the creditor(s) and the corporate debtor.

The first part of the series shall deal with whether a decree constitutes a financial debt.

 

The jurisprudence on this issue generally has held that it is essential that the claim of a financial creditor must be based on the transaction between the debtor and creditor and not on the decree issued by a court or tribunal in any other case between the debtor and creditor.

 

A decree-holder cannot initiate a corporate insolvency resolution process by using the decree or recovery certificate issued by the Debts Recovery Tribunal or Real Estate Regulatory Authority (RERA) or any other authority under any other law.[2] The rationale is that an “amount claimed under the decree is an adjudicated amount and not a debt disbursed against the consideration for the time value of money”[3]. Resultantly, the same cannot be termed to fall within the ambit of any of the clauses enumerated under Section 5(8), IB Code.[4]

 

The NCLAT has maintained that the proceedings under the IB Code are not recovery proceedings. Therefore, when a creditor seeks indirect execution of such decrees or recovery certificates by filing an application under Section 7, IB Code, the same can tantamount to “fraudulent or malicious initiation of insolvency proceedings for a purpose other than for the resolution of insolvency” and hence, actionable under Section 65, IB Code.[5]

 

In other words, the underlying idea is that the adjudicating authority does not become an executing court wherein any petitioner who obtains a decree instead of getting the same executed before the appropriate civil courts, circumvents and seeks such execution indirectly through the proceedings under Section 7 of the IB Code.

 

Similar opinion was maintained in the matter of Akram Khan v. Bank of India Ltd.,[6] wherein the NCLAT opined that the application under Section 7 of the IB Code seems to be made for the purposes of execution of a decree passed by the Debts Recovery Tribunal in favour of the “financial creditor”. Hence, the creditor approached the adjudicating authority, for the purpose other than for the resolution of insolvency, or liquidation and resultantly falls foul of Section 65 of the IB Code. Similar view was taken in C. Shivakumar Reddy v. Dena Bank.[7]

 

One query that could certainly be posed is that why does a creditor rely on a decree or an arbitral award to establish a financial or an operational debt. One particular reason for that could be to prevent the claim being hit by the law of limitation. According to Section 238-A of the IB Code, the Limitation Act, 1963 applies to the IB Code and therefore, an application under Sections 7 or 9 or Section 10 of the IB Code has to be filed within 3 years of the date of default. Therefore, when the date of default predated the year 2013 but the creditor filed the application under Section 7 of the IB Code on 7-1-2019; the creditor sought to place reliance on the decree by the Debts Recovery Tribunal which was passed on 22-10-2016 to argue that their claim was within limitation.[8] However, the same was still rejected by the NCLAT holding that the limitation will start from the date of default and not the date when the recovery certificate was issued by the Debts Recovery Tribunal.[9]

 

However, a diverging stance was taken in Ugro Capital Ltd. v. Bangalore Dehydration and Drying Equipment Co. (P) Ltd.,[10] where specific argument was taken that the creditor had not prosecuted the judgment and decree obtained in 2015 before a civil court and instead has come before the adjudicating authority by filing an application under Section 7 of the IB Code. The NCLAT setting aside the order of the adjudicating authority, had directed the latter to admit the application under Section 7 of the IB Code. The NCLAT referring to the definition of the term “creditor” in the IB Code, in categorical terms, stated:

 

“[i]t is important to point out that the definition of creditor provided in Section 5(10) of the IB Code provides that “creditor means 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.

 

Based on the decree of the court this petition was filed under Section 7 of the Code. Since the definition of word creditor in IB Code includes decree-holder, therefore if a petition is filed for the realisation of decretal amount, then it cannot be dismissed on the ground that applicant should have taken steps for filing execution case in civil court.”

 

In fact, in the above-mentioned case, the NCLAT calculated the limitation for filing the application under Section 7 from the date of the decree.

 

In conclusion, it can be said that majorly the courts had taken an adverse view when an application seeking initiation of a resolution process is supported by a decree or an arbitral award[11]. The impression that the same seems to be communicated to the courts is that the creditor has approached it with a mala fide motive, which is why the provision of Section 65 IB Code[12] is referred to it.[13]

 

However, the same must now be revisited on account of the ruling of the Supreme Court in Dena Bank v. C. Shivakumar Reddy[14]. One of the issues in this case was the financial creditor had relied on the recovery certificate issued by the Debts Recovery Tribunal to establish the claim of a financial debt and to contend that the application under Section 7 was filed in the period of limitation. Setting aside the ruling of the NCLAT, the Supreme Court accepted the submission of the financial creditor, holding:

126… In this case, the appellant financial creditor had, amongst other documents, also relied upon the final judgment and order dated 27-3-2017 passed by the Debts Recovery Tribunal and the subsequent recovery certificate dated 25-5-2017 which constituted cause of action for initiation of proceedings under Section 7 of the IB Code.

Clearly, therefore, a decree can now constitute a financial debt.

Conclusion

From the foregoing discussion, it is clear that the jurisprudence of the NCLAT wherein claim based on a decree was look with skepticism as to whether the same amounts to misuse of the provision of the IB Code, needs revisiting. In light of the ruling of the Supreme Court in Dena Bank[15], a claim can most certainly be based on a decree. However, it must be mentioned here that the claim upon which a decree is rendered must satisfy the fundamental ingredients of a financial debt, since in Dena Bank[16], it was a financial creditor that had secured the decree.

 


† Akaant Kumar Mittal is an advocate at the Constitutional Courts, and National Company Law Tribunal, Delhi and Chandigarh. He is the author of the commentary “Insolvency and Bankruptcy Code – Law and Practice”.

The author gratefully acknowledges the research and assistance of Sh. Mahesh Kumar, 4th Year, B.A.LLB. (Hons.), student at Sharda University, Greater Noida, Uttar Pradesh, in writing this series.

[1] The Report of the Bankruptcy Law Reforms Committee, Volume 1: Rationale and Design (Nov. 2015), Ch. 5.2.1

[2] See, Sushil Ansal v. Ashok Tripathi, 2020 SCC OnLine NCLAT 680.

[3] 2020 SCC OnLine NCLAT 680, para 20.

[4] 2020 SCC OnLine NCLAT 680.

[5] See, G. Eswara Rao v. Stressed Assets Stabilisation Fund, 2020 SCC OnLine NCLAT 416; Sushil Ansal v. Ashok Tripathi, 2020 SCC OnLine NCLAT 680.

[6] 2019 SCC OnLine NCLAT 1427.

[7] 2019 SCC OnLine NCLAT 907.

[8] Digamber Bhondwe v. JM Financial Asset Reconstruction Co. Ltd., 2020 SCC OnLine NCLAT 399.

[9] Digamber Bhondwe v. JM Financial Asset Reconstruction Co. Ltd., 2020 SCC OnLine NCLAT 399, para 18.

[10] 2020 SCC OnLine NCLAT 149.

[11] See HDFC Bank Ltd. v. Bhagwan Das Auto Finance Ltd., 2019 SCC OnLine NCLAT 1338.

[12] IB Code, S. 65(1) states:

“65. Fraudulent or malicious initiation of proceedings.— (1) If, any person initiates the insolvency resolution process or liquidation proceedings fraudulently or with malicious intent for any purpose other than for the resolution of insolvency, or liquidation, as the case may be, the adjudicating authority may impose upon such person a penalty which shall not be less than one lakh rupees, but may extend to one crore rupees.”

[13] See HDFC Bank Ltd. v. Bhagwan Das Auto Finance Ltd., 2019 SCC OnLine NCLAT 1338; G. Eswara Rao v. Stressed Assets Stabilisation Fund, 2020 SCC OnLine NCLAT 416.

[14] 2021 SCC OnLine SC 330.

[15] (2021) 10 SCC 330.

[16] (2021) 10 SCC 330.

Case BriefsSupreme Court

Supreme Court: In a case where it was argued before the Court that an offence under Section 138 of the Negotiable Instruments Act was not made out as the dishonourment alleged is of the cheques which were issued by way of ‘security’ and not towards discharge of any debt, the bench of MR Shah and AS Bopanna*, JJ has held that a cheque issued as security pursuant to a financial transaction cannot be considered as a worthless piece of paper under every circumstance and that there cannot be a hard and fast rule that a cheque which is issued as security can never be presented by the drawee of the cheque.

The Court explained that ‘security’ in its true sense is the state of being safe and the security given for a loan is something given as a pledge of payment. It is given, deposited or pledged to make certain the fulfilment of an obligation to which the parties to the transaction are bound.

“If in a transaction, a loan is advanced and the borrower agrees to repay the amount in a specified timeframe and issues a cheque as security to secure such repayment; if the loan amount is not repaid in any other form before the due date or if there is no other understanding or agreement between the parties to defer the payment of amount, the cheque which   is   issued   as   security   would   mature   for presentation and the drawee of the cheque would be entitled to present the same. On such presentation, if the same is dishonoured, the consequences contemplated under Section 138 and the other provisions of N.I. Act would flow.”

When a cheque is issued and is treated as ‘security’ towards repayment of an amount with a time period being stipulated for repayment, all that it ensures is that such cheque which is issued as ‘security’ cannot be presented prior to the loan or the instalment maturing for repayment towards which such cheque is issued as security.

Further, the borrower would have the option of repaying the loan amount or such financial liability in any other form and in that manner if the amount of loan due and payable has been discharged within the agreed period, the cheque issued as security cannot thereafter be presented. Therefore, the prior discharge of the loan or there being an altered situation due to which there would be understanding between the parties is a sine qua non to not present the cheque which was issued as security. These are only the defences that would be available to the drawer of the cheque in a proceedings initiated under Section 138 of the N.I. Act. Therefore, there cannot be a hard and fast rule that a cheque which is issued as security can never be presented by the drawee of the cheque. If such is the understanding a cheque would also be reduced to an ‘on demand promissory note’ and in all circumstances, it would only be a civil litigation to recover the amount, which is not the intention of the statute.

“When a cheque is issued even though as ‘security’ the consequence flowing therefrom is also known to the drawer of the cheque and in the circumstance stated above if the cheque is presented and dishonoured, the holder of the cheque/drawee would have the option of initiating the civil proceedings for recovery or the criminal proceedings for punishment in the fact situation, but in any event, it is not for the drawer of the cheque to dictate terms with regard to the nature of litigation.”

[Sripati Singh v. State of Jharkhand, 2021 SCC OnLine SC 1002, decided on 28.10.2021]


Counsels

For appellant: Advocate M.C. Dhingra

For respondents: Advocate Raj Kishor Choudhary and Keshav Murthy


*Judgment by: Justice AS Bopanna

Know Thy Judge | Justice A. S. Bopanna

Case BriefsDistrict Court

Additional Chief Metropolitan Magistrate, Mayo Hall Unit, Bengaluru: Vani A. Shetty, XVII Additional Judge, Court of Small Causes & ACMM, addressed a matter with respect to the liability of the accused in a case of dishonour of cheque under Section 138 of the Negotiable Instruments Act, 1881.

In the present case, the accused was tried for the offence punishable under Section 138 of the Negotiable Instruments Act.

Factual Background

Complainant with an intention to have a South Africa trip paid Rs 24 lakhs to the accused to book the tickets. But the accused failed to book the tickets and repaid a sum of Rs 14.5 lakhs to the complainant and sought time for the payment of balance amount of Rs 9.5 lakhs. Towards the discharge of the said liability, the accused issued a cheque for Rs 4,50,000 assuring that the cheque would be honoured if presented for payment.

But the cheque came to be dishonoured on the grounds of ‘payment stopped by drawer’. Thereafter the complainant got issued a legal notice demanding repayment of the cheque amount within 15 days. Due to no response from the accused, an instant complaint was filed.

In view of sufficient ground to proceed further, a criminal case was registered against the accused, and she was summoned.

Question for Consideration:

Whether the complainant proved that the accused has committed an offence punishable under Section 138 of the NI Act, 1881?

Analysis, Law and Decision

While analyzing the matter, Bench stated that in order to constitute an offence under Section 138 NI Act, the cheque shall be presented to the bank within a period of 3 months from its date. On dishonour of cheque, the drawer or holder of the cheque may cause demand notice within 30 days from the date of dishonour, demanding to repay within 15 days from the date of service of the notice.

“If the drawer of the cheque fails to repay the amount within 15 days from the date of service of notice, the cause of action arises for filing the complaint.”

In the present matter, the complainant had complied with all the mandatory requirements of Section 138 and 142 of the NI Act.

Section 118 of the NI Act lays down that until the contrary Is proved, it shall be presumed that every Negotiable Instrument was made or drawn for consideration.

Section 139 NI Act contemplated that unless the contrary is proved, it shall be presumed that the holder of the cheque received the cheque of the nature referred to in Section 138 for the discharge, in whole of any debt or liability.

In a catena of decisions, it has been repeatedly observed that in the proceeding under Section 138 of NI Act, the complainant is not required to establish either the legality or the enforceability of the debt or liability since he can avail the benefit of presumption under Sections 118 and 139 of the NI Act in his favour.

Further, it was observed that by virtue of the presumptions, accused had to establish that the cheque in question was not issued towards any legally enforceable debt or liability.

Later in the year 2006, the Supreme Court in the decision of M.S. Narayan Menon v. State of Kerala, (2006 SAR Crl. 616), has held that the presumption available under Section 118 and 139 of N.I. Act can be rebutted by raising a probable defence and the onus cast upon the accused is not as heavy as that of the prosecution.

Further, in the Supreme Court decision of Krishna Janarshana Bhat v. Dattatreya G. Hegde, (2008 Vo.II SCC Crl.166), the Supreme Court held that the existence of legally recoverable debt was not a presumption under Section 138 NI Act and the accused has a constitutional right to maintain silence and therefore, the doctrine of reverse burden introduced by Section 139 of the NI Act should be delicately balanced.

Bench, in conclusion, observed that the presumption mandated by Section 139 of NI Act does indeed include the existence of legally enforceable debt or liability, it is a rebuttable presumption, open to the accused to raise defence wherein the existence of the legally enforceable debt or liability can be contested.

If the accused is able to raise a probable defence, which creates doubt about the existence of legally enforceable debt or liability, the onus shifts back to the complainant.

Court stated that if the accused was able to probabalise that the disputed cheque was issued due to the intervention and pressure of the police, it may not be justified to draw the presumption contemplated under Section 139 NI Act.

It was added that if the police would have really interfered, the accused could have produced some evidence to show the intervention of the police. But there was absolutely no evidence on record to show that cheque was issued either due to pressure of police or due to some other compulsion.

In Court’s opinion, the Court was required to draw the presumption under Section 139 NI Act in favour of the complainant.

Court noted that in the present matter, accused at no point in time asked the complainant to pay the balance amount. Instead, she had kept quiet by enjoying the huge amount of Rs 24 lakhs which clearly indicated that the non-purchase of the ticket was not on account of the non-payment of the remaining amount. Further, there was no forfeiture clause.

For the above, Bench stated that in the absence of the forfeiture clause, the accused could not have retained the amount of the complainant with her, the said was barred by the doctrine of unlawful enrichment under Section 70 of the Indian Contract Act, 1872.

Hence, even if it was held that the complainant was a defaulter in respect of the payment of the remaining amount, the accused was legally liable to repay the amount received by her from the complainant.

In view of the above reasons, guilt of the accused was proved under Section 138 NI Act. [Srinivas Builders and Developers v. Shyalaja, CC No. 57792 of 2018, decided on 13-10-201]


Advocates before the Court:

For the Complainant: V.N.R., Advocate

For the Accused: J.R., Advocate

National Company Law Tribunal
Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Tribunal, New Delhi Bench, New Delhi –The Coram of P.S.N Prasad, Judicial Member and Narender Kumar Bhola,  Technical Member were inclined to allow the process of CIRP, considering the debt acknowledged by the corporate debtor.

In the pertinent matter the corporate debtor approached the operational creditor for supply of image scanner manufactured by the operational creditor. It was alleged that the operational creditor had to send various reminders through emails, text messages and phones for the payment of the goods purchased by the corporate debtor. Pursuant to which even a demand notice was duly served upon.The petitioner thus submitted that since corporate debtor has acknowledged the debt, therefore the petition under Section 9 of IBC, 2016 should be allowed and the CIR process to be initiated against the corporate debtor.

The Tribunal after perusing the written submissions and arguments advanced by the operational creditor was of the opinion that the corporate debtor through emails has acknowledged the debt. Resultantly, the Tribunal was inclined to admit the application to initiate the process of CIRP of the corporate debtor. And further declared moratorium, and appointed an Insolvency Resolution Professional to take charge of the respondent corporate debtor.

It further stated that the supply of essential goods or services of the corporate debtor shall not be terminated, suspended or interrupted during moratorium period.[CSII India Pvt. Ltd. v. Telexcell Information Systems Limited, IB-411/ND/2020, 05-10-2021]


Agatha Shukla, Editorial Assistant has reported this brief.


Counsel for the Parties:

Operational Creditor:

Kshitiz Karjee & Mrinal Agarwal (Advocates)

Case BriefsHigh Courts

Delhi High Court: The Division Bench of Rajiv Sahai Endlaw and Asha Menon, JJ., held that the pawnor, merely by his act of delivering his own goods to a creditor in consideration of a credit facility granted to the debtor/borrower, by legal fiction becomes liable for the entire debt, would be detrimental to trade and commerce, with borrowings becoming difficult to obtain owing to persons not agreeing to make a pledge of their goods for credit to another, for the fear of becoming liable for more than the value of goods.

Legal Question for Consideration

Whether by virtue of Section 176 of the Indian Contract Act, 1872, the pawnor, even if different from borrower or the principal debtor, becomes liable for payment of the entire debt, even if has not furnished any guarantee for repayment of the entire debt i.e. over and above the value of the pawned goods?

Facts pertinent to the matter

Respondent 1 had filed the original application before the Debt Recovery Tribunal, Delhi under Section 19 of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 along with pendente lite and future interest, jointly and severally from respondent 2 and petitioner.

Aggrieved from the order of DRAT, of dismissal of his appeal, the petitioner filed the instant petition.

Analysis, Law, Decision

It was noted that the counsel for respondent 1 Bank had fairly admitted that there was no document whereunder the petitioner had undertaken liability as a borrower, in his personal capacity or as a guarantor for repayment of the dues of respondent 2 Company to the respondent 1 Bank.

Bench on an interpretation of Clause 2.1 of the Share Pledge Agreement was unable to agree with the contention of respondent 1 Bank that the petitioner became liable for the entire debt.

Further, it was stated that,

In the Share Pledge Agreement,

  • while the respondent 1 Bank is described as the Bank, the respondent 2 Company is described as the Borrower and the petitioner is described as the Pledgor; the same is indicative of the role of the petitioner in the agreement being confined to that of a pledgor/pawnor, as distinct from a borrower; had the intent been, of the petitioner along with the respondent 2 Company borrowing the monies and being liable for repayment thereof, the petitioner, besides as a pledgor, would also have been described as a borrower;
  • Clause 2.1 merely notes the agreement to be for the benefit of the respondent 1 Bank; merely by stating so, the petitioner did not and could not in law have become liable for more than that for which he expressly became liable under the Share Pledge Agreement; the pledge made by the petitioner under the agreement was also for the benefit of the respondent 1 Bank and thus merely from the statement that the agreement was for the benefit of the respondent 1 Bank, it does not follow that the benefit to the respondent 1 Bank flowing from the petitioner was more than that undertaken by the petitioner or provided in the agreement;
  • the petitioner pledged his shares as security for due discharge and repayment of Obligations under the Finance Documents; it is not the case that under the Finance Documents the petitioner is personally liable; and,
  • the parties expressly agreed that in the event of any default by the borrower, the respondent 1 Bank would be entitled to transfer or register in its name the pledged shares and to receive all amounts payable with respect thereto and to sell the same; there is no clause, that on any default or breach by the respondent 2 Company as borrower, the petitioner would become personally liable for the borrowings of respondent 2 Company.

Supreme Court, in State of Maharashtra v. M.N. Kaul, AIR 1967 SC 1634, while answering the question of whether the guarantee subject matter thereof was enforceable, held, “That depends upon the terms under which the guarantor bound himself. Under the law he cannot be made liable for more than he has undertaken”

In Central Bank of India v. Virudhunagar Steel Rolling Mills Ltd., (2015) 16 SCC 207, held that,

“…had the intent been to make the directors personally liable for the outstanding liabilities of the company also, it could have been so provided in the letter of guarantee and the directors were thus not personally liable for the dues of prior to the date they signed the letter of guarantee. It was further held that since the deed of guarantee was drafted by the bank, in case of doubt, had to be read against the bank.”

In the instant matter, High Court dismissed the contention of the respondent 1 Bank that the petitioner admitted his liability before the Recovery Officer.

Court stated that banks are also known to, besides the borrower, make others also on whose surety/guarantee the said credit facilities are extended to the borrower, sign a plethora of documents, again in their standard form. From the conduct of the respondent 1 Bank not making the petitioner sign any such documents, the only inference is that the petitioner was not intended to be liable for dues of respondent 2 Company save to the extent of the value of the shares pledged by the respondent 2 Company.

Moving, further, with the analysis, Bench elaborated that Section 172 provides bailment of goods as security for payment of a debt is called a “pledge” and the bailor is called the “pawnor” and the bailee, the “pawnee”.

In Court’s opinion, none of the provisions preceding or following Section 176 provide for the pawnor, by virtue of the pledge, even if not otherwise liable for the payment of debt, by a legal fiction becoming so liable for payment for debt, even beyond the value of the pawned goods.

“…we hesitate to, merely on the basis of Section 176 hold that a pawnee can recover from the pawnor anything beyond the value of the goods which the pawnor has pledged, unless the pawnor has separately from the pledge also made himself liable for the debt.”

Therefore, Bench decided that under Section 176 of the Contract Act, the pawnor, if not otherwise liable for the debt as a borrower or as a guarantor or otherwise, does not merely from the act of making a pledge, become liable to the creditor/pawnee, for anything more than the value of the goods pledged.

Hence, DRAT erred in holding the petitioner as a pawnor become liable for the entire debt for which pledge was made even without being a borrower and even in the absence of having promised so.

In view of the above discussion, a petition was disposed of. [Ajoy Khanderia v. Barclays Bank, 2021 SCC OnLine Del 3740, decided on 20-07-2021]


Advocates before the Court:

For the Petitioner:

Mr Rajeeve Mehra, Sr. Adv. with Mr Kanishk Ahuja and Ms Neha Bhatia, Advs

For the Respondent:

Mr R.P. Aggarwal and Ms Manisha Agrawal, Advs.


Additional Read:

Section 176 – Pawnee’s right where pawnor makes default. – If the pawnor makes default in payment of the debt, or performance, at the stipulated time of the promise, in respect of which the goods were pledged, the pawnee may bring a suit against the pawnor upon the debt or promise, and retain the goods pledged as a collateral security; or he may sell the thing pledged, on giving the pawnor reasonable notice of the sale.

If the proceeds of such sale are less than the amount due in respect of the debt or promise, the pawnor is still liable to pay the balance. If the proceeds of the sale are greater than the amount so due, the pawnee shall pay over the surplus to the pawnor.”