financial creditor Archives

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

Most Read Story

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

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

Cases Reported in SCC

2022 SCC Vol. 6 Part 1

2022 SCC Vol. 6 Part 2

2022 SCC Vol. 6 Part 3

2022 SCC Vol. 6 Part 4

2022 SCC Vol. 6 Part 5

Know Thy Judges

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

Justice Krishna Murari

Justice M.M. Sundresh

Case Briefs Tribunals/Commissions/Regulatory Bodies

NCLAT Mumbai |Interest on Delayed Payments is a part of Operational Debt under S. 3(11) of IBC

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.

Case Briefs Tribunals/Commissions/Regulatory Bodies

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

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

Background of the case

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

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

Analysis and decision

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

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

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

Advocates who appeared in this case :

Pulkit Deora, Advocate, for the Appellant;

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

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

Case Briefs Tribunals/Commissions/Regulatory Bodies

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

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

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

The issue to be decided on

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

Analysis and decision

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

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

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

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

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

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

Advocates who appeared in this case :

Shri. Amir Bavani, Advocate, for the Petitioner;

Shri. Varun Ambati, Advocate, for the Respondent;

Resolution Professional in person, for Resolution Professional.

Case Briefs Supreme Court

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

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

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

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

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

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

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

Facts of the case

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

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

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

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

Ruling

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

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

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

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

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

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

*Judgment by: Justice Indira Banerjee

Counsels

For Financial Creditor: Senior Advocate Dhruv Mehta

For Appellant: Senior Advocate Jaideep Gupta

Case Briefs Tribunals/Commissions/Regulatory Bodies

Should Resolution Professional include delayed claims of homebuyers under memorandum of information? NCLAT decides

National Company Appellate Tribunal, New Delhi: The Coram of Ashok Bhushan, J (Chairperson), Shreesha Merla (Technical member), and Naresh Salecha (Technical member) has held that regardless of the delay made in filing the claims by homebuyers, a resolution professional should include the corporate debtor’s liabilities as mentioned in the Memorandum of Information(MoI).

Facts of the case and issue raised

An appeal was filed against the Order passed by the Adjudicating Authority (NCLT, New Delhi).

The observation of the Adjudicating Authority was that the claims of the homebuyers have been filed after a gap of eight months from the last date of the submission of the claim and therefore the claims cannot be admitted. Further, it was stated that the Committee of Creditors (CoC) had already approved the resolution plan.

The following issues were raised-

Whether the Resolution Professional was obliged to include the details of Homebuyers as reflected in the records of the Corporate Debtor in the Information Memorandum, even
though they have not filed their claim before the Resolution Professional within time?
Whether Resolution Applicant ought to have also dealt with Resolution Plan regarding Homebuyers, whose names and claims are reflected in the record of the Corporate Debtor, although they have not filed any claim?

Submissions of the counsel

Appellant’s Counsel submitted that even though they could not file their claims within the time prescribed, details of their allotment and payments made by them already existed in the records of the Corporate Debtor. It was further submitted that it was the duty of the Resolution Professional to inform the Appellants to file their claims and in case the financial creditors were not able to do so the Resolution Professional could have included their claims in the Information Memorandum prepared under Regulation 36 of Corporate Insolvency Resolution Process (CIRP) Regulations as liabilities to Corporate Debtor.

Respondent’s Counsel submitted that Appellants did not file their claims within the time and filing of their claims was also beyond 90 days as provided by Section 12 of the Insolvency and Bankruptcy Code, 2016 (IBC) therefore no error was committed by Resolution Professional by not including the names of the Appellants in the ‘list of creditors’.

Analysis and decision

Firstly, the Coram stated that when the allotment letters are issued to the Homebuyers against the payment made, the real estate company is under the obligation to provide possession of the houses along with other attached liabilities.

Further, the Coram opinioned that the liability towards Homebuyers who had not filed their claim exists and are required to be included in the Information Memorandum. Non- consideration of such claims in the information memorandum can lead to inequitable and unfair resolutions.

Therefore, the Coram directed the resolution professional to submit the details of homebuyers, which are mentioned in the records of the corporate debtor including their claims, to the resolution applicant, based on which the resolution applicant shall prepare an addendum to the resolution plan, which may be placed before the CoC for consideration.

[Puneet Kaur v. K.V. Developers (P) Ltd., 2022 SCC OnLine NCLAT 245, dated- 01-06-2022]

Advocates before the tribunal

For Appellant(s): Mr. Mahesh Kumar and Ms. Simran Soni, Advocates.
For Respondent: Mr. Abhinav Vasisht, Sr. Advocate with Mr. Rakesh Kumar Bajaj and Mr.Harish Taneja, Advocates, Mr. Nitin Kumar and Mr. Gagan Gulati, Advocate.
Mr. Sumesh Dhawan and Ms. Vatsala Kak, Advocates.

Case Briefs Tribunals/Commissions/Regulatory Bodies

Can post-dated cheque issued for repayment of principal amount be taken as unqualified admission of debt? NCLT Allahabad decides

National Company Law Tribunal, Allahabad (NCLT): The bench of Rajasekhar V.K., Judicial Member and Virendra Kumar Gupta, Technical Member decided that for the purpose of repayment of principal amount, issuance of post-dated cheques by corporate debtor cannot be taken as unqualified admission of debt because the presumptions drawn under Sections 118 and 139 of the Negotiable Instruments Act, 1881 (NI Act), are rebuttable presumptions.

Factual Background

An application was filed by financial creditors, Maya Goel and N. C. Goel seeking to initiate the Corporate Insolvency Resolution Process (CIRP) by invoking the provisions of Section 7 Insolvency and Bankruptcy Code, 2016 (IBC) against corporate debtor, Piyush Infrastructure India Pvt. Ltd. for a default of repayment of Rs 12,00,000/- (excluding interest).

The financial creditor submitted that they had given an amount of loan of Rs 12, 00,000/- (in total) to the respondent between 2011- 16 with payable interest @18% p.a. The interest paid by the respondents till 04.06.2016 was Rs 18000/- and post-dated cheques were also given for repayment of principal amount starting from 15.01.2018.

The financial debtor, on the other hand, submitted that no interests were being paid and the transactions made during 2012-14 are default in nature. Therefore, it was claimed that the present application was barred by limitation. Further it was being submitted that since no interest was payable, the said transaction could not be considered as being in the nature of a financial debt within the meaning of section 5(8) of IBC.

In the rejoinder the financial creditor submitted that they preferred an application under Section 138 of NI Act which is pending for adjudication before the appropriate legal authority. In respect of limitation, the application was maintainable as it is being claimed that the cheques were given from January 2018 till December 2018 which were dishonoured.

Analysis and Decision

Firstly, the Bench noted that the question of limitation cannot be addressed as the absence of documentation cannot help in establishing the date of default. The date of default can only be calculated when the tenure of the loan is established, or when there is a demand for repayment. Hence the same cannot be determined. The Bench stated that

“The time value of money is an important factor to be considered in order to establish whether this is a financial debt.”

Further, it was observed that it is not possible to establish the tenure for which the loan was granted, and whether there was any notice demanding payment of the loan in question. As regards the interest, except for two letters of corporate debtor, no other evidence showing receipt of such interest was brought on record. Therefore, the claims made regarding receipt of interest remained unsubstantiated.

Holding that the post-dated cheques issued by the corporate debtor for repayment of principal amount cannot be taken to be unqualified admission of debt, the bench explained that,

“In summary jurisdiction, without adequate documentation, it is difficult to establish the purpose for which the money was lent and accepted. It is also not possible to establish whether there was any interest required to be paid. The time value of money is an important factor to be considered in order to establish whether this is a financial debt.”

The bench was hence of the opinion that ex facie, the case at hand appeared to be a petition filed for recovery of money and not for resolution of the corporate debtor. It observed that,

“The Insolvency & Bankruptcy Code, 2016, should not be allowed to be used as an easy way of recovery of money.”

[N.C. Goel & Maya Goel v. Piyush Infrastructure India Pvt. Ltd.; 2022 SCC OnLine NCLT 159; decided on 13-06-2022]

Counsels

For Financial Creditor- Advocates Atul Kumar Singh and Sahil Garg

For Financial Debtor – Advocate Sanchit Garga,

Akaant Mittal Experts Corner

Whether a Decree or an Arbitral Award or a Settlement Deed can form the Basis of a Financial or Operational Debt under IB Code – Part II

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:

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:

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

* * *

… 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.

Op Eds OP. ED.

Does Unsecured Loan with No Returns have the Effect of Time Value of Money and be Covered under the Commercial Borrowing under the IBC Code?

Recently, the Supreme Court of India in Orator Mktg. (P) Ltd. v. Samtex Desinz (P) Ltd.[1], held that disbursement of loan without having any assured rate of interest in return, will be covered within the definition of a financial debt under Section 5(8) of the Insolvency and Bankruptcy Code, 20162 (IBC Code) and the lender would be accredited at par with the status of financial creditor for initiating insolvency proceedings against the borrower the corporate debtor.

By interpreting Section 5(8) of the IBC Code, the view taken by the Supreme Court, is that the definition of financial debt means a debt along with interest, if any, which is disbursed against the consideration for the time value of money. That the return of interest is not sine qua non under Section 5(8) of the IBC Code for initiating the insolvency proceedings under Section 73 of the IBC Code, by the financial creditor against the corporate debtor in the event of default. That if any transaction does not contemplate assured rate of interest in return and not explicitly covered under clauses (a) to (e) of Section 5(8) of the IBC Code, the Court may refer to sub-clause (f) of Section 5(8) of the IBC Code, which means that amounts that are “raised” under “transactions” not covered by any of the other clauses of Section 5(8) of the IBC Code, would amount to a financial debt if they had the commercial effect of borrowing.

That certainly the Supreme Court rightly interpreted that the definition of financial debt means a debt along with the interest, if any, disbursed against the consideration of the time value of money. In a situation where no interest is payable on the loan, only the outstanding amount would qualify as a financial debt, by seeking reference under clause (f) of Section 5(8) of the IBC Code, in terms whereof “financial debt” includes any amount raised under any other transaction, having the commercial effect of borrowing.

However, the judgment of the Supreme Court, raises a question to the effect that if any transaction has no rate of return both in form of profit or discount, does that “transaction” still have the effect of “time value of money” or be covered under the “commercial effect of borrowing”?

As an example, where the advancement of a loan, without any assured rate of interest in return of profit or discount in any manner or form, would still qualify as a financial debt, having an effect of time value of money and be covered under the phrase “commercial effect of borrowing” under clause (f) of Section 5(8) of the IBC Code. This is the question that remained unanswered, which the author seeks to address upon in the present article.

Time value of money and commercial effect of borrowing

That there is no statutory definition of the terms “time value of money” or “commercial effect of borrowing” in the Code. The understanding of the above two terms, has been propounded by judicial precedents, that have been relied upon, to decipher the meaning of the said terms. In Nikhil Mehta & Sons (Huf) v. AMR Infrastructures Ltd.4, amounts raised by developers under assured return schemes, for monthly assured returns to the buyer, were held to have the “commercial effect of borrowing”, as it entails the element of profit in the nature of interest, which the buyer received for the value of money paid to the builder.

Though the current definition of “financial debt” under Section 5(8) of the IBC Code uses the word “includes”, the definition of financial debt is not exhaustive in nature. The phrase “disbursed against the consideration for the time value of money” has been the subject of interpretation only in a handful of cases under the Code. The Report of the Insolvency Law Committee dated 26-3-20185 has discussed the interpretation of the phrase “time value of money” which means compensation, or the price paid for the length of time for which the money has been disbursed. This may be in the form of interest paid on the money or factoring of a discount in the payment.

That in Pioneer Urban Land and Infrastructure Ltd. v. Union of India,6 Justice Nariman, while interpreting the concept of time value of money in Section 5(8) of the IBC Code, as applicable on the real estate builder stated that,

…the money that is disbursed by the allottee to the real estate developer, are utilised by them and they are legally obligated to give money’s equivalent back to the allottee, having used it in the construction of the project, and being at a discounted value so far as the allottee is concerned (in the sense of the allottee having to pay less by way of instalments than he would if he were to pay for the ultimate price of the flat/apartment.

Further Justice Nariman, referred to Collins English Dictionary & Thesaurus (2nd edn., 2000) for the meaning of the expression “borrow” and the meaning of the expression “commercial”.

… borrow—vb 1. to obtain or receive (something, such as money) on loan for temporary use, intending to give it, or something equivalent back to the lender. 2. to adopt (ideas, words, etc.) from another source; appropriate. 3. Not standard. to lend. 4. (intr) Golf. To put the ball uphill of the direct path to the hole: make sure you borrow enough.

* * *

commercial. —adj. 1. of or engaged in commerce. 2. sponsored or paid for by an advertiser: commercial television. 3. having profit as the main aim: commercial music. 4. (of chemicals, etc.) unrefined and produced in bulk for use in industry. 5. a commercially sponsored advertisement on radio or television.

That relying upon the aforesaid definition, the Court further stated that:

“Commercial would generally involve transactions having profit as their main aim.”

That in Shailesh Sangani v. Joel Cardoso7, the shareholder of the company granted an unsecured loan, without any interest in return to the company. On default, the shareholder, initiated insolvency proceedings against the company under Section 7 of IBC Code. The company took a defence, that the transaction does not have an effect of commercial borrowing to qualify as financial debt under clause (f) of Section 5(8) of the IBC Code. The NCLAT held,

… that money advanced by a promoter, director or a shareholder of the corporate debtor as a stakeholder to improve financial health of the company and boost its economic prospects, would have the commercial effect of borrowing on the part of corporate debtor notwithstanding the fact that no provision is made for interest thereon. Enhancement of assets, increase in production and the growth in profits, share value or equity ensures to the benefit of such stakeholders and that is the time value of the money constituting the consideration for disbursement of such amount raised as debt with obligation on the part of company to discharge the same.

Similarly, in Kolla Koteswara Rao v. S.K. Srihari Raju,8 the question arouse was whether parties which had agreed to one-time settlement can claim that there exists no element of profit and the transaction will fall out the contour of clause (f) of Section 5(8) of the Code. The NCLAT held that,

As regarding the argument of the learned appellant counsel that there was no “profit” involved, it is only because of the one-time settlement entered into between the lender bank and the “corporate debtor”, that the “corporate debtor” had benefited in terms of waiver of interest, payment of a lesser amount of Rs 11.70 crores as against the ledger outstanding amount of Rs 16.72 crores and therefore it has to be safely construed that the “corporate debtor” has benefited/profited from the said transaction.

In cases, where the promoters of the company give interest free loans to the company, it certainly exists the element of foreseeable profit to be secured at a later stage, by providing financial stability to the company, means to expand the company business, etc. Though, at the first glance it may look that it is an unsecured loan without any interest, but it certainly carries a motive of making profit in future, which relates to the concept of time value of money and effect of commercial borrowing.

That the disbursement of money by the lender to the borrower, must have an element of profit or factor of discount in return, to have the effect of time value of money and commercial borrowing, to qualify as a financial debt under Section 5(8) of the IBC Code. Certainly, the intent of the legislature is evidently clear when they use the terms like “time value of money and commercial effect of borrowing” which impliedly shows the nexus in between the transaction and the motive behind it for making profit or factoring of discount, by more than one form and manner, through that transaction.

IBC is not intended to be substituted to a recovery forum

That the objective of the Code is to introduce a unified legal regime for effective and timely resolution of the insolvency and bankruptcy of a corporate entity, to attain maximisation of value of assets of the company, to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders. That the intent of the Code, is to safeguard the interest of the company and its creditors, by providing maximum realisation of assets to the creditors of company, while the company will remain a going concern. That the primary focus of the Code, is to ensure revival and continuation of the corporate debtors, by bringing it back on feet, and not being the mere recovery legislation for creditors.

That the IBC Code is bifurcated into two forms of creditors, firstly financial creditors and secondly operational creditors. In the case of financial creditors, the financial debt is disbursed against the consideration for the time value for money. In the case of operational creditors, where the operational debt would include a claim in respect of the provision of goods or services, including employment, or a debt in respect of payment of dues arising under any law and payable to the Government or any local authority.

That the difference between the financial creditors and operational creditors is that the former will firstly attempt to preserve the corporate debtor as a going concern, while ensuring maximum recovery for all creditors as being the objective of the Code, while the later concerns are limited to the recovery of their outstanding dues against the supply of goods and services to the corporate debtor.

That the element of return of profit in the transaction, certainly accedes to the interest of the financial creditor, as they are in the business of money lending, banks and financial institutions, whose primary focus is reviving and restructure the liabilities of the corporate debtor, so that it can continue to remain a going concern. On the other hand, operational creditors, who are limitedly concerned for the recovery of their outstanding dues against the supply of goods and services to corporate debtor.

That if an amount is disturbed as a loan, not against the time value of money, having no effect of commercial borrowing, then the financial creditor rather than having any interest in the revival of corporate debtor, will only seek to recover the said loan amount by pushing the otherwise health company in the shackles of insolvency proceedings, which is not the intent of the IBC Code. That the primary focus of the IBC Code is to ensure revival and continuation of the corporate debtor by protecting the corporate debtor from its own management and from a corporate death by liquidation. The IBC Code is a beneficial legislation which puts the corporate debtor back on its feet, not intended to be substituted by a recovery forum.

Conclusion

Under the IBC Code, the unsecured loan without any interest, must have an effect of time value of money and commercial effect of borrowing, to qualify as the financial debt under clause (f) of Section 5(8) of the IBC Code. For transaction to qualify as a financial debt under the IBC Code, it must have the element of profit or factoring discount, to give it an effect of time value of money and commercial effect of borrowing. Though, the profit or discount may not always materialise in monetary benefits, but it should entail benefit of such a nature, that the money advanced against loans, has a potential earning capacity and furthers the intent of the financial creditors seeking profits.

† Associate, PSL Advocates and Solicitors.

†† Partner, PSL Advocates and Solicitors.

[1] 2021 SCC OnLine SC 513.

2 <http://www.scconline.com/DocumentLink/w93pA9Ln>.

3 <http://www.scconline.com/DocumentLink/K60PW5A6>.

4 2017 SCC OnLine NCLT 219.

5 <http://www.scconline.com/DocumentLink/sYKPTj8e>.

6 (2019) 8 SCC 416, p. 513-514.

7 2019 SCC OnLine NCLAT 52.

8 2021 SCC OnLine NCLAT 110.

Case Briefs Tribunals/Commissions/Regulatory Bodies

NCLAT | On not finding flaws in the NCLT order, abstains from interfering- Petitioner not being authorised under S.7 IBC, lacks locus standi

National Company Law Appellate Tribunal (NCLAT)- The Coram of Justice Jarat Kumar Jain (Judicial Member), Ashok Kumar Mishra (Technical Member), and Alok Srivastava (Technical Member) while dismissing an appeal summarily without notice to the Respondent was of the opinion, that there was no need to interfere with the impugned order since the adjudicating authority had rightly held that the petition was not maintainable.

In the pertinent matter, it was alleged that the adjudication authority had erroneously dismissed the Petition as not maintainable. Appeal was filed by the Shareholder of the Financial Creditor Company, and it was submitted that the petitioner can initiate action on behalf of the Company if the same is in the interest of the Company and the Board is not pursuing the same, as per the doctrine of derivative action. The adjudicating authority was of the opinion that such person does not come within the definition of aggrieved person under Section 61 of the IBC. Therefore, the Appeal was not maintainable. The adjudicating authority held that no Board Resolution was filed in regard to advance loan to Corporate Debtor Company as required under Section 186 of the Companies Act, 2013.

The Tribunal held that

“we have considered the submissions, undisputedly there is no board resolution authorising the appellant to file the petition under Section 7 of the IBC and filed this Appeal as there is deadlock in the Financial Creditors Company”.

The Court further held that,

“The facts of the cited cases are quite different and in theses citations it is held that a shareholder has no locus standi to maintain the suit, affirmed one of the exceptions to the aforesaid rule that where a shareholder can show that the wrong doers are in control of the defendant company and hence the company would be unable to maintain the action. So far as the Petition under Section 7 of the IBC is concerned, there is a specific notification by the Central Government under sub-section (1) of Section 7 of the IBC that on behalf of the Financial Creditor a guardian, an executor or administrator of an estate of a financial creditor, a trustee and a person duly authorized by the board of directors of a company may file Application for initiation of CIRP against the Corporate Debtor. In such situation, doctrine of derivative action cannot be applied in Petition under Section 7 of the IBC.”

[M Sai Eswara Swamy v. Siti Vision Digital Media Pvt. Ltd., Company Appeal (AT) (Ins) No. 706 of 2021, decided on 09-09-2021]

Counsel for the Parties:

For Appellant:

Mr. P Nagesh, Sr. Adv. with Mr. Harshal Kumar, Mr. Shivam Wadhwa

For Respondent:

Mr. Arvind Nayar, Sr. Adv. with Mr. Shivam Singh, Mr. Abhinav Singh, Advocates

Agatha Shukla, Editorial Assistant has reported this brief.

Case Briefs Tribunals/Commissions/Regulatory Bodies

Whether S. 7 IBC petition is maintainable where financial creditor fails to enclose financial contract/documents along with the petition: NCLT examines

National Company Law Tribunal (NCLT): Coram of Judicial Member Ashok Kumar Borah and Technical Member Shyam Babu Gautam has admitted a petition under Section 7 of the Insolvency and Bankruptcy Code, 2016 by Bank of India (Financial Creditor) seeking to initiate Corporate Insolvency Resolution Process against VVVF (India) Limited (Corporate Debtor).

Factual Background

Applicant had sanctioned/revised/reviewed/continued various fund based and non-fund based working capital facilities to VVF (India) Limited for a sum of 283.65 Crore (Loan Amount).

In the petition, it was mentioned that the amount in default along with interest was INR 293, 42, 50, 526.79 (Financial Debt), which was due and payable by the Corporate Debtor in favour of the applicant.

Due to various defaults by Corporate Debtor, its account was classified as a Non-Performing Asset by the applicant.

As per the RBI guidelines, if a company failed to repay the loan liability sanctioned to the borrower under the corrective action plan, then the asset classification of the borrower will be considered from the cut-off date considered for the implementation of the corrective action plan (CAP).

In this account, under CAP, long term working capital loan was sanctioned in 2016 and due to payment default the Statutory Central Auditors of the Applicant classified the Corporate Debtor as an NPA from the implementation date of the CAP.

Further, corporate debtor issued a revival letter addressed to the applicant, confirming and admitting the existence of the various facilities and security documents availed by and executed by the Corporate Debtor and its Promoters.

Even the liability to the Financial Creditor was expressly admitted.

Financial Creditor and the Corporate Debtor had executed 14 agreements/contracts reflecting all amendments and waivers, which were forming part of the Financial Creditor’s pleadings.

Since the financial debt amount remained unpaid, the applicant filed the present petition.

Analysis, Law and Decision

The Tribunal opined that the petition was maintainable by law and the defenses raised by the Corporate Debtor were nothing but an attempt to delay the commencement of the Corporate Insolvency Resolution Process of the Corporate Debtor.

Bench while analyzing the facts of the case, referred to the Supreme Court decision in Swiss Ribbons (P) Ltd. v. Union of India, WP (C) 99 of 2018, wherein the Constitutional validity of IBC was upheld, the position was very clear that unlike Section 9, there was no scope of raising a ‘dispute’ as far as Section 7 petition was concerned. As soon as a ‘debt’ and ‘default’ is proved, the adjudicating authority is bound to admit the petition.

Contention with respect to not attaching the documents as raised by the Corporate Debtor was dealt by the Supreme Court in Dena Bank (now Bank of Baroda) v. C. Shivakumar Reddy, Civil Appeal No. 1650 of 2020, where the same issue was raised and covered.

In Tribunal’s opinion, no dispute with respect to Corporate Debtor owing money to the Financial Creditor existed.

Further, the Coram added that, the Financial Creditor’s application was complete in all respects as required by law. It clearly showed that the Corporate Debtor was in default of a debt due and payable and the default was in excess of the minimum amount stipulated under Section 4(1) of IBC.

Hence, debt and default stood established.

Therefore, Tribunal ordered as follows:

(a) Petition filed by the Bank of India, Financial Creditor, under Section 7 of the IBC read with Rule 4(1) of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 for initiating Corporate Insolvency Resolution Process (CIRP) against VVF (India) Limited the Corporate Debtor, is admitted.

(b) There shall be a moratorium under Section 14 of the IBC, in regard to the following:

(i) The institution of suits or continuation of pending suits or proceedings against the Corporate Debtor including execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority;

(ii) Transferring, encumbering, alienating or disposing of by the Corporate Debtor any of its assets or any legal right or beneficial interest therein;

(iii) Any action to foreclose, recover or enforce any security interest created by the Corporate Debtor in respect of its property including any action under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002;

(iv) The recovery of any property by an owner or lessor where such property is occupied by or in possession of the Corporate Debtor.

(i) The supply of essential goods or services to the corporate debtor, if continuing, shall not be terminated or suspended or interrupted during the moratorium period;

(ii) That the provisions of sub-section(1) of section 14 of the IBC shall not apply to such transactions as may be notified by the Centre in consultation with any sectoral regulator;

(d) Moratorium shall have effect from the date of this order till the completion of the CIRP or until this Adjudicating Authority approves the resolution plan under Section 31 (1) of the IBC or passes an order for liquidation of Corporate Debtor under Section 33 of the IBC, as the case may be.

(e) Public announcement of the CIRP shall be made immediately as specified under section 13 of the IBC read with regulation 6 of the Insolvency & Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016.

(f) Mr Avil Menezes appointed as Interim Resolution Professional of the Corporate Debtor to carry out the functions as per the IBC.

(g) During the CIRP Period, the management of the Corporate Debtor shall vest in the IRP or, as the case may be, the RP in terms of section 17 of the IBC. The officers and managers of the Corporate Debtor shall provide all documents in their possession and furnish every information in their knowledge to the IRP within a period of one week from the date of receipt of this Order, in default of which coercive steps will follow.

(h) Financial Creditor shall deposit a sum of Rs 2,00,000 with the IRP to meet the expenses arising out of issuing public notice and inviting claims. These expenses are subject to approval by the Committee of Creditors (CoC).

[Bank of India v. VVVF (India) Ltd., 2021 SCC OnLine NCLT 452, decided on 23-9-2021]

Appearances:

For the Financial Creditor: Nausher Kohli, Nirav Shah and Viraj Gami i/b DSK Legal

For the Corporate Debtor: Mustsafa Doctor, Counsel i/b M/S Dhruve Liladhar & Co.

Case Briefs Tribunals/Commissions/Regulatory Bodies

NCLAT | Intention of Legislature, deliberation of the Adjudicating Authority | Only permits Suspended Management of the CD to submit viable RP-Affirms

National Company Law Appellate Tribunal (NCLAT): The Coram of Justice Jarat Kumar Jain, Judicial Member and Ashok Kumar Mishra, Technical Member, dismissed an appeal on no finding any infirmity in the impugned order. However, requested the adjudicating authority to consider the application before approving any Resolution Plan.

In the instant matter an impugned order of the National Company Law Tribunal, Guwahati was challenged on the ground that the Resolution Plan was accepted by 91.84% of the members of the ‘Committee of Creditors’ (CoC) but the approval for the same is pending before the Adjudicating Authority.

The Adjudicating Authority was of the opinion,

“…we are of the considered view that the Suspended Management of the Corporate Debtor (CD) be given a chance to submit Resolution Plan as prayed for. And go by the set precedents the pleadings of the Suspended Management to give him a chance for submitting a Resolution Plan, after the final judgment, being as an MSME Unit is reasonable”.

The Adjudicating Authority had also raised an issue of how the ‘Financial Creditor’ claimed 43 times of the amount of loan disbursed 21 years back when the Financial Creditor was under RBI Regulations, and the issue that the guarantee was invoked by the original lenders – IBBI for an amount of Rs.5,42,94,868, which was 24 times of the claimed amount in 18 years.

While referring to the judgments cited by the Appellants, the Tribunal stated that the applicability of the same was under dark as the Adjudicating Authority had only permitted for giving an opportunity to MSME to submit a concrete, composite, feasible and a viable resolution plan, and no other one was allowed to submit any plan other than the Resolution plan already submitted by the Resolution Applicant.

The Tribunal further noted,

“…there is no harm in giving an opportunity to the MSME in accordance with the provisions of the Code for keeping the promotion of entrepreneurship alive. The Adjudicating Authority has only provided an opportunity to the MSME and has given the liberty to the CoC to negotiate with existing Resolution Applicant and MSME unit also and accept the one which is commercially viable and technically feasible”.

On not finding any infirmity in the order, the Appellate Tribunal dismissed the appeal[PLBB Products Pvt. Ltd. v. Piyush Periwal, Company Appeal (AT) (Insolvency) No. 160 of 2021, decided on 07-09-2021]

Agatha Shukla, Editorial Assistant has reported this brief.

For the Appellant :

Mr Abhijeet Sinha, Mr Lzafeer Ahmad BF and Mr Aditya Shukla, Advocates.

For the Respondents :

Mr Jishnu Saha, Sr. Advocate with Mr Abhijit Sarkar, Advocates for Respondent No. 1.

Mr Sidhartha Barua and Mr Praful Jindal, Advocates for Respondent No. 2.

Mr Anand Verma and Mr Abhishek Prasad, Advocates for Respondent No. 3.

Case Briefs Supreme Court

Not just the petitioning creditor but ‘any’ creditor can initiate transfer of winding up proceedings from a Company Court to NCLT; holds SC

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

Scheme of Section 434

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

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

(b) Other types of winding up proceedings.

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

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

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

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

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

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

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

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

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

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

Who can be a “party to the proceedings”?

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

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

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

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

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

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

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

Hence,

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

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

*V. Ramasubramanian has penned this judgment

Advocates who appeared in the matter

For appellant: Senior Advocate Huzefa Ahmadi,

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

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

Legislation Updates Rules & Regulations

Insolvency and Bankruptcy Board of India amends Regulations relating to corporate insolvency proceedings

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

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

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

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

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

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

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

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

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

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

Insolvency and Bankruptcy Board of India

[Press Release dt. 13-11-2020]

Case Briefs Supreme Court

Whether an ex-employee of a financial creditor is eligible to be appointed as Resolution Professional? Read what SC says

Supreme Court: The 3-Judge Bench of Arun Mishra, B.R. Gavai and Krishna Murari, JJ., set aside the NCLAT’s Order with regard to the appointment of Resolution Professional.

Question for Consideration

Whether an ex-employee of the ‘Financial Creditor’ having rendered services in the past, should not be permitted to act as ‘Interim Resolution Professional’ at the instance of such ‘Financial Creditor’, regard being had to the nature of duties to be performed by the ‘Interim Resolution Professional’ and the ‘Resolution Professional’?

NCLT’s position

State Bank of India (Financial Creditor) had filed an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 with regard to initiation of Corporate Insolvency Resolution Process before the National Company Law Tribunal, Delhi.

NCLT on noting the objection regarding the proposed ‘Interim Resolution Professional’ — Shailesh Verma directed the Financial Creditor to perform it’s statutorily mandatory obligation by substituting the name of the ‘Resolution Professional’ to act as an ‘Interim Resolution Professional’ in place of Shailesh Verma as it was of the view that Shailesh Verma having worked with the State Bank of India for 39 years before his retirement in 2016, there was an apprehension of bias and was unlikely to act fairly and could not be expected to act as an Independent Umpire.

NCLAT’s position

Aggrieved with the above position, Financial Creditor preferred the appeal before NCLAT on the ground that the proposed ‘Interim Resolution Professional’ Shailesh Verma fulfils the requirement for appointment as ‘Interim Resolution Professional’/ ‘Resolution Professional’ under the ‘I&B Code’ and admittedly bears no disqualification.

NCLAT opined that the apprehension of bias expressed by the ‘Corporate Debtor’ qua the appointment of Shailesh Verma as proposed ‘Interim Resolution Professional’ at the instance of the Appellant — ‘Financial Creditor’ cannot be dismissed offhand and the Adjudicating Authority was perfectly justified in seeking his substitution.

——————————————————————————-

Supreme Court’s position

In the above background, Bench observed at the outset that, NCLAT’s approach was not correct that merely Resolution Professional who remained in the service of SBI and is getting pension was disentitled to be Resolution Professional.

Solicitor General, Tushar Mehta as well as Senior Counsel, Krishnan Venugopal agreed for the appointment of new Resolution Professional by NCLT.

Hence, the Bench held that new Resolution Professional be appointed by the NCLT in accordance with the provisions of the Insolvency and Bankruptcy Code, 2016.

While concluding the order, Court stated that the change of Resolution Professional shall not reflect adversely upon the integrity of Resolution Professional concerned, who has been replaced.

Since the impugned order does not reflect the correct approach, the same shall not be treated as a precedent.[State Bank of India v. Metenere, 2020 SCC OnLine SC 837, decided on 19-08-2020]

Also Read:

[SC ALERT] NCLAT’s decoder on appointment of a person as Resolution Professional: Will an ex-employee of Financial Creditor be eligible for appointment? Read on

Case Briefs Tribunals/Commissions/Regulatory Bodies

[SC ALERT] NCLAT’s decoder on appointment of a person as Resolution Professional: Will an ex-employee of Financial Creditor be eligible for appointment? Read on

SUPREME COURT ALERT

This NCLAT Order has been set aside by the Supreme Court, the detailed report of which can be found at the end of this piece.

National Company Law Appellate Tribunal (NCLAT): The Coram of Justice Bansi Lal Bhat (Judicial Member), V.P. Singh and Shreesha Merla, Technical Members, addressed a grievance with regard to the appointment of Resolution Professional.

Independent Umpire?

Ex-employee of Financial Creditor appointed as Resolution Professional | NCLT’s position

No disqualification

Aggrieved with the above position, Financial Creditor preferred the instant appeal on the ground that the proposed ‘Interim Resolution Professional’ Shailesh Verma fulfils the requirement for appointment as ‘Interim Resolution Professional’/ ‘Resolution Professional’ under the ‘I&B Code’ and admittedly bears no disqualification.

Question for Consideration

Whether an ex-employee of the ‘Financial Creditor’ having rendered services in the past, should not be permitted to act as ‘Interim Resolution Professional’ at the instance of such ‘Financial Creditor’, regard being had to the nature of duties to be performed by the ‘Interim Resolution Professional’ and the ‘Resolution Professional’?

Analysis

Regulation 3(1) of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 provides that an Insolvency Professional shall be eligible for appointment as a ‘Resolution Professional’ for the ‘Corporate Insolvency Resolution Process’ of a ‘Corporate Debtor’ if he or his partners and directors of the Insolvency Professional Entity are independent of the ‘Corporate Debtor’.

In view of the above-stated regulation, Mr Shailesh Verma came under the ambit of a qualified Insolvency Professional and neither he nor any of his associates were alleged to be connected with the ‘Corporate Debtor’ in a manner rendering him ineligible to act as a ‘Resolution Professional’.

Tribunal referred to the Supreme Court’s decision in Ranjit Thakur v. Union of India, (1987) 4 SCC 611, wherein following was held:

“17. As to the tests of the likelihood of bias what is relevant is the reasonableness of the apprehension in that regard in the mind of the party. The proper approach for the judge is not to look at his own mind and ask himself, however, honestly, “Am I Biased?”; but to look at the mind of the party before him.”

Tribunal’s Opinion

Coram on considering the given set of circumstances opined that the apprehension of bias expressed by the ‘Corporate Debtor’ qua the appointment of Shailesh Verma as proposed ‘Interim Resolution Professional’ at the instance of the Appellant — ‘Financial Creditor’ cannot be dismissed offhand and the Adjudicating Authority was perfectly justified in seeking his substitution.

The said position was notwithstanding the fact that Mr Shailesh Verma was not disqualified or ineligible to act as an ‘Interim Resolution Professional’.

Hence, no legal flaw in the impugned order of NCLT was found. [State Bank of India v. Metenere Ltd., Company Appeal (AT) (Insolvency) No. 76 of 2020, decided on 22-05-2020]

Supreme Court Alert

Supreme Court: The 3-Judge Bench of Arun Mishra, B.R. Gavai and Krishna Murari, JJ., set aside the NCLAT’s Order with regard to the appointment of Resolution Professional.

In the above background, Bench observed at the outset that NCLAT’s approach was not correct that merely Resolution Professional who remained in the service of SBI and is getting pension, was disentitled to be Resolution Professional.

Solicitor General, Tushar Mehta as well as Senior Counsel, Krishnan Venugopal agreed for the appointment of new Resolution Professional by NCLT.

Hence, the Bench held that new Resolution Professional be appointed by the NCLT in accordance with the provisions of the Insolvency and Bankruptcy Code, 2016.

While concluding the order, Court observed that the change of Resolution Professional shall not reflect adversely upon the integrity of Resolution Professional concerned, who has been replaced.

Since the impugned order does not reflect the correct approach, the same shall not be treated as a precedent.[State Bank of India v. Metenere, 2020 SCC OnLine SC 837, decided on 19-08-2020]

Case Briefs Tribunals/Commissions/Regulatory Bodies

NCLAT | Tribunal rejects SBI’s appeal regarding its appointment of an ex-employee as ‘Interim Resolution Professional,’ cites conflict of interest

National Company Appellate Tribunal (NCLAT): Justice Bansi Lal Bhat (Judicial), V.P. Singh (Technical) and Shreesha Merla (Technical) held that an ex-employee of the ‘Financial Creditor’ having rendered services in the past, should not be permitted to act as ‘Interim Resolution Professional’ at the instance of such ‘Financial Creditor’, regard being had to the nature of duties to be performed by the ‘Interim Resolution Professional’ and the ‘Resolution Professional’.

Background of the case:

The appellant- ‘State Bank of India’- is the ‘Financial Creditor’ has filed an appeal against the NCLT’s cognizance of the objection raised by the ‘Corporate Debtor’- ‘Metenere Limited’- regarding the proposed ‘Interim Resolution Professional’- Mr. Shailesh Verma whose employment under SBI for 39 years created an apprehension of bias, since Mr. Shailesh Verma was unlikely to act fairly and could not be expected to act as an Independent Umpire. The question that arose before the court was whether an ex-employee of one of the parties is qualified to act in the position of ‘Interim Resolution Professional’.

Decision

In the current appeal, the tribunal has laid emphasis on the current relationship between IRP and the Financial Creditor, where the former derives a pension from the latter. The Tribunal finds the IRP qualified to be an ‘Interim Resolution Professional’ in his personal capacity but the fact that the Appellant restricted its choice to propose him as IRP shows regard to past loyalty and the long services rendered by him. Further, the filing of instant appeal by ‘Financial Creditor’ shows their dismay at the IRP being asked to be substituted by the impugned order.
The relevant statutory provision which the bench looked into for qualification of the IRP is Regulation 3 (1) of the Insolvency and Bankruptcy Board of India, Company Appeal (AT) (Insolvency) No. 76 of 2020 (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, which reads as under: “(1) An insolvency professional shall be eligible to be appointed as a resolution professional for a corporate insolvency resolution process of a corporate debtor if he, and all partners and directors of the insolvency professional entity of which he is a partner or director, are independent of the corporate debtor.”

The likelihood of bias has been measured via the case of Ranjit Thakur v. Union of India, (1987) 4 SCC 611, in which the Supreme court said: “As to the tests of the likelihood of bias what is relevant is the reasonableness of the apprehension in that regard in the mind of the party. The proper approach for the judge is not to look at his own mind and ask himself, however, honestly, “Am I Biased?”; but to look at the mind of the party before him”. The committee finally upholds the impugned order, by saying the Appellant- ‘Financial Creditor’ should not have been aggrieved of the impugned order as the same did not cause any prejudice to it.

[SBI v. Metenere Ltd., Company Appeal (AT) (Insolvency) No. 76 of 2020, decided on 22-05-2020]

Case Briefs Supreme Court

Lending Banks of Jaypraksah Associates not ‘financial creditors’; SC directs return of mortgaged land to JIL

Supreme Court: The bench of AM Khanwilkar and Dinesh Maheshwari, JJ has restored the NCLT order wherein it was held that the lenders of Jaiprakash Associates Limited (JAL) were not the financial creditors of the corporate debtor Jaypee Infratech Limited (JIL) and that the transactions in question were to defraud the lenders of the corporate debtor JIL. The Court held,

“such lenders of JAL, on the strength of the mortgages in question, may fall in the category of secured creditors, but such mortgages being neither towards any loan, facility or advance to the corporate debtor nor towards protecting any facility or security of the corporate debtor, it cannot be said that the corporate debtor owes them any ‘financial debt’ within the meaning of Section 5(8) of the Code; and hence, such lenders of JAL do not fall in the category of the ‘financial creditors’ of the corporate debtor JIL.”

The Court was hearing the case relating to JAL, a public listed company with more than 5 lakh individual shareholders, which was facing insolvency proceedings under the Insolvency and Bankruptcy Code, 2016. In the year 2003, JAL was awarded the rights for construction of an expressway from Noida to Agra. A concession agreement was entered into with the Yamuna Expressway Industrial Development Authority. Coming on the heels of this project, JIL was set up as a special purpose vehicle. Finance was obtained from a consortium of banks against the partial mortgage of land acquired and a pledge of 51% of the shareholding held by JAL. The banks in question instituted a petition under Section 7 of the Insolvency and Bankruptcy Code, 2016 before the NCLT, seeking initiation of Corporate Insolvency Resolution Process (CIRP) against JIL, while alleging that JIL had committed a default in repayment of its dues to the tune of Rs. 526.11 crore.

NCLT in it’s order held,

“the transactions in question were to defraud the lenders of the corporate debtor JIL, as 858 acres of unencumbered land owned by the corporate debtor to secure the debt of the related party JAL was mortgaged in the midst of the corporate debtor’s immense financial crunch, while continuing with default towards the home buyers and financial creditors and after it had been declared as Non Performing Asset, in utter disregard to fiduciary duties and duty of care to the creditors; and further that the mortgage of land was created without any counter guarantee from the related party and with no other consideration being paid to the corporate debtor.”

While interpreting Section 43 of the Code, the Supreme Court noticed that the transfers in question could be considered outside the purview of sub-section (2) of Section 43 of the Code only if it could be shown that same were made in the ‘ordinary course of business or financial affairs’ of the corporate debtor JIL and the transferees. It, however, further explained that even when furnishing a security may be one of normal business practices, it would become a part of ‘ordinary course of business’ of a particular corporate entity only if it falls in place as part of ‘the undistinguished common flow of business done’; and is not arising out of ‘any special or particular situation’.

“It is difficult to even surmise that the business of JIL, of ensuring execution of the works assigned to its holding company and for execution of housing/building projects, in its ordinary course, had inflated itself to the extent of routinely mortgaging its assets and/or inventories to secure the debts of its holding company. It had also not been the ordinary course of financial affairs of JIL that it would create encumbrances over its properties to secure the debts of its holding company.”

Holding that the NCLAT had not been right in interfering with the well-considered and justified order passed by NCLT, the Supreme Court said,

“the transactions in question are hit by Section 43 of the Code and the Adjudicating Authority, having rightly held so, had been justified in issuing necessary directions in terms of Section 44 of the Code.”

The Court, hence, concluded:

“1) The impugned order dated 01.08.2019 as passed by NCLAT in the batch of appeals is reversed and is set aside.

2) The appeals preferred before NCLAT against the order dated 16.05.2018, as passed by NCLT on the application filed by IRP, are dismissed; and consequently, the order dated 16.05.2018 so passed by NCLT is upheld in regard to the findings that the transactions in question are preferential within 171 the meaning of Section 43 of the Code. The directions by NCLT for avoidance of such transactions are also upheld accordingly.

3) The appeals preferred before NCLAT against the orders passed by NCLT dated 09.05.2018 and 15.05.2018 on the applications filed by the lender banks are also dismissed and the respective orders passed by NCLT are restored with the findings that the applicants are not the financial creditors of the corporate debtor Jaypee Infratech Limited.”

[Anuj Jain v. Axis Bank Ltd., 2020 SCC OnLine SC 237, decided on 26.02.2020]

Case Briefs Tribunals/Commissions/Regulatory Bodies

NCLAT | Dissenting financial creditor cannot be allowed to scramble CIRP process; only the collective decision of Committee of Creditors is enforceable by law

National Company Law Appellate Tribunal (NCLAT): A.I.S. Cheema, J. while deciding the present Company Appeal held that the dissenting Financial Creditor in COC cannot be allowed to scuttle CIRP process otherwise the provision permitting COC to take decisions with regard to subjects stated in Section 28(1) by given majority of 66 percent under Section 28(3) would be rendered nugatory.

In the present matter, the Resolution Professional had filed an MA, under Section 60(5) (c) read with Sections 25(1), 25(2) (c) and 28(1) (a) of the Insolvency and Bankruptcy Code, 2016, before the Adjudicating Authority (National Company Law Tribunal, Division Bench, Chennai) to issue a certification approving Interim Finance and any costs related to it, as it forms part of the insolvency resolution process cost and has to be shared between all the members of the Committee of Creditors, in the proportion of their voting rights.

This application was allowed and the COC members were directed to release the Letter of Comfort.

Against developments as above, EARC filed an appeal claiming in view of the amendment to Section 30(4) of IBC read with Section 52(8) of IBC; Insolvency Resolution Process costs which include interim finance can only be recovered from secured creditors and not from unsecured creditors like Appellant. His appeal further raised ground of not being heard before passing the order thereby violating principles of natural justice.

The learned counsel for Resolution Professional submitted that the RP is responsible to keep the corporate debtor a going concern. It was further submitted that there was an urgency to seek orders of the Adjudicating Authority as the appellant was not ready to release the Letter of Comfort and the default would have led to render the corporate debtor ineligible to participate in the tender for power supply.

The Tribunal opined that the appellant has the right to dissent in a COC meeting, but if the decision is still taken by the majority provided under the statute, all of COC members are duty-bound to abide by the decision.

Reliance was placed on the case of K. Sashidhar v. Indian Overseas Bank, 2019 SCC OnLine SC 257, where it was stated that the commercial wisdom of individual Financial Creditor is non-justiciable.

In view of the above, the appeal was dismissed and no orders as to costs were given; holding that the appellant had not made out a good case that if it was heard, impugned order could have been different. The tribunal found principles of natural justice to be satisfied but could not draw such an interpretation of Sub-Section (4) of Section 30 so as to require only Secured Financial Creditors to contribute towards interim finance and not the Unsecured Financial Creditors. [Edelweiss Asset Reconstruction Company Ltd. v. Sai Regency Power Corpn. (P) Ltd, 2019 SCC OnLine NCLAT 921, decided on 20-12-2019]

Case Briefs Tribunals/Commissions/Regulatory Bodies

NCLAT | Claim to be a ‘financial creditor’ valid when amount disbursed has been made for consideration of time value of money in favour of borrower

National Company Law Appellate Tribunal (NCLAT): A Coram of Sudhansu Jyoti Mukhopadhaya, J. (Chairperson), A.I.S. Cheema, J. (Judicial Member) and Kanthi Narhari (Technical Member) dismissed the appeal of Indiabulls Housing Finance Limited claiming to be a financial creditor of Rudra Buildwell Projects Private Limited.

The appellant, Indiabulls, had sanctioned a loan of Rs 73,23,391 in favor of the borrower, Devender Singh and Sushma Rajput vide loan agreement dated 06-04-2015. In addition a tripartite agreement dated 06-04-2015 was also executed between the appellant, respondent (Corporate Debtor) and the borrower according to which the borrowers informed the appellant about the scheme of arrangement between the borrower and the builder in terms whereof the builder assumed the liability on account of interest payable by the borrower to the IHFL during the period to be referred to as the “Liability Period” in terms of 24 months i.e. till 30-04-2017. The appellant has preferred this appeal challenging the order dated 30-11-2018 passed by the Adjudicating Authority (National Company Law Tribunal), Special Bench, New Delhi rejecting the application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (I&B Code) filed by the appellant.

The learned counsel for the appellant, Sumesh Dhawan, argued that according to the terms of the tripartite agreement, the borrower and the Corporate Debtor are jointly and severally liable for payment of the pre-equated monthly installment interest till the commencement of the equated monthly installment. The learned counsel alleged that the borrowers and the corporate debtor had defaulted in the payment of pre-equated monthly installment interest/ equated monthly installment. The appellant claimed to be a ‘Financial Creditor’ of the respondent.

The Court observed that IHFL, had disbursed the amount for consideration of time value of money in favor of borrower, Davender Singh and not to the builder and hence the Court, referring to the Sections 5 (7) and 5(8) of I&B Code, found that the Adjudicating Authority had rightly held that respondent was not the corporate debtor of the appellant and the application under Section 7 of I&B Code was not maintainable.

In view of the above, the Tribunal dismissed the appeal.[Indiabulls Housing Finance Ltd. v. Rudra Buildwell Projects (P) Ltd., 2019 SCC OnLine NCLAT 200, decided on 14-05-2019]

Top Stories

Most Read Story

More Stories

Cases Reported in SCC

Know Thy Judges

Share this:

Share this:

Share this:

Share this:

Facts of the case

*Judgment by: Justice Indira Banerjee

Share this:

Facts of the case and issue raised

Submissions of the counsel

Share this:

Factual Background

Analysis and Decision

Share this:

Share this:

Time value of money and commercial effect of borrowing

IBC is not intended to be substituted to a recovery forum

Conclusion

Share this:

Share this:

Factual Background

Analysis, Law and Decision

Share this:

Share this:

Share this:

Share this:

Question for Consideration

NCLT’s position

NCLAT’s position

Supreme Court’s position

Also Read:

Share this:

SUPREME COURT ALERT

This NCLAT Order has been set aside by the Supreme Court, the detailed report of which can be found at the end of this piece.

Independent Umpire?

Ex-employee of Financial Creditor appointed as Resolution Professional | NCLT’s position

No disqualification

Question for Consideration

Analysis

Tribunal’s Opinion

Supreme Court Alert

Share this:

Share this:

Share this:

Share this:

Share this:

Popular on scc online blog

MOST COMMENTED