Case BriefsSupreme Court

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]

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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]

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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]

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National Company Law Appellate Tribunal (NCLAT): The Bench of Justice S.J. Mukhopadhaya, Chairperson and Justice Bansi Lal Bhat, Member (Judicial) directed the National Company Law Tribunal (Ahmedabad) to pass appropriate order on application filed by Financial Creditor under Section 7 of the Insolvency and Bankruptcy Code, 2016 without adjourning the matter further.

The present appeal was preferred by Corporate Debtor against an order of NCLT whereby it had adjourned the matter giving time to Financial Creditor for submitting clarifications/removal of defects. Pratik Tripathi, Company Secretary appearing for Corporate Debtor submitted that the matter was pending for one year and NCLT had not passed any order either admitting or rejecting the application filed under Section 7.

The Appellate Tribunal noted that the matter in issue was already settled in Innoventive Industries Ltd. v. ICICI Bank, (2018) 1 SCC 407 which made clear that NCLT is not required to decide mismatch of ‘debt’ and it cannot be a ground reject the claim if the amount due is more than Rs 1 lakh and there is a ‘default’. The Appellate Tribunal did not see any reason as to why NCLT kept adjourning the case which was pending for admission since 2017. It was categorically observed,

“The Insolvency Code provides a specific time frame to complete the process and the Adjudicating Authority should take it seriously and cannot adjourn the matter on one or the other ground…”

In such view of the matter, the appeal was disposed of by directing NCLT decide the pending application on merits on the next date without adjourning the matter. [Dhar Textile Mills Ltd. v. Asset Reconstruction Co. (India) Ltd., 2019 SCC OnLine NCLAT 3, Order dated 07-01-2019]

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National Company Law Appellate Tribunal: The Bench of Justice S.J. Mukhopadhaya, Chairperson and Justice Bansi Lal Bhat, Member (Judicial) disposed of an appeal filed by the workers/employees of Tantia Constructions Ltd. (Corporate Debtor).

The appellants were the workers/employees of the Corporate Debtor. State Bank of India (Financial Creditor) had filed an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 for initiation of the corporate insolvency resolution process. Appellants moved an application for intervention to bring to NCLT’s notice that winding up proceedings had already been initiated against Corporate Debtor under Sections 433(e) and 434 of the Companies Act and therefore application under Section 7 was not maintainable. NCLT held that appellants had no locus standi. This order was challenged in the present appeal.

The Appellate Tribunal agreed with NCLT that at the stage of filing of an application under Section 7, no person has a right to claim for hearing except the Corporate Debtor.  However, it was observed that NCLT should keep in mind the provisions of Section 11 according to which application under Section 7 or 9 is not maintainable if winding up proceedings had been initiated against the Corporate debtor. In such background, the appellants were not allowed to oppose or support the application at the stage of admission. However, NCLT was directed to decide the matter taking into consideration the fact of winding up proceedings brought to its notice by the appellants. [Deb Kumar Majumder v. State Bank of India, 2019 SCC OnLine NCLAT 26, dated 14-01-2019]

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National Company Law Appellate Tribunal (NCLAT): A two-member bench comprising of Justice S.J. Mukhopadhaya, Chairperson and Justice A.I.S. Cheema, Member (Judicial) allowed an appeal filed against the order of National Company Law Tribunal, New Delhi whereby appellant’s application under Section 7 of the Insolvency and Bankruptcy Code, 2016 was dismissed.

The appellant was an allottee of a residential apartment in Earth Gracia developed by the respondent Credit Debtor  — Earth Gracia Buildcon (P) Ltd. The Adjudicating Authority (NCLT) dismissed the said application on the ground that disbursement made by the appellant did not come within the meaning of financial debt. Aggrieved thereby, the appellant filed the instant appeal.

The Appellate Tribunal noted that the allotment letter from the respondent showed that a residential apartment in the proposed group housing complex, Earth Gracia, had been allotted in favour of the appellant, wherein provision of assured return had also been shown. The Appellate Tribunal followed its earlier decision in Nikhil Mehta and Sons v. AMR Infrastructure Ltd., Company Appeal (AT) (Insolvency) No. 7 of 2017, dated 21-7-2017, wherein it was held that allottees of residential units are also financial creditors. Subsequently, by the Insolvency and Bankruptcy Code (Amendment) Act, 2018, an explanation was inserted in Section 5(8)(f) as per which, any amount raised from an allottee under a real estate project shall be deemed to be an amount having the commercial effect of a borrowing. Therefore, after the amendment, the allottees of real estate project have been treated as financial creditors. In light of the above, the Appellate Tribunal allowed the appeal, set aside the order impugned and directed NCLT to admit appellant’s application and initiate the Corporate Insolvency Resolution Process. [Rajendra Kumar Saxena v. Earth Gracia Buildcon (P) Ltd., 2018 SCC OnLine NCLAT 711, Order dated 11-09-2018]

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National Company Law Appellate Tribunal (NCLAT): A two-member bench comprising of Justice S.J. Mukhopadhaya, Chairperson and Justice Bansi Lal Bhat, Member (Judicial)  dismissed an appeal filed against the order of the National Company Law Tribunal, Chennai whereby the application filed by the Financial Creditor under Section 7 of the Insolvency and Bankruptcy Code, 2016 was admitted.

Firstly, the appellant (shareholder of the Corporate Debtor) submitted that the respondent is not a Financial Creditor as defined in Section 5(7) read with Section 5(8). However, on facts, the Appellate Tribunal rejected the submission. It was found that the Rajkumar Impex Ghana Ltd. (subsidiary of the Corporate Debtor) had applied for a loan which was provided by Stanbic Bank Ghana Ltd. The Corporate Debtor executed guarantee in favour of the Bank for the said loan. As such, the Bank became a Financial Creditor. Secondly, the admission of application filed by the respondent under Section 7 for initiation of Corporate Insolvency Resolution Process was assailed. It was challenged on the ground that NCLT while admitting the application, did not record reasons in writing.

The Appellate Tribunal rejected the second submission filed by the appellant as well. It observed that application under Section 7 is not a recovery proceeding or proceeding for determining of a claim on merit that can be decided only by a court of competent jurisdiction. An application under Sections 7, 9 or 10 of the Code not being a money claim or suit and not being an adversarial litigation, NCLT is not required to write a detailed decision as to which are the evidence relied upon for its satisfaction. NCLT is only required to be satisfied that there is a debt and default had occurred. In the present case, NCLT had held that a prima facie case was made out by the applicant. As such, NCLT expressed its satisfaction about existence of debt and default. Thus, the appeal was dismissed holding it to be sans merit. [V.R. Hemantraj v. Stanbic Bank Ghana Ltd.,2018 SCC OnLine NCLAT 451, dated 29-08-2018]

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National Company Law Appellate Tribunal (NCLAT): A two-member bench comprising of Justice S.J. Mukhopadhaya, Chairperson and Justice Bansi Lal Bhat, Member (Judicial) dismissed an appeal filed by the Corporate Debtor against the initiation of Insolvency Resolution Process.

The Financial Creditor had granted a loan of Rs 1.02 crores to the Corporate Debtor which they were unable to repay. The Financial Creditor took recourse to arbitration and an award was passed favouring the Financial Creditor. The Corporate Debtor failed to comply with the award. Consequently, the Financial Creditor triggered the Insolvency Resolution Process. The appellant – a shareholder of Corporate Debtor – assailed the initiation of the process on the ground that there was an internal dispute among the directors which was pending adjudication under Section 241 and 242 of the Companies Act, 2013 before National Company Law Tribunal, New Delhi.

The Appellate Tribunal perused the entire scheme of the Insolvency and Bankruptcy Code regarding the Insolvency Resolution Process. It was observed that internal dispute among directors of the Corporate Debtors does not construe a valid defence to triggering of the process. Furthermore, it could not be defeated by taking resort to pendency of matter before the NCLT under Companies Act. The Code is a special law having an overriding effect on any other law as mandated by Section 238. The factum of default and non-compliance with arbitral award was not disputed by the Corporate Debtor; and thus, the Financial Creditor was well within its right to initiate the process. The appeal was held to be frivilous and costs amounting to Rs 1 lakh were imposed. The appeal was, thus, dismissed. [Jagmohan Bajaj v. Shivam Fragrances (P) Ltd.,2018 SCC OnLine NCLAT 413, dated 14-08-2018]

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National Company Law Appellate Tribunal (NCLAT): A two-member bench comprising of Justice S.J. Mukhopadhaya, Chairperson and Justice Bansi Lal Bhat, Member (Judicial), dismissed an appeal filed against the judgment of National Company Law Tribunal, New Delhi whereby Respondents 1 and 2 were held to be Financial Creditors.

Factual matrix of the case is that the said respondents were the erstwhile Directors of the Corporate Debtor company. They extended loan to the Corporate Debtor from time to time at an interest of 18% per annum. The question that arose for consideration in this appeal was whether the respondents came within the meaning of Financial Creditors as defined in Section 5(7) and (8) of the Insolvency and Bankruptcy Code, 2016. It is pertinent to note that Section 5(7) defines a Financial Creditor as any person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred to.

The Appellate Tribunal perused various provisions of the Code and observed that the expression debt defined under Section 3(11) means a liability or obligation in respect of a claim which is due from any person and includes a financial debt and operational debt. Non-payment of such debt which has become due and payable and is not repaid by the Corporate Debtor falls within the mischief default defined under Section 3(12) of the Code. Further, in the present case, the manner and circumstances in which the amount of loan was borrowed by the Corporate Debtor from time to time with stipulated interest, left no room for doubt that the outstanding unsecured debt had all the trappings of a Financial Debt. Hence, the said respondents (erstwhile Directors) were safely held to be Financial Creditors. All the contentions raised by the appellant were repelled holding them sans merit. The appeal was, thus, dismissed. [Rajesh Gupta v. Dinesh Chand Jain,2018 SCC OnLine NCLAT 412, Order dated 09-08-2018]

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National Company Law Appellate Tribunal (NCLAT): A two-member bench comprising of Justice S.J. Mukhopadhaya, Chairperson and Justice Bansi Lal Bhat, Member (Judicial), dismissed an appeal filed by the Financial Creditor, holding it to be sans merit.

The appeal was filed by the appellant Bank (Financial Creditor) against the order passed by the National Company Law Tribunal, Chennai whereby and whereunder the application preferred by the Operational Creditor under Section 9 of Insolvency and Bankruptcy Code, 2016 against the Corporate Debtor was admitted, order of moratorium was passed and name of the Interim Resolution Professional was called for. It was submitted that the Bank had taken possession of certain lands of the Corporate Debtor, and therefore, the Corporate Debtor colluded with the Operational Creditor to file the application under Section 9.

The National Company Law Appellate Tribunal rejected the submission of the Bank in absence of evidence. Moreover, NCLT could not have decided the issue of collusion which could only be decided by a Court of competent jurisdiction. The contentions regarding insufficiency in service of Demand Notice to the Corporate Debtor were also rejected as the Corporate Debtor itself did not raise any such objection. It was observed that as per the Supreme Court decision in Innoventive Industries Ltd. v. ICICI Bank, (2018) 1 SCC 407, if the application under Section 9 is complete and there is no existence of dispute and there is a debt and default, then the Adjudicating Authority (NCLT) is bound to admit the application. The Appellate Tribunal also noted that the appellant Bank had already taken steps under Securitisation and Reconstruction of Financial Assets and Enforcement of Interest Act, 2002. It was held, however, that such action could not continue as I&B Code prevails over SARFAESI Act. In the result, the appeal filed by the Bank was dismissed. [Canara Bank v. Sri Chandramoulishvar Spg. Mills (P) Ltd.,2018 SCC OnLine NCLAT 389, order dated 03-08-2018]

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National Company Law Appellate Tribunal: In a recent order passed by S.J. Mukhopadhaya, Chairperson and Bansi Lal Bhagat J., Member  regarding the appeal of the petitioner, who claims to be a promoter, regarding excessive voting rights given to L&T Finance (Financial Creditor).

The brief facts being that the National Company Law Tribunal (NCLT) had directed the Resolution Professional to grant proportionate rights to L&T, which had been challenged here in this case by the appellant regarding the rights granted not to be just and proper.

It was held by this Tribunal, that the appellant, who was found to be a promoter/director of the corporate debtor, had no locus standi to challenge the voting rights of any financial creditor. It was also held that with respect to Section 29-A of the Insolvency and Bankruptcy Code, 2016, that the appellant was not a ‘connected person’ to file the case. Hence, no relief was granted and the appeal was dismissed, since the Tribunal found no merit in the present appeal. [Gurdeep Singh Sahani v. Berger Paints India Limited, 2017 SCC OnLine NCLAT 437, decided on 30-11-2017]