Case BriefsSupreme Court

Supreme Court: Dealing with the issue of limitation in cases under the Insolvency and Bankruptcy Code, 2016 (IBC), the bench of Indira Banerjee* and JK Maheshwari, JJ has held that the pendency of the proceedings in a parallel forum is not sufficient cause for the delay in filing an application under Section 9 of the IBC if by the time the application was filed, the claim had become barred by limitation.

Background

On or about 22.12.2015, the Respondent filed a Winding Up petition dated 04.07.2015 in the Madras High Court.

On 05.01.2016, the High Court returned the Winding Up petition to the Respondent for curing of defects. The Winding Up petition was represented on 03.02.2016, but again returned on 24.05.2016 with an endorsement to comply with the defects as intimated earlier.

The IBC came into force on 01.12.2016. Thereafter the Respondent issued a demand notice on 14.11.2017 under Section 8(1) calling upon the Appellant to repay its dues.

On 30.03.2018, the Respondent filed petition under Section 9 of the IBC for initiation of the Corporate Insolvency Resolution Process (CIRP) in the NCLT. By an order dated 02.01.2019, the Adjudicating Authority (NCLT) rejected the application as barred by limitation.

The Respondent appealed to the NCLAT under Section 61 of the IBC. By the impugned judgment and order, the NCLAT set aside the order dated 02.01.2019 passed by the Adjudicating Authority (NCLT) rejecting the application of the Respondent under Section 9 of the IBC and remitted the case to the Adjudicating Authority for admission after notice to the parties. The NCLAT held :-

“8. In the present case, it is not in dispute that right to apply under Section 9 accrued to the Appellant on 1st December, 2016, when ‘I&B Code’ came into force. Therefore, we find that the application under Section 9 filed by the Appellant is within the period of three years from the date of right to apply accrued.”

Analysis

The provisions of the Limitation Act are applicable to proceedings under the IBC as far as may be. Section 14(2) of the Limitation Act which provides for exclusion of time in computing the period of limitation in certain circumstances, provides as follows:

“14. Exclusion of time of proceeding bona fide in court without jurisdiction.— (1) … (2) In computing the period of limitation for any application, the time during which the applicant has been prosecuting with due diligence another civil proceeding, whether in a court of first instance or of appeal or revision, against the same party for the same relief shall be excluded, where such proceeding is prosecuted in good faith in a court which, from defect of jurisdiction or other cause of a like nature, is unable to entertain it.”

Similarly, under Section 18 of the Limitation Act, an acknowledgment of present subsisting liability, made in writing in respect of any right claimed by the opposite party and signed by the party against whom the right is claimed, has the effect of commencing of a fresh period of limitation, from the date on which the acknowledgment is signed. However, the acknowledgment must be made before the period of limitation expires.

Proceedings in good faith in a forum which lacks jurisdiction or is unable to entertain for like nature may save limitation. Similarly, acknowledgment of liability may have the effect of commencing a fresh period of limitation.

The Supreme Court observed that for the purpose of limitation, the relevant date is the date on which the right to sue accrues which is the date when a default occurs.

The condition precedent for condonation of the delay in filing an application or appeal, is the existence of sufficient cause. Whether the explanation furnished for the delay would constitute “sufficient cause” or not would be dependent upon facts of each case. However, there cannot be any straitjacket formula for accepting or rejecting the explanation furnished by the Appellant/applicant for the delay in taking steps.

When an appeal is filed against an order rejecting an application on the ground of limitation, the onus is on the Appellant to make out sufficient cause for the delay in filing the application. The date of enforcement of the IBC and/or the date on which an application could have first been filed under the IBC are not relevant in computation of limitation.

“It would be absurd to hold that the CIRP could be initiated by filing an application under Section 7 or Section 9 of the IBC, within three years from the date on which an application under those provisions of the IBC could have first been made before the NCLT even though the right to sue may have accrued decades ago.”

Further, the fact that an application for initiation of CIRP, may have been filed within three years from the date of enforcement of the relevant provisions of the IBC is inconsequential. What is material is the date on which the right to sue accrues, and whether the cause of action continuous.

In the case at hand, the last acknowledgment was in 2013 and the Madras High Court neither suffered from any defect of jurisdiction to entertain the winding up application nor was unable to entertain the winding up application for any other cause of a like nature.

As the limitation for initiation of winding up proceedings in the Madras High Court stopped running on the date on which the Winding Up petition was filed, the initiation of proceedings in Madras High Court would not save limitation for initiation of proceedings for initiation of CIRP in the NCLT under Section 7 of the IBC.

[Tech Sharp Engineers Pvt Ltd v. Sanghvi Movers ltd, 2022 SCC OnLine SC 1249, decided on 19.09.2022]


*Judgment by: Justice Indira Banerjee

Op EdsOP. ED.

   

The sole objective of the Insolvency and Bankruptcy Code, 20161 (IBC or the Code) is to provide an eloquent manner for revival, reorganisation, and resolution of distressed or bankrupt entities/persons in a time-bound manner. The very contemplation, advancing a time-bound mechanism for the resolution process makes it distinct from the previously existing laws relating to insolvency and bankruptcy. The legislation was brought to consolidate and amend the laws with respect to resolution and insolvency of corporate persons, partnership firms and individuals in a time-bound manner. However, within a period of just 5 years, the Code saw a series of amendments to make it more methodical and market driven. One such instance was the insertion of Section 12-A2 into the Code vide the IBC Amendment Act of 20183 which paved the way for erstwhile management of the corporate debtor and the creditors to settle the matters without facing the jostle of the court proceedings.

Lokhandwala Kataria Construction (P) Ltd. v. Nisus Finance and Investment Managers LLP4 was the first matter, in which both the parties were permitted by the Supreme Court to settle the matter using its inherent powers under Article 142 of the Constitution of India5, which states that in order to serve justice, the Supreme Court in the exercise of its jurisdiction may pass such decree or make such order in any cause or matter pending before it. Furthermore, the Supreme Court set aside the order of the National Company Law Appellate Tribunal (NCLAT), whereby the appellate authority did not exercise its inherent powers under Rule 11 of the National Company Law Appellate Tribunal Rules, 20166. It provides for the “inherent powers” to the tribunals to make such orders or give such directions as may be necessary for meeting the ends of justice or to prevent abuse of process of the law. 

Purpose of Section 12-A

The introduction of Section 12-A in the Code validated the idea of settlements between the creditors and the erstwhile management, accelerating the resolution process of the corporate debtor as there stood no provisions for withdrawal in the Code, prior to the introduction of the abovementioned provision. In pursuance of this, the Insolvency Law Committee made the recommendation of altering the law to allow for withdrawal7.

The insertion of the abovementioned section was done through the IBC (Second Amendment) Act, 2018 w.e.f. 6-6-2018. The Code, before the amendment was made, did not provide any provisions for the settlement of debts between the creditors and the erstwhile management. It is noteworthy that neither the National Company Law Tribunal (NCLT) nor NCLAT ever exercised the inherent powers to grant withdrawal of applications that were admitted under Sections 78, 99 or 1010 of the Code. Despite the mutual consent of both the parties even if the applicant, creditors, and erstwhile management/promoters of the corporate debtor agreed to settle the matters outside court, after the admission of the application, the Code did not justify rendering the desired outcomes. Considering the scenario prior to the insertion of Section 12-A to the Code, it is indeed ironic that the inception of the Code was to warrant timely disposal of insolvency matters, but at the same time, it failed to address the prominence of an out-of-court settlement. Aggrieved by the limited remedies left to the creditors as well as the erstwhile management, parties started approaching the Supreme Court for relief. The Supreme Court under Article 142 of the Constitution of India passed orders for allowing the withdrawal of applications against the corporate debtor under the corporate insolvency resolution process (CIRP). In Uttara Foods & Feeds (P) Ltd v. Mona Pharmachem11, the Supreme Court gave directions to the Government to embody a provision under the Code for allowing withdrawal of application after the admission of CIRP, to prevent such applications to be filed before Supreme Court.

Withdrawal of application before the CoC is constituted

If an application is filed for withdrawal under Section 12-A of the Code, before the constitution of committee of creditors (CoC), the interim resolution professional (IRP) is duty-bound to place it directly before the adjudicating authority for its approval. It is pertinent to mention that the approval of the CoC stands invalid in such cases.

In Anuj Tejpal v. Rakesh Yadav12, the NCLAT, Delhi Bench held that:

41. Rule 11 of the NCLAT Rules, 2016 provides that “Nothing in these rules shall be deemed to limit or otherwise affect the inherent powers of the Appellate Tribunal to make such orders as may be necessary for meeting the ends of justice or to prevent abuse of the process of the Appellate Tribunal.” The Supreme Court in Swiss Ribbons (P) Ltd. v. Union of India13 has clearly discussed the stage and has observed that “we make it clear that at any stage where the Committee of Creditors is not yet constituted, a party can approach NCLT directly, which Tribunal may, in exercise of its inherent powers under Rule 11 of the NCLT Rules, 2016, allow or disallow an application for withdrawal or settlement. This will be decided after hearing all the parties concerned and considering all relevant factors on the facts of each case”. It is a well-settled proposition of law that substantive law takes precedence over a regulation and Section 12-A clearly refers to the withdrawal of an application under Sections 7, 9 or 10 after the constitution of the Committee of Creditors, seeking approval of 90% of the voting share of the CoC. Keeping in view the ratio of the Supreme Court in Swiss Ribbons (P) Ltd.14 and the aforenoted reason, we hold that in the facts and circumstances of the attendant case before us, we do not find force in the contention of the proposed intervenor applicants that the application for withdrawal, filed, prior to the constitution of CoC ought to be mandatorily dealt with the provisions under Regulation 30-A(1). We find it just and proper to exercise our inherent powers under Rule 11 in this case.

Withdrawal of application after the CoC is constituted

To move an application under Section 12-A of the Code, the procedure prescribes that the interim resolution professional shall forward the same to the CoC for approval. It is imperative to note that a majority vote of 90% is required for the approval. If the proposal crosses the first hurdle of the majority vote, it is then presented to the adjudicating authority. Further, it is at the discretion of the adjudicating authority to allow or dismiss such applications.

The question that is important to be addressed here is that of the 90% of the majority vote for the withdrawal of the application. It is a well-established fact that if a company goes under CIRP, all creditors of the company are subjected to the threat of financial loss. The idea behind the majority vote being 90% is to discourage individual actions and encourage collective actions and the decision to settle the matter must be unanimously agreed. This was substantiated in Shaji Purushothaman v. Union Bank of India15 wherein the NCLAT, New Delhi Bench held that:

9. If an application under Section 12-A is filed by the appellant, the “Committee of Creditors” may decide as to whether the proposal given by the appellant for settlement in terms of Section 12-A is better than the “resolution plan” as approved by it and may pass appropriate order. However, as such decision is required to be taken by the “Committee of Creditors”, we are not expressing any opinion on the same.

Therefore, the decision of withdrawal shall be taken by the capable creditors who possess an interest to revive the business of the corporate debtor. Further, in Vallal RCK v. Siva Industries and Holdings Ltd.16 , the Supreme Court categorically held that:

23. As already stated hereinabove, the provisions under Section 12-A IBC have been made more stringent as compared to Section 30(4) IBC17. Whereas under Section 30(4) IBC, the voting share of CoC for approving the resolution plan is 66%, the requirement under Section 12-A IBC for withdrawal of CIRP is 90%.

24. When 90% and more of the creditors, in their wisdom after due deliberations, find that it will be in the interest of all the stakeholders to permit settlement and withdraw CIRP, in our view, the adjudicating authority or the appellate authority cannot sit in an appeal over the commercial wisdom of CoC. The interference would be warranted only when the adjudicating authority or the appellate authority finds the decision of the CoC to be capricious, arbitrary, irrational and dehors the provisions of the statute or the Rules.

Withdrawal of application after Form G is released

One of the very frequently raised doubts pertaining to withdrawal is whether withdrawal can be made after Form G i.e. expression of interest (EOI) is issued. It is relevant to state herein that in Swiss Ribbons (P) Ltd. v. Union of India18 the Supreme Court held that:

81.…Regulation 30-A(1) of the CIRP Regulations, 2016 is not mandatory but is directory for the simple reason that on the facts of a given case, an application for withdrawal may be allowed in exceptional cases even after issue of invitation for expression of interest under Regulation 36-A of the CIRP Regulations, 201619.

The same was reiterated in Brilliant Alloys (P) Ltd. v. S. Rajagopal20 wherein the Supreme Court held that an application for withdrawal under Regulation 30-A of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (the CIRP Regulations) can also be made after the public invitation for claims was issued. The expression “shall” to be read as “may” and, consequently, the provision was held to only be directory. Further, in V. Navaneetha Krishnan v. Central Bank of India21, the NCLAT, New Delhi Bench, held that the application can be withdrawn only on the condition that it gets majority vote of 90% by the CoC.

Further, in Satynarayan Malu v. SBM Paper Mills Ltd.22 the NCLT Mumbai, allowed the withdrawal application after the resolution plan was approved by the CoC, stating that:

9. In the light of the foregoing detailed discussion and on due consideration of the provisions of the statute as also the connected Regulations it is hereby concluded that the proposal of this applicant for one-time settlement is in the benefit of this corporate debtor for its revival along with all the stakeholders. Moreover, it is a practical solution through which Allahabad Bank is also recovering 100% debt amount as affirmed by the bank authorities concerned through an affidavit dated 27-11-2018 conveying their consent for withdrawal of the petition on account of acceptance of one-time settlement. As a result, circumstances of this case demands that permission be granted to allow the withdrawal of application/petition (CP 1362/2018).

Therefore, considering the abovementioned precedents, it is imperative to state herein that under Section 12-A IBC and Regulation 30-A(1) of the CIRP Regulations, 2016 an application filed under Sections 7, 9 or 10 can be withdrawn after the issuance of Form G, provided the proposal gets 90% of the majority vote of the CoC. However, it is also imperative to state herein that Regulation 30-A of CIRP Regulations, 2016 prescribes that where the application is made under clause (b) after the issue of invitation for expression of interest under Regulation 36-A, the applicant shall state the reasons justifying withdrawal after issue of such invitation.

Withdrawal of application after the initiation of liquidation process

Another bone of contention is withdrawal after the initiation of liquidation process. The answer to this is, yes. An application filed under Sections 7, 9 or 10 can very well be withdrawn after the liquidation process has commenced. It is imperative to state herein that the pivot of the Code is to maximise the assets of the corporate debtor in order to save it from the wrath of liquidation.

In V. Navaneetha Krishnan v. Central Bank of India23, the NCLAT, New Delhi Bench held that:

5. However, in view of Section 12-A even during the liquidation period if any person, not barred under Section 29-A24, satisfy the demand of “Committee of Creditors” then such person may move before the adjudicating authority by giving offer which may be considered by the “Committee of Creditors”, and if by 90% voting share of the “Committee of Creditors”, accept the offer and decide for withdrawal of the application under Section 7 of the Insolvency and Bankruptcy Code, the observation as made above or the order of liquidation passed by the adjudicating authority will not come in the way of adjudicating authority to pass appropriate order.

Further, in V.S. Varun v. South Indian Bank25 the NCLT, Bengaluru Bench, held that:

7. The above-referred provisions pertaining to the withdrawal of the applications filed under Sections 7, 9 or 10 IBC, 2016 provide for filing an application by the applicant in the company petition. In the instant case, the company petition was filed under Section 10 IBC, by the corporate applicant i.e. M/s Aradhya Wire and Ropes Pvt. Ltd. itself. On admission of the company petition the corporate debtor was initially taken over by the RP and after passing of the orders of the liquidation by the Liquidator. The instant application has been filed by the Liquidator on receipt of the application from one of the promoters of the corporate debtor. The NCLAT in Shweta Vishwanath Shirke v. Committee of Creditors26held that the promoters/shareholders are entitled to settle the matter in terms of Section 12-A and in such case, it is always open to the applicant to withdraw the application. Hence, we are of the view that the instant application filed by the liquidator under Section 12-A of the IBC, 2016, is maintainable.

Therefore, an application filed under Sections 7, 9 or 10 of the Code, after the commencement of liquidation process can be withdrawn through the provisions of Section 12-A of the Code read with Regulation 30-A of the CIRP Regulations, 2016. However, the commercial wisdom of the CoC cannot be overlooked in any such scenarios.

Conclusion

In view of the above, it shall be concluded that an application filed under Sections 7, 9 or 10 of the Code can very well be withdrawn vide provisions of Section 12-A IBC, the adjudicating authorities may allow or disallow the withdrawal of such applications. It is pertinent to state herein that the applications can be withdrawn not only after issuing an invitation of EOI but in some cases, even after receiving resolution plans. In recent times, both legislature and the judiciary have strongly advocated for the settlement of cases as it promotes a win-win situation for both parties and also helps unclog the judicial system. The courts of law have, time and again, upheld and focused on the importance of protecting the interests, not only of the creditors but also of the corporate debtor, wherever possible. The adjudicating authorities have always taken a concrete stand, that ordering liquidation must be taken into consideration after all remedies have been exhausted, and hence be treated as a last resort.

Various contentions have also been raised to reflect the pitfalls of this provision and how it might affect the entire idea of the Code. It is imperative to state herein that it can be apprehended that a misuse of this provision might rescind the intent of the Code i.e. revival of the corporate debtor into a mere instrument for recovery and settling private disputes. A few stalwarts of IBC have also questioned about the withdrawal process stating that such actions of allowing withdrawal shall result in wastage of time and effort that has been invested during the whole CIRP period. However, it is pertinent to note herein, that such flexibility may go a long way in protecting the value of the assets of the corporates and various stakeholders. The original promoters with vested interests in the companies are better aware of the nitty-gritty involved in managing their company and these provisions further uphold the notion with which IBC was enacted, that is, protection of interests of the stakeholders and maximisation of the value of the assets of the corporate debtor. On the other hand, a very vital question arises for consideration i.e. regarding the fate of other creditors. It is pertinent to mention that even though insolvency proceedings are in rem and affect the substantive rights of rest of the creditors, the opinions of the other creditors who had filed their claims have not been considered while withdrawing. Further, considering the scenario mentioned hereinabove it is evident that Section 12-A does not mention about the interest of other creditors at all. Consequently, if the claims of other creditors are not settled, it indeed would lead to agitation of the other creditors and call for another round of litigation as there is a legislative vacuum on this point and suitable modifications may be required in this regard, or else the provision might call for ramifications that would destroy the intent behind bringing in the very provision under the Code. A suggestive measure in order to keep the other creditors in consideration is to inform them about the withdrawal of the main application whereupon the CIRP was initiated in the first place. An announcement informing the public at large, akin to the announcement made by interim resolution professional at the stage of initiation of CIRP, could be one of the ways through which it can be done appropriately.

At this instance, it is essential to note that the judiciary has very well considered the interest of other creditors in many matters and one such order has been very recently passed in Swamy Traders v. SNS Starch Ltd.27, wherein the NCLT Hyderabad Bench, held that,

3. Since the IRP reported that six operational creditors have raised their claims before the IRP, let the IRP inform all such operational creditors/petitioners that they are at liberty to seek recall of the earlier order in view of the order passed in this company petition.

Therefore, the IRP/RP must inform the rest of the creditors about the withdrawal of the application.

Further, in Anuj Tejpal v. Rakesh Yadav28 the counsel raised questions on the withdrawal as the rest of the stakeholders' interest are overlooked and they would be the one suffering as the claim made by them would still be unsettled.

Further, in Jai Kishan Gupta v. Green Edge Buildtech LLP29, the NCLAT, New Delhi Bench held that:

16. The question, however, remains that the Supreme Court has in the above para 82 left discretion with the adjudicating authority to allow or disallow an application for withdrawal or settlement. The last sentence of the paragraph states that “this will be decided after hearing of the parties concerned and considering all relevant factors on the facts of each case”. Thus, adjudicating authority has to consider all relevant factors on facts of each case and to take a decision. Para 83 of the judgment in Swiss Ribbons30 has dealt with a decision being taken by CoC under Section 12-A and left the door open that if CoC arbitrarily rejects a just settlement and/or withdrawal claim the NCLT, and thereafter NCLAT can set aside such decisions under Section 60 of the Code31.

Further, in Sushil Ansal v. Ashok Tripathi32, the NCLAT New Delhi Bench, held that:

12.…All parties concerned will be required to be heard before allowing withdrawal or settlement. It is also manifestly clear that the exercise of inherent powers is discretionary and invoked only to meet the ends of justice or prevent abuse of process of court. The adjudicating authority or the Appellate Tribunal will have to keep in view interest of various stakeholders and claimants before allowing such withdrawal or settlement. Scuttling of corporate insolvency resolution process cannot be permitted to jeopardise the legitimate interests of other stakeholders, more particularly in a real estate project where fate of innumerable allottees would be hanging in balanced….

14. Admittedly, the interim resolution professional has received 283 claims from allottees of different projects, financial creditors, operational creditors, other creditors and employees as detailed in Para 10 of the reply filed by Respondent 3 and the settlement deed does not take care of the interest of claimants other than Respondents 1 and 2. Therefore, allowing of withdrawal of application on the basis of such settlement which is not all-encompassing and being detrimental to the interests of other claimants including the allottees numbering around 300 would not be in consonance with the object of “the I&B Code” and purpose of invoking of Rule 11 of the NCLAT Rules. In a case where interests of the majority of stakeholders are in serious jeopardy, it would be inappropriate to allow settlement with only two creditors which may amount to perpetrating of injustice. Exercise of inherent powers in such cases would be a travesty of justice.

Further, in Gopal Krishan Bathla v. Crown Realtech (P) Ltd.33 the NCLAT New Delhi Bench held that:

7. The dictum of the Supreme Court is loud and clear. The National Company Law Tribunal can exercise inherent powers vested in Company Appeal (AT) (Insolvency) No. 28 of 2020 under Rule 11 of the National Company Law Tribunal Rules, 2016 to allow or reject an application for withdrawal or settlement prior to the constitution of the “Committee of Creditors.” However, such exercise of power would depend on consideration of all relevant factors in each individual case, after providing an opportunity of hearing to all parties concerned. A similar power is vested in this Appellate Tribunal under Rule 11 of the National Company Law Appellate Tribunal Rules, 2016 and it is not disputed that such power can be exercised in appropriate cases on similar consideration as delineated by the Supreme Court. The question that arises for consideration is whether the instant case is a fit one for the exercise of such power.

The intent of Section 12-A IBC is to legislatively recognise post-admission settlement cases, which was introduced based upon the recommendations of the Insolvency Law Committee Report34. However, certain changes may be brought in to make it more effective and just.


*Founder, AB Legal. Author can be reached at <amir.bavani@ablegal.in>.

**Senior Associate, AB Legal.

***Associate, AB Legal.

1. Insolvency and Bankruptcy Code, 2016.

2. Insolvency and Bankruptcy Code, 2016, S. 12-A.

3. Insolvency and Bankruptcy Code ( Second Amendment) Act, 2018.

4. (2018) 15 SCC 589.

5. Constitution of India, Art. 142.

6. National Company Law Appellate Tribunal Rules, 2016, R. 11.

7. Report of the Insolvency Law Committee.

8. Insolvency and Bankruptcy Code, 2016, S. 7.

9. Insolvency and Bankruptcy Code, 2016, S. 9.

10. Insolvency and Bankruptcy Code, 2016, S. 10.

11. (2018) 15 SCC 587.

12. 2021 SCC OnLine NCLT 5794.

13. (2019) 4 SCC 17.

14. (2019) 4 SCC 17.

15. 2019 SCC OnLine NCLAT 1151.

16. 2022 SCC OnLine SC 717.

17. Insolvency and Bankruptcy Code, 2016. S. 30(4).

18. (2019) 4 SCC 17, 87.

19. Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, Regn. 36-A.

20. (2022) 2 SCC 544.

21. 2018 SCC OnLine NCLAT 904.

22. 2018 SCC OnLine NCLT 32358.

23. 2018 SCC OnLine NCLAT 904.

24. Insolvency and Bankruptcy Code, 2016, S. 29-A.

25. 2022 SCC OnLine NCLT 218.

26. 2019 SCC OnLine NCLAT 1049.

27. 2022 SCC OnLine NCLT 214.

28. 2021 SCC OnLine NCLT 5794.

29. 2019 SCC OnLine NCLAT 916.

30. (2019) 4 SCC 17.

31. Insolvency and Bankruptcy Code, 2016, S. 60.

32. 2020 SCC OnLine NCLAT 680.

33. 2020 SCC OnLine NCLAT 1070.

34. Report of the Insolvency Law Committee.

Case BriefsSupreme Court

Supreme Court: The bench of Indira Banerjee* and AS Bopanna, JJ has reversed the NCLAT order wherein it was held that the Government cannot claim first charge over the property of the Corporate Debtor, as Section 48 of the Gujarat Value Added Tax, 2003 (GVAT Act), which provides for first charge on the property of a dealer in respect of any amount payable by the dealer on account of tax, interest, penalty etc. under the said GVAT Act, cannot prevail over Section 53 of the Insolvency and Bankruptcy Code, 2016 (IBC).

Holding that NCLAT clearly erred in its observation that Section 53 of the IBC over-rides Section 48 of the GVAT Act, the Court observed that, Section 48 of the GVAT Act is not contrary to or inconsistent with Section 53 or any other provisions of the IBC. Under Section 53(1)(b)(ii), the debts owed to a secured creditor, which would include the State under the GVAT Act, are to rank equally with other specified debts including debts on account of workman’s dues for a period of 24 months preceding the liquidation commencement date.

Going into the scheme of both the Statutes, the Court said that Section 3(30) of the IBC defines secured creditor to mean a creditor in favour of whom security interest is credited. Such security interest could be created by operation of law. The definition of secured creditor in the IBC does not exclude any Government or Governmental Authority. Likewise, the State is a secured creditor under the GVAT Act.

On the validity of a resolution plan which does not meet the requirements of Section 30(2) of the IBC, the Court held that the same would be invalid and not binding on the Central Government, any State Government, any statutory or other authority, any financial creditor, or other creditor to whom a debt in respect of dues arising under any law for the time being in force is owed. Such a resolution plan would not bind the State when there are outstanding statutory dues of a Corporate Debtor.

Explaining the scope of Section 31 of the IBC, the Court said that if a Resolution Plan meets the requirements, the Adjudicating Authority is mandatorily required to approve the Resolution Plan under Section 31(1). On the other hand, Section 31(2), which enables the Adjudicating Authority to reject a Resolution Plan which does not conform to the requirements referred to in Section 31(1), uses the expression “may”. If the established facts and circumstances require discretion to be exercised in a particular way, discretion has to be exercised in that way. If a Resolution Plan is ex facie not in conformity with law and/or the provisions of IBC and/or the Rules and Regulations framed thereunder, the Resolution would have to be rejected.

It was, hence, held that if the Resolution Plan ignores the statutory demands payable to any State Government or a legal authority, altogether, the Adjudicating Authority is bound to reject the Resolution Plan. Consequently, the Court observed that the Committee of Creditors, which might include financial institutions and other financial creditors, cannot secure their own dues at the cost of statutory dues owed to any Government or Governmental Authority or for that matter, any other dues.

Hence, if a company is unable to pay its debts, which should include its statutory dues to the Government and/or other authorities and there is no plan which contemplates dissipation of those debts in a phased manner, uniform proportional reduction, the company would necessarily have to be liquidated and its assets sold and distributed in the manner stipulated in Section 53 of the IBC.

[State Tax Officer v. Rainbow Papers Ltd, 2022 SCC OnLine SC 1162, decided on 06.09.2022]


*Judgment by: Justice Indira Banerjee

Case BriefsSupreme Court

Supreme Court: While adjudicating a case related to the Reliance Commercial Finance resolution, the 3-judges Bench comprising Dr. D Y Chandrachud*, Surya Kant, and A S Bopanna, JJ., was posed with a question as to whether the SEBI Standardisation of procedure Circular (13-10-2020) has retroactive application. The Court clarified,

“Many decisions of this Court define ‘retroactivity’ to mean laws that destroy or impair vested rights, in real terms, this is the definition of ‘retrospectivity’ or ‘true retroactivity’.”

On one hand, SEBI argued that the circular will have a retroactive application, on the other, Reliance Commercial Finance Ltd., argued that applying the circular on the instant case would make its application retrospective. The Court held that the SEBI Circular has retroactive application by relying on the following definitions:

In Principles of Statutory Interpretation by Justice G.P. Singh (14th Edn., 2016 at p. 583), it is stated that the rule against retrospective construction is not applicable to a statute merely because “a part of the requisites for its action is drawn from a time antecedent to its passing.” If that were not so, every statute will be presumed to apply only to persons born and things which come into existence after its operation and the rule may well result in virtual nullification of most of the statutes.

Significant Precedents

In Vineeta Sharma v. Rakesh Sharma, 2020 (9) SCC 1, the Court described the nature of prospective, retrospective, and retroactive laws as follows:

“The prospective statute operates from the date of its enactment conferring new rights. The retrospective statute operates backwards and takes away or impairs vested rights acquired under existing laws. A retroactive statute is the one that does not operate retrospectively. It operates in futuro. However, its operation is based upon the character or status that arose earlier. Characteristic or event which happened in the past or requisites which had been drawn from antecedent events.”

Noticing that the terms “retrospective” and “retroactive” are often used interchangeably, though their meanings are distinct, the Court referred to State Bank’s Staff Union (Madras Circle) v. Union of India, (2005) 7 SCC 584, where this difference was succinctly appreciated in the following words:

“’Retroactivity’ is used to cover at least two distinct concepts. The first, which may be called ‘true retroactivity’, consists in the application of a new rule of law to an act or transaction which was completed before the rule was promulgated. The second concept, which will be referred to as ‘quasi-retroactivity’, occurs when a new rule of law is applied to an act or transaction in the process of completion…the foundation of these concepts is the distinction between completed and pending transactions….” (T.C. Hartley, The Foundations of European Community Law 129 (1981)

Conclusion

The Court clarified that though many decisions of the Court define “retroactivity” to mean laws that destroy or impair vested rights, in real terms, this is the definition of “retrospectivity” or “true retroactivity”. “Quasi-retroactivity” or simply “retroactivity” on the other hand is a law that is applicable to an act or transaction that is still underway. Such an act or transaction has not been completed and is in the process of completion. Retroactive laws also apply where the status or character of a thing or situation arose prior to the passage of the law.

[SEBI v. Rajkumar Nagpal, 2022 SCC OnLine SC 1119, decided on 30-08-2022]


*Judgment by: Justice Dr. D Y Chandrachud


Appearance:

For SEBI: N Venkataraman, Senior Counsel & Additional Solicitor General

For RCFL: Darius Khambata, Senior Counsel

For Bank of Baroda: KV Viswanathan, Senior Counsel

For Authum Investment and Infrastructure Ltd.: Dhruv Mehta, Senior Counsel


*Kamini Sharma, Editorial Assistant has put this report together.


Also Read

SC upholds applicability of SEBI Circular; but gives a green signal to Reliance Commercial Finance resolution to avoid “unscrambling of resolution process”

Case BriefsSupreme Court

Supreme Court: In the Reliance Commercial takeover dispute, the 3-judges Bench comprising Dr. D Y Chandrachud*, Surya Kant and A S Bopanna, JJ., gave a green signal to the voting process to implement the resolution plan. The Court, though upheld the applicability of SEBI circular, it opined that the different voting mechanism proposed under the SEBI Circular will further delay the resolution process and potentially disrupt the efforts undertaken by the stakeholders, including the retail debenture holders. The Court noted,  

“Such unscrambling of the resolution process will not only prove time-consuming, but may also adversely affect the agreed realized gains to the retail debenture holders, who have already consented to the negotiated settlement before the High Court.” 

Factual Matrix 

The instant case relates to takeover of Reliance Commercial Finance Ltd. (RCFL) by Authum Investment and Infrastructure Ltd.; where a dispute arose with regard to the applicability of two circulars issued by RBI and SEBI— Reserve Bank of India (Prudential Framework for the Resolution of Stressed Assets) Directions 2019 and SEBI Standardisation of procedure Circular (13-10-2020).   

RCFL had issued Non-Convertible Debentures to various persons and Vistra ITCL (India) Ltd. was the Debenture Trustee under three Debenture Trust Deeds. RCFL committed its first default under the Debenture Trust Deeds in March 2019. 

The dispute 

Seventeen debenture holders instituted a suit on the Original Side of the Bombay High Court for protection of their interests with respect to the amounts due to them by RCFL, alleging that certain funds available with the Bank of Baroda, were distributed amongst creditors without regard to their status as secured or unsecured creditors without their consent and that they had a first charge on the receivables of RCFL.  

The debenture holders further alleged that the RBI Circular permitted this illegal distribution of funds and hence they urged for setting aside of the RBI Circular as illegal and ultra vires. They also sought an injunction restraining RCFL, Bank of Baroda, and RBI from implementing the RBI Circular. 

Impugned Decision  

The Single Judge held that the SEBI Circular could not be permitted to operate retrospectively and did not govern the Debenture Trust Deeds.  However, opining that a mere reference to the SEBI Circular would not override the express terms of any of the Debenture Trust Deeds, the Single Judge allowed to proceed with the voting process for the takeover of RCFL according to Debenture Trust Deeds signed in compliance with the RBI circular. In appeal, the Division Bench affirmed the aforesaid order of the Single Judge. 

Issues  

Based on the submissions canvassed by the parties, the following issues arose for determination: 

  1. Whether the civil court had the jurisdiction to entertain the lis in this case; and 
  2. Whether the debenture holders and other parties in the present case were required to follow the procedure under the SEBI Circular. 

Issue 1: Jurisdiction  

On the first issue, the Court noted that Section 15Y of the SEBI Act imposes a bar on the civil court to entertain any suit in respect of any matter that an adjudicating officer appointed under the SEBI Act is empowered to determine; however, since the Adjudicating officer has no jurisdiction under the SEBI Act to grant the relief sought by the plaintiffs in the first instance, the bar in Section 15Y would not operate as against the suit in the instant case. 

Similarly, with regard to the bar under Section 430 of the Companies Act that no civil court shall have the jurisdiction to entertain any suit in respect of any matter which the National Company Law Tribunal or the National Company Law Appellate Tribunal is empowered to determine, the Court observed that since neither the NCLT nor the NCLAT has jurisdiction to adjudicate upon a challenge to the RBI Circular, the bar in Section 430 is not attracted in the case at hand. 

Therefore, the Court held that the Single Judge as well as the Division Bench of the Bombay High Court properly exercised jurisdiction over the subject matter of the suit. 

Issue 2: Applicability of the SEBI Circular  

The RBI Circular provided that certain lenders may opt for a resolution strategy available to them under the existing legal framework, including entering into a resolution plan or initiating legal proceedings for recovery or insolvency. If the lenders chose to implement a Resolution Plan, they were required to enter into an Inter-creditor Agreement (ICA). 

By issuing the SEBI Circular, SEBI subscribed to the overall framework of the RBI Circular and permitted debenture holders to participate in the process specified in the RBI Circular to enter into a Resolution Plan (RBI circular provides only lenders can participate). Under the RBI Circular, the Resolution Plan cannot come into existence without an ICA. The SEBI Circular does not disturb this position. Hence, both the RBI Circular and the SEBI Circular refer to one and the same ICA and Resolution Plan.  

Rejecting the RCFL’s argument that Clauses 22 and 23 of the Fifth Schedule to the Debenture Trust Deed(s) are not concerned with signing an ICA or with the subject matter of the SEBI Circular in general, the Court observed that RCFL’s suggestion that the ICA and the Resolution Plan are distinct and severable is an incorrect interpretation of the circulars in question. The ICA and the Resolution Plan are inextricably intertwined and the latter has its genesis in the former and flows from it. 

Hence, the Court held that any reference to an ICA in the SEBI Circular is also necessarily a reference to the Resolution Plan and vice versa. It is not open to debenture holders to participate in the implementation of the Resolution Plan without being involved in its genesis through the ICA. The Court remarked,  

“There is only one ―door, so to speak, through which debenture holders can gain entry into the Resolution Plan with the lenders and that is through the ICA. Therefore, while the SEBI Circular does not mandate the execution of an ICA as the only route to entering a compromise with the issuer company, it lays down a procedure in the event that debenture holders choose the route of implementing a Resolution Plan with the lenders. This procedure cannot be circumvented.” 

Upholding the applicability of the SEBI circular, the Court pointed out the following: 

  • The purpose of the SEBI Circular is multi-fold – not only does it protect the interests of debenture holders at large (Clause 7), but it also protects the interests of any dissenting debenture holders (Clause 6.6).  
  • In the absence of Clause 7, debenture trustees would likely be unable to exit the ICA or the Resolution Plan even if they were not ―in the interest of investors or if the Resolution Plan was not finalized within 180 days from the end of the review period.  
  • Significantly, the absence of Clause 6.6 could mean that dissenting debenture holders would be bound by decisions taken even by way of a simple majority.  
  • We agree that the language in Regulation 15(7) of the 1993 Regulations and the SEBI Circular is facilitative and not mandatory. This is in recognition of the fact that debenture holders may opt to exercise their rights through mechanisms other than the execution of a Resolution Plan.  
  • The language cannot be construed to be facilitative in the sense of providing debenture holders with the option of by-passing the modalities prescribed by the SEBI Circular while accepting a Resolution Plan. The ICA continues to be the foundation or mother document for the Resolution Plan. 

Retroactive Application of the SEBI Circular  

Though RCFL issued the debentures and defaulted on the payments to the debenture holders prior to the issuance of the SEBI Circular, the Court culled out the following points to uphold the retroactive applicability of the SEBI Circular: 

  • On 13-10-2020 (when the SEBI Circular came into force), a compromise or agreement on the restructuring of the debt owed by RCFL did not exist. The debenture holders were not vested with any rights with respect to the resolution of RCFL‘s debt.  
  • The existence of the debt and the subsequent default by RCFL was the status of events, which existed prior to 13 October 2020. Once it came into force, the SEBI Circular applied to the manner of resolution of debt, as specified therein. 
  • Even assuming that debenture holders were vested with the right to sanction a compromise or arrangement in terms of the special majority in Clause 23 to the Fifth Schedule of the Debenture Trust Deed, they were divested of such a right upon the issuance of the SEBI Circular.  
  • Clause 59 of the Debenture Trust Deed stipulates that any provision in the Debenture Trust Deed which is in conflict with the 1993 Regulations is null and void.  
  • A contractually vested right may be taken away by the operation of a statutory instrument. The SEBI Circular owes its existence to statutory powers conferred by special legislation.  

Can SEBI Circular Bind Dissenting Debenture Holders 

SEBI contended that the compromise arrived at in terms of the direction of the High Court will also bind all the other debenture holders, who were not a party to the original suit before the High Court which will prejudice the dissenting debenture holders as they have to settle for a lesser amount – 24.96% of the principal among with a further 5% of the principal outstanding.  

Agreeing with SEBI‘s submission that the compromise arrived at the Debenture Trust Deed level among the consenting debenture holders should not bind the dissenting debenture holders, the Court directed that the dissenting debenture holders should be provided an option to accept the terms of the Resolution Plan.  

Alternatively, the Court held that the dissenting debenture holders have a right to stand outside the proposed Resolution Plan framed under the lender‘s ICA and pursue other legal means to recover their entitled dues. Hence, the Court disapproved the High Court’s interpretation of SEBI circular.  

Findings and Conclusion  

Though the Court upheld the applicability of the SEBI circular, it refrained from applying the same due to following findings:  

  • Under the present scheme of the Resolution Plan, retail debenture holders having exposure of up to INR 10 lakhs would stand to realize 100% of their principal dues. The secured retail debenture holders having an exposure of more than INR 10 lakhs would realize 29.69%. 
  • In comparison, the secured ICA lenders would receive 24.96% of their principal amount, which is lower than the recovery made by the debenture holders. It is also important to highlight that none of the debenture holders have raised any grievance with regard to the proposed compromise.  
  • The different voting mechanism proposed under the SEBI Circular will further delay the resolution process and potentially disrupt the efforts undertaken by the stakeholders, including the retail debenture holders.  
  • Such unscrambling of the resolution process will not only prove time-consuming, but may also adversely affect the agreed realized gains to the retail debenture holders, who have already consented to the negotiated settlement before the High Court. 

The Court observed,  

“In such a situation, application of the SEBI Circular, though right in law, may lead to unjust outcomes for the retail debenture holders if this court were to reverse the entire course of action which has occurred in the present case.” 

Relying on State v. Kalyan Singh, (2017) 7 SCC 444, the Court opined that the jurisdiction under Article 142 can be used to relax the rigors of law depending upon the peculiar facts and circumstances. Hence, considering that the compromise presently arrived at, which is in the interests of all the parties, will be disturbed if a new process is directed to be commenced in accordance with the SEBI Circular at the present stage, the application of the SEBI Circular will lead to a scenario where a Resolution Plan validly agreed upon by the ICA lenders under the RBI Framework will have to be unscrambled.  

Hence, the Court extended the benefit under Article 142 to the retail debenture holders by allowing the Resolution Plan to pass muster. The appeal was partly allowed and the Authum was allowed to process the takeover of RCFL.  

[SEBI v. Rajkumar Nagpal, 2022 SCC OnLine SC 1119, decided on 30-08-2022] 


*Judgment by: Justice Dr. D Y Chandrachud 


Appearance:  

For SEBI: N Venkataraman, Senior Counsel & Additional Solicitor General  

For RCFL: Darius Khambata, Senior Counsel 

For Bank of Baroda: KV Viswanathan, Senior Counsel  

For Authum Investment and Infrastructure Ltd.: Dhruv Mehta, Senior Counsel 


*Kamini Sharma, Editorial Assistant has put this report together.  


SCC Part
Cases ReportedSupreme Court Cases

   

Constitution of India — Arts. 300-A and 31 — Expropriation of private property by State — Compensation — Entitlement: State on ground of delay and laches cannot evade its legal responsibility towards those from whom private property has been expropriated. Right against deprivation of property unless in accordance with procedure established by law, continues to be a constitutional right under Art. 300-A. It is cardinal principle of rule of law, that nobody can be deprived of liberty or property without due process, or authorisation of law. When it comes to subject of private property, high threshold of legality must be met, to dispossess an individual of their property, and even more so when done by State. [Sukh Dutt Ratra v. State of H.P., (2022) 7 SCC 508]

Criminal Law — Criminal Trial — Sentence — Principles for sentencing — Victimology — Just punishment — Recognises protection of victim’s right — Right of victim or their near and dear ones to seek enhancement of sentence: Victim’s right (including that of victim’s relations, heir or guardian), is a facet of human rights, a substantive and enforceable right and deserves equal regard. Criminal cannot be treated leniently solely on the ground of discretion vested in court. Victim’s relations, heir or guardian should be treated as victim. [Jaswinder Singh v. Navjot Singh Sidhu, (2022) 7 SCC 628]

Debt, Financial and Monetary Laws — Debt, Debt Recovery and Relief — Sale of debtor’s property — Maintainability of writ petition to set aside auction-sale: Hearing of writ petition challenging the auction-sale is not permissible, when proceedings invoked by petitioner in fora below were themselves found non-maintainable. [Deenadayal Nagari Sahakari Bank Ltd. v. Munjaji, (2022) 7 SCC 594]

Evidence Act, 1872 — Ss. 65-A and 65-B — Admissibility of electronic records — Non-compliance with requirement of certification of electronic evidence: Certificate under S. 65-B(4), Evidence Act is mandatory for production of electronic evidence, oral evidence in place of such certificate cannot suffice. [Ravinder Singh v. State of Punjab, (2022) 7 SCC 581]

Insolvency and Bankruptcy Code, 2016 — Ss. 5(13) and 53 — Claims of workmen/employees towards their wages/salaries during CIRP — Payability of, as CIRP costs: While considering the claims of the workmen/employees concerned towards the wages/salaries payable during CIRP, first of all it has to be established and proved that during CIRP, the corporate debtor was a going concern and that the workmen/employees concerned actually worked while the corporate debtor was a going concern during CIRP. Further, as per S. 5(13) only with respect to those workmen/employees who actually worked during CIRP when the corporate debtor was a going concern, their wages/salaries are to be included in CIRP costs and they shall have the first priority over all other dues as per S. 53(1)(a). Also, any other dues towards wages and salaries of the employees/workmen of the corporate debtor shall have to be governed by Ss. 53(1)(b) and 53(1)(c). [Sunil Kumar Jain v. Sundaresh Bhatt, (2022) 7 SCC 540]

Land Acquisition Act, 1894 — S. 23 — Compensation — Determination — Sale exemplars which may be considered: Sale instances of adjacent village either subsequent to land acquired or with respect to small areas of land — Whether may be considered, explained. [Ramrao Shankar Tapase v. Maharashtra Industrial Development Corpn., (2022) 7 SCC 563]

Negotiable Instruments Act, 1881 — S. 138 r/w S. 142 — Dishonour of cheque where a company is payee of that cheque — Filing of complaint in such a case — Maintainability — Prerequisites: When a company is payee of cheque based on which a complaint is filed under S. 138 of the NI Act, the complainant necessarily should be the company represented by an authorised employee. For maintainability of complaint in such cases, prima facie indication in complaint and sworn statement (either orally or by an affidavit) before court to the effect that complainant company is represented by an authorised person who has knowledge about transaction in question, would be sufficient. Such averment and prima facie material is enough to take cognizance and issue process. Issue as to whether aforesaid authorisation and knowledge about transaction is proper, is a matter for trial. [TRL Krosaki Refractories Ltd. v. SMS Asia (P) Ltd., (2022) 7 SCC 612]

Penal Code, 1860 — S. 300 [S. 300 Thirdly] and Ss. 341, 447, 504 and 506 — Case whether one of murder, when the assault is not made with any weapon, but only by legs and hands — Determination of: In this case, material clearly established that after deceased fell down with the help of co-accused, accused K kicked and assaulted deceased on his neck with his legs and hands. Ocular version supported by medical evidence, which indicated that the deceased suffered abraded contusion of reddish blue colour on the neck area and abraded contusion reddish in colour on the left side of the chest. Further, internal dissection revealed profuse bleeding over the muscles of the neck surrounding the arteries that were ruptured. Further, certain left side ribs also fractured. Ventral part of the sternum also broken into two pieces and the spinal cord at certain level also contused, edematous and elongated. Cause of death opined as haemorrhagic shock as a result of multiple injuries, hence, conviction of accused K under Ss. 302, 341, 447, 504 and 506, held, justified. [Krishnamurthy v. State of Karnataka, (2022) 7 SCC 521]

Rent Control and Eviction — Mesne Profits/Compensation/Occupation charges/Damages for wrongful use/trespass: Principles clarified regarding proper basis and reasonable manner of determination of mesne profits of residential property on termination of leave and licence agreement pending first appeal. [Anar Devi v. Vasudev Mangal, (2022) 7 SCC 504]

Service Law — Appointment — Invalid appointment/Wrong appointment/Illegal appointment: Appointment dehors statutory rules, reiterated, is void ab initio. [State of Odisha v. Sulekh Chandra Pradhan, (2022) 7 SCC 482]

Service Law — Judiciary — Promotion: In this case, for promotion to 25% of posts of Higher Judicial Service strictly on basis of merit through Limited Departmental Competitive Examination (LDCE) from Civil Judges (Senior Division), eligibility criteria applicable, only for Delhi Higher Judicial Service (DHJS), was modified, both in terms of: (A) Civil Judges who would be eligible, and (B) Period of qualifying service re different categories of Civil Judges, due to non-availability of candidates as per the existing prescribed criteria, and, parity of work performed by Civil Judge (Junior Division) and Civil Judge (Senior Division) in Delhi. Civil Judges (Junior Division), held, also to be eligible for promotion to DHJS via this channel if they satisfied the norms as specified herein. [All India Judges Assn. v. Union of India, (2022) 7 SCC 494]

Income Tax Appellate Tribunal
Case BriefsTribunals/Commissions/Regulatory Bodies

Income Tax Appellate Tribunal (ITAT), Hyderabad: While deciding the instant appeal in the backdrop of Corporate Insolvency Resolution Proceedings (CIRP) pending against the assessee before the National Company Law Appellate Tribunal (NCLAT), the Bench of Rama Kanta Panda (Accountant Member) and K. Narasimha Chary (Judicial Member), held that once the proceedings have commenced by institution of application under Sections 7 or 9 or 10 of the Insolvency and Bankruptcy Code, 2016 (hereinafter IBC or the Code), the continuance of pending proceedings in any Court of law or Tribunal is prohibited.

The Tribunal observed the issue in the light of Sections 13 and 14 IBC 2016 and stated that under Section 13 of IBC, 2016, the adjudicating authority after admission of the application under Sections 7 or 9 or 10 of the Code, shall declare a moratorium which shall include the prohibition of the institution of suits or continuation of pending suits or proceedings against the corporate debtor in any court of law or tribunal

The Tribunal relied upon Ghanashyam Mishra & Sons (P) Ltd. v. Edelweiss Asset Reconstruction Co. Ltd., (2021) 9 SCC 657 wherein it was held that once a resolution plan is duly approved by the Adjudicating Authority under Section 31 (1) of the Code, the claims as provided in the resolution plan shall stand frozen and will be binding on the Corporate Debtor and its employees, members, creditors including the Central Government, any State Government or any local authority, guarantors and other stakeholders. All the dues including the statutory dues owed to the Central or any State Government, local authority (if not part of the resolution plan), shall stand extinguished and no proceedings in respect of such dues for the period prior to the date on which the Adjudicating Authority grants its approval under Section 31 could be continued.

Decision:With the afore-stated observations and noting that there is an ongoing proceeding before the NCLAT instituted under the IBC, 2016, the Tribunal dismissed the appeals in limine.

The parties were granted leave to seek restoration of the appeals only if it is necessitated by the orders of the Corporate Insolvency Resolution Proceedings.[Deccan Chronicle Holdings Ltd. v. ACIT, 2022 SCC OnLine ITAT 474, decided on 22-07-2022]


Advocates who appeared in this case :

Assessee: S.Rama Rao, AR

Revenue: Y.V.S.T.Sai, CIT-DR


*Sucheta Sarkar, Editorial Assistant has reported this brief.

Case BriefsSupreme Court

Supreme Court: The 3-judge bench of NV Ramana*, CJ and JK Maheshwari and Hima Kohli, JJ has held that the Insolvency and Bankruptcy Code, 2016 (IBC) would prevail over the Customs Act, 1962 to the extent that once moratorium is imposed in terms of Sections 14 or 33(5) of the IBC as the case may be, the Central Board of Indirect Taxes and Customs (CBIC) only has a limited jurisdiction to assess/determine the quantum of customs duty and other levies as it does not have the power to initiate recovery of dues by means of sale/confiscation, as provided under the Customs Act.

In India, when the corporate insolvency process commences, the adjudicating authority is mandated to declare a moratorium on continuation or initiation of any coercive legal action against the Corporate Debtor. Even if a company goes into liquidation, a moratorium continues in terms of Section 33(5) of the IBC.

Section 14 of the IBC prescribes a moratorium on the initiation of CIRP proceedings and its effects. One of the purposes of the moratorium is to keep the assets of the Corporate Debtor together during the insolvency resolution process and to facilitate orderly completion of the processes envisaged under the statute. Such measures ensure the curtailing of parallel proceedings and reduce the possibility of conflicting outcomes in the process. Further, one of the motivations of imposing a moratorium is for Section 14(1)(a), (b), and (c) of the IBC to form a shield that protects pecuniary attacks against the Corporate Debtor. This is done in order to provide the Corporate Debtor with breathing space, to allow it to continue as a going concern and rehabilitate itself.

The Court, hence, observed that any contrary interpretation would crack this shield and would have adverse consequences on the objective sought to be achieved.

The Court, further, explained that, the IBC, being the more recent statute, clearly overrides the Customs Act. Section 142A of the Customs Act notes that the Custom Authorities would have first charge on the assets of an assessee under the Customs Act, except with respect to cases under Section 529A of Companies Act 1956, Recovery of Debts Due to Banks and Financial Institutions Act 1993, Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 and the IBC, 2016. This exception created under the Customs Act is duly acknowledged under Section 238 of the IBC as well.  Section 238 of the IBC clearly overrides any provision of law which is inconsistent with the IBC. It was, hence, held that,

“The Customs Act and the IBC act in their own spheres. In case of any conflict, the IBC overrides the Customs Act.”

On the scope of power of CBIC, the Court held that CBIC can only initiate assessment or re-assessment of the duties and other levies. They cannot transgress such boundary and proceed to initiate recovery in violation of Sections 14 or 33(5) of the IBC. The interim resolution professional, resolution professional or the liquidator, as the case may be, has an obligation to ensure that assessment is legal and he has been provided with sufficient power to question any assessment, if he finds the same to be excessive.

The Court also took note of the fact that issuing a notice under Section 72 of the Customs Act for non-payment of customs duty falls squarely within the ambit of initiating legal proceedings against a Corporate Debtor. Even under the liquidation process, the liquidator is given the responsibility to secure assets and goods of the Corporate Debtor under Section 35(1)(b) of IBC. On the other hand, the authorities under the Customs Act have a limited jurisdiction to determine the quantum of operational debt in order to stake claim in terms of Section 53 of the IBC before the liquidator. CBIC does not have the power to execute its claim beyond the ambit of Section 53 of the IBC.

[Sundresh Bhat v. Central Board of Indirect Taxes and Customs, 2022 SCC OnLine SC 1101, decided on 26.08.2022]


*Judgment by: CJI NV Ramana


For appellant: Senior Advocate  Arvind Datar

For CBIC: Additional Solicitor General K.M. Nataraj

Insolvency Law
OP. ED.SCC Journal Section Archives

INTRODUCTION

The Insolvency and Bankruptcy Code, 2016 (“the Code”) was inter alia enacted to consolidate and amend the laws relating to the reorganisation and insolvency of corporate persons. It marked a sea change (nautical references will be a recurring theme in this piece) in the manner in which corporate insolvencies were treated. Replacing multiple legislation and mechanisms in this field, the legislature saw the need for a complete “Code”, rather than an “Act”, to “bring the insolvency law in India under a single umbrella with the object of speeding up of the insolvency process”.1

Although the Code did address many problems relating to restructuring and insolvency law, one issue that has cropped up is its general application to all corporate entities, whereas certain types of corporate entities would require differential treatment. For instance, real estate companies were a class of corporate entities where the extant provisions in the Code were found to be problematic. Accordingly, by an amendment2, the Code now specifies a minimum number of allottees in a real estate project who must join an action to trigger a corporate insolvency resolution process (“CIRP”). Similarly, financial service providers, despite being corporate entities, are treated differently inasmuch as they are not “corporate persons”3 and an application against them for initiation of a CIRP would not lie as it would for other corporate entities. Pursuant to Section 227 of the Code and to an extensive report which proceeds on the basis that “financial firms are different from other firms”4, the Central Government notified separate rules5 for them.

Therefore, there appears to be a recognition that the Code cannot apply to all corporate entities uniformly. While, perhaps understandably, shipping companies did not loom large on the lawmakers’ horizon, they too are an entirely distinct subset of corporate entities and present unique challenges for the purpose of the Code.

The primary assets of shipping companies tend to be the vessels themselves. The difficulty arises on account of the fact that a vessel is to be treated as an independent juristic person. This has followed the long and storied development of admiralty law internationally, leading to the excellent judgment of Thommen, J. in MV Elisabeth v. Harwan Investment and Trading (P) Ltd.6 reading those internationally-accepted positions into Indian law. A person having a maritime claim (which includes the higher subset of maritime lien) could proceed against the vessel independent of the owner. Unless the owner entered appearance and deposited security, the vessel could be sold and the proceeds appropriated as per a predetermined waterfall amongst different categories of claimants. India codified admiralty law for the first time through the Admiralty (Jurisdiction and Settlement of Maritime Claims) Act, 2017 (“the Admiralty Act”),7 largely following extant international conventions and the position in common law. Pertinently for us, it continued treating vessels as independent juristic persons; allowed those vessels to be proceeded against independently; and prescribed a waterfall for treatment of claimants vis-à-vis the sale proceeds.

It was thus inevitable that the provisions of the Code and the subsequent Admiralty Act would have to be reconciled in the case of a shipping company undergoing a CIRP. In an admirable attempt to resolve this impasse, the Bombay High Court pronounced an exhaustive judgment in Barge Madhwa8.

DECISION IN BARGE MADHWA8

The Court first examined whether or not there was a conflict between the two statutes. It observed that in the event of a conflict between two special statutes—one with a non obstante clause and the other without—the one with a non obstante clause would prevail.9 This presumably proceeds on the basis that both the Code and the Admiralty Act were deemed to be special statutes. However, the Court did not find itself to be in a position where this principle of statutory interpretation would have to be applied because it concluded that there was no conflict and it was possible to harmoniously interpret the two statutes.10

The Court found that since admiralty proceedings were in rem against the vessel, a distinct juridical entity, they were capable of being initiated both during moratorium11 and in liquidation12. However, if the owner of the vessel entered appearance and furnished security, the admiralty suit would no longer be in rem, but would be in personam against the owner of the vessel. Consequently, the moratorium prescribed under the Code13 would apply and the suit would not proceed.8 Where no security was furnished by the owner, the admiralty suit would continue to be a proceeding in rem and thus not barred by the moratorium. However, while the vessel could be arrested/remain under arrest, the suit would not to proceed during the CIRP since that would undermine the objectives of the Code.14 No such limitation would exist once liquidation commenced and the vessel could be sold and the proceeds distributed in accordance with the Admiralty Act. In fact, the Court correctly observed that a sale under the Admiralty Act would likely fetch a better price since it would be free of all encumbrances (including liens).15

Further, it held that an arresting plaintiff would be considered as a secured creditor (qua the vessel) for the purposes of a Resolution Plan under the Code, and would be entitled to satisfaction of its claim as if sale proceeds had been distributed on the basis of the priorities enlisted in Section 10 of the Admiralty Act.16 If, on an application of this formula, the entirety of its claim were not satisfied, it would rank as an operational creditor for the remainder of its claim.17

BATTENING DOWN THE HATCHES

Despite the attempt by the Bombay High Court to harmonise the Code and the Admiralty Act, there are a few issues that require consideration, inasmuch as these form the basis of the harmonisation exercise in Barge Madhwa8 and necessitate a particularly delicate balancing act. For the purpose of this article, the following four broad categories have been dealt with:

(a) Vessels as independent juristic persons.

(b) The treatment of a plaintiff as a secured creditor for the purpose of a resolution plan under the Code.

(c) Distribution of proceeds/determination of priorities in liquidation.

(d) The Code — a general law or special law?

Vessels as Independent Juristic Persons

To aid the process of reorganisation, the Code mandates a moratorium13 during which the institution or continuation of suits or proceedings against the company is prohibited. But what of vessels that are independent juristic persons? If suits against them are allowed to proceed, a shipping company is likely to be left with no assets to offer a prospective resolution applicant. Imagine the steel producing factories of Essar Steel being treated as independent juristic persons against whom the moratorium would not operate — would there be any chance of a successful resolution process?

The Bombay High Court, relying upon the decision in MV Elisabeth6, has reiterated that a vessel is a “separate juridical personality” and, more importantly for this study, that a person having a maritime claim against the vessel: (Barge Madhwa case8, SCC OnLine Bom para 40)

40. … has a right in rem conferred by the Admiralty Act, to arrest the vessel to perfect his claim … a very valuable right which cannot be taken away or destroyed by implication or inference unless there is an express provision in any law to this effect.8

Given that there was no express bar against proceeding against vessels in rem under the Code, it was held that “there is little conflict … the two Acts can be read and construed harmoniously so as to give effect to both”.18 This harmonious construction leads to the mechanism which Barge Madhwa8 prescribes—the existence of a moratorium would not preclude the initiation or continuation of admiralty proceedings, however, they would not proceed beyond the arrest of the vessel since that “would defeat the very purpose of insolvency resolution under the IBC”19.

This tightrope walk i.e. finding that a vessel is a distinct juridical entity and thus a moratorium would not protect it, but then restricting any such action to the arrest of the vessel alone and prohibiting further steps, being the sale of the vessel and distribution of the proceeds, is the price one must pay in terms of conceptual purity at the altar of practicality and harmonious construction. If the vessel was distinct from the corporate entity, which indeed it is, there is no reason in theory that would justify prohibiting a sale and the distribution of proceeds. This would, however, render the insolvency resolution attempt of any shipping company entirely untenable. Any harmonious construction of the two statutes would have to be anchored by the accord struck in Barge Madhwa8 which prohibits these further steps from taking place. However, as will be seen below, this tightrope walk leads to problems of its own.

Treatment of Admiralty Act plaintiffs in an Insolvency Resolution

One of the other pillars of the harmonious construction exercise is the treatment of a plaintiff who has secured an arrest order from an admiralty court. Barge Madhwa8, following the decision of the Court of Appeal in ARO Company Ltd., In re20 holds that once a person has obtained an arrest, the vessel stands charged with his claim and he thus becomes a secured creditor. Accordingly, any resolution plan must treat that plaintiff as a secured creditor for the value of his charge on the vessel.

This proposition is difficult to reconcile with the definition of a secured creditor under the Code. Under the Code21, a secured creditor is defined as one in whose favour a security interest has been created, which in turn is defined22 as any right, title, interest or claim to property created to secure the payment or performance of an obligation. It is submitted that, it is difficult to see how the mere factum of an arrest or the deposit of money into court to secure the release of an arrested vessel, creates a security interest as defined under the Code. This is particularly so because there would be no adjudication of the plaintiff’s claim given that further proceedings are stayed. Even if there is a deposit, it would be in favour of the plaintiff only once the suit is decreed. Such a mechanism would also tantamount to an artificial distinction between similarly placed creditors, say bunker suppliers, in their treatment in the resolution process—some of who may be “secured” by obtaining the arrest and others who have not.

There is a further difficulty. Barge Madhwa8 says that, “In such a situation plaintiff should ordinarily be entitled to realise his claim to the full extent of the security provided.”23 In practice, this would mean that various claimants who qualify as operational creditors under the Code will have to be paid out in full prior to any financial creditors, who effectively control the CIRP. Whether this is something that would appeal to the “commercial wisdom” of the committee of creditors is anyone’s guess; it is entirely likely that such treatment would lead to the exact situation which the Court wished to avoid in the first place, i.e. undermining the resolution process under the Code.

Determination of priorities in liquidation under the Code and the Admiralty Act

Difficulties though, are not confined only to the designation of an arresting plaintiff as a secured creditor in the CIRP. In the event that the CIRP fails, the shipping company would immediately proceed to liquidation. This gives rise to a difference in treatments under the Code and the Admiralty Act which is impossible to overcome without one prevailing over the other.

Under the Code, Section 53, which begins with a non obstante clause, sets out the distribution waterfall with respect to sale proceeds of the liquidation assets. In the Admiralty Act, Sections 9 and 10 deal with the determination of priorities. For several categories of claims these provisions are at odds with one another. For instance, the wages of seamen working on the vessel would constitute the highest category of maritime lien under Section 9 of the Admiralty Act, which consequently is the highest category of maritime claim during the determination of priorities. In other words, seamen wages would be paid out in full and have the first right over the sale proceeds of the vessel. Under the Code, seamen would be considerably worse off. Firstly, a secured creditor of the vessel could choose to remain outside liquidation altogether, in which case the seamen would have no specific right with respect to the sale proceeds of that vessel. Even otherwise, assuming that there is either no mortgagee of the vessel or the mortgagee has relinquished his rights in favour of the liquidation estate, seamen’s claims would rank pari passu with such secured creditors, and that too only for wages which precede the date of liquidation by 24 months. A similar situation would also arise with respect to port dues and statutory dues, which albeit ranking lower than crewmen’s wages, still constitute maritime liens and hence, rank above a secured creditor under the Admiralty Act while falling further down the waterfall under the Code.

In Barge Madhwa8, the Bombay High Court has addressed this conundrum by finding that, on liquidation, the: (SCC OnLine Bom para 102)

102. … determination of priorities will also be done in accordance with Section 10 of the Admiralty Act and inter se priorities of maritime liens will be decided in accordance with Section 9 of the said Act. Section 53 of IBC which refers to distribution of assets will not apply.24

Although the pronouncement of law is categorical, there are a few issues that merit consideration. Firstly, is it fair that wages for seamen are accorded such a high priority in the case of a liquidation under the Code when wages of workmen in other industries fall far lower in the pecking order? Was this the legislative intent i.e. distinguishing between workers on a ship and, for instance, workers in a coal mine, both of whom are subject to considerable personal peril? Secondly, elsewhere in the decision, the Court arrived at a finding that: (Barge Madhwa case8, SCC OnLine Bom para 72)

72. … where there are two special enactments, one of which contains a non obstante provision and bars the jurisdiction of the civil court and the other which does not contain a non obstante provision, the clear legal position is that in the event of conflict, the former Act will prevail. The principle of interpretation that the later Act overrides the earlier Act is not applicable in such a situation.9

Therefore, in the event of a conflict, this would suggest that the Code would prevail over the Admiralty Act. It is then difficult to see the legal justification for why the determination of priorities would proceed in accordance with the Admiralty Act rather than the Code.

This leads straight to the next part of this article where it is considered whether the Code is in fact a general law and the Admiralty Act, being a special law, ought to prevail.

The Code: A General Law or Special Law?

The decision in Barge Madhwa8 tries to harmonise the Code and Admiralty Act—as any judgment must attempt to—and finds that there is no conflict. The difficulties with such an approach have been considered above and the apparent conflicts that arise. While it may be possible to harmonise the statutes in the context of proceedings in rem against a vessel, which Barge Madhwa8 has done excellently, it is submitted that in the treatment of the plaintiffs as secured creditors and the determination of priorities in liquidation, the two statutes are completely divergent, and harmonisation may not have been the appropriate answer.

It is submitted that it would have been apposite for the Court to consider whether one statute would prevail over the other in these circumstances. Although having found that the two statutes are capable of harmonisation, the Court has observed that, in the case of two special statutes, one of which contains a non obstante clause, that statute would prevail in the case of a conflict. This would suggest that the Code would prevail. However, there is another way to consider this situation.

A statute may be general in one context, but special in another; what has to be seen to determine whether or not a statute is general is (i) its principal subject-matter, and (ii) the perspective in consideration.25 As we have seen above, the Code was enacted to consolidate and amend insolvency laws.26 In doing so, it does not distinguish amongst different types of corporations and applies uniformly to all of them. The Admiralty Act, on the other hand, applies only in the context of shipping corporations.

Moreover, claims such as “rewards for salvage services”, and in respect of “loss of life and personal injury” do not even find a mention under the Code. These are claims which are unique to the Admiralty Act and would, at best, fall under the residual category of “any remaining debts and dues” under Section 53 of the Code. They would thus rank sixth in the order of priorities under the Code, but rank highest under the Admiralty Act. Mortgage debts, on the other hand, would be satisfied on a priority basis under the Code whereas, under the Admiralty Act, they would be satisfied only after all maritime liens have been discharged.

Therefore, it is apparent that, while the Code deals generically with classes of creditors that would ordinarily be found in any corporation, the Admiralty Act recognises certain stakeholders that are unique to maritime operations and provides for a distinct manner in which their interests are to be satisfied. This again suggests that the Admiralty Act is a special law vis-à-vis the Code.

Maritime liens are another marker for why the Admiralty Act should be treated as a special law qua the general Code. As Nigel Meeson puts it poignantly, a maritime lien, although a sui generis concept,27 is essentially a charge which adheres to the vessel from the time the fact giving rise to the lien occurs and which continues to bind the ship until it is discharged.28 The fact that a vessel may change hands, whether in terms of possession or ownership, is immaterial.29 A maritime lien continues to attach itself to the vessel.

Under Section 31(1) of the Code, a resolution plan, once approved by the adjudicating authority, is binding on the corporate debtor and its creditors. However, insofar as maritime lien holders are concerned, they are not just creditors of the corporate debtor, but their claim also attaches to the vessel regardless of ownership, until it is discharged. Therefore, conceptually, this charge would continue to attach itself to the vessel even if the ownership of the corporate debtor changed hands under a resolution plan. The Code neither contemplates, nor deals with such a scenario. On the contrary, Section 8 of the Admiralty Act does. It says that, on the sale of a vessel by an admiralty court, it would vest free of all liens, attachments, charges, encumbrances and registered mortgages.

In light of these reasons, we believe that considering the subject-matters of the two statutes as well as from the perspective of the stakeholders involved, the Admiralty Act is a special statute vis-à-vis the Code. Although Barge Madhwa8 has made a creditable attempt to harmonise the two statutes, given the difficulties that are likely to arise, it is submitted that the Court ought to have held that the Admiralty Act prevails over the Code. This would no doubt lead to a CIRP for shipping companies being rendered difficult—given that their assets would be the subject-matter of admiralty proceedings—but we see that as something that is likely to arise even under the harmonisation method. It would, however, lead to a quicker resolution through sale of the vessel in case the shipowner is defunct, and the distribution of proceeds as per the maritime industry’s time-honoured priorities (now encapsulated in the Admiralty Act), without undergoing a CIRP and dealing with competing creditors. It would also serve the overarching principle of the Code i.e. maximisation of value given that a prompt admiralty sale is likely to achieve a far higher price, in light of Section 8 and without the delays of the CIRP.


Advocates, Bombay High Court.

*The article has been published with kind permission of SCC Online cited as (2021) 5 SCC J-31

1 Innoventive Industries v. ICICI Bank, (2018) 1 SCC 407, para 13 (Nariman, J.).

4 Report of the Sub-Committee of the Insolvency Law Committee for Notification of Financial Service Providers under Section 227 of the Insolvency & Bankruptcy Code, 2016, 1 (dated 4-10-2019).

7 The Act came into effect on 1-4-2018.

8 Raj Shipping Agencies v. Barge Madhwa, 2020 SCC OnLine Bom 651

9 Id, para 72.

10 Id, paras 78 to 131.

11 Id, para 112.

12 Id, para 123.

14 Raj Shipping Agencies v. Barge Madhwa, 2020 SCC OnLine Bom 651, para 100.

15 Id, para 125.

16 Id, para 104.

17 Id, para 106.

8 Raj Shipping Agencies v. Barge Madhwa, 2020 SCC OnLine Bom 651.

6 MV Elisabeth v. Harwan Investment and Trading (P) Ltd., 1993 Supp (2) SCC 433

8 Raj Shipping Agencies v. Barge Madhwa, 2020 SCC OnLine Bom 651, para 40.

18 Id, para 90.

19 Id, para 92.

8 Raj Shipping Agencies v. Barge Madhwa, 2020 SCC OnLine Bom 651.

23 Id, para 98.

8 Raj Shipping Agencies v. Barge Madhwa, 2020 SCC OnLine Bom 651.

24 Id, para 102.

9 Id, para 72.

8 Raj Shipping Agencies v. Barge Madhwa, 2020 SCC OnLine Bom 651.

25 See: LIC v. D.J. Bahadur, (1981) 1 SCC 315; Yakub Abdul Razak Memon v. State of Maharashtra, (2013) 13 SCC 1.

27 Nigel Meeson & John Kimpbell, Admiralty Jurisdiction and Practice (4th Edn., Lloyd’s Shipping Law, 2011) p. 260.

28 Id, p. 266.

29 Id, pp. 260-61.

8 Raj Shipping Agencies v. Barge Madhwa, 2020 SCC OnLine Bom 651.

SCC Part
Cases ReportedSupreme Court Cases

   

Army Act, 1950 — Ss. 125, 126, 69, 3(ii) and 70 — Criminal trial — Concurrent jurisdiction of court martial under Army Act and criminal courts under CrPC: When Designated Officer/Commanding Officer impliedly declined to exercise discretion to conduct trial in court martial. Trial by criminal court under CrPC, held, mandatory. In a case of concurrent jurisdiction, when court martial has impliedly declined to conduct trial, criminal court cannot direct the court martial to do the same. [State of Sikkim v. Jasbir Singh, (2022) 7 SCC 287]

Civil Procedure Code, 1908 — Or. 41 R. 27 — Admissibility of additional evidence in appellate court not adduced in the court of original jurisdiction: Admissibility of additional evidence under Or. 41 R. 27 CPC does not depend upon the relevancy of the issue on hand, or whether the applicant had an opportunity for adducing such evidence at an earlier stage or not, but it depends upon whether or not appellate court requires the evidence sought to be adduced to enable it to pronounce judgment or for any other substantial cause. That is, whether such additional evidence has a direct bearing on pronouncement of the judgment. [Sanjay Kumar Singh v. State of Jharkhand, (2022) 7 SCC 247]

Constitution of India — Arts. 21, 32 and 226 — Constitutional/Public Law Torts/Public Safety — Violation of life and personal liberty: Where life and personal liberty have been violated, absence of any applicable statutory provision(s) for compensation is of no consequence. Right to life guaranteed under Art. 21 is the most sacred right preserved and protected under the Constitution, violation of which is always actionable and there is no necessity of any statutory provision as such for preserving that right. Thus, a writ petition seeking compensation is maintainable. Furthermore, Art. 21 has to be read into all public safety statutes, since prime object of public safety legislation is to protect individual and to compensate him for loss suffered. Duty of care expected from State or its officials functioning under public safety legislation is very high. [Sanjay Gupta v. State of U.P., (2022) 7 SCC 203]

Constitution of India — Arts. 300-A and 226 — Right to property: Deprivation of property can only be permitted when and to the extent it is strictly in compliance with applicable law. Land reserved for public purpose under Town Planning law. Lapse of acquisition due to inaction of executive to acquire land within prescribed statutory time period cannot be interfered with by Court contrary to scheme of the applicable statute. [Laxmikant v. State of Maharashtra, (2022) 7 SCC 252]

Education Law — Professional Colleges/Education — Medical and Dental Colleges — Reservation of seats/Quota/Exemption/Priority in Medical/Dental Institutions: In this case, directions were issued to implement roster point-based reservation for preferential candidates as followed by JIPMER in all AIIMS institutes. However, roster points need not be similar to that of JIPMER. This order directed to be applicable for admission from year 2022. Students Assn. [AIIMS v. AIIMS, (2022) 7 SCC 201]

Insolvency and Bankruptcy Code, 2016 — Ss. 8, 9, 5(20), 5(21), 3(6) and 3(12) — Procurer/purchaser of services/goods from corporate debtor by rendering advance payments to it — Consideration of, as operational creditor: Debt arising from a contract in relation to supply of goods/services by corporate debtor amounts to “operational debt”. [Consolidated Construction Consortium Ltd. v. Hitro Energy Solutions (P) Ltd., (2022) 7 SCC 164]

Land Acquisition Act, 1894 — S. 23 — Compensation awarded in another proceeding: Extent to which compensation awarded in another proceeding may be relied on, all relevant factors and necessity of consideration of it, explained. [LAO v. N. Savitha, (2022) 7 SCC 256]

Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 — S. 35 r/w Ss. 13(2), 13(4) and 2(1)(zc) to (zf) — Dues of secured creditor, priority of, over dues of Central Excise Department: Dues of secured creditor over the properties of assessee have priority over dues of Central Excise Department. Prior to insertion of S. 11-E of the Central Excise Act, 1944 there was no provision in the 1944 Act inter alia providing for first charge on the property of the assessee or any person under the 1944 Act. Further, S. 35 of the SARFAESI Act inter alia provides that the provisions of the SARFAESI Act shall have overriding effect on all other laws. Also, even the provisions contained in S. 11-E of the Central Excise Act are subject to the provisions contained in the SARFAESI Act. [Punjab National Bank v. Union of India, (2022) 7 SCC 260]

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Know Thy Judges


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

Justice Krishna Murari

Justice M.M. Sundresh

NCLAT
Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Appellate Tribunal, New Delhi: The Bench of Ashok Kumar Bhushan, J., Chairperson, M. Satyanarayana Murthy, J., Judicial Member, and Barun Mitra, Technical Member set aside an order given by the National Company Law Tribunal, New Delhi (NCLT, New Delhi) and held that the Appellant, Entertainment City Ltd., is an affiliate of the Unitech Group. Hence, the moratorium imposed by the Supreme Court in orders given in the case of Bhupinder Singh v. Unitech Ltd. Civil Appeal No. 10856 of 2016, on 20-01-2021 and 24-03-2021 would apply to the Appellant and the application filed by the Respondent for initiation of Corporate Insolvency Resolution Process under Section 7 of the Insolvency and Bankruptcy Code, 2016 stood adjourned sine die.

The Appeal was filed against the order dated 06-04-2022 wherein NCLT, Delhi rejected the prayer of the Appellant, that the proceedings in Section 7 Application be adjourned sine die because of the Moratorium passed by the Supreme Court in Bhupinder Singh v. Unitech Limited.

The Bench noticed that the order of the Supreme Court dated 20-01-2020, referred to the expression which “included all its affiliates, trusts, subsidiaries, etc.” Hence, the Bench referred to the definition of ‘affiliate‘ defined in the Subscription-cum-Shareholders Agreement. As per paragraph 1 of the agreement, an affiliate refers to “Affiliate” means in relation to any party, (i) any person that directly or indirectly Controls, is Controlled by, such party; or (ii) any person, the legal and beneficial ownership of at least 26% of which is directly or indirectly held (including through one or more persons) collectively or severally by such party; (iii) any trust in respect of which such party is a direct or indirect a beneficiary; and (iv) in the case of a natural person, any Relative of such person.” Further, “the term “Affiliate” shall include (i) any fund, collective investment scheme, trust, partnership (including without limitation anyco-investment partnership), special purpose or other vehicles, or any subsidiary or Affiliate of any of the foregoing, in which any member or subsidiary of Investor is a general or limited partner, shareholder, investment manager or advisor, member of a management or investment committee, nominee, custodian, trustee or unit holder

In the light of the above definition, the Bench concluded that Unitech Holdings Ltd, a wholly owned subsidiary of Unitech Ltd, has a shareholding to the extent of 41.95% in the Appellant. Hence, the Appellant is an affiliate of Unitech Group.

Therefore, the Bench held that the order dated 06-04-2022 passed by the NCLT, Delhi was set aside and the Application under Section 7 filed by the Respondent was adjourned sine die till the Moratorium imposed by the orders of the Supreme Court.

[Entertainment City Ltd v. Simran Kaur, 2022 SCC OnLine NCLAT 334, decided on 25-07-2022]


Advocates who appeared in this case :

Siddharth Batra, Shivani Chawla, and Chinmay Dubey, Advocates, For Appellants;

Piyush Singh and Aditi Sinha, Advocates, for the Respondents.

NCLAT
Case BriefsTribunals/Commissions/Regulatory Bodies

   

National Company Law Appellant Tribunal, New Delhi: The Bench of Ashok Bhushan, J., Chairperson, and Shreesha Merla, Technical Member, while dismissing a company appeal held that when a Corporate Debtor as a Guarantor has not invoked the Corporate Guarantee before the initiation of Corporate Insolvency Resolution Process (hereinafter as ‘CIRP') under the provisions of Insolvency and Bankruptcy Code, 2016 (Hereinafter as ‘IBC') then the ‘right to payment' cannot be accrued by the Corporate Debtor.

Background of the Case

The Appellant, IDBI, was appointed as a Debenture Trustee for the benefit of the Holders of certain Debentures issued by M/s. Saha Infratech Pvt. Limited (Principal Borrower) as per the Debenture Trustee Agreement dated 18-05-2016. The first Respondent, Mr. Abhinav Mukherjee, is the Homebuyer of Palm Developers Pvt. Ltd., ‘Corporate Debtor' having a claim of Rs.2,94,43,634/-; the second Respondent Mr. Krit Narayan Mishra is the Resolution Professional of the ‘Corporate Debtor', appointed vide letter dated 13-07-2021 in I.A. 1742/2021 replacing the erstwhile IRP, Mr. Manoj Kumar Singh. The Appellant, ECL Finance Limited is the original Debenture Holder which executed the Assignment Agreement dated 27-03-2020 whereby all rights regarding the Financial Assistance were assigned in favour of Assets Care and Reconstruction Enterprise Limited (‘ACRE').

The appeals were filed under Section 61 (1) of the IBC challenging the impugned order dated 14-03-2022 passed by the National Company Law Tribunal, New Delhi, wherein the application filed by a homebuyer was allowed and held that ‘IDBI Trusteeship Services Limited' and ‘ECL Finance Ltd.', the Appellants are not ‘Financial Creditors' and also observed that the Appellants are ‘Related Parties' to the ‘Corporate Debtor'.

Analysis and Decisions

  • Whether the NCLT, Delhi was right in applying the ratio of ‘Anuj Jain Interim Resolution Professional for Jaypee Infratech Limited v Axis Bank and holding that the Appellants are not ‘Financial Creditors' since there was no ‘direct disbursal' of the amount to the ‘Corporate Debtor'/Guarantor.

The Bench observed that a ‘Guarantee is included' as one of the illustrations which specify the definition of ‘Financial Debt' under Section 5(8)(i) of the IBC. Further, the Bench referred to the judgment given in Ascot Realty Private Limited v. Ajay Kumar .', (2020) SCC OnLine NCLAT 732, where it was held that for initiation of Insolvency Proceedings against the Corporate Guarantor, the element of disbursal for ‘Time Value of Money' is not required. Hence, the Bench opined that there was no direct disbursal of the amount to the Corporate Guarantor, any amounts released to the Principal Borrower and not to the Corporate Guarantor do constitute ‘Financial Debt' as defined under Section 5(8) of the IBC and it cannot be said that such amounts do not have consideration for ‘Time Value of Money'.

Therefore, the Bench held that the ratio of Anuj Jain Interim Resolution Professional for Jaypee Infratech Ltd v. Axis Bank, 2019 SCC OnLine SC 1775 is not applicable.

  • Whether the locus of the ‘Individual Homebuyer' or Financial Creditor to challenge the Constitution of the Committee of Creditors (‘CoC')?

The Bench in this regard referred to the judgment of the Supreme Court in Phoenix Arc Pvt.Ltd.' v. Spade Financial Services Ltd. (2021) 3 SCC 475, wherein it was held that ‘Financial Creditors' forming part of the CoC must be heard during proceedings which would establish the status of other ‘Financial Creditors'. Further, the Bench even referred to the judgment given in Aashray Social Welfare Society v. Saha Infratech Pvt. Ltd. & Ors., Comp. (AT) (Ins) No. 904 of 2021, wherein it was held, “It cannot be said that since the Authorised Representative has not come up before the Adjudicating Authority for filing the impleadment application, the Appellants who themselves are Homebuyers have no right to participate in the adjudication initiated by filing applications”.

Therefore, in the light of the above cases, the Bench held that the Homebuyer has every right to be heard and has the locus to challenge the Claim of the Appellants.

  • Whether the Appellants are ‘Related Parties' of the ‘Corporate Debtor' and were in a ‘position' to ‘control' the affairs of the ‘Corporate Debtor', to fall within the ambit of the definition of ‘Related Party' as defined under Section 5(24) of the IBC.

The Bench observed that the purpose of excluding a related party of a ‘Corporate Debtor' from the CoC is to obviate conflicts of interest that are likely to arise if a related party is allowed to become a part of the CoC. The Supreme Court in many judgments has held that the exclusion under the first proviso to Section 21(2) of the IBC was related not to the debt itself, but to the relationship existing between the related party ‘Financial Creditor' & ‘Corporate Debtor'.

Hence, the Bench relied on the judgment given in the case of Arcelormittal India Pvt. Ltd. v. Satish Kumar Gupta, (2019) 2 SCC 1, and held that the Appellants do have ‘Positive Powers'and are in a position to directly and indirectly control the management and the policy decisions of the ‘Corporate Debtor'.

  • Whether the Appellant can make a ‘Claim' based on the ‘Guarantee Deed' which was never invoked pre-commencement of the CIRP, and remained uninvoked even as on the date of filing of the ‘Claim', thereby meaning that ‘Right to Payment' has not yet accrued?

The Bench relied on the observation of the Supreme Court in Swiss Ribbons Pvt. Ltd. v. Union of India, (2019) 4 SCC 17, where it was observed that “Whereas a “claim” gives rise to a “debt” only when it becomes “due”, a “default” occurs only when a “debt” becomes “due and payable” and is not paid by the debtor. It is for the reason that a financial creditor has to prove “default” as opposed to an operational creditor who merely “claims” a right to payment of a liability or obligation in respect of a debt which may be due.” Therefore, the Bench opined that he Appellants cannot Claim the amounts in the CIRP of the ‘Corporate Debtor' who is a ‘Corporate Guarantor ‘based on the Deed of Guarantee which was never invoked as on the date of filing of the Claims.

Further, the Bench placed reliance on the judgment of the Supreme Court in Ghanshyam Mishra and Sons Pvt Ltd v. Edelweiss Asset Reconstruction Co. Ltd., (2021) 9 SCC 657 and held that when the ‘Corporate Debtor' is a ‘Guarantor' and the ‘Corporate Guarantee' was not invoked before the commencement of the CIRP, as on the date of filing of the Claims, the ‘Right to Payment' cannot be accrued.

Hence, the Bench dismissed the company appeals.

[IDBI Trusteeship Services Ltd. v. Abhinav Mukherjee, 2022 SCC OnLine NCLAT 267, decided on 12-07-2022]


Appearances before the tribunal

COMPANY APPEAL (AT) (INSOLVENCY) No. 356 of 2022

Dr. Abhishek Manu Singhvi, Sr. Advocate with Gaurav Mitra, Dev Roy, Himanshi Rajput, Atul Sharma, and Aditya Vashisth, Advocates, for the Appellants;

Abhijeet Sinha, and Raghavendra M. Bajaj, Advocates, for the Respondent No.1;

Milan Singh Negi, Advocate, for the New IRP.

COMPANY APPEAL (AT) (INSOLVENCY) No. 358 of 2022

Ramji Srinivasan, Sr. Advocate with Gaurav Mitra, Dev Roy, Atul Sharma, Renuka Iyer, Aditya Vashisth and Ms. Himanshi Rajput, Advocates, for the Appellants;

Abhijeet Sinha and Raghavendra M. Bajaj, Advocate for R-1;

Milan Singh Negi, Advocate, for the New IRP.

NCLAT
Case BriefsTribunals/Commissions/Regulatory Bodies

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

Background of the case

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

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

Analysis and decision

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

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

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

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

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

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

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


Advocates who appeared in this case :

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

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

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

Financial Creditor
Case BriefsTribunals/Commissions/Regulatory Bodies

   

National Company Law Tribunal, Mumbai: The Bench of P.N. Deshmukh, J., Judicial Member, and Shyam Babu Gautam, Technical Member admitted an application filed under Section 9 of the Insolvency and Bankruptcy Code, 2016 (IBC) for the initiation of Corporate Insolvency Resolution Process (CIRP) against Sahara Hospitality Ltd. (Sahara).

In 2018, a company petition was filed by Delta Electro Mechanical Pvt. Ltd. (Delta Electro), which got disposed of in 2021, when Sahara agreed to settle the matter for Rs 20,00,00,000 in 14 installments. Delta Electro again approached the tribunal seeking the revival of the company petition after Sahara failed to perform the commitment. A new settlement agreement was drawn up. But Sahara failed again with its commitments and tried to shrug off its liabilities stating that it entered into the settlement to maintain good business relations with Delta Electro. Further, it stated that the agreement settlement failed, and hence the company petition was disposed of. Hence, contended that the petition cannot be admitted without a prayer of restoration.

Hence, Delta Electro filed a company petition seeking to initiate the CIRP against the Sahara by invoking the provisions under Section 9 of the IBC for default of Rs 51,77,97,495/-.

The Bench stated that Delta Electro had sent a demand notice dated 25-05-2018 under Section 8 of the IBC for an unpaid amount of Rs. 32,72,03,256/-. Further, the Bench stated that Sahara in its written submissions dated 24-03-2022 submitted that rental dues or dues under a leave and license agreement cannot be considered an operational debt by relying upon the judgment in Anup Sushil Dubey v. National Agriculture Co-operative Marketing Federation of India Ltd., 2020 SCC OnLine NCLAT 674 , wherein it was held that the subject lease rentals arising out of use and occupation of a cold storage unit which is for Commercial Purpose is an ‘Operational Debt' as under Section 5(21) of the IBC. Therefore, the Bench held that Sahara is liable to pay the dues payable against the facilities extended by Delta Electro.

Hence, the Bench admitted the Company Petition and ordered to initiate CIRP against Sahara. For the process, Mamta Binani was appointed as the Insolvency Professional.

[Delta Electro Mechanical Pvt. Ltd. V. Sahara Hospitality Ltd., CP No. 2430/2018, decided on- 15-07-2022]


Advocates who appeared in this case :

Shyam Kapadia, Advocate, for the Applicant;

Sandeep Bajaj, Advocate, for the Respondent.

Financial Creditor
Case BriefsTribunals/Commissions/Regulatory Bodies

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 BriefsSupreme Court

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

Financial Creditor
Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Tribunal, Chennai: The Bench of S. Ramathilagam, J., Judicial Member, and Anil Kumar B, Technical Member held that the tribunal has the power to replace the liquidator of a Corporate Debtor in a liquidating process if the tribunal finds necessary grounds for such replacement.

Factual Background and Submissions made

A Corporate Insolvency Resolution Process was initiated against the Corporate Debtor, the applicant on 25-02-2019. On 29-05-2020 the liquidation process was initiated and Mr. Venkata Sivakumar was appointed as the Liquidator (respondent) for the liquidation process of the applicant.

The applicant submitted that the respondent did not process a valid Authorisation for Assignment as required under Regulation 7 A of the Insolvency and Bankruptcy Board of India (Resolution Professionals) Regulations, 2016 on the date of appointment as the liquidator, and therefore sought removal of the respondent as the liquidator.

The respondent submitted that there is no provision under the Insolvency and Bankruptcy Code, 2016 (hereinafter as IBC) to change the liquidator, and also the liquidator cannot be changed at the behest of the stakeholders unless or otherwise a serious allegation of corruption has been made.

Analysis and decision

Firstly, the Bench observed the provision under Section 16 of the General Clauses Act, 1897 which states that the power to appoint includes the power to suspend or dismiss. Therefore, the Bench opined that when Section 16 is being read with Section 33 of the IBC, the tribunal which has the power to appoint a person, equally has the power to suspend or dismiss the Liquidator, in the absence of any specific powers conferred thereto. Hence, the tribunal has the power to dismiss the liquidator under Sections 33 and 34 of the IBC.

Further, the Bench observed that the provisions of IBC do not explicitly state the grounds on which the liquidator can be removed. Therefore, in the absence of such provisions, provisions under Section 276 of the Companies Act, 2013 have to be considered to determine the removal of the Liquidator. As per the provision under the section, a liquidator may be removed or replaced on the grounds of misconduct, fraud, professional incompetence, inability to act, due care and diligence, etc.

Therefore, the bench held that in the present case, the respondent failed to exercise due care and diligence in the performance of the powers and functions while discharging his duties as a liquidator as he had shared the valuation report with the prospective scheme proponents. Therefore, he was required to be replaced.

Hence, NCLT allowed the application for the removal of the liquidator under Section 60(5) of the IBC read with Rule 11 of the National Company Law Tribunal Rules, 2016 and Section 276 of the Companies Act, 2013.

[IDBI Bank Ltd. Represented by Dy General Manager v. V. Venkata Sivakumar, 2022 SCC OnLine NCLT 212, decided on 01-07-2022]


Advocates who appeared in this case :

Varun Srinivasan, NVS & Associates, Advocates, for the Applicant;

V. Venkata Sivakumar, Party in Person, Advocate, for the Respondents.

NCLAT
Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Appellant Tribunal, Chennai: The Bench of M.V. Venugopal, J. Judicial Member, and Kanthi Narahari, Technical Member has held that a Resolution Professional under Section 18(1)(f) of the Insolvency and Bankruptcy Code, 2016 (hereinafter as IBC) is only an authority to exercise control over Bank Accounts operated by the ‘Corporate Debtor’. He cannot freeze the ‘Bank Accounts’.

Facts of the case

The Appellant, Corporate Debtor, is a Real Estate Developer. The Corporate debtor had taken a loan from a bank to complete the construction of a multi-storied housing complex at Perungudi, Chennai. A Resolution Professional was appointed as the appellant defaulted on payments against the loan amount. Resolution Professional issued a letter to the bank for freezing bank accounts belonging to the appellant that was being utilised for the real estate project. The appellant filed a company petition before the National Company Law Tribunal, Chennai (NCLT, Chennai). NCLT, Chennai ordered to release 50% of the amount available in the Bank Accounts. Therefore, the Appellant filed the present company appeal.

Analysis and Decision

The Bench observed that as per Section 18(1)(f) of the Insolvency and Bankruptcy Code, 2016 an interim resolution professional can take control and custody of the assets over which the corporate debtor has ownership rights. Therefore, the Bench held that a resolution professional under the law can only exercise authoritative rights over the bank accounts held by the corporate debtor, he cannot order the bank authorities or any other financial institution to freeze the bank accounts of corporate debtors.

Hence, the impugned order given by NCLT, Chennai was set aside.

[Beauty Etiole Pvt. Ltd. v. C. Sanjeevi, 2022 SCC OnLine NCLAT 308, decided on 07-06-2022]


Advocates who appeared in this case :

Mr. Ramakrishnan Viraraghavan, Senior Counsel, Mr. Chetan Sagar, Advocates, for the Appellant;

Ms. M. Savitha Devi, Advocate, for the Respondents.

Financial Creditor
Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Tribunal, Mumbai: The coram of H.V. Subba Rao, Judicial Member and Chandra Bhan Singh, Technical Member, declared that the auction purchaser of the Corporate Debtor company, as a going concern is responsible for any claims/ liabilities/ obligations of the Corporate Debtor.

An interlocutory application was filed by the applicant to resolve the issue whether the sale of the Corporate Debtor as a going concern under Section 60(5) of Insolvency and Bankruptcy Code, 2016 [IBC] and Regulation 32-A of Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 [IBBI Regulations] includes both assets and liabilities or assets alone without any liabilities. The applicant prayed for not making him responsible for any claims/ liabilities/ obligations payable by the Corporate Debtor, (Gajanan Industries Limited) to the Financial Creditors (Harsh Vinimay Pvt. Ltd) or any other stakeholders including Government dues.

After becoming a successful auction purchaser, the applicant, in respect of an e-auction dated 03-03-2021 conducted by Liquidator, , he was declared as the highest bidder of the Corporate Debtor. Further, a letter of intent was issued by the liquidator as per the requirements of the banker and on the request of the applicant. On 31-05-2021, the applicant made the full payment to which the liquidator confirmed the amount of interest and communicated- “on the payment of the full amount, the sale shall stand completed, the liquidator shall execute certificate of sale or sale deed to transfer such asset and the assets shall be delivered to him in the manner specified in terms of sale”.

Further, the applicant wanted to know about the process to be followed for completion of the deal and to clarify certain issues. The liquidator in reply to this said that the procedure must be followed as per the law and indicated that the entire responsibility of the Corporate Debtor falls on the applicant.

The Tribunal relied on a similar matter in Visisth Services Limited v. S.V. Ramani, 2022 SCC OnLine NCLAT 24, where the same bench held that the sale of Corporate Debtor as a going concern as is where basis under Regulation 32-A of IBBI Regulations and the IBC includes that where the committee of creditors has not identified the assets and liabilities, the liquidator has to do the same and group the assets and liabilities.

The Tribunal held that the applicant is not entitled for the relief sorted in his prayer. Therefore, the above application was dismissed.

[Gaurav Agarwal v. CA Devang P Sampat, 2022 SCC OnLine NCLT 182, decided on 06-05-2022]


Advocates who appeared in this case :

Nausher Kohli, Amey Hadwale and Geeta Lundwani, Advocates, for the Applicant;

Rohaan Cama, Kunal Mehta and Gauri Joshi, Advocates, for the Respondents.