SCC Part
Cases ReportedSupreme Court Cases

   

Civil Procedure Code, 1908 — S. 96, Or. 41 Rr. 31 and 33: Principles summarised regarding powers and duty of first appellate court in deciding an appeal under S. 96 CPC r/w Or. 41 R. 31. Cryptic and cursory approach of High Court as first appellate court is not sustainable. Remand to first appellate court to determine the matter afresh, when unwarranted, explained. [Somakka v. K.P. Basavaraj, (2022) 8 SCC 261]

Court Fees Act, 1870 — S. 7(iv)(d) and provisos thereto — Valuation of court fees: Market value of immovable property involved in litigation might have its relevance depending on nature of relief claimed but, ultimately, valuation of any particular suit has to be decided primarily with reference to relief/reliefs claimed. It remains trite that it is nature of relief claimed in plaint which is decisive of question of suit valuation. As a necessary corollary, market value does not become decisive of suit valuation merely because an immovable property is subject-matter of litigation. [Bharat Bhushan Gupta v. Pratap Narain Verma, (2022) 8 SCC 333]

Criminal Procedure Code, 1973 — S. 145 — Dispute concerning land or water likely to cause breach of peace: In this case, according to the petitioner, findings on title and possession had been recorded in the order passed by the Magistrate on 1-4-2010, and they would prejudice the petitioner in all judicial proceedings. Keeping in mind the mandate contained in S. 145(4) CrPC, held, that the determination of the Magistrate is without reference to merits of the claims of any of the parties. In this case, clarified that the observations recorded by the Magistrate in the order dt. 1-4-2010, will not be treated as a binding determination on the issues pertaining to possession and title. The interests of the petitioner were fully protected by High Court, by relegating the petitioner to seek the redressal of its grievance, before a competent civil court. [Asset Reconstruction Co. (India) Ltd. v. Inspector of Police, (2022) 8 SCC 238]

Environment Law — General Principles of Environmental Law — Polluter Pays Principle and Remedial/Compensatory/Punitive Measures: Owners of demolished flats illegally constructed are not entitled to recover interest from builders/promoters/persons/officers responsible for raising illegal constructions, on principal amount paid by evicted flat owners. [Kerala State Coastal Zone Management Authority v. Maradu Municipality, (2022) 8 SCC 240]

Insolvency and Bankruptcy Code, 2016 — S. 12-A: Grant of withdrawal of CIRP proceedings, after constitution of Committee of Creditors (CoC), in exercise of power under Art. 142 of the Constitution, when warranted, explained. Relevance of settlement between homebuyers-applicants and corporate debtor, and, protection of homebuyers’ interest, also explained. [Amit Katyal v. Meera Ahuja, (2022) 8 SCC 320]

Insolvency and Bankruptcy Code, 2016 — S. 9: Withdrawal of company petition/corporate insolvency resolution process (CIRP) proceedings, before constitution of Committee of Creditors (CoC), upon settlement between the parties, permissible. [Kamal K. Singh v. Dinesh Gupta, (2022) 8 SCC 330]

Maharashtra Control of Organised Crime Act, 1999 (30 of 1999) — S. 23 r/w Ss. 2(1)(d), 2(1)(e), 2(1)(f), 3(1)(ii), 3(2), 3(4) and 18 — Sanction or prior approval for prosecution under MCOCA: Having regard to the stringent provisions of MCOCA, its provisions need to be very strictly interpreted and, thus, the Court has to consider as to whether the basic and threshold requirements, as per combined reading of cls. (d), (e) and (f) of S. 2(1), are fulfilled. If they are not so fulfilled, mere use of the expressions of the statute in the sanction order would be of no effect but, on the other hand, if the requirements are fulfilled, mere want of any expression or word in a particular passage in the sanction order would not take away the substance of the matter. Scope of “organised crime” under MCOCA, explained. [Abhishek v. State of Maharashtra, (2022) 8 SCC 282]

Penal Code, 1860 — S. 302 — Murder trial: In this case, appellant-accused herein after sprinkling chilli powder into eyes of deceased, stabbed him with knife on his chest and abdomen, resulting in grievous injuries to him, leading to his death in hospital. Guilt was established beyond reasonable doubt, hence conviction was confirmed. [Mekala Sivaiah v. State of A.P., (2022) 8 SCC 253]

Penal Code, 1860 — Ss. 409 and 420 r/w S. 120-B — Cheating and misappropriation: Principles summarized regarding interference with conviction in revisional jurisdiction in the case of cheating and misappropriation, when permissible. [Malkeet Singh Gill v. State of Chhattisgarh, (2022) 8 SCC 204]

Registration Act, 1908 — Ss. 32 to 35 — Registration: Three essential steps comprising registration, explained. Proper forum for challenging the same at each step, clarified. [Asset Reconstruction Co. (India) Ltd. v. S.P. Velayutham, (2022) 8 SCC 210]

SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 — Regns. 9 and 10 r/w Regns. 3(b), (c), (d), 4(1) and 4(2)(e), (f), (k) and (r) — Disclosure of investigation report: A quasi-judicial authority has a duty to disclose the material that has been relied upon at the stage of adjudication. Further, an ipse dixit of the authority that it has not relied on certain material would not exempt it of its liability to disclose such material if it is relevant to and has a nexus to the action that is taken by the authority. In all reasonable probability, such material would have influenced the decision reached by the authority. Thus, the actual test is whether the material that is required to be disclosed is relevant for purpose of adjudication; if it is, then the principles of natural justice require its due disclosure. [T. Takano v. SEBI, (2022) 8 SCC 162]

Securities, Markets and Exchanges — Manipulative/Fraudulent, Unfair trade practices and Market abuse — Penalty for engaging in manipulative trades as per the provisions of the SEBI Act and the relevant SEBI Regulations — Quantum of: Penalty by way of bar from trading in proprietary account, for a period of four years not considered as arbitrary, harsh or distinctly disproportionate to the nature of the violation. Relevance of wider consequences of action on the securities market, as opposed to quantum of gain made, explained. [MBL & Co. Ltd. v. SEBI, (2022) 8 SCC 273]

Service Law — Recruitment Process — Eligibility criteria/conditions — All-India Services — Physical fitness: R. 7(a)(vii), Appendix III of the CSE Rules, 2014 envisaging that candidate declared “temporarily unfit” must apply for re-medical examination “ordinarily” not exceeding six months at “maximum”. Here, word “ordinarily” must be conjointly read with word “maximum” during which candidate declared “temporarily unfit” has to approach for re-medical examination from date of uploading of medical examination report on website of Department which indicates outer limit of six months. [Union of India v. K. Rajashekhara Reddy, (2022) 8 SCC 246]

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

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: 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]

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, 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.

Financial Creditor
Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Tribunal, New Delhi: In a case where a Resolution Professional (RP) had submitted a report even prior to the order by the Adjudicating Authority that had appointed him, the bench of of H. V. Subba Rao, Judicial Member and Chandra Bhan Singh, Technical Member, has asked him to submit a fresh report.

The petition was filed by Bank of Baroda for initiation of Insolvency Resolution Process under Section 95(1) of Insolvency and Bankruptcy Code, 2016. It was passed against Mr. Pawan V Kikavat, Personal Guarantor of Mahavir Roads and Infrastructure Pvt. Ltd.

The counsel for the Bank of Baroda mentioned the demand notice dated 06-11-2020 invoking the Guarantee against the Personal Guarantor. He also gave proof of delivery of the demand notice. The deed of Guarantee dated 26-04-2012 executed by Bank of Baroda was also brought to the notice of the Bench. The petitioner also suggested the name of RP, Mr. Kairav Anil Trivedi, to conduct the Insolvency Resolution Process.

The counsel for the Personal Guarantor opposed the maintainability of the Petition pointing out that the RP has already filed his report without there being any order passed by the Adjudicating Authority appointing him and directing him to do so.

The issue was whether the report filed by RP without him receiving directions can be taken on record or a separate order should be filed by RP on the directions given.

The Bench appointed Kairav Anil Trivedi to submit a fresh report after examining the petition within 10 days of the date of this order.


[Bank of Baroda Limited v Pawan V Kikavat, 20 C.P. (IB)-140(MB)/2022, decided on 29-06-2022]


Counsels:

For Petitioner: Kairav Trivedi, PCA

For Personal Guarantor: Advocate Nausher Kohli


Case BriefsSupreme Court

Supreme Court: The bench of L. Nageswara Rao and BR Gavai*, JJ has held that the proceedings under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) cannot continue once the CIRP has been initiated and the moratorium has been ordered as per the Section 14(1)(c) of the Insolvency and Bankruptcy Code, 2016 (IBC).

The Indian Oversees Bank had extended certain credit facilities to the Corporate Debtor. When the Corporate Debtor failed to repay the dues and the loan account became irregular, it came to be classified as “Non¬Performing Asset” (NPA).

The Bank issued a Demand Notice under Section 13(2) of the SARFAESI Act, calling upon the Corporate Debtor and its guarantors to repay the outstanding amount due. Upon failure to do so, the Bank, under Section 13(4) of the SARFAESI Act, took symbolic possession of two secured assets of the Corporate Debtor and Corporate Guarantor, mortgaged exclusively with it. E-auctions were also held to recover the public money availed by the Corporate Debtor.

Later, NCLT, passed an order under Section 10 of the IBC, after which the Corporate Insolvency Resolution Process (CIRP) of the Corporate Debtor commenced. A moratorium under Section 14 of the IBC was notified and an Interim Resolution Professional (the IRP) was also appointed.

It is important to note, that 75% of the sale consideration from E-Auctions was received before initiation of the CIRP. The remaining 25% was recovered subsequently. Hence, it was argued that merely because a part of the sale consideration was received subsequently, it could not affect the sale. It was also argued before the Court that the CIRP was initiated only to stall the SARFAESI proceedings.

It was submitted before the Court that Section 14(1)(c) of the IBC interdicts any action to foreclose, recover or enforce any security interest including any action under SARFAESI. However, it does not undo actions which have already stood completed.

The Court, however, noticed that, in the case at hand, the balance amount was accepted by the Bank on 8th March 2019. The sale stood completed only on 8th  March 2019. Admittedly, this date falls much after 3rd January 2019, i.e., on which date CIRP commenced and moratorium was ordered.  Hence, the Court refused to accept the argument of the Bank that the sale was complete upon receipt of the part payment.

The Court explained that under Section 14(1)(c) of the IBC, which has overriding effect over any other law, any action to foreclose, recover or enforce any security interest created by the Corporate Debtor in respect of its property including any action under the SARFAESI Act is prohibited.

Considering that IBC is a special Code, its provisions have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law.

It is thus clear that after the CIRP is initiated, there is moratorium for any action to foreclose, recover or enforce any security interest created by the Corporate Debtor in respect of its property including any action under the SARFAESI Act. It is clear that once the CIRP is commenced, there is complete prohibition for any action to foreclose, recover or enforce any security interest created by the Corporate Debtor in respect of its property. The words “including any action under the SARFAESI Act” are significant.  The legislative intent is clear that after the CIRP is initiated, all actions including any action under the SARFAESI Act to foreclose, recover or enforce any security interest are prohibited.

[Indian Overseas Bank v. RCM Infrastructure ltd., 2022 SCC OnLine SC 634, decided on 18.05.2022]


*Judgment by: Justice BR Gavai


For Bank: Senior Advocate Tushar Mehta

For aution purchasers: Senior Advocate C.S. Vidyanathan

For Respondents: Senior Advocate K.V. Viswanathan and Advocate Aditya   Verma

Financial Creditor
Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Tribunal, Kolkata Bench I: The Bench of Rajasekhar V.K., judicial member and Balraj Joshi, technical member has held that no fresh legal proceeding can be initiated, including personal debts, and all pending legal action will be stayed during the interim moratorium period, as per Section 95 of the Insolvency and Bankruptcy Code, 2016 (IBC). The interim moratorium period commences from the date of filing of the application and continues until the application is rejected or admitted by the Adjudicating Authority.

EMC was admitted into Corporate Insolvency Resolution Process (CIRP) on 12-11-2018 and an Interim Resolution Professional (RP), Rakesh Kumar Agarwal, was appointed. On 06-02-2019 one Kannan Tiruvengadam was appointed as Resolution Professional, and the resolution was approved through order dated 21-10-2019.

In the present case, State Bank of India (‘SBI’) and Industrial Financial Corporation of India (‘IFCI’) filed two separate applications under Section 95 and Section 95(1) of the IBC for initiation of insolvency against Manoj Toshniwal (Personal Guarantor of EMC, EMC being the Corporate Debtor) on 09-07-2021 and 29-09-2021 respectively. In the application filed by SBI, a coordinate bench of the NCLT appointed a Resolution Professional (‘RP’) who was directed to file a report under Section 99 of IBC, by order of 14-01-2022 (‘SBI Order’). On 21-02-2022, the order was modified and a new RP was appointed. The NCLT also heard the application filed by the IFCI and appointed a different RP and directed him to submit the report vide order dated 17-02-2022 (‘IFCI Order’).

Meanwhile, Manoj Toshniwal also filed an application under Section 60(5) of IBC for setting aside the IFCI Order contending that by the virtue of the SBI Order, an interim moratorium period already commenced against the creditors ruling out initiation of any legal action against the personal guarantor with respect of any debt. Hence, the proceedings initiated by the IFCI must be stayed.

Analysis and decision

NCLT made the following observations-

  1. Interim moratorium commences from the date of filing of application under Section 95 of IBC and ceases to have effect on admission and rejection of the application from the same date. During this period, all legal actions pending in respect of any debt should be stayed and creditors cannot initiate any fresh legal action in respect of any debt.

  2. The Bench also observed that the term “and” in Section 96 IBC should be read as a conjunctive clause. Meaning, interim moratorium commences against all debts- including his personal debt, and creditors are barred from initiating any legal proceedings.

  3. It was concluded that the interim moratorium against the personal guarantor commenced from 09-07-2021 as the application by SBI was filed on the same and the application by IFCI was filed after that date, i.e. on 29-09-2021.

Hence, the application made by Manoj Toshniwal, personal guarantor of corporate debtor was allowed by this Bench. As a result, the application by IFCI was stayed and the RP appointed on 17-02-2022 by the virtue of IFCI Order was discharged of his duties.

[IFCI Limited v. Manoj Toshniwal, 2022 SCC OnLine NCLT 172, decided on 07-06-2022]

NCLAT
Case BriefsTribunals/Commissions/Regulatory Bodies

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

Facts of the case and issue raised

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

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

The following issues were raised-

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

Submissions of the counsel

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

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

Analysis and decision

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

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

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

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


Advocates before the tribunal

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

Financial Creditor
Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Tribunal, New Delhi: The bench of Abni Rajan Kumar Sinha, Judicial Member and Hemant Kumar Sarangi, Technical Member has held, that default made in payment of instalment amount as per the terms of the settlement agreement does not fall under the definition of operational debt.

Facts of the case

Operational creditor, Ahluwali Contracts (India) Pvt. Ltd. entered into a Memorandum of Understanding (MoU)/ Settlement Agreement with corporate debtor, Logix Infratech Pvt. Ltd. on 30-09-2019 for the final settlement against the work done by the operational creditor according to the ‘Work Contracts’.

The operational debtor defaulted in making payments of instalments as determined under the settlement agreement. Operational creditor filed a company petition seeking to initiate the Corporate Insolvency Resolution Process (CIRP) against corporate debtor by invoking the provisions of Section 9 r/w Rule 6 of the Insolvency and Bankruptcy Code, 2016 (IBC) for a resolution of Operational Debt of Rs 7,72,00,000.

Issue Whether the breach of terms and conditions mentioned under the settlement agreement comes within the purview of ‘operational debt’?

Analysis and decision

Firstly, the Bench noted that operational debt means a claim in respect of provision of goods and services including employment. In the present petition, the claim of the operational creditor did not fall under the category of either goods or services provided by the operational debtor. Rather, the present application was being pressed by the operational creditor only in respect of default made due to the breach of terms and conditions mentioned under the settlement agreement.

At this juncture, the bench referred to the decision of NCLT, Allahabad in Delhi Control Devices Pvt. Ltd. v. Fedders Electric and Engineering Ltd. (Company Petition (IB) No. 343/ALD/ 2018 wherein the bench held that, “unpaid instalment as per the agreement cannot be treated as operational debt a per Section 5(21) of IBC. The failure or Breach of settlement agreement can’t be a ground to trigger CIRP against corporate debtor under the provision of IBC 2016 and remedy may lie elsewhere not necessarily before the Adjudicating Authority”. A similar view was followed in the case Nitin Gupta v. International Land Developers Pvt. Ltd. (IB No. 507/ND/2020).

Hence, the bench applied the same principle as laid down in the aforementioned cases and considered that the default of payment of settlement agreement does not come under the definition of operational debt.

Therefore, the bench dismissed the application.

[Ahluwali Contracts (India) Pvt. Ltd. v Logix Infratech Pvt. Ltd., 2022 SCC OnLine NCLT 169, decided on 03-06-2022]


Advocates before the Tribunal

For the Applicant: Adv. Dhruv Rohatgi

For the Respondent: Adv. Nitish K. Sharma


NCLAT
Case BriefsTribunals/Commissions/Regulatory Bodies

A coram of Justice Ashok Bhushan (Chairperson), Shreesha Merla (Technical member) and Naresh Salecha (Technical Member) has held that non-payment of TDS by the Corporate Debtor is not a default and an application under Section 9 of the Insolvency and Bankruptcy Code, 2016 (IBC) cannot be admitted over the same.

Factual Background:

The present Appeal was preferred by a ex director of the CD against the order of the Adjudicating Authority which admitted a Section 9 application filed by the Operational Creditor (OC).

The facts leading up to the Section 9 application were as such. The OC had preferred a Section 9 application, however the parties agreed to enter into a settlement. The Adjudicating Authority passed an order to the effect, that the application could be revived in the event of settlements talks failing.  Subsequently, the CD and OC entered into certain settlements. The settlement explicitly conveyed that the amounts were inclusive of the TDS amount.

Subsequent to settlement amounts being paid by the CD, the OC prayed before the Adjudicating Authority revival of the Section 9 Application and the Adjudicating Authority passed an order asking the CD to indicate the details of the payment.

Consequently, via a supplementary affidavit the appellants conveyed the Adjudicating Authority that certain TDS amounts remained outstanding. Post this, the Adjudicating Authority admitted the Section 9 application and it is this order that the appeal has been preferred.

Observations and Decision:

The Tribunal observed that there was no event or scope of settlement talks between parties failing and thus the Adjudicating Authority could not have intervened and made an order approving the revival.

The only outstanding amount payable were the two TDS amounts. It was held that non-payment of the TDS amount by the CD was no occasion for admitting Section 9 application by the Adjudicating Authority.  The appropriate authority for taking action against non-payment of TDS is provided under Income Tax Act, 1961 and is in the domain of income tax authorities. Therefore, the approval of Section 9 application was termed to be unsustainable and set aside.

Further, the tribunal clarified that the provisions of the IBC could not be used for giving effect to the recovery of TDS amounts. Appeal was allowed with a cost of Rupees One Lakh on the OC for misusing the process under IBC.

[Amitabh Roy v Master Development Management (India) Pvt. Ltd., 2022 SCC OnLine NCLAT 240, decided on 18-5-2022]


Advocates appearing before NCLAT:

For appellants: Mr Anand Sukumar, Mr Mainak Bose and Mr Bhupesh Kumar Pathak

for Respondent: Mr Ankur Rai