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Case BriefsHigh Courts

  

Delhi High Court: In a case filed by the Resolution Professional of Era Infra Engineering Limited (EEIL) being admitted to insolvency proceedings under the provisions of the IBC, challenging the attachment orders issued by Directorate of Enforcement (ED) and raising a pertinent question that what will be the impact of a moratorium issued under Section 14 of the Insolvency and Bankruptcy Code, 2016 (IBC) would have on the powers of the Enforcement Directorate to enforce an attachment under the provisions of the Prevention of Money Laundering Act, 2002 (PMLA), Yashwant Verma, J., held that the provisions of the PMLA are not liable to be read as being subservient to the moratorium provision comprised in Section 14 of the IBC.

The Court noted that the intent and objective of the moratorium provision incorporated in the IBC is that it principally subserves the purpose of preservation of the assets of the debtor, enables all stakeholders to explore the possibility of its revitalization and if ultimately those efforts fail, for its expeditious liquidation. Thus, the purpose of a moratorium is clearly distinct from the purpose and objectives of attachment action taken under the PMLA. PMLA is not concerned with the recovery or enforcement of a debt. Proceedings for attachment that may be initiated in terms thereof cannot by any stretch of imagination be viewed as being akin to an action for enforcement or recovery of a debt.

Placing reliance on Nitin Jain Liquidator of PSL Limited v. Enforcement Directorate, 2021 SCC OnLine Del 5281, the Court noted that the moratorium would not prevent the authorities under the PMLA from exercising the powers conferred by Sections 5 and 8 notwithstanding the pendency of the CIRP.

The Court observed that while proceeding to attach the tainted property, the respondents are not in essence effacing the property rights that may be claimed by an individual. It is a symbolic taking over of the custody of the property and for its preservation till such time as the proceedings that may be initiated under the PMLA come to a conclusion. Thus, attachment is not liable to be viewed as an effacement of all rights that may exist or be claimed to be exercisable in respect of a property.

The Court stated that it is essentially an action aimed at bringing into the control of a court or an authority, property over which multiple claims may exist. In any case, since the act of attachment does not result in the effacement of rights in property, it would clearly stand and survive outside the scope of a moratorium or an action relating to an action in respect of a debt due or payable.

The Court opined that the however, both the orders under Sections 5 and 8 remain orders of attachment. The passing of those orders neither result in confiscation of those properties nor do those properties come to vest in the Union Government upon such orders being made. Thus, attached property, thus, comes to vest in the Union Government only upon the passing of such an order as may be passed by the special Court either under sub-Sections 5 or 7 of Section 8 or Sections 58-B or Section 60(2)(a). This concludes that the provisional attachment of properties would in any case not violate the primary objectives of Section 14 of IBC.

The Court observed that attachment under the PMLA, as was noted hereinabove, is not an attachment for debt but principally a measure to deprive an entity of property and assets which comprise proceeds of crime. Attachment under the PMLA does not result in an extinguishment or effacement of property rights. It is essentially a fetter placed upon the possessor of that property to deal with the same till such time as proceedings under the aforesaid enactment come to a definitive conclusion on the question of confiscation. Thus, since the act of attachment does not result in the effacement of rights in property, it would clearly stand and survive outside the scope of a moratorium or an action relating to an action in respect of a debt due or payable.

The Court further observed that both IBC and the PMLA are special statutes in the generic sense; they both seek to subserve independent and separate legislative objectives. The subject matter and focus of the two legislations is clearly distinct. When faced with a situation where both the special legislations incorporate non obstante clauses, it becomes the duty of the Court to discern the true intent and scope of the two legislations.

Thus, the Court concluded that the statutory injunct against the invocation or utilization of the powers available under the PMLA was thus ordained to come into effect only once the trigger events envisaged under Section 32-A IBC came into effect. The Legislature thus in its wisdom chose to place an embargo upon the continuance of criminal proceedings including action of attachment under the PMLA only once a Resolution Plan were approved or a measure in aid of liquidation had been adopted.

Thus, the Court held that the power to attach under the PMLA would not fall within the ken of Section 14(1)(a) of the IBC.

[Rajiv Chakraborty Resolution Professional of EEIL v. Directorate of Enforcement, 2022 SCC OnLine Del 3703, decided on 11-11-2022]


Advocates who appeared in this case :

Mr. Abhinav Vashisht, Sr. Adv. with Mr. Shivank Diddi, Advocate for Petitioner;

Mr. Zoheb Hossain, SC for ED with Mr. Vivek Gurnani and Mr. Kavish Garach, Advocates for Respondents.


*Arunima Bose, Editorial Assistant has reported this

Case BriefsSupreme Court

Supreme Court: The bench of Indira Banerjee* and JK Maheshwari, JJ has held that if there are two borrowers or if two corporate bodies fall within the ambit of corporate debtors, there is no reason why proceedings under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC) cannot be initiated against both the Corporate Debtors.

The Court, however, clarified that the same amount cannot be realised from both the Corporate Debtors.

“If the dues are realised in part from one Corporate Debtor, the balance may be realised from the other Corporate Debtor being the co-borrower. However, once the claim of the Financial Creditor is discharged, there can be no question of recovery of the claim twice over.”

In the case at hand, a Non-banking Financial Company, i.e. “Financial Creditor” disbursed loan to the tune of Rs. 6 Crores to one Premier Limited, under three separate Loan-cum-Pledge Agreements. According to the Appellant, Doshi Holdings pledged shares held by it in Premier, in favour of the Financial Creditor, by way of security for the loan. It was argued before the Court that the Loan-cum-Pledge Agreements contemplated two distinct transactions under one document, that is, grant of loan to Premier, and creation of pledge by Doshi Holdings of securities held by the Doshi Holdings in Premier.

When Premier failed to make repayments in terms of the Loan-cum-Pledge Agreements, the Financial Creditor, called upon Premier and Doshi Holdings, also described as the borrower under the Loan-cum-Pledge Agreements, to pay the entire outstanding loan amount of Rs. 8,35,25,398/-.

It was argued before the Court that no amount under the Loan-cum-Pledge Agreements 4 was disbursed by the Financial Creditor to Doshi Holdings. The Financial Creditor granted loans to Premier. The loans were disbursed to Premier. Doshi Holdings did not utilize any part of the money disbursed by the Financial Creditor under the Loan-cum-Pledge Agreement. Hence, there was no obligation on the part of Doshi Holdings to make any repayment to the Financial Creditor and that there was no financial debt owed by Doshi Holdings to the Financial Creditor under Section 5(8) of the IBC. Insofar as Doshi Holdings is concerned, the Loan-cum-Pledge Agreements only created a pledge of the shares of Doshi Holdings in Premier in favour of the Financial Creditor. Hence, the petition under Section 7 of the IBC against the Corporate Debtor was not maintainable.

The Financial Creditor, on the other hand, argued that Doshi Holdings was party to the Loan-cum-Pledge Agreements in its dual capacity as co-borrower and pledgor which had pledged its shares in Premier in favour of the Financial Creditor. The Appellant had signed documents on behalf of Doshi Holdings in its capacity as co-borrower. The Appellant was Director of both, Premier and Doshi Holdings and that both Premier and Doshi Holdings have been described as borrowers in the Loan-cum-Pledge Agreements.

Taking note of the facts of the case, the Supreme Court held that the finding of the Appellate Authority that Doshi Holdings is a borrower, is based on its interpretation of the Loan-cum-Pledge Agreements and supporting documents. The interpretation given by the Appellate Authority is definitely a possible interpretation. Hence, interpretation is a plausible interpretation which cannot be interfered with.

[Maitreya Doshi v. Anand Rathi Global Finance Limited, 2022 SCC OnLine SC 1276, decided on 22.09.2022]


*Judgment by: Justice Indira Banerjee

For Appellant: Senior Advocate KK Vishwanathan

For Respondent: Advocate Prateek Sakseria

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 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, 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.

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

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Appellate Tribunal (NCLAT), New Delhi: In a matter with regard to fees of resolution professional, the Coram of Justice Ashok Bhushan (Chairperson) and Shreesha Merla (Technical Member) held that, when proceedings in a matter are put to stay, the resolution professional is not entitled to fees during the stay on insolvency.

An appeal had been filed against the order of the National Company Law Tribunal, Mumbai, by which the Resolution Professional was allowed for reimbursement of Rs 30,81,719.

In 2018, the Corporate Insolvency Resolution Process was initiated, and the Insolvency Resolution Professional was appointed.

Appellant contended that, when the Supreme Court of India had stayed the insolvency proceedings, there was no entitled fee to be paid to the Resolution Professional.

Further, the Counsel for the Resolution Professional submitted that even when the Insolvency Proceedings were stayed, certain expenses were incurred by the RP which payment cannot be denied.

Analysis and Decision


Tribunal stated that, when the Supreme Court order 26-11-2018, had stayed the insolvency proceedings which proceedings ultimately were set aside by the final Judgment dated 2-9-2019, the Resolution Professional was not entitled to any fee after 26-11-2018.

In view of the above, the appeal was partly allowed. [IndusInd Bank Ltd. v. Rajendra K. Bhuta, 2022 SCC OnLine NCLAT 201, decided on 26-4-2022]


Advocates before the Tribunal:

For Appellant: Mr. Rohit Gupta, Ms. Rubina Khan, Advocates.

For Respondent: Mr. Rajeev K Pandey, Mr. Rajeev M Roy, Advocates for R-2

Mr. Mayank Kshirsagar, Darryl Pereira, Advocates for IRP/R1

Case BriefsSupreme Court

Supreme Court: In a case where out of the total 128 home buyers, 82 were against the insolvency proceedings of the Corporate Debtor of a Gurgaon based housing project, the bench of MR Shah* and BV Nagarathna, JJ has allowed the original applicants (three home buyers) to withdraw the CIRP proceedings as the same shall be in the larger interest of the home buyers who are waiting for the possession since more than eight years. The Court observed that this decision will also be in line with the object and purpose of the IBC i.e. not to kill the company and stop/stall the project, but to ensure that the business of the company runs as a going concern.

Case Trajectory

  • Corporate Debtor – Jasmine Buildmart Pvt. Ltd. had come out with a Gurgaon based housing project, namely, Krrish Provence Estate but could not complete the project even after a period of eight years.
  • Three home buyers preferred Section 7 application before the Adjudicating Authority/NCLT, Delhi seeking initiation of CIRP against the Corporate Debtor. They also sought refund of an amount of Rs.6,93,02,755/- due to an inordinate delay in the completion of the project and failure to handover possession within the stipulated time. The said application was filed on 06.12.2018, i.e., prior to the amendment to Section 7 of the IBC, which now permits 100 or 10% of the home buyers/allottees to apply under Section 7 of the IBC.
  • NCLT directed commencement of CIRP. NCLAT upheld the said order.
  • By order dated 03.12.2020, Supreme Court, while issuing notice in the appeal, stayed the operation and implementation of the impugned order, subject to the appellant depositing the amount of Rs.2,75,55,186/- plus interest at the rate of 6% per annum in the Registry of the Court within two weeks from that date.
  • Meanwhile, Krrish Provence Flat Buyers Association had filed a caveat apprehending that if any order is passed in the present proceedings, it may affect them as home buyers.
  • On 04.02.2022, it was brought to the Court’s notice that the original applicants as well as 79 other home buyers have settled the dispute with the Corporate Debtor and a settlement has been entered into, under which, it is agreed that the Corporate Debtor shall complete the entire project and hand over the possession to the home buyers (who want the possession), within a period of one year.

Analysis and Ruling

The Court noticed that although the COC was constituted on 23.11.2020, there has been a stay of CIRP proceedings on 3.12.2020 (within ten days) and no proceedings have taken place before the COC. Also, the COC comprises 91 members, of which 70% are the members of the Flat Buyers Association who are willing for the CIRP proceedings being set aside, subject to the Corporate Debtor company honouring the settlement plan.

In such facts and circumstances, where out of 128 home buyers, 82 home buyers will get the possession within a period of one year, as undertaken by the appellant and Corporate Debtor, coupled with the fact that original applicants have also settled the dispute with the appellant/Corporate Debtor, the Court was of the opinion that it was a fit case to exercise the powers under Article 142 of the Constitution of India read with Rule 11 of the NCLT rules, 2016 and to permit the original applicants to withdraw the CIRP proceedings.

Explaining the reasoning behind it’s ruling, the Court observed that if the original applicants and the majority of the home buyers are not permitted to close the CIRP proceedings, it would have a drastic consequence on the home buyers of real estate project. If the CIRP proceedings are continued, there would be a moratorium under Section 14 of the IBC and there would be stay of all pending proceedings and which would bar institution of fresh proceedings against the builder, including proceedings by home buyers for compensation due to delayed possession or refund. If the CIRP is successfully completed, the home buyers like all other creditors are subjected to the pay outs provided in the resolution plan approved by the COC.

“Most often, resolution plans provide for high percentage of haircuts in the claims, thereby significantly reducing the claims of creditors. Unlike other financial creditors like banks and financial institutions, the effect of such haircuts in claims for refund or delayed possession may be harsh and unjust on homebuyers.”

On the other hand, if the CIRP fails, then the builder-company has to go into liquidation as per Section 33 of the IBC. The homebuyers being unsecured creditors of the builder company stand to lose all their monies that are either hard earned and saved or borrowed at high rate of interest, for no fault of theirs.

The Court further explained the legislative intent behind the amendments to the IBC which is to secure, protect and balance the interests of all home buyers. The interest of home buyers is protected by restricting their ability to initiate CIRP against the builder only if 100 or 10% of the total allottees choose to do so, all the same conferring upon them the status of a financial creditors to enable them to participate in the COC in a representative capacity.

“Being alive to the problem of a single home buyer derailing the entire project by filing an insolvency application under Section 7 of the IBC, the legislature has introduced the threshold of at least 100 home buyers or 10% of the total home buyers of the same project to jointly file an application under Section 7 of the IBC for commencement of CIRP against the builder company.”

The Court, hence, held that the settlement arrived at between the home buyers and the appellant and corporate debtor – company shall be in the larger interest of the home buyers and under the settlement and as undertaken by the appellant/corporate debtor, out of 128 home buyers, 82 home buyers are likely to get possession within a period of one year, for which they are waiting since last more than eight years after they have invested their hard earned money.

Directions

(1) The entire project shall be completed within one year from 01.03.2022 and respective home buyrers shall be offered the possession;

(2) Corporate Debtor shall complete the entire project including all the apartments, common areas, amenities, etc. as specified in the ABA;

(3) all demands be raised and timely paid, strictly in terms of ABA;

(4) Company shall continue the provisions of all maintenance services as per the ABA; and

(5) Company will make the application for obtaining Occupancy Certificate within six months, before the competent authority.

[Amit Katyal v. Meera Ahuja, 2022 SCC OnLine SC 257, decided on 03.03.2022]


*Judgment by: Justice MR Shah


Counsels

For appellant: Senior Advocate Kapil Sibal,

For original applicants: Advocate Lokesh Bhola

For Impleaders: Senior Advocate K.V. Vishwanathan

For Home Buyers Association: Senior Advocate Nakul Diwan

For Resolution Professional: Advocate Yogesh Mittal

For intervenors: Advocate Radhika Gupta

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Appellate Tribunal (NCLAT): The Coram of Anant Bijay Singh, J. (Judicial Member) and Shreesha Merla (Technical Member) while allowing an appeal closed insolvency proceedings against Oyo and its subsidiary, OYO Hotels and Homes Private Limited (OHHPL), while disallowing the intervention of external parties including Federation of Hotel & Restaurant Associations of India (FHRAI).

The instant appeal against the Order of Admission of Application under Section 9 of the Insolvency and Bankruptcy Code, 2016 filed by the Operational Creditor, R.K. Yadav. He had claimed that OHHPL defaulted on a payment of Rs. 16 lakh. Thus the consequential directions, in the nature of passing of moratorium, and appointment of Interim Resolution Professional (IRP) in the impugned order of the NCLT Ahmedabad were assailed through the appeal.

The Tribunal after considering the submissions put forth, evidences and the cases referred to by the parties, was of the opinion that the due amount payable by the Corporate Debtor to the Operational Creditor was paid in full and final satisfaction. The Tribunal relied on Swiss Ribbons Pvt. Ltd. v. Union of India, (2019) 4 SCC 17, for exercising Rule 11 of the NCLT Rules, 2016, and thus allowed the application of withdrawal.

The Tribunal stated,

“We are of the considered view that before Constitution of Committee of Creditors (CoC) mere filing of a ‘Claim’ does not constitute a default per se. It is only on the basis of the ‘Claims’ that the CoC is constituted. In a catena of Judgments, the Supreme Court has reiterated that the prime objective of the Court is not recovery, but revival”.

It further stated that,

“…To reiterate, we are of the view that in the interest of Justice, the inherent powers under Rule 11 can be exercised by both NCLT and NCLAT which may allow or disallow the Application of Withdrawal keeping in view the interest of the concerned parties and the facts of each case…”.

And freed Oyo and its subsidiary from all ‘the rigours of law’ while allowing it to function independently through its Board of Directors with immediate effect. Also, during the pendency of IA 815 of 2021, several Intervention Applications were filed by the proposed Intervenors, the tribunal while allowing IA 815 of 2021 dismissed the others.

However, the Tribunal even made it clear that the

“…Order will not come in the way of any Financial/Operational Creditors to move an Application for CIRP before the Learned Adjudicating Authority, Which shall hear the matter, uninfluenced by observations, if any, made in this Judgment and proceed in accordance with law”.

[Anuj Tejpal v. Rakesh Yadav, Company Appeal (AT) (Insolvency) No. 298 of 2021, decided on 7-07-2021]


Agatha Shukla, Editorial Assistant has reported this brief.


Counsel for the Appellant:

Mr. Mukul Rohatgi, Sr. Advocate alongwith Mr. Abhijeet Sinha, Mr. Jeevan Ballav Panda, Ms. Shalini Sati Prasad, Ms. Meher Tandon, Mr. Satish Padhi, Mr. Gaurav Sharma, Ms. Shreya Agarwal, Mr. Ishan Nagar, and Mr. Harsh Kaushik.

Counsel for the Respondents:

Mr. Rakesh Yadav (in person), Mr. Kumar Anurag Singh, Mr. Srinivas Kotni, Mr. Shantam Gorawara and Mr. Zain A Khan, for R-1. Mr. Keyur J. Shah and Ms. Noopur K Dalal, for IRP (R-2).

Proposed Intervenors:

Mr. Pankaj Jain, for I.A. 941 of 2021. Ameya Ranade, for I.A. 956 of 2021. Mr. Mohit Chaudhary and Ms. Garima Sharma, for I.A. 957 of 2021. Mr. Ramchandra Madan and Mr. Rahul Gupta, for I.A. 1082, 1083, 1084, 1085 & 1086 of 2021. Mr. Krishnendu Datta, Sr. Advocate alongwith Mr. Samer Parekh, Mr. Sumit Goel, Ms. Sonal Gupta and Ms. Malvika Bhenot, for I.A. 1094 of 2021. Mr. Salvador Santosh Rebello, for I.A. 1116 of 2021. Mr. Debesh Panda, for Diary No. 27487 & 27488. Ms. Mithali Gupta, Mr. Raghav Sharma, Ms. Anukriti Dua, Mr. Mukesh Suhkhija, Mr. P.S. Ghai, Mr. Paras Mithal and Mr. Carlos De Sousa.

Case BriefsHigh Courts

Delhi High Court: A Division Bench of Hima Kohli and Subramonium Prasad, JJ., considered the following question:

Whether a bank/financial institution can institute or continue with proceedings against a guarantor under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act), when proceedings under the Insolvency and Bankruptcy Code 2016 (IB Code) have been initiated against the principal borrower and the same are pending adjudication?

Respondent 4 was the principal borrower in the present case who had obtained loans from the State Bank of India. Guarantor was the wife of the promoter of the principal borrower. Further, it has been stated that the bank filed an insolvency petition against the principal borrower under the provisions of the IB Code before the NCLT, Delhi.

At the time of pendency of the insolvency proceedings against the principal borrower, bank issued a notice under Section 13(2) of the SARFAESI Act to the petitioner and another notice under Section 13(4) of the SARFAESI Act was also issued. Both the notices were challenged by the petitioner.

The above-stated notices were challenged before Debts Recovery Tribunal but were later withdrawn in light of negotiation talks between the Bank and the Principal Borrower.

Petitioner alleged that without issuing a Notice under Section 1(4) of SARFAESI Act, the Bank issued  Sale Notice under Rule 8 (6) of Security Interest (Enforcement) Rules for sale of her residential house.

In the instant matter, the prime question for consideration was confined to the action of the Bank of initiating proceedings against the petitioner under the SARFAESI Act when insolvency proceedings have been initiated against the Principal Borrower under the IB Code and the same are pending before the NCLT.

Analysis & Decision

Bench referred to the relevant provisions, Sections 14 and 31 of the IB Code and Section 128 of the Contract Act.

Section 14 of the IB code related to Moratorium, Section 31 of the IB Code refers to the approval of the resolution plan and Section 128 of the Contract Act provides the Surety’s liability.

Section 128 of the Contract Act provides that the liability of a Guarantor is coextensive with that of the Principal Debtor.

Bench cited the decision of Industrial Investment Bank of India Ltd. v. Biswanath Jhunjhunwala, (2009) 9 SCC 478.

Court held that since the liability of a guarantor is co-extensive with that of the principal debtor and not in the alternative, it cannot be said that proceedings in the NCLT against the principal debtor can be a bar to institution or continuation of proceedings against the guarantor under the SARFAESI Act.

Bench stated that the question raised with regard to whether the bank can proceed against a guarantor even after initiation of proceedings under the IB Code also stands settled and is squarely covered by the Supreme Court’s decision in SBI v. V. Ramakrishan, (2018) 17 SCC 394.

The above-cited decision holds that Sections 14 and 31 of the IB Code do not bar initiation and continuation of the SARFAESI proceedings against the Guarantor.

View of the Supreme Court amply demonstrated that neither Section 14 nor Section 31 of the IB Code place any fetters on banks/Financial Institutions from initiation and continuation of the proceedings against the guarantor for recovering their dues.

Therefore, Court held that,

“…petitioner cannot escape her liability qua the respondent/Bank in such a manner. The liability of the principal borrower and the Guarantor remain co-extensive and the respondent/Bank is well entitled to initiate proceedings against the petitioner under the SARFESI Act during the continuation of the Insolvency Resolution Process against the Principal Borrower.”

In view of the above, no merit was found in the petition and hence was dismissed. [Kiran Gupta v. State Bank of India, 2020 SCC OnLine Del 1390, decided on 02-11-2020]

OP. ED.SCC Journal Section Archives

The National Company Law Appellate Tribunal (hereinafter “Nclat”) recently in Shah Bros. Ispat1, approved parallel continuation of proceedings under the Negotiable Instruments Act, 1881 (hereinafter “the NI Act”) against a company subjected to moratorium while undergoing resolution process under the Insolvency and Bankruptcy Code, 2016 (hereinafter “the IB Code”). The decision of Nclat raises multiple issues ranging from an apparent conflict between the NI Act and the IB Code to practical impossibilities in allowing both the proceedings to continue simultaneously. The object of the article is to discuss the legal problems that may arise in light of the decision in Shah Bros. Ispat1, and why the decision needs to be revisited in light of the settled law.

DECISION IN SHAH BROS. ISPAT2

The appellant creditors before Nclat had initiated two separate proceedings under Section 138 of the NI Act, one prior to the admission of insolvency proceedings under the IB Code and one post the admission of insolvency proceedings under the IB Code. The respondent debtor contended that once a moratorium is imposed under Section 14(1)2 of the IB Code, proceedings under the NI Act would have to be halted. Nclat categorically rejected the submission and held:

6. … as Section 138 is a penal provision, which empowers the court of competent jurisdiction to pass order of imprisonment or fine, [and] cannot be held to be proceeding or any judgment or decree of money claim. Imposition of fine cannot held to be a money claim or recovery against the Corporate Debtor nor order of imprisonment, if passed by the court of competent jurisdiction on the Directors, they cannot come within the purview of Section 14. Infact no criminal proceeding is covered under Section 14 of I&B Code.3

The major precise for allowing parallel continuation of proceedings was that the moratorium does not cover criminal proceedings, but it is submitted that while this position might be true, proceedings under the NI Act cannot be classified as criminal proceedings in strict sense. The decision of Nclat raises multiple issues, namely:

(a) whether proceedings under the NI Act are purely criminal in nature,

(b) whether the accused company’s right to compose (and put an end to) a cheque bounce case is circumvented during the imposition of moratorium, and

(c) whether continuation of parallel proceedings under the NI Act and the IB Code conflict with the object as well as the procedure of the resolution process and if whether it affects the rights of other creditors.

For the purposes of the argument, the article does not distinguish between the NI proceedings initiated prior to the initiation of proceedings under the IB Code and the NI proceedings initiated post the initiation of proceedings under the IB Code since the reasoning of Nclat permeates both the scenarios.

[Read more]


Advocate, Punjab and Haryana High Court, Chandigarh, BA LLB (Hons.) and Executive Member, Bar Association of Punjab and Haryana High Court. Graduated in 2016 from National Law University, Delhi. Ph. No: +918447586173. Email Address mittalakaant@gmail.com, akaant.mittal.alumni@nludelhi.ac.in.

** This article was first published in Supreme Court Cases (2020) 1 SCC J-23. It has been reproduced with the kind permission of Eastern Book Company

[1] Shah Bros. Ispat (P) Ltd. v. P. Mohanraj, 2018 SCC OnLine NCLAT 415.

[2] Insolvency and Bankruptcy Code 2016, Section 14(1) states:

14. Moratorium.—(1) Subject to provisions of sub-sections (2) and (3), on the insolvency commencement date, the adjudicating authority shall by order declare moratorium for prohibiting all of the following, namely:

(a) the institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority;

(emphasis supplied)

[3] Shah Bros. Ispat (P) Ltd., 2018 SCC OnLine NCLAT 415, para 6.

COVID 19Legislation UpdatesNotifications

S.O. 1205(E).—In exercise of the powers conferred by the proviso to section 4 of the Insolvency and Bankruptcy Code, 2016 (31 of 2016), the Central Government hereby specifies one crore rupees as the minimum amount of default for the purposes of the said section.


Ministry of Corporate Affairs

[Notification dt. 24-03-2020]