High Court Round UpLegal RoundUpTribunals/Regulatory Bodies/Commissions Monthly Roundup

Here’s our interesting picks of the week from the stories reported


“Notaries operating from public taxis around vicinity of Court”: Dignity of the profession needs to be maintained and the legal profession cannot be allowed to function from the streets | Bom HC   

“…though we have full sympathy for the Advocates who do not have their offices of their own to function from, we do not believe that the dignity of the profession needs to be maintained and the legal profession cannot be allowed to function from the streets.” 

Read full report, here.


Gangubai Kathiawadi | Can after certification granted by Board, public exhibition of a film be prohibited? Bom HC answers

In respect to petitions with regard to the release of movie Gangubai Kathiawadi, Division Bench of Dipankar Datta, CJ and M.S Karnik, J., while expressing that “Once the film is granted a certificate by the competent statutory authority, i.e. the Board, the producer or distributor of the film has every right to exhibit the film in a hall unless, of course, the said certificate is modified/nullified by a superior authority/Court”, held that, there cannot be any kind of obstruction for the exhibition of a film, which is certified, unless the said certificate is challenged and Court stays its operation,

Read full report, here.


If husband and wife get their marriage registered under Special Marriage Act & under Parsi Marriage and Divorce Act, 1936 as well, would this require them to get nullity of marriage under both Acts or one? Court decides

G.S. Kulkarni, J., expressed that, there is no provision under legislations, that if a marriage between the same couple is annulled under a competent law as enacted by the Parliament, it can as well be of a legal effect in the corresponding enactment.

Read full report, here.


If husband brings home concubine due to which wife leaves house, would that lead to desertion by wife? Chh HC explains

The Division Bench of Goutam Bhaduri and Rajani Dubey, JJ., expressed that,

“If the husband keeps another lady; gives shelter to her; and proceeds to have child with the said lady and for that reason if the first wife has to leave the matrimonial home because of physical and mental torture meted out to her it cannot be presumed as a desertion on the part of wife.”

Read full report, here.


Can an Admin of a messaging service group be held criminally liable for the offensive content posted by member of a group? Kerala HC addresses

While addressing the question of whether the creator or administrator of a WhatsApp group is criminally liable for offensive content posted by a group member, Dr Kauser Edappagath, J., held that a person can be criminally liable for the acts of another if they are party to the offence.

Read full report, here.


Can flat owners be prevented from use of certain open spaces and facilities by builders? NCDRC answers

“The Common Area and Facilities remain undivided and no Apartment Owner or any other person shall bring any action for partition or division of any part thereof.”

Read full report, here.


If granting exclusion of time would help Corporate Debtor from liquidation, should NCLAT allow such exclusion? Here’s what NCLAT says

“If granting of 90 days helps the Corporate Debtor to revive, then the basic objective of the I&B Code, 2016 will be met. Liquidation is the last resort.”

Read full report, here.


Zee Insider Trading Case | In absence of direct evidence, matters of insider trading are to be tested on what grounds? SEBI lifts restrictions on 10 entities

“…considering the fact that in today’s age of technology with mushrooming applications that enable seamless calls and messages which provide service of end- to-end encryption assuring complete anonymity, it will be a simplistic assumption to state that the Entities would have communicated the UPSI with each other through the regular telephone calls only.”

Read full report, here.

Case BriefsSupreme Court

Supreme Court: The Division Bench of Hrishikesh Roy* and R. Subhash Reddy, JJ., while deciding on an appeal challenging dismissal of suit by the Calcutta High Court restored the Trial Court’s judgement which was reversed by the High Court.

Factual Backdrop

The suit was filed by SIBCO Investment seeking interest on the alleged belated payment of principal sum and accrued interest to the plaintiff for the Bonds issued by Small Industries Development Bank of India (SIDBI). SIBCO had purchased 15 Bonds at 13.50% and 26 Bonds at 12.50% worth Rs3.69 crores aggregate as on 01-07-1998 from one Shankar Lal Saraf who had bought it from CRB Capital Markets Ltd. The name of the plaintiff was not included by SIDBI as CRB Capital was facing involuntary liquidation proceedings at the instance of the RBI in the Delhi High Court (Company Court).

On 17-12-2004, the Company Court held that the subject Bonds were beyond the purview of the liquidation proceedings. The defendant thus made payment of principal amount and interest calculated up to 31-10-2005 with 20% TDS deduction.

The plaintiff’s case was that the amount, both principal and interest were paid beyond the maturity period and, therefore, the defendant was liable to pay the interest for delayed payment. Whereas the defendant pleaded that the maturity amount was not paid on the date of maturity because of the embargo and restriction by the RBI and the pending proceedings.

Findings of the Trial Court

The Trial Court did not agree with the submission of the plaintiff that there was any deliberate attempt to delay the payment of the maturity amount by the defendant and subsequently dismissed the matter on two grounds: Firstly, the bonds could not be transferred as there was liquidation proceedings against CRB capital whereafter the RBI issued a directive to the petitioner directing not to part with any payment pertaining to the said Bonds without consent of the Official Liquidator and  secondly, the plaintiff slept over the interest claim for almost 8 months after receiving the payment.

Impugned Order of the High Court

The High Court reversed the order of the Trial Court and allowed the plaintiff to raise further demands including demand for interest on delayed payment. Accordingly, the defendant was directed to pay simple interest at 6% per annum on interest from date of accrual and 8% simple interest per annum on principal amount from date of maturity.

Analysis and Findings

Noticing that the transfer in Shankar Lal Saraf’s favor was executed during suspect spell, the Bench opined that the defendant’s prima facie suspicion that the transfer during the suspect spell may be deemed fraudulent was not misplaced. Further, both the RBI and the Official Liquidator treated the transfer in Shankar Lal Saraf’s favour as fraudulent and it was only after the judgment of the Company Court that the cloud over the issue was cleared wherein the defendant’s claim that the transfer in Shankar Lal Saraf’s favour was ‘fraudulent preference’ was rejected. Hence, the Bench held the following:

  • The RBI direction carried statutory force and that it was necessary for plaintiffs to implead RBI in the litigation for getting more clarity on the issue but the same was not done.
  • There was bonafide shadow over the plaintiff’s title to the Bonds till the same was cleared by the Company Court. Therefore, withholding payment was justified till the conclusion of dispute by the Court.
  • The plaintiff failed to establish that the defendant had derived any undue benefit by withholding the payment accrued on the Bonds since the amount was immediately transferred and was not used by the defendant for their business.
  • The plaintiff was not serious on its claim for pendente lite interest as no argument was recorded in previous litigation regarding it.
  • The plaintiff accepted the payment from the defendant as due settlement and failed to raise protest and demand for interest at the earliest possible stage which amounted to sub-silencio Hence, the claim was barred by the principle of waiver/acquiescence.
  • Claim of interest on delayed payment was barred by the principle of constructive Res Judicata.

Conclusion

Finally, considering that as soon as the Company Court’s decision was communicated to the defendant, payment was promptly made to the plaintiff without hesitation, the Bench held that the defendant bank justified in withholding payment till conclusion of dispute in Company Court, even though the relief claimed was in respect of an ‘unconditional undertaking’, as there were reasonable legal concerns for the transaction during the suspect spell, for making such payments.

Consequently, the Bench concluded that the defendant was not entitled to payment till the Company Court’s order. Therefore, rejecting the plaintiff’s claim for interest the Bench compared it to the Shakespearean character Shylock and remarked,

“…the holder of the Bond has received their ‘pound of flesh’, but they seem to want more. Additional sum in our estimation is not merited as SIBCO has already received their just entitlement and burdening the defendant with any further amount towards interest would be akin to Shylockian extraction of blood from the defendant.”

In the light of the above, the defendant’s appeal against the impugned judgment was allowed and the Trial Court’s judgment was restored.

[SDBI v. SIBCO Investment, 2022 SCC OnLine SC 5, decided on 03-01-2022]


*Judgment by: Justice Hrishikesh Roy


Appearance by:

For the Appellant/Defendant: K V Viswanathan, Senior Counsel

For the Plaintiff/Respondent: Sabyasachi Chaudhury, Senior Counsel


Kamini Sharma, Editorial Assistant has put this report together

Case BriefsTribunals/Commissions/Regulatory Bodies

 If CIRP or Liquidation Proceeding of a Corporate Debtor is pending before a NCLT, application relating to Insolvency Process of Corporate or Personal Guarantor should be filed before same NCLT.

National Company Law Appellate Tribunal, New Delhi (NCLAT): The Coram of Justice Ashok Bhushan (Chairperson) and Dr Alok Srivastava (Technical Member) expressed that, Application having been filed under Section 95(1) and the Adjudicating Authority for application under Section 95(1) as referred in Section 60(1) being the NCLT, the Application filed will be maintainable and cannot be rejected on the ground that no CIRP or Liquidation Proceedings were pending before the NCLT.

“…when a CIRP or Liquidation Proceeding of a Corporate Debtor is pending before ‘a’ NCLT the application relating to Insolvency Process of a Corporate Guarantor or Personal Guarantor should be filed before the same NCLT.”

An appeal was filed against the order of the National Company Law Tribunal, Kolkata. The State Bank of India had filed an application under Section 95(1) of the Insolvency and Bankruptcy Code, 2016 to seek initiation of Corporate Insolvency and Resolution Process against the Guarantor. The said application was rejected by the Adjudicating Authority as premature.

Appellant’s Counsel submitted that NCLT did not correctly interpret Section 60(2) of the Code and the application was fully maintainable under Section 60(1) of the Code despite there being no pendency of any Corporate Insolvency Resolution Process in NCLT.

Let’s have a look at Section 60 (2) and (2) of the IBC:

Section 60: Adjudicating Authority for corporate persons.

*60.(1) The Adjudicating Authority, in relation to insolvency resolution and liquidation for corporate persons including corporate debtors and personal guarantors thereof shall be the National Company Law Tribunal having territorial jurisdiction over the place where the registered office of the corporate persons located.

(2) Without prejudice to sub-section (1) and notwithstanding anything to the contrary contained in this Code, where a corporate insolvency resolution process or liquidation proceeding of a corporate debtor is pending before a National Company Law Tribunal, an application relating to the insolvency resolution or[liquidation or bankruptcy of a corporate guarantor or personal guarantor, as the case may be, of such corporate debtor] shall be filed before such National Company Law Tribunal.

Section 60(2) of the IBC does not in any way prohibit filing of proceedings under Section 95 of the Code even if no proceeding are pending before the NCLT.

“…Section 60(2) was applicable only when a CIRP or Liquidation Proceeding of a Corporate Debtor is pending before NCLT.”

Coram added that Section 60(2) is applicable only when CIRP or Liquidation Proceeding of a Corporate Debtor is pending, when CIRP or Liquidation Proceeding are not pending with regard to the Corporate Debtor there is no applicability of Section 60(2).

Further, it was elaborated that Section 60(1) provides that Adjudicating Authority in relation to Insolvency or Liquidation for Corporate Debtor including Corporate Guarantor or Personal Guarantor shall be the NCLT having territorial jurisdiction over the place where the Registered Office of the Corporate Person was located.

“…substantive provision for an Adjudicating Authority is Section 60, sub-Section (1), when a particular case is not covered under Section 60(2) the Application as referred to in sub-section (1) of Section 60 can be very well filed in the NCLT having territorial jurisdiction over the place where the Registered Office of corporate Person is located.”

Hence, in the present matter, the Adjudicating Authority erred in holding that since no CIRP or Liquidation Proceeding of the Corporate Debtor were pending the application under Section 95(1) was not maintainable.

“…Application having been filed under Section 95(1) and the Adjudicating Authority for application under Section 95(1) as referred in Section 60(1) being the NCLT, the Application filed by the Appellant was fully maintainable and could not have been rejected only on the ground that no CIRP or Liquidation Proceeding of the Corporate Debtor are pending before the NCLT.”

[SBI v. Mahendra Kumar Jajodia, 2022 SCC OnLine NCLAT 58, decided on 27-1-2022]


Advocates before the tribunal:

For Appellant: Malvika Trivedi, Sr. Advocate with Mr. Akash Tandon, Mr. Ashish Chudhury, Santosh Kumar, Bhargavi Kannar, Akanksha Tripathi, Rituparna Sanyal, Mansi Chaudhary, Advocates

For Respondent: Advocate Supriyo Gole

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Appellate Tribunal, New Delhi (NCLAT): The Coram of Justice M. Venugopal (Judicial Member) and Dr Ashok Kumar Mishra (Technical Member) held that if granting exclusion of time helps the Corporate Debtor to revive, the basic objective of Insolvency and Bankruptcy Code will eb achieved.

An appeal was filed under Section 61 of the Insolvency and Bankruptcy Code, 2016 against the impugned order passed by the Adjudicating Authority.

Adjudicating Authority had not granted exclusion of certain period of ‘Corporate Insolvency Resolution Process’ inspite of the Resolution passed by the 100% voting share of the Committee of Creditors of the Corporate Debtor.

Counsel for the appellant submitted that the exclusion of 90 days from the CIRP of the CD would save the company from ‘Liquidation’. It was also pointed that there was a ‘Prospective Resolution Applicant’ who has submitted his ‘Resolution Plan’ & there was a likelihood for the revival of the CD.

Due to the prevalent pandemic, there was not much progress in de-attachment of property from ED at Tribunals/Courts. The CoC had also considered reissue of ‘Expression of Interest’ (EOI) and hence there was a need for exclusion of such period.

Appellant was perusing legal proceedings to get attachment of sole property of the CD lifted before various judicial forum to get the property released as early as possible and also cited the decision of Supreme Court in the case of Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta,  (2020) 8 SCC 531, wherein it has held that the ‘Adjudicating Authority or the Appellate Authority has discretion to extend the time of CIRP period even beyond 330 days in certain exceptional cases’.

Analysis and Decision

Tribunal observed that the pandemic had no doubt updated the normalcy in various activities of ‘Corporate Insolvency Resolution Process’.

The Resolution Professional received a Resolution Plan for Prospective Resolution Applicant which was under the scrutiny of Resolution Professional/Committee of Creditors.

Further, Coram expressed that,

“If granting of 90 days helps the Corporate Debtor to revive, then the basic objective of the I&B Code, 2016 will be met. Liquidation is the last resort.”

Therefore, Tribunal opined that no prejudice will be caused in allowing the instant appeal to prevent an aberration of justice and to promote the substantial cause of justice.

Hence, the appeal was allowed. [Vinod Tarachand Agrawal, In Re., 2022 SCC OnLine NCLAT 82, decided on 16-2-2022]


Advocates before the Tribunal:
For Appellant: Mr. Monaal Davawala, Advocate.

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Appellate Tribunal (NCLAT): The Bench of Justice Ashok Bhushan (Chairperson) and Dr. Alok Srivastava (Technical Member) allowed distribution of INR 223 crore from the cash balance available with EPC Construction among its creditors and lenders.

The instant appeal was filed by IDBI Bank in its capacity as a financial creditor and lead lender of EPC Construction India-Corporate debtor as well as a representative of all other lenders of the Corporate Debtor against the order of the NCLT whereby the application urging to direct the Respondent-Liquidator to permit the Financial Creditors of the Corporate Debtor to distribute an amount of INR 223 crore from the cash balance available with the Corporate Debtor in the proportion of their respective voting share in the erstwhile CoC had been dismissed.

The appellant submitted that the said application had been wrongly rejected by the Adjudicating Authority (NCLT) on the ground distribution of the cash would derogate the value of the Company, which observations were not in accordance with law.

Initially, an application was filed by the appellant-creditor before the Adjudicating Authority seeking a direction against the Respondent-Liquidator to distribute the available cash balance of the Corporate Debtor, amongst the stakeholders of the Corporate Debtor in favour of whom the same were charged, including the appellants herein, as per the waterfall mechanism set out in Section 53 of the Insolvency and Bankruptcy Code, 2016, and amongst the workmen of the Corporate Debtor as required under Section 53 (1) (b) (i) of the Code after accounting for the costs/reserving the estimated costs under Section 53(1) (a) towards Insolvency Resolution Process costs and the liquidation costs.

Noticeably, the liquidator did not raise any objection to distribution of surplus cash balance of the Corporate Debtor up to an extent of INR 220 Crores amongst the stakeholders in accordance with the order of priority and in the manner specified under Section 53 of the IBC, however, a condition was made to the extent that if there is any shortfall in meeting the requirements involved in the liquidation process, then the said amount shall be replenished by the financial creditors within a period of fifteen (15) days, from the date of demand. The said condition had been agreed by the appellants. The rationale behind the liquidator’s claim was following:

  1. “As per records, Corporate Debtor has a balance of approximately INR 300 (three hundred) crores in its bank accounts–which includes funds received from invocation of performance bank guarantee of INR 42 (forty-two) crores. In addition, there is additional margin money of approx. INR 13 (thirteen) crores also available. The Corporate Debtor further also generates approximately INR 6-7 crores in cash every month.
  2. Most of the business of the Corporate Debtor is non-functional. Only the equipment leasing division of the Corporate Debtor is operational. All the other division of the Corporate Debtor are being utilized for recovery of dues. The Corporate Debtor at present has a total 109 employees along with 14 employees serving notice period and superannuation. The Respondent estimates that, the process of liquidation, in all likelihood, subject to other external factors should be completed within a year. Therefore, as per the estimate of the liquidator, the cost of the liquidation process may not exceed INR 80 crores approximately – which has been computed by factoring in the receipts during liquidation period minus expenses incurred during the said period and CIRP costs.”

The liquidator contended that even after distribution of INR 223 crores, as sought in the appeal, the Corporate Debtor would have sufficient liquidity of approximately INR 80 (eighty) crores to enable him to run the liquidation process smoothly in accordance with law.

In the light of above submissions, the NCLAT reversed the decision of the Adjudicating Authority and directed for distribution of INR 223 crores as submitted by the Liquidator subject to undertaking by the members of the CoC to return the amount in the event they are paid any amount in excess to their entitlement as per waterfall mechanism under Section 53 of the Code. The impugned order was set aside.[IDBI Bank Ltd. v. Liquidator, EPC Constructions (India) Ltd., 2022 SCC OnLine NCLAT 43, decided on 27-01-2022]


Kamini Sharma, Editorial Assistant has reported this brief.


Appearance by:

For Appellant: Tushar Mehta, Sr. Advocate with Akshay Sapre, Advocate

For Respondent: Pulkit Sharma, Swarnendu Chatterjee and Shriraj H. Khambete, Advocates

Akaant MittalExperts Corner

In the previous column, we had covered how the position of law was inconsistent with respect to a decree as a foundation for a financial debt. The same is now finally put to rest by the ruling of the Supreme Court in Dena Bank v. C. Shivakumar Reddy[1].

 

While a decree can now be the basis of a financial debt, we will proceed with the position of law with respect to an arbitral award or a decree forming the basis for an operational debt.

 

The position here seems aligned with what the Supreme Court had held in the above-discussed ruling in Dena Bank[2]. In Usha Holdings LLC v. Francorp Advisors (P) Ltd.[3], an issue arose if a debt is based on a decree which was passed by a foreign court. In such circumstances, while it was held that an adjudicating authority cannot decide the legality and viability of such a decree, the NCLAT further held that the same does not mean that the need for establishing a relation between operational creditor and the corporate debtor is waived off. The NCLAT required that such decree must pertain to or relate to supply of goods or services, and the failure to establish such link led to the rejection of the application under Section 9, IB Code.[4]

 

The NCLAT then presented even a clearer picture on this issue in Ashok Agarwal v. Amitex Polymers (P) Ltd.,[5] when the issue of whether a consent decree falls under the definition of operational debt was raised. The NCLAT herein relied upon the definition of a creditor as stated in Section 3(10) to conclude that a “decree-holder” cannot be excluded from the definition of an “operational creditor” under Section 5(20) of the IB Code. Resultantly, the order of the adjudicating authority was set aside and the claim of the appellant — operational creditor based on the consent decree was found to be an operational debt.

 

By doing so, the NCLAT ended up distinguishing its own ruling in Digamber Bhondwe v. JM Financial Asset Reconstruction Co. Ltd. [6], wherein in a case under Section 7, it was held that a decree-holder does not fall under the definition of a financial creditor. The NCLAT in Digamber Bhondwe case[7] had held:

  1. 22. [W]e further reject the submission that because in Section 3(10) of I&B Code in definition of “creditor” the “decree-holder” is included it shows that decree gives cause to initiate application under Section 7 of I&B Code. Section 3 is in Part I of I&B Code. Part II of I&B Code deals with “insolvency resolution and liquidation for corporate person”, and has its own set of definitions in Section 5. Section 3(10) definition of “creditor” includes “financial creditor”, “operational creditor” “decree-holder”, etc. But Section 7 or Section 9 dealing with “financial creditor” and “operational creditor” do not include “decree-holder” to initiate corporate insolvency resolution process (CIRP) in Part II.

 

The opinion in Ashok Agarwal[8] seems to be supported by Form V of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016, which expressly directs, under the heading “particulars of operational debt (documents, records and evidence of default)”, the operational creditor to disclose before the adjudicating authority the particulars of an order of a court, tribunal or arbitral panel adjudicating on the default, if any.

 

Part-V

Particulars of Operational Debt (Documents, Records and Evidence of Default)

1.

Particulars of security held, if any, the date of its creation, its estimated value as per the creditor

Attach a copy of a certificate of registration of charge issued by the Registrar of Companies (if the corporate debtor is a company)

 

2.

Details of reservation/retention of title arrangements (if any) in respect of goods to which the operational debt refers  

3.

Particulars of an order of a court, tribunal or arbitral panel adjudicating on the default, if any (attach a copy of the order)  

4.

Record of default with the information utility, if any (attach a copy of such record)  

5.

Details of succession certificate, or probate of a will, or letter of administration, or court decree (as may be applicable), under the Succession Act, 1925 (10 of 1925) (attach a copy)  

6.

Provision of law, contract or other document under which operational debt has become due  

7.

A statement of bank account where deposits are made or credits received normally by the operational creditor in respect of the debt of the corporate debtor (attach a copy)  

8.

List of other documents attached to this application in order to prove the existence of operational debt and the amount in default  

Therefore, a legal provision itself stipulates that an order of a court/tribunal/arbitral panel with regard to a default committed by a debtor could show the particulars of an “operational debt”.

 

In G. Shivramkrishna v. Isgec Covema Ltd.,[9] the NCLAT specifically calculated the limitation to file an application under Section 9 of the IB Code by taking into account the relevant dates of the arbitral award.[10] The arbitral award was passed on 30-5-2013, and the application for setting aside the award under Section 34 of the Arbitration law was dismissed on 27-1-2016 and the time to file the appeal under Section 37 lapsed on 27-4-2016. The application under Section 9 was filed on 3-4-2019. The NCLAT taking this relevant dates concluded that the application was within limitation. The argument that an application under Section 9 could not be filed for the purposes of execution of the arbitral award was rejected to hold :

by passing award by the learned sole arbitrator, the amount has been crystalised and by default in payment and by not honouring the award, the amount became due and payable. Respondent 1 had rightly invoked jurisdiction of the adjudicating authority under Section 9 of the IBC after issuance of demand notice as prescribed under Section 8 of IBC…”

 

The fundamentals, however, must remain that the decree or the award must be on account of an operational debt i.e. on account of providing a good or a service. In G. Shivramkrishna[11], the underlying debt pertained to a work order.

 

The only practical issue with basing the claim for an operational debt on an arbitral award or a decree is the fact that any challenge to an arbitral award (be it under Section 34 or Section 37 of the Arbitration and Conciliation Act, 1996) or any appeal against a decree may end up showing that there is a pre-existing dispute between the parties.[12] Otherwise, it is submitted that there is no general bar on relying on an arbitral award or decree to establish an operational debt. The Supreme Court in its ruling in K. Kishan v. Vijay Nirman Co. (P) Ltd.[13] had clarified that in cases where the creditor could show that a petition under Section 34 challenging an arbitral award is barred by limitation, in only such circumstances, the insolvency process may then be put into operation. As seen in the facts and circumstances in G. Shivramkrishna,[14] the same could still be achievable.


Akaant Kumar Mittal is an advocate at the Constitutional Courts, and National Company Law Tribunal, Delhi and Chandigarh. He is the author of the commentary “Insolvency and Bankruptcy Code – Law and Practice”.

[1] (2021) 10 SCC 330.

[2] (2021) 10 SCC 330.

[3] 2018 SCC OnLine NCLAT 792.

[4] 2018 SCC OnLine NCLAT 792, paras 12 and 13.

[5] 2021 SCC OnLine NCLAT 49.

[6] 2020 SCC OnLine NCLAT 399.

[7] 2020 SCC OnLine NCLAT 399.

[8] 2021 SCC OnLine NCLAT 49.

[9] 2020 SCC OnLine NCLAT 909.

[10] In this case, the limitation was calculated in the following manner:

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

*                                   *                                   *

  1. the learned XXIV Additional Chief Judge, City Court, Hyderabad, dismissed the petition [under Section 34 of the Arbitration and Conciliation Act, 1996] on 27-1-2016 and the statutory period for filing appeal under Section 37 of Arbitration and Conciliation Act is 90 days in case of decree. The appeal under Section 37 of the Arbitration and Conciliation Act excludes the limitation from 27-4-2016 i.e. 90 days from 27-1-2016 as per Article 116 of the Limitation Act and if three years is taken from 27-1-2016, following the judgment of the Supreme Court in the above decision (B.K. Educational … supra) and as per Article 137 of the Limitation Act, three years’ period would expire on 27-4-2019. Whilst, the application under Section 9 of the IBC filed on 3-4-2019. Accordingly, it is well within the period of limitation. (Additions supplied)

[11] 2020 SCC OnLine NCLAT 909.

[12] See for instance Jai Balaji Industries v. D.K. Mohanty, Civil Appeal No. 5899 of 2021, decided on 1-10-2021(SC). Where pending appeal under Section 37 of the Arbitration and Conciliation Act, 1996 was held to show pre-existing dispute.

[13] (2018) 17 SCC 662, para 19.

[14] 2020 SCC OnLine NCLAT 909.

Akaant MittalExperts Corner

Introduction

A liquidation proceeding stands initiated once the corporate insolvency resolution process fails. Section 33 of the Insolvency and Bankruptcy Code, 2016 (IB Code) sets out the conditions laying down three scenarios wherein liquidation proceedings can be initiated against the corporate debtor.

 

First, when the adjudicating authority does not receive the resolution plan upon expiry of the insolvency process or it rejects the resolution plan.[1]

 

Second, when the resolution professional intimates the adjudicating authority that the committee of creditors has decided to liquidate the corporate debtor.[2]

 

Third, when any person, whose interests are prejudicially affected when the approved resolution plan is contravened by the corporate debtor, makes an application to the adjudicating authority to initiate liquidation proceedings.[3]

 

Once the liquidation process is initiated, the same concludes with the distribution of the assets of the corporate debtor in accordance with the waterfall (distribution) mechanism provided under Section 53 of the IB Code.

 

This column seeks to discuss about one peculiar aspect of liquidation wherein it is sought to be ensured that workers of a corporate debtor suffer the least on account of the expiration of the corporate debtor.

 

“Gratuity” and its Interplay with IB Code

While the Payment of Gratuity Act has not explicitly defined the term “gratuity”, it can be understood to be a sum payable by the employer to his workers upon completing service for the prescribed period of time.[4] Now once the company is brought to an end by the liquidation, then clearly such payment is to be paid to the workers.

 

Simultaneously, the IB Code provides for the formation of a “liquidation estate”[5] containing all the assets of the debtor. It is these proceeds that will be distributed to the respective stakeholders (creditors) in terms of waterfall mechanism under Section 53 of the IB Code.

 

Issue arises because if the gratuity falls under the “liquidation estate” and is to be distributed in terms of Section 53, then the workers may not get their dues in total. For instance, assuming that the only asset of the company is the gratuity sum to the tune of Rs 1 crore. Now if this sum forms part of the liquidation estate, then this sum of Rs 1 crore will be distributed firstly towards the insolvency resolution process costs and liquidation costs. If these costs run over Rs 1 crore, then the entire gratuity amount will be consumed under these expenses only. Otherwise, if these costs are, let us say, Rs 50 lakhs, then the remaining Rs 50 lakhs will be distributed towards the workers’ dues for the period of 24 months preceding the liquidation commencement date and dues towards secured creditors. The list goes so on and so forth.

 

However, Section 36 of the IB Code stipulates certain payments that are not to form part of the “liquidation estate”. Section 36(4)(a)(iii) of the IB Code stipulates that:

(4) The following shall not be included in the liquidation estate assets and shall not be used for recovery in the liquidation:

(a) assets owned by a third party which are in possession of the corporate debtor, including–

(i)-(ii)                             ***

(iii) all sums due to any workman or employee from the provident fund, the pension fund and the gratuity fund;

 

In other words, any amount due to the workers from the pension fund, provident fund, and the gratuity fund will not form a part of the liquidation estate of the corporate debtor and will not be used for recovery in liquidation.

 

Since in many instances, liquidation results in the complete closure of the business of the ailing debtor, which results in the termination of the employment of the workers. In legal parlance, this discharge of workers amounts to their retrenchment i.e. the termination of service of workers by the employer for any reason other than punishment inflicted by way of disciplinary action.[6] Naturally to protect the workers, funds such as pension fund, provident fund, and the gratuity fund are kept out of the liquidation distribution and to be used solely for the benefit of the workers.

 

This question was even dealt with by the National Company Law Appellate Tribunal (NCLAT) in Somesh Bagchi v. Nicco Corpn. Ltd.[7] (Somesh Bagchi) as well SBI v. Moser Baer Karamchari Union[8] (Moser Baer – NCLAT) wherein the Appellate Tribunal had held that gratuity does not form a part of the liquidation estate.

 

Unsettled Legal Issues Arising with Gratuity

Now further issue arises on whether a liquidator can be directed to make provision for the payment of gratuity to the workers in case the erstwhile management of the corporate debtor did not create such fund for the workers.

 

The recent ruling by the National Company Law Tribunal (NCLT) Allahabad in Standard Chartered Bank v. JVL Agro Industries Ltd.[9] (Agro Industries) brings out the trouble in how to counter balance the workers benefit wherein the employer had faulted in not providing for gratuity; all the while respecting the statutory limitations of the authority of a liquidator.

 

In Agro Industries[10], a resolution proceeding was initiated and consequently a moratorium was declared and a resolution professional was appointed. Since, no resolution plan was approved by the committee of creditors, the liquidation proceeding was initiated. The corporate debtor had nearly 500 employees some of whom had filed an application for payment of their dues after the public announcement of liquidation was made. The corporate debtor had taken gratuity policy for 92 of its employees from Life Insurance Corporation (LIC), and the other 403 were not covered by it. It was further represented before the NCLT that the corporate debtor has requisite funds to cover the gratuity payments of the rest of its employees as well as pay the renewals for the already existing policyholders.

 

The NCLT referring to the ruling in Alchemist Asset Reconstruction Co. Ltd. v. Moser Baer India Ltd.[11] (Moser Baer – NCLT) which had been upheld by the NCLAT allowed the same and directed the liquidator to pay for the existing holders whose premiums are due as well as procure a new gratuity policy for the other 403 employees.

 

The precedent of Moser Baer – NCLT[12] referred to by the NCLT in Agro Industries[13] was primarily on the issue of whether gratuity funds could be used to make up the “liquidation estate” and consequently available for distribution amongst other creditors in terms of Section 53 of the IB Code. Allowing the prayer of the workers, the NCLT held that amount due towards the workers cannot be used for the purposes of distribution in terms of Section 53 of the IB Code.

 

In Moser Baer – NCLT[14], the Court further directed the liquidator that in cases there is any deficiency to the provident, pension or the gratuity funds; the liquidator shall ensure that the fund is available in these accounts, “even if their employer has not diverted the requisite amount”.

 

This order was impugned by the State Bank of India – a secured creditor of Moser Baer in SBI v. Moser Baer Karamchari Union,[15] where the limited question that came before the NCLAT was whether the gratuity dues formed a part of the liquidation estate. Holding the answer in negative, the NCLAT decided not to interfere with the order of the NCLT.

 

However, complications arise from the facts that confronted the NCLAT in its ruling in Savan Godiwala v. Apalla Siva Kumar[16] (Siva Kumar) wherein the NCLAT had held that if there has been no fund set aside for the payment of gratuity, provident and pension dues then the liquidator cannot be directed to do so.

 

The ex employees of the corporate debtor herein had contended that since corporate debtor had failed to maintain a gratuity fund or obtain insurance for the fulfilment of its liability towards payment of the gratuity to its employees, the gratuity dues payable to the employees shall be treated as an asset of the employee lying in possession of corporate debtor and as such, cannot be treated as a claim at par with other creditors.

 

In the counter the liquidator submitted that if there is no separate fund for gratuity payments, the same cannot be done from the running accounts of the corporate debtor, presumably because under the statutory scheme[17] of the IB Code the gratuity funds are excluded from the ambit of “liquidation estate”.

 

The NCLAT, firstly, discussed judicial precedent in Moser Baer – NCLAT[18] and Section 36(4)(a)(iii) as to how funds such as gratuity and provident funds do not form part of liquidation estate, therefore, are outside the purview of any discussion on “liquidation estate”. Secondly, it referred to Section 36(2)[19] of the IB Code to reason that the liquidator holds the funds in the “liquidation estate” in a fiduciary capacity for the purposes of distribution amongst creditors in terms of Section 53 of the IB Code, therefore such funds cannot be used for any other purpose except the distribution mechanism under Section 53 of the IB Code. Thirdly and finally, the NCLAT referred to the facts and circumstances, where there was no separate fund provided by the erstwhile management for the purposes of gratuity funds.

 

Resultantly, the NCLAT concluded:

  1. [i]n a case, where no fund is created by a company, in violation of the statutory provision of Section 4 of the Payment of Gratuity Act, 1972, then in that situation also, the liquidator cannot be directed to make the payment of gratuity to the employees because the liquidator has no domain to deal with the properties of the corporate debtor, which are not part of the liquidation estate.[20]

 

The Agro Industries[21] case refers to a situation where funds for payment of gratuity have been set aside by the corporate debtor but are not enough to cover the dues. Siva Kumar[22] talks about a situation where the corporate debtor has failed to comply with its statutory obligation of creation of gratuity funds under the Payment of Gratuity Act – in such a situation no funds can be set aside by the liquidator since she/he lacks the domain to do so. Therefore, the ratio of Siva Kumar[23] seems to hold that unless there are funds specifically set aside for the payments of premium for gratuity; funds from the “liquidation estate” cannot be used for the payments of such payments. On the other hand, the Moser Baer – NCLT[24] as a matter of principle rules that provident, pension and gratuity funds should be kept duly furnished by the liqudiator even if the employer did not divert the requisite amount.

 

Conclusion

It is now a settled position of law that gratuity funds due towards the workers fall outside the scope of the liquidation estate, and cannot be used for payments of dues of other creditors.

 

That still leaves a difficult position (at least in equity) if the statutory duty to cover the workers with gratuity and provident is avoided purely on account of the illegality of the erstwhile management who originally did not create any funds for the payments of premiums towards these funds. The only consequence is that the workers stand to lose the rightful coverage.

 


† Akaant Kumar Mittal is an advocate at the Constitutional Courts, and National Company Law Tribunal, Delhi and Chandigarh. He is also a visiting faculty at the NUJS, Kolkata and the author of the commentary Insolvency and Bankruptcy Code – Law and Practice. 

†† 4th year law student at the National University of Juridical Sciences, Kolkata. She can be contacted at lavanya218024@nujs.edu

[1] S. 33(1), Insolvency and Bankruptcy Code, 2016.

[2] S. 33(2), Insolvency and Bankruptcy Code, 2016.

[3] S. 33(3), Insolvency and Bankruptcy Code, 2016.

[4]Payment of Gratuity Act, 1972.

[5]IB Code, S. 36.

[6]S. 2(oo), Industrial Disputes Act, 1947.

[7]2018 SCC OnLine NCLAT 833 .

[8]2019 SCC OnLine NCLAT 447.

[9] CA No 294/2019 in CP No (IB) 223/ALD/2018, order dated 10-12-2020 (NCLT).

[10] Ibid.

[11]2019 SCC OnLine NCLT 118.

[12]Ibid.

[13] CA No 294/2019 in CP No (IB) 223/ALD/2018, order dated 10-12-2020 (NCLT).

[14] 2019 SCC OnLine NCLT 118.

[15]2019 SCC OnLine NCLAT 447.

[16]2020 SCC OnLine NCLAT 191.

[17]See IB Code, S. 36(4)(a)(iii).

[18] 2019 SCC OnLine NCLAT 447.

[19]IB Code, S. 36(2) stipulates:

“(2) The liquidator shall hold the liquidation estate as a fiduciary for the benefit of all the creditors.”

[20]2020 SCC OnLine NCLAT 191.

[21] CA No 294/2019 in CP No (IB) 223/ALD/2018, order dated 10-12-2020 (NCLT).

[22] 2020 SCC OnLine NCLAT 191.

[23] Ibid.

[24] 2019 SCC OnLine NCLT 118.

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Appellate Tribunal– A Coram of Bansi Lal Bhatt, J. (Acting Chairperson) and Dr Ashok Kumar Mishra (Technical Member) ordered for initiation for liquidation of the Corporate Debtor, while setting aside the impugned order passed by the Adjudicating Authority. Further held, “…that neither the Adjudicating Authority nor the Appellate Authority is supposed to look into the commercial wisdom of ‘Committee of Creditors’ (CoC)…”.

To state the facts briefly, an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (Code) was filed by SREI Infrastructure Finance Limited (also the financial creditor), and the Adjudicating Authority had accepted the petition in respect of the Corporate Debtor (M/s. K.S Oils Ltd.)  and ordered for Corporate Insolvency Resolution Process (‘CIRP’). Since the maximum statutory period of 270 days concluded without a Resolution Plan approved by CoC, the Resolution Professional (RP), the appellant, filed an Intervention Application to consider passing of orders for liquidation of the Corporate Debtor under Chapter –III of the Code. However, the Adjudicating Authority asked the RP to consider subsequent addendums which were rejected by the CoC repetitively. State Bank of India, one of the CoC members filed an appeal before the Appellate Tribunal on the ground that Adjudicating Authority has not adhered to the timelines of CIRP and has not passed liquidation order even after completion of maximum period allowed under CIRP requiring Adjudicating Authority under Part-III of the Code for initiation of Liquidation. Therefore, even after the lapse of 981 days and repeated compliance by the RP of the direction of the Adjudicating Authority, no initiation of liquidation was considered.

The Coram was of the opinion, “…No doubt, reorganisation and Insolvency Resolution is the prime purpose of the Act but with a rider in a time bound manner as well as maximization of the value of assets of such Corporate Debtor. This also suggests that the need for giving multiple opportunities to the sole Resolution Applicant is not warranted to defeat the very purpose of the Act…”. Also, “…It is unfortunate to observe that even after the lapse of 981 days and repeated compliance by the RP of the direction of the Adjudicating Authority; the Adjudicating Authority has not yet considered initiation of Liquidation as per Section 33 / Chapter –III of the Code…”. While rejecting the Intervention application, it was of the opinion that accepting it , “will violate the principles of natural justice as the Code and the Regulator IBBI has prescribed a process for selection of Resolution Applicant which initially starts with Invitation for Expression of Interest (EOI) followed by Information Memorandum, Evaluation Matrix and a request for Resolution Plan in accordance with Chapter –X of IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016”. Further made it abundantly clear that, “time is the essence of the Code. The Adjudicating Authority naturally, is to keep this factor in mind”.

 Further held that, “we are no way inclined to allow the Intervention Application and accordingly, the Intervention Application is rejected at the very threshold”. Due regards were even given to the fact that the global pandemic could have acted as a possible hindrance but allowing repeated reference of Resolution Applicant for the consideration when CoC kept rejecting the variants.   And thus initiated the processing for liquidation, and appointed the appellant, Insolvency Professional as the liquidator.[Kuldeep Verma v. State Bank of India, 2021 SCC OnLine NCLAT 36, decided on 16-03-2021]

Akaant MittalExperts Corner

The issue was also discussed at one of the sessions at the International Symposium on Insolvency and Bankruptcy Code, 2016 organised by the Centre for Transnational Commercial Law at National Law University, Delhi on 7-1-2021, where I had moderated the panel discussion on the session on “Corporate Liquidation and Key Issues”. I must express my appreciation towards Sh. Ravi Sharma, Advocate Pricewaterhouse Coopers for his succinct presentation on this issue at the session.

 

In the present post, I shall briefly discuss the conflict between Insolvency and Bankruptcy Code, 2016 (IB Code) vis-à-vis the tax statutes during the stage of liquidation of a corporate debtor. In examining the interplay of IB Code vis-à-vis the tax statutes and its impact on the latter, it is relevant to refer to the non-obstante clause in the IB Code under Section 238 which stipulates:

  1. Provisions of this Code to override other laws.— The provisions of this Code shall 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.

This particular provision purports to address numerous conflicts arising between the IB Code and other statutes. In the subsequent discussion, we shall see how the provisions of the IB Code have circumvented other statutory laws and the same has been given effect to by virtue of Section 238 of the IB Code.

Introduction

Several issues have arisen when during the liquidation proceedings under the IB Code, the tax authorities have invoked their right to recover dues. Section 53 of the IB Code is relevant provision which has been a bone of contention for the tax authorities with the IB Code. The provision provides for a waterfall mechanism ranking the relevant stakeholders and designating the priority of their claim in the following manner:

  1. Distribution of assets.— (1) Notwithstanding anything to the contrary contained in any law enacted by the Parliament or any State Legislature for the time being in force, the proceeds from the sale of the liquidation assets shall be distributed in the following order of priority and within such period and in such manner as may be specified, namely—

(a) the insolvency resolution process costs and the liquidation costs paid in full;

(b) the following debts which shall rank equally between and among the following—

(i) workmen’s dues for the period of twenty-four months preceding the liquidation commencement date; and

(ii) debts owed to a secured creditor in the event such secured creditor has relinquished security in the manner set out in Section 52;

(c) wages and any unpaid dues owed to employees other than workmen for the period of twelve months preceding the liquidation commencement date;

(d) financial debts owed to unsecured creditors;

(e) the following dues shall rank equally between and among the following:

(i) any amount due to the Central Government and the State Government including the amount to be received on account of the Consolidated Fund of India and the Consolidated Fund of a State, if any, in respect of the whole or any part of the period of two years preceding the liquidation commencement date;

(ii) debts owed to a secured creditor for any amount unpaid following the enforcement of security interest;

(f) any remaining debts and dues;

(g) preference shareholders, if any; and

(h) equity shareholders or partners, as the case may be.

 

Explaining the rationale behind keeping the right of the Central and State Governments in the distribution waterfall in liquidation at a priority below the unsecured financial creditors, the Bankruptcy Law Reforms Committee stated that the same will be helpful in:

… promoting the availability of credit and developing a market for unsecured financing (including the development of bond markets). In the long run, this would increase the availability of finance, reduce the cost of capital, promote entrepreneurship and lead to faster economic growth. The Government also will be the beneficiary of this process as economic growth will increase revenues. Further, efficiency enhancement and consequent greater value capture through the proposed insolvency regime will bring in additional gains to both the economy and the exchequer.[1]

Keeping this objective in mind, we will discuss the issues that have arisen during the liquidation proceedings under the IB Code vis-à-vis the tax authorities.

 

Issue 1 – Sections 178, 179 of the Income Tax Act, 1961 versus Section 53 of the IB Code

In LML Ltd., In re,[2]  issue arose as to under which “head” will the payment of capital gain tax on the sale of assets of the corporate debtor during liquidation fall into.

Option (a) was to include such capital gain tax as part of the “liquidation expense”.

Option (b) was to rule it as creditor’s due and the same will come under the “operational debt”.

The distinction was crucial since option (a) would have meant that the tax dues would be ranked higher up in the priority list under the IB Code. The same would have to be paid in priority of the other claims such as of workers’ dues or the dues of the secured creditors in terms of the waterfall mechanism specified under Section 53 of the IB Code.

The National Company Law Tribunal (NCLT) in this case ruled that such a capital gain tax has to fall under option (b) and has to be recovered in accordance with the waterfall mechanism provided under Section 53 of the IB Code. The reasoning of the NCLT was also premised on the reading of Section 178[3]  of the Income Tax Act, 1961 which in the marginal note states “company in liquidation” and sub-clause (6) of which was amended by the legislature to read as:

  1. (6) The provisions of this section shall have effect notwithstanding anything to the contrary contained in any other law for the time being in force except the provisions of the Insolvency and Bankruptcy Code, 2016.

     

Based on this, it was concluded that the legislature intended to give the provisions of the IB Code (Section 53, in the present case) to override the provisions of Section 178 of the Income Tax Act, 1961.

It is crucial to understand that while Section 178 of the Income Tax Act, 1961 was amended, the legislature did not amend Section 179 of the Income Tax Act, 1961 which provides for the personal liability of the directors of a private company in liquidation.

Section 179 provides that where any tax is due from a private company and if the same could not be recovered, then, every person who was a director of the private company at any time during the relevant previous year shall be jointly and severally liable for the payment of such tax unless he proves that the non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the company.

Similar issue arose in Pooja Bahry, In re,[4] where the liquidator sold certain properties relinquished by the secured creditors. Issue before the adjudicating authority was whether the liquidator is required to deposit “capital gains” on the sale of secured assets which was relinquished by the secured creditors and include it in the “liquidation cost”. Reiterating Section 178(6) of the Income Tax Act, 1961, the Tribunal held that the tax on capital gains must be distributed in accordance with the waterfall mechanism under Section 53 of the IB Code.

The Tribunal also noted that under the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest (SARFAESI) Act, 2002, a secured creditor can effect a sale of the secured asset and appropriate the entire amount towards its dues, without any liability to first pay capital gain. However, if the capital gain is to be first provided for under the IB Code by including the same under “liquidation cost”, the Tribunal opined that an anomalous situation will be created where the secured creditor shall get a lesser remittance under the IB Code than what it could have realised under the SARFAESI Act, had it not released the security into the common corpus.

An issue was brought before the Telangana High Court in Leo Edibles & Fats Ltd.,[5] where the petitioner purchased an immovable property in the liquidation proceeding of a corporate debtor. When the Income Tax Department claimed a charge over the property on account of an attachment order, and refused to allow the transfer of the immovable property in the name of the successful bidder, the issue arose with respect to Sections 52 and 53 of the IB Code vis-à-vis the Income Tax Act, 1961.

The High Court held that the Income Tax Department cannot claim any priority on the ground that:

(a) Tax dues, being an input to the Consolidated Fund of India and of the States, clearly come within the ambit of Section 53(1)(e) of the IB Code.

(b) The order of attachment of assets is issued by the Income Tax Department is prior to the initiation of liquidation proceedings under the IB Code.

(c) Under Section 36(3)(b) of the IB Code, a “liquidation estate” includes “assets that may or may not be in possession of the corporate debtor, including but not limited to encumbered assets”. Resultantly, the court opined that even if the order of attachment constitutes an encumbrance on the property, the same will not take out the property outside the purview of the liquidation estate.

(d) Section 178 of the Income Tax Act, 1961 stands excluded by virtue of the amendment of Section 178(6) of the Income Tax Act, 1961.

Similarly, in Om Prakash Agarwal v. Tax Recovery Officers,[6] an order attaching the bank accounts of the corporate debtor under liquidation was set aside by considering the tax dues as operational debt and a reference to the provision of Section 178(6). Thus, held that it is entitled to be claim distribution as envisaged under Section 53 of the IB Code.

 

Issue 2 – Sections 88 and 89 of Central Goods and Services Tax Act, 2017 (CGST Act, 2017) versus Section 53 of the IB Code

The provisions of Sections 88[7] and 89[8] of the CGST Act, 2017 are to an extent pari materia to the provisions of Sections 178 and 179 of the Income Tax Act, 1961.

Under Section 88(1) of the CGST Act, just like Section 178(1) when any company is being wound up or liquidated, the “liquidator” appointed shall give intimation of his appointment to the Commissioner.

Sections 88(3) and 89 of the CGST Act, similar to Section 179(2) of the Income Tax Act, 1961 incorporated the principle of vicarious liability of the directors of the debtor company. It provides that when any private company is liquidated and any tax, interest or penalty determined under this Act remains unrecovered, then the directors of such debtor company shall be jointly and severally liable for the payment of such tax, interest or penalty.

The issue herein shall be with respect to Section 88(1). While it is similar to Section 178(1), it does not contain the provision of Section 178(6) of the Income Tax Act, 1961, which explicitly provides for the overriding effect of the IB Code over the provisions of Section 178 of the Income Tax Act, 1961.

 

Issue 3 – TDS versus Section 53 of the IB Code

Section 194-IA(1) of the Income Tax Act, 1961 stipulates:

194-IA Payment on transfer of certain immovable property other than agricultural land.—.(1) Any person, being a transferee, responsible for paying (other than the person referred to in Section 194-LA) to a resident transferor any sum by way of consideration for transfer of any immovable property (other than agricultural land), shall, at the time of credit of such sum to the account of the transferor or at the time of payment of such sum in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to one per cent of such sum as income tax thereon.

(2)-(3) ***

In Pooja Bahry, In re,[9] the adjudicating authority held that the applicability of Section 194-IA of the Income Tax Act will not have an overriding effect on the waterfall mechanism provided under Section 53 of the IB Code.

However in Om Prakash Agarwal v. CIT (TDS),[10] issue arose on deduction of TDS by the successful bidder on the purchase of a liquidation asset. The liquidator sought a direction from the adjudicating authority to prevent the bidder from deducting TDS on the payment to be made for successfully purchasing the asset.

The NCLT rejecting the submission observed that the overriding effect under Section 238 is applicable to the issues between the creditor and the debtor but not to TDS deductions. The reasoning was predicated on the fact that deduction of TDS does not tantamount to payment of government dues in priority to other creditors, because it is not a tax demand for realisation of tax dues and the Government is not making any claim against the corporate debtor, rather it is incumbent on the purchaser to credit the TDS to the Income Tax Department. Hence the provision of Sections 53 and 238 of the IB Code was held to be inapplicable.

 

Miscellaneous issues

Apart from the above issues, there are several other inconsistencies that may arise during the corporate insolvency resolution process as well as the liquidation process.

For instance, Section 5(13) of the IB Code defines the term “insolvency resolution process costs” on account of the costs incurred by a resolution professional during the resolution process. The same includes costs such as the fees payable to any person acting as a resolution professional; any costs incurred by the resolution professional in running the business of the corporate debtor as a going concern. The issue arises on the tax treatment of such expenses. Which part of these expenses will fall under the head of “capital expenditure” and which may fall under the head of “revenue expenditure” is a question that remains to be seen. It is also argued that costs on restructuring can be classified as a “revenue expenditure”.[11]

Then there is also the issue of Section 56(2)(x) of the Income Tax Act, 1961, which imposes taxes on “gifts”. The provision stipulates that if any person receives any property, other than an immovable property, for a consideration which is less than the aggregate fair market value of the property by an amount exceeding fifty thousand rupees, will be charged income tax under the head “income from other sources”.

In cases of restructuring such instances do arise where lenders convert their outstanding loans into equity of the borrower company at a price which is less than the prescribed fair market value of such shares. The same is argued to be open to invocation of Section 56(2)(x) of the Income Tax Act, 1961.[12]

Conclusion

In conclusion, the issues discussed above show that the nitty-gritties of the taxation system vis-à-vis the objective of the IB Code are the next line of challenges that may require a conclusive position of law. One thing is certain that the breadth of the tax laws and the traditional priority of the claims under it have certainly in a lot of issues taken a subordinate position post the enactment of the IB Code.

Notwithstanding the above, Section 179 of the Income Tax Act, 1961 as well as Sections 88(3) and 89 of the CGST Act, 2017, still show that the personal liability of the directors of the company, vicariously, may subsist for the non-recovery of taxes due.


†Akaant K M, Advocate, National Company Law Tribunals and Constitutional Courts and author of the commentary “Insolvency and Bankruptcy Code – Law and Practice” foreworded by Justice Suryakant and available HERE 

[1] Report of the Bankruptcy Law Reforms Committee, Executive Summary – Chapter 2, “Liquidation”, accessible at  <https://ibbi.gov.in/uploads/resources/BLRCReportVol1_04112015.pdf>.

[2] 2017 SCC OnLine NCLT 1685.

[3] Income Tax Act, 1961, S. 178 stipulates:

178. Company in liquidation.— (1) Every person—

   (a) who is the liquidator of any company which is being wound up, whether under the orders of a court or otherwise; or

  (b) who has been appointed the receiver of any assets of a company,(Mark as RI2)

(hereinafter referred to as “the liquidator”) shall, within thirty days after he has become such liquidator, give notice of his appointment as such to the assessing officer who is entitled to assess the income of the company.(Mark as RI1)

(2)  The assessing officer shall, after making such inquiries or calling for such information as he may deem fit, notify to the liquidator within three months from the date on which he receives notice of the appointment of the liquidator the amount which, in the opinion of the assessing officer, would be sufficient to provide for any tax which is then, or is likely thereafter to become, payable by the company.

(3)  The liquidator—

(a) shall not, without the leave of the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner, part with any of the assets of the company or the properties in his hands until he has been notified by the assessing officer under sub-section (2); and

(b) on being so notified, shall set aside an amount, equal to the amount notified and, until he so sets aside such amount, shall not part with any of the assets of the company or the properties in his hands: 

Provided that nothing contained in this sub-section shall debar the liquidator from parting with such assets or properties for the purpose of the payment of the tax payable by the company or for making any payment to secured creditors whose debts are entitled under law to priority of payment over debts due to Government on the date of liquidation or for meeting such costs and expenses of the winding up of the company as are in the opinion of the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner reasonable.

(4)-(5) ***

(6)  The provisions of this section shall have effect notwithstanding anything to the contrary contained in any other law for the time being in force except the provisions of the Insolvency and Bankruptcy Code, 2016.

[4] Pooja Bahry, Liquidator v. Gee Ispat Pvt. Ltd. [CA 666/2019 in (IB)/250(ND)/2017, Order dt. 22.10.2019].

[5] Leo Edibles & Fats Ltd. v. Tax Recovery Officer, 2018 SCC OnLine Hyd 193.

[6] Item No. 301, IA-992/2020 in CP/294/2018 Principal Bench, Order dt. 15.06.2020.

[7] Central Goods and Services Tax Act, 2017, S. 88 states:

“88. Liability in case of company in liquidation.— (1) When any company is being wound up whether under the orders of a court or tribunal or otherwise, every person appointed as receiver of any assets of a company (hereafter in this section referred to as “the liquidator”), shall, within thirty days after his appointment, give intimation of his appointment to the Commissioner.

(2) The Commissioner shall, after making such inquiry or calling for such information as he may deem fit, notify the liquidator within three months from the date on which he receives intimation of the appointment of the liquidator, the amount which in the opinion of the Commissioner would be sufficient to provide for any tax, interest or penalty which is then, or is likely thereafter to become, payable by the company.

(3) When any private company is wound up and any tax, interest or penalty determined under this Act on the company for any period, whether before or in the course of or after its liquidation, cannot be recovered, then every person who was a director of such company at any time during the period for which the tax was due shall, jointly and severally, be liable for the payment of such tax, interest or penalty, unless he proves to the satisfaction of the Commissioner that such non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the company.”

[8] Central Goods and Services Tax Act, 2017, S. 89 stipulates

“89. Liability of directors of private company.— (1) Notwithstanding anything contained in the Companies Act, 2013 (18 of 2013) where any tax, interest or penalty due from a private company in respect of any supply of goods or services or both for any period cannot be recovered, then, every person who was a director of the private company during such period shall, jointly and severally, be liable for the payment of such tax, interest or penalty unless he proves that the non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the company.

(2) Where a private company is converted into a public company and the tax, interest or penalty in respect of any supply of goods or services or both for any period during which such company was a private company cannot be recovered before such conversion, then, nothing contained in sub-section (1) shall apply to any person who was a director of such private company in relation to any tax, interest or penalty in respect of such supply of goods or services or both of such private company:

Provided that nothing contained in this sub-section shall apply to any personal penalty imposed on such director.”

[9] Pooja Bahry, Liquidator v. Gee Ispat Pvt. Ltd. [CA 666/2019 in (IB)/250(ND)/2017, Order dt. 22.10.2019].

[10] [Item No. 203 CP/294/2018]

[11] Insolvency and Bankruptcy Code beyond the Tip of the Iceberg, a Deloitte Research Study referring to the decision in CIT v. Akzo Nobel India Ltd., 2018 SCC OnLine ITAT 14623, accessible at <https://www2.deloitte.com/content/dam/Deloitte/in/Documents/tax/in-tax-ibc1-noexp.pdf>.

[12] Insolvency and Bankruptcy Code beyond the Tip of the Iceberg, a Deloitte Research Study, accessible at <https://www2.deloitte.com/content/dam/Deloitte/in/Documents/tax/in-tax-ibc1-noexp.pdf>.

Legislation UpdatesRules & Regulations

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

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

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

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

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

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

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

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

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

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


Insolvency and Bankruptcy Board of India

[Press Release dt. 13-11-2020]

Legislation UpdatesRules & Regulations

The Insolvency and Bankruptcy Board of India (IBBI) notified the Insolvency and Bankruptcy Board of India (Voluntary Liquidation Process) (Second Amendment) Regulations, 2020 on 05-08-2020.

The Insolvency and Bankruptcy Code, 2016 enables a corporate person to initiate voluntary liquidation process if it has no debt or it will be able to pay its debts fully from the proceeds of the assets. The corporate person appoints an insolvency professional to conduct the voluntary liquidation process by a resolution of members or partners, or contributories, as the case may be. However, there can be situations which may require appointment of another resolution professional as the liquidator.

The amendment made to the Regulations provides that the corporate person may replace the liquidator by appointing another insolvency professional as liquidator by a resolution of members or partners, or contributories, as the case may be.

NOTIFICATION


Insolvency and Bankruptcy Board of India

[Notification dt. 05-08-2020]

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Appellate Tribunal (NCLAT): A Bench of Justice Venugopal M., Member (Judicial) and Balvider Singh and Ashok Kumar Mishra, Members (Technical) dismissed an appeal filed against the order of the National Company Law Tribunal. Chandigarh, whereby the resolution plan submitted by the appellant was rejected and liquidation of the Corporate Debtor was directed to be initiated.

The Corporate Debtor had filed a petition under Section 10 of the Insolvency and Bankruptcy Code, 2016, for initiation of the corporate insolvency resolution process. The application was submitted by the NCLT and Resolution Professional was appointed. On the expiry of the period for completion of the insolvency resolution process, the Resolution Professional filed an application seeking liquidation of the Corporate Debtor. The appellant (Resolution Applicant) submitted before the NCLT that the resolution plan submitted by them was not duly considered. Per contra, the Resolution Professional submitted that no resolution plan was approved by the Committee of Creditors.

After hearing both the parties, the NCLT order liquidation of the Corporate Debtor. Aggrieved thereby, the appellant preferred the instant appeal.

The Appellant Tribunal noted certain facts including that the suspended Director of the Corporate Debtor has been operating the bank accounts of the Resolution Applicant as authorised signatory. The Resolution Applicant also had various transactions with the Corporate Debtor such as transfer of assets, sale of goods and rental income from the Resolution Applicant. Considering these facts, the Appellate Tribunal held that it was established that the appellant (Resolution Applicant) was a related party and was not eligible as per Section 29-A of the Insolvency and Bankruptcy Code.

Accordingly, the Appellate Tribunal found no merit in the appeal filed by the Resolution Applicant and dismissed the same. [Global Business Corpn. v. Punjab National Bank, 2020 SCC OnLine NCLAT 95, decided on 23-01-2020]

Case BriefsForeign Courts

Supreme Court of the United Kingdom: A Full Bench of Lady Hale (President), Lord Reed (Deputy President), Lord Lloyd Jones, Lord Sales, and Lord Thomas, dismissed the appeal filed by a bank.

In the present case, the respondent company, “Singularis”, is registered in the Cayman Islands, which was set up to manage the personal assets of Mr Maan Al Sanea. He was the company’s sole shareholder and also one of the directors. The other 6 directors did not have any influence over the company’s management. A loan financing for the purchase of shares was provided to Singularis in 2007, by the appellant investment bank i.e., Diawa. This loan was also the security for the repayment of the loan. In the year 2009, after the shares were sold and the loans were repaid, a surplus amount of money (US$204m) was held by the bank for the account of the respondent company. As per the instruction given by Al Sanea, Daiwa paid out the surplus funds to third parties. The payments were misappropriation of Singularis’ fund and as a result of that Singularis was unable to meet the demands of the creditors. Singularis consequently entered into liquidation. On 18.09.2009, the Cayman Islands made a winding-up order and a joint liquidator were appointed for the same.

Respondent company herein (Singularis) held a certain sum of money as a deposit with the appellant bank (Daiwa). In 2009, the bank Daiwa was instructed by an authorised signatory of Singularis (Mr. Al Sanea) to make payments out of Singularis’ account. The Bank approved and completed the transfers notwithstanding many obvious and glaring signs that Mr. Al Sanea was perpetrating a fraud on the company. In 2014, Singularis issued a claim against the bank for USD 204 million (the total amount transferred in 2009). There were two bases for the claim: (i) dishonest assistance in Al Sanea’s breach of fiduciary duty in misapplying Singularis’ funds; and (ii) breach of the Quincecare duty of care owed by the Bank to Singularis by giving effect to the payment instructions.

The Quincecare duty arises when bankers are asked to make payments in circumstances where there are reasonable grounds to suspect possible fraud. In such a situation, banks owe a duty of care to their customers to refrain from making payments. When “on inquiry” in this way, banks have a positive duty to investigate the potential fraud, they have to be satisfied, by enquiring as far a reasonable banker could be expected to do so, that the payment is not fraudulent before they can be “off inquiry” and go on to comply with their contractual obligations and make the payment.

The claim allowed by the High court was the breach of the Quincecare duty of care. Since Daiwa’s appeal against the finding of liability on the negligence was dismissed, it appealed to the Supreme Court.

The main issue which arose in this matter was, whether the appellant bank was in the breach of its duty towards their customers by transferring the money regardless of circumstances which were suspicious. Also, whether the customer’s claim against the bank was precluded by the fact that the fraudulent acts of the director should be attributed to the customer so as to bar the claim of the customer against the bank.

According to the findings of the case, the judge held that there was a clear breach of Quincecare duty of care by the appellant bank towards the respondent company. The possible defences raised by Daiwa were: illegality, causation, countervailing claim in deceit and attribution. The Court opined that whether or not Mr. Al Sanea’s fraud was attributed to the company, the said defences would fail in any circumstance. It was held that Daiwa was liable to Singularis for its breach of Quincecare duty. It was the appellant bank’s duty to realise something suspicious was going on and a reasonable inquiry should have been done for the same. Due to Daiwa’s negligence, the company (and through the company, its creditors) had to suffer and be victims of fraudulent incidents.

Thus, the claims of Daiwa were dismissed and the judgment of the trial court was upheld. [Singularis Holdings Ltd. v. Daiwa Capital Markets Europe Ltd., [2019] 3 WLR 997, decided on 30-10-2019]

Legislation UpdatesRules & Regulations

The Ministry of Corporate Affairs (MCA) has notified the Insolvency and Bankruptcy (Insolvency and Liquidation Proceedings of Financial Service Providers and Application to Adjudicating Authority) Rules, 2019 (Rules) to provide a generic framework for insolvency and liquidation proceedings of systemically important Financial Service Providers (FSPs) other than banks.

The Rules shall apply to such FSPs or categories of FSPs, as will be notified by the Central Government under Section 227 from time to time in consultation with appropriate regulators, for the purpose of their insolvency and liquidation proceedings.

The Insolvency and Bankruptcy Code, 2016 (Code) provides a consolidated framework for reorganisation, insolvency resolution and liquidation of corporate persons, limited liability partnerships, partnership firms and individuals in a time-bound manner. Section 227 of the Code enables the Central Government to notify, in consultation with the financial sector regulators, financial service providers (FSPs) or categories of FSPs for the purpose of insolvency and liquidation proceedings, in such manner as may be prescribed.

Shri Injeti Srinivas, Secretary, Corporate Affairs, stated that the special framework provided under Section 227 of the Code for financial service providers is essentially aimed at serving as an interim mechanism to deal with any exigency pending introduction of a full-fledged enactment to deal with the financial resolution of Banks and other systemically important financial service providers.  The special framework under Section 227 of the Code shall not apply to Banks.  Separately, however, the government will notify specific categories of FSPs that do not fall under the systemically important category and shall be resolved under the normal provisions of the Code as ordinarily applicable to corporate debtors.

The Rules provide that the provisions of the Code relating to the Corporate Insolvency Resolution Process (CIRP), Liquidation Process and Voluntary Liquidation Process for a corporate debtor shall, mutatis mutandis, apply to a process for an FSP, subject to modifications, as under:

  1. The CIRP of an FSP shall be initiated only on an application by the appropriate regulator.
  2. On admission of the application, the Adjudicating Authority shall appoint the individual, who has been proposed by the appropriate regulator in the application for initiation of CIRP, as the Administrator.
  3. While conducting a proceeding of an FSP, the Administrator shall have the same duties, functions, obligations, responsibilities, rights, and powers of an insolvency professional, interim resolution professional, resolution professional or liquidator, as the case may be. He shall be appointed or replaced by the Adjudicating Authority on an application made by the appropriate regulator in this behalf.
  4. The appropriate regulator may constitute an Advisory Committee of three or more experts to advise the Administrator in the operations of the FSP during the CIRP.
  5. An interim moratorium shall commence on and from the date of filing of the application for initiation of CIRP by the appropriate regulator till its admission or rejection by the Adjudicating Authority.
  6. The provisions of interim-moratorium or moratorium shall not apply to any third-party assets or properties in custody or possession of the FSP, including any funds, securities and other assets required to be held in trust for the benefit of third parties.
  7. The Administrator shall take control and custody of third-party assets or properties in custody or possession of the FSP and deal with them in the manner, to be notified by the Central Government under Section 227.
  8. The license or registration which authorises the FSP to engage in the business of providing financial services shall not be suspended or cancelled during the interim-moratorium and the CIRP.
  9. Upon approval of the resolution plan by the Committee of Creditors, the Administrator shall seek ‘no objection’ from the appropriate regulator to the effect that it has no objection to the persons, who would be in control or management of FSP after approval of the resolution plan. The appropriate regulator shall issue ‘no objection’ on the basis of the ‘fit and proper’ criteria applicable to the business of the FSP without prejudice to the provision of Section 29A of the Code.
  10. The FSP shall obtain prior permission of the appropriate regulator for initiating voluntary liquidation proceedings.
  11. The Adjudicating Authority shall provide the appropriate regulator an opportunity of being heard before passing an order for liquidation or dissolution of the FSP.

Ministry of Corporate Affairs

[Press Release dt. 15-11-2019]

Case BriefsTribunals/Commissions/Regulatory Bodies

Securities and Exchange Board of India (SEBI): V.S. Sundaresan, Adjudicating Officer, quashed the adjudicating proceedings initiated against ABG Shipyard Limited, holding them to be infructuous. 

SEBI examined the status of compliance with the provisions of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, by ABG Shipyard (“Noticee”), whose equity shares are listed on BSE and NSE. During the examination, SEBI observed that the Noticee did not make requisite disclosure under Regulation 40(10) read with 40(9), Regulation 7(3) and 13(3) of LODR Regulations. 

On 8-8-2019, V.S. Sundaresan was appointed as Adjudicating Officer to inquire into and adjudge in the manner specified under Rule 4 of SEBI (Procedure for Holding Inquiry and Imposing Penalties) Rules, 1995 read with Section 15-I (1) and (2) of SEBI Act, and if satisfied, impose a penalty. Accordingly, Notice was issued ABG Shipyard. 

During enquiry, it was observed that the National Company Law Tribunal, vide its order dated 25-4-2019, had ordered the commencement of liquidation of Noticee and also appointed a liquidator therefor under Section 34(2) of the Insolvency and Bankruptcy Code, 2016; whereas, the instant adjudication proceedings were initiated vide order dated 8-8-2019. 

In order to examine the maintainability of the instant adjudication proceedings against the Noticee, the Board referred to Section 446 of the Companies Act, 1956, and its corresponding Section 279 of the Companies Act, 2013, whose provisions are in pari materia, insofar as the commencement or continuation of any “other legal proceedings”, after appointment of liquidator, are concerned.

Referring also to the decision of the Bombay High Court in Deutsche Bank v. S.P. Kala, (1990) 67 Com Cases, the Board observed: “… it is mandatory and a pre-condition to obtain the leave of NCLT for commencing the instant proceedings against the Noticee, which is under liquidation in terms of order dated April 25, 2019 passed by NCLT. It is pertinent to note that there is no material on record to suggest that leave of NCLT has been taken in the instant proceedings.”. It was concluded that instant adjudication proceedings against the Noticee had been initiated after the order of commencement of liquidation and, that too, without the leave of the NCLT.

In view of the foregoing, the Board held that the adjudication proceedings initiated against ABG Shipyard Limited, vide order dated 8-8-2019, and show cause notice dated 18-10-2019 are infructuous and, therefore, cannot be proceeded with. [ABG Shipyard Ltd., In re, 2019 SCC OnLine SEBI 248, decided on 11-11-2019]     

Case BriefsSupreme Court

Supreme Court: When the 3-judge bench of Arun Mishra, SA Nazeer and MR Shah, JJ was called upon to decide whether under the provisions of Section 109 of the Maharashtra Co­operative Societies Act, 1960 on expiry of the period fixed for liquidation, the proceedings for recovery of dues instituted/pending as against the members, shall stand closed, it said,

“the members who have obtained stay in appeal or on recovery proceedings or the case is pending, cannot take advantage of the fact that the period fixed for Liquidator under the Act is over.”

The Court further explained that once a report has been submitted, the Registrar has to take action in terms of the report and in such circumstances when the proceedings for recovery are pending against the members and the Society has taken loan from the banks for its member, the actual money has to go to the creditor i.e., to the bank who is going to be benefitted by recovery of public money in the hands of members. In such cases it would be appropriate for the Registrar to send notice of the proceedings to a person who is to be benefitted from the recovery. It said that merely on the liquidation of Society, or the factum that the period fixed for liquidation is over, liability of the members for the loans cannot be said to have been wiped off. The disbursement of loan in an arbitrary manner and failure to recover was the very fulcrum on the basis of which winding up of the Society was ordered.

It also said,

“The concept of restitution is a common law principle and it is a remedy against unjust enrichment or unjust benefit. The court cannot be used as a tool by a litigant to perpetuate illegality. A person who is on the right side of the law, should not have a feeling that in case he is dragged in litigation, and wins, he would turn out to be a loser and wrong­doer as a real gainer, after 20 or 30 years.”

The Court concluded by saying that though the Liquidator cannot continue once the proceedings are over. Notice in such cases should be issued by the Registrar to the creditors and to persons for whose benefit recovery is to be made, to continue the pending proceedings in the instrumentality of court/tribunals/recovery officers etc.

[Goa State Cooperative Bank v. Krishna Nath A., 2019 SCC OnLine SC 1058, decided on 20.08.2019]