Liquidation

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]