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]

Legislation UpdatesRules & Regulations

The Insolvency and Bankruptcy Board of India (IBBI) notified the Insolvency and Bankruptcy Board of India (Liquidation Process) (Third Amendment) Regulations, 2020.

The Regulations require the committee of creditors to fix the fee payable to the liquidator.  Where the fee has not been fixed by the committee of creditors, the Regulations provide for a  fee as a percentage of the amount realised and of the amount distributed by the liquidator. There have been instances where a liquidator realises the amount while another liquidator distributes  the same to stakeholders. The amendment made to the Regulations today clarifies that where a  liquidator realises any amount, but does not distribute the same, he shall be entitled to a fee corresponding to the amount realised by him. Likewise, where a liquidator distributes any  amount, which is not realised by him, he shall be entitled to a fee corresponding to the amount distributed by him.


Read the regulations here: REGULATIONS

Insolvency and Bankruptcy Board of India

[Notification dt. 05-08-2020]

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Appellate Tribunal (NCLAT): A Bench comprising of Justice S.J. Mukhopadhaya (Chairperson) and Justice B.L. Bhat (Judicial member) rejected an appeal challenging an NCLT judgement where it allowed a liquidator to sell the assets of a company which had been attached by the Directorate of Enforcement (ED) during the period of ‘Moratorium’.

The Resolution Professional had filed an application before the NCLT for releasing the attachment of certain assets of Varrsana Ispat Limited (Corporate Debtor) by the ED. The NCLT held that ordering the release of the attached assets would not be maintainable since the attachment order was issued before the order of declaration of ‘Moratorium’ in the present case. The aforesaid NCLT order had been challenged in this appeal.

The Tribunal rejected the appellant’s contentions that Section 14 of the Insolvency and Bankruptcy Code, 2016 would have an overriding effect over the Prevention of Money Laundering Act, 2002 and that creditors and investigative agencies could not disrupt the ‘Corporate Insolvency Resolution Process’ during the period of ‘Moratorium’. The bench observed that since the provisions of the Prevention of Money Laundering Act, 2002 pertained to ‘proceeds of crime,’ Section 14 of the I&B Code would not be applicable to such a proceeding.

The Order stated that the offence of money-laundering has nothing to do with the ‘Corporate Debtor’ but will be applicable to individuals such as ex-Directors and shareholders of the ‘Corporate Debtor,’ who cannot be given protection from the Prevention of Money Laundering Act, 2002 by taking advantage of Section 14 of the I&B Code. Rather, it held that both the Acts would be invoked simultaneously. Since the attachments were made by the ED long before the initiation of the Corporate Insolvency Resolution Process, this would disallow the ‘Resolution Professional’ from taking advantage of Section 14 of the I&B Code. [Varrsana Ispat Limited v. Deputy Director, Directorate of Enforcement, Company Appeal (AT) (Insolvency) No. 493 of 2018, decided on 27-07-2020]

Op EdsOP. ED.

The  National Company Law Appellate Tribunal (NCLAT) in the matter of Punjab National Bank v. Kiran Shah, Liquidator of ORG Informatics Ltd.[1] observed that an application for removal of Liquidator cannot be moved in the absence of any provision under the law. In this case, the Committee of Creditors (CoC) instructed the resolution professional to move an application under Sections 33 & 34 of the Insolvency and Bankruptcy Code, 2016 (IBC). The application was accepted by the Adjudicating Authority (AA) on 20.11.2019. The Lead Financial Creditor (FC) appealed to NCLAT against the appointment of the Liquidator. NCLAT decided not to interfere with the order of AA on two grounds: (1) CoC has no role to play and are simply claimants whose matters are determined by the Liquidator, and (2) Such a creditor cannot move an application for removal of the Liquidator in the absence of any provision under the law.[2]

The decision of NCLAT has raised several eyebrows among the academicians and practitioners. The decision highlights the existence of a void in the current insolvency and bankruptcy law, wherein, there is no answer to the following questions:

  1. How can a Liquidator be removed?
  2. Who can seek the removal of a Liquidator?
  3. Who will decide on the matter of the removal of a Liquidator?
  4. Who will appoint the new Liquidator?

Understanding the transition of provisions governing Liquidators from Companies Act, 1956 to IBC, 2016

In the Companies Act, 1956, the appointment of a Liquidator was to be made by the High Court[3] prior to the Companies (Second Amendment) Act, 2002[4]. After the amendment, the same provision read to substitute High Courts with Tribunals[5]. The Official Liquidator was to be appointed from the pool of Liquidators made available by Section 448(1) of the 1956 Act. However, the provision[6] comes with a proviso stating that the Tribunal was to give due regard to the views of the secured creditors and workmen before the appointment of the Official Liquidator. The Liquidator was to perform such duties as the Tribunal may specify[7] and he could be removed by the Tribunal on sufficient cause being shown[8]. There was a sharing of powers between the Tribunal and the Central Government regarding their jurisdiction over a Liquidator[9].

In Chapter XX of the Companies Act, 2013, the Tribunal was to appoint an Official Liquidator or a Liquidator while passing an order for winding up[10]. The Liquidator was to be appointed from the pool of Liquidators made available by Section 275(2) of the Companies Act, 2013. The Companies Act, 2013, unlike its precursor, provided for a detailed list of grounds on which a Liquidator can be removed. These included misconduct, fraud, professional incompetence, failure to exercise due care and diligence etc.[11] Once again, there was a sharing of powers between the Tribunal and the Central over a Liquidator[12].

The Insolvency and Bankruptcy Code, 2016, by virtue of Schedule XI, has brought in a few amendments to the Companies Act, 2013.  What is important to note here is that the supervision over the appointment of a Liquidator, in the Insolvency and Bankruptcy Code, remains with the Adjudicating Authority or NCLT[13] whereas the setup of disciplinary supervision over a Liquidator now vests with the Insolvency and Bankruptcy Board of India (IBBI)[14].

1. Removal of the Liquidator:

a. The inherent powers of  NCLT – Rule 11 of the NCLT Rules, 2016 [15]

i. Rule 11 of the NCLT Rules is carefully worded:

11. Inherent Powers. – Nothing in these rules shall be deemed to limit or otherwise affect the inherent powers of the Tribunal to make such orders as may be necessary for meeting the ends of justice or to prevent abuse of the process of the Tribunal.

It is important to note that these rules are not specific to a particular act or do not derive their powers solely to be made applicable to a particular act. These are general rules that govern the Tribunal, while dealing with cases brought before it – by any and all acts that have appointed the Tribunal to adjudicate on certain disputes. Therefore, it would be improper to say that the Tribunal cannot use its inherent powers. Considering how the Bankruptcy Law Reforms Committee (BLRC) wished to use the existing infrastructure in place[16], it is clear that the Tribunal was to be utilised to meet the ends of justice in adjudicating Insolvency matters of corporate persons.

ii. Two important terms in the Preamble of the Insolvency and Bankruptcy Code, 2016 are time bound manner for maximisation of value of assets and balance the interests of all the stakeholders[17]. Removal and replacement of a Liquidator is an act that NCLT must undertake for the purpose of value maximisation of assets and to balance the interests of all the stakeholders.

iii. The Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 cannot be drawn into picture here since, in Rule 2 of the said Rules, it is clearly mentioned that these Rules would be applicable to matters relating to Corporate Insolvency Resolution Process. The same rules define Corporate Insolvency Resolution Process to mean the resolution process for corporate persons under Chapter II of Part II of the Code. However, liquidation squarely falls in Chapter III of Part II of the Code. Therefore, arguments limiting use of NCLT’s inherent powers cannot be taken.

iv. It is also noteworthy to mention that in  Allahabad Bank v. Supreme Tex Mart Ltd.[18], the Chandigarh Bench of NCLT faced a similar pressing situation. The Liquidator of the corporate debtor was facing cardiac problems and was advised to rest for 3-6 months. Therefore, NCLT was presented with an application for the replacement of the Liquidator and although there was no provision in the Code that permitted the replacement of the Liquidator, NCLT, in para 5 noted as follows and replaced the Liquidator:

“…. As rightly submitted by the learned counsel for the applicant, this authority can invoke its inherent power in the interest of justice and in the circumstances of the application.”

b. Section 16 of the General Clauses Act, 1897

Section 16 of the General Clauses Act, 1897[19] reads as follows:

Power to appoint to include power to suspend or dismiss. Where, by any [Central Act] or Regulation, a power to make any appointment is conferred, then, unless a different intention appears, the authority having [for the time being] power to make the appointment shall also have power to suspend or dismiss any person appointed [whether by itself or any other authority] in exercise of that power.

This is an important provision in understanding how NCLT has the inherent power to remove a Liquidator who has been appointed.

According to Woodroffe’s Book on Receivers[20], it is said:

The power to terminate flows naturally and as a necessary sequence from the power to create. The power of the Courts to remove or discharge a Receiver whom it has appointed may be exercised at any stage of the litigation. It is a necessary adjunct of the power of appointment and is exercised as an incident to, or consequence of, that power; the authority to call such officer into being necessarily implying the authority to terminate his functions when their exercise is no longer necessary, or to remove the incumbent for an abuse of those functions or for other cause shown” or “because of the necessity of the appointment having ceased to exist.”

It was also noted by the Federal Court that:

It seems because of this statutory rule based on the principles mentioned above that in Order XL Rule 1 of the Code of Civil Procedure no express mention was made of the power of the court in respect of the removal or suspension of a receiver. The General Clauses Act has been enacted so as to avoid superfluity of language in statutes wherever it is possible to do so. The legislature instead of saying in Order XL Rule 1, that the court will have power to appoint, suspend or remove a receiver, simply enacted that wherever convenient the court may appoint a receiver and it was implied within that language that it may also remove or suspend him. If Order XL Rule 1 of the Code of Civil Procedure is read along with the provisions above mentioned, then it follows by necessary implication that the order of removal falls within the ambit of that rule…[21]

To further drive home the point that such an exercise of power to remove a receiver, is exercised by the inherent powers of a court, it was noted that:

It is a necessary adjunct of the power of appointment and is exercised as an incident to, or consequence of, that power; the authority to call such officer into being necessarily implying the authority to terminate his functions when their exercise is no longer necessary, or to remove the incumbent for an abuse of those functions or for other cause shown” or “because of the necessity of the appointment having ceased to exist.” I take it, therefore, that the present petition is put in for the exercise of the inherent powers of the Court, though it does not come under any particular section or rule in the Code.[22]

(emphasis supplied)

The same reasoning was also used in  Chacko v. Jaya Varma[23].

The inherent powers of the court under the Code of Civil Procedure (CPC) are found in various sections[24]. The relevant section similar to the current issue is Section 151 CPC which reads as follows, “Nothing in this Code shall be deemed to limit or otherwise affect the inherent powers of the Court to make such orders as may be necessary for the ends of the justice or to prevent abuse of the process of the court.” Rule 11 of the NCLT Rules and Section 151 CPC are similarly worded. Therefore, even in the absence of a specific provision, NCLT can exercise its inherent powers along with Section 16 of the General Clauses Act to remove a Liquidator.

2. Stakeholders may approach  NCLT:

The BLRC Report mentions that it should be available for the stakeholders to be able to remove a Resolution Professional for causes shown. The relevant provision reads as follows:

“The Code makes provision for the removal of the RP[25] during the resolution process. This can be done either during an insolvency or a bankruptcy resolution process. An application can be made to the Adjudicator by the creditors committee for the removal of the RP at any time during the IRP[26], or by the board during the liquidation process. In either case, this must be supported with a majority vote. Any other application for the removal of the RP can be made to the Adjudicator with cause shown.”[27]

The Code mentions that a Liquidator has the power to consult any of the stakeholders entitled to a distribution of proceeds under Section 53[28]. This makes it clear that the Code realises that those mentioned in Section 53 are stakeholders and this by very mention gives them a right to approach NCLT in case the Liquidator is acting in a manner that is going to harm their interests.

The BLRC Report had also envisioned the removal of a Liquidator. In the drafting instructions for the code, Box 5.26, point 2 says that “The Adjudicator will admit an application for the removal of either the RP or a Liquidator during the resolution process, from any other party with cause shown”. This could possibly mean that if the Liquidator’s acts cause grievance to “any party” of a Liquidation process, then such a party could approach the Adjudicator/NCLT.

3. NCLT is the right forum to decide on this matter:

Section 60(5)(c) of the Insolvency and Bankruptcy Code empowers NCLT to decide on matters of insolvency resolution or liquidation. The provision reads as follows: “any question of priorities or any question of law or facts, arising out of or in relation to the insolvency resolution or liquidation proceedings of the corporate debtor or corporate person under this Code”. Therefore, the ideal approach for the removal and replacement of the Liquidator would be to move the National Company Law Tribunal under Section 60(5)(c) of the Insolvency and Bankruptcy Code, 2016 read with Rule 11 of the NCLT Rules, 2016.

4. Appointment of the new Liquidator:

From the perusal of the BLRC Report, it is clear that the procedure that was intended by the Committee to replace a Liquidator was that once the communication for the replacement is made by the Adjudicating Authority to IBBI, the replacement was to be given effect to by IBBI suggesting a new Professional within 48 hours of this communication. Box 5.26 of the BLRC Report, which has drafting instructions for the Code, in Point 3 says that “The Code does not permit the removal to be accompanied by a new recommended replacement candidate.

Conclusion

Therefore, in the absence of any such provision that gives effect to the removal of a Liquidator, all such applications that show the incompetence of a Liquidator or that show that the Liquidator is not being diligent in discharging his duties, can be made to NCLT under Section 60(5)(c) of the Insolvency and Bankruptcy Code, 2016 read with Rule 11 of the National Company Law Tribunal Rules, 2016. If this process is not allowed and if incompetent Liquidators are allowed to conduct liquidation proceedings, it would prove detrimental to the interests of all the stakeholders in Section 53 of the Code. 

To put an end to all and any possible interpretation for the issues raised above, it is imperative that an amendment be introduced to the Insolvency and Bankruptcy Code, 2016 that mentions the circumstances in which a Liquidator may be removed/replaced, the manner and procedure for such replacement and the locus of parties who may approach the Adjudicating Authority for the same[29]. This would be in the interest of all the stakeholders and in the spirit of the Code.

Misconduct, fraud, misfeasance, professional incompetence or failure to exercise due care and diligence in performance of powers and functions by the Liquidator, when the Liquidator expresses his inability to act as a Liquidator, when there arises a conflict of interest or lack of independence during the term of his appointment that justify his removal, or when there is a death or resignation of the liquidator – could be the grounds on which a Liquidator can be removed/replaced.

It is also important to note that during the Insolvency Resolution Period, the Resolution Professional is in the supervision of the Committee of Creditors and direct supervision of the Adjudicating Authority. Once liquidation commences, the Committee of Creditors ceases to exist, which is all the more reason why the Adjudicating Authority should use its powers to ensure that the Liquidator is discharging his duties and if it is found out that he isn’t, the Adjudicating Authority should act quickly to ensure that there is no delay in the process of Liquidation and replace him[30]. This is the need of the hour and if this is not done, there would be no balance in the interests of the stakeholders, which would be against the very spirit of the Code.


*Graduate from Symbiosis Law School, Hyderabad and has a background in the field of Insolvency and Bankruptcy. Author can be reached at kssyasaswi@gmail.com

[1] 2020 SCC OnLine NCLAT 155

[2]. Id.

[3] Section 448(1) of the Companies Act, 1956

[4] Companies (Second Amendment) Act, 2002, w.e.f. 1.4.2003, to establish  National Company Law Tribunals. 

For more, read Press No. 2/2003 dated 4th April, 2003, Department of Company Affairs, available at https://www.mca.gov.in/Ministry/pdf/press_release/Press_022003.html. (Till the constitution of Tribunals was completed, the jurisdiction of the Company Law Boards was to continue)

[5] This is when it was thought that a Company Tribunal would be established and until then, the powers were to be vested with the Company Law Board. Therefore, the amended provision used “Tribunal” instead of “Court”.

[6] Section 448(1) of the Companies Act, 1956

[7] Section 448(6) of the Companies Act, 1956

[8] Section 448(6)(b) of the Companies Act, 1956

[9]The Tribunal was to adjudicate on disputes and could order the removal of a Liquidator whereas the Central Government looked into the conduct of the Liquidator and could take disciplinary action against him/her (Section 463 of the Companies Act, 1956).

[10] Section 275 of Companies Act, 2013

[11] Section 276 of the Companies Act, 2013. Section 276(3) also brought in the liability of a Liquidator for the losses caused to a company under Liquidation because of his acts.

[12] Tribunal could remove a Liquidator from a proceeding on the grounds mentioned in Section 276 of the Companies Act, 2013 and the Central Government could remove a Liquidator from its panel under Section 275(4) of the Companies Act, 2013. The former is an adjudication process whereas the latter is a disciplinary measure.

[13] For instance, Section 34(1) of the Insolvency and Bankruptcy Code, 2016 reads, “Where the Adjudicating Authority passes an order for liquidator of the Corporate Debtor under Section 33…unless replaced by the Adjudicating Authority…”and Section 35 of the Insolvency and Bankruptcy Code, 2016 reads, “Subject to the directions of the Adjudicating Authority, the Liquidator shall….It is also common practice that the NCLT, while passing an order for liquidation, in the last few pages of the written order, gives a few directions to the Liquidator which are nothing more than the provisions of Section 35 of the Insolvency and Bankruptcy Code, 2016.

[14] The Insolvency and Bankruptcy Board of India (IBBI) is to take disciplinary action against the Liquidator under Section 47(2)(b) of the Insolvency and Bankruptcy Code, 2016. It also exercises disciplinary powers under Section 220 of the IBC.

[15] National Company Law Tribunal Rules, 2016

[16] 4.2.1., Tribunals, Bankruptcy Law Reforms Committee Report, Pg. 44

[17] Preamble, Insolvency and Bankruptcy Code, 2016.

[18] CA No. 941/2019 in CP (IB) No. 67/Chd/Pb/2017, Decided On: 01.11.2019, MANU/NC/9236/2019

[19] General Clauses Act, 1897

[20] Page 269, Section 30

[21] Kutoor Vengayil Rayarappan Nayanar v. Kutoor Vengayil Valia Madhavi Amma , 1949 SCC OnLine FC 34  

[22] M.K. Subramania Iyer v. Muthulakshmiammal, LQ 1912 HC 1629

[23] Chacko v. Jaya Varma, 1999 SCC OnLine Ker 373 

[24] Sections 148 and 149 – deal with grant or enlargement of time, Section 150 – deals with transfer of business, Sections 152, 153 and 153-A –  deal with amendments in judgments, decrees or order or in separate proceedings.

[25] Resolution Professional

[26] Insolvency Resolution Period

[27] 5.5.10, Bankruptcy Law Reforms Committee Report, 2015, Pages 109 & 110

[28] Section 35(2) of the Insolvency and Bankruptcy Code, 2016

[29] Since previous Acts have given locus to parties. See Section 183(5) of Companies Act, 1913; Section 460(6) of Companies Act, 1956 and Section 292(4) of Companies Act, 2013.

[30] 5.5.10, Bankruptcy Law Reforms Committee Report, 2015, Pg. 109 & 110, “The Adjudicator must apply to the Regulator for a replacement RP as soon as the application is made. The Regulator must recommend a replacement RP within not more than 48 hours. In case the application is to remove an RP during the IRP, the removal of the RP does not allow for an extension in the window of time permitted for the IRP: there final date of closure for the IRP remains the same as in the order registering the IRP.”

Hot Off The PressNews

The Central Registrar of Cooperative Societies, Department of Agriculture, Cooperation and Farmers’ Welfare, Ministry of Agriculture and Farmers’ Welfare, Government of India has passed an Order for winding up the Adarsh Credit Cooperative Society Ltd., Ahmedabad and has appointed a Liquidator for the purpose under the provisions of the MSCS Act, 2002 (& Rules made thereunder) today.

The Adarsh Credit Cooperative Society Ltd., Ahmedabad, Gujarat has been found to indulge in misusing the funds of the members/ depositors for personal gains, indulged in gross irregularities and has violated Cooperative Principles.


Ministry of Agriculture & Farmers Welfare

[Press Release dt. 29-11-2019]

[Source: PIB]

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Tribunal, New Delhi: The Bench of M.M. Kumar, Chief Justice (Retd.), President and S.K. Mohapatra, Member (Technical) disposed of an application while making it clear that,

“Provident Fund dues, Pension Funds and Gratuity Fund dues are not treated as a part of the liquidation estate and would not, therefore, be recovered by Section 53 of the Code which provides for waterfall mechanism.”

Factual matrix of the case:

The present application has been filed by the workmen of Moser Baer India Ltd. which is going into liquidation. Workmen of the company have filed the present application in order to seek directions to be issued to the liquidator for excluding the amount due to them towards provident fund, pension fund and gratuity fund from the waterfall mechanism envisaged under Section 53 of the Insolvency and Bankruptcy Code, 2016 and pay them under the stated heads.

Further directions have also been sought to pay the dues to the workmen in accordance with Section 25FFF of the Industrial Disputes Act, 1947.

The Tribunal on keeping in consideration the facts and circumstances of the case, stated that, “there is a basic flaw in the reasoning adopted by the liquidator as under Section 36(4)(a)(iii), the expression ‘liquidation estate’ has been defined and clarified that – all sums due to any workman or employee from the provident fund, pension fund and gratuity fund, were not to constitute and included in the expression “liquidation estate assets”.  Coram also stated that, once the above mentioned three heads do not constitute a part of the liquidation estate, we fail to understand as to how Section 53 could be invoked along with its explanation. Therefore, the amount mentioned of the workmen dues cannot be a part of liquidation estate assets.

Relying on the case of Asset Reconstruction Company (India) Ltd. v. Precision Fasteners Ltd., the bench stated that liquidator has unnecessarily taken a perverse view. The order was concluded by stating that “If there is any deficiency to the Provident Fund, pension Fund and Gratuity Fund, then the liquidator shall ensure that the fund is made available in the aforesaid accounts, even if their employer has not diverted the requisite amount.” Tribunal disposed of the application and asked the needful to be done in 2 weeks preferably. [Alchemist Asset Reconstruction Co. Ltd. v. Moser Baer (India) Ltd., 2019 SCC OnLine NCLT 118, Order dated 19-03-2019]