Case BriefsSupreme Court

Supreme Court of India: The Bench of M.R. Shah and Aniruddha Bose, JJ., observed that,

“Appellate Tribunal has jurisdiction or power to condone the delay not exceeding 15 days from the completion of 30 days, the statutory period of limitation.”

Aggrieved and dissatisfied with impugned order passed by the National Company Law Appellate Tribunal by which NCLAT refused to condone delay of 44 days in preferring the appeal against the order passed by the National Company Law Tribunal rejecting the claim of the appellant. Appellant has preferred the present appeal.

Factual Background

State Bank of India (SBI) had initiated the insolvency proceedings before the NCLT under Section 7 of the Insolvency and Bankruptcy Code, 2016 against Dunar Foods Limited (Corporate Debtor) on the ground that Corporate Debtor had taken credit limits by hypothecating the commodities kept in the warehouses of the appellant.

It was stated that there was a delay of 44 days in preferring the appeal before NCLAT as the said appeal was required to be filed within a maximum period of 45 days (30 days + 15 days). However, there was a further delay of 44 days beyond a total period of 45 days.

Therefore, considering Section 61(2) of IBC which provides for powers to the Appellate Tribunal to condone delay of only 15 days which it can condone over the period of 30 days, if there is a sufficient cause, by impugned order, the Appellate Tribunal dismissed the appeal on the ground that the tribunal had no jurisdiction to condone the delay beyond 15 days and thereby the appeal was barred by limitation.

Analysis, Law and Decision

Bench noted that the appellant had applied for the certified copy of the order passed by the adjudicating authority after a delay of 34 days. Hence the said copy of the order was applied beyond the prescribed period of limitation i.e. beyond 30 days.

As the Appellate Tribunal can condone the delay up to a period of 15 days only, the Appellate Tribunal refused to condone the delay which was beyond 15 days from completion of 30 days, i.e., in the present case delay of 44 days and consequently dismissed the appeal.

 Hence, the appellate tribunal did not commit any error.

Further, the Court stated that in a case there may arise a situation where the applicant may not be in a position to file the appeal within a statutory period of limitation and even within the extended maximum period of appeal which could be condoned owing to genuineness, viz., illness, accident, etc. However, Parliament has not carved any exception of such a situation.

“…courts have no jurisdiction and/or authority to carve out any exception. If the courts carve out an exception, it would amount to legislate which would in turn might be inserting the provision to the statute, which is not permissible.”

In the decision of Popat Bahiru Govardhane v.  Special Land Acquisition Officer, (2013) 10 SCC 765, this Court has observed and held that it is a settled legal position that the law of limitation may harshly affect a particular party but it has to be applied with all its rigour when the Statute so prescribes.

Further, in the decision of this Court in Oil & Natural Gas Corporation Limited v. Gujarat Energy Transmission Corporation Limited, (2017) 5 SCC 42, the question was with respect to delay beyond 120 days in preferring the appeal under Section 125 of the Electricity Act and the question arose whether the delay beyond 120 days in preferring the appeal is condonable or not. After considering various earlier decisions of this Court on the point and considering the language used in Section 125 [2] of the Electricity Act which provided that delay beyond 120 days is not condonable, this Court has observed and held that it is not condonable and it cannot be condoned, even taking recourse to Article 142 of the Constitution.

Hence, Supreme Court held that delay beyond 15 days in preferring the appeal is uncondonable, the same cannot be condoned even in exercise of powers under Article 142 of the Constitution.

Conclusion 

“…considering the fact that even the certified copy of the order passed by the adjudicating authority was applied beyond the period of 30 days and as observed hereinabove there was a delay of 44 days in preferring the appeal which was beyond the period of 15 days which maximum could have been condoned and in view of specific statutory provision contained in Section 61(2) of the IB Code, it cannot be said that the NCLAT has committed any error in dismissing the appeal on the ground of limitation by observing that it has no jurisdiction and/or power to condone the delay exceeding 15 days.”

In view of the above discussion, the appeal failed and was dismissed. [National Spot Exchange Ltd. v. Anil Kohli, 2021 SCC OnLine SC 716, decided on 14-09-2021]

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Appellate Tribunal (NCLAT): The Coram of Justice Jarat Kumar Jain, Judicial Member and Dr Ashok Kumar Mishra, Technical Member while dismissing as appeal released the Corporate Debtor Company from the rigours of CIRP, and allowed the Board to function through its Board of Directors from immediate effect. The Appellate Tribunal also remitted back the matter to the Adjudicating Authority to decide the fees and costs of CIRP payable to IRP, to be borne by the Corporate Debtor.

In the instant matter, K. Srinivas Krishna, the Suspended Director of Corporate Debtor, filed an appeal against the order passed by the Adjudicating Authority before the Appellate Tribunal. Further, a civil appeal was filed before the Supreme Court challenging the Appellate Tribunal’s impugned order. The appeal was dismissed on the ground that the claim of the Operational Creditor for Rs, 50,32,028 was not tenable and other claim was paid. Further, the interim stay passed by the Tribunal was vacated and IRP was directed to take further action against the CIRP. Further, the objections raised by the Operational Creditor were rejected by the adjudicating authority on the grounds of material error, where the form FA (application for withdrawal of CIRP) was not signed by the Operational Creditor (applicant) on whose application CIRP was initiated. Therefore, the application was dismissed for not being maintainable.  Being aggrieved by the order, the Suspended Director of the Company filed an appeal where the impugned order was challenged.

The Tribunal was of the opinion that, to prevent abuse of process, setting aside the impugned order and the order of initiating CIRP against the Corporate Debtor was more conducive. Therefore, the Corporate Debtor Company was released from the rigours of the CIRP and was allowed to function through its Board of Directors from immediate effect.

Further, the Tribunal remitted back the matter to the Adjudicating Authority to decide the fees and costs of CIRP payable to IRP which shall be borne by the Corporate Debtor.[K. Srinivas Krishna v. Shyam Arora, Company Appeal (AT) (Insolvency) No. 221 of 2021, decided on 02-09-2021]


Agatha Shukla, Editorial Assistant has reported this brief.


Counsel for the Parties:

For Appellant :

Mr. P Nagesh, Sr. Advocate with Mr. Srinivas Kotni, Mr. Shantam Gorwara, Advocates and Mr. Srinivas Krishna, in person.

For Respondents :

Mr. Shyam Arora, Respondent No. 1 in person, Mr. Sharad Tyagi, Mr. K. Gayatri, Advocates for Respondent No. 1. 2

Mr. Sanjay Kapur, Mr. V M Kannan, Ms. Shubhra Kapur, and Mr. Arjun Bhatia, Advocates for Respondent No. 2.

Dr. Laxhmi Narashimha, Advocate for RP.

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Appellate Tribunal (NCLAT): The Coram of Justice Jarat Kumar Jain, Judicial Member and Ashok Kumar Mishra, Technical Member, dismissed an appeal on no finding any infirmity in the impugned order. However, requested the adjudicating authority to consider the application before approving any Resolution Plan.

In the instant matter an impugned order of the National Company Law Tribunal, Guwahati was challenged on the ground that the Resolution Plan was accepted by 91.84% of the members of the ‘Committee of Creditors’ (CoC) but the approval for the same is pending before the Adjudicating Authority.

The Adjudicating Authority was of the opinion,

“…we are of the considered view that the Suspended Management of the Corporate Debtor (CD) be given a chance to submit Resolution Plan as prayed for. And go by the set precedents the pleadings of the Suspended Management to give him a chance for submitting a Resolution Plan, after the final judgment, being as an MSME Unit is reasonable”.

The Adjudicating Authority had also raised an issue of how the ‘Financial Creditor’ claimed 43 times of the amount of loan disbursed 21 years back when the Financial Creditor was under RBI Regulations, and the issue that the guarantee was invoked by the original lenders – IBBI for an amount of Rs.5,42,94,868, which was 24 times of the claimed amount in 18 years.

While referring to the judgments cited by the Appellants, the Tribunal stated that the applicability of the same was under dark as the Adjudicating Authority had only permitted for giving an opportunity to MSME to submit a concrete, composite, feasible and a viable resolution plan, and no other one was allowed to submit any plan other than the Resolution plan already submitted by the Resolution Applicant.

The Tribunal further noted,

“…there is no harm in giving an opportunity to the MSME in accordance with the provisions of the Code for keeping the promotion of entrepreneurship alive. The Adjudicating Authority has only provided an opportunity to the MSME and has given the liberty to the CoC to negotiate with existing Resolution Applicant and MSME unit also and accept the one which is commercially viable and technically feasible”.

On not finding any infirmity in the order, the Appellate Tribunal dismissed the appeal[PLBB Products Pvt. Ltd. v. Piyush Periwal, Company Appeal (AT) (Insolvency) No. 160 of 2021, decided on 07-09-2021]


Agatha Shukla, Editorial Assistant has reported this brief.


For the Appellant :

Mr Abhijeet Sinha, Mr Lzafeer Ahmad BF and Mr Aditya Shukla, Advocates.

For the Respondents :

Mr Jishnu Saha, Sr. Advocate with Mr Abhijit Sarkar, Advocates for Respondent No. 1.

Mr Sidhartha Barua and Mr Praful Jindal, Advocates for Respondent No. 2.

Mr Anand Verma and Mr Abhishek Prasad, Advocates for Respondent No. 3.

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Appellate Tribunal (NCLAT): The Coram of Justice Jarat Kumar Jain, Judicial Member and Ashok Kumar Mishra, Technical Member while disposing of an appeal challenging an impugned order of the National Company Law Tribunal, Kolkata Bench. Kolkata stated,

“There is no bar in merging unhealthy company with healthy company to come over the crisis. There was no need perhaps to pass this specific direction”.

In the instant case two appeals under Section 421 of the Companies Act, 2013 were clubbed together. The appeals had challenged the impugned order of the National Company Law Tribunal, Kolkata Bench, Kolkata wherein the Tribunal [in para

23 (xviii)] directed that “part III and part IV of the creditors of the applicant Company shall maintain status quo till further orders with respect to their respective contractual terms dues claims and rights and are estopped from taking any coercive steps including reporting in any form and /or changing the account status of the Applicant Company and its holding Company (SREI Infrastructure Finance Limited) from being a standard asset, which will prejudicially affect the implementation of the Scheme and render the said Scheme ineffective”. The appellant raised an issue of material irregularity in exercising the jurisdiction by the Tribunal under Section 230 of the Companies Act, 2013. Both the appeals arising out of the same impugned order were clubbed and heard together for disposal of the case.

The Coram, while disposing of the appeals, left many aspects of the impugned order untouched except the direction in para 23 (xviii) of the order. The Tribunal made certain observations regarding the aspects enunciated in the impugned order and accepted and rejected them with sound reasons.

Observations:

-The Tribunal to issue notice under Section 230(5) of the Act, requiring representation to all the authorities concerned, and which were likely to be affected by the compromises or arrangements

-To dispense with calling of meetings of creditors having at least 90% value agreed to the scheme

-The Tribunal was right in calling the meeting of creditors and appointing ‘Chairperson’ and ‘Scrutiniser’ etc.

-The direction, not to classify loan amount as NPA, till further orders and stopping from taking coercive steps including reporting in any form was not in order.

Therefore, keeping all the other aspects intact, Coram refuted the direction on the grounds that there is no harm in merging unhealthy company with healthy company to survive.[UCO Bank v. SREI, Company Appeal( AT) No. 232 of 2020, decided on 07-09-2021]


Agatha Shukla, Editorial Assistant has reported this brief.


For Appellant:

Mr. C.A. Sundaram, Sr. Advocate with Mr. P.C. Ghosh, Mr. Partha Sil and Mr. Tavish Bhushan Prasad Advocates.

For Respondents:

Mr. Joy Saha, Sr. Advocate with Mr. Abhijeet Sinha, Mr. Dipen Chatterjee, Ms. Rusha Mitra, Mr. Saptrshi Mandal, Ms. Shreyas Edupuganti, Advocates for Respondent No. 1.

Mr. Kumar Anurag Singh, Mr. Zain A. Khan and Mr. Saikat Sarkar, Advocates for Respondent No. 2.

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Appellate Tribunal (NCLAT): The Coram of Judicial A.I.S. Cheema (The officiating Chairperson) and Dr Alok Srivastava (Technical Member) while disposing of an appeal, directed NCLT to decide the matter ‘one way or the other’, hoping that it would take up the application with ‘all sincerity’.

In the instant matter, an appeal was filed against an impugned order of NCLT, Kolkata Bench, Kolkata, that an Application under Section 7 of Insolvency and Bankruptcy Code, 2016 has been pending before it since 30-12-2019 and the Admission Order is not yet passed one way or the other. The counsel submitted that the matter was getting protracted before the Adjudicating Authority which defeats the purpose of the provisions of IBC requiring the Application to be admitted within 14 days.

The Tribunal considering the facts and circumstances noted,

“…we appreciate the pain of the Appellant due to pendency of such Application under Section 7 of IBC which has been pending since 30th December, 2019. We have already said what we could on 29th January, 2021. We hope that the Adjudicating Authority would in all sincerity take up the Application and decide the same one way or the other”.

[South Indian Bank Ltd. v. Gold View Vyapaar (P) Ltd., 2021 SCC OnLine NCLAT 297, decided on 19-08-2021]


Agatha Shukla, Editorial Assistant has reported this brief.


Counsel for the Parties:

For Appellant:

 Ms. Malvika Trivedi, Sr. Advocate with

Mr. Parag Maini, Mr. Abhimanyu Chopra,

Mr. Raghav Chadha and Bhargavi Kannan, Advocates.

For Respondent:

 Mr. Joy Saha, Sr. Advocate with

Mr. Ishaan Saha, Mr. Santosh Kumar Ray

and Rituparna Sanyal, Advocates.

Case BriefsSupreme Court

Supreme Court: The Division Bench of Dr Dhananjaya Y Chandrachud and M R Shah, JJ., observed that,

Jurisdiction of the Adjudicating Authority and the Appellate Authority cannot extend into entering upon merits of a business decision made by a requisite majority of the CoC in its commercial wisdom.

Under the Indian Insolvency regime, it appears that a conscious choice has been made by the legislature to not confer any independent equity-based jurisdiction on the Adjudicating Authority other than the statutory requirements laid down under Section 30 (2) of the IBC.

The Appeal

 Present appeal arose under Section 62 of the Insolvency and Bankruptcy Code against the decision of the National Company Law Appellate Tribunal. Reliance Infratel Limited (RIL) was the corporate debtor and appellants the operational creditors.

NCLAT had upheld the decision of NCLT wherein it had approved the resolution plan formulated in the course of the insolvency resolution process of the Corporate Debtor.

Analysis, Law and Decision

Valuation of Preference Shares

The first aspect was in relation to the inclusion of realisable value from sale of preference shares held by Reliance Bhutan Limited, in Reliance Realty Limited, in determining the liquidation value of the Corporate Debtor. Earlier, it was clarified that under IBC and its regulations, the RP appointed two registered valuers to carry out the valuation of the Corporate Debtor and to determine the liquidation value and fair value.

Appellants submission that the realizable value from the preference shares was excluded from the liquidation value of the Corporate Debtor had been rebutted by a specific clarification contained in the Monitoring Committee’s affidavit.

Further, it was added that the realisable value for the Corporate Debtor on account of any proceeds realised from the preference shares held by its subsidiary (Reliance Bhutan Limited), is included in the determination of the liquidation value of the Corporate Debtor.

Hence, value of preference shares not being included in calculating the liquidation value of Corporate Debtor was factually incorrect.

Liquidation Value – To remain nil?

On this aspect, it had been clarified that the liquidation value due to the unsecured operational creditors would remain nil in all scenarios, including if the corpus of Rs 800 crores was separately considered.

Further, it was added that even if the liquidation value of the realizable value of preference shares were to be considered in isolation for distribution amongst all the operational creditors, in terms of the priority contained in Section 53 (1) of the Code, the liquidation value due to the appellants would still remain at nil.

Impact of Exclusion 

Order of NCLT in Doha Bank proceedings

It was stated that, the exclusion of certain financial debts and hence, the exclusion of certain financial creditors from the CoC, pursuant to the order of the NCLT in the Doha Bank proceedings, has no practical implication since the resolution plan continues to be approved with a 100 per cent majority even after their exclusion.

Jurisdiction to approve a Resolution Plan 

NCLT is within its jurisdiction in approving a resolution plan which accords with the IBC, there is no equity-based jurisdiction with the NCLT, under the provisions of the IBC.

Adding to the above, it was expressed that the jurisdiction which had been conferred upon the Adjudicating Authority in regard to the approval of a resolution plan was statutorily structured by Section 31 (1).

The jurisdiction is limited to determining whether the requirements which are specified in Section 30 (2) have been fulfilled. This is a jurisdiction which is statutorily defined, recognised and conferred, and hence cannot be equated with jurisdiction in equity, that operates independently of the provisions of the statute.

Ambit of the Adjudicating Authority is to determine whether the amount that is payable to the operational creditors under the resolution plan is consistent with the norms provided stipulated in clause (b) of sub-clause (2) of Section 30.

Hence, the statute indicated that once the requirements of Section 30(2)(b) are fulfilled, the distribution in accordance with its provisions is to be treated as fair and equitable to the operational creditors.

Appellants challenged the treatments of operational creditors on the ground that it had not been fair and equitable.

It was added that as long as the payment under the resolution plan is fair and equitable amongst the operational creditors as a class, it satisfies the requirements of Section 30(2)(b).

Nature of the jurisdiction exercised by the Adjudicating Authority, while approving a resolution plan under Section 31, had been interpreted in the decision of a 2-Judge Bench in K. Sashidhar v. Indian Overseas Bank, (2019) 12 SCC 150.

Elaborating the above discussion, Supreme Court stated that the submission that there had been a failure to maximise the value of the assets was not substantiated by any concrete material before the Court, apart from the reference to the preference shares which had already been clarified earlier in this judgment.

It must be borne in mind that the jurisdiction of the Adjudicating Authority is circumscribed by the terms of the provisions conferring the jurisdiction.

 “…jurisdiction of the Adjudicating Authority and the Appellate Authority cannot extend into entering upon the merits of a business decision made by a requisite majority of the CoC in its commercial wisdom. Nor is there a residual equity-based jurisdiction in the Adjudicating Authority or the Appellate Authority to interfere in this decision, so long as it is otherwise in conformity with the provisions of the IBC and the Regulations under the enactment.”

 In Court’s opinion, IBC is a complete code in itself.

IBC defines what is fair and equitable treatment by constituting a comprehensive framework within which the actors partake in the insolvency process. The process envisaged by the IBC is a direct representation of certain economic goals of the Indian economy. 

Therefore, once the requirements of the IBC have been fulfilled, the Adjudicating Authority and the Appellate Authority are duty bound to abide by the discipline of the statutory provisions.

“…neither the Adjudicating Authority nor the Appellate Authority have an unchartered jurisdiction in equity.”

Conclusion

 In the present matter, the resolution plan had been duly approved by a requisite majority of the CoC in conformity with Section 30(4).

  • Whether or not some of the financial creditors were required to be excluded from the CoC is of no consequence, once the plan is approved by a 100 per cent voting share of the CoC.
  • Jurisdiction of the Adjudicating Authority was confined by the provisions of Section 31(1) to determining whether the requirements of Section 30(2) have been fulfilled in the plan as approved by the CoC. once the requirements of the statute have been duly fulfilled, the decisions of the Adjudicating Authority and the Appellate Authority are in conformity with law.

In view of the above discussion, appeal was dismissed. [Pratap Technocrats (P) Ltd. v. Monitoring Committee of Reliance Infratel Ltd.,  2021 SCC OnLine SC 569, decided on 10-08-2021]

Case BriefsSupreme Court

Supreme Court: A Division Bench of Indira Banerjee and V. Ramasubramanian, JJ. held that there is no bar in law to amendment of pleadings in an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 or to filing of additional documents apart from those initially filed, at any time until a final order either admitting or dismissing the application has been passed.

The Court also held that an application under Section 7 for imitation of corporate insolvency resolution process against a corporate debtor is not be barred by limitation if there is an acknowledgement of the debt by the corporate debtor before expiry of the limitation period. Such acknowledgment can be by way of statement of accounts, balance sheets, financial statements and offer of one time settlement.

Moreover, a final judgment and/or decree of any court or tribunal or any arbitral award for payment of money, if not satisfied, would fall within the ambit of a financial debt, enabling the creditor to initiate proceedings under Section 7.

Factual Matrix and Timeline

In 2011, Dena Bank sanctioned a term loan of to the Corporate Debtor, which was to be repaid in 24 quarterly installments. The Corporate Debtor defaulted in repayment and their account was declared Non Performing Asset (“NPA”) in December 2013. In 2014, the Bank sent a letter to the Corporate Debtor to repay the outstanding dues. However, no payment was made.

In 2015, the Bank initiated proceedings before the Debts Recovery Tribunal (“DRT”) for recovery of outstanding dues from the Corporate Debtor. By a letter dated 5 January 2015, the Corporate Debtor requested the Bank to restructure the loan. Again, on 3 March 2017, while proceedings were pending before DRT, the Corporate Debtor gave an offer for one time settlement of the term loan account, which  was rejected by the Bank. On 27 March 2017, DRT passed an order against the Corporate Debtor for recovery of outstanding dues to the Bank. In May 2017, DRT issued a Recovery Certificate in favour of the Bank. Thereafter in June 2017, the Corporate Debtor once again gave the Bank a proposal for one time settlement to mutually settle the loan amount.

In October 2018, the Bank sought initiation of corporate insolvency resolution process against the Corporate Debtor. It filed a petition under Section 7 of the Insolvency and Bankruptcy Code (“IBC”) before the National Company Law Tribunal, Bengaluru. Thereafter, twice in 2019, the Bank filed applications for permission to place additional documents on record. Both these applications were allowed by NCLT. In March 2019, NCLT passed an order to admit the Section 7 petition filed by the Bank.

Appeal

The Corporate Debtor challenged the order of NCLT in an appeal under Section 61 IBC before the National Company Law Appellate Tribunal. The NCLAT allowed the appeal reversed the order of NCLT. Aggrieved, the Bank approached the Supreme Court.

Issues

Three questions arose for consideration of the Court:

(i) Whether a petition under Section 7 IBC would be barred by limitation, on the sole ground that it had been filed beyond a period of three years from the date of declaration of the loan account of the Corporate Debtor as NPA, even though the Corporate Debtor might subsequently have acknowledged its liability to the appellant Bank, within a period of three years prior to the date of filing of the Section 7 petition, by making a proposal for a one time settlement, or by acknowledging the debt in its statutory balance sheets and books of accounts.

(ii) Whether a final judgment and decree of DRT in favour of financial creditor, or the issuance of a Certificate of Recovery in favour of financial creditor, would give rise to a fresh cause of action to financial creditor to initiate proceedings under Section 7 IBC within three years from the date of the final judgment and decree, and/or within three years from the date of issuance of the Certificate of Recovery.

(iii) Whether there is any bar in law to the amendment of pleadings, in a petition under Section 7 IBC, or to the filing of additional documents, apart from those filed initially, along with the Section 7 petition in Form-1 given in the Annexure to the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 (“2016 Adjudicating Authority Rules”).

Analysis and Observations

Interpretation of the Code

Discussing the object of IBC, the Court observed that it is imperative that provisions of IBC and Rules and Regulations framed thereunder be construed liberally, in a purposive manner to further the objects of enactment of the statute, and not be given a narrow, pedantic interpretation which defeats its purposes.

Permissibility of amending Section 7 petition for filing additional documents

On a careful reading of IBC provisions and in particular the provisions of Section 7(2) to (5) read with the 2016 Adjudicating Authority Rules, the Court reached a conclusion that there is no bar to the filing of documents at any time until a final order either admitting or dismissing the application has been passed.

The Court noted that under Section 7(2) IBC, a financial creditor is required to apply for initiation of corporate insolvency resolution process against a corporate debtor in the prescribed Form-1 under the 2016 Adjudicating Authority Rules. Since a financial creditor is required to apply under Section 7 IBC in statutory Form-1, the financial creditor can only fill in particulars as specified in the various columns of the Form. There is no scope for elaborate pleadings. The Court observed:

An application to the Adjudicating Authority (NCLT) under Section 7 of the IBC in the prescribed form, cannot therefore, be compared with the plaint in a suit. Such application cannot be judged by the same standards, as a plaint in a suit, or any other pleadings in a Court of law.

The Court summed up the discussion on this point by mentioning that there is no bar in law to amendment of pleadings in an application under Section 7 IBC, or to filing of additional documents, apart from those initially filed along with application under Section 7 in Form-1. It was observed:

In the absence of any express provision which either prohibits or sets a time limit for filing of additional documents, it cannot be said that NCLT committed any illegality or error in permitting the Bank to file additional documents.

However, the Court added that depending on the facts and circumstances of the case, when there is inordinate delay, the adjudicating authority might, at its discretion, decline the request of an applicant to file additional pleadings and/or documents, and proceed to pass a final order.

Lastly, it was clarified that Babulal Vardharji Gurjar v. Veer Gurjar Aluminium Industries (P) Ltd., (2020) 15 SCC 1 is not an authority for the proposition that there can be no amendment of pleadings at the fag end of NCLT proceedings. Moreover, in the instant case, the amendments were not made at the fag end of the proceedings but within 2/3 months of their initiation, before admission of the petition under Section 7 IBC.

Limitation and effect of acknowledgment of debt

Under the scheme of IBC, the insolvency resolution process begins when a default takes place, in the sense that a debt becomes due and is not paid. Before considering the main point, the Court noted that there can be no dispute with the proposition that in terms of Article 137 of Limitation Act, 1963, the period of limitation for making an application under Section 7 IBC is three years from the date of accrual of the right to sue, that is, the date of default.

However, as per Section 18 of Limitation Act, an acknowledgement of present subsisting liability, made in writing in respect of any right claimed by the opposite party and signed by the party against whom the right is claimed, has the effect of commencing a fresh period of limitation from the date on which the acknowledgement is signed. The acknowledgement must be made before the relevant period of limitation has expired. Relying on Sesh Nath Singh v. Baidyabati Sheoraphuli Coop. Bank Ltd., 2021 SCC Online SC 244 and Laxmi Pat Surana v. Union Bank of India, 2021 SCC Online SC 267, the Court reiterated that there is no reason to exclude the effect of Section 18 of the Limitation Act to proceedings initiated under IBC.

Relying further on Asset Reconstruction Co. (India) Ltd. v. Bishal Jaiswal, 2021 SCC Online SC 321, the Court noted that:

It is well settled that entries in books of accounts and/or balance sheets of a Corporate Debtor would amount to an acknowledgment under Section 18 of the Limitation Act.

In view of such law, the Court concluded that NCLAT’s finding that there was nothing on record to suggest that the Corporate Debtor acknowledged the debt within three years and agreed to pay debt, was not sustainable in law in view of the statement of accounts/balance sheets/financial statements for the years 2016-2017 and 2017-2018 and the offer of one time settlement including in particular the offer of one time settlement made on 3 March 2017.

In the instant case, Rs 1.11 crore had been paid towards outstanding interest on 28 March 2014 and the offer of one time settlement was within three years thereafter. In any case, NCLAT overlooked the fact that a Certificate of Recovery was issued by DRT in favour of the Bank on 25 May 2017. The Corporate Debtor did not pay dues in terms of the Certificate of Recovery. The Court held:

The Certificate of Recovery in itself gives a fresh cause of action to the Appellant Bank to institute a petition under Section 7 of IBC. The petition under Section 7 IBC was well within three years from 28th March 2014.

The Court relied on Jignesh Shah v. Union of India, (2019) 10 SCC 750 for concluding that a final judgment and/or decree of any court or tribunal or any arbitral award for payment of money, if not satisfied, would fall within the ambit of a financial debt, enabling the creditor to initiate proceedings under Section 7 IBC.

Before concluding, the Court considered that when the petition under Section 7 IBC was filed, the date of default was mentioned as 30 September 2013 and the date of declaration of term loan account of the Corporate Debtor as NPA was stated as 31 December 2013. However, according to the Court, it was not correct to say that there was no averment in the petition of any acknowledgment of debt. Such averments were duly incorporated by way of amendment, and NCLT rightly looked into the amended pleadings to admit the petition of Bank. The Court reiterated:

Even assuming that documents were brought on record at a later stage … the Adjudicating Authority was not precluded from considering the same. The documents were brought on record before any final decision was taken in the petition under Section 7 of IBC.

Decision

For the reasons discussed above, the Supreme Court held that the Section 7 IBC petition filed by Dena Bank was admissible. The impugned judgment of NCLAT was unsustainable which was set aside. [Dena Bank v. C. Shivakumar Reddy, 2021 SCC OnLine SC 543, decided on 4-8-2021]


Tejaswi Pandit, Senior Editorial Assistant has reported this brief.

Case BriefsTribunals/Commissions/Regulatory Bodies

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

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

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

The Tribunal stated,

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

It further stated that,

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

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

However, the Tribunal even made it clear that the

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

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


Agatha Shukla, Editorial Assistant has reported this brief.


Counsel for the Appellant:

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

Counsel for the Respondents:

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

Proposed Intervenors:

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

Tribunals/Regulatory Bodies/Commissions Monthly Roundup

Here’s a run-through of all the significant decisions covered in the month of June, 2021 under the Section of Tribunals/Commission/Regulatory Bodies.


Armed Forces Tribunal

♦ AFT | Pension cannot be denied for disability being less than 20% where the disability is assessed at 15-19%“

The assessment of disability to the tune of 15-19% itself is a doubtful assessment and cannot be final for the simple reason that there is no barometer which can assess the disability percentage to the extent of 1% and therefore, the percentage of disability which has been assessed as 15-19% may be 20% also and there may be variation of at least two percent plus also. In case of doubt as the benefit should always be given to the applicant.”

https://wp.me/scenps-pension


Competition Commission of India

♦ CCI examines if airlines were involved in cartelization resulting in anti-competitive practice during Jat Agitation in 2016 || Synoptic view of Judgment

“…with the use of algorithms, there exists a high possibility of collusion with or without the need of human intervention or coordination between competitors.”

https://wp.me/pcenps-130u

♦ ABFI prohibits State Baseball Associations from joining unrecognised leagues, threatens disciplinary action | CCI to examine such conduct in light of provisions of Competition Act

“ABFI isued communication to its affiliated State Baseball Association requested them no to entertain unrecognized bodies and further by requesting them not to allow their respective State players to participate in any of the tournaments organized by such unrecognized bodies, has violated the provisions of Section 4(2)(c) of the Act as it resulted in denial of market access to other federations.”

https://wp.me/pcenps-130J

♦ CCI | Did Google leverage dominance in Play Store? Director-General to conduct investigation in complaint by smart phone/smart TV users

“..by making pre-installation of Google’s proprietary apps conditional upon signing of ACC for all android devices manufactured/distributed/marketed by device manufacturers, Google has reduced the ability and incentive of device manufacturers to develop and sell devices operating on alternative versions of Android and thereby limited technical or scientific development relating to goods or services to the prejudice of consumers in contravention of Section 4(2)(b) of the Act.”

https://wp.me/scenps-google

♦ Are Tourist Taxi Unions in State of Goa preventing entry of App-based Taxi Aggregator Companies in Goa? Read a detailed account of CCI’s decision

“..despite the opposition of taxi unions, the State of Goa does not appear to have acceded to or conceded to the demands of the OPs and the policy allowing entry of app based taxi aggregators was eventually notified.”

https://wp.me/pcenps-13au

♦ CCI | Co-location facility of National Stock Exchange is anti-competitive? Is the service an autocratic move against traders? Comprehensive Report

A robust exchange acts as a backbone of the financial system and the provision of co-location facility by exchanges help increase volumes of trades manifold and provides liquidity to investors. This augurs well for the market, the companies and the economy.

https://wp.me/pcenps-13aA


Customs, Excise and Services Tax Appellate Tribunal

♦ CESTAT | Assessable Value to include Advertising and Marketing Costs, if relatable to Imported Goods; Tribunal provides relief to Volvo Auto India

https://wp.me/pcenps-1312


Income Tax Appellate Tribunal

♦ ITAT | Whether DTAA protection in respect of taxation of dividend in source jurisdiction, can be extended to ‘dividend distribution tax’ under S. 115-O, Income Tax Act, in the hands of a domestic company? Matter referred to larger Bench

“Whether the protection granted by the tax treaties, under Section 90 of the Income Tax Act, 1961, in respect of taxation of dividend in the source jurisdiction, can be extended, even in the absence of a specific treaty provision to that effect, to the dividend distribution tax under Section 115-O in the hands of a domestic company?”

https://wp.me/scenps-taxation


National Consumer Disputes Redressal Commission

♦ NCDRC | In a case of death insurance claim, can police investigation be replaced by private agency investigation engaged by insurance company? Commission spells out

Inquest is conducted as mandated under the Cr.P.C., Post Mortem is conducted by the concerned government Medical Officer, Investigation is conducted by the Police (a private agency engaged by the Insurance Co. does not substitute for the Police).

https://wp.me/pcenps-12Zd

♦ NCDRC | Builder unilaterally, high-handedly cancels sale agreement on not handing over timely possession: Commission decides builder-buyer dispute, levies interest to be paid by builder

“According to Section 8 of the Maharashtra Ownership of Flats (Regulation of the Promotion of Construction, Sale, Management and Transfer) Act, 1963, if the builder is not able to hand over the possession over the building/flat within the time specified in the agreement then the builder is liable to pay interest to the purchaser of the flat for the period for which the possession has not been handed over.”

https://wp.me/pcenps-139u


National Company Law Appellate Tribunal

NCLAT | Can Banks debit amounts from Corporate Debtor Company after Moratorium Order? Is there an obligation of releasing ‘title deeds’ under Resolution Process? Read on

Banks cannot freeze accounts, nor can they prohibit the ‘Corporate Debtor’ from withdrawing the amount as available on the date of the moratorium for its day-to-day functioning.

https://wp.me/pcenps-12UG


Real Estate Regulatory Authorities

Rajasthan Real Estate Regulatory Authority, Jaipur

♦ Is S. 13 of RERA Act a mandatory requirement? Can promoter demand cost of plot more than 10% before registering sale agreement? | Raj RERA decides

https://wp.me/scenps-rera

Maharashtra Real Estate Regulatory Authority, Mumbai

♦ Can promoter/builder sell covered car parking by charging certain amount? Whether open parking has to be handed to society or can be sold in open market? MahaRERA decides

https://wp.me/pcenps-133Q


State Consumer Forums

State Consumer Disputes Redressal Commission, U.T. Chandigarh

♦ Consumer spending hefty amount has right to ask for record of expenditure. Can service provider evade liability? Read on

…every person who is shredding hefty amount from his pocket towards the services being provided to him, has the right to know as to how, where and in what manner, the same has been utilized.”

https://wp.me/pcenps-12OG

Consumer Disputes Redressal Commission Gujarat State, Ahmedabad

♦ Consumer Forum | Can complainant raise consumer dispute where excess electricity duty is charged? Is he overriding statutory remedy if he already approached the Collector? Read on

“Section 3 of Consumer Proetction Act cannot be said to be inconsistent with Rule 12 of the Electricity Duty Rules.”

https://wp.me/pcenps-12Ns

State Consumer Disputes Redressal Commission, Telangana

♦ Can insurance company repudiate claim if insured suppresses fact of suffering from ailment while taking policy? Telangana State Consumer Forum answers

“If the insurer can show that prior to the date of declaration of being healthy, the insured was suffering with ailment which was within her knowledge but was suppressed, then the insurance company is well within its right to repudiate the claim on the ground of suppression veri.”

https://wp.me/pcenps-134C


Securities Appellate Tribunal

♦ Oscillating Independent Director; SAT to determine independency of Pradip K. Khaitan, independent director of Dhunseri Ventures Ltd.

https://wp.me/pcenps-12PM

♦ SAT | SEBI exonerated preferential allottees, exit providers and LTP contributors from manipulation | SAT terms it ‘cryptic’

https://wp.me/pcenps-135j

♦ SAT | Franklin Templeton gets interim relief | Gives due consideration to the 2 decades’ reputation

https://wp.me/pcenps-138Y


Securities Exchange Board of India

♦ Infosys insider trading | While in possession of Unpublished Price Sensitive Information, 2 employees of Infosys & 6 other entities violated Insider Trading Regulations on Infosys Stock [Detailed Report]

“The liability of acting partners and non-acting partners (collectively known as firm) for the injury to the third party is an outcome of joint and several liability of such partners under IPA, irrespective of whether that the conduct (act of omission or commission of the firm) which gave rise to the loss/injury to the third party is also in violation of any provision under securities law.”

https://wp.me/scenps-infosys

♦ Decoded | SEBI bars Director of Franklin Templeton AMC,  wife from accessing securities markets for 1 yr: Can redemption of units by Director of a mutual fund AMC be titled as fair conduct?

Laws dealing with information asymmetries (PIT Regulations and PFUTP Regulations) essentially seek to address the issues arising out of disparities in access to material information, that is otherwise not legally available to general investors, and to prevent those persons having access to such superior information from exploiting the informational advantage, in order to protect the integrity of the market and maintain investor confidence.

https://wp.me/pcenps-12Vh

♦ SEBI | Not so “independent” Independent director and a concocted scheme with affinity and consanguinity |SEBI takes on each violation with mordant remarks

“…remuneration and qualification are two crucial criterions to evaluate and adjudge the significance of a position held by a person in an organisation and his importance and status in participating in the management of a company.”

https://wp.me/pcenps-133k

♦ SEBI | Kingfisher’s chopped wings and shrinked wingspan | United Breweries Acquisition | Heineken exempted from the obligation under Takeover Regulations with exceptions

https://wp.me/pcenps-135X

Akaant MittalExperts Corner

Recapitulation

The present column post will conclude the 3-part series on the law of limitation and its interplay with the Insolvency and Bankruptcy Code, 2016 (IB Code).

 

In the first part of the column, we had discussed the initial issues in the interplay of IB Code with the law on limitation and how they were resolved by the insertion of Section 238-A to the IB Code and the Supreme Court rulings in B.K. Educational Services[1] and Vashdeo R. Bhojwani v. Abhyudaya Cooperative Bank Ltd.[2] We also discussed the recent ruling of the Supreme Court in Sesh Nath Singh v. Baidyabati Sheoraphuli Cooperative Bank Ltd.[3] which provided some respite as far as Section 14 of the Limitation Act is concerned and how a creditor can use that provision to seek extension of limitation period.

 

In the second part of the column, we discussed the applicability of Section 18 of the Limitation Act to the applications seeking initiation of resolution process under the IB Code. The missed opportunities of Babulal Vardharji[4] now stand settled conclusively by the rulings in Laxmi Pat[5]. Similarly, the limitation issues concerning the acknowledgment of debt for the purposes of Section 18 of the Limitation Act by virtue of entries in balance sheets of a company was settled by the Supreme Court in Asset Reconstruction Co.[6] ruling.

 

In this third part, we will discuss the issue of the effect of Section 19 of the Limitation Act, 1963 which stipulates the “effect of payment on account of debt or of interest on legacy” on an application seeking initiation of resolution process under the IB Code.

 

Brief on Section 19 of the Limitation Act, 1963

 

  1. Effect of payment on account of debt or of interest on legacy.—Where payment on account of a debt or of interest on a legacy is made before the expiration of the prescribed period by the person liable to pay the debt or legacy or by his agent duly authorised in this behalf, a fresh period of limitation shall be computed from the time when the payment was made:

Provided that, save in the case of payment of interest made before the 1st day of January, 1928, an acknowledgment of the payment appears in the handwriting of, or in a writing signed by, the person making the payment.

 

To attract the application of Section 19, two conditions are essential (i) the payment must be made within the prescribed period of limitation; and (ii) it must be acknowledged by some form of writing, either in the handwriting of the payee himself or signed by him.

 

Applicability of Section 19 of the Limitation Act, 1963 to IB Code

The National Company Law Appellate Tribunal (NCLAT) has been confronted on several occasions where partial payment of the debt or payment of interest has been made by the debtor on account of the debt.

 

For instance in Neha Himatsingka v. Himatsingka Resorts (P) Ltd.[7] the argument that the debt in question was time barred was rejected. The NCLAT noted that as per the record the corporate debtor had paid interest even after the year 2016-2017 and also issued cheques in the year 2018; therefore, the argument that the claim is time barred was rejected.

 

Similarly in T. Johnson[8], the creditor relied upon (1) the revival letter dated 20-2-2016; (2) balance confirmation letter dated 22-2-2016 by the corporate debtor; and (3) the factum of last payment having been made on 14-11-2017 to establish that its claim is not time barred.

 

The NCLAT noting that apart from the above, there is an admission on the part of the corporate debtor on the basis of the written submissions of the appellant before the National Company Law Tribunal (NCLT) and the fact that the appellant debtor is merely disputing the correctness of the quantum of balance claimed by the financial creditor rejected the argument that the claim is time barred.[9]

 

As we have seen in the previous columns, in the rulings of Laxmi Pat[10], Sesh Nath[11] and Asset Reconstruction Co.[12] the Supreme Court has settled that the phrase “the provisions of Limitation Act have been made applicable to the proceedings under the Code, as far as may be applicable” in Section 238-A of the IB Code means that all the relevant provisions of the Limitation Act can be invoked while filing an application under the IB Code. The same in those cases meant that Sections 5, 14 and 18 of the Limitation Act were invoked to extend limitation period.

 

Now the recent ruling of the NCLAT ruling in Rajendra Narottamdas Sheth v. Chandra Prakash Jain,[13] provides us with a more useful reference point to understand the interplay between Section 19 of the Limitation Act, 1963 with the IB Code.

 

In Rajendra Narottamdas[14], the account of the debtor was declared as a non-performing asset (NPA) on 30-9-2014 and the financial creditor filed an application seeking initiation of corporate insolvency resolution process (CIRP) against the debtor on 25-4-2019.[15] The debtor claimed that the application is time barred as it was beyond the three-year limitation period that commenced on the date of the NPA.[16] The financial creditor argued that the limitation period got extended on account of Section 18 of the Limitation Act by relying on the documents showing acknowledgments of debt by the corporate debtor in writing. The creditor also placed reliance on the statements of accounts showing various instalments paid on account of debt and interest, even after the declaration of NPA to invoke the application of Section 19 of the Limitation Act.[17]

 

The NCLAT referred to the following undisputed facts where: (a) the corporate debtor had issued balance confirmation letter dated 7-4-2016 and acknowledged the debt; (b) the account statements showed regular credit entries after 7-4-2016 till May 2018; and (c) the corporate debtor issued a letter dated 17-11-2018 giving details of amounts repaid till 30-9-2018 and acknowledging amount outstanding in respective accounts as on that date.

 

On the basis of these facts, the NCLAT held that the benefit of Sections 18 and 19 were attracted and the application by the creditor was not time barred.[18]

 

Conclusion

 

If the reasoning in Sesh Nath[19], Laxmi Pat[20] and Asset Reconstruction Co.[21] is to be accepted that the “provisions of Limitation Act have been made applicable to the proceedings under the Code, as far as may be applicable”[22], then clearly Section 19 of the Limitation Act can be used to extend limitation period. To that effect, the ruling of the NCLAT in Rajendra Narottamdas[23] shows the way ahead for the application of Section 19 of the Limitation Act to the IB Code.


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

The author gratefully acknowledges the research and assistance of Sh. Abhishek Jain, 3rd Year, B.A.LLB. (Hons.), Student at National University of Juridical Sciences, Kolkata, in writing this article.

 

[1] B.K. Educational Services (P) Ltd. v. Parag Gupta and Associates, (2019) 11 SCC 633 : (2018) 5 SCC (Civ) 528.

[2] (2019) 9 SCC 158 : (2019) 4 SCC (Civ) 308.

[3] 2021 SCC OnLine SC 244.

[4]Babulal Vardharji Gurjar v. Veer Gurjar Aluminium Industries (P) Ltd., (2020) 15 SCC 1 : 2020 SCC OnLine SC 647.

[5] Laxmi Pat Surana v. Union Bank of India, 2021 SCC OnLine SC 267.

[6] Asset Reconstruction Co. (India) Ltd. v. Bishal Jaiswal, 2021 SCC OnLine SC 321.

[7] 2018 SCC OnLine NCLAT 784.

[8] T. Johnson v. Phoenix ARC (P) Ltd., 2019 SCC OnLine NCLAT 244.

[9] Id., para 6.

[10] 2021 SCC OnLine SC 267.

[11] 2021 SCC OnLine SC 244.

[12] 2021 SCC OnLine SC 321.

[13] 2020 SCC OnLine NCLAT 827.

[14] Id.

[15] Id, para 3.

[16] Id, para 4.

[17] Id, para 8.

[18] Id, paras 24-27.

[19] 2021 SCC OnLine SC 244.

[20] 2021 SCC OnLine SC 267.

[21] 2021 SCC OnLine SC 321.

[22] Laxmi Pat Surana, 2021 SCC OnLine SC 267, para 41.

[23] 2020 SCC OnLine NCLAT 827.

Op EdsOP. ED.

Introduction

After the enactment of the Insolvency and Bankruptcy Code 2016, NCLT and NCLAT have seen a sharp increment in number of proceeding before it.  These cases have overburdened the tribunals with proceedings related to oppression and mismanagement, revival of companies and IBC. Given the intense emphasis on these subject-matter cases, many appear to be unsure about the Tribunals’ powers, including the ability to pass orders and issue instructions if the Tribunals discover that a complainant has perjured itself before it. In this paper, the authors attempted to address this problem through case comment of Kvr Industries Pvt Ltd Vs Pp Bafna Ventures Pvt Ltd[1].

Fact

Corporate Debtor has filed an appeal against order of NCLT passed at Hyderabad for financial creditor P.P. Bafna Ventures Pvt. Ltd. Corporate debtor filled an application for initiating criminal proceeding under section 340 of Cr. P.C. read with Section 195 (1) (b) (i) of Cr. P.C. read with Section 193 of Indian Penal Code, 1860 against the P.P. Bafna who is authorized signatory of Financial Creditor. The NCLT has passed an order for withdrawal of an application filed by Financial Creditor on the ground that Eshwar Enterprise (Operational Creditor) has already filled an application under section 8 of IBC against the Corporate Debtor and, financial creditor can club its application with application of operational creditor. It was contended by the Financial Creditor that Corporate Debtor and Operational Creditor has settled their dispute outside of the court, so court should restore their previous application. On the other side, Corporate Debtor contends that signature of the Financial Creditor on application sought for restoration of earlier application is forged and court should initiate the criminal proceeding against the Financial Creditor.[2]

Background of Law

  • Section 424(4) of Companies Act state that all proceeding before NCLT or NCLAT should be treated as ‘judicial proceeding’ within the meaning of section 193, 196 and 228 and NCLT and NCLAT will be treated as civil court for purpose of section 195 and Chapter XXVI of the code of Civil procedure.[3]
  • Section 195 1(b)(1)of IPC “No Court shall take cognizance of any offence punishable under any of the following sections of [the IPC], namely, Sections 193 to 196 (both inclusive), 199, 200, 205 to 211 (both inclusive) and 228, when such offence is alleged to have been committed in, or in relation to, any proceeding in any Court”.[4] Sub section (3) of 195 states that “In clause (b) of sub-section (1), the term ‘Court’ means a Civil, Revenue or Criminal Court, and includes a tribunal constituted by or under a Central, Provincial or State Act if declared by that Act to be a Court for the purposes of this section.”[5]
  • 340 of Cr.P.C. states that when court is of opinion that it is convenient in interest of justice to have an inquiry related to offence mentioned under clause (b) of sub-section(1) of Section 195 of IPC which appears to have been committed in or in relation to a proceeding in that Court or, as the case may be, in respect of a document produced or given in evidence in a proceeding in that Court, such Court may, after such preliminary inquiry, if any, as it thinks necessary,—

a) Record a finding to that effect;

b) Make a complaint thereof in writing;

c) Send it to a Magistrate of the First Class having jurisdiction;

d) Take sufficient security for the appearance of the accused before such Magistrate, or if the alleged offence is non-bailable and the Court thinks it necessary so to do, send the accused in custody to such Magistrate; and

e) Bind over any person to appear and give evidence before such Magistrate.” And sub section (4) provides that ‘Court’ will be having same meaning given under section 195.”[6]

Issue

  • Whether NCLT or NCLAT are courts within the ambit of Section 195 read with 340 of Cr.P.C?
  • Whether NCLT or NCLAT has power to order criminal proceeding?
  • Whether judicial proceeding mentioned under section 424(4) of Companies Act comes under the purview of proceeding in any court under section 195(1)(b)(1) of Cr.P.C.?

Analysis

In present case, NCLAT held that Adjudicating Authority is not right while stating that it does not have jurisdiction to order criminal proceeding against the financial creditor. Section 340 of Cr.P.C read with section 195 of Cr.P.C gives Adjudicating Authority a power to hold preliminary inquiry “of opinion that it is expedient in the Interest of Justice that an inquiry should be made” into any offence referred in Clause ‘b’ of Sub-Section 1 of Section 195, which appears to have been committed in or in relation to a proceeding in that Court or, as the case may be, in respect of a document produced or given in evidence in a proceeding in that Court, i.e. Adjudicating Authority”.[7] Section 5 (1)of IBC defined adjudicating authority as NCLT formed under section 408 of Companies Act 2013. NCLAT also stated that ‘Courts’ in Section 195(3) of Cr.P.C. includes any tribunal constituted by or under Central, Provincial or State Act if the said act provides it. Section 424 sub clause 4 also provides that proceeding before NCLT or NCLAT shall be treated as ‘judicial proceeding’ within the meaning of section 193 and 228 and for the purposes of Section 196 of the Indian Penal Code and the NCLT this Tribunal shall be deemed to be Civil Court for the purposes of Section 195 and Chapter XXVI of Cr. P.C. NCLAT after interpreting all these provision held that NCLT was not right in its observation that it did  not have jurisdiction to entertain matter related to criminal proceeding. In case of Lalji Haridas vs State of Maharastra[8], Supreme Court stated that judicial proceeding under section 193 of IPC would include “any proceeding in any court” per Section 195(1)(b) Cr. PC. In case of Amit vashistha vs Suresh[9]SC relying on the decision of Lalji Haridas[10]said that proceeding before the authority under the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952[11] were specifically in the nature of a “judicial proceeding”[12]so it can be treated as proceeding before “court” under section 195(1) of Cr.P.C. Court relied on Section 2(1) of Cr.PC as it defined judicial proceeding to include every proceeding where evidence is collected or may be taken on oath[13]and proceeding by authority under section 7-A Employees’ Provident Funds and Miscellaneous Provisions] Act [1952] gives power to take evidence on oath[14]. Therefore such proceeding can be equated with judicial proceeding under section 195(1)(b) of Cr.P.C.[15] Similarly, Bombay High Court in case of Baskar Mendon vs Sadashiv Narayan Shetty[16]stated that proceeding before the labour court will be treated as proceeding before the court under section 195 of Cr.P.C.  By reading harmoniously the Judgement of Lalji Haridas, Amit Vashitha and Baskar Mendon it can be summarized that;1) proceeding before NCLT and NCLAT are judicial proceeding for the purpose of section 193 of IPC; 2) NCLT and NCLAT comes under the definition of “court” under section 195(1)(b) and 340 of Cr.P.C; 3) NCLT or NCLAT has power under section 340 of Cr.P.C to conduct preliminary inquiry of an application and send it as a complain to magistrate of first class having jurisdiction for the commission of the offense of perjury committed in proceeding before NCLT or NCLAT.[17] Following that, such Magistrate of the First Class shall continue to act on such a complaint in the same manner as he or she would in a normal criminal trial.[18]

Conclusion

While these statutes, when read in conjunction with the aforementioned judicial decisions, provide a consistent procedural framework for furnishing false evidence in the NCLT and the NCLAT, the NCLT Rules and the National Company Law Appellate Tribunal Rules, 2016 do not specify which officer of such Tribunals is explicitly appointed to submit the “complaint” to the Magistrate of the First Class. However, given how proceedings in India are conducted, it is possible that the Tribunals may instruct the party claiming perjury to carry out service of such “complaint,” and if the NCLT or NCLAT initiates suo motu proceedings relating to perjury, the Tribunal may direct a member of the Tribunal to carry out service of such “complaint.” An ad hoc process, on the other hand, may stifle the NCLT’s and NCLAT’s ability to pursue those who present false evidence or information. Any institution’s judicial discipline, as well as the reverence and power it bears among the general public, is dependent on its ability to avoid misuse of its process. This would also include the ability to punish a litigant for wrongdoing during the hearings. To that end, NCLT`s President should use his administrative powers to appoint enough officials from each Bench to be able to initiate criminal proceedings against the person who provides false information or give false evidence.


*4th Year Student at WBNUJS Kolkata

[1] 2020 SCC ONLINE NCLAT 828

[2] 2020 SCC ONLINE NCLAT 828

[3] Section 424(4) of Companies Act 2013

[4] Section 195 of IPC

[5] ibid

[6] Section 340 of Cr.P.C. 

[7] 2020 SCC ONLINE NCLAT 828

[8]  Lalji Haridas vs State of Maharastra  (1964) 6 SCR 700

[9] Amit vashistha vs Suresh (2018) 15 SCC 240

[10] S.340 of Cr.P.C.

[11] 2020 SCC ONLINE NCLAT 828

[12] Akin to  Section 424(4) of Companies Act 2013

[13] Section 2(1) Cr.P.C.

[14] S.7A of the Employees’ Provident Funds and Miscellaneous Provisions] Act, 1952

[15] Section 340 of Cr.P.C.

[16] Baskar Mendon vs Sadashiv Narayan Shetty 2018 SCC OnLine Bom 2106

[17] S. 340 of Cr.P.C.

[18] S. 340 of Cr.P.C.

Op EdsOP. ED.

Introduction

Insolvency and Bankruptcy Code, 2016[1] (hereinafter “IBC”) has introduced a much more stable structure with strict time frames into the resolution process, providing the system with much-needed clarity and reliability. It has totally removed the governing powers of the companies under the resolution process and transferred them to a resolution professional to ensure a smooth transition and revival. Unlike the previous regime’s never-ending moratorium, the IBC established a far more practical structure with a set deadline. As per Section 14 of the IBC, while the moratorium is in effect, creditors of a company in the corporate insolvency resolution process (CIRP) are prohibited from taking any action to recover a security interest generated by the corporate debtor. However, the scope of this section has remained under debate for the longest time and has finally been settled by the Supreme Court as well as the National Company Law Appellate Tribunal (NCLAT). This comes after the 2018 Amendment to the IBC. In this paper, the issue whether a bank guarantee can be invoked during moratorium period in light of Bharat Aluminium Co. Ltd. v. J.P. Engineers (P) Ltd.[2]  has been analysed.

Facts

M/s Worldwide Metals Pvt. Ltd., the operational creditors, had filed a company petition under Section 9[3] of the IBC to initiate the corporate insolvency resolution process against M/s J.P. Engineers Pvt. Ltd., the corporate debtor and Respondent 1. The National Company Law Tribunal (NCLT) admitted the application and appointed an interim resolution professional (IRP). Bharat Aluminium, the appellants, and the corporate debtor had entered into an agreement for purchase and sale of aluminium products. Subsequently, the corporate debtor issued a bank guarantee worth Rs one crore and sixty lakhs which was executed by Respondent 2 i.e., Andhra Bank. At the end of the contractual period, the debtor failed to make the payments as a result of which, the appellant wrote a letter to Respondent 2 for invoking the bank guarantee. To this letter, Respondent 2 replied that the bank guarantee could be encashed only upon the approval of the IRP. Thereafter, the appellant applied to the IRP, but the IRP refused to allow encashment of the bank guarantee on the grounds of enforcing moratorium against Respondent 1. Thereafter, the appellant had filed an application before NCLT seeking encashment of the bank guarantee on the grounds that it is not covered by moratorium as specified under Section 14 of the IBC. The Tribunal dismissed this application and directed the appellant to not ask for encashment of bank guarantee, as the same is covered under moratorium declared under Section 14 of the IBC. Thus, the appellant filed this appeal.

Issue

The NCLAT was posed with the issue whether a bank guarantee can be invoked against the surety once the moratorium has been imposed against the corporate debtor under Section 14 of the IBC.

Background of law

Section 14 of the IBC provides the effect and scope of the moratorium.[4] Until 2018, the law was unclear on whether the bank guarantees can be invoked during moratorium period. However, after an amendment passed in June 2018, a clause was introduced in the IBC which provided that in a contract of guarantee to a corporate debtor, the surety is not shielded under moratorium.[5] However, for a personal debtor, the Supreme Court, relying upon the report of the Insolvency Law Committee, held that moratorium will not apply to such debtor.[6] The report noted that the assets of the debtors and that of the surety are separate and thus, the ongoing proceedings of CIRP against the corporate debtor will not have any impact as a result of any actions taken against the assets of the surety.[7] Further, invoking guarantee will not have any significant impact on the corporate debtor’s debt because the creditor’s right against the debtor simply transfers to the surety, for the amount paid by surety.[8] The Committee recommended that the scope of moratorium should be limited only to the assets of the corporate debtor and actions against the guarantors cannot be barred.[9]

Analysis of the judgment

In the present case, the NCLAT held that “bank guarantee can be invoked even during moratorium period issued under Section 14 of the IBC in view of the amended provision under Section 14(3)(b) of the IBC”.[10] The appellant drew an analogy between performance bank guarantees and financial bank guarantees by referring to  Section 14 and proviso to Section 3(31)[11], which excludes performance bank guarantees from “security interest”, to emphasise their contention that bank guarantees can be invoked during moratorium.[12] They also relied on the amendment discussed above and various case laws to submit that bank guarantees can be invoked during moratorium.[13] On the contrary, the respondent relied on cases to establish that once the moratorium period has begun, no amount can be debited from the account of the corporate debtor.[14] They distinguished between financial and performance bank guarantees.[15] Further, they submitted that since IBC is a specific law, it will prevail over a general law like the Contract Act, 1872.[16]

The Tribunal perused the submissions of the parties and held that the guarantee in question is a financial bank guarantee and not a performance bank guarantee.[17] The Reserve Bank of India (RBI) has also distinguished between the two types of guarantees in one of its circular.[18] The NCLT in its judgment dated 31-7-2020 had relied on Nitin Hasmukhlal Parikh v. Madhya Gujarat Vij Co. Ltd.[19], where the Tribunal held that the moratorium applies for all bank guarantees, except for performance bank guarantees, as they form a part of “security interest” defined under Section 3(31) of the IBC. This case was decided on 9-2-2018. The amendment to Section 14 was introduced on 6-6-2018.[20] The court gave the judgment on 31-7-2020, which was after the amendment was introduced. As mentioned above, the amendment provided that the effect of moratorium will not apply to “a surety in a contract of guarantee to a corporate debtor”.[21] Thus, the NCLT erred in its decision by relying on Nitin case[22] and overlooking the amendment which had a retrospective effect. The Tribunal then relied on Ramakrishnan[23], where the Supreme Court held that Section 14(3) is clarificatory in nature and has retrospective effect.[24] The Tribunal also backed its finding by relying on principles of Contract Act, which provides that the “liability of surety is coextensive with that of a principal debtor and the creditor may go against either of them”.[25] Thus, the NCLAT rightly held that the corporate creditor can invoke bank guarantee during moratorium with no difficulties, as the bank guarantee is irrevocable and unconditional.[26] It was held in U.P. State Sugar Corpn. v. Sumac International Ltd. that a bank is bound to honour irrevocable bank guarantees irrespective of any issue raised by the customers.[27] It further distinguished the assets of the corporate debtor with those of the surety and overruled the decision of the lower court i.e., NCLT.

Conclusion

Prior to the amendment, the law on the point on invocation of bank guarantee during moratorium was not clear. There were several conflicting decisions being passed by the tribunals across the country. The amendment put an end to the series of conflicting judgments. In addition to this, the judgment of the Supreme Court in Ramakrishnan[28], which explained the application and scope of the amended provision, acted as a cherry on top of the cake and gave more clarity on this issue. The NCLT, though, erred in its decision by not taking the amendment into consideration and relying on a case which was decided before the amendment was introduced. The NCLAT corrected the error made by the NCLT and by relying on the reports of the Insolvency Law Committee, the object of IBC and Section 14 of the IBC, rightly held that financial bank guarantee can be invoked during moratorium period under Section 14 of the Code. The judgment of the NCLAT is also in consonance with the judgments of the Supreme Court on the same issues.

The decision of the Court acts as a clarification on the issue whether the guarantees issued by third parties/banks can be invoked during the moratorium period. This decision, though, is definitely in favour of the creditors, banks may find it difficult to recover their money from a corporate debtor on whom moratorium is imposed under Section 14 of the IBC.


± 4th year student, BA LLB (Hons.), West Bengal National University of Juridical Sciences (WBNUJS) 
Kolkata

[1] <http://www.scconline.com/DocumentLink/86F742km>.

[2] 2021 SCC OnLine NCLAT 57

[3] <http://www.scconline.com/DocumentLink/09ftZIDF>.

[4] The Insolvency and Bankruptcy Code, 2016, S. 14

[5] The Insolvency and Bankruptcy Code (Second Amendment) Act, 2018, S. 10

[6] SBI v. V. Ramakrishnan, (2018) 17 SCC 394

[7] Shri Injeti Srinivas, Report of the Insolvency Law Committee, 35 (26-3-2018), <http://www.scconline.com/DocumentLink/sYKPTj8e>.

[8] Ibid.

[9] Ibid.

[10] Bharat Aluminium Co. Ltd. v. J.P. Engineers (P) Ltd., 2021 SCC OnLine NCLAT 57, para 37

[11] <http://www.scconline.com/DocumentLink/rOllWgj8>.

[12] Id at para 8.

[13] Id at para 9.

[14] Id at para 16.

[15] Id at para 18.

[16] Id at para 17.

[17] Id at para 22.

[18] Reserve Bank of India, Circular DBOD.No.BP.BC.89.21.04.009/2012-13 (Issued on 2-4-2013), <http://www.scconline.com/DocumentLink/z9UP86k8>.

[19] 2017 SCC OnLine NCLT 19360 

[20] The Insolvency and Bankruptcy Code, 2016, S. 14

[21] Ibid.

[22] 2017 SCC OnLine NCLT 19360

[23] SBI v. V. Ramakrishnan, (2018) 17 SCC 394.

[24] Bharat Aluminium Co. Ltd v. J.P. Engineers (P) Ltd., 2021 SCC OnLine NCLAT 57, para 31.

[25] Contract Act, 1872, S. 128.

[26] Bharat Aluminium Co. Ltd. v. J.P. Engineers (P) Ltd., 2021 SCC OnLine NCLAT 57, para 37.

[27] (1997) 1 SCC 568.

[28] SBI v. V. Ramakrishnan, (2018) 17 SCC 394.

Op EdsOP. ED.

Introduction

  1. This article analyses the following issues arising from the Supreme Court (SC) decision in Indus Biotech Pvt. Ltd. v. Kotak India Venture (Offshore) Fund[1]:

(i) Should the adjudicating authority first decide the application under Section 8 of the Arbitration and Conciliation Act, 1996[2] (the A&C Act), before deciding the application under Section 7 of the Insolvency and Bankruptcy Code, 2016[3] (IBC)?

(ii) What should be the inquiry of National Company Law Tribunal (NCLT) under Section 7 IBC?

(iii) Was the procedure for appointment of Arbitral Tribunal followed?

Relevant facts 

  1. 4 entities of Kotak Fund (Kotak) entered into 4 separate share subscription agreement (SSSA) with Indus Biotech Private Limited (Indus).
  2. Kotak subscribed to certain equity shares and optionally convertible redeemable preference shares (OCRPS) of Indus. According to Kotak, (i) Schedule J of SSSA specified that OCRPS were issued for a term of 20 years unless previously redeemed and cancelled or converted; (ii) Kotak also had an option to convert or seek redemption of OCRPS; and (iii) SSSA specified that at the end of the period specified, investment of Kotak is redeemable at internal rate of return (IRR) of 30% and if not redeemed, it will be treated as debt. Indus of course advance a different interpretation of these terms.
  3. According to Kotak, Indus failed to provide Kotak an exit by an agreed date by qualified initial public offering (QIPO). Therefore, Kotak exercised its right of redemption and asked Indus to make payment of Rs 367 crores as the redemption value of OCRPS.
  4. Indus did not make the payment. According to Kotak, as per the calculation and conversion formula to be followed while converting OCRPS into equity shares, Kotak should get 30% of the total paid-up share capital of Indus; while as per Indus, it should only be 10%.
  5. On 16-8-2019, one of the four entities of Kotak filed a petition before NCLT Mumbai, under Section 7[4] IBC, as a financial creditor claiming a default in payment of debt by Indus, a financial debtor, to initiate corporate insolvency resolution process (CIRP) against Indus.
  6. On 20-9-2019, Indus sent an arbitration notice to Kotak seeking to invoke arbitration under all the 4 SSSA. Kotak set up a defence that the notice was defective because (i) under the arbitration clause, Indus had no right to appoint an arbitrator; and (ii) there were 4 separate agreements providing for constitution of separate Arbitral Tribunal.
  7. On 6-11-2019, Indus filed an application, in the pending Section 7 IBC proceedings, under Section 8 of the A&C Act, to refer to dispute to arbitration. Indus had also filed an application seeking dismissal of Section 7 IBC proceedings as not maintainable.

Proceedings before NCLT

  1. The impugned order[5] of NCLT allowed Indus’ application under Section 8 of the A&C Act and dismissed Kotak’s Section 7 IBC application as a corollary.
  2. From the orders of NCLT, it is apparent that NCLT heard and decided the Section 8 application first and did not meaningfully engage or decide the Section 7 IBC application on merits. This article discusses why this approach is problematic.
  3. Kotak’s case before NCLT was:

(i) Existence of arbitration clause is not relevant, not a factor and cannot affect proceedings under Section 7 IBC;

ii) Section 7 IBC deals with subject-matter of insolvency which is non-arbitrable and in rem; and

(iii) Non-payment of redemption value of OCRPS is a default in payment of debt by Indus and, therefore, NCLT should admit the application under Section 7 IBC.

  1. Indus’ response was:

(i) Dispute pertains to valuation of Kotak’s OCRPS, which is arbitrable;

(ii) Indus is a debt-free, profitable company and is not in need of resolution; and

(iii) Investment of Kotak was in the share capital of Indus, by preference shares and Kotak is not a financial creditor.

  1. Without addressing the issue of maintainability i.e. whether Kotak is a financial creditor or whether there is a debt, NCLT Mumbai allowed[6] the application under Section 8 of the A&C Act. While allowing the application, NCLT made observations that:

(i) Indus is a solvent, debt-free and profitable company and pushing a solvent company into insolvency is neither meaningful nor desirable at that stage;

(ii) Dispute between the parties is regarding the valuation of OCRPS and parties must make an attempt to reconcile the differences and invocation of arbitration is justified; and

(iii) Petition for appointment of arbitrator filed by Indus is pending before the SC.

Proceedings before the Supreme Court

  1. There were 2 proceedings before the SC: (i) petition by Indus, common for the 4 SSSA, under Section 11[7] of the A&C Act for appointment of an Arbitral Tribunal; and (ii) special leave petition (and not appeal) by Kotak against the NCLT order. The SC appointed an Arbitral Tribunal and held:

(i) Mere filing of an application under Section 7 IBC does not make the proceeding in rem. It becomes in rem only on the date of admission; and

(ii) IBC overrides all other laws.

  1. Therefore, if there is an application under Section 8 of the A&C Act pending in a Section 7 IBC application which has not been admitted, the adjudicating authority will first decide Section 7 IBC application and ascertain if there is any default by the financial debtor. This will ensure that mere filing of an application under Section 8 of the A&C Act will now allow corporate debtor to delay the process. There will be no independent consideration of Section 8, A&C Act application dehors the Section 7 IBC application.
  2. The SC justified the NCLT’s approach where it allowed Section 8, A&C Act application and as a corollary rejected Section 7 IBC application, in the facts and circumstances of the case and “construed in the reverse”[8].

Should adjudicating authority first decide the application under Section 8 of the A&C Act, before deciding Section 7 IBC application?

  1. The SC held that if there is an application under Section 8 of the A&C Act pending in a Section 7 IBC application which has not been admitted, the adjudicating authority will first decide the Section 7 IBC application and ascertain if there is any default by the financial debtor. However, in the facts of Indus Biotech[9], the SC does not meaningfully engage with this issue.
  2. There was an application filed by Indus challenging the maintainability of Section 7 IBC proceeding. However, NCLT considered the Section 8, A&C Act application. This is evident from the order of NCLT.
  3. NCLT ought to have first decided whether it would admit Section 7 IBC proceeding. If it chose to admit it, the proceeding would become in rem and there would be no occasion for a pending Section 8, A&C Act application to survive or a future application to be maintainable. However, if it found that there is no default and hence no trigger for Section 7 IBC, there would have been no occasion to decide Section 8, A&C Act application as the main proceeding had terminated. Therefore, it is not easy to reconcile the conclusion of SC to uphold NCLT order of allowing Section 8, A&C Act application even after dismissing Section 7 IBC proceedings.
  4. The scope and inquiry of a Section 7 IBC application is different from the scope and inquiry of a Section 8, A&C Act application. The presence of an arbitration clause and existence of a dispute is relevant for the purpose of Section 9[10] IBC where an operational creditor approaches the court. It will be a bar to initiation of corporate insolvency resolution process. However, not in the case of Section 7 IBC. This is the main difference between Section 7 and Section 9 IBC.
  5. By deciding Section 8, A&C Act application first, NCLT did not actually conduct a proper inquiry under Section 7 IBC. Its inquiry was primarily directed to Section 8 application with a perfunctory mention of the default. This is evident from:

(a) NCLT recorded submissions of Indus in the Section 8 application first, followed by submissions of Kotak’s counsel.

(b) In para 3.1 of NCLT order[11], Kotak submitted that if Section 8 application is dismissed, Section 7 IBC matter should be heard on merits.

(c) In para 3.8[12], the order states “the principal argument in the present IA….

(d) In para 5.2[13] where NCLT records its findings, “[a]t the outset, we must say that the subject-matter of this IA – seeking a reference to arbitration in a petition filed under Section 7 of the IBC – is something that is res integra”.

(e) In para 5.5.[14], the question framed was “[W]ill the provisions of the Arbitration and Conciliation Act, 1996 prevail over the provisions of Insolvency and Bankruptcy Code, 2016?”.

  1. The NCLT order extracts Section 238[15]IBC and wrongly concludes in paras 5.10 and 5.11 that the A&C Act will prevail over IBC. Apparently, the NCLT decided the Section 8, A&C Act application on this premise. This is contrary to law.
  2. Even Kotak in its written submissions before the SC argued that it was not heard on merits of Section 7 IBC by NCLT. This should have weighed with the SC. If NCLT did not hear the parties on merits of Section 7 IBC proceedings, the SC could have considered remanding the matter back to NCLT.

What should be the inquiry of NCLT under Section 7 IBC?

  1. The inquiry of NCLT ought to have been:

(i) Is Kotak a financial creditor?

(ii) Whether OCRPS constitute financial debt?

(a) Whether OCPRS issued with IRR of 30% constitute disbursal against consideration for time value of money as per Section 5(8)[16]IBC?

(b) Whether OCPRS constitute “any amount…having commercial effect of a borrowing” under Section 5(8)(f) IBC?

(c) Whether a shareholder can be a debtor and what is the nature of OCRPS?

       (iii) Whether there is a default?

      (iv) If Section 7 IBC application is allowed or rejected, what should be the fate of Section 8, A&C Act application? – not the reverse.

  1. Both NCLT and the SC proceeded on the understanding/assumption that Kotak is a financial creditor, to whom financial debt is due, but go on to find that there is no default yet. Both NCLT and SC did not engage in a meaningful analysis of default. There is also no analysis or finding of debt.
  2. This issue was raised in written submissions before the SC, but the SC in para 36[17] observed that:

36…“[t]he contention as to whether payment of investment in preferential shares can be construed as financial debt was raised in the written submissions. However, we have not adverted to that aspect since the same was not the basis of the impugned order passed by the adjudicating authority.”

  1. This issue should have formed the basis of the proceedings before NCLT. However, in para 5.5, the question framed by NCLT was “[W]ill the provisions of the Arbitration and Conciliation Act, 1996 prevail over the provisions of Insolvency and Bankruptcy Code, 2016?”.
  2. If there is no financial debt, Kotak could not have maintained Section 7 IBC proceedings. The application should have been rejected and there should have been no occasion to even examine Section 8 application. According to Kotak, non-payment is a default which should trigger Section 7 IBC, while according to Indus payment cannot be made till the conversion formula calculation is finalised, hence, no default. Kotak relied on Clauses 5.1 and 5.2 of Schedule J to SSSA to argue that parties had agreed that redemption value shall constitute a debt outstanding by Indus to Kotak.
  3. NCLT in allowing the Section 8, A&C Act application was influenced by the following factors:

(i) Indus is a solvent, debt-free and profitable company and pushing a solvent company into insolvency is neither meaningful nor desirable at that stage;

(ii) Dispute between the parties is regarding the valuation of OCRPS and parties must make an attempt to reconcile the differences and invocation of arbitration is justified; and

(iii) Petition for appointment of arbitrator is pending before the SC.

  1. In paras 20 and 21[18], the SC agreed that NCLT’s exercise of finding no default is correct. It observed that:

(i) Yes, there is a debt including a clause in the agreement providing that redemption value shall constitute a debt;

(ii) There is a redemption date;

(iii) There were inconclusive discussions between the parties on the redemption value;

(iv)It was premature to arrive at a conclusion of default in payment of debt until the amount payable is determined; and

(v) It is not appropriate to find a default merely because Kotak made a claim as per the agreed date of redemption and filed a petition under Section 7 IBC.

Why is it not appropriate? Would a dispute between parties on the redemption value, postpone the trigger of default? The SC should have given reasons for its findings or the relevance of these questions.

  1. Let us test these factors – in the author’s opinion, none of these are relevant for an inquiry default under Section 7 IBC proceeding:

 (i) In para 27[19] of Monotrone Leasing (P) Ltd.v. PM Cold Storage (P) Ltd.[20], the National Company Law Appellate Tribunal (NCLAT) held that inability to pay debts and committing default are two different aspects which are required to be adjudged on equally different parameters. Inability to pay debt has no relevance for admitting or rejecting an application for initiation of CIRP under the IBC.

(ii) Similarly, the SC in para 64 of Swiss Ribbons (P) Ltd. v. Union of India[21], observed that the legislative policy is to move away from the concept of “inability to pay debts” to “determination of default”. The said shift enables the financial creditor to prove, based upon solid documentary evidence, that there was an obligation to pay the debt and that the debtor has failed in such obligation.

(iii) There is no connection between the value of redemption and a finding of default. If the debt is unpaid on the due date, it is default. If the Court’s reasoning is correct, a debtor has to simply create a dispute about the sum/amount to be paid and will escape Section 7 IBC.

(iv)The finding of default under Section 7 IBC is independent from the inquiry whether the subject-matter of the underlying dispute of valuation is capable of being resolved by arbitration.

  1. This decision is a missed opportunity for the SC to develop jurisprudence for issues like – can an agreement change the nature of a security – in this case the agreement specified that OCRPS will constitute debt upon redemption; and whether preference shares/OCRPS constitute financial debt under Section 7 IBC.

Was the procedure for appointment of Arbitral Tribunal followed?

  1. There are 2 issues here. First, Section 11 petition was filed by Indus but as per SSSA, Indus did not have a right to nominate an arbitrator. The agreed procedure had not failed, and Section 11 petition was premature. On this issue, the SC treated the affidavit by promoters (only promoters and Kotak had a right to nominate arbitrator), who had the right to nominate arbitrator, as sufficient to constitute an Arbitral Tribunal. The problem with this is that Indus had no locus standi to file Section 11 petition. Kotak argued that the arbitration notice is defective, and the petition is not in accordance with the arbitration agreement. This was an opportunity for the Court to decide whether Section 11 can be invoked by a party which does not have a right to nominate an arbitrator under the agreement. The author has not come across any decision on this issue. Additionally, such appointment of Arbitral Tribunal is contrary to settled position of law that procedure for appointment has to be followed strictly and appointment which is not in accordance with the procedure is void.
  2. Second, the SC thought it was fit to consider the nature of Arbitral Tribunal, because one agreement will give rise to ICA and other three to domestic arbitration. However, after flagging this issue, the SC does not meaningfully address it. In para 39[22], the SC appointed a single Arbitral Tribunal with same members but separately constituted for each agreement and left it open to the Tribunal to work out the modalities of conducting ICA separately and clubbing the remaining domestic arbitrations.
  3. In the author’s view, the SC could have considered clarifying whether this will be a composite arbitration which will result in 1 award or 4 arbitrations under 4 agreements with 4 separate awards. In absence of this, Kotak is likely to seek 4 separate awards from the Tribunal and Indus will seek a composite common award.

Conclusion

In the author’s view, the order of NCLT is not an order on merits of the Section 7 IBC application. If existence of dispute is not an inquiry for a Section 7 IBC proceeding and Section 7 IBC application has to be considered first, the SC should have considered setting aside the impugned order and remanded the matter to NCLT for deciding the Section 7 IBC proceedings on merits. The Court should, if an opportunity arises, consider clarifying that NCLT cannot decide Section 8, A&C Act application first and dismiss Section 7 IBC proceeding as a corollary or consequence.


*Advocate. Author can be reached at renu@renugupta.co.in

[1] 2021 SCC OnLine SC 268.

[2]  The Arbitration and Conciliation Act, 1996.

[3] The Insolvency and Bankruptcy Code, 2016.

[4] 7. Initiation of corporate insolvency resolution process by financial creditor.— (1) A financial creditor either by itself or jointly with other financial creditors, or any other person on behalf of the financial creditor, as may be notified by the Central Government, may file an application for initiating corporate insolvency resolution process against a corporate debtor before the adjudicating authority when a default has occurred:

*                               *                                     *

Explanation.— For the purposes of this sub-section, a default includes a default in respect of a financial debt owed not only to the applicant financial creditor but to any other financial creditor of the corporate debtor.

(emphasis supplied)

[5] Indus BioTech (P) Ltd. v. Kotak Venture Fund, 2020 SCC OnLine NCLT 1430 [NCLT Mumbai].

[6] Ibid.

[7]<http://www.scconline.com/DocumentLink/02bfnuC4>.

[8]Indus case, supra Note 1.

“36. In that circumstance though in the operative portion of the order dated 9-6-2020 the application filed under Section 8 of the Act,1996 is allowed and as a corollary the petition under Section 7 of the IB Code is dismissed; in the facts and circumstances of the present case it can be construed in the reverse. Hence, since the conclusion by the adjudicating authority is that there is no default, the dismissal of the petition under Section 7 of IB Code at this stage is justified. Though the application under Section 8 of the Act, 1996 is allowed, the same in any event will be subject to the consideration of the petition filed under Section 11 of the Act, 1996 before this Court. The contention as to whether payment of investment in preferential shares can be construed as financial debt was raised in the written submissions. However, we have not adverted to that aspect since the same was not the basis of the impugned order passed by the adjudicating authority.

                                                                                                                                                                (emphasis supplied)

[9] Supra Note 1.

[10]<http://www.scconline.com/DocumentLink/09ftZIDF>.

[11]3.1. Mr Fredun E DeVitre, learned Senior Counsel for the respondent-financial creditor, submitted that the only issue to be decided in the present is this:

“Are the reliefs claimed in the petition capable of being referred to arbitration or being granted by an Arbitral Tribunal?”

If the answer is no, then the present IA should be dismissed, and the underlying company petition should be heard on merits.”

[12]3.8. The third aspect of Mr Fredun E DeVitre’s argument centred on the QIPO date. He submitted that in terms of the SSPA, the date was to be December 2011 or a date which is approved by three investors. The principal argument in the present  IA is that the respondent-financial creditor has not redeemed the OCRPS by 2011. In this regard, there was an amendment made to the SSPA in 2017, in terms of which the life of the agreement was extended by another ten years. The amendment retains the QIPO definition from the original document, since all other terms and conditions were retained. Therefore, Mr Fredun DeVitre argues, a fresh right of redemption by agreement was conferred on the respondent.”

(emphasis supplied)

[13]5.2. At the outset, we must say that the subject-matter of this IA – seeking a reference to arbitration in a petition filed under Section 7 IBC – is something that is res integra. The facts of the case are, however, undisputed, and therefore, we seek to address the points of law that need to be addressed. In our endeavour to arrive at a decision, we have tried to be guided by the decisions of the constitutional courts under other laws, and the underlying reasons in arriving at those decisions. The case law cited by both senior counsel is a good starting point in this quest.”

(emphasis supplied)

[14] Be that as it may, the question that really needs to be answered is this: Will the provisions of the Arbitration andConciliation Act, 1996 prevail over the provisions of the Insolvency and Bankruptcy Code, 2016? If so, in what circumstances?

[15]Section 238 IBC.

[16] Section 5(8) IBC.

[17]Indus case, supra Note 1. “36. In that circumstance though in the operative portion of the order dated 9-6-2020 the application filed under Section 8 of the Act, 1996 is allowed and as a corollary the petition under Section 7 of the IB Code is dismissed; in the facts and circumstances of the present case it can be construed in the reverse. Hence, since the conclusion by the adjudicating authority is that there is no default, the dismissal of the petition under Section 7 of IB Code at this stage is justified. Though the application under Section 8 of the Act, 1996 is allowed, the same in any event will be subject to the consideration of the petition filed under Section 11 of the Act, 1996 before this Court. The contention as to whether payment of investment in preferential shares can be construed as financial debt was raised in the written submissions. However, we have not adverted to that aspect since the same was not the basis of the impugned order passed by the adjudicating authority.”

(emphasis supplied)

[18]Indus case, supra note 1, paras 20 and 21.

20. Therefore, in a fact situation of the present nature when the process of conversion had commenced and certain steps were taken in that direction, even if the redemption date is kept in view and the clause in Schedule J indicating that redemption value shall constitute a debt outstanding is taken note ; when certain transactions were discussed between the parties and had not concluded since the point as to whether it was 30 per cent of the equity shares in the company or 10 per cent by applying proper formula had not reached a conclusion and thereafter agreed or disagreed, it would not have been appropriate to hold that there is default and admit the petition merely because a claim was made by Kotak Venture as per the originally agreed date and a petition was filed. In the process of consideration to be made by the adjudicating authority the facts in the particular case are to be taken into consideration before arriving at a conclusion as to whether a default has occurred even if there is a debt in strict sense of the term, which exercise in the present case has been done by the adjudicating authority.

  1.  In such circumstance if the adjudicating authority finds from the material available on record that the situation is not yet ripe to call it a default, that too if it is satisfied that it is profit-making company and certain other factors which need consideration, appropriate orders in that regard would be made; the consequence of which could be the dismissal of the petition under Section 7 of IB Code on taking note of the stance of the corporate debtor. As otherwise if in every case where there is debt, if default is also assumed and the process becomes automatic, a company which is ably running its administration and discharging its debts in planned manner may also be pushed to the corporate insolvency resolution process and get entangled in a proceeding with no point of return. Therefore, the adjudicating authority certainly would make an objective assessment of the whole situation before coming to a conclusion as to whether the petition under Section 7 of IB Code is to be admitted in the factual background. Dr Singhvi, however contended, that when it is shown the debt is due and the same has not been paid the adjudicating authority should record default and admit the petition. He contends that even in such situation the interest of the corporate debtor is not jeopardised inasmuch as the admission orders made by the adjudicating authority is appealable to the NCLAT and thereafter to the Supreme Court where the correctness of the order in any case would be tested. We note, it cannot be in dispute that so would be the case even if the adjudicating authority takes a view that the petition is not ripe to be entertained or does not constitute all the ingredients, more particularly default, to admit the petition, since even such order would remain appealable to the NCLAT and the Supreme Court where the correctness in that regard also will be examined.”

                                                                                                                                                                                                          (emphasis supplied)

[19] 2020 SCC OnLine NCLAT 581.   “27. We are bound to emphasise that a presumption cannot be drawn merely on the basis that a company, being solvent, cannot commit any default. As observed in financial and economic parlance, the inability to payoff debts and committing default are two different aspects which are required to be adjudged on equally different parameters. Inability to pay debt has no relevance for admitting or rejecting an application for initiation of CIRP under the IBC.”

                                                                                                                                                                                (emphasis supplied) 

[20]2020 SCC OnLine NCLAT 581. Civil appeal and a review both were dismissed by the Supreme Court.

[21] (2019) 4 SCC 17

64. The trigger for a financial creditor’s application is non-payment of dues when they arise under loan agreements. It is for this reason that Section 433(e) of the Companies Act, 1956 has been repealed by the Code and a change in approach has been brought about. Legislative policy now is to move away from the concept of “inability to pay debts” to “determination of default”. The said shift enables the financial creditor to prove, based upon solid documentary evidence, that there was an obligation to pay the debt and that the debtor has failed in such obligation. Four policy reasons have been stated by the learned Solicitor General for this shift in legislative policy.”

                                                                                                                                                                                  (emphasis supplied)

[22]Indus case, supra Note 1. “39. A perusal of the arbitration agreement indicates that the arbitration shall be held at Mumbai and be conducted by three arbitrators. For the purpose of appointment KIVF I, KEIT and KIVL are to jointly appoint one arbitrator and the promoters of Indus Biotech Private Limited, to appoint their arbitrator. In the second agreement dated 20-7-2007, “KMIL” as the investor is on the other side. In the third agreement dated 20-7-2007, “KIVFI” as the investor is on the other side and in the fourth agreement dated 9-1-2008 it has the same clause as in the first agreement. The two arbitrators who are thus appointed shall appoint the third arbitrator who shall be the Chairperson. Recital (c) in the different agreements though refers to each of the entity in  Kotak Investment Venture and amount invested in shares is referred to, it is provided therein that the equity shares and preference shares subscribed by KMIL, KIVF I, KEIT and KIVL are hereafter collectively referred to as the “financial investors shares”. If the said aspect is taken into consideration keeping in view the nature of the issues involved being mainly with regard to the conversion of preference shares into equity shares and the formula to be worked thereunder, such consideration in the present facts can be resolved by the Arbitral Tribunal consisting of same members but separately constituted in respect of each agreement. It will be open for the Arbitral Tribunal to work out the modalities to conduct the proceedings by holding separate proceedings in the agreement providing for international arbitration and by clubbing the domestic disputes. All other issues which have been raised on merits are to be considered by the Arbitral Tribunal and therefore they have not been referred to in this proceedings.”

                                                                                                                                                               (emphasis supplied)

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Appellate Tribunal (NCLAT): The Division Bench of Justice Anant Bijay Singh, Judicial Member and Shreesha Merla, Technical Member held that the Banks cannot freeze accounts, nor can they prohibit the ‘Corporate Debtor’ from withdrawing the amount as available on the date of the moratorium for its day-to-day functioning.

Instant appeal was filed by Bank of India, Central Bank of India, Syndicate Bank and State Bank of India against the National Company Law Tribunal’s decision wherein the Adjudicating Authority allowed the application filed by the Resolution Professional under Section 14 read with Section 17 and Section 60(5) of the Insolvency and Bankruptcy Code, 2016.

Resolution Professional had sought a direction against the appellant Banks and Financial Institutions to reimburse the amounts appropriated by them after Insolvency Commencement Date, together with the amount appropriated towards interest payments and further to resume the working capital limits as available to the ‘Corporate Debtor’ as on the Insolvency Commencement Date.

Analysis, Law and Decision

Tribunal noted that the main case of the Appellant Banks was that this Tribunal vide an Order dated 09-08-2017 passed an interim order directing the Company to be run as a going concern, engaging all Banks where the Company had accounts, to co-operate with the IRP for the operation of the accounts.

Further, the IRP requested the banks to make available the limits which were subsisting as on the date of commencement of the process of Resolution. The LC facility was continued on request of the erstwhile RP and the LC Bills negotiated by the beneficiary Banks were retired by the ‘Corporate Debtor’. The amount was paid by the Company into their Cash Credit Account so that fresh LCs could be opened within the sanctioned limits to purchase necessary raw materials to keep the Company a going concern.

Section 17(1)(d) of the Insolvency and Bankruptcy Code states that the Financial Institutions maintaining the accounts of the ‘Corporate Debtor’ have to act on the instructions of the Interim Resolution Professional in relation to such accounts and furnish all information relating to ‘Corporate Debtor’.

Bench reiterated that Banks cannot debit any amounts from the account of the ‘Corporate Debtor Company’ after the Order of moratorium, as it amounts to the recovery of the amount.

 Moratorium Period

Tribunal expressed that Section 14 of the I&B Code overwrites any other provision contrary to the same and any amount due prior to the date of CIRP cannot be appropriated during the period of moratorium.

Keeping in view the above discussion, Bench opined that merely because the ‘Corporate Debtor’ had enough liquidity to run the Company as a going concern, the act of the Appellant Banks to adjust the credit balance in the Cash Credit Account towards the debit balance after CIRP commenced, cannot be justified.

Present appeal failed and hence was dismissed.

Further, the new management of the ‘Corporate Debtor Company’ sought the release of the title deeds of the Immovable Properties of the Company which were in possession of Bank of India.

Applicant stated that the non-applicant Bank declined to release the title deeds as conformation from Canara Bank was pending. Though vide an email Bank of India had cited ‘Issuance of No objection Certificate by Canara Bank’ as the ground for non-release of the title deeds.

Further, Section 31 of the Insolvency and Bankruptcy Code was referred which provided that the terms of the ‘Resolution Plan’ are binding on the Company, its employees, creditor and stakeholders. Clauses 3(c)(vii) and 3(c)(viii) of the Plan contemplate that title deeds are required to be released immediately upon distribution of Resolution Process.

Therefore, Bench held that since the debt had been legally extinguished, therefore withholding the title deeds and preventing the Company from being able to create security interest for securing the non-convertible Debentures issued to the Debenture Holders, in terms of the Plan would be unjustifiable.

Tribunal allowed the release of title deeds for effective implementation of the terms of the ‘Resolution Plan’.[Bank of India v. Bhuban Madan, 2021 SCC OnLine NCLAT 189, decided on 28-05-2021]


Advocates before the Court:

Appellants:

Mr Rajiv Ranjan, Sr. Advocate alongwith Dr Sudhir Bisla and Mr Rahul Adlakha, Advocates.

Respondents:

Mr Abhinav Vashisht, Sr. Advocate alongwith Mr Rajat Bector and Ms Charu Bansal, for R-1.

Ms Malak Bhatt, Mr Saurav Panda and Ms Anannya Ghosh, Advocates.

Case BriefsSupreme Court

Supreme Court: Taking note of the depleting strength of the members of the NCLT and NCLAT, the 3-judge bench of L. Nageswara Rao, Hemant Gupta and S. Ravindra Bhat, JJ has issued certain directions and has asked the Government to complete the reappointment process “at the earliest and not later than two months”.

The direction came in the petition filed by the National Company Law Tribunal and Appellate Tribunal Bar Association seeking direction to the Central Government

  • to fill up the vacancies of Chairman, NCLAT and President of NCLT without any further delay.
  • to issue letters of appointment to the candidates pursuant to the Selection procedure initiated in 2019 and to fill up the remaining vacancies of Members of NCLT and NCLAT.
  • to extend the term of six Members of the NCLT and NCLAT for a further period of five years as they are completing the tenure by June, 2021.

The Additional Solicitor General Balbir Singh had told the Court that the process for appointment of candidates who have been selected pursuant to the procedure which was initiated in 2019 shall be expedited and orders of appointment shall be issued soon. In respect of the process to be initiated for filling up the existing vacancies, a search cum Selection Committee has to be constituted. The Court, hence, directed that the Selection Process shall be initiated at the earliest.

On the issue of extension of the term of the Members of the NCLT and NCLAT who are completing their tenure in June, 2021 is concerned, Attorney General KK Venugopal submitted that the government has initiated the process for reappointment by requesting the Chief Justice of India to constitute a committee for the purposes of the reappointment of members to the NCLT and NCLAT.

As per Section 413 of the Company’s Act 2013, the President or other members of the Tribunal shall hold office for a period of 5 years and shall be entitled for reappointment for another term of 5 years.

The petitioner, however, requested that the members who are completing their tenure should be permitted to continue till the process of reappointment is completed.

“… there are 39 members at present for a sanctioned strength of 63 and the depletion of the strength of the members will adversely affect the smooth functioning of the Tribunals.”

The Court, hence, directed the Government to complete the process within two months and said,

“As the Government has already initiated the process of reappointment by writing to the Hon’ble Chief Justice, we trust and hope that the reappointment process should be completed expeditiously, as there is no necessity of issuance of any advertisement for participation of other eligible candidates. Reappointment of members can be considered separately without waiting for the process of fresh appointments to commence.”

[National Company Law Tribunal and Appellate Tribunal Bar Association v. Ministry of Corporate Affairs, 2021 SCC OnLine SC 406, order dated 31.05.2021]


For Petitioner(s) Mr. A.S. Chandhiok, Sr. Adv. Mr. Virender Ganda, Sr. Adv. Mr. Ajay Kumar Jain, Adv Mr. Rakesh Kumar, Adv Mr. Vipul Ganda, Adv Mr. Vishal Ganda, Adv Mr. Satyajit A. Desai, Adv. Mrs. Anagha S Desai, AOR Ms. Aastha Trivedi, Adv Ms. Guresha Bhamra, Adv Mr. Tejasvi Chaudhry, Adv Mr. Satya Kam Sharma, Adv.

For Respondent(s) Mr. KK Venugopal, Ld. AG Mr. Balbir Singh, Ld. ASG Mr. R. Balasubramanium, Sr. Adv. Mr. Zoheb Hossain, Adv Ms. Shradha Deshmukh, Adv. Ms. Chinmayee Chandra, Adv. Mr. Shyam Gopal, Adv. Mr. Ankur Talwar, Adv. Ms. Suhasini Sen, Adv. Mr. Gurmeet Singh Makker, AOR

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Appellate Tribunal (NCLAT): A Division Bench of Justice Venugopal M. (Judicial Member) and V.P. Singh (Technical Member) dismissed an appeal filed against the order of the National Company Law Tribunal, Hyderabad (“NCLT”), whereby the NCLT had admitted an application filed by the Financial Creditor−Punjab National Bank under Section 7 of the Insolvency and Bankruptcy Code, 2016 (“IBC”) for initiation the Corporate Insolvency Resolution Process (“CIRP”) against the Corporate Debtor−Saptarishi Hotels (P) Ltd. The appellant was the promoter/suspended director of Saptrishi Hotels (P) Ltd.

The Corporate Debtor is a ”special purpose vehicle” incorporated to undertake a certain public-private partnership project with Government of Telangana. The Corporate Debtor availed of a loan facility from a ‘consortium’ which included Punjab National Bank (“PNB”). Having defaulted in repaying the loan amount within time, PNB filed a Section 7 IBC application which was admitted by the NCLT.

Corporate Debtor’s Argument

The Corporate Debtor raised the issue of limitation. It was contended that the NCLT erred in admitting the application since it was barred by limitation. The Corporate Debtor took a stand that the ‘date of default’ for all facilities extended by PNB was 30-3-2016, whereas the Section 7 application was filed by PNB only on or after 18-7-2019. According to the Corporate Debtor, the period of limitation (3 years) for filing the Section 7 application expired on 29-6-2019. Therefore, PNB’s application, having been filed beyond the 3 years’ period of limitation, was liable to be rejected.

Financial Creditor’s Argument

The Punjab National Bank refuted Corporate Debtor’s argument by stating that the Corporate Debtor has not filed two a vital documents, viz. ‘Balance and Security Confirmation Letter’ dated 20-2-2018 executed by the Corporate Debtor, which amount to an ‘acknowledgment of debt’ as contemplated under Sections 18 and 19 of the Limitation Act, 1963.

Discussion

Insolvency and Bankruptcy Code, 2016

For deciding the appeal, the Appellate Tribunal referred to certain provisions of IBC, including:

(i) Section 3(6)(a), which defines “claim” meaning a right to payment, whether or not such right is reduced to judgment, fixed, disputed, undisputed, legal, equitable, secured or unsecured.

(ii) Section 3(8), which defines “Corporate Debtor” meaning a Corporate person who owes a debt to any person.

(iii) Section 3(10), which defines “Creditor” meaning any person to whom a debt is owed and includes a financial creditor, an operational creditor, a secured creditor, an unsecured creditor and a decree-holder.

(iv) Section 3(11), which defines “debt” meaning ‘a liability or obligation in respect of a claim which is due from any person and includes a financial debt and operational debt.

(v) Section 3(12), which defines “default” meaning non-payment of debt when whole or any part or installment of the amount of debt has become due and payable and is not paid by the debtor or the corporate debtor, as the case may be.

Acknowledgment − Limitation Act, 1963

The Appellate Tribunal noted that Section 18 (Effect of acknowledgment in writing) of the Limitation Act does not enjoin that an ‘acknowledgement’ has to be in any particular form or to be express. The Appellate Tribunal further said that it must be borne in mind that an ‘acknowledgement’ is to be examined resting upon the attendant circumstances by an admission that the writer owes a ‘debt’. No wonder, an ‘unconditional acknowledgement’ implies a promise to pay because that is the natural inference if there is no other contrary material.

Further, to treat the writing signed by an individual as an ‘acknowledgement’, the person acknowledging must be conscious of his liability and the commitment ought to be made in respect of that liability.

Decision

After a careful consideration of respective contentions projected on either side, the Appellate Tribunal held that considering the prime fact that the ‘guarantors’ in respect of the Corporate Debtor had executed a Balance and Security Confirmation Letter (confirming the correctness of debit balance) and keeping in mind yet another fact that a certain part payment was made by the Corporate Debtor on 15-10-2018 towards its liability to Punjab National Bank, the irresistible conclusion was that there was an acknowledgment of debt as per Sections 18 and 19 of the Limitation Act in respect of the loan account of the Corporate Debtor.

Therefore, the Appellate Tribunal dismissed the appeal filed by the Corporate Debtor holding that the NCLT rightly admitted the Section 7 application filed by the Financial Creditor. [Lakshmi Narayan Sharma v. Punjab National Bank, 2021 SCC OnLine NCLAT 155, decided on 12-5-2021]

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Appellate Tribunal (NCLAT): A Coram of Bansi Lal Bhat, J. (Acting Chairperson), Anant Bijay Singh, J. (Judicial Member) and Shreesha Merla (Technical Member) was of the opinion that Spectrum is a natural resource and the Government is holding the same as cestui que trust. Resultantly, it cannot be treated as a security interest by the lenders and they cannot be said to be the owners in possession but only in occupation of the right to use spectrum. And that it would not be available to use without payment of requisite dues.

The 10 appeals were against approval of resolution plans in respect of Aircel Ltd., Dishnet Wireless Ltd. and Aircel Cellular Ltd. in terms of common order passed by the Adjudicating Authority.

In the present matter the debt-ridden telecom companies that are undergoing insolvency proceedings sought rights to their spectrum where they claimed  it as a security interest. It was therefore alleged, that the defaulting Licensees/TelCos sought to wriggle out of their liabilities by resorting to triggering of Corporate Insolvency Resolution Process (CIRP) by seeking initiation of CIRP under Section 10 of Insolvency and Bankruptcy Code, 2016 (the Code) not for purposes of resolution but fraudulently and with malicious intent of withholding the huge arrears payable to Government, obtaining moratorium to abort Government’s move to suspend, revoke or terminate the Licences and in the event of a Resolution Plan being approved, subjecting the Central Government to be contented with the peanuts offered to it as ‘Operational Creditor’, if at all anything survives for the Operational Creditors within the ambit of distribution mechanism contemplated under Section 53 of the Code. Further that it was indisputable that the Licensees are the self-confessed defaulters having contravened terms and conditions of Licence Agreement on account of nonpayment of contractual dues towards use of spectrum causing huge pecuniary loss to the Nation besides being guilty of breach of trust but instead of rectifying the breach raised disputes of sorts to evade the huge outstanding payment. Counsel representing the Union of India remarked that “…The twin requirements of payment of dues and maintenance of services are the imprimatur of the licence agreement as the same would protect the public interest. while the Tripartite Agreement was entered to facilitate the financing of the project by Lenders and enabled Lenders to procure assignment or transfer of licence, the interest of DOT was never intended to be inferior to the interests of Lenders”. It was further submitted that the Aircel Companies stopped operations before going into insolvency and for about three years spectrum was being wasted.

Counsel for the respondent among other things submitted that the same being payable for the grants arising prior to commencement of CIRP would not be required to be paid during the moratorium period.

In the pertinent case, the issues involved were:

-Whether Telecom Service Providers can be said to be the owner based on the right to use the spectrum under licence granted to them?

-Whether a licence is a contractual arrangement? Whether ownership belongs to the Government of India?

-Whether spectrum being under contract can be subjected to proceedings under Section 18 of the Code?

– Whether the spectrum can be said to be in possession, which arises from ownership. What is the distinction between possession and occupation? Whether possession correlates with the ownership right?

-The difference between trading and insolvency proceedings and whether a licence can be transferred under the insolvency proceedings, particularly when the trading is subjected to clearance of dues by seller or buyer, as the case may be, as provided in guideline nos. 10 and 11; whereas in insolvency proceedings dues are wiped off. Guideline No. 12 is also assumed to be of significance in case spectrum is subjected to insolvency proceedings, which must be considered. the licence contained an agreement between the licensor, licensee, and the lenders, whether on the basis of that, spectrum can be treated as a security interest and what is the mode of its enforcement.

The Tribunal dealt with the matter in depth, and appreciated the articulate oral submissions so made that helped the case to see the light of the day. Thus, drafted the following summary:

Summary of Findings

-Is a natural resource and the Government is the trustee, therefore not be available to use without payment of requisite dues.

-Being an intangible asset can be subjected to insolvency/liquidation proceedings.

-Dues of Central Government/ DOT under the Licence fall within the ambit of Operational Dues under the Code and payment installments of spectrum acquisition cost also fall within the ambit.

-As per Revenue Sharing Regime and the provisions of Indian Telegraph Act, 1885, the nature of dues payable to Licenser continues to be ‘Operational Dues’ which are payable primarily in terms of the Licence Agreement.

-Triggering of CIRP under the Code with malicious or fraudulent intention, would be impermissible.

-Telecom Service Providers have the right to use spectrum under licence granted to them. They cannot be said to be the owners in possession of the spectrum but only in occupation of the right to use spectrum. Ownership of spectrum belongs to Nation (people) with Government only being its Trustee. Possession correlates with the ownership right.

-Under Section 18 of the Code, the Interim Resolution Professional is bound to monitor the assets of the Corporate Debtor and manage its operations, take control and custody.

– Insolvency Proceedings arise out of default in discharge of financial or operational debt and are triggered for insolvency resolution of corporate persons, etc. in a time bound manner for maximization of value of assets of such persons.

 -While a licence can be transferred as an intangible asset of the Licensee /Corporate Debtor under Insolvency Proceedings in ordinary circumstances, however as the trading is subjected to clearance of dues by Seller or Buyer, as the case may be, the Transferor/Seller or Transferee/Buyer being in default, would not qualify for transfer of licence under the insolvency proceedings.

-The spectrum cannot be utilised without payment of requisite dues which cannot be wiped off by triggering CIRP under the Code.

-The defaulting Licensees/ TelCos cannot withhold the huge arrears payable to Government, obtaining moratorium to abort Government’s move to suspend, revoke or terminate the Licences and in the event of a Resolution Plan being approved, subjecting the Central Government to be contended with the peanuts offered to it as ‘Operational Creditor’ within the ambit of distribution mechanism contemplated under Section 53 of the Code.

-Having regard to Clause 3.4 and 3.5 of the Tripartite Agreement according priority/ first charge to DOT, the spectrum cannot be treated as a security interest by the Lenders. Therefore, the mode of Enforcement of security interest was not considered.

 [Union of India v. Vijaykumar V. Iyer, Company Appeal (AT) (Insolvency) No. 733 of 2020], decided on 13-04-2021]


Advocates before the Tribunal:

Counsel for the Appellant

Amit Mahajan, CGSC with Pooja Mahajan, Gitesh Chopra, Vidur Mohan, Kanu Agrawal and Shefali Munde

Counsel for the Respondent

Ravi Kadam and Abhinav Vashisht, Sr. Advocates with Anoop Rawat,  Charu Bansal, Ankita Mandal, Vaijayant Paliwal, Saurav Panda, Kriti Kalyani and Salonee Kulkarni, Advocates for R1. Dhruv Dewan, Harshita Choubey, Dhruv Sethi, Chandni Ghatak and Rohan Batra, Advocates for R-2. Ramji Srinivasan, Sr. Advocate with Raunak Dhillon, Aditya Marwah, Madhav Kanoria, Shubhankar Jain, Shivkrit Rai and Rajshree Chaudhary, Advocates for R-3

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Appellate Tribunal (NCLAT): Coram of Bansi Lal Bhatt, J. (Acting Chairperson), Anant Bijay Singh, J. (Judicial Member), Dr Ashok Kumar Mishra (Technical Member) while dismissing an appeal imposed costs to the tune of Rs.1 Lakh on the Appellant on finding it to be yet another effort to wriggle out of its obligations and seek withdrawal of Resolution Plan in a different garb.

In the relevant matter Union Bank of India filed an Application under Section 7 of Insolvency and Bankruptcy Code, 2016 (I&B Code) before Adjudicating Authority for initiating the Corporate Insolvency Resolution Process ( ‘CIRP’) against the Corporate Debtor – Amtek Auto Limited (‘CD’ or ‘AAL’) and subsequently CIRP commenced. Respondent No.1 came to be appointed as Interim Resolution Professional (IRP). The appellant urged that the Adjudicating Authority while approving the Resolution Plan cannot re-write the same nor can it waive any condition of the Resolution Plan, that too without the express consent of the Appellant. And the burden has been placed on the Appellant to invest huge sums to furnish the balance Performance Bank Guarantee (PBG) of Rs 150 crores.  And that there were certain preconditions that were not adhered to. The appellant contended that the execution of the long term lease was a condition precedent and the integral part of the Resolution Plan and the business of the Corporate Debtor as a going concern is dependent on the availability of this leased land as admitted by Respondents 1 and 2

Respondent vehemently denied it on the ground that the Committee of creditors and the Appellant had mutually agreed for inclusion of execution of long term lease as a condition precedent to the implementation of the approved Resolution Plan after due consideration to the land. However, it was submitted that this condition was not a condition precedent to the approval and acceptance of the Resolution Plan. Further contended that the objections raised were with ulterior objective to wriggle out from an otherwise binding Resolution Plan. Further, the Resolution Plan clearly provided that the implementation of Resolution Plan shall commence from the date of approval by AA and Letter of Intent was not a condition precedent to file the Application for approval of the Resolution Plan and was subject to directions of Supreme Court.

The Tribunal after going through the oral and written submissions, declined to accept impleadment and intervention sought by Vistra and Kotak Mahindra respectively. It was of the opinion that, “The tone and tenor of this order leaves no scope for the Appellant to resile from and wriggle out of the implication of the offer made by him, i.e. the Resolution Plan, which has been approved in terms of the order impugned in this Appeal. It is therefore manifest that the Appellant would not be permitted to backtrack and seek exit from its Resolution Plan on any pretext whatsoever…”. Further held, “…It would therefore emerge that the said condition of including execution of long term lease of 20 years with respect to Ace Complex Land on Acceptable Terms was a condition precedent to the implementation of the approved Resolution Plan and not to the approval of the Resolution Plan. “…The Respondents have been able to demonstrate that the Appellant has breached the Resolution Plan by not submitting PBG in respect of balance amount of Rs.150 crore prior to submission of Resolution Plan before the Adjudicating Authority…”.

Therefore, the Coram dismissed the appeal imposing costs of Rs 1 Lakh on the Appellant on finding it to be frivolous and devoid of merit.[Deccan Value Investors L.P, In re, 2021 SCC OnLine NCLAT 143, decided on 16-04-2021]


Advocates for Appellant

Vikram Nankani, Sr. Advocate with Dinesh Pednekar, Chanakya Keswani, Kumar Anurag Singh, Anando Mukherjee and Arpan Behl.
Advocates for Respondent

Sumant Batra, Sanjay Bhatt and Niharika Sharma, Advocates for R-1 (RP).

Tushar Mehta, SGI, Abhinav Vasisht, Sr. Advocate with Misha, Anoop Rawat, Siddhant Kant, Charu Bansal and Prabh Simran Kaur, Advocates for R2 (CoC).

Sumesh Dhawan, Advocate for R-4.

Sudhir K Makkar, Sr. Advocate with Anindita Roychowdhury, Vatsala Rai, Saumya Gupta, Bharat Makkar and Yogita Rathore, Advocates for Vistra ITCL (India) Ltd.

Arun Kathpalia, Sr. Advocate with Kaushik Moitra, Shreya Sircar, Ishita Jain, Anurag Tandon, Sanjukta Roy, Advocates for Kotak Mahindra Bank (Intervenor).

Case BriefsSupreme Court

Supreme Court: In a long awaited verdict in the Tata-Mistry Row, the 3-judge bench of SA Bobde, CJ and AS Bopanna and V. Ramasubramanian, JJ has upheld the removal of Cyrus Mistry as Chairman by the Tata Sons and has also answered all questions in favour of Tata Sons. The Court said that NCLAT has, by reinstating Mistry without any pleading or prayer, has forced upon the appellant an Executive Chairman, who now is unable to support his own reinstatement.” 

The Court said,

“The relief of reinstatement granted by the Tribunal, was too big a pill even for the complainant companies, and perhaps Cyrus Mistry, to swallow.”

The dispute

From 25.06.1980 to 15.12.2004 Shri Pallonji S. Mistry, the father of Cyrus Pallonji Mistry was a Non-Executive Director on the Board of Tata Sons. On 10.08.2006 Cyrus Mistry was appointed as a Non¬Executive Director on the Board and by a Resolution of the Board of Directors of Tata Sons dated 16.03.2012, Mistry was appointed as Executive Deputy Chairman for a period of five years from 01.04.2012 to 31.03.2017, subject however to the approval of the shareholders at a General Meeting.

He was then redesignated as the Executive Chairman with effect from 29.12.2012, even while designating Ratan Tata as Chairman Emeritus.

On 24.10.2016, the Board of Directors of Tata Sons replaced Mistry with Ratan Tata as the interim NonExecutive Chairman. It is relevant to note that Mistry was replaced only from the post of Executive Chairman and it was left to his choice to continue or not, as Non¬Executive Director of Tata Sons.

As a follow up, certain things happened and by separate Resolutions passed at the meetings of the shareholders of Tata Industries Limited, Tata Consultancy Service  Limited and  Tata Teleservices Limited, Mistry was removed from Directorship of those companies.

Mistry then resigned from the Directorship of a few other operating companies such as the Indian Hotels Company Limited, Tata Steel Limited, Tata Motors Limited, Tata Chemicals Limited and Tata Power Company Limited, after coming to know of the impending resolutions to remove him from Directorship.

Thereafter, 2 companies by name, Cyrus Investments Private Limited and Sterling Investment Corporation Private Limited, in which CPM holds a controlling interest, filed a company petition before the National Company Law Tribunal under Sections 241 and 242 read with 244 of the Companies Act, 2013, on the grounds of unfair prejudice, oppression and mismanagement.

NCLT on Mistry’s removal

  • The removal of CPM as Executive Chairman of Tata Sons on 24.10.2016 and his removal as   Director on 06.02.2017, were on account of trust deficit and there was no question of a Selection Committee going into the issue of his removal. n
  • There was no material to hold that CPM was removed on account of purported legacy issues. CPM created a situation where he is not accountable either to the majority shareholders or to the Trust nominee Directors and hence his removal.
  • The letter dated 25.10.2016 issued by CPM could not have been leaked to the media by anyone other than CPM and hence his removal from Directorship on 06.02.2017 became inevitable.

NCLAT on Mistry’s removal

  • Ratan Tata was determined to remove Mistry even prior to the meeting of the board and the majority shareholders of Tata Trust knew that there was a requirement of advance notice before the removal.
  • There is nothing on the record to suggest that the Board of Directors or any of the trusts, namely— Sir Dorabji Tata Trust or the Sir Ratan Tata Trust at any time expressed displeasure about the performance of Mistry.
  • The record suggests that the removal of CPM had nothing to do with any lack of performance. On the other hand, the material on record shows that the Company under the leadership of Mistry performed well which was praised by the ‘Nomination and Remuneration Committee’ a Statutory Committee under Section 178, on 28th June, 2016 i.e. just few months before he was removed.

Supreme Court on NCLT and NCLAT’s approach

NCLT dealt with every one of the allegations of oppression and mismanagement and recorded reasoned findings. But NCLAT, despite being a final court of facts, did not deal with the allegations one by one nor did the NCLAT render any opinion on the correctness or otherwise of 64 the findings recorded by NCLT. Instead, the NCLAT summarised in one paragraph, its conclusion on some of the allegations, without any kind of reasoning.

“The allegations relating to (i) over priced and bleeding Corus acquisition (ii) doomed Nano car project (iii) undue favours to Siva and Sterling (iv) loan by Kalimati to Siva (v) sale of flat to Mehli Mistry (vi) the unjust enrichment of the companies controlled by Mehli Mistry (vii) the Aviation industry misadventures (viii) losses due to purchase of the shares of Tata Motors etc., were not individually dealt with by NCLAT, though NCLT had addressed each one of these issues and recorded findings in favour of Tata Sons. Therefore, there is no escape from the conclusion that NCLAT did  not expressly overturn the findings of facts recorded by NCLT, on these  allegations.”

Supreme Court on NCLAT’s decision to reinstate Mistry

Sections 241 and 242 of the Companies Act, 2013 do not specifically confer the power of reinstatement, nor is there any scope for holding that such a power to reinstate can be implied or inferred from any of the powers specifically conferred.

The following words at the end of sub¬section (1) of 242 “the Tribunal may, with a view to bringing to an end the matters complained of, make such order as it thinks fit” cannot be interpreted a conferring on the Tribunal any implied power of directing reinstatement of a director or other officer of the company who has been removed from such office.

“These words can only be interpreted to mean as conferring the power to make such order as the Tribunal thinks fit, where the power to make such an order is not specifically conferred but is found necessary to remove any doubts and give effect to an order for which the power is specifically conferred.”

Hence, the architecture of Sections 241 and 242 does not permit the Tribunal to read into the Sections, a power to make an order (for reinstatement) which is barred by law vide Section 14 of the Specific Relief Act, 1963 with or without the amendment in 2018.

Further, NCLAT appears to have granted the relief of reinstatement gratis without any foundation in pleadings, without any prayer and without any basis in law, thereby forcing upon the appellant an Executive Chairman, who now is unable to support his own reinstatement.

Not just this, but NCLAT has gone to the extent of reinstating Mistry not only on the Board of Tata Sons, but also on the Board of Tata group companies, without they being parties, without there being any complaint against those companies under section 241 and without there being any prayer against them. These companies have followed the procedure prescribed by Statute and the Articles and they have validly passed resolutions for his removal.

For instance, TCS granted an opportunity to CPM and held a general meeting in which 93.11% of the shareholders, including public institutions who hold 57.46% of shares supported the resolution. In any case CPM’s tenure itself was to come to an end on 16.06.2017 but NCLAT passed the impugned order reinstating him “for the rest of the tenure”.

“Now by virtue of the impugned order, CPM will have to be reinstated even on the Board of companies from which he has resigned. This is why even the complainant companies have found it extremely difficult to support the order.”

Interestingly, one of the grounds of challenge to the order of NCLAT, raised by SP group in their appeal is that the Tribunal ought not to have granted the relief of reinstatement. Mistry has himself stated clearly that he had no intent to once again taken charge of Executive Chairman and Director of the Tata Group companies.

[Tata Consultancy Services Ltd. v. Cyrus Investments Private Ltd., 2021 SCC OnLine SC 272, decided on 26.03.2021]

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Appellate Tribunal (NCLAT): A Coram of Justice Jarat Kumar Jain (Judicial Member) and Kanthi Narahari (Technical Member) accepted an appeal holding the impugned order, modifying the date of appointment, to be unwarranted.

In the present appeal, the appellant under Sections 230 to 232 of the Companies Act, 2013 submitted a scheme for amalgamation of the Transferor Company (Accelyst Solutions Pvt Ltd) into Transferee Company (Payment Technologies Pvt. Ltd.). NCLT, Delhi, even approved the scheme of amalgamation and the appointed date 07.10.2017. However, NCLT, Mumbai, modified the appointed date from 07.10.2017 to 01.04.2018, on the ground that considerable time has lapsed from the appointed date as mentioned in scheme with varying Board Resolution of the Scheme dated 27.03.2018 and Valuation Report dated 22.03.2018.

The counsel for the appellant submitted that NCLT, Mumbai while modifying the appointed date has not assigned any reason for modification and has failed to consider the fact that it had already been approved and therefore, condone the delay and extend the time for compliance.

 Reliance was placed on Miheer H. Mafatlal v. Mafatlal Industries Ltd. (1997) 1 SCC 579 which was later approved in Hindustan Lever v. State of Maharashtra, (2004) 9 SCC 438. Even the Court considered it useful to refer to the same. The following paragraphs were quoted while placing heavy consideration:

“…11. While exercising its power in sanctioning a scheme of arrangement, the Court has to examine as to whether the provisions of the statute have been complied with. Once the Court finds that the parameters set out in Section 394 of the Companies Act have been met then the Court would have no further jurisdiction to sit in appeal over the commercial wisdom of the class of persons who with their eyes open give their approval, even if, in the view of the Court better scheme could have been framed…” The subsequent paragraphs laid down the broad contours of the jurisdiction of the company court in granting sanction to the scheme. Further quoted, “…the Court will have no further jurisdiction to sit in appeal over the commercial wisdom of the majority of the class of persons who with their open eyes have given their approval to the scheme even if in the view of the Court there would be a better scheme for the company and its members or creditors for whom the scheme is framed…”.

Therefore, considering the facts, it was clear that the appellant fulfilled all the requisite statutory compliances. The impugned order so far as the modification of appointed date was concerned was set aside, and the date which was approved by the shareholder of the appellant company was fixed.[Accelyst Solutions Pvt Ltd v. Freecharge Payment Technologies Pvt Ltd, Company Appeal (at) No.15/2021, decided on 24-03-2021]