Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Tribunal (NCLT): Coram of Judicial Member Ashok Kumar Borah and Technical Member Shyam Babu Gautam has admitted a petition under Section 7 of the Insolvency and Bankruptcy Code, 2016 by Bank of India (Financial Creditor) seeking to initiate Corporate Insolvency Resolution Process against VVVF (India) Limited (Corporate Debtor).

Factual Background

Applicant had sanctioned/revised/reviewed/continued various fund based and non-fund based working capital facilities to VVF (India) Limited for a sum of 283.65 Crore (Loan Amount).

In the petition, it was mentioned that the amount in default along with interest was INR 293, 42, 50, 526.79 (Financial Debt), which was due and payable by the Corporate Debtor in favour of the applicant.

Due to various defaults by Corporate Debtor, its account was classified as a Non-Performing Asset by the applicant.

As per the RBI guidelines, if a company failed to repay the loan liability sanctioned to the borrower under the corrective action plan, then the asset classification of the borrower will be considered from the cut-off date considered for the implementation of the corrective action plan (CAP).

In this account, under CAP, long term working capital loan was sanctioned in 2016 and due to payment default the Statutory Central Auditors of the Applicant classified the Corporate Debtor as an NPA from the implementation date of the CAP.

Further, corporate debtor issued a revival letter addressed to the applicant, confirming and admitting the existence of the various facilities and security documents availed by and executed by the Corporate Debtor and its Promoters.

Even the liability to the Financial Creditor was expressly admitted.

Financial Creditor and the Corporate Debtor had executed 14 agreements/contracts reflecting all amendments and waivers, which were forming part of the Financial Creditor’s pleadings.

Since the financial debt amount remained unpaid, the applicant filed the present petition.

Analysis, Law and Decision

The Tribunal opined that the petition was maintainable by law and the defenses raised by the Corporate Debtor were nothing but an attempt to delay the commencement of the Corporate Insolvency Resolution Process of the Corporate Debtor.

Bench while analyzing the facts of the case, referred to the Supreme Court decision in Swiss Ribbons (P) Ltd. v. Union of India, WP (C) 99 of 2018, wherein the Constitutional validity of IBC was upheld, the position was very clear that unlike Section 9, there was no scope of raising a ‘dispute’ as far as Section 7 petition was concerned. As soon as a ‘debt’ and ‘default’ is proved, the adjudicating authority is bound to admit the petition.

Contention with respect to not attaching the documents as raised by the Corporate Debtor was dealt by the Supreme Court in Dena Bank (now Bank of Baroda) v. C. Shivakumar Reddy, Civil Appeal No. 1650 of 2020, where the same issue was raised and covered.

In Tribunal’s opinion, no dispute with respect to Corporate Debtor owing money to the Financial Creditor existed.

Further, the Coram added that, the Financial Creditor’s application was complete in all respects as required by law. It clearly showed that the Corporate Debtor was in default of a debt due and payable and the default was in excess of the minimum amount stipulated under Section 4(1) of IBC.

Hence, debt and default stood established.

Therefore, Tribunal ordered as follows:

(a)        Petition filed by the Bank of India, Financial Creditor, under Section 7 of the IBC read with Rule 4(1) of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 for initiating Corporate Insolvency Resolution Process (CIRP) against VVF (India) Limited the Corporate Debtor, is admitted.

(b)       There shall be a moratorium under Section 14 of the IBC, in regard to the following:

(i)  The institution of suits or continuation of pending suits or proceedings against the Corporate Debtor including execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority;

(ii)  Transferring, encumbering, alienating or disposing of by the Corporate Debtor any of its assets or any legal right or beneficial interest therein;

(iii)  Any action to foreclose, recover or enforce any security interest created by the Corporate Debtor in respect of its property including any action under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002;

(iv)  The recovery of any property by an owner or lessor where such property is occupied by or in possession of the Corporate Debtor.

(c) Notwithstanding the above, during the period of moratorium:

(i)  The supply of essential goods or services to the corporate debtor, if continuing, shall not be terminated or suspended or interrupted during the moratorium period;

(ii)  That the provisions of sub-section(1) of section 14 of the IBC  shall not apply to such transactions as may be notified by the Centre in consultation with any sectoral regulator;

(d) Moratorium shall have effect from the date of this order till the completion of the CIRP or until this Adjudicating Authority approves the resolution plan under Section 31 (1) of the IBC or passes an order for liquidation of Corporate Debtor under Section 33 of the IBC, as the case may be.

(e) Public announcement of the CIRP shall be made immediately as specified under section 13 of the IBC read with regulation 6 of the Insolvency & Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016.

(f) Mr Avil Menezes appointed as Interim Resolution Professional of the Corporate Debtor to carry out the functions as per the IBC.

(g) During the CIRP Period, the management of the Corporate Debtor shall vest in the IRP or, as the case may be, the RP in terms of section 17 of the IBC. The officers and managers of the Corporate Debtor shall provide all documents in their possession and furnish every information in their knowledge to the IRP within a period of one week from the date of receipt of this Order, in default of which coercive steps will follow.

(h) Financial Creditor shall deposit a sum of Rs 2,00,000 with the IRP to meet the expenses arising out of issuing public notice and inviting claims. These expenses are subject to approval by the Committee of Creditors (CoC).

[Bank of India v. VVVF (India) Ltd., CP (IB) 331/MB/C-II/2020, decided on 23-9-2021]


Appearances:

For the Financial Creditor: Nausher Kohli, Nirav Shah and Viraj Gami i/b DSK Legal

For the Corporate Debtor: Mustsafa Doctor, Counsel i/b M/S Dhruve Liladhar & Co.

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Appellate Tribunal (NCLAT): The Coram of Justice A.I.S. Cheema, Officiating Chairperson and Alok Srivastava, Technical Member while dismissing an appeal affirmed adjudicating authority’s impugned order on not finding any substance in the appeal.

In the pertinent matter the impugned order of NCLT, Mumbai Bench, Mumbai was challenged where the adjudicating authority disagreed with the Committee of Creditors which had approved ‘success fees’ to the Resolution Professional of an amount of  ₹ 3 Crore. The adjudicating authority had opined, “We believe that if the RP was so certain, he should have claimed/ asked for the success fees in the beginning itself and now when the plan is approved. It was only in the distribution matrix that he/CoC had approved the success fees to the RP. With this observation RP and the CoC to proportionately distribute the said amount of Rs 3 Cr. among the employees/ underpaid operational creditors/unsecured creditors of the corporate debtor and if left, it is to be proportionately distributed among the underpaid operational creditors”. The appellants submitted that the approval of the success fees was a commercial decision of the CoC and the adjudicating authority could not have interfered with the same. To which the adjudicating authority replied in its order that, “…Fixation of fee is not a business decision depending upon the commercial wisdom of the Committee of Creditors”.

Interestingly, Amicus Curiae submitted that there were many instances of exorbitant charging of fees by the resolution professional and the adjudicating authority has interfered so as to rationalise the same. In the present matter, at the last stage when Resolution Plan was being approved the Resolution Professional without putting on record necessary particulars for the success fee got the same included. CoC may be approving the fees but as it has to be reasonable under the provisions of the Code and Regulations, it is justiciable.

The Tribunal while appreciating the support of the Amicus Curiae and concurring with the NCLT’s order opined,

“we hold that ‘success fees’ which is more in the nature of contingency and speculative is not part of the provisions of the IBC and the Regulations and the same is not chargeable. Apart from this, even if it is to be said that it is chargeable, we find that in the present matter, the manner in which, it was last minute pushed at the time of approval of the Resolution Plan and the quantum are both improper and incorrect”.

And further stated that,

“The argument that the Adjudicating Authority should have sent the matter back to the CoC if it was not approving the success fee deserves to be discarded as the Adjudicating Authority while not accepting the success fee merely asked proportionate distribution which would even otherwise have happened if ‘success fee’ was set aside as the money would become available improving percentage of other creditors’ dues”.

[Jayesh N. Sanghrajka v. Monitoring Agency nominated by the Committee of Creditors of Ariisto Developers Pvt. Ltd., Company Appeal (AT) (Insolvency) No. 392 of 2021, decided on 20-09-2021]


Agatha Shukla, Editorial Assistant has reported this brief.


Counsel for the Parties:

For Appellant:

Mr Dhruv Mehta, Senior Advocate with Mr Tishampati Sen, Ms Riddhi Sancheti, Mr Ashish Perwani, Mr Devesh Juvekar, Ms Jyoti Goyal and Mr Dikshat Mehra, Advocates.

For Respondents:

(Notice not issued)

Mr. Sumant Batra, Ld. Amicus Curiae

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 BriefsSupreme Court

Supreme Court: A Division Bench of Dr D.Y. Chandrachud and M.R. Shah, JJ. has held that under Insolvency and Bankruptcy Code, 2016, a Resolution Applicant is not entitled to withdraw or modify its Resolution Plan, once it has been submitted to the National Company Law Tribunal (Adjudicating Authority). The Supreme Court held:

“The existing insolvency framework in India provides no scope for effecting further modifications or withdrawals of CoC-approved Resolution Plans, at the behest of the successful Resolution Applicant, once the plan has been submitted to the Adjudicating Authority.”

The Court observed that a Resolution Applicant, after obtaining the financial information of the Corporate Debtor through the informational utilities and perusing the Information Memorandum, is assumed to have analysed the risks in the business of the Corporate Debtor and submitted a considered proposal. A submitted Resolution Plan is binding and irrevocable as between the Committee of Creditors (“CoC”) and the successful Resolution Applicant in terms of provisions of the Insolvency and Bankruptcy Code, 2016 (“IBC”) and the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (“CIRP Regulations”).

At the same time, the Court recognised that long delays in approving the Resolution Plan by NCLT affect subsequent implementation of the plan. It was observed:

“These delays, if systemic and frequent, will have an undeniable impact on the commercial assessment that the parties undertake during the course of the negotiation. … Such inordinate delays cause commercial uncertainty, degradation in the value of the Corporate Debtor and makes the insolvency process inefficient and expensive.”

The Supreme Court urged NCLT and NCLAT to be sensitive to the effect of such delays on the insolvency resolution process and be cognizant that adjournments hamper the efficacy of the judicial process. The Court said:

“The NCLT and the NCLAT should endeavor, on a best effort basis, to strictly adhere to the timelines stipulated under the IBC and clear pending resolution plans forthwith. Judicial delay was one of the major reasons for the failure of the insolvency regime that was in effect prior to the IBC. We cannot let the present insolvency regime meet the same fate.”

The Court was deciding appeals filed against the judgments of NCLAT whereby it had upheld the orders passed by NCLT rejecting withdrawal applications filed by Resolution Applicants (appellants before the Supreme Court).

Following is a comprehensive report of Supreme Court’s legal and factual analysis.

Question of Law

In the instant case, the task before the Supreme Court was to answer the question of law: Whether a Resolution Applicant is entitled to withdraw or modify its Resolution Plan, once it has been submitted by the Resolution Professional to NCLT and before it is approved by the latter under Section 31(1) of the Insolvency and Bankruptcy Code, 2016?

Legal Analysis and Observations

Purpose of a law on insolvency

Discussing the dynamic and comprehensive nature of IBC, the Supreme Court noted that the procedure designed for the insolvency process is critical for allocating economic coordination between the parties who partake in, or are bound by the process. This procedure produces substantive rights and obligations. The Court said:

“Upholding the procedural design and sanctity of the process is critical to its functioning. The interpretative task of the Adjudicating Authority, Appellate Authority, and even this Court, must be cognizant of, and allied with that objective.”

The Court opined that any judicial creation of a procedural or substantive remedy that is not envisaged by the statute would not only violate the principle of separation of powers, but also run the risk of altering the delicate coordination that is designed by IBC framework and have grave implications on the outcome of the Corporate Insolvency Resolution Process (“CIRP”), the economy of the country and the lives of the workers and other allied parties who are statutorily bound by the impact of a resolution or liquidation of a Corporate Debtor. It was observed:

“The adjudicating mechanisms which have been specifically created by the statute, have a narrowly defined role in the process and must be circumspect in granting reliefs that may run counter to the timeliness and predictability that is central to the IBC.”

Nature of a Resolution Plan

The Supreme Court sought to determined the nature of a Resolution Plan after its approval by CoC but prior to its approval by NCLT. This would help establish the source of legal force of a Resolution Plan ─ whether it is IBC or the law of contract. It was noted that the insolvency process, as governed by IBC, does not merely structure the conduct of participants in the process after finalisation and approval of a Resolution Plan by CoC, but also the conduct stemming from the very first steps of inviting prospective Resolution Applicants. Discussing the statutory framework, the Court observed:

“[F]eatures of a Resolution Plan, where a statute extensively governs the form, mode, manner and effect of approval distinguishes it from a traditional contract, specifically in its ability to bind those who have not consented to it.”

The Court opined that a Resolution Plan cannot be construed purely as a ‘contract’ governed by the Contract Act, in the period intervening its acceptance by CoC and the approval of NCLT.

Further, the Court opined that a Resolution Plan cannot be classified even as a ‘statutory contract’. There is no provision under IBC referring to a Resolution Plan as a contract. The legal force of a Resolution Plan arises due to the framework provided under IBC. Reiterating that IBC is a self-contained Code, the Court concluded:

“Principles of contractual construction and interpretation may serve as interpretive aids, in the event of ambiguity over the terms of a Resolution Plan. However, remedies that are specific to the Contract Act cannot be applied, de hors the overriding principles of the IBC.”

Statutory framework governing CIRP

IBC and regulations framed thereunder provide a detailed procedure for completion of CIRP. The Supreme Court noted that CIRP is a time bound process with a specific aim of maximising the value of assets. IBC and the regulations made under it lay down strict timelines which need to be adhered to by all the parties, at all stages of CIRP. The second proviso to Section 12(3) of IBC read with the judicial dictum in Essar Steel (India) Ltd. v. Satish Kumar Gupta, (2020) 8 SCC 531 prescribes that CIRP in its entirety must be completed within 330 days from the insolvency commencement date, including the time taken in legal proceedings, with a short extension to be granted only in exceptional cases. This is indicative of the strong emphasis of IBC on its timelines and its attempt to thwart the prospect of stakeholders engaging in multiple litigations solely with the intent of causing undue delay. The Court observed:

“Delays are also a cause of concern because the liquidation value depletes rapidly, irrespective of the imposition of a moratorium, and a delayed liquidation is harmful to the value of the Corporate Debtor, the recovery rate of the CoC and consequentially, the economy at large.”

The evolution of IBC framework, through an interplay of legislative amendments, regulations and judicial interpretation, consistently emphasises the predictability and timeliness of IBC. If CIRP is not completed within the prescribed timeline, the Corporate Debtor is sent into liquidation. Relying on Innoventive Industries Ltd. v. ICICI Bank, (2018) 1 SCC 407 and Gujarat Urja Vikas Nigam Ltd. v. Amit Gupta, 2021 SCC OnLine SC 194, the Court said:

“The stipulation of timelines and a detailed procedure under the IBC ensures a timely completion of CIRP and introduces transparency, certainty and predictability in the insolvency resolution process. … This Court should proceed with caution in introducing any element in the insolvency process that may lead to unpredictability, delay and complexity not contemplated by the legislature.”

Withdrawal of Resolution Plan by a successful Resolution Applicant under IBC

Absence of legislative hook or regulatory tether to enable withdrawal

Analysing the statutory framework governing CIRP and periodic reports of the Insolvency Law Committee, the Supreme Court observed that it is a creditor-driven process. It was noted that IBC is silent on whether a successful Resolution Applicant can withdraw its Resolution Plan. However, the statutory framework laid down under IBC and the CIRP Regulations provide a step-by-step procedure which is to be followed from the initiation of CIRP to the approval by NCLT. It was observed:

“The absence of any exit routes being stipulated under the statute for a successful Resolution Applicant is indicative of the IBC’s proscription of any attempts at withdrawal at its behest.”

The Court took note of the fact that Section 12-A was inserted in IBC by an amendment whereby the Corporate Debtor and CoC have been empowered to withdraw from CIRP, but the Parliament chose not to introduce any explicit provision for allowing any amendment of the Resolution Plan after approval of creditors, let alone a power to withdraw the Resolution Plan at that stage. Keeping in mind the principles for interpretation of economic statutes, the Court opined:

“In the absence of any provision under the IBC allowing for withdrawal of the Resolution Plan by a successful Resolution Applicant, vesting the Resolution Applicant with such a relief through a process of judicial interpretation would be impermissible. Such a judicial exercise would bring in the evils which the IBC sought to obviate through the back-door.”

Terms of Resolution Plan not sufficient to effect withdrawals or modifications after submission to NCLT

The appellant−Resolution Applicants submitted that a Resolution Plan only becomes binding when it is approved by NCLT under Section 31(1) of IBC. Examining the contention that the terms of a Resolution Plan can reserve the right to modify or withdraw its contents after submission to NCLT, the Supreme Court observed:

“The language of Section 31(1) cannot be construed to mean that a Resolution Plan is indeterminate or open to withdrawal or modification until it is approved by the Adjudicating Authority or that it is not binding between the CoC and the successful Resolution Applicant.”

The Court noted that the procedure envisages a 15-day window between submission of Resolution Plan and its approval or rejection by NCLT which clearly indicates that the statute envisages a certain level of finality before the Resolution Plan is submitted for approval to NCLT.  It was observed:

“Even the CoC is not permitted to approve multiple Resolution Plans or solicit [Expressions of Interest] after submission of a Resolution Plan to the Adjudicating Authority, which would possibly be in contemplation if the Resolution Applicant was permitted to withdraw from, or modify, the Plan after acceptance by the CoC.”

Following the decision in AMTEK Auto Ltd. v. Dinkar T. Venkatasubramanian, (2021) 4 SCC 457 which thwarted similar attempt of successful Resolution Applicant relying on certain open-ended clauses in its Resolution Plan to seek a direction compelling CoC to negotiate a modification to its Resolution Plan, the Court opined:

“A Resolution Plan whose implementation can be withdrawn at the behest of the successful Resolution Applicant, is inherently unviable, since open-ended clauses on modifications/withdrawal would mean that the Plan could fail at an undefined stage, be uncertain, including after approval by the Adjudicating Authority”

The Court further explained that the negotiations between the Resolution Applicant and CoC are brought to an end after CoC’s approval. The only conditionality that remains is the approval of NCLT, which has a limited jurisdiction to confirm or deny the legal validity of the Resolution Plan in terms of Section 30(2) of IBC.

Noting that various mandatory timelines have been imposed for undertaking specific actions under CIRP and if the legislature intended to allow withdrawals or subsequent negotiations by successful Resolution Applicants, it would have prescribed specific timelines for the exercise of such an option, the Court said:

“The recognition of a power of withdrawal or modification after submission of a CoC-approved Resolution Plan, by judicial interpretation, will have the effect of disturbing the statutory timelines and delaying the CIRP, leading to a depletion in the value of the assets of a Corporate Debtor in the event of a potential liquidation.”

Based on plain terms of the statute, the Court concluded that NCLT lacks authority to allow withdrawal or modification of Resolution Plan by a successful Resolution Applicant or to give effect to any such clauses in the Resolution Plan. Further, no such power can be vested with NCLT even under its residuary jurisdiction in terms of Section 60(5)(c) as it cannot do what IBC consciously did not provide it the power to do.

Factual Analysis and Observation

Without affecting the legal position formulated, the Supreme Court undertook an analysis on whether the individual Resolution Applicants in the instant appeal had specifically negotiated with the respective CoCs for a right of modification or withdrawal and were contractually entitled to the same.

Ebix Singapore (P) Ltd.

CIRP of Educomp Solutions Ltd. commenced in 2017, in which Ebix Singapore (P) Ltd. emerged as successful Resolution Applicant. Ebix submitted a Resolution Plan which was approved by CoC. Thereafter, the Resolution Plan was filed for approval of NCLT. However, subsequently, owing to investigations into accounts of Educomp, Ebix filed withdrawal application on account of delay in approval. It relied on inter alia the terms of the Resolution Plan that it was valid for six months only.

The Supreme Court rejected the submission since the terms related to the validity of the Resolution Plan for the period of negotiation with CoC and not for a period after the Resolution Plan was submitted for approval of NCLT. It was observed:

“The time which may be taken before the Adjudicating Authority is an imponderable which none of the parties can predict. … Parties cannot indirectly impose a condition on a judicial authority to accept or reject its Plan within a specified time period, failing which the CIRP process will inevitably come to an end.”

Next, Ebix argued that its position changed manifestly because of new allegations which came up in relation to the financial conduct of Educomp. However, in this regard, the Court noted that the Request For Resolution Plan (“RFRP”) directed prospective Resolution Applicants to conduct their own due diligence and independent investigations. Further noting the provisions of Section 32-A of IBC (liability for prior offences, etc.), the Court observed:

“Thus, in any case even if it is found that there was any misconduct in the affairs of Educomp prior the commencement of the CIRP, Ebix will be immune from any prosecution or punishment in relation to the same. The submission that Ebix has been placed in a prejudicial position due to the initiation of investigation into the affairs of Educomp by the CBI and SFIO is nothing but a red herring since such investigations have no bearing on Ebix.”

Lastly, the Court noted that no clause of Ebix’s own Resolution Plans provided them with a right to revise/withdraw their Resolution Plan after its approval by CoC, but before its confirmation by the Adjudication Authority. Also, Ebix did not stop pursuing their Resolution Plan after the expiry of six months, if the true import of the commercial bargain was a withdrawal of the Resolution Plan after six months of its submission.

Kundan Care Products Ltd.

CIRP of Astonfield Renewables (P) Ltd. commenced in 2018. Kundan Care Products Ltd. submitted a Resolution Plan which was approved by CoC. Thereafter, the Resolution Plan was filed for approval of NCLT. Subsequently, Kundan Care moved an application for withdrawal of its Resolution Plan because of uncertainty over the sole Power Purchase Agreement with Gujarat Urja Vikas Nigam Ltd. which formed the entirety of Astonfield’s business. However, the withdrawal application was dismissed by NCLT.

Kundan Care initially relied on terms of their Resolution Plan to argue that it had reserved the right to modify or withdraw the Plan in event of a ‘material adverse change’ which affects Astonfield. However, the Resolution Professional pointed out that the Letter of Intent awarded to Kundan Care clearly stipulated that the submitted Resolution Plan was irrevocable. This was reaffirmed by the terms of RFRP, which indicated that the condition of a ‘material adverse event’ could be exercised only until CoC was considering the Resolution Plan, and not after it had been submitted to NCLT.

Notably, in July 2021, Kundan Care addressed a communication to EXIM Bank and PFCL (lenders) seeking a revision/renegotiation of the resolution amount/financial proposal of Kundan Care for the resolution of Astonfield. Responding to Kundan Care’s request lenders were prima facie agreeable to deliberate the financial proposal seeking revision on resolution plan amount. Pursuant to this, a joint application was filed by the parties for liberty to submit a revised plan before NCLT.

Noting that EXIM Bank and PFCL represent 98% of financial creditors of Astonfield, the Supreme Court allowed the request with directions, deeming it appropriate to exercise its jurisdiction under Article 142 of the Constitution for a one-time relief.

Seroco Lighting Industries (P) Ltd.

CIRP of Arya Filaments (P) Ltd. commenced in 2018. Seroco Lighting Industries (P) Ltd. submitted a Resolution Plan which was ultimately approved by CoC. Thereafter, the Resolution Plan was filed for approval of NCLT. In June 2020, Seroco sought modification of Resolution Plan and the amount on account of economic slowdown caused by COVID-19 pandemic, and subsequently filed applications before NCLT seeking modification of the Resolution Plan on account of the original being filed over eighteen months ago. However, NCLT rejected the application. Seroco relied on terms of their Resolution Plan, but the Supreme Court found there were no such terms in the Plan that could provide such a benefit to Seroco. Concluding, the Court observed:

“This Court is cognizant that the extraordinary circumstance of the COVID-19 pandemic would have had a significant impact on the businesses of Corporate Debtors and upon successful Resolution Applicants whose Plans may not have been sanctioned by the Adjudicating Authority in time, for myriad reasons. But the legislative intent of the statute cannot be overridden by the Court to render outcomes that can have grave economic implications which will impact the viability of the IBC.”

Decision

In such view of the matter, the appeals filed by Ebix and Seroco were dismissed, and parties to the appeal preferred by Kundan Care were directed to abide by the directions issued by the Court in exercise of powers under Article 142 as a one-time relief. [Ebix Singapore (P) Ltd. v. Educomp Solutions Ltd. (Committee of Creditors), 2021 SCC OnLine SC 707, decided on 13-9-2021]


Tejaswi Pandit, Senior Editorial Assistant has reported this brief.

Appointments & TransfersNews

Appointments Committee of the Cabinet has approved the proposal for the appointment of the following persons to the posts of Judicial and Technical Members in the National Company Law Tribunal for a period of 5 years from the date of assumption of charge of the post, or till attaining the age of 65 years or until further order, whichever is the earliest:

Judicial Member:

  • Justice Telaprolu Rajani, Judge, Andhra Pradesh High Court
  • Justice Pradeep Narhari Deshmukh, Retd. Judge, Bombay High Court
  • Justice S. Ramathilagam, Retd. Judge, Madras High Court
  • Dharminder Singh, Presiding Officer, DRT-3, Delhi
  • Harnam Singh Thakur, Retd. Registrar General, Punjab and Haryana High Court
  • P. Mohan Raj, Retd. District Court Judge, Principal District Court, Salem, Tamil Nadu
  • Rohit Kapoor, Advocate
  • Deep Chandra Joshi, District Court Judge

Technical Member

  • Ajai Das Mehrotra, IRS, Principal Chief Commissioner of Income Tax
  • Balraj Joshi, Retd. CMD, NHPC
  • Rahul Prasad Bhatnaga, IAS (UP:83_, Retd. Secretary, Ministry of Panchayati Raj
  • Subrata Kumar Dash, IRS, Retd. Principal Director General of Income Tax
  • Avinash K Srivastava, IAS (UP:82), Retd. Secretary, Department of Consumer of Affairs
  • Shree Prakash Singh, Retd. Chief General Manager, SBI
  • Sameer Kakar, Chartered Accountant
  • Manoj Kumar Dubey, IRS, Retd. Director-General of Income Tax
  • Kaushalendra Kumar Singh, IR, Chief Commissioner of Income Tax
  • Anuradha Sanjay Bhatia, IRS, Principal Chief Commissioner of Income Tax

Ministry of Personnel, Public Grievances & Pensions

[DT. 11-09-2021]

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Tribunal, Hyderabad Bench: The Coram of Madan B Gosavi (Judicial Member) and Veera Brahma Rao Arekapudi (Technical Member) was of the view that the pertinent case was a fit case to pass liquidation order in consonance with the commercial wisdom in terms of Section 33(1) of the Insolvency and Bankruptcy Code, 2016 (Code).

In the instant matter, Resolution Professional had sought for liquidation of Corporate Debtor, Ind-Barath Power Gencom Ltd. under Section 33 (2) and 34 (1) of the Code. The Corporate Debtor was supplying electricity to Tamil Nadu Generation and Distribution Corporation Ltd. (TANGEDCO) and it owed an amount of Rs. 157,85,71,585 to the Corporate Debtor. And even the deposit of Rs 36 crores in fixed deposit under garnishee orders by TANGEDCO, could not improve the financial position of the Corporate Debtor. Further, it was stated that the Committee of Creditors (CoC) in its commercial wisdom had rejected the resolution plans.

While stating the reason the Tribunal referred to K Sashidhar v. Indian Overseas Bank, (2019) 148 LA 497 (SC) which further held,

“The Adjudicating Authority (NCLT) is not expected to do anything more; but is obliged to initiate liquidation process under Section 33(1) of the I&B Code. The legislature has not endowed the adjudicating authority (NCLT) with the jurisdiction or authority to analyse or evaluate the commercial decision of the CoC much less to enquire into the justness of the rejection of the resolution plan by the dissenting financial creditors”.

Therefore, falling in line with the CoC wisdom to not accept any of the resolution plans for revival of the Company and having been resolved with 81% voting share in favor of the liquidation of the Company, the Adjudicating Authority found no reason to go against and hold a contrary view in terms of Section 33(1) (a) of the Code.[Axis Bank Ltd. v. Ind-Barath Power Gencom Ltd., 2021 SCC OnLine NCLT 371, decided on 13-08-2021]


Agatha Shukla, Editorial Assistant has reported this brief.


Counsel for the Parties:

For Applicant: Shri V.V.S.N, Raju, Advocate

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Tribunal, New Delhi: The Coram of Abni Ranjan Kumar Sinha, (Judicial Member) and L.N. Gupta (Technical Member) dismissed an application considering the pre-existing dispute and on failure to prove that the operational debt was undisputed.

The instant matter was pertaining to an Application under Section 9 of the Insolvency and Bankruptcy Code, 2016 read with Rule 6 of the Insolvency and Bankruptcy Rules, 2016 by KK Continental Trade Ltd., to initiate Corporate Insolvency Resolution Process against Diamond Traexim Pvt. Ltd. (Corporate Debtor). The dispute was to release an outstanding balance amount of Rs. 6,29,45,000/- pursuant to the High Seas Sale Agreement for the purchase of 2000 metric tons of Crude Palm Oil in bulk  The Corporate Debtor denied the debt amount so due and further disputed the amount claimed, stating the deteriorated quality of the supplied goods. The counsel for the corporate debtor further submitted that there has been a dispute prior to the service of demand notice, for which the application is not maintainable. And also that the Corporate Debt

What was noted by the Tribunal was that the sole Arbitrator in the Arbitral Award concluded that,

“the claim of the Claimant is premature and can be filed only after the complaint/claim of Rs. 9,06,00,00/- of the Respondent is addressed to by the supplier of the Oil to the Claimant. Accordingly, the Claim is dismissed. The counter Claim of the Respondent also deserves to be dismissed”.

The Tribunal considered the fact that the applicant itself had initiated the Arbitration Proceeding to resolve the dispute relating to its claim, which resulted in dismissal of the claim being pre-mature. It, therefore, concluded that,

“the material on record sufficiently indicates that there has been a pre-existing dispute between the parties prior to issuance of demand notice. Therefore, there being a pre-existing dispute and a situation in which the Applicant itself has referred the dispute to the Arbitration proceeding, which resulted in dismissal of the claim of the Applicant being pre-mature, the applicant has failed to prove that its operational debt is undisputed. In terms of Section 9(5) (ii) (d) of the IBC, the moment it is established that there is a pre-existing dispute, the Corporate Debtor gets out of the clutches of the IBC”.

[KK Continental v. Diamond Traexim Pvt. Ltd., 2021 SCC OnLine NCLT 350, decided on 16-08-2021]


Agatha Shukla, Editorial Assistant has reported this brief.


Counsel for the Parties:

For the Operational Creditor: CS Chauhan, Advocate

For the Corporate Debtor: Mr Abhishek Kumar Dwivedi, Advocate

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 BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Tribunal (NCLT): The Coram of H.V. Subba Rao (Judicial Member) and Chandra Bhan Singh (Technical Member) while allowing the application for the liquidation of the Corporate Debtor by the CoC, appointed Mr Santanu T Ray as the Liquidator as provided under Section 34(1) of the Insolvency and Bankruptcy Code, 2016.

In the instant matter the Resolution Professional, Ram Ratan Kanoongo, through an application had sought for liquidation of Firestar International Limited (hereinafter referred as Corporate Debtor) under Section 33(1) read with Section 60 of the Insolvency and Bankruptcy Code, 2016. The CoC had made the following observations for taking the Corporate Debtor into liquidation without going through the Resolution Plan:

  1. There are no business prospects with the Corporate Debtor;
  2. There is no substance in chasing the legal suits and cases for recovery;
  3. There is no point in spending good money to make efforts to recover bad money, having very remote chance of recovery;
  4. The assets with the Corporate Debtor are not sufficient to repay the amounts of creditors;
  5. Any resolution plan is not possible, which could enable the company to pay the entire debts.

The Tribunal while accepting the application was of the opinion,

“The reasons assigned by the applicant in the application with respect to taking the decision of liquidation of the Corporate Debtor by the CoC appears to be genuine and convincing considering the financial conditions and assets of the company”.

Also, this would be second such company to go into liquidation since February, this year.[Corporation Bank v. Firestar International Limited, 2021 SCC OnLine NCLT 362, decided on 10-08-2021]


Agatha Shukla, Editorial Assistant has reported this brief.


For the Resolution Professional: Adv. Pulkit Sharma

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 BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Tribunal, NCLT Mumbai: Coram of Suchitra Kanuparthi, Judicial Member and Chandra Bhan Singh, Technical Member, observed that,

“…a Judicial authority ought not to pass Orders which would lead to further multiplicity of proceedings.”

The instant application was filed by the Operational Creditor who had earlier initiated the corporate insolvency resolution process against the Corporate Debtor−Rolta India Ltd. The applicant−Operation Creditor now sought withdrawal of his company petition admitted under Section 9 of the Insolvency and Bankruptcy Code, 2016.

The applicant worked as an employee of the Corporate Debtor from March 2013 to June 2019, when he was relieved from services without settlement of arrears of salary and other dues. Consequently, he filed a petition under Section 9 which was admitted by the National Company Law Tribunal, Mumbai (“NCLT”), in May 2021 and an Insolvency Resolution Professional was appointed for the Corporate Debtor.

Thereafter, further negotiations took place between the parties and they reached a settlement agreement. Consequently, the application requested the Insolvency Resolution Professional to file an application under Section 12-A (Withdrawal of application admitted under Section 7, 9 or 10). As the Insolvency Resolution Professional did not file the application immediately, the applicant preferred the Section 12-A application before the NCLT.

The withdrawal application was vehemently opposed by the Financial Creditors (a consortium of several Public Sector Banks) and some of the other ex-employees. Notably, over 75 other petitions under Sections 7 and 9 of  IBC were pending against the Corporate Debtor.

Analysis, Law and Decision

Instant application had been filed under Section 12-A of the IBC read with Rule 11 of the NCLT Rules, 2016 by an employee of the Corporate Debtor company in the capacity of Operational Creditor seeking withdrawal of the company petition in terms of Regulation 30-A of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016.

Applicant mentioned that he had approached the Insolvency Resolution Professional for filing the Application in Form FA under Regulation 30-A(1)(a) to seek withdrawal of the admitted company petition. However, he stated that the Insolvency Resolution Professional did not cooperate and, therefore, the applicant was compelled to file the present application on their own motion under Rule 11 of the NCLT Rules seeking withdrawal of the admitted company petition.

The Insolvency Resolution Professional mentioned that she had received claims/intimation of claims of about Rs 5523.81 crores from financial creditors, operational creditors and workmen employees of Rolta India Limited.

Further, the Bench noted that even under Workmen and Employees’ claim there were 567 employees whose claims had been collated by the Insolvency Resolution Professional. However, the settlement entered into by the Corporate Debtor was only with 32 employees. It was also noted that even the settlement which was proposed by the promoter on behalf of the Corporate Debtor company kept aside majority of the workmen employees’ claim which had been brought out by the Insolvency Resolution Professional. Moreover, the proposed settlement with the employees under the Joint Settlement Agreement will be done only after they withdraw the petition. The Bench observed:

“…Corporate Debtor is willing to pay the major part of the dues to the employees only subsequent to withdrawal of petition through the settlement jointly and/or severally with the employees. The Bench feels that this provides an escape route to both the promoter as well as to the Corporate Debtor Company to conveniently wriggle out of the partial mini settlement at any point of time.”

Major Issue 

The Tribunal noted the major issue:

Whether it would be proper for the Bench to allow withdrawal of corporate insolvency resolution process (“CIRP”) under Section 12-A or to exercise, its discretion to reject the present application under Section 12-A?

The Bench was fully aware that after passing the “Admission Order” dated 13-05-2021 and after the commencement of CIRP, the proceeding are in rem and therefore, any decision regarding the continuation or otherwise of CIRP has to be decided in the interest of all stakeholders and not just a handful of employees. It was reiterated:

“…under Section 53 of IBC the debts of the workmen rank equally with the financial debt owed to the secure/ unsecured creditors.”

In view of the above, it was stated that it cannot be ignored that Tribunal has to take into account the interest of all stakeholders. Before taking the discussion further, the Bench relied upon some of the prominent judgments in respect of the scope and ambit of Section 12-A of IBC. Supreme Court in the decision of Swiss Ribbons (P) Ltd. v. Union of India, (2019) 4 SCC 17, clearly directed that interest of all stakeholders have to be considered while accepting or disallowing an application for withdrawal.

Supreme Court recently in the matter of Indus Biotech (P) Ltd. v. Kotak India Venture (Offshore) Fund, 2021 SCC OnLine SC 268 has clearly observed that when a petition under Section 7 of IBC is admitted/triggered it becomes a proceeding in rem and even the creditor who has triggered the process would also lose control of the proceedings as corporate insolvency resolution process is required to be considered through the mechanism provided under IBC.

Further, the Tribunal noted that in the present matter, there were several Financial Creditors and total financial claim collated by the Insolvency Resolution Professional in the matter of Rolta India Ltd. was upward of Rs 5000 crore. Thus, this itself would be an enough ground to disallow the present application for withdrawal under Section 12-A. The Tribunal said:

“…even in the event of the original creditor [and] the Corporate Debtor settling their disputes prior to the constitution of the CoC, the Tribunal has sufficient jurisdiction to reject an application under Section 12-A of the IBC if the facts and circumstances of the case warrants such rejection.”

Tribunal in view of the above, expressed that, even if withdrawal was permitted, it is a fact that all the dues of all the employees of the Corporate Debtor company were not being settled. About more than 100 employees had lodged their claims against the Corporate Debtor. However, only some employees’ claims were being settled by the ex-management/promoter of the company. Therefore, the purported settlement lacked bona fide.

Moreover, the interest of the employees would be taken care of during the CIRP of the Corporate Debtor and they being operational creditors will be entitled to their rights as provided for under the IBC. Concluding, the Bench said that it had no doubt in its mind that considering that CIRP proceedings are in rem, the substantial claims of Financial Creditors cannot be disregarded or ignored in view of the purported settlement of certain employees of the Corporate Debtor.

In view of the above, the Bench dismissed the application filed under Section 12-A of the IBC and the CIRP against the Corporate Debtor company would continue. [Dinesh Gupta v. Rolta India Ltd., MA No. 1196 of 2021, decided on 6-08-2021]


Advocates before the Tribunal:

For the Promoter: Mr. Prateek Seksaria, Advocate.

For the IRP: Ms. Ranjana Roy Gawai, Mr. Pervinder, Mr. Vineet Kumar, Advocates a/w Ms. Vandana Garg, IRP.

For the Financial Creditor: Mr. Rohit Gupta, Mr. Nausher Kohli, Advocates.

For the Operational Creditor: Mr. Nausher Kohli and Mr. Rohit Gupta, Advocates

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 Tribunal (NCLT): Coram of H.V. Subba Rao (Judicial Member) and Chandra Bhan Singh (Technical Member) held that ‘Working Capital’ provided by an investor cannot be considered as ‘Financial Debt’.

Instant company petition was filed seeking to initiate Corporate Insolvency Resolution Process against the Corporate Debtor alleging that the Corporate Debtor committed default in making payment to the Financial Creditor.

Petition was filed by invoking the provisions of Section 7 of Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016.

Since the Corporate Debtor failed to make payment of a sum of Rs 7,02,682, a petition was filed before the Adjudicating Authority.

Financial Creditor submitted that a Restaurant Operation and Services Agreement (ROSA) was signed between the parties on, as per which the investor would finance furnish and equip restaurants whereas the respondent operating partner was to provide day to day Operations and Management Services for the running of the business.

Analysis, Law and Decision

Bench noted that the total claim of the petitioner was based on Article 2 Section 4 of the Agreement regarding working capital.

Article 2, Section 4: Capital Expenditure

“…The Capital Expenditure to be incurred by the Investor with respect to each of the Restaurants is capped at Rs. 35,00,000/-, excluding goods and service tax. Provided however, the Operating Partner shall use reasonable endeavours to minimize the actual Capital Expenditure for each Restaurant. In the event the Capital Expenditure exceeds the aforesaid amount, the Investor may, at its discretion, approve and incur the same…”

 Financial Creditor submitted that it provided a loan of Rs 7.02 lakhs.

Bench noted that all the three premises from where the restaurants were operating was rented in the name of the Financial Creditor under Leave and License Agreement and the Corporate Debtor was not a party.

Further, the total claim mentioned was a claim to Rent Commission and Maintenance, none of which amounted to a Financial Debt.

Adding to the above, Tribunal noted that there was no disbursement to the respondent and all the payments were related to the third party.

Hence, no money was received by the Corporate Debtor in its account. The Petitioner failed to produce any bank statement showing that the said amount had gone into the respondent’s account.

Therefore, about Rs. 7.02 lakhs did not come into the account of the Corporate Debtor but were paid by the Financial Creditor.

Bench even opined that Article 2 Section 4 never mentions that it is a working capital loan, it only says that in the event of Operating Partners requires the Working Capital for the initial period till a Restaurant has achieved break even, the Investor shall provide the same in a manner as may be mutually agreed between the parties.

Hence, the Tribunal stated that,

“…it was not a loan and till the achievement of the ‘break even’ the investor was to provide the Working Capital.”

 Further, it was also noted that the petitioner was trying to make out a case not as an Investor in the restaurant project but as a creditor which was contrary to the documents executed between the parties.

Corporate Debtor clearly brought out that the said restaurants never ‘broke even’ and therefore, there was no obligation on the part of the respondent to pay an amount which had been provided by way of working Capital.

Therefore, while concluding the matter, Bench held that the amount which was being claimed as Financial Debt was not a Debt at all and at best was a payment due after the restaurant business ‘breaks even’.

Hence, the amount claimed of Rs 7,02,682/- does not qualify as a Financial Debt under Section 5(8) of the Code and is not default under Section 3(12) of the Code. [Plutusone Hospitality (P) Ltd. v. Busabong & Co. (P) Ltd., CP No. 4395/IBC/MB/2019, decided on 26-7-2021]


Advocates before the Tribunal:

For the Applicant: Mr Shyam Kapadia, Advocate

For the Respondent: Mr Nausher Kohli, Advocate

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Tribunal (NCLT): The Coram of Justice Abni Ranjan Kumar Sinha,(Judicial Member), and L.N. Gupta, (Technical Member) while exercising their jurisdiction, terminated the CIR process of the Corporate Debtor with immediate effect.

In the instant case, Om Logistics Ltd., Operational Creditor, had filed an application for initiation of CIR Process against the Ryder India Pvt. Ltd., Corporate Debtor and the Adjudicating Authority had initiated the CIR Process against the Corporate Debtor and had appointed Mr. Bikram Singh Gusain IP, as the Interim Resolution Professional (IRP). It was alleged that the CIR Process so initiated, was not for the resolution of Insolvency. Instead, the Operational Creditor had used for recovery and got the CIR process started with malicious intent for a purpose other than the resolution of insolvency of the Corporate Debtor, not permissible under the IBC 2016.

The Tribunal was of the view that the IRP for dissolution of the Corporate Debtor ‘cannot be accepted since the Liquidation is a pre-requisite to the Dissolution’ and in the present case, no order of Liquidation has been passed due to absence of any such proposal and non-functioning of the CoC.

The Tribunal was thus of the opinion that,

“After hearing submissions of the Applicant/IRP, perusing his averments and documents placed on record, this Bench is of the view that the prayer made by the IRP for dissolution of the Corporate Debtor cannot be accepted since the Liquidation is a pre-requisite to the Dissolution and in the present case, no order of Liquidation has been passed due to absence of any such proposal and non-functioning of the CoC”.

The Coram further held that

“by exercising our jurisdiction under Section 60(5) of IBC 2016 along with inherent power under Rule 11 of the NCLT Rules, 2016, we hereby terminate the CIR process of the Corporate Debtor with immediate effect and release the Corporate Debtor from the rigors of the CIRP and moratorium”.[Om Logistics Limited v Ryder India Pvt. Ltd. IA. 2038/ND/2020, decided on 29-07-2021]


Advocates before the Tribunal:

For the Applicant: Mr. Vinod Chaurasiya, Advocate for IRP

Case BriefsHigh Courts

Gujarat High Court: The Division Bench of Vineet Kothari and B.N. Karia, JJ., took up a petition which dealt with the parties not only filing Civil Suits, Writ Petitions, and Letters Patent Appeals under Article 226 of the Constitution but also going for forum shopping.

The Writ petition was dismissed by the order dated 06-10-2010. In Letters Patent Appeal, this Court had initially passed the status quo order on 13-12-2010 which came to be modified after detailed hearing on 17-02-2021.

The assets of the Defaulter Company –  GPPML were taken over by GSFC in the exercise of its statutory powers under Section 29 of the SFC Act, 1951 and sold away to SIL at a price which was the subject matter of challenge.

Detailed interim orders passed in the matter leading to the proposed order passed by the Court for facilitating the transfer of all the proceedings to the National Company Law Tribunal (NCLT), Ahmedabad, which is the expert fact-finding Tribunal constituted under the provisions of the New & Special Law viz. Insolvency and Bankruptcy Code, 2016 in terms of the decision of the Supreme Court in the case of Action Ispat and Power (P) Ltd. v. Shyam Metalics and Energy Ltd., (2021) 224 Comp Cases 35 (SC) where it was held that the winding up Court or the Company Court should transfer the winding up proceedings to NCLT, not only at the initial stage, but even in the mid stage of winding-up proceedings, unless the winding-up proceedings have reached a stage where it would be irreversible and making it impossible to set the clock back and then only that the Company Court must proceed with the winding-up, instead of transferring the proceedings to NCLT under IBC provision.

The Court noticed that the auction purchaser – SIL not only was involved in litigation before this Court, and entered into an alleged OTS (One Time Settlement) with GSFC which is with a doubtful integrity to say the least and is under a serious contest by left out Secured and Unsecured Creditors, but SIL also approached the Hon’ble Delhi High Court by way of writ petitions merely because it had a namesake registered office of the Company in Delhi also, whereas its industry in question is in Gujarat.

The Court stated that scattering the litigation in various Forums is the root cause of multiplicity of litigation and amounts to misuse and abuse of process of law and by sheer passing of the different orders which may or may not be conflicting orders inter-se by different Forums, who apparently would have the competent jurisdiction to be seized of those proceedings and passed those orders, ultimately may result in an utter messy confusion of the things and unresolved problems for long time. Such malpractices deserve to be seriously checked by enacting some kind of filters where the parties to one lis essentially are restricted to one competent Forum to avoid any such chance of conflicting orders and forum shopping.

The hurried One Time Settlement of GSFC with SIL in favour of which even the major part of the auction price was converted into a term loan by GSFC and in the repayment of which, SIL defaulted, still instead of again taking over the assets and re-auctioning them, GSFC chose, for the reasons best known to it to enter into One Time Settlement with SIL at a mere Rs.60 lakhs and that is a matter to be looked into by the NCLT. The said SIL is also said to have stopped its production activities and the assets of GPPML sold to it under Section 29 way back in the year 1990 are still in disuse or are not being used for any productive activity and that is not only a wastage of assets for the creditors and other stakeholders, but also a national waste.

The Court was of the view that NCLT would be the best suited Forum in these circumstances to the concerned and connected issues in this case.[Lalitaben Govindbhai Patel v. Gujarat State Financial Corpn., 2021 SCC OnLine Guj 1077, decided on 26-07-2021]


Suchita Shukla, Editorial Assistant has reported this brief.


Appearance:

For the Appellants: Mr Sandeep Singhi and Mr AS Vakil

For the Respondents: Mr BH Bhagat, Mr RD Dave, Mr Pranav G Desai, Mr Abhijit P Joshi, Mr Nandish Y Chudgar and Mr Devang D Trivedi

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Tribunal, Mumbai: Coram of H.V. Subba Rao, Judicial Member and Chandra Bhan Singh, Technical Member dismissed an interlocutory application filed against a personal guarantor under Section 95 (“application by creditor to initiate insolvency resolution process”) of the Insolvency and Bankruptcy Code, 2016, finding that the Corporate Debtor concerned was not under Corporate Insolvency Resolution Process.

The instant Interlocutory Application was filed by the Financial Creditor under Section 95 of the Insolvency and Bankruptcy Code against the personal guarantor.

Further, on an enquiry from the Bench, it came out that the Corporate Debtor for which the personal guarantee had been given was not under Corporate Insolvency Resolution Process.

Hence, the present Interlocutory Application cannot be prosecuted and therefore the IA was disposed of. [Altico Capital India Ltd. v. Rajesh Patel, IA 1062 of 2021, decided on 9-07-2021]


Advocates before the Tribunal:

For the Personal Guarantor: Nausher Kohli

Samit Shukla, Associate Partner and Yash Dhruva, Associate i/b DSK Legal

For the Creditor: Faizan Mithaiwala

Op EdsOP. ED.

In the March of 2020, the Insolvency and Bankruptcy Code, 2016[1] (Code), notified two new thresholds which significantly impacted the real estate industry. Firstly, by a notification[2], the minimum threshold of default under Section 4(1)[3] of the Code was increased from Rs 1 lakh to Rs 1 crore, keeping in mind the financial repercussions of the global pandemic. Secondly, an amendment[4] was introduced, which mandated a numerical threshold requirement for allottees of a real estate project to trigger the corporate insolvency resolution process (CIRP).

Rationale behind the introduction of a numerical threshold for allottees

The Supreme Court in Pioneer Urban Land and Infrastructure Ltd. v. Union of India[5] had clarified that the sale agreement between the developer and homebuyer has a “commercial effect” of borrowing, as the money is paid in advance for temporary use, so that a flat/apartment could be given back to the homebuyer.

This essentially gave every individual allottee the status of a financial creditor, allowing them to trigger the CIRP against the promoter/developer of the real estate project in case of a default. This led to a large number of applications, frivolous or otherwise being filed in the National Company Law Tribunal (NCLT), thereby augmenting the misuse of the provisions of the Code, in turn leading to the disruption of the real estate sector.

Thus, an amendment was introduced in Section 7[6] of the Code, requiring the application for initiating CIRP to be filed jointly by at least a hundred allottees or one-tenth of the total number of allottees in the same real estate project, whichever is less.

Furthermore, the Supreme Court, in Manish Kumar v. Union of India[7] (Manish Kumar) while upholding the constitutionality of the amendment also threw light on the rationality and the need for the introduction of such a threshold. The Court observed that the consequence of empowering a lone allottee to initiate the CIRP at his discretion could thwart the entire real estate project, thereby endangering the interests of other allottees who were not in favour of the same and might have faith in the developer.

This post seeks to analyse the ground realities and the ambiguities that may arise in light of the amendment and the Manish Kumar[8] judgment.

Prerequisites for initiating CIRP

In light of the notification and the amendment, an allottee has to now fulfil the following two prerequisites to initiate the insolvency proceedings under Section 7 of the Code:

  1. The total amount of default by the corporate debtor shall be more than Rs 1 crore; and
  2. the application has to be filed jointly by hundred allottees or one-tenth of the total number of allottees in the same real estate project, whichever is less.

Calculation of total default

The threshold of Rs 1 crore means the total default of the corporate debtor to any financial creditor and not necessarily only to the applicant allottees. Thus, the allottees can move against the promoter even without any amount being due to them, provided that they meet the numerical threshold requirement under Section 7.

What constitutes a real estate project

As per the Code, the term “real estate project” (project) shall have the meaning assigned to it in clause (zn) of Section 2[9] of the Real Estate (Regulation and Development) Act, 2016 (RERA) which provides only a general overview of the scope of inclusion of the constituents of a project, leaving a grey area for interpretation.

Phases/towers/blocks in a project – separate individual projects

Section 3[10] of RERA deals with the mandatory requirements of registration and exemption from such registration to projects where the area of land proposed to be developed does not exceed five hundred square meters or the number of apartments proposed to be developed does not exceed eight, inclusive of all phases. However, the explanation to this section reads as follows:

For the purpose of this section, where the real estate project is to be developed in phases, every such phase shall be considered a stand-alone real estate project, and the promoter shall obtain registration under this Act for each phase separately.

The above explanation fails to confer a clear interpretation of how the phases should be included in the calculation of the numerical threshold of allottees.

The literal interpretation of the phrase “every phase shall be considered a stand-alone real estate project shall mean to apply only for the purpose of “this section, so as to analyse whether the registration of a project can be totally exempted from the purview of the Act.

Thus, it can be inferred from the literal interpretation and purpose of the section that each phase would not be considered as a stand-alone real estate project in calculation of the required numerical threshold of allottees. Hence, all the phases in a project shall be considered together for the purpose of calculating such threshold under Section 7 of the Code.

Further, to substantiate this interpretation, the observations deduced from some clauses under Section 4(2)[11] of the RERA which pertains to the details and documents required for filing an application for registration of a project can be referred. The relevant clauses are extracted below:

(d) the sanctioned plan, layout plan and specifications of the proposed project or the phase thereof, and the whole project as sanctioned by the competent authority;

Here, the clause refers to “the phase thereof, and the whole project which indicates that all the phases that are sanctioned by the competent authority to constitute a particular project may be considered as one project.

(f) the location details of the project, with clear demarcation of land dedicated for the project along with its boundaries including the latitude and longitude of the endpoints of the project;

Here, providing information relating to proper demarcation of land and boundaries to indicate the endpoints of a project would be helpful in ascertaining whether a certain building is a phase of a particular project or a different project in itself.

Example: Confusion may occur with regard to the demarcation between two projects by the same promoter, if the projects are adjacent to each other. How would one distinguish whether the said projects are two separate real estate projects or just phases of the same real estate project?

Thus, in the above scenario the location details provided by the promoter to the competent authority while registering the project as per Section 4(2)(f) would be considered.

Calculation of allottees for the numerical threshold

As per the Code, the term “allottee” shall have the meaning assigned to it under Section 2(d) of the RERA which states that an allottee is a person to whom a plot, apartment or building is allotted by sale, transfer or otherwise by the promoter of the project or any subsequent owner.

For calculating the total number of allottees, only the number of allotted units in a project shall be considered, irrespective of the number of units constructed.

In cases of joint allotments, wherein a single unit is allotted to more than one person, the joint allottees of that unit shall be considered to mean a single allottee.

Example: In a project constituting a total of twenty units, three individuals — A, B, and C book four units each. Here, the number of individual allottees is only three i.e. A, B, and C but the number of apartments allotted is twelve. Hence, for the purpose of calculation for threshold requirement, the total number of allottees shall be twelve.

Access to the information of allottees in a project

The Supreme Court, in Manish Kumar[12], reiterated the following provisions to address the concerns of homebuyers with regard to the asymmetry in availability of information.

Section 11(1)(b)[13] of the RERA, requires the promoter to upload quarterly updates of the number of apartments allotted on the RERA web page which can be referred to ascertain the total number of allottees till date. However, the Court failed to observe the fact that there is no obligation on the promoter to provide names and details of such allottees.

Section 11(4)(e) mandates the promoter to enable the formation of the association of allottees (association) within three months of the majority of units being allotted, in the absence of local laws, allowing the allottee to be privy to the details of fellow the allottees in the project. However, the Court overlooked the fact that there is no obligation on the promoter to form an association, in case the majority of units are not booked. Additionally, local laws of States like U.P. and Haryana require the formation of such association only after obtaining the completion certificate, thus slyly providing a loophole in favour of the promoters.

As a result, in the absence of such an association and where the promoter refuses to furnish the said information, the only redressal available to an allottee is to approach the real estate regulatory authority (authority). The authority using its discretionary powers under Section 37[14] may direct the promoter to furnish the required information.

Conclusion

The introduction of a numerical threshold for triggering the CIRP is a step in the right direction to curb the use of the Code as a debt recovery mechanism, thereby contradicting its primary objective of revival of an entity. This step ensures that the project does not collapse on the whims and fancies of a few disgruntled allottees.

However, the Court failed to address the major issue of unavailability of the necessary information faced by an allottee while meeting the newly imposed numerical threshold under the Code. This will pose a major hurdle in initiating the CIRP where the promoter is unable to meet his debt obligations and there is a dire need for an overhaul of the management.

The builders and the homebuyers are on the opposite sides of a weighing scale representing the real estate sector and the recently imposed thresholds have tilted the scales in favour of the builders. Thus, in order to create and maintain balance, it is necessary to implement regulations mandating the builders to publish the required information of allottees in the public domain.


Final year LLB student at ILS Law College, Pune.

†† Final year LLB student at ILS Law College, Pune.

[1] <http://www.scconline.com/DocumentLink/i9ibga9l>.

[2] <http://www.mca.gov.in/Ministry/pdf/Notification_28032020.pdf>.

[3] <http://www.scconline.com/DocumentLink/7uaUmcO6>.

[4] <https://ibbi.gov.in/uploads/legalframwork/d36301a7973451881e00492419012542.pdf>.

[5] (2019) 8 SCC 416

[6] <http://www.scconline.com/DocumentLink/K60PW5A6>.

[7] 2021 SCC OnLine SC 30

[8] 2021 SCC OnLine SC 30

[9] <http://www.scconline.com/DocumentLink/jXVqv4Tm>.

[10] <http://www.scconline.com/DocumentLink/1x31154O>.

[11] <http://www.scconline.com/DocumentLink/9l3Q426Y>.

[12] 2021 SCC OnLine SC 30

[13] <http://www.scconline.com/DocumentLink/OzOYWrYB>.

[14] <http://www.scconline.com/DocumentLink/om9ga1Y0>.

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)