Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Appellate Tribunal, New Delhi (NCLAT): The Coram of Justice Ashok Bhushan (Chairperson) and Dr Alok Srivastava (Technical Member) observed that, provisions of the Limitation Act are applicable to proceedings under IBC.

An appeal was filed against the order passed by the National Company Law Tribunal, Mumbai, by which the application filed by the appellant had been rejected as barred by time.

Contentions

Appellant’s counsel submitted that both the parties were maintaining a running account and there have been transactions inter se which was reflected from the ledger account filed by the respondent.

Further, in the facts of the present case, Article 1 of the Limitation Act was attracted as per which the limitation period of 3 years began to run from the close of the year in which the last item admitted or proved was entered into the amount.

Analysis, Law and Decision

Tribunal expressed that in the application under Section 9 IBC, the appellant had claimed payment of outstanding dues on the basis of different invoices issued in the year 2015-16.

The Adjudicating Authority after perusing the date of all the invoices returned a finding that Application under Section 9 having been filed on 24th October, 2019 even the last invoices dated 29.09.2016 and 10.10.2016 were more than three years prior to filing of Section 9 Application hence the Application having been not filed within limitation, the same is rejected.

Coram observed that the Limitation Act is applicable in IBC Proceedings and IBC does not exclude the application of Sections 6 to 14 or 18 and any provision of the Limitation Act.

Whether appellant can take benefit of Article 1 of the Limitation Act, 1963?

Supreme Court in B.K Educational Services (P) Ltd. v. Parag Gupta, (2019) 11 SCC 633 after considering the provisions of IBC and the Limitation Act had laid down that for filing application under Sections 7 and 9, it is Article 137 which is attracted.

Supreme Court in Babulal Vardharji Gurjar v. Veer Gurjar Aluminium Industries (P) Ltd., (2020) 15 SCC 1 has reiterated the applicability of the Limitation Act and it was again reiterated that period for limitation is governed by Article 137 of the Limitation Act.

It was noted that Article 1 is in Part-I of the Schedule of the Limitation Act dealing with suits, under the “suit relating to accounts”. The application filed under Section 9 of the appellant cannot be said to be a suit relating to accounts.

Tribunal concluded stating that, limitation as per Article 137 will begin to run from the date when the right to apply accrues and the application filed on the basis of invoices were prior to much before three years period from filing of Section 9 application, NCLT had rightly rejected the application.

Therefore, the appeal was dismissed. [S.M. Ghogbhai v. Schedulers Logistics India (P) Ltd., Company Appeal (AT) Insolvency No. 281 of 2022, decided on 23-5-2022]


Advocates before the Tribunal:

For Appellant: Advocate Ekta Mehta

For Respondent: Advocate Kayomars K. Kerawalla, Advocate Kunal Mehta and Advocate Robin Fernades.

Case BriefsSupreme Court

Supreme Court: The Division Bench of Dinesh Maheshwari and Aniruddha Bose, JJ., issued notice to Topworth Urja & Metals Ltd. in a case alleging oppression and mismanagement in appointment of additional directors.

The question of law before the Court was whether a non-member/non-shareholder director is barred from raising a dispute regarding oppression/mismanagement and the illegal appointments of directors before the Civil Court u/s 430 of the Companies Act, 2013?

The appellant, Manish Kumar was holding the directorship in the respondent Company, which was engaged in the business of manufacturing of state-of-art range of steel, pipes, tubes, mining offered steel et cetera. The grievance of the appellant was that the respondent company had illegally appointed respondents 2 to 6 as the Additional Directors of the company. Further, the appellant alleged that the appointment was made without giving notice to the appellant and other aggrieved directors.

Therefore, the appellant had approached the Civil Court, alleging that the conduct of the company amounted to mismanagement qua the directorial appointments which were per se illegal in nature and were made with the intention to siphon off funds. The Civil Court had dismissed the application and relegated the appellant to National Company Law Tribunal (NCLT) to agitate his issues.

Aggrieved, the appellant approached the Bombay High Court seeking declaration that the alleged appointment of directors was illegal and void-ab-initio and to restore status quo ante with respect to directorship as on 23-11-2021. The appellant argued that he being a director without being a shareholder was not a ‘member’ within the meaning of Section 2(55), therefore, he could not seek relief for oppression before NCLT u/s 241 of the Act, 2013, since the said section is restricted to “a member of the Company”.

Rejecting the contentions of the appellant, the High Court held that the word ‘matter’ used in Section 430 is of wide amplitude and it cannot be read in a constricted way to limit it to an individual, but it will have to be given the widest meaning to cover any matter which the Tribunal is empowered to determine under the Act and this would necessarily cover the dispute regarding the affairs of the Company alleged to be conducted prejudicial to the interest of the Company or even any allegation of oppression or mismanagement.

Therefore, dismissing the appeal, the High Court observed that if any person, who is interested in the affairs of the Company alleges mismanagement or oppression, he shall not be restrained from knocking the doors of the Tribunal merely because the words employed in Section 241.

The High Court held that the words ‘any member’ if read constrictively and confining it only to member as defined, it would result in defeating the intention of law makers, who created the special Tribunal with exclusive jurisdiction only for corporate and reduce the multiplicity of litigation before different forums, including civil courts and to provide justice at close range.

The appellant had challenged the impugned High Court order stating that both the Civil Court and the High Court had fell into grave error by misinterpreting the law on the issue of jurisdiction under Section 430 of the Companies Act, 2013 and relegating the appellant to approach NCLT.

Further, the appellant alleged that the both the Civil Court and the High Court had erroneously relied on Chiranjeevi Rathnam vs. Ramesh, (2017) SCC OnLine Mad 23049, and had failed to appreciate the plain interpretation of the wording of Sections 2(34), 2 (55) and Section 244 of the Act, 2013.

Reliance was placed by the appellant on the decision of NCLT in Jithendra Parlapalli v. Wirecard India (P) Ltd. (judgment dated 16-02-2022), wherein the NCLT had, by detailed reasoning, distinguished the judgment of Chiranjeevi (supra) and held that, a non-member director cannot file an application before NCLT under Sections 241 and 242 of Companies Act, 2013 due to the embargo under Sec. 244 of the Companies Act, 2013.

The Court had issued notice to the respondent company.

[Manish Kumar v. Topworth Urja & Metals Ltd., Special Leave to Appeal (C) No. 9191 of 2022, order dated 18-05-2022]


Appearance by:

For Petitioner(s): Siddharth Bhatnagar, Sr. Adv.

Swarnendu Chatterjee, AOR

Aditya S., Adv.

Pranav Auhad, Adv.

Darshana Naval, Adv.

Yashwardhan Singh, Adv.


Kamini Sharma, Editorial Assistant has put this report together 


Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Appellate Tribunal, New Delhi (NCLAT): The Coram of Justice Ashok Bhushan (Chairperson) and Shreesha Merla (Technical Member) held that, the territorial jurisdiction of NCLT to decide a case under Insolvency and Bankruptcy Code, 2016 cannot be taken away by the Facility Agreement between the parties.

Instant appeal was filed against the order passed by the National Company Law Tribunal, New Delhi, by which the application under Section 7 of the Insolvency and Bankruptcy Code, 2016 had been admitted.

The Appellant’s counsel submitted that there was no jurisdiction with the Principal Bench, Delhi to entertain Section 7 Application. He referred to a Clause from the Facility Agreement, as per which Courts at Mumbai had jurisdiction in respect of any matter of the Facility Agreement.

Analysis, Law and Decision

First, the Tribunal referred to Section 60(1) of the Code provides for Adjudicating Authority for Corporate Persons. Section 60(1) is as follows:

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

Coram expressed that, Adjudicating Authority in relation to Insolvency Resolution shall be the National Company Law Tribunal having territorial jurisdiction over the place where the registered office of the corporate persons is located.

Tribunal stated that, the appellant cannot rely on clause 24.12 of the Facility Agreement which provides jurisdiction to the Mumbai Courts.

Noting the above, Coram held that, for filing an Application under Section 7 of the Code, the provisions of Section 60(1) read with Section 238 of the Code shall be overriding clause 24.12 of the Facility Agreement.

Further, not denying that Corporate Debtor’s registered office was situated in New Delhi where the territorial jurisdiction to entertain such application was with NCLT, Delhi, Coram did not accept the submissions of Counsel for the appellant.

In view of the above, the appeal was dismissed. [Anil Kumar Malhotra v. Mahindra & Mahindra Financial Services Ltd., Company Appeal (AT) (insolvency) No. 415 of 2022, decided on 19-4-2022]


Advocates before the Tribunal:

For Appellant:  Mr. Yajur Bhalla, Mr. Siddharth Srivastava, Sumeir Ahuja, Advocates

Advocate Gunjan Chauvey, for R-1

For Respondent: Mr. Rajesh Kumar Mittal, Advocate for IRP, R-2.

Hot Off The PressNews

The Central Bureau of Investigation has arrested an Interim Resolution Professional (IRP), National Law Tribunal (NCLT), Mumbai and two private persons including the Proprietor of Mumbai based firm in a  bribery case of Rs Two Lakh.

            A case was registered on complaint against an Interim Resolution Professional (IRP), National Company Law Tribunal (NCLT), Mumbai and unknown others on the allegations of demanding undue advantage of Rs.20 lakh for settling the NCLT matter of Complainant’s company. It was further alleged that the accused demanded initial part payment of Rs.2 lakh, out of the total demand of Rs.20 lakh from the Complainant and told him that a private person would come to collect the said amount at Pune.

            CBI laid a trap and caught the said private person while accepting the initial part payment of Rs.2 Lakh from the Complainant. Later, the Interim Resolution Professional (IRP) and the Proprietor/Jeweller of Mumbai whose alleged role came in the case were also caught.

            Searches were conducted at the premises of the accused at Pune, Navi Mumbai which led to recovery of incriminating documents etc.

            All the three arrested accused are being produced today in the Court of Special Judge, CBI Cases, Pune.


Central Bureau of Investigation

[Press Release dt. 5-5-2022]

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Appellate Tribunal, Delhi (NCLAT): The Coram of Justice Ashok Bhushan (Chairperson) and Shreesha Merla (Technical Member) held that decision taken by the class of Homebuyers will be binding on all the homebuyers.

An appeal was filed against the Order passed by the Adjudicating Authority (NCLT, New Delhi).

The observation of Adjudicating Authority was that the class of Homebuyers were already represented in the matter and the applicant had already filed the application question rejection of the claim which was still pending before the Adjudicating Authority. The intervention applications were rejected.

Appellant’s Counsel submitted that even the authorized representation of the Homebuyer was not being provided for the facts and information and hence, the appellant filed an Intervention Application.

Analysis and Decision

Tribunal held that the appellant as a homebuyer had to go with the class of Homebuyers and the decision taken by the class of Homebuyers was binding.

The authorised representative in the event of any difficulty, it is always open for him to approach the Resolution Professional and Adjudicating Authority, if so required.

Concluding the matter, Tribunal held that the Adjudicating Authority did not commit any error in rejecting the Intervention Application of the appellant and there was no merit in the appeal. [Sandeep Kumar Jain v. Anil Tayal Resolution Professions of AVJ Developers (India) (P) Ltd., 2022 SCC OnLine NCLAT 187, decided on 27-4-2022]


Advocates before the Tribunal:

For Appellant: Mr. Harshit Aggarwal, Advocates.

For Respondent: Mr. Abhishek Anand and Mr. Karan Kohli, Advocates for RP.

Case BriefsHigh Courts

Bombay High Court: A very interesting question was considered by G.S. Kulkarni, J., the question being, whether mere filing of a proceeding under Section 7 of the Insolvency and Bankruptcy Code, 2016 would amount to an embargo on the Court considering an application under Section 11 of the Arbitration and Conciliation Act, 1996, to appoint an arbitral tribunal?

Factual Background


 In the present matter, the respondent provided financial assistance to the applicant of an amount of Rs 4,50,00,000 for which a loan agreement was entered between the applicant and the respondent, referred to as Agreement 1.

Due to a change in the business scenario, another Agreement was executed referred to as Agreement 2, under which the date of repayment of the borrowing was extended.

There were defaults on the part of the applicant in the payment of the loan instalments.

Applicant’s case was that in the discharge of its liability towards the respondent under the above-stated agreements, the applicant issued a cheque to the respondent, of an amount of Rs 31,08,33,457 being the repayment of the respondent’s dues, which was in accordance with the terms and conditions of the loan agreement.

Respondent had approached the NCLT by initiating proceedings against the applicant under Section 7 of the Insolvency and Bankruptcy Code, 2016.

Though, so far, no order had been passed by the NCLT admitting the petition as per the provisions of Section 7(5) of the IBC.

Analysis and Decision


High Court observed that there was no dispute in regard to the arbitration agreements between the parties and there was a dispute in regard to the invocation of the arbitration agreement.

Thus, the primary considerations for this Court to exercise jurisdiction under Section 11(6) were certainly present.

The Bench stated that, even if an application under Section 8 of the ACA is filed, the adjudicating authority has a duty to advert to the contentions put forth under an application filed under Section 7 of the IBC by examining the material placed before it by the financial creditor and record a satisfaction as to whether there is default or not.

“…if the irresistible conclusion of the adjudicating authority (NCLT) is that there is default and the debt is payable, the bogey of arbitration to delay the process would not arise despite the position that the agreement between the parties contains an arbitration clause.”

The Bench observed that,

“…mere filing of the proceedings under Section 7 of the IBC cannot be treated as an embargo on the Court exercising jurisdiction under Section 11 of the ACA, for the reason that only after an order under sub-section (5) of Section 7 of the IBC is passed by the NCLT, the Section 7 proceedings would gain a character of the proceedings in rem, which would trigger the embargo precluding the Court to exercise jurisdiction under the ACA, and more particularly in view of the provisions of Section 238 of IBC which would override all other laws.”

Hence, as noted in the present case, the Corporate Insolvency Resolution Process initiated by the respondent is yet to reach a stage of the NCLT passing an order admitting the said proceedings, the Court would not be precluded from exercising its jurisdiction under Section 11 of the ACA, when admittedly, there was an arbitration agreement between the parties and invocation of the arbitration agreement had been made, which was met with a refusal on the part of the respondent to appoint an arbitral tribunal.

While concluding the matter, Bench held that, the Court would be required to allow the present application by appointing an arbitral tribunal for adjudication of the disputes and differences which arose between the parties under the agreements in question.

Though the Court added that a formal order appointing an arbitral tribunal was not required to be made as after the judgment was reserved, the parties just two days back, settled the disputes stating that arbitration was not warranted. [Jasani Realty (P) Ltd. v. Vijay Corpn., 2022 SCC OnLine Bom 879, decided on 25-4-2022]


Advocates before the Court:

Dr. Birendra Saraf, Senior Advocate a/w. Anshul Anjarlekar i/b. Raval- Shah & Co., Advocate for the Applicant.

Mr.Yusuf Iqbal Yusuf i/b. Y. and A Legal, Advocate for the Respondent.

Akaant MittalExperts Corner


A. Introduction


The IB Code differentiates between financial creditors and operational creditors. Financial creditors are those having a relationship with the corporate debtor that is purely a financial contract, such as a loan or a debt security. Whereas, operational creditors are those who have due from the debtor on account of transactions made for the operational working of the debtor.[1]

 

For the purposes of the definition of the term “goods”, the Sale of Goods Act, 1930 can be referred to; whereas, the definition of the term “services” is still not concretely defined. A claim on operational debt may be on account of breach of an agreement or a decree of a court of law; still the same must relate to the supply of goods and services.

 

Now issue arises as to the status of lease dues forming an “operational debt”. The question has two aspects, namely, one whether the landlord could claim to be an operational creditor against the tenant for the rental dues outstanding; and two whether a tenant while using the tenanted premise, if suffers any damages, could claim to be an operational creditor.

 


B. Landlord claiming to be an Operational Creditor


The Bankruptcy Law Reforms Committee Report that formed the basis of the IB Code illustratively suggested that the definitions of “operational creditor” and “operational debt” include wholesale vendors of spare parts whose spark plugs are kept in inventory by the car mechanic and who gets paid only after the spark plugs are sold, thus making them operational creditors. Similarly, the lessor who rents out space to an entity is an operational creditor to whom the entity owes monthly rent on a three-year lease.[2] Operational creditors, in other words, maybe employees, rental obligations, utilities payments and trade credit.[3]

 

While the landlord certainly could claim to be an operational debtor in light of what the Bankruptcy Law Reforms Committee seems to suggest, however, in Annapurna Infrastructure (P) Ltd. v. SORIL Infra Resources Ltd.[4], such an issue was left open by the NCLAT to be decided by the NCLT. In this case, the landlord had initiated proceedings under Section 9 against the tenant on the basis of an arbitral award which awarded rent due towards the landlord on the part of the tenant. The NCLAT, however, left this contention unaddressed and remitted the matter on other grounds.

 

In Sarla Tantia v. Nadia Health Care (P) Ltd.,[5] the question before the NCLT was whether the recovery of arrears of rent can be claimed as operational debt within the meaning of Section 5(21) of the IB Code. The counsel for the corporate debtor i.e. Nadia Health Care relied on the input output test arguing that the operational debt are only those debts that have “a correlation of direct input to output produced or supplied by the corporate debtor”. However, the NCLT herein relied on the observations from the decision of the Supreme Court in Mobilox Innovations (P) Ltd. v. Kirusa Software (P) Ltd.,[6] to conclude that the Supreme Court in the affirmative settled the issue of lease dues being an operational debt.

 

It is submitted that the same is erroneous because (i) the Supreme Court in Mobilox Innovations[7] did not discuss the issue of lease deeds in its own observations. The court had merely reproduced paragraphs from the report of the Bankruptcy Law Reforms Committee, a part of which had also touched upon rental and lease dues as a type of operational debt; and (ii) to begin with, the issue was not the subject-matter of dispute before the Supreme Court at all.

Therefore, the opinion of the NCLT in Sarla Tantia[8] may not be on strong footing.

 

Split in jurisprudence

A split in the jurisprudence before the NCLAT is found in the two rulings rendered by the NCLAT in M. Ravindranath Reddy v. G. Kishan,[9] on one side and Anup Sushil Dubey v. National Agriculture Coop. Mktg. Federation of India Ltd.[10] on the other.

 

In Ravidranath, the specific query was addressed by the NCLAT on whether a landlord by providing lease could be treated as operational creditor. The same was held by the Full Bench of NCLAT to not fall within the ambit of the definition of the term “operational debt”.[11] The NCLAT in Ravidranath[12] opined that the recommendation of the Bankruptcy Law Reforms Committee pertaining to the treatment of lessors/landlords as operational creditors, was not adopted by the legislature and only the claim in respect of goods and services were kept in the definition of operational creditor and operational debt under Sections 5(20) and 5(21) of the IB Code. Resultantly, it was concluded that the definition of an operational debt and operational creditor could not be interpreted to include rent dues as operational debt. Therefore, non-payment of rent does not amount to an operational debt.

 

There is a qualification added to the ruling in M. Ravindranath[13], when the NCLAT in Sanjeev Kumar v. Aithent Technologies (P) Ltd.[14] distinguished the former. In Sanjeev Kumar, the relationship between the creditor landlord and the debtor tenant was found to be not merely of the one to that of a landlord tenant but was held to also include certain provision of services such as electricity, diesel, sewer and water charges amongst others given to the debtor tenant. In such cases once the dues were found to be more than the pecuniary threshold, the debt was held to fall under the definition of an operational debt and an application under Section 9 of the Code was admitted.[15]

 

On the other hand in Anup Sushil Dubey[16] the NCLAT held that lease and licence agreements fall within the ambit of Section 5(21) of the IB Code. The NCLAT here noted that the appellants had leased out the premises for “commercial purpose” and the same fell within the meaning of term “service” under Section 5(21) of the IB Code. Then the NCLAT found the definition of “service” under the Consumer Protection Act, 2019 to be of relevance, which defines a service in the following manner :

(42) “service” means service of any description which is made available to potential users and includes, but not limited to, the provision of facilities in connection with banking, financing, insurance, transport, processing, supply of electrical or other energy, telecom, boarding or lodging or both, housing construction, entertainment, amusement or the purveying of news or other information, but does not include the rendering of any service free of charge or under a contract of personal service.

 

The NCLAT similarly referred to the provisions of the Central Goods and Services Tax Act, 2017, which under the Schedule II lists down the activities that are to be treated as supply of goods or services, and in Para 2 of the Schedule stipulates as follows:

(a) any lease, tenancy, easement, licence to occupy land is a supply of services;

(b) any lease or letting out of the building including a commercial, industrial or residential complex for business or commerce, either wholly or partly, is a supply of services.

 

On the basis of the above, taking into account that the premises were leased out for a commercial purpose, it was held that the dues claimed by the creditor squarely fell within the ambit of the definition of “operational debt” as defined under Section 5(21) of the Code.

 

It is essential to note that while M. Ravindranath[17] was a decision by a Full Bench of the NCLAT, the ruling in  Anup Sushil Dubey[18] was by a Division Bench. Furthermore, the NCLAT in Anup Sushil Dubey[19] while noted that the corporate debtor appellant before it, cited the ruling in M. Ravindranath[20]; the NCLAT however did not render any findings on the reference to M. Ravindranath[21].

 


C. Tenant claiming to be an Operational Creditor


On the other hand, as regards the claim of a tenant in its tenant landlord relationship is concerned, the position seems to be settled in Jindal Steel & Power Ltd. v. DCM International Ltd.[22] wherein it was held that tenants do not come within the meaning of “operational creditor” as defined under Sections 5(20) and (21), IB Code. In this case, the tenant sought to recover the security deposit on account of the termination of the lease agreement with the landlord. The NCLAT upheld the order of the NCLT rejecting the application filed under Section 9 by the tenant holding that the tenant does not come within the meaning of the term “operational creditor”.

 

It must also be noted here that while in Sarla Tantia,[23] the NCLT had referred to the Schedule II of the CGST Act, 2017[24] which in context of land and buildings, classifies “any lease, tenancy, easement, licence to occupy land” as a supply of services. Here in Jindal Steel[25], the NCLT held that the definition of “service” in the fiscal statutes has no bearing because the purpose of fiscal statutes is to generate revenue for the Government in the form of taxes, whereas the purpose of the IB Code is to consolidate and amend the laws relating to reorganisation and insolvency resolution.

 

Similar position was maintained in  D & I Taxcon Services (P) Ltd. v. Vinod Kumar Kothari,[26] where a tenant filed a claim on account of suffering damage in the tenanted premises due to a fire incident. The NCLAT clarified that the claim of the tenant does not constitute any operational debt since by using the demised premises as a tenant, the appellant could not be said to have been providing any “services”.

 

However, sub-tenants cannot be treated as a corporate debtor even if part of the payment is made directly by such sub-tenants to the operational creditor since the same will not create any relationship of operational creditor and debtor.[27]


Conclusion


On account of the differing viewpoints expressed by the NCLT and NCLAT, the issue on whether a landlord could claim to be an operational creditor remains unresolved.

 

Since different types of creditors are granted distinct rights under the IB Code framework, it is necessary to determine to which category, a creditor belongs to. In this context, it is possible that, in the future, a leasing agreement may not fall within either of the two categories of creditors who can file for initiating a corporate insolvency resolution process (CIRP), namely, financial and operational creditors, and that they will have to make a claim as other creditors. Categorisation as such would also lead to a significant loss of rights as such creditors would have no participatory role (whatsoever) in the CoC working.

The issue is now pending before the Supreme Court in Promila Taneja.[28]

 

Given the ambiguity surrounding the problem, the Supreme Court must evaluate the larger issue of claims resulting from the use of immovable property and other associated costs, and eventually resolve the question of whether rent arrears constitute as operational debt.

 

To sum up, unless the existing gaps in the Code regarding lease transactions, their treatment as secured creditors, the right to relinquish, and other factors discussed above are addressed, the true devil will lie in the strategically drafting of lease agreements, which will essentially make or break the rights available to the lessor.


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

“The author gratefully acknowledge the research and assistance of Sh. Priyanshu Fauzdar, pursuing law at NLU, Assam in writing this article.”

[1] The Report of the Bankruptcy Law Reforms Committee, Volume 1: Rationale and Design (Nov. 2015), Ch. 5.2.1, available online at HERE .

[2] The Report of the Bankruptcy Law Reforms Committee, Volume 1: Rationale and Design, (Nov. 2015), Ch.

5.2.1.

[3] The Report of the Bankruptcy Law Reforms Committee, Volume 1: Rationale and Design, (Nov. 2015), Ch.3.2.2.

[4] 2017 SCC OnLine NCLAT 380.

[5] 2018 SCC OnLine NCLT 16726.

[6] (2018) 1 SCC 353.

[7] (2018) 1 SCC 353.

[8] 2018 SCC OnLine NCLT 16726.

[9] 2020 SCC OnLine NCLAT 84.

[10] 2020 SCC OnLine NCLAT 674.

[11] The ruling in M. Ravindranath case, 2020 SCC OnLine NCLAT 84 has been followed subsequently in Aurora Accessories (P) Ltd. v. Ace Acoustics & Audio Video Solutions (P) Ltd., 2020 SCC OnLine NCLAT 527; Promila Taneja v. Surendri Design (P) Ltd., 2020 SCC OnLine NCLAT 1105.

[12] 2020 SCC OnLine NCLAT 84.

[13] 2020 SCC OnLine NCLAT 84.

[14] 2020 SCC OnLine NCLAT 734.

[15] 2020 SCC OnLine NCLAT 734.

[16] 2020 SCC OnLine NCLAT 674.

[17] 2020 SCC OnLine NCLAT 84.

[18] 2020 SCC OnLine NCLAT 674.

[19] 2020 SCC OnLine NCLAT 674.

[20] 2020 SCC OnLine NCLAT 84.

[21] 2020 SCC OnLine NCLAT 84.

[22] Jindal Steel & Power Ltd. v. DCM International Ltd., 2017 SCC OnLine NCLAT 441 upholding the order of the NCLT in Jindal Steel and Power Ltd. v. DCM International Ltd., 2017 SCC Online NCLT 989.

[23] 2018 SCC OnLine NCLT 16726.

[24] Central Goods and Services Tax, 2017, Schedule II read with S. 2(a).

[25] 2017 SCC Online NCLT 989.

[26] 2020 SCC OnLine NCLAT 878.

[27] Rahul Gupta v. Mahesh Madhavan, 2018 SCC OnLine NCLAT 263.

[28] Promila Taneja v. Surendri Design (P) Ltd., Civil Appeal No. 4237 of 2020, order dated 28-1-2021. (SC)

Legal RoundUpTribunals/Regulatory Bodies/Commissions Monthly Roundup

18 Reports to Read


Competition Commission of India (CCI)


Star India providing bouquet of channels at lesser prices resulting significant loss in consumer base of Asianet Digital Network: Star India abusing dominance of its position? 

The Coram of Ashok Kumar Gupta (Chairperson) and Sangeeta Verma and Bhagwant Singh Bishnoi (Members) noted allegations against Star India for providing a bouquet of channels at lesser prices resulting in denying of market access and also amounting to unfair pricing.

Read full report here…

7 entities indulged in anti-competitive agreement for supply of signages for branches/offices/ATMs of SBI: E-mails exchanged between parties formed basis for manipulation of bidding process

Noting that in respect of cases concerning cartels that are hidden or secret, there is little or no documentary evidence and may be quite fragmentary, Coram of Ashok Kumar Gupta (Chairperson) and Sangeeta Verma and Bhagwant Singh Bishnoi (Members)  imposed penalties on 7 entities and signages for bid-rigging activities and cartelization with respect to the supply of signage for branches, offices and ATMs of State Bank of India.

Read full report here…

Forcing buyers to purchase insurance policies?  Even if dealers offer to sell insurance policies to customers, customers may yet have option to buy such policies from alternative channels

The Coram of Ashok Kumar Gupta (Chairperson) and Sangeeta Verma and Bhagwant Singh Bishnoi (Members) addressed a matter wherein it was alleged that certain Car Companies were abusing their dominant position and denying the cashless claim to consumers if the insurance policy had not been obtained through them, their dealers or their insurance broking companies.

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Customs, Excise and Service Tax Appellate Tribunal (CESTAT)


Amount deposited during the investigation, ipso facto, becomes pre-deposit when the assessee carries the dispute before the Appellate Forum

Anil Choudhary (Judicial Member) dismissed applications filed by the Revenue pertaining to rectification of mistakes.

Read full report here…


Income Tax Appellate Tribunal (ITAT)


Notice issued against a dead person is null and void and all consequent proceedings/orders being equally tainted are liable to be set aside

The Coram of Amit Shukla (Judicial Member) and Pradip Kumar Kedia (Accountant Member) allowed an appeal against a revisional order passed under Section 263 of the Income Tax Act, 1961.

Read full report here…

Does Income Tax Act prohibit HRA Exemption On Rent Paid To Wife?

An appeal was filed by the assessee against the order of CIT(A)-21, New Delhi dated 21-01-2019 before the bench comprising of Sh. A. D. Jain (Vice-President) and Dr. B. R. R. Kumar (Accountant Member).

Read full report here…


National Consumer Disputes Redressal Commission (NCDRC)


When a Statute provides for a particular period of limitation, it has to be scrupulously applied, as an unlimited limitation leads to a sense of uncertainty

The Coram of Justice R.K. Agrawal (President) and Dr S.M. Kantikar (Member) expressed that, when a Statute provides for a particular period of limitation, it has to be scrupulously applied, as an unlimited limitation leads to a sense of uncertainty.

Read full report here…

Will Tax deducted at source be attracted on compensation awarded under Consumer Protection Act “in the form of simple interest”?

The Coram of Dinesh Singh (Presiding Member) and Justice Karuna Nand Bajpayee (Member) expressed that in the ‘service’ of ‘housing construction’, if, in a particular case, “compensation” is computed “by way of interest” on the deposited amount it shall not be differently treated than the other cases in which the term “interest” may not at all be used in computing the compensation.

Read full report here…

If a person conceals facts about pre-existing fatal disease at the time of taking insurance, would it be a breach of insurance contract?

The Coram of Dinesh Singh (Presiding Member) and Karuna Nand Bajpayee (Member) upheld the decision of the District Commission with respect to concealment of pre-existing fatal diseases at the time of taking insurance.

Read full report here…

Consensus between dentists and patients essential to standardize treatment plans and methods: No X-ray conducted prior to performing root canal treatment: Read how NCDRC found dentist negligent

Expressing that, the consensus between the dentists and patients is essential to standardize treatment plans and methods, Coram of Justice R.K. Agrawal (President) and Dr S.M. Kantikar (Member) addressed a case of dental negligence and remarked that,

“The teeth are only part of the face and it cannot be simply concluded that the whole face will become more beautiful once the teeth become neat.”

Read full report here…


National Company Law Tribunal (NCLT)


Whether Shareholders have the right to remove Directors of a company? NCLT explains in light of Companies Act, 2013

Expressing that the management of business affairs in a company is not a sole duty of a Director, the results of a company’s performance is a team of work of Board of Directors, the Coram of Ashok Kumar Borah, Judicial Member and Shyam Babu Gautam, Technical Member, held that, Companies Act gives shareholders the right to remove the Directors of the company.

Read full report here…

National Company Law Tribunal orders insolvency proceedings against Supertech: Indebted and defaulted repayment of loan

The Coram of P.N. Prasad, Judicial Member and Rahul Bhatnagar, Technical Member, declared insolvency proceedings against the builder Supertech Limited.

Read full report here…

Logix Insolvent? NCLT initiates insolvency proceedings against Logix City Developers

The Coram of Bachu Venkat Balaram Das (Judicial Member) and Narender Kumar Bhola (Technical Member) initiates insolvency proceedings against Logix City Developers due to default in payment.

Read full report here…


National Company Law Appellate Tribunal (NCLAT)


Reduction of Capital’ is a ‘Domestic Affair’ of a particular company in which, ordinary, a Tribunal will not interfere because of the reason that it is a ‘majority decision’ which prevails

“A ‘special resolution’ is required to determine those matters for which the Act requires a ‘special resolution’ and except these matters in all other situations an ‘Ordinary Resolution’ is to be passed.”

Read full report here…


National Green Tribunal (NGT)


Unregulated tourism activities resulting in damage to environment in eco-sensitive Himalayan States of India: NGT takes suo motu cognizance

The Coram of Justice Adarsh Kumar Goel (Chairperson) and Justice Sudhir Agarwal (Judicial Member), Prof. A. Senthil Vel (Expert Member) and Dr Vijay Kulkarni (Expert Member) took suo moto cognizance based on media report highlighting the damage to the environment in eco-sensitive Himalayan States of India due to unregulated tourism.

Read full report here…


Securities Exchange Board of India (SEBI)


Can SEBI proceed against a Chartered Accountant for lack of due diligence? SAT analyses

The Coram of Justice Tarun Agarwala (Presiding Officer) and Justice M.T. Joshi (Judicial Member) while addressing a matter whether a Chartered Accountant could be held guilty by SEBI for lack of due diligence, held that,

Lack of due diligence can only lead to professional negligence which would amount to a misconduct which could be taken up only by ICAI.


Uttar Pradesh Real Estate Appellate Tribunal


Developer issued two allotment letters, increasing cost of a unit in second by correcting taxes, lease rent and advance maintenance charges: Read whether UPRERA finds it to be illegal

The Division Bench of Justice Dr D.K. Arora (Chairman) and Rajiv Misra (Administrative Member) set aside the decision of the Regulatory Authority and held that the developer did not conceal the details of the project including the status of the same.

Read full report here…


West Bengal Taxation Tribunal


Can States levy ‘Entry Tax’?

The Coram of Justice Malay Marut Banerjee (Chairman) and Suranjan Kundu (Judicial Member) and Chanchalmal Bachhawat (Technical Member), expressed that, Article 304(a) frowns upon discrimination (of a hostile nature in the protectionist sense) and not on mere differentiation.

Read full report here…

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Tribunal: The Coram of Bachu Venkat Balaram Das (Judicial Member) and Narender Kumar Bhola (Technical Member) initiates insolvency proceedings against Logix City Developers due to default in payment.

The Operational Creditors, Colliers International (India) Property Services Private Limited sought an order to initiate the Corporate Insolvency Resolution Process of the Corporate Debtor viz., Logix City Developers Private Limited, declare  moratorium and appoint Interim Resolution Professional.

Background

The Operational Creditor’s case was that the parties entered into an agreement for providing construction for Bloom Zest Project at Noida and appointed the operational creditor as its project manager. On providing various services, the Operational Creditor raised various invoices and against some of the invoices raised, the Corporate Debtor being unable to pay its obligations allotted a residential unit to the Operational Creditor.

Vide an email, the Corporate Debtor was requested to pay the Operational Debt. However, he failed to do so. Hence, a demand notice was issued to him.

Corporate Debtor acknowledged and admitted its liability to pay the Operational Debt. Therefore, the present petition was filed.

Corporate Debtor on realizing the prevalent real estate conditions caused due to COVID-19 pandemic, failed in paying the amounts as claimed by the Operational Creditor under Demand Notice. Further, it stated that the delay in payment of installment amounts was due to the fact that the construction of the said project was stopped due to various EPCAJ NGT Orders and thereafter unprecedented conditions created due to COVID-19 Pandemic.

Additionally, the Corporate Debtor stated that it is an indisputable fact that the Real Estate Business is going through slump whereby all the builders and promoters of the real estate projects are experiencing heavy economic losses.

Analysis and Decision

Tribunal found that the Corporate Debtor failed to discharge its liability as the admitted amount remained unpaid as on date.

“…this authority has to only satisfy itself regarding default in payment by the corporate debtor towards the operational creditor and there is no pre-existing dispute”

In the present matter, the above two conditions are fulfilled, hence it deserves to be admitted. Therefore, the Tribunal initiated the CIR Process of Corporate Debtor.

Tribunal appointed Insolvency Resolution Professional Yogesh Kumar Gupta as Interim Resolution Professional as proposed by the Operational Creditor.

Further, Moratorium was declared which shall have effect from this Order till the completion of CIRP for the purposes referred to in Section 14 of the IBC, 2016. [Colliers International (India) Property Services (P) Ltd. v. Logix City Developers (P) Ltd., 2022 SCC OnLine NCLT 37, decided on 22-3-2022]


Advocates before the Tribunal:

Operational Creditor: Adv. S. Sriranga, Adv. Balaji Srinivasan, Adv. Garima Jain and Adv. Gayatri Mohite

Corporate Debtor: Adv. Vijay Kaundal

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Tribunal, New Delhi: The Coram of P.N. Prasad, Judicial Member and Rahul Bhatnagar, Technical Member, declared insolvency proceedings against the builder Supertech Limited.

An application was filed to initiate the Corporate Insolvency Resolution Process against Supertech Limited under Section 7 of the Insolvency and Bankruptcy Code 2016 for the alleged default by the respondent in settling an amount of Rs 431,92,53,302.

Counsel for the Corporate Debtor had admitted the debt and default.

“In order to initiate CIRP under Section 7 the applicant is required to establish that there is a financial debt and that a default has been committed in respect of that financial debt.”

Tribunal on perusal of the documents found that the Corporate Debtor had indebted and defaulted the repayment of loan amount.

Therefore, Coram admitted the present petition and initiated CIRP on the Corporate Debtor with immediate effect.

Mr Hitesh Goel was appointed as Interim Resolution Professional.

Material on record clearly depicted that the respondent had availed the credit facilities and committed default in repayment of the outstanding loan amount.

Tribunal on being satisfied that the present application was held that the applicant financial creditor was entitled to claim its outstanding financial debt from the corporate debtor and that there had been default in payment of the financial debt.

Further, the Coram directed that in terms of Section 13(2) of the Code, public announcement shall be made by the Interim Resolution Professional immediately with regard to the admission of this application under Section 7 of the Insolvency and Bankruptcy Code, 2016.

Moratorium in terms of Section 14 of IBC was declared. Thus following prohibitions are imposed:

(a) 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;

(b) transferring, encumbering, alienating or disposing of by the corporate debtor any of its assets or any legal right or beneficial interest therein;

(c) 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 Securitization and reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002;

(d) the recovery of any property by an owner or lessor where such property is occupied by or in the possession of the corporate debtor.

It was made clear that the provisions of the moratorium shall not apply to transactions which might be notified by the Centre or supply of essential goods or services to the Corporate Debtor are not to be terminated or suspended or interrupted during the moratorium period. As per IBC, the provisions of the moratorium shall not apply to the surety in a contract of guarantee.

Registrar of Companies shall update its website by updating the status of ‘Corporate Debtor’. [Union Bank of India v. Supertech Ltd., 2022 SCC OnLine NCLT 40, decided on 25-3-2022]


Advocates before the Tribunal:

Counsel for the Petitioner: Alok Kumar, Advocate

Counsel for the Respondent: Kanishk Khetan, Advocate

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Appellate Tribunal, New Delhi (NCLAT): The Coram of Justice Venugopal. M, Judicial Member and Kanthi Narahari, Technical Member, held that ‘Reduction of Capital’ is a ‘Domestic Affair’ of a particular company in which, ordinary, a Tribunal will not interfere because of the reason that it is a ‘majority decision’ which prevails.

The present Company Appeal was focused on being dissatisfied with the order of the National Company Law Tribunal in rejecting the petition filed under Section 66(1)(b) of the Companies Act, 2013 and granting liberty to file a fresh application.

The reason for the filing the company petition by the appellant was seeking an order confirming the reduction of share capital.

The appellant/company had sought relief to confirm the reduction of issued, subscribed and paid-up equity share capital of the petitioner company (appellant) as resolved by the Members in the Annual General Meeting by passing the special resolution.

Further, the pre-mordial plea of the appellant was that the NCLT had failed to appreciate the creeping in of an ‘inadvertent typographical error’ figuring in the extract of the Minutes of the Meeting characterizing the special resolution as a unanimous ordinary resolution. Moreover, the appellant had fulfilled all the statutory requirements of its own ‘Articles of Association’ which had resulted in the dismissal of the petition seeking approval of ‘Reduction of Share Capital’.

On behalf of the Respondents, it was represented that the members of the Appellant/Company at the ‘Annual General Meeting’ that took place among other things resolved that pursuant to Section 66 of the Companies Act, 2013 and subject to other requisite approvals, the paid-up share capital of the Company would reduce from its present level of Rs 67,47,90,000/- to Rs 4,90,00,000/-.

Analysis and Decision

The Resolution passed in the ‘Annual general Meeting’ of the appellant’s company under Section 66 of the Companies Act was found to be in order by the respondents. Registrar of Companies, Delhi found that the appellant had filed the said resolution keeping in tune with the ingredients of Section 66 of the Companies Act, 2013.

‘Reduction of Capital’ is a ‘Domestic Affair’ of a particular company in which, ordinary, a Tribunal will not interfere because of the reason that it is a ‘majority decision’ which prevails.

A ‘special resolution’ is required to determine those matters for which the Act requires a ‘special resolution’ and except these matters in all other situations an ‘Ordinary Resolution’ is to be passed.

Conclusion

Tribunal after subjectively satisfying itself that the appellant has tacitly admitted its creeping in of typographical error in the extract of the minutes and also taking into consideration of 1st respondent’s stand that the appellant had filed the special resolutions with it, which satisfied the requirement of Section 66 of the Companies Act, 2013 and allows the appeal by setting aside the impugned order passed by the NCLT, thereby confirming the reduction of share capital of the appellant.[Economy Hotels India Service (P) Ltd. v. Registrar of Companies, 2020 SCC OnLine NCLAT 653, decided on 24-8-2020]


Advocates before the Tribunal:

For Appellant: Mr. Sujoy Dutta, Mr. Satvinder Singh, Mr. NPS Chawla and Mr. Surek Kant Baxy, Advocates

For Respondent: Mr. P S Singh, Advocate for ROC, Ms. Chetna Kandtal, Company Prosecutor for R1 and R2

Case BriefsHigh Courts

Meghalaya High Court: Sanjib Banerjee, CJ, addressed a petition wherein a creditor’s winding-up petition was instituted under Section 433 of the Companies Act, 1956 and the same was not yet advertised.

Section 433 of the Companies Act, 1956

  1. Circumstances in which company may be wound up by Court. A company may be wound up by the Court,-

(a) if the company has, by special resolution, resolved that the company be wound up by the Court;

(b) if default is made in delivering the statutory report to the Registrar or in holding the statutory meeting;

(c) if the company does not commence its business within a year from its incorporation, or suspends its business for a whole year;

(d) if the number of members is reduced, in the case of a public company, below seven, and in the case of a private company, below two;

(e) if the company is unable to pay its debts;

(f) if the Court is of opinion that it is just and equitable that the company should be wound up.

High Court expressed that there was a divergence in the practice followed in different High Courts since the inception of the Companies Act, 1956. Some High Courts required the immediate publication of an advertisement upon the creditor’s winding-up petition being filed; whereas others, including Calcutta and Gauhati, required the Company Court to first be satisfied as to the existence of the indisputable debt before directing the publication of the advertisement.

Invariably, when the Court was satisfied that the debt was indisputably due, an option would be given to the company to pay off the same, failing which, the advertisement would ensue.

With respect to the present matter, the advertisement had not yet been published.

Though the petition was filed before the relevant provisions of the Companies Act, 2013 were notified and the Insolvency and Bankruptcy Code, 2016 came into effect, the law, as it stands now, permitted only matter that has been advertised to be retained by the Court and requires all other matters to be transferred to appropriate Company Law Tribunal since the entire regime as to insolvency had been recognized and parked with such authority.

Hence, the entire matter stood transferred to the National Company Law Tribunal, Guwahati.[Walchandnagar Industries Ltd. v. Green Valley Ind. Ltd., 2022 SCC OnLine Megh 44, decided on 23-2-2022]


Advocates before the Court:

For the Petitioner/Appellant (s)

: Mr. K.K. Mahanta, Sr. Adv. With Mr. K.M. Mahanta, Adv.

Mr. S. Gautam, Adv.

For the Respondent (s)

: Mr. K. Paul, Sr. Adv.

Mr. JM Thangkhiew, Adv.

Case BriefsDistrict Court

Dwarka Courts, New Delhi: Noting the complaint to be a complete abuse of process of law or in a manner sort of forum shopping, Sumit Dass, Additional Sessions Judge—03, dismissed the complaint expressing that,

“..it would be apt to nip this litigation in the bud rather than keeping it pending and burdening the docket of the Court.”

The present order shall dispose of the present complaint filed by the company under Section 439(2) read with Section 436(1)(A) and (D) read with Section 212 of the Companies Act, 2013 read with Section 62(1) of the Companies Act, 1956 read with Section 193 of the Code of Criminal Procedure, 1973.

  • Complainant company had filed a petition under Section 213 of the Companies Act 2013 which was pending before the NCLT and to that aspect the complainant’s counsel submitted that the said petition was pending and infact they had also sought for an SFIO probe/exhaustive probe insofar as the violation and the criminal acts committed by the Company and its management.

Court’s opinion:

Bench held that since the petition had been pending before the NCLT, there was no reason to file the present complaint.

This Court cannot and should not overreach and rather should lay its hands off and let those proceedings continue/attain finality.

Further, the Court also expressed that,

NCLT is a designated tribunal for the said purposes and in eventuality if any probe or any investigation is ordered the same would cover or encompass the allegations made in the complaint.

High Court stated that the complainant ought to have come before this Court with clean hands and informed that such a petition was pending/prosecuted before the NCLT.

Non-Disclosure of the said facts amounts to concealment of facts. 

Instant complaint only mentioned a petition filed under Sections 241 and 242 of the Companies Act, 2013 and does not mention the petition which had been filed under Section 213 of the Companies Act.

In Court’s opinion, any pending litigation is a material fact that should be placed before the Court.

While adjudicating the application under Section 156(3) of the CrPC, in view of the Supreme Court decision in Priyanka Srivastava v. State of U.P., (2015) 6 SCC 287, the complainant is enjoined to file a detailed affidavit mentioning all the relevant facts.

Insofar as the complaints under the Companies Act, 2013 are concerned the complainant should disclose all the material facts by way of a detailed affidavit.

Another significant point was with respect to Section 439(2) of the Companies Act, which is read as under:

“No Court shall take cognizance of any offence under this Act which is alleged to have been committed by any company or any officer thereof except on the complaint in writing of the Registrar, a shareholder of the company, or of a person authorized by the Central Govt. in that behalf.” [emphasise mine].” 

The said section vests a shareholder with a right to prefer a complaint seeking action under the Companies Act, 2013 however the shareholder should be in a sense an “undisputed shareholder” qua which there should not be any sort of dispute pending.

The Court can take cognizance of the grievances of the “shareholder” but cannot decide as to whether the complainant is a “shareholder” or not.

Deciding whether the complainant is a shareholder or not, would be venturing into the uncharted territory/travelling beyond the jurisdiction of this Special Court constituted under the Companies Act.

In view of the above discussion, the present complaint does not lie before this Court as it would be a futile exercise to continue with the same – rather would not be in consonance with judicial propriety on account of the pendency of the matter before the NCLT, also this Court cannot adjudicate the right of the complainant being a shareholder or otherwise aggrieved of which the complainant could vindicate by filing a criminal complaint.[Green Edge Infrastructure (P) Ltd. v. Magic Eye Developers (P) Ltd., CC No. 693 of 2020, decided on 4-3-2022]

Case BriefsHigh Courts

Delhi High Court: Amit Bansal, J., expressed that an LLP or any other business entity can carry out business in different parts of the country, but that would not mean that a suit with regard to disputes between the partners, could be filed in any place where the business of the firm/LLP is carried out.

A petition was filed under Article 227 of the Constitution of India which impugned the order passed by the District Judge whereby the application was filed on behalf of the petitioners/defendants under Order VII Rule 10 and 11(d) of the Code of Civil Procedure, 1908 had been dismissed.

The plaint from which instant petition arose was filed by the respondent/plaintiff, being one of the partners of the petitioner 3/defendant 3 which was a Limited Liability Partnership (LLP) and against the respondents 1 and 2/defendants 1 and 2 who were the remaining partners of the said LLP.

Petitioners/Defendants counsel submitted that the registered office of the LLP was in Hyderabad, hence the Courts in Delhi did not have any jurisdiction.

Respondent/Plaintiff submitted that the business of the LLP was duly being carried out in Delhi through the respondent/plaintiff and therefore, the cause of action would arise in Delhi. Hence, the Courts in Delhi would be competent to try and entertain the present suit.

Grievance in the Matter

Respondent/plaintiff was aggrieved that he had been denied access to the business accounts of the respondent 3/defendant 3.

Analysis and Discussion

In the plaint it was nowhere submitted that the business accounts, in respect of which access has been sought were kept in Delhi, in fact, the plaint is conspicuously silent on the aspect of the cause of action for filing of the suit.

The entire basis of the respondent/plaintiff for filing the suit in Delhi was on account of the fact that the LLP carried out business in Delhi and that the products of the LLP were regularly sold in Delhi by means of online sales as well as through physical stores such as Nature’s Soul, which is in Delhi.

High Court opined that the fact that business of the LLP was being carried out in Delhi would not vest the Courts of Delhi with jurisdiction to try and entertain the present suit.

Additionally, the Bench stated that Section 13 of the LLP Act provides that every LLP shall have a registered office, where all communications and notices may be addressed and shall be received. In terms of Section 34(1) of the LLP Act, the books of account in respect of an LLP shall be maintained at the registered office.

Further, in view of the facts and circumstances of the case, Court decided that the jurisdiction to entertain the present suit shall vest with the Courts in Hyderabad.

Since there was no principal or subordinate office of the LLP in Delhi and neither the books of accounts were kept in Delhi, therefore, there was no cause of action in respect of the present suit which was arising within the territorial limits of the Courts in Delhi.

Parties by agreement cannot give jurisdiction to a Court which otherwise does not have such jurisdiction. 

Maintainability in Civil Court

Bench elaborated that, merely because the definition of the “body corporate” under Section 2(1)(d) of the LLP Act includes an LLP, it is not automatically implied that the NCLT would be the competent forum for deciding all disputes inter se the partners of an LLP. Unlike Section 430 of the Companies Act, 2013, there is no bar on the jurisdiction of the Civil Courts under the provisions of the LLP Act. Therefore, in terms of Section 9 of the CPC, the suit shall be maintainable in a Civil Court.

Decision

Courts in Delhi lack the territorial jurisdiction to try and entertain the present suit.

In view of the above discussion, the present suit stood allowed. [Aanchal Mittal v. Ankur Shukla, 2022 SCC OnLine Del 633, decided on 25-2-2022]


Advocates before the Court:

For the Petitioners: K.C. Mittal with Yugansh Mittal and Sanjay Kumar, Advocates

For the Respondent: Vishal Singh, Advocates

Legal RoundUpTribunals/Regulatory Bodies/Commissions Monthly Roundup

Appellate Tribunal for Electricity (APTEL)


State commission disallows benefit of increase in the tariff based on the change in law provision; Tribunal directs reconsideration

A Coram of R.K. Gauba (Officiating Chairperson) and Sandesh Kumar Sharma (Technical Member) decided on an appeal which was filed by Solar Power Project Developer (“SPD”) assailing order passed by respondent Bihar Electricity Regulatory Commission (“the State Commission”) disallowing the benefit of increase in the tariff based on the change in law provision with respect to increased Operation and Maintenance (O&M) costs of its 10MW solar power generating system.

Read full report, here…


 Customs, Excise and Service Tax Appellate Tribunal (CESTAT)


Whether Membership Subscription Charges, which is an essential service for business promotion, will be eligible for CENVAT Credit? CESTAT explains

While taking into consideration various of kinds of charges and whether they would qualify to be eligible for CENVAT Credit, P. Dinesha (Judicial Member) held that Membership Subscription charges are essential for business promotion and hence eligible for refund claim.

Read full report, here…

Unless 7.5% of the penalty is deposited when the penalty is in dispute, the appeal cannot be entertained by the Tribunal

The Coram of Sulekha Beevi, C.S. (Judicial Member) and P. Anjani Kumar (Technical Member) decided on an appeal which was filed in the matter of non-compliance with the pre-deposit.

Read full report, here…

Whether the services provided by CRS companies to the appellant can be subjected to levy of service tax under the OIDAR services? CESTAT addresses

The Coram of Dilip Gupta (President) and P.V. Subba Rao (Technical Member) took up an appeal which was filed by Air India to assail that part of the order by which the demand of service tax of Rs. 37,58,23,581/- has been confirmed against the total amount of service tax that was proposed in the show cause notice. It was for the reason that there was no liability pay service tax prior to 18-04-2006. The Commissioner had also ordered for recovery of interest under section 75 of the Finance Act, 1994 and penalty under Sections 76, 77 and 78 of the Finance Act.

Read full report, here…


National Consumer Disputes Redressal Commission (NCDRC)


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

While noting whether the flat owners can be prevented from the use of certain common spaces, the Coram of Justice R.K. Agarwal (President) held that under the provisions of the Maharashtra Apartment Ownership Act 1970 and even Maharashtra Ownership Flats (Regulation of the promotion of construction, sale management and transfer) Act, 1963, a Society had to be formed by the builder and the entire building premises including the open space in question was to be transferred to the Society or a legal body for its maintenance and further, as per Section 6 of the MAOA 1970, each flat owner is entitled to an undivided interest in the common areas and the facilities.

Read full report, here…

Can doctors alleged of medical negligence be exempted from legal proceedings as they are busy and conscious about their duties towards patients? NCDRC answers in a transfer application

The Coram of Dr S.M. Kantikar (Presiding Member) and Binoy Kumar (Member) while allowing an application for transfer expressed that,

“…it is true that the doctors are busy and conscious about their duties towards the patient, but they are not exempted from the legal proceedings and duty bound to attend the court proceedings (physical or virtual mode) either through their Counsel or on their own.”

Read full report, here…

Patient developed serious complications after being operated which were promptly treated by doctors, yet she died. Would this amount to ‘medical negligence’? NCDRC analyses

The Coram of Justice R.K. Agarwal (President) and Dr S.M. Kantikar (Member) analyses a matter wherein a patient developed serious issues after being operated, which led to her death, hence the doctors/hospital were alleged for medical negligence.

Read full report, here…

Homebuyer invests his hard-earned money to get legal possession of flat, yet gets subjected to a 6-year delay: Read how NCDRC provided relief to consumer

While addressing a case wherein there was a delay of 6 years in handing over the possession to the buyer, the Coram of Dr S.M. Kantikar (Presiding Member) and Binoy Kumar, Member, held that in view of catena of Supreme Court decisions on the said issue, the buyer was entitled to get legal possession along with compensation.

Read full report, here…

Builder took money from homebuyer for formation of Co-operative Housing Society, but never formed so: Read why the homebuyer approached Commission

The Coram of R.K. Agrawal (President) and Dr S.M. Kantikar (Member) addressed a matter wherein the builder took money from the purchaser for the formation of a co-operative housing society but failed to do so and when asked for the refund, he did not return the money as well.

Read full report, here…


National Company Law Tribunal (NCLT)


Operational Creditor is under obligation to recover money from its client and not agent: NCLT decides while dismissing a petition filed under S. 9 IBC

The Coram of H.V. Subba Rao (Judicial Member) and Chandra Bhan Singh (Technical Member) dismissed a petition filed under Section 9 of the IBC while noting that no operational debt existed under Section 5(8) and expressed that,

Operational Creditor being the Principal was always under obligation to recover the money from the client and not from his agent unless the agent failed to perform his duties.

Read full report, here…

In case of an application being filed under S.7 of IBC, will insufficiency of stamp duty be looked into? NCLT decides

The Coram of H.V. Subba Rao, Judicial Member addressed the relevancy of insufficiency of stamp duty under Section 7 proceedings of Insolvency and Bankruptcy Code, 2016

“…a Section 7 application under the IBC can be filed in a simple form prescribed in the Code even without any pleadings.”

Read full report, here…

Mumbai International Airport Limited temporarily restrained from removing Jet Airways assets from its premises including MIAL’s hangar: Airline’s representatives, workmen, etc. allowed access for maintenance of assets

The Coram of Kapal Kumar Vohra, Technical Member and Justice P.N. Deshmukh, Judicial Member, while addressing a matter wherein Jet Airways requested Mumbai Airport not remove its assets from its premises, expressed that,

“…it is to be noted that one of the principal objectives of the Code is to provide for revival of the CD and every attempt ought to be made to revive the CD and Liquidation being the last resort.”

Read full report, here…


National Company Law Appellate Tribunal (NCLAT)


 If a case was filed under IBC, can penalty be imposed under Companies Act? NCLAT addresses

The Coram of Justice Ashok Bhushan (Chairperson) and Dr Alok Srivastava (Technical Member) held that if the Intervention Application was filed under the IBC, then, any penalty to be imposed should have been under the provisions of IBC and not the Companies Act.

Read full report, here…

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

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

Read full report, here…

Can application filed under S. 95(1) read with S. 60(1) IBC be rejected on ground that no Corporate Insolvency Resolution Process was pending against Corporate Debtor? NCLAT addresses

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

Read full report, here…

EPC Construction Resolution: NCLAT allows distribution of Rs 223 crores from available cash balance among creditors and lenders

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

Read full report, here…


Securities Exchange Board of India (SEBI)


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

The Coram of Santosh Kumar Mohanty (Whole Time Member) lifted restrictions imposed on 10 Entities who were alleged in insider trading, though the Tribunal added that the said relaxation was being granted subject to the outcome of appeal proceedings filed by SEBI against SAT Order before Supreme Court.

Read full report, here…

Case BriefsHigh Courts

Bombay High Court: The Division Bench of Milind N. Jadhav and S.J. Kathawalla, JJ., refused to grant any ad-interim order in favour of ‘MEP’ Infrastructure Developers Ltd. (‘Petitioner’)  in view of the order dated 14-01-2022 passed by G.S. Patel, J. where the Court directed MEP Infrastructure to refrain from taking any action towards disposal of or creation of any third party rights in respect of its immovable properties in Maharashtra.

 

Facts:

SDMC being a statutory body is liable to collect toll taxes from vehicles entering into Delhi. It is one of the major sources of revenue for all the Municipal Corporations of Delhi. In order to collect such taxes SDMC had, by way of a tender process, awarded a contract to MEP Infrastructure Developers Ltd. at the highest bid of Rs. 1206 Crore per year for a period of five year.

MEP faltered in timely payment of the Rs. 1206 Crore divided on a weekly basis. After which SDMC started to recover the toll amounts from MEP.

The Commissioner of SDMC by exercising his powers under the DMC Act sought to recover toll tax by attachment of properties of MEP in Delhi and beyond.

In such exercise, SDMC successfully reached the doors of MEP in Maharashtra and obtained an order from Bombay High Court in October 2021, where the  Court had directed the local authorities to recover the monies against MEP as per the law. In such exercise, the local authorities of the respective district in Maharashtra have already attached a few properties of MEP.

However, to obstruct such exercise of recovery by SDMC through local functionaries, MEP filed another writ petition before Bombay High Court.

The Court by way of interim order dated February 14, 2022 directed MEP to refrain from taking any action towards disposal of or creation of any third party rights in respect of its immovable properties in Maharashtra. Further, High Court directed MEP to maintain balances in its Bank accounts as on date as a security towards the amounts due.

 

The review petition was filed seeking review of the Order dated 27-10-2021 (“Subject Order”) passed by this Court whereby this court had issued writ of mandamus against Respondent No. 2  to 5 herein to take action as per law and discharge their statutory duty.

 

Present Order:

The Court refused to grant ad interim relief to the MEP Infra for already being protected in view of the Order dated 14th January, 2022 passed by Justice G.S. Patel directing the parties to maintain status quo.

The matter is stood over to 04-03-2022.

[MEP Infrastructure Developers Ltd. v. South Delhi Municipal Corpn., Review Petition 9 of 2022, order dated 18-02-2022]


Mr Ravi Kadam, Senior Advocate with Mr Venkatesh Dhond, Senior Advocate a/w Mr Zal Andhyarujina, Senior Advocate a/w Mr Rashmin Khandekar, Ms Tanmayi Gadre, Mr Deepak Deshmukh, Ms Swati Singh and Mr Vivek Dwivedi by Naik & Naik for the Petitioner

Mr Sanjay Vashishtha a/w Ms Shreya Shrivastava and Ms Dishya Pandey for Respondent 1

Ms Neha Bhide, ‘B’ Panel Counsel for the State


*Suchita Shukla, Editorial Assistant has reported this brief.

Case BriefsTribunals/Commissions/Regulatory Bodies

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

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

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

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

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

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

Section 60: Adjudicating Authority for corporate persons.

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

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

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

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

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

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

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

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

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

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


Advocates before the tribunal:

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

For Respondent: Advocate Supriyo Gole

Op EdsOP. ED.

Background

The Indian insolvency regime had very fragmented, time-consuming, and archaic personal insolvency laws. Two major laws on personal insolvency before the enactment of the Insolvency and Bankruptcy Code, 20161 (IBC or Code) were: (i) The Presidency-Towns Insolvency Act, 19092 dealing with insolvency cases in Presidency Towns (Bombay, Madras, Calcutta), and (ii) the Provincial Insolvency Act, 19203 which was applicable elsewhere. Due to persistent and continuing issues with the provisions of this Act, the need for a more structured and updated insolvency framework was felt. Acting upon it, the enactment of IBC in 2016 came into the picture. The provisions dealing with personal insolvency are provided under Part III of the Code. The Code comprehends three categories of individuals under Part III i.e.

(i) personal guarantors to corporate debtors;

(ii) individuals with partnership firms or sole proprietorships; and

(iii) other individuals.

However, the Code notified the insolvency resolution process in respect of companies initially and up until recently, the insolvency resolution process of the personal guarantors came into the existence on the recommendations of the Report of Reconstituted Working Group on Individual Insolvency (RWG).4

Further, the RWG suggested that the phase implementation of Part III is essential as the market dynamics, stakeholders, transactions, and nature of the proceedings may not adjust under a single umbrella procedure. Thus following the suggestion, the piecemeal approach was preferred and the rules and regulations thereof for the insolvency resolution process of personal guarantors were brought into existence.

Understanding personal guarantor to corporate debtor insolvency process

Before moving on to the jurisdictional dilemma on the personal guarantor to corporate debtor, the understanding of the concept of personal guarantor as envisaged under the Code is imperative. Personal guarantor as defined under Section 5(22)5 of the Code states that a personal guarantor is an individual who is the surety in a contract of guarantee to a corporate debtor. To put it simply, any person who promises to pay a borrower’s debt in the event that the borrower defaults in respect of their obligation. Under the mechanism of the Code, the personal guarantors provide guarantees for the loan or any other type of facility availed by the corporate debtor from the principal borrower. Consequently, when a corporate debtor defaults on the payment of such facilities, the liability of the personal guarantor comes into existence.

Parallel proceedings against the personal guarantor — A distinct category

The rationale of parallel proceeding against the personal guarantors has its genesis in the fundamental principle of co-extensive liability of the surety (personal guarantor) against the creditor or principal borrower.6 As far as the applicability of this principle under the Insolvency and Bankruptcy Code, 2016 is concerned, the Supreme Court in Lalit Kumar Jain v. Union of India7 held that the approval of a resolution plan for the resolution of corporate debtor does not ipso facto discharge a personal guarantor (of a corporate debtor) of her/his liabilities under the contract of guarantee.

The scheme of the Code for the designated adjudicating authority to adjudicate matters is clear and unambiguous. For the insolvency processes under Part II of the Code which deals with the insolvency resolution and liquidation process for the corporate persons, the adjudicating authority shall be the National Company Law Tribunal8 (NCLT). Whereas, the insolvency resolution and bankruptcy process for individual and partnerships firms which includes personal guarantors will have Debts Recovery Tribunal (DRT)9 as their designated adjudicating authority.

Therefore, on a bare perusal of the statutory provisions, the distinction is discrete without any ambiguity. However, with the introduction of the Insolvency and Bankruptcy Code (Second Amendment) Act, 201810 the conflict and overlapping of the jurisdiction in the case of personal guarantor arose.

Personal guarantor by nature is classified as individual insolvency and hence is a subject- matter of Part III of the Code. However, in this amendment, a distinct category was created for personal guarantors which does not align with the scheme of the Code and their insolvency resolution plan shall be dealt with under Part II of the Code. The constitutionality of the Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rules, 201911 (the 2019 Rules) were challenged which enabled this provision was challenged in Lalit Kumar Jain v. Union of India12. The Supreme Court upheld the 2019 Rules and thus a distinct category for personal guarantor is now firmly established.

The jurisdictional anomaly on personal guarantor’s process

Therefore, the said Amendment and the Rules inter alia enabled the provisions of Section 6013 of the Code which envisaged four situations under which the exclusive jurisdiction in personal guarantor applications rests with the NCLT—

  1. The adjudicating authority in relation to insolvency and resolution for personal guarantors shall be NCLT having territorial jurisdiction.
  2. Instances where the corporate insolvency resolution process (CIRP) against the corporate debtor is pending.
  3. In an instance where the CIRP is in the process against the corporate debtor, the application against the personal guarantor shall be transferred before such NCLT.
  4. The powers provided to DRT in matters of the personal guarantor shall be vested with NCLT.

Here, we have a situation where an application against the corporate debtor is either initiated, pending, or in the process (admitted) in such a case the application for initiation of insolvency resolution process against the personal guarantor shall be the NCLT.

On a harmonious construction of Sections 9414, 9515 and Section 60 of the Code, it can be construed that special provisions have been provided to vest NCLT with the jurisdiction in personal guarantors to corporate debtors’ cases. The intent of these provisions of the Code is manifested to allow for the creditor to initiate and maintain proceedings against both the corporate debtor and the guarantor simultaneously and before the same forum.

However, different NCLTs have taken a different view on this aspect. For instance, the NCLT, New Delhi in PNB Housing Finance Ltd. v. Mohit Arora16 discussed the scope of the amendment enabling Section 60 of the Code. The NCLT stated that whenever Section 60 is attracted, the provision of Section 179(1)17 IBC, 2016 shall not be applicable and the jurisdiction shall vest with NCLT.

Further, the Tribunal held that in a situation where application(s) in relation to the corporate debtor for initiation of CIRP is pending before NCLT then, initiation of CIRP of the corporate debtor is not a prerequisite for maintainability of an application under Section 95  IBC filed for initiating insolvency resolution process against the personal guarantor of that corporate debtor before the NCLT.

The NCLT in PNB Housing Finance Ltd. v. Goldy Gupta18 held that the commencement of CIRP against the corporate debtor is not a condition precedent for maintaining an application under Section 95 of the Code filed for initiating insolvency resolution process against the personal guarantor of the corporate debtor before the NCLT.

This rationale was not taken by the NCLT, Mumbai in Insta Capital (P) Ltd. v. Ketan Vinod Kumar Shah19 where the issue for consideration is whether a financial creditor can initiate CIRP against the personal guarantor in the absence of any resolution process/liquidation process against the corporate debtor.  The Tribunal held an application for insolvency for a resolution against the personal guarantor is not maintainable unless that CIRP or liquidation application is ongoing against the corporate debtor. It is further observed that filing of applications seeking resolution of personal guarantors without the corporate debtor undergoing CIRP, would tantamount to the vesting of jurisdiction on two courses, one is NCLT and another is the Debts Recovery Tribunal.

The NCLTs have a diverse opinion on the initiation of the insolvency resolution process against the personal guarantor during the initiation or pendency of CIRP application against the corporate debtor. Such a situation has not been resolved as the NCLAT (Appellate Tribunal) has not yet dealt with this anomaly.

Concurrent jurisdiction with Debts Recovery Tribunals

As pointed, the Debts Recovery Tribunals are the designed adjudicating authority in proceedings related to insolvency matters of individuals and firms, which also includes personal guarantors and having territorial jurisdiction over the place where the individual debtor actually and voluntarily resides or carries on business or personally works for gain20. It can be stated that the original jurisdiction for personal guarantors rests with the DRTs.

However, a peculiar situation which Section 60 of the Code does not comprehend is that where an application for initiation of CIRP against the corporate debtor is neither initiated, pending nor admitted in such cases who shall have the jurisdiction. This situation further builds up to the existing dilemma.

Following the strict interpretation of the provisions of the Code, in such situations, the DRTs are best suited to entertain the application. The reason being, they have the original jurisdiction to deal with personal guarantors under the Code. Further, the Amendment of 2018 and Rules thereof are the enabling provisions that created a special case for Section 60 provision. However, the amendment and rules are silent on the deprivation of jurisdiction with the DRTs.

In addition to that the RWG stated that “In cases where there a corporate insolvency process is not pending against the corporate debtor, the jurisdiction in respect of insolvency and bankruptcy of personal guarantor is Debts Recovery Tribunal.”21

DRT taking up the jurisdiction in personal guarantors insolvency proceedings

The Debts Recovery Tribunal, Chennai in KEB Hana Bank v. Rohit Nath22 has taken a step further and entertained an application under Section 95 of the Code wherein the CIRP against the corporate debtor is already initiated. The Tribunal in reply to the contention of the respondent on non-applicability of the application on grounds of lack of jurisdiction stated:

 “in our view that this contention is unfounded as Section 60 deals with proceedings initiated against the corporate debtor whereas having a separate forum is clothed with the power to adjudicate. The present proceedings are against the guarantor to the corporate debtor alone. As far as the proceedings before this Tribunal is concerned under Section 60 IBC have no application.”

Conclusion

On a concurrent reading of the provisions under Sections 60 and 95 of the Code, even NCLT has concurrent jurisdiction. Therefore, the provisions here clearly outlined the anomaly where two different forums have assumed jurisdiction for overlapping matters. Unfortunately, the concrete answer and resolution to this problem are not yet provided as the higher courts or tribunals have not yet entertained this anomaly. The assumptive rationale behind that could be that both NCLT and DRT have assumed jurisdiction as per their interpretations and hence they have been filed on an appeal.

Although, it is clear from the provisions, amendments, and the Supreme Court ruling in Lalit Kumar case23 that DRT has original jurisdiction along with a special situation where CIRP is not even initiated against the corporate debtor or principal borrower. Whereas NCLT is vested with jurisdiction through an enabling Amendment. Such a jurisdiction can be termed as “exceptional jurisdiction” to streamline the CIRP process against the personal guarantor and the corporate debtors.

IBC is still in its nascent stages and its jurisprudence is evolving throughout. The anomaly highlighted in this article shall sooner be knocking on the doors of the higher courts for interpretation. Hence, a ruling with the Appellate Tribunal and ultimately the Supreme Court will settle this jurisdictional challenge.


Graduate Insolvency Programme, Indian Institute of Corporate Affairs (2021-2023); LLM in Corporate and Financial Law and Policy, Jindal Global Law School, Sonipat; BA LLB, Hidayatullah National Law University, Raipur. Author can be reached at shivamsinghal020@gmail.com.

1 Insolvency and Bankruptcy Code, 2016.

2 Presidency-Towns Insolvency Act, 1909.

3 Provincial Insolvency Act, 1920.

4 Report of the Working Group on Individual Insolvency (Regarding strategy and approach for implementation of the provisions of the Insolvency and Bankruptcy Code, 2016 to deal with the insolvency of guarantors to corporate debtors and individuals having business).

5 Insolvency and Bankruptcy Code, 2016, S. 5(22).

6 Contract Act, 1872, S. 128.

7 (2021) 9 SCC 321 : 2021 SCC OnLine SC 396.

8 Insolvency and Bankruptcy Code, 2016, S. 5(1).

9 Insolvency and Bankruptcy Code, 2016, S. 79(1).

10 Insolvency and Bankruptcy Code (Second Amendment) Act, 2018.

11 Insolvency and Bankruptcy  (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rules, 2019.

12 (2021) 9 SCC 321 : 2021 SCC OnLine SC 396.

13 Insolvency and Bankruptcy Code, 2016, S. 60.

14 Insolvency and Bankruptcy Code, 2016, S. 90.

15 Insolvency and Bankruptcy Code, 2016, S. 95.

16 2021 SCC OnLine NCLT 488.

17 Insolvency and Bankruptcy Code, 2016, S. 179(1).

18 2021 SCC OnLine NCLT 487.

19 2021 SCC OnLine NCLT 486.

20 Insolvency and Bankruptcy Code, 2016, S. 179(2).

21 Report of the Working Group on Individual Insolvency (Regarding strategy and approach for implementation of the provisions of the Insolvency & Bankruptcy Code, 2016 to deal with the insolvency of Guarantors to Corporate Debtors and Individuals having business).

22 2020 SCC OnLine DRT 1.

23 (2021) 9 SCC 321 : 2021 SCC OnLine SC 396.

Op EdsOP. ED.

Introduction

Prior to the introduction of the Insolvency and Bankruptcy Code, 20161 the economic insolvency structure was a blend of various statutes comprising of the Companies Act, 19562, the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 20023, the Sick Industrial Companies (Special Provisions) Act, 19854, the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 etc., with no balanced outcome or a formula to resolve the situation. The Government of India had to act upon the predicament, as the surviving framework was insufficient to safeguard the interest of the promoter, creditor, stakeholders and shareholders. Likewise, the judicial designation was with the National Company Law Tribunal (NCLT), the National Company Law Appellate Tribunal (NCLAT) (in case of appeal), the High Courts and the Supreme Court. After the 2016 Insolvency Act, the floodgates of petition knocked the NCLT. The purpose behind the introduction of this legislature was to induce a consolidated opinion of recovery proceedings with a structured format, so as to have a consistency in the approach system while in default. However, the IBC, 2016 focused mainly on the multinational corporations (MNCs), corporate body, partnership, etc., while completely neglecting the major fund contributing part of the economy, the micro, small and medium enterprises. The notification by the Ministry of Micro, Small and Medium Enterprises on 26-6-2020 inserted the provisions under the Micro, Small and Medium Enterprises Development Act, 20065 (the MSME Act) to be classified as “MSME”. The notification lays down the revised financial threshold limit and investment plans as – (a) the investment in plant and machinery under the micro enterprises, shall not exceed Rs1 crore while the turnover amount shall not exceed Rs 5 crores; (b) the investment in plant and machinery for the small enterprises shall not exceed Rs10 crores while the turnover amount shall not exceed Rs 50 crores. The investment in plant and machinery under the medium enterprises shall not exceed Rs 50 crores while the turnover amount shall not exceed Rs 250 crores.

 On 3-8-2021, the Rajya Sabha passed the amendment to the Insolvency and Bankruptcy Code, 2016 shielding the MSME sector in case of default. Although the House of Representatives turned a blind eye without discussing the Ordinance promulgated, the Bill yet received the presidential assent on 11-8-2021. Amidst the ruckus which surfaced in the lower house by the opposing alliance and the pandemic hit disruptions, the urge for an effective recovery mechanism became crucial. Prior to the Amendment, the Code highlighted its views on proposing a “feasible resolution plan” by the financial/operational creditors with other requirements suggested by the Insolvency and Bankruptcy Board of India (IBBI). The Insolvency and Bankruptcy Code (Amendment) Ordinance, 20216 promulgated by the President on 4-4-2021 was inter alia added to the Chapter III-A of the earlier Code (2016). With the initiation of corporate insolvency resolution process (CIRP), the debtor control regime swaps to become the creditor control business with the subsequent proposition of 66% of the voting rights by the committee of creditors. The rationale was to encompass all those companies with Rs 1 lakh of budget preposition for business management. Erstwhile, the 2021 Amendment alters its position by incorporating the MSME classified under the Micro, Small and Medium Enterprises Development Act, 20067 within its purview. The cumulative progress by the Government of India to enforce IBC stimulation with the significant heads has provided an extensive interpretation of the term “insolvency” and other related disputes. While the legislature mainly focuses on economising the debtor’s business operation through a resolution applicant for restructuring the corporate debtors insolvency mess. The authors intend to enunciate how the pre-packed insolvency emerged in India as a requisite factor in advancing and resolving the economic bankruptcy crisis.

According to the survey conducted by the MSME Ministry, approximately 29% of the GDP is contributed through both its national and international trade. During the pandemic outbreak, the previous 2 years in the country have interspersed and terminated the entire cash flow. At the end of the credit period, numerous debtors defaulted with their finances with the subsequent interest being tagged along with the principal sum, payable to their respective creditors.

The threshold in the increase of the number of insolvency matters in the MSME precinct, coerced the Government to secure the rights of creditors, exploited during the nationwide crisis. Parliament had to be considerate about this amendment, as it would be the first-ever legal platform including both “manufacturing and service” providing industries under the single framework. The combination of three market standard positions (micro, small and medium enterprise) would be strenuous and also burdensome to the judiciary, when evaluating all these areas on a single platform would have different modus operandi of transactions. So, the Ministry of Corporate Affairs in regulation with the Insolvency and Bankruptcy Board of India guidelines set up an open platform for these marketers to initiate the insolvency procedure against the corporate debtor. In case of default operating through the new scheme of the “pre-packaged insolvency”, the corporate debtor himself could initiate the insolvency proceedings. This was a pivotal step required to safeguard the strata of the community.

Enforcement of pre-packaged insolvency resolution process (PPIRP)

The nationwide crisis due to the Covid-19 pandemic, led to the conception of bringing forth the sentinel for many business sectors which were exposed to dreadful financial distress. Accordingly, the investment plan8maintained under the Code enhances the fluctuating turnover rates for each enterprise defining the classifications and the term “MSME”. The Ordinance was promulgated to limit its applicability only to those corporate debtors who qualified under the framework of MSME. On the other hand, the Ordinance does not define MSME. The Indian MSME insolvency envisaged both formal and informal ways of settlement in order to encounter unspecified circumstances during the proceedings. The pre-packaged insolvency was initiated to incorporate all those business areas, irrespective of financial default caused (threshold mentioned in the notification), and subsequently ensure the moratorium for recovery. While the pre-packaged insolvency application concentrated mainly on the key aspects of speedy disposal and flexibility to ensure maximum efficiency. In order to protect the small businesses from being dragged into insolvency proceedings, the Government of India through a delegating authority constituted a sub-committee for the enhancement of the insolvency framework. However, the lack of funds flowing in the economy created havoc in the judicial chambers. On March 2020 the Committee issued a notification9cumulating the minimum threshold to be Rs 1 crore or more (as may be notified by the Central Government) from the primary limit of Rs 1 lakh, required for initiating CIRP were altered. The default, in general generated a multitude of financial obligations towards corporate debtors across. Erstwhile major part of the MSME sector comprised of the operational creditors. As a matter of fact, the suspension of Sections 710, 811 and 912 caused financial distress to these creditors with the additional economic breakdown. These circumstances plunged the Central Government to reduce the out-of-court workouts by constituting a sub-committee for the advancement of an ecosystem, mandatory checks and balances, etc. for ensuring a prearranged insolvency resolution mechanism.

The report to the Ministry of Corporate Affairs submitted by the Insolvency Law Committee dated 31-10-2020 held the inclusion of only corporate debtors, who were a part of the MSME sector, following the pre-packed framework. The Sub-Committee delineated few basic components to be unfiltered that ensured the stability to guide the pre-packaged insolvency proceedings. The Code highlights, “creditor’s control”, “approval of the resolution plan” and “the moratorium period” to be unfettered. Further, the Central Government notified the initiation of the Insolvency and Bankruptcy Code (Amendment) Ordinance introduced in the lower house for MSME focusing on securing the debtor’s interest and rights via the pre-packaged insolvency resolution process. Interestingly, in spite of the Insolvency and Bankruptcy Code, 2016 being commenced, it took over 5 years to propose the amendments catering to the needs of only the MSME sectors, following the Code’s suspension for a year.

Long overdue in the inception for the pre-packaged insolvency

After the cataclysm, following the mutatis mutandis and the suggestions put forth by the Sub-Committee, the Government rejuvenated the economic speculation through the pre-packaged insolvency. Although the pre-packaged Insolvency Code is in motion in European countries, India started with the insolvency programme off lately during 2016. It practically took the Government five years to begin with the pre-packaged insolvency, irrespective of the introduction of this Code would not had been a newfangled process. The Government of India held the 2016 Act to be congruous and at the same time was reassured about the MSME Developmental Act, 2006 being satisfactory to save the MSME sector from insolvency crisis. It was the 2021 pandemic hit, where innumerable manufacturers had a downslide with their businesses which edged them towards the insolvent position. Also, due to the threshold for insolvency application in these sectors being too stunted, the Government was coerced to bring a subsequent act for withholding the piling of default cases.

The seven-member panel was appointed to scrutinise the prerequisite factors required to reduce the burdens upon the NCLTs. Subsequently, the Sahoo Panel Report suggested the need for “pre-packaged insolvency” to reduce the “out-of-court settlements” and for the overall Code efficiency. The Panel aimed at providing a faster resolution mechanism compared to the traditional CIRP. The approval of Atmanirbhar Bharat funds for MSME sector paved the way to energise a new regime investment threshold. Subsequently, with the nationwide lockdown the Government sheltered these enterprises by the expansion of the term “MSME” along with other incentives following the principle of “nova constitution futuris formam imponere debet, non praeteritis”. The moot point being, whether the Government delays in these enforcements was worth the wait. Affirmatively, the Insolvency Law Committee proposition was to protect the interest of the stakeholders by blending both the formal and informal theories of insolvency procedure to ensure flexibility without any haircut in the bankruptcy claims.

For an impenetrable structure, the Government started following the systemised implementation alongside maintaining the obligatory instructions for its perusal. It first instituted with the increase in the threshold limit, under Section 413of the Code from Rs 1 lakh to 1 crore. The foremost objective of increasing the amount was to substantiate that the creditors shall not file for a petition, ensuring termination of the liquidation process under the Code. On the other hand for initiating PPIRP the minimum threshold of default was of Rs 10 lakhs. This would empower the debtors to have adequate time for the repayment, alongside it would hoard these businessmen from being tagged in the pre-packaged insolvency resolution process (PPIRP). Successively the second stage starting from 25-3-2020, where the Insolvency Ordinance submitted the suspension of Sections 7, 8 and 9 against the corporate debtor for a period of 6 months, restraining the creditors from filing the petition. This would shelter the corporate debtor’s assets against the initiation of insolvency process, the insertion under Section 66(3) of the Code14 have barricaded the adjudicating authority from making any application. However, the insertion of Section 10-A15was a major setback. On 4-6-2020 to safeguard the interest and the welfare of MSME, the Ministry of Micro, Small and Medium Enterprises tried to revise the definition of MSME, in order to encompass a more number of enterprises within this framework. Meanwhile the Insolvency Bankruptcy Code with the MSME Development Act, 2006 incited its way for the “pre-packaged insolvency process” in India.

Safeguarding the nation’s interest through MSME workouts

The intention behind this Code was to minimise the number of insolvency cases knocking the NCLT. Apart from the first resolution mechanism, the Government had three major outlines to be involved, that is regarding the informal structure setups, the employment generation through these sectors which indeed encouraged many for startups. Quintessentially the issue was to substitute the traditional approach of the Insolvency and Bankruptcy Code, 2016. The highlighting attribute of this Amendment stands for its “informal structure” while dealing without muddling up with the existing Code. The motive behind the commencement of informal mechanism was to make it cost efficient, flexible and speedy maintaining the transparency which assists in reducing the overall tax burden plan. Fundamentally since India has never dealt with any immature bankruptcy dealings, the question arises whether the marketers are ready to opt for an “informal way of settlement. Pre-packaged insolvency opts for an informal plan which operates without the involvements of courts and tribunals. It is a type of restructuring which idealises the debtor and the creditor to discuss for informal workouts and then submit its resolution plan for the approval. However pre-packaged insolvency is hybrid mechanism of the earlier insolvency structure which lacks the statutory sanctity, which in turn breaks down the conflicts post the approval. It is essential to note that approximately 14,510 applications were withdrawn from the NCLT at the pre-admission stage after the relevant parties discussed their workouts through the informal way. Interestingly, unlike the corporate insolvency resolution process the base resolution plan is entirely framed by the corporate debtor. This informal structure has opened gates for a unique way of proposing the resolution plan. While there is no compulsion for the parties to opt for this mechanism, provided it was consensual. This format lowers the burdens on tribunals safeguarding the rights of the parties involved in the insolvency proceedings. The implementation of these amendments gave birth to the long-awaited insolvency procedure.

For the growth of the MSME sector, the Government has bestowed them with granting bank loans without securities, lower electricity bills with promotional subsidies for the overall development. The public sector Bank of India announced the reduction of repo rates from 5.15 per cent to 4.40 per cent ensuring the secularisation of loans at lower rate of interest which is linked to Reserve Bank of India. It is not incorrect to say that “MSME” is the third wheel of the society, contributing majorly towards the socio-economic development. The liberties granted under this scheme have widened the scope of startups in India as the State Government guides in entailing tax benefits, tariffs, capital investment facilities. This sector needs to be carefully nourished and brought up, as it bolsters just not the economy but also the employment. Accordingly, the MSME sector in India has attained position one by generating over 35% employment rates through its different programmes. Consequently, the MSME’s role as an ancillary industry, complementary to the large-scale industries has enhanced the need to safeguard their positions in the markets.

Commencement of the new regime – The 2021 Amendments

The recommendation of the Insolvency Bankruptcy Amendments16 was to shift the burdens from the tribunals to the outside court settlements through informal discussion between the parties. Nirmala Sitharaman had tabled the Bill in Parliament to have an “effective alternative” mechanism to the traditional insolvency procedure. It alongside would have a kick-start to the new pre-packaged insolvency procedure, by liberating the collapse of the MSME’s. Chapter III-A of the Insolvency Code from Sections 54-A to 54-P enlarged the management crisis happening within the corporate debtors company.

  1. The corporate debtors termed as MSME under the MSME Development Act, 2006 stands eligible to initiate for pre-packaged insolvency resolution process. Unlike CIRP, the debtors shall have the entire management control. The corporate debtor alone or at least with the consent of three-fourth of the partner’s approval submit the base resolution plan17. Meanwhile, Section 54-A(1) of the Code18 grant only the corporate debtors to initiate the pre-packaged insolvency procedure after obtaining 66% of approval from their respective creditors, for submitting the resolution plan to the adjudicating authority for the approval. The NCLT has to either approve or reject the resolution plan with 14 days of its receipt submitted. During the initiation of these proceedings, the corporate debtor mandatory shall come in clean chit without undergoing any prior liquidation under CIRP, as an obligatory field required under Section 3319.
  2. The submission of the base resolution plan by the corporate debtor through the nomination process under Section 54-A(4) must comply with provisions under Sections 30(1) and (2) of the Code20. After the completion of the nomination process, the resolution professional is required to submit a report, confirming the condition precedent adhering under the above sections.
  3. There must be no record of a completed CIRP for past 3 years or the initiation of PPIRP during the previous year.
  4. Application under PPIRP should be approved by at least 66% of the “unrelated creditor” obtaining the green signal for the submission of the base resolution plan. In addition to the resolution plan, the creditor must approve for the appointment of the resolution professional. Subsequently, the debtor should also provide the name of the resolution professional to the financial creditors. In case, the corporate debtor does not have an unrelated party, then the corporate debtor is required to hold a similar meeting for operation creditor (major part contribution and comprising MSME) and attain the approval of all the members in the meeting in the same manner conducted for the “unrelated financial creditors”.
  5. The Code includes Section 29-A21 as a prerequisite factor. The Code barricades the related party to the corporate debtor to be a part of the Committee of Creditors while voting for the feasible plan. It is necessary to amputate the related party rights to ensure that company would not regain its control via the liquidation process by stepping through the backdoor mechanism.
  6. Under Section 54-A(2)(f), the declaratory terms and conditions be filed by the majority of the partners or directors of the corporate debtors.
  7. On 24-3-2020, the number of insolvency cases increased as a result the minimum threshold (for default) for initiating CIRP was increased from Rs 1 lakh to Rs 1 crore, which may vary as per the notification from the Central Government. A second proviso inserted under Section 4 stated, minimum thresholds for initiating the application under the PPIRP was Rs 10 lakhs against the MSME.
  8. The penalising of the officer-in-charge (resolution professional) who manages the debtor’s claims under Section 67-A22, with the intend or commit the gross mismanagement to defraud the creditors.
  9. The resolution professional, after the commencement of the Committee of creditors has to submit the plan to the adjudicating authority within a period of 120 days. The completion of the entire process must be within 90 days.
  10. Usually for the withdrawal of CIRP, under Section 12-A23 requires 90% of the approval from the Committee of creditors. Unlikely, under PPIRP anytime from commencement but before the approval of the resolution plan, PPIRP can be terminated for the initiation of CIRP with the approval of at least 66% of the creditors.

Under MSME sector, the filing of an application under the PIRP involves the following methodology. Firstly, the minimum threshold amount of default must be 10 lakh rupees. The base resolution plan must be proposed by the corporate debtor or with the consent of the three-fourth of total partners. During the PPIRP the entire management control shall be with the corporate debtor, unlike CIRP. Subsequently, the appointment of the resolution professional and shall be approved by 66% of the unrelated party of the corporate debtor. The debtor is required to submit prior claims24 and prerequisite details regarding to whom the company owes money. If default or any omission of preliminary information memorandum is suspected, then the promoter, director shall be liable to pay without any prejudice to the damage caused to the individual. After the approval of the base resolution plan by Committee of Creditors, the resolution professional shall submit the proposal to the adjudicating authority for approval. If NCLT is satisfied with the submitted proposal the liquidation process maybe decreed. Consequently, the restructuring scheme rejuvenates the MSME’s depreciating assets through regaining of the creditor’s trust by informal proceedings under the pre-packaged insolvency mechanism. These Amendments have curtailed the debtors from being dragged into the lengthy insolvency procedure and simultaneously reduced the burden on the Company Tribunals.

The UNCITRAL path

The model law was regulated to enhance  the betterment of bilateral agreement, happening between the nations in a manner suitable for them while adapting to assertions prescribed by law. While restructuring the Code, to secure the agreement made with creditors, the United Nations Commission on International Trade Law (UNCITRAL) used a formal base progressing with an informal structure. The negotiation and the proposing of the resolution plan remains the top notch in practices of “pre-packaged insolvency”. The court proceedings are scarcely just a formality for attainting the consent for the liquidation process. Under the pre-packaged insolvency mechanism, the informal plan discussion between the parties, in a manner that permits the resolution professional to rehabilitate and maximise the assets value, prior to the initiation of liquidation process guides them to have manifesto for negotiation on the pre-agreed sale of business assets. This authentication is sanctioned by the governing laws protecting the interest and rights of the demanding party. The model law describes pre-packaged insolvency25 as “the expedited reorganisation proceedings”, to address those situations that follow the procedure of reorganisation, but on an expedited basis, combining voluntary restructuring negotiations, where a plan is negotiated and agreed by the majority of affected creditors, with reorganisation proceedings commenced under the insolvency law to obtain court confirmation of the plan in order to bind dissenting creditors. This shall protect the rights of the parties, ensuring a balanced framework without compromising the other parties’ statement. Countries like Singapore, UK, USA, etc. who have adapted insolvency model law is obligatory to follow the pre-insolvency priorities on condition of co-equal opportunities to both the parties. Although, UNCITRAL is not incorporated in India, but under the recommendation of the Indian Insolvency Joint Committee 2015 it follows a cross-border insolvency process under Sections 23426 and 23527. The model insolvency law is indispensable to most of the countries around as it promotes the uniform code of insolvency proceedings. It defines the pre-packaged insolvency to be a “voluntary restructuring process” manifesting the settlement beyond the courts charter. The Indian system needs to adapt the model law guide in order to have an effective insolvency resort. Subsequently it must adapt to these guidelines for ensuring the coordination and harmony between cross-border nations and to avoid encumbrance of cash flow in the economy.

Is India late to the pre-packaged insolvency game

When compared to the traditional way of corporate insolvency resolution process, the restructuring scheme has been the most effective way of sustainability to those distressed firm seeking recovery within the shortest span. Although the Insolvency Bankruptcy Code, 2016 does not cover within its ambit numerous areas of bankruptcies like trust insolvency, the corporative insolvency, etc., but why has the pre-packaged insolvency been added under Chapter III-A, sidelining the rest of the insolvency areas. Erstwhile why did India fail to scrutinise the insolvency grievances of the MSME sector, when many countries under the model law had incorporated the practice of PPIRP. Whether was it the pandemic that urged the Central Government with the proposition or whether this Code has been the long-waited requirement under the Indian Insolvency Code. Affirmatively, the commencement of the pre-packaged insolvency for MSME has rescued the economies major contributing sector from turning insolvent. In countries like UK, Singapore, USA, Canada and South Korea, the PPIRP system has been a common practice shielding the distressed firms from undergoing the liquidation process.

The United Nation follows and recognises the pre-packaged insolvency through voting, rescheduling, negotiating and formulating the plan by the debtor. Therefore, the rights of the stakeholders, creditors are protected before the company files for a petition under Chapter 11 of the Code. It authorises the administrator for the partial or complete sale of the corporate debtor’s business. By summoning all the interested parties to object to the proposed deal put forth, it notifies that the business is clear-cut not involved in the its assets. Section 36328 deals with the pre-arranged insolvency proceedings. Interestingly, both the United Nations and the United Kingdom follows the same principle of Code of permitting the stakeholders of the corporate debtor to initiate the insolvency proceedings. However, the United Kingdom insolvency tricked the debtors for a long time, as only the judicial system supported this process. Contrarily the UK Insolvency Code, 1986 neither provided for nor operated the insolvency process. While this process mainly focused on selling of business assets on “going concern” without the approval of the creditors. Once the administrator was appointed, the entire process would be shut down with no claims being entertained from any side. Addressing this concern, Graham Committee was constituted to analyse this mishap within the process ensuring the stability to avoid transactions to the connected party and the tracking of “serial pre-packing”. Restoring the said provisions under the Insolvency Code, 1986 within a period of 5 years span, on November 2015 the amendments aimed to empower the Government and the pre-pack sale occurring to the connected party. Enlarging the view of pre-pack mechanism in UK, it revived its policy under the Corporate Insolvency and Governance Act, 2020. In comparison to the other countries, Singapore, under its High Court orders sanctioned its first insolvency on January 2018. This Code traces its background from the pre-packaged insolvency procedure of Chapter 11 under the US Bankruptcy laws with the compilation of the Singapore’s formula schemed under Section 211I of the Companies Act. However, the bankruptcy does not strictly claim for the “creditors support agreement”.

The detail reading of the aforementioned provisions above provides a jigsaw of the insolvency proceedings of various countries. Indian pre-packaged insolvency is a blend of both the UK and the US bankruptcy laws, certifying the Code to have an indestructible base. Yet, these structures differ from one another.

  1. The motive behind proposing the “pre-packaged” insolvency regime was to protect the rights of the creditors and the corporate debtor’s company from running insolvent. While comparing this stimulation with USA and Indian insolvency, it is noted that the interest of the shareholders is compromised in India and UK. Although UK and USA follow the same principle and guidelines for the insolvency practice, during the insolvency procedure only the creditors’ claims are considered. In USA, the shareholders’ rights are considered although they are prioritised below the creditors during repayment.
  2. India and USA justices have wide discretionary powers subjected to their restructuring process. India has only two regulatory authorities, NCLT and the Supreme Court practising its inherent powers under Rule 11 of the NCLT Rules29, with the NCLAT being only for appeals. While the other alternative for the MSME sector (creditors) would be the Debts Recovery Tribunal. The Indian courts have limited its scope with only 2 or 3 approaches. Under the USA insolvency base, the jurisdiction is vested in every District Court which issues an “order of reference30”. These are specialised Judges dealing with the core matter of the pre-packaged insolvency proceedings.
  3. Under USA pre-packaged insolvency, the administrator is entitled to wholly or sustainably sell the corporate debtor’s assets, after notifying the interested parties. The insolvency trustee must mandatorily provide the opportunity to all classes of creditors to object. Following the objection, it must then obtain consent from the bankruptcy court as these dealings are operated normal outside the routine cycle, ensuring that the business is not involved in its assets. In India, after the proposition of plan by the corporate debtor (under PPIRP), the Committee of creditors has to approve the plan by at least 66.6% while there is no objection raised by the creditors during the process. The interim resolution professional who is later confirmed as resolution professional submits the plan to the Tribunal which may reject or accept the application.
  4. The Bankruptcy Code of USA does not prescribe a proper structure on how these pre-sale transactions must be conducted and concluded outside the courts. Under the Indian pre-packaged insolvency, it mentions a structured format on how these “pre-planned” transactions must function.

Though India has delayed its inception of pre-packaged insolvency, it has addressed the major issues faced by the MSME sector and accordingly, sheltered their needs. By keeping the base of CIRP intact, the legislators have scrutinised the structure of Insolvency Bankruptcy Code, 2016 and thereby made it less burdensome to the courts with simultaneous commencement of PPIRP. Whilst it also provides for an option to the creditors where they could shift their claims from PPIRP to CIRP.

Conclusion

The pandemic destructions in the MSME sectors have left the judicial system cumbersome, which was later surpassed by the enforcement of the pre-packaged mechanism in India. The authors appreciate this proposition to be magnificent as the pre-packaged insolvency process covers major loopholes found in the corporate insolvency process 2016. Although the pre-packaged insolvency has no suitable statutory definition, yet the legislation has been moving ahead in full-swing since inception. The overall perception about pre-packaged insolvency makes it necessary to have a straitjacket formula in order to avoid the uncertainty and to have an anticipation of the upcoming matters while embracing the judicial assessments. However, the amendment is silent on how the assets of the third party shall be dealt with during the pre-packaged insolvency process. On the other hand, the altered and controlled system reassures the flexibility in the restructuring process, balancing the societal needs. Therefore, in circumstances of puzzlement and overlapping of issues, it is advisable to have a separate tribunal dedicated only to resolve the pre-packaged insolvency issues and to accordingly address them.


*Principal Associate, Saraf and Partners, Law Offices.

**4th year student, BA LLB , SDM Law College, Mangalore.

1Insolvency and Bankruptcy Code, 2016.

2Companies Act, 1956.

3Securitisation and Reconstruction of Financial Assests and Enforcement of Security Interest Act, 2002.

4Sick Industrial Companies (Special Provisions) Act, 1985.

5Micro, Small and Medium Enterprises Development Act, 2006.

6Insolvency and Bankruptcy (Amendment) Ordinance, 2021.

7Micro, Small and Medium Enterprises Development Act, 2006, S. 7(1).

  1. Classification of enterprises.—(1) Notwithstanding anything contained in S. 11-B of the Industries (Development and Regulation) Act, 1951, the Central Government may, for the purposes of this Act, by notification and having regard to the provisions of sub-ss. (4) and (5), classify any class or classes of enterprises, whether proprietorship, Hindu Undivided Family, association of persons, cooperative society, partnership firm, company or undertaking, by whatever name called,—

(a) in the case of the enterprises engaged in the manufacture or production of goods pertaining to any industry specified in the First Schedule to the Industries (Development and Regulation) Act, 1951, as—

(i) a micro enterprise, where the investment in plant and machinery does not exceed twenty-five lakh rupees;

(ii) a small enterprise, where the investment in plant and machinery is more than twenty-five lakh rupees but does not exceed five crore rupees; or

(iii) a medium enterprise, where the investment in plant and machinery is more than five crore rupees but does not exceed ten crore rupees;

(b) in the case of the enterprises engaged in providing or rendering of services, as—

(i) a micro enterprise, where the investment in equipment does not exceed ten lakh rupees;

(ii) a small enterprise, where the investment in equipment is more than ten lakh rupees but does not exceed two crore rupees; or

(iii) a medium enterprise, where the investment in equipment is more than two crore rupees but does not exceed five crore rupees.

Explanation 1.—For the removal of doubts, it is hereby clarified that in calculating the investment in plant and machinery, the cost of pollution control, research and development, industrial safety devices and such other items as may be specified, by notification, shall be excluded.

Explanation 2.—It is clarified that the provisions of S. 29-B of the Industries (Development and Regulation) Act, 1951, shall be applicable to the enterprises specified in sub-cls. (i) and (ii) of cl. (a) of sub-s. (1) of this section.

8Expln. 2.1 from the RBI Notification (Noti. No. FIDD.MSME & NFS.BC.No.3/06.02.31/2020-21) defining investment plan as under—

2.1.Classification of enterprises.—An enterprise shall be classified as a micro, small or medium enterprise on the basis of the following criteria, namely:

(i) a micro enterprise, where the investment in plant and machinery or equipment does not exceed one crore rupees and turnover does not exceed five crore rupees;

(ii) a small enterprise, where the investment in plant and machinery or equipment does not exceed ten crore rupees and turnover does not exceed fifty crore rupees; and

(iii) a medium enterprise, where the investment in plant and machinery or equipment does not exceed fifty crore rupees and turnover does not exceed two hundred and fifty crore rupees.

9Explanation of the proviso inserted under S. 4 of the Insolvency and Bankruptcy Code, 2016 ((F. No. 30/9/2020-Insolvency) S.O. 1205(E).—In exercise of the powers conferred by the proviso to Section 4 of the Insolvency and Bankruptcy Code, 2016, the Central Government hereby specifies one crore rupees as the minimum amount of default for the purposes of the said section.

10Insolvency and Bankruptcy Code, 2016, S. 7.

11Insolvency and Bankruptcy Code, 2016, S. 8.

12Insolvency and Bankruptcy Code, 2016, S. 9.

13Insolvency and Bankruptcy Code, 2016, S.  4 (hereinafter referred to as “the principal Act”). In S. 4, after the proviso, the following proviso shall be inserted, namely: “Provided further that the Central Government may, by notification, specify such minimum amount of default of higher value, which shall not be more than one crore rupees, for matters relating to the pre-packaged insolvency resolution process of corporate debtors under Ch. III-A.”

14Insolvency and Bankruptcy Code, 2016, S. 66(3).

15Insolvency and Bankruptcy Code, 2016, S. 10-A

10-A. Suspension of initiation of corporate insolvency resolution process.—Notwithstanding anything contained in Ss. 7, 9 and 10, no application for initiation of corporate insolvency resolution process of a corporate debtor shall be filed, for any default arising on or after 25-3-2020 for a period of six months or such further period, not exceeding one year from such date, as may be notified in this behalf: 

Provided that no application shall ever be filed for initiation of corporate insolvency resolution process of a corporate debtor for the said default occurring during the said period.

Explanation.—For the removal of doubts, it is hereby clarified that the provisions of this section shall not apply to any default committed under the said sections before 25-3-2020.

16Insolvency and Bankruptcy Code (Amendment) Bill, 2021.

17Insolvency and Bankruptcy Act, 2016, S. 5(2-A), after cl. (2), the following clause shall be inserted, namely: “(2-A) ‘base resolution plan’ means a resolution plan provided by the corporate debtor under cl. (c) of sub-s. (4) of S. 54-A.”

18Insolvency and Bankruptcy Code, 2016, S. 54-A(1).

19Insolvency and Bankruptcy Code, 2016, S. 33.

20Insolvency and Bankruptcy Code, 2016, Ss. 30(1) and (2).

21Insolvency and Bankruptcy Code, S. 29-A.

22Insolvency and Bankruptcy Code, S. 67-A.

23Insolvency and Bankruptcy Act, S. 12-A.

24 Insolvency and Bankruptcy Code, 2016, S. 54-G

54-G. List of claims and preliminary information memorandum.—(1) The corporate debtor shall, within two days of the pre-packaged insolvency commencement date, submit to the resolution professional the following information, updated as on that date, in such form and manner as may be specified, namely:

(a) a list of claims, along with details of the respective creditors, their security interests and guarantees, if any; and

(b) a preliminary information memorandum containing information relevant for formulating a resolution plan.

(2) Where any person has sustained any loss or damage as a consequence of the omission of any material information or inclusion of any misleading information in the list of claims or the preliminary information memorandum submitted by the corporate debtor, every person who—

(a) is a promoter or director or partner of the corporate debtor, as the case may be, at the time of submission of the list of claims or the preliminary information memorandum by the corporate debtor; or

(b) has authorised the submission of the list of claims or the preliminary information memorandum by the corporate debtor, shall, without prejudice to S. 77-A, be liable to pay compensation to every person who has sustained such loss or damage.

(3) No person shall be liable under sub-s. (2), if the list of claims or the preliminary information memorandum was submitted by the corporate debtor without his knowledge or consent.

(4) Subject to S. 54-E, any person, who sustained any loss or damage as a consequence of omission of material information or inclusion of any misleading information in the list of claims or the preliminary information memorandum shall be entitled to move a court having jurisdiction for seeking compensation for such loss or damage.

25Explanation defining pre-packaged insolvency under the UNCITRAL—The expedited reorganisation proceedings discussed in the Guide to address those situations follow the procedure of reorganisation, but on an expedited basis, combining voluntary restructuring negotiations, where a plan is negotiated and agreed by the majority of affected creditors, with reorganisation proceedings commenced under the insolvency law to obtain court confirmation of the plan in order to bind dissenting creditors.

26Insolvency and Bankruptcy Code, 2016, S. 234.

27Insolvency and Bankruptcy Code, 2016, S. 235.

28United Nations Bankruptcy Code, S. 363. S. 363 defines “cash collateral” as cash, negotiable instruments, documents of title, securities, deposit accounts, or other cash equivalents, whenever acquired, in which the estate and an entity other than the estate have an interest. It includes the proceeds, products, offspring, rents, or profits of property and the fees, charges, accounts or payments for the use or occupancy of rooms and other public facilities in hotels, motels, or other lodging properties subject to a creditor’s security interest.

29National Company Law Tribunal Rules, 2016, R. 11.

3028 US Code S. 157 Procedures under US Codes  (a) Each District Court may provide that any or all cases under Title 11 and any or all proceedings arising under Title 11 or arising in or related to a case under Title 11 shall be referred to the bankruptcy Judges for the district.

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Tribunal, Mumbai: The Coram of H.V. Subba Rao, Judicial Member addressed the relevancy of insufficiency of stamp duty under Section 7 proceedings of Insolvency and Bankruptcy Code, 2016

“…a Section 7 application under the IBC can be filed in a simple form prescribed in the Code even without any pleadings.”

Point of Reference:

Whether the Debenture Trust Deed dated 1st March, 2014 and Redeemable Non-Convertible Debenture Subscription Agreement dated 1st March, 2014, shall be impounded and be sent for payment of requisite stamp duty in accordance with the Maharashtra Stamp Act?

Background

Main company petition was filed by M/s Vistara ITCL (India) Limited as Financial Creditors against M/s Satra Properties (India) Limited who was the Corporate Debtor under Section 7 of the Code for initiation of insolvency proceedings against the Corporate Debtor.

During the pendency of the above-stated Company Petition, the Corporate Debtor filed a Miscellaneous Application.

Petitioner/Corporate Debtor contended that the (i) Secured Redeemable Non-Convertible Debenture Subscription Agreement dated 1st March 2014 and the (ii) Debenture Trust Deed dated 1st March 2014 filed in the Company Petition cannot be looked into nor relied upon by the Financial Creditors till the deficit stamp duty payable on the above two instruments is paid in accordance with the provisions of the Maharashtra Stamp Act.

Both the members of the tribunal had ordered initiation of CIRP against the Corporate Debtor vide an order concurring with each other and by observing that the ‘debt’ and ‘default’ stood proved even without relying on the Debenture Trust Deed and NCD Subscription Agreement.

Judicial Member went ahead and partially allowed the Miscellaneous Application while holding that the Debenture Trust Deed and Redeemable Non-Convertible Debenture Subscription Agreement shall be impounded and be sent for payment of requisite Stamp Duty in accordance with Maharashtra Stamp Act and issued necessary directions to the Registrar.

Whereas, the Technical Member without expressing any opinion on the issue of stamp duty directed the Registry to immediately place the record before the President for constituting appropriate Bench for an opinion so that the order in M.A is rendered in accordance with the majority opinion.

Hence, the above M.A. was referred for independent opinion of the third member.

Core Issues:

  • Whether the pleas of deficit stamp duty, non-payment of stamp duty can be raised by a Corporate Debtor in a Section 7 application more so when the ‘debt’ and ‘default’ are proved even without relying on those documents?
  • If so at what stage and before whom?

Coram expressed that a Section 7 application under the IBC can be filed in a simple form prescribed in the Code even without any pleadings. Similarly, the ‘debt’ and ‘default’ can be proved through the records of ‘debt’ and ‘default’ maintained by the “information utility” even without filing any documents by the party.

When once the Adjudicating Authority is satisfied with these two legal requirements and if the application is complete in accordance with the Code, the Adjudicating Authority has no option except to admit the Company Petition without going into any other trivial technical issues raised by the Corporate Debtor.

Hence, the Tribunal opined that the plea of Stamp Duty in the present matter is not available to the Corporate Debtor when once the debt and default are proved without looking into the documents.

“…as per the terms and conditions of the NCD Subscription Agreement it is the Petitioner/Corporate Debtor that shall bear all documentation charges (including stamp duty) legal and valuation charges.”

Since it was the very case of the petitioner that the documents upon which the Financial Creditors were relying were novated and the respondent stood discharged of the liability in view of the larger understanding and overall settlement. Hence, the petitioner had no legal right to insist on impounding the above document.

When and before whom the issue of stamp duty will be raised?

From the provisions of the Maharashtra Stamp Act and Indian Stamp Act, it is clear that a duty is cast upon the authority before whom the document is sought to be used as evidence by the party for the purpose of enforcing the contractual rights and obligations.

Therefore, proper course of action needs to be adopted to the Miscellaneous Application without getting into the issue of stamp duty as it was irrelevant and uncalled for in a Section 7 application more so when the ‘debt’ and ‘default’ are proved otherwise without looking into those documents.

In view of the above M.A was dismissed. [Vistra ITCL (India) Ltd. v. Satra Properties (India) Ltd., 2022 SCC OnLine NCLT 15, decided on 10-2-2022]


Appearance:

For the Applicant: Mr. Nausher Kohli, Advocate

For the Respondents: Mr. Pulkit Sharma, Advocate