Central Government Notification
Legislation UpdatesRules & Regulations

The Central Government has notified the Companies (Registration of Charges) Second Amendment Rules, 2022 to amend the Companies (Removal of Names of Companies from the Register of Companies) Rules, 2016.

The amendment inserts a new rule 13 to the Companies (Registration of Charges) Rules, 2014 dealing with ‘Signing of charge e-forms by insolvency resolution professional or resolution professional or liquidator for companies under resolution or liquidation’. The Rule provides that the Form No.CHG-1, CHG-4, CHG-8 and CHG-9 shall be signed by Insolvency resolution professional or resolution professional or liquidator for companies under resolution or liquidation, as the case may be and filed with the Registrar.

Financial Creditor
Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Tribunal, New Delhi: In a case where a Resolution Professional (RP) had submitted a report even prior to the order by the Adjudicating Authority that had appointed him, the bench of of H. V. Subba Rao, Judicial Member and Chandra Bhan Singh, Technical Member, has asked him to submit a fresh report.

The petition was filed by Bank of Baroda for initiation of Insolvency Resolution Process under Section 95(1) of Insolvency and Bankruptcy Code, 2016. It was passed against Mr. Pawan V Kikavat, Personal Guarantor of Mahavir Roads and Infrastructure Pvt. Ltd.

The counsel for the Bank of Baroda mentioned the demand notice dated 06-11-2020 invoking the Guarantee against the Personal Guarantor. He also gave proof of delivery of the demand notice. The deed of Guarantee dated 26-04-2012 executed by Bank of Baroda was also brought to the notice of the Bench. The petitioner also suggested the name of RP, Mr. Kairav Anil Trivedi, to conduct the Insolvency Resolution Process.

The counsel for the Personal Guarantor opposed the maintainability of the Petition pointing out that the RP has already filed his report without there being any order passed by the Adjudicating Authority appointing him and directing him to do so.

The issue was whether the report filed by RP without him receiving directions can be taken on record or a separate order should be filed by RP on the directions given.

The Bench appointed Kairav Anil Trivedi to submit a fresh report after examining the petition within 10 days of the date of this order.


[Bank of Baroda Limited v Pawan V Kikavat, 20 C.P. (IB)-140(MB)/2022, decided on 29-06-2022]


Counsels:

For Petitioner: Kairav Trivedi, PCA

For Personal Guarantor: Advocate Nausher Kohli


IBBI
Legislation UpdatesRules & Regulations

On 14th June, 2022, Insolvency and Bankruptcy Board of India notifies Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) (Second Amendment) Regulations, 2022. This regulation seeks to amend the procedure of recording evidences, and applications made to ‘resolution professional’ by the creditors. 

 

Key Points: 

  • For the purpose of resolving the process of insolvency, creditors may furnish the relevant records of transaction/debt/default by operational creditor. 
  • For making such applications, copies of Form GSTR-1 and GSTR-3B under GST and e-way bill will have to be provided. For the successful submission of these applications the Operational creditors will require their PAN and e-mail. 
  • Documents of debtors are part of major evaluation while assessing their insolvency, while doing so the resolution professional may go through his documents under Regulation 4(1). 
  • With newly added provision Regulation 4 (2) and (3), the debtors are bound by law to provide relevant information for such evaluation. Along with the management personnel of debtors, creditors will have to provide records of assets and liabilities stock statements, valuation reports, etc., of the debtor. 
  • In the process of preparing information memorandum of the corporate debtor, the resolution professional with require from the creditors, under Regulation 35-A, the financial health for auditing his assets and liabilities.  
  • To find out the fair value/liquidation value two valuers are allotted to evaluate the inventories and fixed assets of the debtor. Under the Resolution Plan of these Regulation, Regulation 35 (1)(b) has been modified. 
  • After this evaluation, when two ‘significantly different’ [defined under Explanation (ii)] estimates are submitted from valuers, third valuer for ‘asset class’ [defined under Explanation (i)] is appointed. Both the terms are clearly defined by this amendment. 

 


*Shubhi Srivastava, Editorial Assistant has reported this brief. 

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Appellate Tribunal (NCLAT), New Delhi: In a matter with regard to fees of resolution professional, the Coram of Justice Ashok Bhushan (Chairperson) and Shreesha Merla (Technical Member) held that, when proceedings in a matter are put to stay, the resolution professional is not entitled to fees during the stay on insolvency.

An appeal had been filed against the order of the National Company Law Tribunal, Mumbai, by which the Resolution Professional was allowed for reimbursement of Rs 30,81,719.

In 2018, the Corporate Insolvency Resolution Process was initiated, and the Insolvency Resolution Professional was appointed.

Appellant contended that, when the Supreme Court of India had stayed the insolvency proceedings, there was no entitled fee to be paid to the Resolution Professional.

Further, the Counsel for the Resolution Professional submitted that even when the Insolvency Proceedings were stayed, certain expenses were incurred by the RP which payment cannot be denied.

Analysis and Decision


Tribunal stated that, when the Supreme Court order 26-11-2018, had stayed the insolvency proceedings which proceedings ultimately were set aside by the final Judgment dated 2-9-2019, the Resolution Professional was not entitled to any fee after 26-11-2018.

In view of the above, the appeal was partly allowed. [IndusInd Bank Ltd. v. Rajendra K. Bhuta, 2022 SCC OnLine NCLAT 201, decided on 26-4-2022]


Advocates before the Tribunal:

For Appellant: Mr. Rohit Gupta, Ms. Rubina Khan, Advocates.

For Respondent: Mr. Rajeev K Pandey, Mr. Rajeev M Roy, Advocates for R-2

Mr. Mayank Kshirsagar, Darryl Pereira, Advocates for IRP/R1

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]

NCLAT
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 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) 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 Companies Act.

Appellant filed the present appeal under Section 61 of the Insolvency and Bankruptcy Code 2016, assailing the order passed by the Adjudicating Authority.

Factual Matrix

An application under Section 9 of the IBC was admitted vide the order of the Adjudicating Authority and CIRP was initiated against the Corporate Debtor along with the appointment of Interim Resolution Professional.

During the pendency of the Corporate Insolvency Resolution Process, the IRP moved two applications under Section 19(2) and Section 60(5) of the IBC alleging that the appellant had withdrawn a sum of Rs 32 lakhs during the moratorium period during the CIRP though the appellants claimed that they had given a post-dated cheque to Kewal Kishan as repayment of the loan and the said cheque was not given by them during the ongoing CIRP.

Adjudicating Authority had imposed a penalty of Rs 5 lakhs on each of the two ex-directors to be deposited in the account of the Government of India, Ministry of Corporate Affairs.

Since the ex-directors of the corporate debtor did not provide the records and other financial information to the Resolution Professional under Section 19(2), the Adjudicating Authority invoked Section 128(6) of the Companies Act and levied a penalty of Rs 5 lakhs each on the appellants 1 and 2, therefore the present appeal was filed seeking to set aside the impugned order.

Analysis and Decision

Tribunal on noting that the appellants not only did not provide the records and financial documents relating to the corporate debtor to the erstwhile resolution professional and the liquidator despite multiple requests, they also did not comply with the Adjudicating Authority’s orders.

Hence such acts of carelessness in complying with the requirements of law, amounting to defiance and disrespect of the legal process, could not eb condoned and needed to be dealt with strictly in accordance with the provisions of Chapter VII: “OFFENCES AND PENALTIES” of the IBC.

“…we are of the view that since the IA No. 1253/2020 was filed under the provisions of IBC, it would have served the requirement of law if any order regarding the penalty was imposed under the provisions of IBC. Moreover, it would have served the cause of natural justice if the Appellants were given an opportunity to be heard before imposition of any penalty. Chapter VII of the IBC which lays down “Offences and Penalties” under which officers of the Corporate Debtor can be penalized and/or punished with imprisonment is relevant in this regard.”

Therefore, Tribunal directed that the case be remanded to the Adjudicating Authority for taking a decision under the provisions of IBC after giving an opportunity to the appellants to present their case.

In view of the above discussion, the impugned order was set aside. [Ashish Chaturvedi v. Sanjay Kapoor, Company Appeal (AT) (Insolvency) No. 1103 of 2020, decided on 14-2-2022]


Advocates before the Tribunal:

For Appellants:

Mr. Manoj Kumar Garg, Advocate.

For Respondents:

Mr. K.D. Sharma and Mr. Anuj Kumar Pandey, Advocates for R-3.

Case BriefsSupreme Court

Supreme Court: In a case were the Division Bench of Sanjay Kishan Kaul and M.M. Sundresh*, JJ., was sought to provide judicial interpretation of Section 29A(h) of the IBC, as amended by the Act, 2018, the Bench held that ineligibility has to be seen from the point of view of the resolution process. It can never be said that there can be ineligibility qua one creditor as against others. Rather, the ineligibility is to the participation in the resolution process of the corporate debtor. The Bench remarked,

“…what is required to earn a disqualification under the said provision is a mere existence of a personal guarantee that stands invoked by a single creditor, notwithstanding the application being filed by any other creditor seeking initiation of insolvency resolution process subject to further compliance of invocation of the said personal guarantee by any other creditor.”

An application was filed by RBL Bank under Section 7 of the Insolvency and Bankruptcy Code, 2016 to initiate corporate insolvency resolution process (CIRP) against Respondent 1. Pursuant to which a resolution plan, after certain modifications was submitted by the respondent 3 on 22-11-2017. Meanwhile, by way of the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2017, Section 29A was introduced to the Code. It was specifically under 29A (h) that the CoC held a meeting to deliberate upon the impact of the amendment qua the eligibility of the Respondent 3 in submitting a resolution plan in the CIRP proceedings.

It was in the above backdrop that respondent 3 approached the NCLT praying for a declaration that he was not disqualified from submitting a resolution plan under sub-section (c) and (h) of Section 29A of the Code. NCLT, vide its order held that the Respondent 3 was eligible to submit a resolution plan, notwithstanding the fact that he did extend his personal guarantees on behalf of the Respondent 1 which were duly invoked by some of the creditors, on it. It was against the order; the Punjab National Bank approached the NCLAT. However, the Bank later sought to withdraw its appeal to change in circumstances, i.e.  the resolution plan gathered 78.50% vote share. The NCLAT allowed the withdrawal request without any liberty to challenge the same very impugned order.

Consequently, the NCLT approved the resolution plan submitted to it inter alia holding that there is a marked difference between extension and exclusion and therefore, the rigor of Section 12(1) of the Code would not get attracted on the facts of the case particularly when there were pending proceedings with interim orders, notably an interim order was issued by the NCLAT directing the adjudicating authority not to act on resolution plan until the final order of NCLAT. Further, the plan having received 75% vote share, having considered the techno-economic viability and feasibility of the plan, the application filed for approval of the resolution plan was allowed with a direction that the approved resolution plan shall come into force with immediate effect. The appeals against the said order of NCLT were dismissed on the ground that it cannot sit in appeal over the decision of the adjudicating authority or the CoC in the absence of any apparent discrimination.

Grounds for Challenge

Noticeably, the appellant had approached before NCLAT seeking to be impleaded as a party to the proceedings initiated by Punjab National Bank with an intention to continue the lis, however, the same was not favourably considered. The appellant even raised its objection to the withdrawal of appeal. The appellant had approached the Court with the following grievances:

  • The respondent 3, a promoter of the corporate debtor, was ineligible to submit a resolution plan under Section 29A(h) of the Code, as several personal guarantees executed by the Respondent 3 in favour of various creditors of the Respondent 1-corporate debtor stood invoked, prior commencement of CIRP.
  • The law which was prevailing on the date of the application has to be seen, therefore, the disqualification gets attracted on the date of filing of the application and on the same analogy not only Section 29A(h) but also Section 30(4) has to be interpreted.
  • The approval of the resolution plan was made after the mandatory period of 270 days, i.e. after the expiry of the CIRP period. Since there is clear infraction of Section 12, the 12 orders passed are liable to be interfered with.

Hence, the instant case was filed for seeking judicial interpretation of Section 29A(h) of the Insolvency and Bankruptcy Code, 2016, as amended by the Act, 2018.

Interpretation of Section 29A (h) of the Code

The idea of the Insolvency and Bankruptcy Code, 2016 being to facilitate a process of rehabilitation and revival of the corporate debtor with the active participation of the creditors, the Bench opined that there are two principal actors in the entire process, viz., (i) the committee of creditors and, (ii) the corporate debtor. Therefore, there can never be any other interest than that of the committee of creditors and the corporate debtor.

Observing that the objective behind Section 29A of the Code is to avoid unwarranted and unscrupulous elements to get into the resolution process while preventing their personal interests to step in, and to prevent certain categories of persons who may not be in a position to lend credence to the resolution process by virtue of their disqualification, the Bench relied on Ebix Singapore Pvt. Ltd. vs. COC of Educomp Solutions Ltd., 2021 SCC OnLine 707, to hold that the CoC even with the requisite majority, while approving the Resolution Plan must consider the feasibility and viability of the Plan and the manner of distribution proposed, which may take into account the order of priority amongst creditors as laid down in sub-section (1) of section 53 of the IBC. And that the CoC cannot approve a Resolution Plan barred under Section 29A of the IBC.

Rejecting the contention of the respondents that Section 29A(h) had to be literally interpreted to the extent that a personal guarantor is barred from submitting a resolution plan only when the creditor invoking the jurisdiction of the adjudicating authority has invoked a personal guarantee executed in favour of said creditor by the resolution applicant and no personal guarantee stood invoked by RBL Bank at the time of application to the adjudicating authority under Section 7 of the Code, the Bench emphasised that ineligibility has to be seen from the point of view of the resolution process. It can never be said that there can be ineligibility qua one creditor as against others. Rather, the ineligibility is to the participation in the resolution process of the corporate debtor. The manner of invocation can never be a factor for the adjudicating authority to adjudge, as against its existence. Adequate importance will have to be given to the latter part of the provision which also disqualifies a person whose liability under the personal guarantee executed in favour of a creditor, remains unpaid in full or in part for the amount due from him, upon invocation.

Difference between Extension and Exclusion

On the question of limitation, the Bench affirmed the views of adjudicating authority as confirmed by the appellate tribunal, noticing that there were earlier rounds of litigation with the interim orders. Therefore, the Bench held that delay of 106 days had been rightly condoned and excluded by the adjudicating authority by invoking Section 12(3) of the Code.

Hence, the Bench opined, the adjudicating authority was right in holding that there is a marked difference between extension and exclusion. Exclusion would come into play when the decision is challenged before a higher forum. Extension is one which is to be exercised by the authority constituted.

Factual Analysis

Admittedly, the Respondent 3 had executed personal guarantees which were invoked by three of the financial creditors even prior to the application filed. Therefore, the Bench held that rigor of Section 29A(h) of the Code obviously got attracted and the plan submitted by the Respondent 3 ought not to have been entertained. Accordingly, the Bench concluded, the adjudicating authority and the appellate tribunal were not right in rejecting the contentions of the appellant on the ground that the earlier appeals having been withdrawn without liberty, the issue qua eligibility cannot be raised for the second time, particularly when the appellant was not a party to the decision of the adjudicating authority on the first occasion.

Though the resolution plan submitted by the Respondent 3 was held ineligible and not maintainable, the Bench opined that much water had flown under the bridge as the requisite percentage of voting share had been achieve, majority of the creditors had given their approval to the resolution plan and the plan was also put into operation since 18-04-2018. The Bench remarked,

“We need to take note of the interest of over 23,000 shareholders and thousands of employees of the Respondent 1. Now, about Rs. 300 crores has also been approved by the shareholders to be raised by the Respondent 1. It is stated that about Rs. 63 crores has been infused into the Respondent No.1 to make it functional. There are many on-going projects of public importance undertaken by the Respondent No.1 in the nature of construction activities which are at different stages.”

Conclusion

Hence, considering the ultimate object of the Code, i.e. to put the corporate debtor back on the rails, and noticing that no prejudice would be caused to the dissenting creditors as their interests would otherwise be secured by the resolution plan itself, which permits them to get back the liquidation value of their respective credit limits, the Bench refused to disturb the resolution plan leading to the on-going operation of the Respondent 1. The appeal was dismissed.

[Bank of Baroda v. Mbl Infrastructures Ltd., 2022 SCC OnLine SC 48, decided on 18-01-2022]


*Judgment by: Justice M.M. Sundresh


Appearance by:

For the Appellant: Tushar Mehta, Solicitor General and Bishwajit Dubey, Advocate

For Respondent 1: Ranjit Kumar, Senior Advocate

For Respondent 3: Parag P. Tripathi, Senior Advocate


Kamini Sharma, Editorial Assistant has put this report together 


 

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Appellate Tribunal (NCLAT): Justice Ashok Bhushan (Chairperson) and Dr Ashok Kumar Mishra (Technical Member) expressed that, once Resolution Plain is approved by the Adjudicating Authority, it no longer remains a confidential document, so as to preclude Regulator and other persons from accessing the said document.

Whether the appellant/applicant is entitled to be given a copy of Resolution Plan or any part of the Resolution Plain in the appeal?

Appellant had sought a direction to produce records along with a full set of documents relating to Corporate Insolvency Resolution Process of Corporate Debtor in the application for interim relief.

Question that is to be answered in the present matter is:

Whether appellant is entitled to a copy of Resolution Plan?

Background

Appellant was an association of aggrieved workmen of the Jet Airways (India) Ltd. and were Operational Creditors who filed their claim before the Resolution Professional. The Resolution Plan allocated workmen and employees an amount of Rs 52 Crores. The said Appeal had been filed by the Appellant challenging the order of the Adjudicating Authority approving the Resolution Plan on several grounds.

Analysis, Law and Decision

In view of relevant sections and regulations, Coram expressed that an Insolvency Professional must ensure that confidentiality of the insolvency resolution process, liquidation or bankruptcy process, as the case may be, is maintained at all times. However, this shall not prevent him from disclosing any information with the consent of the relevant parties or required by law.

Section 24 of the IB Code read with Regulation 21 (3) (iii) of Process Regulation 2016, makes it clear that all Members, who were to participate in the meeting of the Committee of Creditors had to be provided copies of all relevant documents.

Therefore, in view of the above, the entitlement of copy of documents during the CIRP is for only those who are to participate in CIRP.

The category of creditors including the Members of the suspended Board of Directors or the partners of the corporate persons, who are entitled to participate in the meeting of the Committee of Creditors are entitled to receive copies of all documents.

Supreme Court in the decision of Vijay Kumar v. Standard Chartered Bank, (2019) 20 SCC 455, held that Members of the suspended Board are entitled to participate in the meeting of the Committee of Creditors. They are also entitled to be given a copy of the Resolution Plan before such meetings are held.

The question which arose in the present proceeding was: Whether the Resolution Plan after it being approved by the Adjudicating Authority, still continues to be a confidential document, so as to deny access to any of the claimants? 

Tribunal observed that when the inspection is permitted of record of the Adjudicating Authority, obviously inspection can very well be made of the Resolution Plan, which is part of the proceedings before the Adjudicating Authority.

Further, the provision of Section 61(3) reaffirms the Tribunal’s view that after approval of the Resolution Plan, Resolution Plan does not remain a confidential document, so as to deny its perusal to a claimant, who is aggrieved by the Plan and has come up on the Appeal.

Adding to the above, Coram elaborated that the Resolution Plan even though it is not a confidential document after its approval, cannot be made available to each and to anyone who has no genuine claim or interest in the process.

In the present case, the appellant is entitled to the relevant part of the Resolution Plan relating to the claim of the workmen and employees. Hence Tribunal directed that part of the Resolution Plan which deals with the claim of workmen and employees should be provided to the appellant by the successful resolution applicant. [Assn. of aggrieved Workmen of Jet Airways (India) Ltd. v. Jet Airways (India) Ltd., 2022 SCC OnLine NCLAT 36, decided on 20-1-2022]


Advocates before the Tribunal:

For Appellants:

Mr. Nikhil Nayyar, Sr. Advocate with Ms. S. Manjula Devi, Advocate

Dr. KS Ravichandran (CS)

For Respondents:

Mr. Arun Kathpalia, Sr. Advocate with Mr. Malhar Zatakia, Mr. Nishant Upadhyay, Madhur Arora, Mr. Dhiraj Kumar Totala Ms. Tanya Chib, Advocates (R-1, 3)

Ms. Isha Malik, Ms. Niharika Shukla and Mr. Raunak Dhillon, Advocates (R-2)

Ms. Pooja Mahajan, Mr. Aashish Vats, Mr. Arveera Sharma, and Ms. Mahima Singh, Advocates (R-4)

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Appellate Tribunal, New Delhi (NCLAT): Coram of Justice Ashok Bhushan (Chairperson) and Justice Jarat Kumar Jain, Judicial Member and Dr Alok Srivastava, Technical Member heard appeals filed against the decision passed by National Company Law Tribunal, Mumbai.

A petition was filed under Section 95 of the Insolvency and Bankruptcy Code, 2016 through the Resolution Professional against the three appellants. Adjudicating Authority passed an order on the application filed through the Resolution Professional directing the Resolution Professional to exercise the powers enumerated under Section 99 of the I&B Code and submit the recommendations with reasons in writing for acceptance or rejection of application within the stipulated time as envisaged under Section 99.

Aggrieved by the above order, appeals were filed.

Analysis, Law and Decision

Section 97 of the I&B Code which deals with ‘appointment of resolution professional’ with reference to Insolvency Resolution Process under Chapter III, following is a statutory scheme as delineated by Section 97(1) and (2).

Appellate Tribunal expressed that there cannot be any dispute with the statutory scheme as contained in Section 97 that when application is filed by the Resolution Professional under Section 95, the Adjudicating Authority shall direct the Board within seven days of the date of the application to confirm that disciplinary proceedings pending against the Resolution Professional or not and the Board was required within seven days to communicate in writing either confirming the appointment of the Resolution Professional or rejecting the appointment of the Resolution Professional and nominating another Resolution Professional.

Coram stated that in the present matter, appellant’s case was not that any disciplinary proceedings were pending against the Resolution Professional who had filed the application, Appellate Tribunal saw no useful purpose in again directing the Adjudicating Authority to send the recommendation to the Board for confirmation.

The order having been passed more than three months’ prior to the passing of the order, hence Appellate Tribunal opined that due to the said reason the order of the Adjudicating Authority does not need to be interfered with.

Coming to another submission that Adjudicating Authority was not required at the stage when report was still to be filed by the Resolution Professional to record a finding regarding default, Appellate Tribunal was of the view that the said submission was fully supported by the decision Ravi Ajit Kulkarni

In the impugned judgment, the Adjudicating Authority had made observations to the following effect at page 33:-

“Based on the submissions made by the Applicant and the documents produced and placed on record before this Bench, the Bench has no doubt in its mind that there is a ‘default’ on the part of the Personal Guarantor by not fulfilling the debt owed to the Corporate Debtor, i.e., Anoushka Medicare & Diagnostics Private Limited as per the Deed of Personal Guarantee entered between the parties through the Deed of Personal Guarantee dated 01.08.2017.”

Appellate Tribunal found substance in the appellant counsel’s submission that the observation regarding default deserved to be deleted from the Judgment and was ordered to be deleted.

Counsel for the Respondent submitted that in the last paragraph, the Adjudicating Authority gave full liberty to the Resolution Professional to make a recommendation with reasons in writing for acceptance or rejection of the Application. The above directions do clearly mention that report has to be submitted as per Section 99, but to avoid any prejudice to any of the parties, Coram opined that the observations as quoted above are required to be deleted from the judgment.

Appeals were partly allowed. [Kanchan Nanubhai Desai Personal Guarantor v. Finquest Financial Solutions (P) Ltd., 2022 SCC OnLine NCLAT 8, decided on 3-1-2022]

Case BriefsTribunals/Commissions/Regulatory Bodies

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

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

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

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

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

And further stated that,

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

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


Agatha Shukla, Editorial Assistant has reported this brief.


Counsel for the Parties:

For Appellant:

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

For Respondents:

(Notice not issued)

Mr. Sumant Batra, Ld. Amicus Curiae

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Tribunal (NCAT): A Coram of Justice A.I.S. Cheema (Judicial member) and Dr Alok Srivastava (Technical member) dismissed an appeal on the grounds of it being repetitive.

In the instant case, the appellant was aggrieved by non-payment of his salary and illegal actions by the Resolution Professional. The appellant had approached the NCLT for addressing his grievance for payment of his salary or for the inclusion of his salary expenses as CIRP cost in the Resolution Plan. Later an appeal was filed before the NCLAT, which had directed the adjudicating authority to provide an opportunity to the Appellant before taking a decision regarding the Resolution Plan.

Now, the Appellant contended, that the impugned order, the authority did record as intervener but the grievances and detailed arguments/written-submissions advanced by the Appellant before the Adjudicating Authority were not addressed, admitted nor discussed.  Whereas the counsel for the respondent submitted that legitimate grievances of the Appellant were included in the Resolution Plan and also have been duly paid. Further, it was submitted that the present appeal was nothing but a reproduction of the claims made earlier in the appeal.

Therefore, the Coram was of the opining that, “what appears is that the Appellant is reagitating what is already recorded in the order dated 17.02.2021 and only because the liberty was given, the present Appeal is filed”. On the same ground, the appeal stood dismissed.[Sundeep Thakar v. Raj Ralhan, Company Appeal (AT) (Insolvency) No. 170 of 2021, decided on 08-03-2021]

National Company Law Tribunal
Hot Off The PressNews

National Company Law Tribunal (NCLT), Hyderabad bench approved NHPC’s Resolution Plan for taking over Jalpower Corporation Limited (JPCL) as going concern vide its order dated 24.12.2020 and uploaded the same on its website on 07-01-2021.

JPCL was executing 120 MW Rangit Stage-IV Hydroelectric Project in Sikkim. The Company is currently undergoing Corporate Insolvency Resolution Process (“CIRP”) which was initiated on April 09, 2019, vide order of Hon’ble NCLT.

NHPC Ltd., a PSU under Ministry of Power, had submitted its Resolution Plan and was declared the successful resolution applicant by Committee of Creditors (CoC) on 24.01.2020. CoC approved Resolution Plan was filed by Resolution Professional with Hon’ble NCLT Hyderabad Bench on 28.01.2020.

NHPC will make an upfront payment of Rs 165 Crore and cost of the project is considered as Rs 943.20 Crore.

Jalpower Corporation Limited is the second company after LancoTeesta Hydro Power Ltd (LTHPL) to be acquired through the NCLT process by NHPC.


Ministry of Power

[Press Release dt. 07-01-2020]

[Source: PIB]

National Company Law Tribunal
Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Tribunal (NCLT): The Coram of Dr Deepti Mukesh (Judicial Member) and Sumita Purkayastha (Technical Member), reiterated that any shortfall in gratuity payable to employees has to be made over by the Resolution Professional and payment of dues has to be paid outside the waterfall mechanism provided under Section 53 of the Insolvency and Bankruptcy Code, 2016.

The instant application was filed by Sandeep Tyagi on behalf of 52 Ex-Employees of MOSER BAER ELECTRONICS LTD. who sought directions to release the lawful dues of the ex-employees who submitted their resignation prior to the initiation of the CIRP process.

FACTS

Facts pertaining to the present case are that the Corporate Debtor is a wholly-owned subsidiary of MOSER BAER INDIA LIMITED. It is stated that all the employees were forced to resign by the ex-management by March 2019. Further, it was stated that, they were not paid their dues.

The dues were not settled by the ex-management of the Corporate Debtor citing financial instability.

As an application for CIRP was preferred by Autonix Lighting Private Limited (Operational Creditor) under Section 9 of the IBC on account of default. Mr Hemant Sharma was appointed at the Interim Resolution Professional of the Corporate Debtor.

Applicant stated that the Corporate debtor did not deposit Provident Fund till their dates of resignation respectively. The salary slips of the ex-employees show that Provident Fund was deducted every month but admittedly it was not deposited with the EPFO.

Applicant relied on the decision of Principal Bench in CA (PB) No. 19 (PB) of 2019 dated 19-03-2019 filed by the Moser Baer Karamchari Union of the MOSERBAER INDIA LIMITED (Holding Company) against the Resolution Professional in CP No. (IB) 378(PB)/2017 Alchemist Asset Reconstruction Co. Ltd. v. Moser Baer India Limited for release of their dues.

It was observed that the above-stated Order dated 19-03-2019 of the Adjudicating Authority had been challenged before the Appellate Authority. In the Order dated 19-08-2019, the Appellate Authority upheld the same and stated the following:

“Para 24- Once the liquidation estate/asset of the Corporate Debtor under Section 36(1) read with Section 36(3), do not include all sum due to any workman and employees from the provident fund, the pension fund and the gratuity fund, for the purpose of distribution of assets under Section 53, the provident fund, the pension fund and the gratuity fund cannot be included.

Para 25- The Adjudicating Authority having come to such finding that the aforesaid funds i.e., the provident fund, the pension fund and the gratuity fund do not come within the meaning of liquidation estate’ for the purpose of distribution of assets under Section 53. we find no ground to interfere with the impugned order dated 19th March, 2019.”

Bench while parting with the decision held that it would like to fall in line with the ratio laid down by the Principal Bench:

“…any shortfall in gratuity has to be made over by the Resolution Professional and payments of the dues has to be paid outside the waterfall mechanism.”

Bench directed the Resolution Professional to release the dues of the ex-employees and deposit the Provident Fund with EPFO and release Gratuity dues forthwith.[Autonix Lighting Industries (P) Ltd. v. Moser Baer Electronics Ltd., 2020 SCC OnLine NCLT 1111, decided on 19-11-2020]


Advocates for parties:

For Resolution Professional: Milan Singh

For Applicant: Advocate Swarnendu Chatterjee


Ed. Note: See, however, the judgment of NCLAT in Savan Godiwala v. Apalla Siva Kumar, 2020 SCC OnLine NCLAT 191.

Case BriefsSupreme Court

Supreme Court: The 3-Judge Bench of Arun Mishra, B.R. Gavai and Krishna Murari, JJ., set aside the NCLAT’s Order with regard to the appointment of Resolution Professional.

Question for Consideration

Whether an ex-employee of the ‘Financial Creditor’ having rendered services in the past, should not be permitted to act as ‘Interim Resolution Professional’ at the instance of such ‘Financial Creditor’, regard being had to the nature of duties to be performed by the ‘Interim Resolution Professional’ and the ‘Resolution Professional’?

NCLT’s position

State Bank of India (Financial Creditor) had filed an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 with regard to initiation of Corporate Insolvency Resolution Process before the National Company Law Tribunal, Delhi.

NCLT on noting the objection regarding the proposed ‘Interim Resolution Professional’ — Shailesh Verma directed the Financial Creditor to perform it’s statutorily mandatory obligation by substituting the name of the ‘Resolution Professional’ to act as an ‘Interim Resolution Professional’ in place of Shailesh Verma as it was of the view that Shailesh Verma having worked with the State Bank of India for 39 years before his retirement in 2016, there was an apprehension of bias and was unlikely to act fairly and could not be expected to act as an Independent Umpire.

NCLAT’s position

Aggrieved with the above position, Financial Creditor preferred the appeal before NCLAT on the ground that the proposed ‘Interim Resolution Professional’ Shailesh Verma fulfils the requirement for appointment as ‘Interim Resolution Professional’/ ‘Resolution Professional’ under the ‘I&B Code’ and admittedly bears no disqualification.

NCLAT opined that the apprehension of bias expressed by the ‘Corporate Debtor’ qua the appointment of Shailesh Verma as proposed ‘Interim Resolution Professional’ at the instance of the Appellant — ‘Financial Creditor’ cannot be dismissed offhand and the Adjudicating Authority was perfectly justified in seeking his substitution.

——————————————————————————-

Supreme Court’s position

In the above background, Bench observed at the outset that, NCLAT’s approach was not correct that merely Resolution Professional who remained in the service of SBI and is getting pension was disentitled to be Resolution Professional.

Solicitor General, Tushar Mehta as well as Senior Counsel, Krishnan Venugopal agreed for the appointment of new Resolution Professional by NCLT.

Hence, the Bench held that new Resolution Professional be appointed by the NCLT in accordance with the provisions of the Insolvency and Bankruptcy Code, 2016.

While concluding the order, Court stated that the change of Resolution Professional shall not reflect adversely upon the integrity of Resolution Professional concerned, who has been replaced.

Since the impugned order does not reflect the correct approach, the same shall not be treated as a precedent.[State Bank of India v. Metenere,  2020 SCC OnLine SC 837, decided on 19-08-2020]


Also Read:

[SC ALERT] NCLAT’s decoder on appointment of a person as Resolution Professional: Will an ex-employee of Financial Creditor be eligible for appointment? Read on

Case BriefsTribunals/Commissions/Regulatory Bodies

SUPREME COURT ALERT

This NCLAT Order has been set aside by the Supreme Court, the detailed report of which can be found at the end of this piece.

National Company Law Appellate Tribunal (NCLAT): The Coram of Justice Bansi Lal Bhat (Judicial Member), V.P. Singh and Shreesha Merla, Technical Members, addressed a grievance with regard to the appointment of Resolution Professional.

Independent Umpire?

Ex-employee of Financial Creditor appointed as Resolution Professional | NCLT’s position

State Bank of India (Financial Creditor) had filed an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 with regard to initiation of Corporate Insolvency Resolution Process before the National Company Law Tribunal, Delhi.

NCLT on noting the objection regarding the proposed ‘Interim Resolution Professional’ — Shailesh Verma directed the Financial Creditor to perform it’s statutorily mandatory obligation by substituting the name of the ‘Resolution Professional’ to act as an ‘Interim Resolution Professional’ in place of Shailesh Verma as it was of the view that Shailesh Verma having worked with the State Bank of India for 39 years before his retirement in 2016, there was an apprehension of bias and was unlikely to act fairly and could not be expected to act as an Independent Umpire.

No disqualification

Aggrieved with the above position, Financial Creditor preferred the instant appeal on the ground that the proposed ‘Interim Resolution Professional’ Shailesh Verma fulfils the requirement for appointment as ‘Interim Resolution Professional’/ ‘Resolution Professional’ under the ‘I&B Code’ and admittedly bears no disqualification.

Question for Consideration

Whether an ex-employee of the ‘Financial Creditor’ having rendered services in the past, should not be permitted to act as ‘Interim Resolution Professional’ at the instance of such ‘Financial Creditor’, regard being had to the nature of duties to be performed by the ‘Interim Resolution Professional’ and the ‘Resolution Professional’?

Analysis 

Regulation 3(1) of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 provides that an Insolvency Professional shall be eligible for appointment as a ‘Resolution Professional’ for the ‘Corporate Insolvency Resolution Process’ of a ‘Corporate Debtor’ if he or his partners and directors of the Insolvency Professional Entity are independent of the ‘Corporate Debtor’.

In view of the above-stated regulation, Mr Shailesh Verma came under the ambit of a qualified Insolvency Professional and neither he nor any of his associates were alleged to be connected with the ‘Corporate Debtor’ in a manner rendering him ineligible to act as a ‘Resolution Professional’.

Tribunal referred to the Supreme Court’s decision in Ranjit Thakur v. Union of India, (1987) 4 SCC 611, wherein following was held:

“17. As to the tests of the likelihood of bias what is relevant is the reasonableness of the apprehension in that regard in the mind of the party. The proper approach for the judge is not to look at his own mind and ask himself, however, honestly, “Am I Biased?”; but to look at the mind of the party before him.”

Tribunal’s Opinion

Coram on considering the given set of circumstances opined that the apprehension of bias expressed by the ‘Corporate Debtor’ qua the appointment of Shailesh Verma as proposed ‘Interim Resolution Professional’ at the instance of the Appellant — ‘Financial Creditor’ cannot be dismissed offhand and the Adjudicating Authority was perfectly justified in seeking his substitution.

The said position was notwithstanding the fact that Mr Shailesh Verma was not disqualified or ineligible to act as an ‘Interim Resolution Professional’.

Hence, no legal flaw in the impugned order of NCLT was found. [State Bank of India v. Metenere Ltd., Company Appeal (AT) (Insolvency) No. 76 of 2020, decided on 22-05-2020]


Supreme Court Alert

Supreme Court: The 3-Judge Bench of Arun Mishra, B.R. Gavai and Krishna Murari, JJ., set aside the NCLAT’s Order with regard to the appointment of Resolution Professional.

In the above background, Bench observed at the outset that NCLAT’s approach was not correct that merely Resolution Professional who remained in the service of SBI and is getting pension, was disentitled to be Resolution Professional.

Solicitor General, Tushar Mehta as well as Senior Counsel, Krishnan Venugopal agreed for the appointment of new Resolution Professional by NCLT.

Hence, the Bench held that new Resolution Professional be appointed by the NCLT in accordance with the provisions of the Insolvency and Bankruptcy Code, 2016.

While concluding the order, Court observed that the change of Resolution Professional shall not reflect adversely upon the integrity of Resolution Professional concerned, who has been replaced.

Since the impugned order does not reflect the correct approach, the same shall not be treated as a precedent.[State Bank of India v. Metenere, 2020 SCC OnLine SC 837, decided on 19-08-2020]

Legislation UpdatesStatutes/Bills/Ordinances

The Insolvency and Bankruptcy Code (Second Amendment) Bill, 2020 received Presidential assent on 23-09-2020.

Insolvency and Bankruptcy Code (Second Amendment) Act, 2020

Key Features:

Suspension of Initiation of Corporate Insolvency Resolution Process

In light of the extraordinary situation caused by the COVID-19 pandemic, a need was felt to temporarily suspend the initiation of the corporate insolvency resolution process under the Code, initially for a period of 6 months not exceeding one year from 25th March, 2020 to provide relief to the companies in order to recover from the financial stress.

Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020 was promulgated by the president on 05-06-2020 as the Parliament was not in session at that time.

New Section 10 A replacing Sections 7, 9 and 10 [Temporary Suspension]

(a) To insert a new Section 10A in the Code to provide for temporary suspension of Sections 7, 9 and 10 in respect of any default arising on or after 25-03-2020 for a period of six months or such further period, not exceeding one year from such date, as may be notified in this behalf; and

EXPLAINER: Temporary suspension of initiation of the corporate insolvency resolution process

Amendment of Section 66

(b) to insert a new sub-section (3), in Section 66 of the Code to provide that no application shall be filed by a resolution professional under sub-section (2), in respect of such default against which initiation of the corporate insolvency resolution process is suspended as per Section 10A.

EXPLAINER: Resolution Professional from filing such an application in relation to the defaults for which initiation of CIRP has been prohibited.

Please read the Amended Act here: ACT


Ministry of Law and Justice

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Appellate Tribunal (NCLAT): Justice Bansi Lal Bhat (Judicial), V.P. Singh (Technical) and Shreesha Merla  (Technical) held that an ex-employee of the ‘Financial Creditor’ having rendered services in the past, should not be permitted to act as ‘Interim Resolution Professional’ at the instance of such ‘Financial Creditor’, regard being had to the nature of duties to be performed by the ‘Interim Resolution Professional’ and the ‘Resolution Professional’.

Background of the case:

The appellant- ‘State Bank of India’- is the ‘Financial Creditor’ has filed an appeal against the NCLT’s cognizance of the objection raised by the ‘Corporate Debtor’- ‘Metenere Limited’- regarding the proposed ‘Interim Resolution Professional’- Mr. Shailesh Verma whose employment under SBI for 39 years created an apprehension of bias, since Mr. Shailesh Verma was unlikely to act fairly and could not be expected to act as an Independent Umpire. The question that arose before the court was whether an ex-employee of one of the parties is qualified to act in the position of ‘Interim Resolution Professional’.

Decision

  • In the current appeal, the tribunal has laid emphasis on the current relationship between IRP and the Financial Creditor, where the former derives a pension from the latter. The Tribunal finds the IRP qualified to be an ‘Interim Resolution Professional’ in his personal capacity but the fact that the Appellant restricted its choice to propose him as IRP shows regard to past loyalty and the long services rendered by him. Further, the filing of instant appeal by ‘Financial Creditor’ shows their dismay at the IRP being asked to be substituted by the impugned order.
  • The relevant statutory provision which the bench looked into for qualification of the IRP is Regulation 3 (1) of the Insolvency and Bankruptcy Board of India,  Company Appeal (AT) (Insolvency) No. 76 of 2020 (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, which reads as under: “(1) An insolvency professional shall be eligible to be appointed as a resolution professional for a corporate insolvency resolution process of a corporate debtor if he, and all partners and directors of the insolvency professional entity of which he is a partner or director, are independent of the corporate debtor.”
  • The likelihood of bias has been measured via the case of Ranjit Thakur v. Union of India, (1987) 4 SCC 611, in which the Supreme court said: “As to the tests of the likelihood of bias what is relevant is the reasonableness of the apprehension in that regard in the mind of the party. The proper approach for the judge is not to look at his own mind and ask himself, however, honestly, “Am I Biased?”; but to look at the mind of the party before him”. The committee finally upholds the impugned order, by saying the Appellant- ‘Financial Creditor’ should not have been aggrieved of the impugned order as the same did not cause any prejudice to it.

[SBI v. Metenere Ltd., Company Appeal (AT) (Insolvency) No. 76 of 2020, decided on 22-05-2020]

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Appellate Tribunal (NCLAT): A.I.S. Cheema, J. while deciding the present Company Appeal held that the dissenting Financial Creditor in COC cannot be allowed to scuttle CIRP process otherwise the provision permitting COC to take decisions with regard to subjects stated in Section 28(1) by given majority of 66 percent under Section 28(3) would be rendered nugatory.

In the present matter, the Resolution Professional had filed an MA, under Section 60(5) (c) read with Sections 25(1), 25(2) (c) and 28(1) (a) of the Insolvency and Bankruptcy Code, 2016, before the Adjudicating Authority (National Company Law Tribunal, Division Bench, Chennai) to issue a certification approving Interim Finance and any costs related to it, as it forms part of the insolvency resolution process cost and has to be shared between all the members of the Committee of Creditors, in the proportion of their voting rights.

This application was allowed and the COC members were directed to release the Letter of Comfort.

Against developments as above, EARC filed an appeal claiming in view of the amendment to Section 30(4) of IBC read with Section 52(8) of IBC; Insolvency Resolution Process costs which include interim finance can only be recovered from secured creditors and not from unsecured creditors like Appellant. His appeal further raised ground of not being heard before passing the order thereby violating principles of natural justice.

The learned counsel for Resolution Professional submitted that the RP is responsible to keep the corporate debtor a going concern. It was further submitted that there was an urgency to seek orders of the Adjudicating Authority as the appellant was not ready to release the Letter of Comfort and the default would have led to render the corporate debtor ineligible to participate in the tender for power supply. 

The Tribunal opined that the appellant has the right to dissent in a COC meeting, but if the decision is still taken by the majority provided under the statute, all of COC members are duty-bound to abide by the decision.

Reliance was placed on the case of K. Sashidhar v. Indian Overseas Bank, 2019 SCC OnLine SC 257, where it was stated that the commercial wisdom of individual Financial Creditor is non-justiciable.

In view of the above, the appeal was dismissed and no orders as to costs were given; holding that the appellant had not made out a good case that if it was heard, impugned order could have been different. The tribunal found principles of natural justice to be satisfied but could not draw such an interpretation of Sub-Section (4) of Section 30 so as to require only Secured Financial Creditors to contribute towards interim finance and not the Unsecured Financial Creditors. [Edelweiss Asset Reconstruction Company Ltd. v. Sai Regency Power Corpn. (P) Ltd, 2019 SCC OnLine NCLAT 921, decided on 20-12-2019]

Case BriefsSupreme Court

Supreme Court: The 3-judge bench of RF Nariman, Surya Kant and V. Ramasubramanian, JJ has set aside the NCLAT order dated 04.07.2019 in the Essar Steel India insolvency case and has held,

“The NCLAT judgment which substitutes its wisdom for the commercial wisdom of the Committee of Creditors and which also directs the admission of a number of claims which was done by the resolution applicant, without prejudice to its right to appeal against the aforesaid judgment, must therefore be set aside.”

NCLAT had, in the impugned order, held that in a resolution plan there can be no difference between a financial creditor and an operational creditor in the matter of payment of dues, and that therefore, financial creditors and operational creditors deserve equal treatment under a resolution plan. Accordingly, the NCLAT has re-distributed the proceeds payable under the approved resolution plan as per the method of calculation adopted by it so that all financial creditors and operational creditors be paid 60.7% of their admitted claims.

The present appeals and writ petitions were an aftermath of this Court’s judgment dated 04.10.2018 in ArcelorMittal India Private Limited v. Satish Kumar Gupta, (2019) 2 SCC 1.

The Court also answered some important questions which have been elaborated as follows:

Role of Resolution Professional

Resolution professional is a person who is not only to manage the affairs of the corporate debtor as a going concern from the stage of admission of an application under Sections 7, 9 or 10 of the Code till a resolution plan is approved by the Adjudicating Authority, but is also a key person who is to appoint and convene meetings of the Committee of Creditors, so that they may decide upon resolution plans that are submitted in accordance with the detailed information given to resolution applicants by the resolution professional.

“Another very important function of the resolution professional is to collect, collate and finally admit claims of all creditors, which must then be examined for payment, in full or in part or not at all, by the resolution applicant and be finally negotiated and decided by the Committee of Creditors.”

Role of the prospective resolution applicant

The prospective resolution applicant has a right to receive complete information as to the corporate debtor, debts owed by it, and its activities as a going concern, prior to the admission of an application under section 7, 9 or 10 of the Code. For this purpose, it has a right to receive information contained in the information memorandum as well as the evaluation matrix mentioned in Regulation 36-B.

Role of Committee of Creditors

Since it is the commercial wisdom of the Committee of Creditors that is to decide on whether or not to rehabilitate the corporate debtor by means of acceptance of a particular resolution plan, the provisions of the Code and the Regulations outline in detail the importance of setting up of such Committee, and leaving decisions to be made by the requisite majority of the members of the aforesaid Committee in its discretion.

“The Committee of Creditors does not act in any fiduciary capacity to any group of creditors. On the contrary, it is to take a business decision based upon ground realities by a majority, which then binds all stakeholders, including dissentient creditors.”

The decisions relating to management of the corporate debtor cannot be taken without the prior approval of at least 66% of the votes of the Committee of Creditors.

Constitution of a sub-committee by the Committee of Creditors

Sub-committees cannot be constituted for:

  • Exercising of the Committee of Creditors’ powers on questions which have a vital bearing on the running of the business of the corporate debtor.
  • approving a resolution plan.

However, sub-committees can be appointed for the purpose of negotiating with resolution applicants, or for the purpose of performing other ministerial or administrative acts, provided such acts are in the ultimate analysis approved and ratified by the Committee of Creditors.

Jurisdiction of the Adjudicating Authority and the Appellate Tribunal

The Adjudicating Authority generally cannot interfere on merits with the commercial decision taken by the Committee of Creditors. However, the limited judicial review available is to see that the Committee of Creditors has taken into account the fact that the corporate debtor needs to keep going as a going concern during the insolvency resolution process; that it needs to maximise the value of its assets; and that the interests of all stakeholders including operational creditors has been taken care of.

If the Adjudicating Authority finds, on a given set of facts, that the aforesaid parameters have not been kept in view, it may send a resolution plan back to the Committee of Creditors to re-submit such plan after satisfying the aforesaid parameters. The reasons given by the Committee of Creditors while approving a resolution plan may thus be looked at by the Adjudicating Authority only from this point of view, and once it is satisfied that the Committee of Creditors has paid attention to these key features, it must then pass the resolution plan, other things being equal.

Secured and unsecured creditors; the equality principle

Financial creditors are in the business of lending money who are capital providers for companies, who in turn are able to purchase assets and provide a working capital to enable such companies to run their business operation. Whereas operational creditors are beneficiaries of amounts lent by financial creditors which are then used as working capital, and often get paid for goods and services provided by them to the corporate debtor, out of such working capital. Hence,

“If an “equality for all” approach recognising the rights of different classes of creditors as part of an insolvency resolution process is adopted, secured financial creditors will, in many cases, be incentivised to vote for liquidation rather than resolution, as they would have better rights if the corporate debtor was to be liquidated rather than a resolution plan being approved.”

This would defeat the entire objective of the Code which is to first ensure that resolution of distressed assets takes place and only if the same is not possible should liquidation follow.

Constitutional validity of Sections 4 and 6 of the Insolvency and Bankruptcy Code (Amendment) Act, 2019

Section 4

So far as Section 4 is concerned, it is clear that the original timelines under Section 12 of the Code in which a CIRP must be completed have now been extended to 330 days, which is 60 days more than 180 plus 90 days. The proviso to Section 12 reads:

“the corporate insolvency resolution process shall mandatorily be completed within a period of three hundred and thirty days from the insolvency commencement date, including any extension of the period of corporate insolvency resolution process granted under this section and the time taken in legal proceedings in relation to such resolution process of the corporate debtor.”

The Court, hence, while leaving the provision otherwise intact, struck down the word “mandatorily” as being manifestly arbitrary under Article 14 of the Constitution of India and as being an excessive and unreasonable restriction on the litigant’s right to carry on business under Article 19(1)(g) of the Constitution. The effect of this declaration is that ordinarily the time taken in relation to the corporate resolution process of the corporate debtor must be completed within the outer limit of 330 days from the insolvency commencement date, including extensions and the time taken in legal proceedings.

It was, however, explained that on the facts of a given case, if it can be shown to the Adjudicating Authority and/or Appellate Tribunal under the Code that only a short period is left for completion of the insolvency resolution process beyond 330 days, and that it would be in the interest of all stakeholders that the corporate debtor be put back on its feet instead of being sent into liquidation and that the time taken in legal proceedings is largely due to factors owing to which the fault cannot be ascribed to the litigants before the Adjudicating Authority and/or Appellate Tribunal, the delay or a large part thereof being attributable to the tardy process of the Adjudicating Authority and/or the Appellate Tribunal itself, it may be open in such cases for the Adjudicating Authority and/or Appellate Tribunal to extend time beyond 330 days.

Section 6

Section 30(2)(b) of the Code as substituted by Section 6 of the Amending Act is in fact a beneficial provision in favour of operational creditors and dissentient financial creditors as they are now to be paid a certain minimum amount, the minimum in the case of operational creditors being the higher of the two figures calculated under sub-clauses (i) and (ii) of clause (b), and the minimum in the case of dissentient financial creditor being a minimum amount that was not earlier payable. As a matter of fact, pre-amendment, secured financial creditors may cramdown unsecured financial creditors who are dissentient, the majority vote of 66% voting to give them nothing or next to nothing for their dues. In the earlier regime it may have been possible to have done this but after the amendment such financial creditors are now to be paid the minimum amount mentioned in sub-section (2).

It was also noticed that the discretion given to the Committee of Creditors by the word “may” again makes it clear that this is only a guideline which is set out by this sub-section which may be applied by the Committee of Creditors in arriving at a business decision as to acceptance or rejection of a resolution plan.

[Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta, 2019 SCC OnLine SC 1478, decided on 15.11.2019]