The period of October to December 2024 saw significant developments in Insolvency and Bankruptcy Code (IBC) case law, with pronouncements from both the Supreme Court and various High Courts. These judgments clarify crucial aspects of the Code, ranging from the powers of the Committee of Creditors (CoC) to the treatment of related party transactions and the implementation of resolution plans. Several Supreme Court decisions addressed critical issues concerning the jurisdiction of courts in CIRP matters, the invocation of inherent powers, and the sanctity of approved resolution plans. High Court rulings further elucidated the interplay between the IBC and other laws, including the Companies Act and SEBI regulations, as well as the rights and obligations of various stakeholders.
The Supreme Court, in Committee of Creditors of KSK Mahanadi Power Company Limited v. Uttar Pradesh Power Corporation Limited, emphasized the limitations of High Court intervention in CIRP proceedings, reinforcing the IBC’s structured framework. In GLAS Trust Company LLC v. BYJU Raveendran, the apex court clarified the scope of inherent powers under Rule 11 of the NCLAT Rules, holding that they cannot override explicit provisions of the Code, particularly those related to withdrawal of CIRP under Section 12A. The State Bank of India v. The Consortium of Mr. Murari Lal Jalan case dealt with the intricacies of resolution plan implementation, specifically addressing the impermissibility of adjusting performance bank guarantees against first tranche payments and the consequences of defaulting on plan obligations. The Court’s decision underscored the importance of adhering to timelines and fulfilling commitments outlined in approved plans, ultimately leading to the liquidation of Jet Airways due to repeated defaults by the SRA. The Supreme Court also reiterated the importance of CoC’s commercial wisdom in resolution plan approvals in this case. In Committee of Creditors v. Directorate of Enforcement, the Supreme Court examined the interplay between the IBC and the Prevention of Money Laundering Act (PMLA), particularly concerning the attachment of properties of the corporate debtor. Finally, in China Development Bank v. Doha Bank, the Supreme Court clarified the definition of “financial creditor” under Section 5(7) of the IBC, holding that lenders providing guarantees can be classified as financial creditors, even without direct lending to the corporate debtor.
High Court decisions during this period addressed a range of issues relating to the IBC. The Bombay High Court, in Vijendra Kumar Jain v. IBBI, upheld the suspension of a Resolution Professional (RP) for dereliction of duty, emphasizing the RP’s responsibility to address creditor claims and consider relevant objections. In Siti Networks Limited v. Rajiv Suri, the same High Court considered the status of funds deposited by a corporate debtor in an execution appeal, determining that such funds constitute assets of the corporate debtor subject to the IBC’s provisions. Harsh Mehta v. Securities and Exchange Board of India examined the validity of SEBI regulations concerning the delisting of shares pursuant to an IBC-approved resolution plan, upholding their legality. The Telangana High Court, in Mandava Holdings Private Limited v. PTC India Financial Services Limited, clarified the precedence of the IBC over other regulatory frameworks, including RBI regulations, in matters of insolvency resolution.
Decisions by the National Company Law Appellate Tribunal (NCLAT) further contributed to the evolving IBC jurisprudence. In Commissioner of Income Tax (TDS-1) v. Sundaresh Bhat, the NCLAT emphasized the importance of adhering to claim submission deadlines and the binding nature of approved resolution plans. Avil Menezes v. Ministry of Coal addressed the treatment of dues related to mine closure costs during CIRP, holding that pre-CIRP dues should be treated as claims and post-CIRP dues as part of insolvency resolution process costs. 1 Several other NCLAT rulings addressed issues ranging from the validity of CIRP initiation to the treatment of development rights in real estate projects and the priority of going concern sales during liquidation. These cases, along with the Supreme Court pronouncements, provide valuable insights into the practical application and interpretation of the IBC, shaping the landscape of insolvency resolution in India.
1. Supreme Court
Committee of Creditors of KSK Mahanadi Power Company Limited Vs. M/s Uttar Pradesh Power Corporation Limited & Ors. [Civil Appeal No. 11086 of 2024]
AA rejected the application filed by one of the FC for consolidation of CIRP of KSK Mahanadi Power Company Limited (CD) with other two group companies. The appeal filed by FC before NCLAT was later withdrawn. In the meanwhile, Uttar Pradesh Power Corporation Limited (Respondent/ OC) filed a WP in Telangana HC, seeking relief of consolidation for maximization of assets. The HC had declined to grant the main relief and directed OC to approach the NCLT with the grounds available under the law and stayed the CIRP. Aggrieved by the order of HC, the CoC filed an appeal before SC.
The issue for consideration before the SC was whether the HC was justified in granting stay during the first hearing without notice to CoC and others. The SC while allowing the appeal, has set aside the order of HC. It observed that the decision of HC in deferring the CIRP proceedings is beyond its jurisdictional boundaries under Article 226 and held that such a decision “breaches the discipline of the law which has been laid down in the provisions of the Insolvency and Bankruptcy Code 2016.”
GLAS Trust Company LLC (GTCL), an administrative agent of the secured lender in the capacity of FC, had filed section 7 application against Think and Learn Private Limited, a subsidiary of M/s Byju’s Alpha Inc., a USA based entity. Earlier, the CIRP had already commenced against the CD on the application filed by OC i.e., The Board of Control for Cricket in India (BCCI). Therefore, GTCL was allowed to submit claims in the ongoing CIRP with the liberty to seek restoration of its petition. NCLT’s orders were challenged by the CD and FC before NCLAT which granted stay on the constitution of CoC. In the meanwhile, one of the directors of CD proposed settlement of dues with BCCI which was objected by FC and the appellant herein on the grounds of source of funds, round-tripping and that such payments would amount to preferential treatment to OC and prejudicial to FCs. However, NCLAT while exercising inherent powers under rule 11 of National Company Law Appellate Tribunal Rules, 2016 (NCLAT Rules) allowed withdrawal of CIRP. On appeal by FC, the issue before SC was whether rule 11 can be invoked when provisions for withdrawal are prescribed under the law. SC while setting aside the judgment of NCLAT, examined the provisions of section 12A read with regulation 30A of CIRP Regulations and inherent powers under the rule 11 of NCLAT Rules and held that inherent powers can be exercised in cases where statutory provisions are silent or ambiguous and such powers cannot be used to go against the established legal framework provided under the provisions of the Code. Further, it also highlighted the importance of ensuring fairness and compliance with insolvency regulations to protect the interests of all stakeholders and directed that the funds in question remain in an escrow account under the oversight of the Committee of Creditors (CoC) until further developments.
AA admitted Jet Airways (India) Limited (CD) into CIRP vide order dated 20.06.2019. Subsequently, AA approved the resolution plan of SRA. The implementation of the resolution plan was delayed beyond the timelines owing to extensions sought by the SRA. The CoC objected for extensions as the dues payable to workmen, airport authorities, and other costs etc. were on the rise. Further, SRA approached NCLAT to exclude the period in deciding appeal from 180-day period for infusion of 1st tranche of funds and restrain FCs from encashing Performance Bank Guarantee (PBG). On 16.08.2023, the FC filed an affidavit before the NCLAT and submitted that, if SRA (i) infuses Rs. 350 crores by 31.08.2023; (ii) complies with the payment obligations to the workmen and employees, and (iii), follows the other terms and conditions of the plan – then it would not contest the issues relating to the grant of extension of time as well as the issue relating to the compliance of the terms and conditions of the plan. On 28.08.2023, the NCLAT partly allowed the adjustment application filed by the SRA by holding that the payment of the first tranche of Rs. 350 Crore and remaining Rs. 200 Crore were allowed to be infused on or by 31.08.2023 and 30.09.2023 respectively and, accordingly timeline was considered. FCs filed an appeal before the SC against the aforesaid order. On 18.01.2024, the SC held that the PBG cannot be permitted to be adjusted against the first tranche payment and therefore, directed that the amount of Rs. 150 Crore be infused in cash on or before 31.01.2024 and prayer for extension of the compliance order was dismissed. Meanwhile, FCs’ submissions regarding non-fulfilment of the stipulations under the resolution plan was dismissed by NCLAT holding that SRA had complied with the conditions in the plan. FCs filed an appeal before SC against the order of NCLAT. While adjudicating upon the present appeals, SC held that the PBG could not have been adjusted against the first tranche payment, as it contravened its previous order dated 18.01.2024 and the terms of the resolution plan. It noted malafide intention on part of the SRA in delaying implementation of the resolution plan in the garb of pendency of litigation against non-fulfilment of terms and conditions and held that the adjustment of the PBG was impermissible under the terms of the resolution plan read with regulation 36B(4A) of the CIRP Regulations. SC, further held that the SRA, not having infused the first tranche payment of Rs. 350 Crore within a period of 180 days from the effective date, has defaulted on its obligation towards the payment of CIRP costs (which include airport dues) and has breached the terms of the resolution plan towards payment of workmen and employees’ dues and other statutory dues like PF and Gratuity. Considering the above, it concluded that failure to implement the resolution plan by the SRA has rendered CIRP too costly for the FCs, leaving liquidation as the last resort to recover their money.
SC reiterating the superiority of the commercial wisdom of the CoC in deciding resolution plan with minimum judicial interference, it suggested that the Central Government and the IBBI should explore the possibilities of better enforcement of the standards and practices enumerated in the Guidelines for CoC through an independent mechanism under the auspices of an oversight committee instead of making them self-regulatory. Further, SC observed that AA, while approving a resolution plan, should record the steps which are to be taken by the respective parties for implementation of the approved resolution plan. It also observed that the IBC should statutorily incorporate provisions for the constitution of a Monitoring Committee once the plan has been approved, for a smooth handover of the CD to the SRA, removing AA’s discretion to order constitution of such Committee. Lastly, SC, while allowing appeal, invoked Article 142 of the Constitution and held that the amount of Rs 200 Crore already infused by the SRA shall be forfeited and FCs were permitted to encash the PBG of Rs. 150 Crore furnished by the SRA and directed to commence liquidation of CD.
Committee of Creditors Vs. Directorate of Enforcement & Ors. [SLP (Civil) Nos. 29327- 29328 of 2019]
CoC had filed a civil appeal against Directorate of Enforcement (ED) challenging the provisional attachment orders issued by the latter post approval of resolution plan. The issue before SC was on the jurisdiction of the ED to attach the properties of the CD in the light of section 32A of the Code. In the peculiar facts of the case, considering the prayer of the ED to proceed with the investigation of the case registered against the promoters of Bhushan Power and Steel Limited- CD and seeking restitution of the attached properties to the SRA under the provisions of PMLA, SC directed ED to handover the properties that were provisionally attached, forthwith to SRA in terms of section 8(8) of the Prevention of Money Laundering Act, 2002 (PMLA) read with rule 3A of the said Rules.
China Development Bank Vs. Doha Bank Q.P.S.C. & Ors. [Civil Appeal No. 7298 of 2022 & Ors.]
A Deed of Hypothecation (DoH) was executed between China Development Bank (lender/appellant) and Rcom entities comprising of four entities including Reliance Infratel Limited-CD-Chargors, whereby a charge was created on pooled properties, for securing repayment of the facilities provided by the lenders. It was agreed between the parties that if any entity fails in repayment, then all would jointly and severally be liable to make the repayment after realisation of hypothecated assets. The lenders submitted their claims as FCs after CIRP initiation against the CD and their claims were admitted as FC. Doha Bank another FC challenged the lender’s status as FC, before NCLT, as the latter is not involved in the direct lending. AA upheld the status of lender as FC. In the appeal filed by another FC, NCLAT reversed the order of NCLT. Aggrieved by the NCLAT order, the lender filed an appeal before SC. The issue before SC was whether the appellants can be classified as FCs within the meaning of section 5(7) of the Code and can they be classified as secured creditors and paid as per security interest. The SC observed that financial debt defined in section 5(8) of the Code includes liabilities arising from guarantee and direct lending is not a pre-requisite of section 5(8), when the debt arises from a valid guarantee. Through Master Security Trustee Agreement (MSTA), lenders have authorised a security trustee to enforce the security in accordance with the provisions of the agreement and to receive and apply all money in accordance with the security documents. Therefore, the secured lenders have authorised the Security Trustee to accept the security on their behalf. The DoH comprises of elements of guarantee and its legal effect must not be seen from its nomenclature. Clause 5(iii) of the DoH obligates that CD, who is not the borrower of the appellants, but agreed to discharge the liability of the third parties i.e., RCom entities to the lender in the case of default of RCom entities. Thus, by the covenants of the DoH, a guarantee was provided by the CD to the appellants in terms of section 126 of the Contract Act. SC while allowing the appeal held that there is no requirement under section 5(8) of the Code that a debt becomes financial debt only when default occurs and restored the order of AA.
2. High Court
Vijendra Kumar Jain Vs. IBBI [W.P. No. 12320 of 2024]
One of the OCs had filed an appeal before NCLAT against the approved resolution plan. The NCLAT observed that the RP should have been more dutiful and alert in responding to the emails of OC concerning their claims backed by arbitral award. RP also failed to take cognizance of objectional comments of SRA on Arbitral award passed in favour of OC, while the resolution plan was in consideration before the CoC and AA. Subsequently, IBBI after investigation, issued show cause notice (SCN) to RP for dereliction of duty. Thereafter, his registration as RP was suspended for a period of one year by the order of Disciplinary Committee (DC). Thereafter, RP filed WP in Bombay HC, challenging the order of DC. The HC while dismissing WP observed that the SCN was issued on the sufficient grounds, and the DC had adhered to the principles of natural justice in passing the order. Further, it observed that there was sufficient material available with DC, on the basis of which the SCN was disposed. It noted that by not taking into account the claim of OC in CIRP and not taking cognizance of remarks made by SRA on the arbitral award, in the resolution plan, RP had failed in the performance of his duties. HC held that the suspension order is proportionate based on material available, and the DC has jurisdiction under the Code to take into consideration all related aspects including the conduct of RP.
Siti Networks Limited Vs. Rajiv Suri [IA(Lodg.) No. 31055 of 2024 in Appeal No. 597 of 2016 in Suit No. 2295 of 2002]
During the pendency of an appeal in execution of a decree, the judgment debtor was pushed into CIRP. The CD filed an application before the HC of Bombay seeking withdrawal of such appeal and release of the amount deposited with the appellant court. The issue for consideration before the HC was whether such amount deposited by the CD in appellate court would form part of the CD’s asset? HC while disposing the application held that- i. Such amounts due from the CD under a judgement or decree would give way to the IBC; ii. Monies deposited with the court are assets of the CD, with possession being in the hands of the Court. iii. Though such amount constitutes “security interest” under the purview of section 3(31) of Code with regards to “performance of an obligation”, but its enforcement is subject to provisions of IBC. iv. With regard to release of the deposited amount, it observed that “No meaningful purpose would be served in continuing with the deposit, since even if the Appeal were to fail, the Respondent would need to be subjected to the CIRP run by the Committee of Creditors through the Resolution Professional. If the resolution attempts fail, the Respondent’s rights under the Impugned Judgement would be subject to the waterfall mechanism for distribution of liquidation proceedings, stipulated under the IBC”. While allowing the withdrawal of original appeal, HC allowed release of the amount to the CD.
Harsh Mehta Vs. Securities and Exchange Board of India & Ors. [W.P. No. 4844 of 2024]
Harsh Mehta (petitioner) had acquired 6700 equity shares of the Reliance Capital Limited-CD subsequent to the approval of resolution plan by AA. The approved resolution plan provides NIL value to the equity shareholders and shares of CD were delisted accordingly. The stock exchange issued circulars suspending trading of CD’s shares. The petitioner being aggrieved with the delisting of shares of CD, filed a WP, challenging the regulation 3(2)(b)(i) of the SEBI (Delisting of Equity Shares) Regulations, 2021 (Delisting Regulations) as the said regulation was ultra vires to Securities Contracts (Regulation) Act, 1956 (SCRA) and Securities and Exchange Board of India Act, 1992 (SEBI). The issue before HC was whether the regulations are manifestly arbitrary and violative of Article 14 of the Constitution. The HC while dismissing the WP, observed that (i) The petitioner invested in a minuscule percentage of shares after being aware that CD was in CIRP. (ii) The Delisting Regulations provides that it would not apply to delisting of shares of a listed company, made pursuant to IBC approved resolution plan. The provisions of SEBI and SCRA, empower SEBI to regulate financial markets and protect the interest of investors, and SEBI acted within its regulatory scope and no breach of power had been committed. (iii) IBC aims to provide a comprehensive framework for expeditious resolution and asset maximisation, and SEBI’s decision to not govern the delisting cannot be held to be ultra vires as the NCLT approved plan is consistent with the objective of SEBI Act.
Mandava Holdings Private Limited Vs. PTC India Financial Services Limited & Ors. [W.P. No. 20620 of 2024]
CIRP in terms of section 10 of the Code was initiated by AA vide its order dated 18.01.2018. An OTS was proposed by the promoter of CD which was rejected by CoC. Thereafter, CoC approved the resolution plan with 83.35% of votes. A writ of Mandamus was filed by the promoter challenging such rejection of OTS. Some of the major issues for consideration before Telangana High Court were-(i) Can the RBI Regulations create new rights which are not contemplated under the IBC? (ii) Can a sole FC, entertain OTS once the CIRP of CD commences? and (iii) Can an application for withdrawal from CIRP be entertained after the approval of plan by CoC? HC held that any settlement must be done within the statutory framework of the IBC only. It observed that “The Court is hence of the view that the mandate of the RBI Framework must give way to the CIRP of the Borrower Entity once the process has been initiated. It is further relevant that paragraph 14 of the RBI Circular provides that “the compromise settlements with the borrowers under the above framework shall be without prejudice to the provisions of any other statute in force” which indicates that the RBI Framework recognizes the precedence of the relevant statute (the IBC in this case) …”. With regards to issue of sole creditor entertaining the OTS, it was held that if any entity wants to withdraw from the CIRP, it has to obtain the approval of the entire CoC in accordance with law. The option of negotiating with only one creditor is not contemplated under the law. Further, section 12A of the IBC makes it clear that once a resolution plan is approved by the CoC, it becomes binding and cannot be undone even by the NCLT and neither the CoC nor the SRA can deviate from the approved resolution plan.
3. National Company Law Appellate Tribunal
Commissioner of Income Tax (TDS-1), Mumbai Vs. Sundaresh Bhat & Ors. [CA(AT)(Ins) No. 575 of 2023]
The appellant-Income Tax Department (ITD) submitted its claim of Rs.10.14 crore after the last date for submission of claims but before the resolution plan was approved. It claimed that it was not informed of its rejection by RP. On an application filed before AA by ITD against the rejection of their claim, the said application was dismissed. On appeal by ITD, the issue before the NCLAT was whether the ITD showed due diligence in submitting the claim. The NCLAT while dismissing the appeal ruled that (i) the RP was empowered to seek additional evidence to analyse the admissibility of the claim. (ii) CIRP Regulations does not provide any discretion to RP for admitting the claim after the extended period. (iii) Putting the status of claims of the creditors on the websites of CD and IBBI portal amounted to deemed knowledge and constructive notice on the ITD in respect of rejection of its claim. (iv) the provisions of the Income Tax Act do not create any charge or security interest on the CD. (v) after approval of a resolution plan by both the CoC and the AA, no surprise claims should be flung on the SRA.
During the CIRP process of the CD, the Coal Ministry issued withdrawal of mine opening permission for certain coal blocks owing to non-deposit of Annual Mine Closure Costs (AMCC). Subsequently, the resolution was approved by CoC with requisite majority. AA in its order partly approved plan directing RP to keep aside the AMCC; and directed the RP to be personally liable for disposal of mined coal in terms of the mine agreement. The RP filed an appeal before NCLAT. The NCLAT while disposing the appeal has stated that AMCC funds deposited into an escrow account were not held in trust as opening of a separate trust is not contemplated under the agreement. It observed that Respondents (Ministry of Coal and others) cannot be allowed to recover the pre-CIRP AMCC dues outside the resolution plan framework as it would be a discriminatory arrangement not envisaged under IBC. NCLAT observed that AMCC should be treated as part of IRP cost during the CIRP and pre-CIRP AMCC to be part of the claim. It held that the IBC, being a special and the subsequent law, overrides inconsistent provisions of Mines and Minerals (Development and Regulation) Act, 1957. It did not agree with the Ministry of Coal’s reliance on the Rainbow Papers judgment and held that no security interest had been created for the AMCC by virtue of any law.
Sunil Kumar Sharma Vs. ICICI Bank Limited & Ors. [CA(AT)(Ins) No. 1158 & 1162 of 2024]
Jaiprakash Associates Limited-CD involved in the business of infrastructure development, had slipped into NPA in the year 2014. The joint lender forum (JLF) approved Debt Realignment Plan (DRP) in 2016. Thereafter, the JLF approved Comprehensive Reorganisation and Restructuring Plan (CRRP) and Master Restructuring Agreement in October 2017. As it did not materialise, the lenders filed section 7 application against the CD. AA admitted CD into CIRP on 03.06.2024. The suspended director challenged the admission orders before NCLAT. The issues for consideration were (i) whether the pendency of a scheme of arrangement under the Companies Act preclude the initiation of CIRP under section 7 of the IBC? (ii) whether restructuring agreements, including DRP and MRA, waive of the pre-existing defaults? (iii) whether the submission of an OTS proposal by the CD constitute acknowledgment of debt and default? (iv) whether RBI, under section 35AA of the Banking Regulation Act can direct banks to initiate CIRP? NCLAT while dismissing the appeal held that pendency of scheme of arrangement before AA does not bar initiation of CIRP against the CD. The Code being a special statute prevails over other laws when it comes to resolving corporate insolvencies. It observed that master restructuring agreements do not automatically extinguish pre-existing defaults. Further, it also rejected the averment of the CD that OTS proposal waived of the default. On the issue of RBI issuing direction to the Banks, it observed that “Directions issued by the RBI, based on defaults within the meaning of Section 3(12) of the IBC, are binding and cannot be disregarded. These directions form a crucial basis for initiating insolvency proceedings.”
K.H. Khan & Anr. Vs. Art Constructions Private Limited & Ors. [CA(AT)(Ins) No. 1116 & 1117 of 2024]
Owners of the land (appellants) had entered into a collaboration agreement with M/s. Era Landmarks (India) Limited (CD) to develop and construction project on their land. Later, CIRP was initiated against the CD under section 7. Subsequently, another developer issued public notice intending to enter into a Joint Development Agreement with the Owners, for the development of the same property which was part of the earlier collaboration agreement between CD and the owners. The application of owners to remove the said property from CIRP was rejected by the AA. Aggrieved by the order, the owners approached NCLAT. The following issues were before NCLAT for its consideration: (i) whether AA had power to decide the subject land to be the assets of the CD under section 60 of IBC (ii) whether RP could have included the subject land in the CIRP process of the CD in terms of explanation to section 18(1)(f) of the Code. Relying upon the SC dictum in Victory Iron Works Ltd. vs. Jitendra Lohia & Anr., wherein it was held that the development rights created in favour of the CD constitute “property” within the meaning of section 3(27) of the IBC, NCLAT held that AA did not lack jurisdiction in adjudicating the question of development rights and deciding as to whether some assets are part of the CIRP. Thus, AA is the proper forum, and the parties need not be relegated to the Civil Court. Answering the second question in affirmative, NCLAT noted that the assignment of rights and obligations was contemplated under the collaboration agreement itself with the consent of other party, which indicated that the developers had development rights to the extent of 70.5% in the assets. Since the impugned case contains similar facts, NCLAT reiterated its own decision in the case of Nilesh Sharma, Resolution Professional. Vs. Mordhwaj Singh & Ors. and held that the CD has development rights in the immovable assets. Thus, NCLAT while dismissing the appeal held that RP has rightly included the subject land in the CIRP.
On an IA filed by the liquidator, AA confirmed the sale of CD as a going concern. Two appeals were filed by minority shareholder seeking to quash the e-auction and prayed for considering the scheme under section 230 of the Companies Act, 2013 (CA) proposed by them as the same was earlier rejected by SCC on grounds that the value offered was lower than the liquidation value and no clarity on source of funds was provided. The NCLAT has examined the basic premise that a CD has to be revived, evaluated the provisions of section 230 of CA, 2013 vis-à-vis sale as a going concern under regulation 32A of the liquidation regulations. It observed that the intention of the legislature is very clear that a company should be continued, to the maximum extent possible, as a going concern, while addressing the issues of insolvency / sickness, it envisages certain processes and procedures to be followed as laid down in section 230. With enactment of IBC, the process of insolvency resolution has been fast tracked and therefore, the significance of section 230(1) in addressing the issue of insolvency / sickness has diminished. The sale of the CD as a going concern under regulations 32(e) and 32A of liquidation regulations are more transparent and effective; the arrangement under section 230 of CA, 2013 should not be put on a higher pedestal; since it is a carryover from an earlier legal regime. NCLAT while dismissing both the appeal held that “while taking action under Chapter 6 of Liquidation Process Regulations, dealing with realizations of assets of the Corporate Debtor, selling the Corporate Debtor as a going concern, will have to be the first priority for the Liquidator, in order to meet the objective of the I & B Code, 2016, i.e. the Corporate Debtor is to be kept, as a going concern after resolution of the insolvency. Therefore, the sale of the Corporate Debtor as a going concern will have precedence, rather than resorting to the Scheme of Compromise under Section 230 (1) of the Companies Act, 2013.”
Praveen Arya & Ors. Vs. Anju Aggarwal (RP) & Anr. [CA(AT)(Ins) No. 40, 45 and 61 of 2024]
Approved resolution plan was challenged by the dissenting financial creditors (DFCs) who were allottees of commercial space, sought exclusion of their allotted units from the asset of CD. The pivotal issue for consideration before NCLAT was whether by virtue of lease deed between lessees and the CD for the allotted unit of one of the DFCs pending registration, can lessor be held to be the owner of the units allotted to them so as to get the units exempted from the asset of the CD? NCLAT observed that executing a lease deed cannot be claimed as ownership for the commercial spaces and more so, the allotted property has not been registered in the name of DFC. NCLAT dismissed the appeal holding that a contract between the parties at best, can lead to specific performance only and the property would continue to be dealt as asset of CD.
Getz Cables Private Limited Vs. State Bank of India & Ors. [CA(AT)(Ins) No. 1953 of 2024]
CD had availed certain credit facilities from SBI and the Northern ARC Capital Ltd (FCs) separately for which Getz Cables Pvt. Ltd. executed a Corporate Guarantee in favour of the FCs. As the account slipped into NPA, ARC issued a demand notice to the corporate guarantor. Another FC-SBI initiated proceedings under section 13(2) of the SARFAESI Act, 2002 against CD and corporate guarantor and subsequently possession notice was issued. Thereafter, the corporate guarantor had filed section 10 application under the Code. In the meanwhile, the District Magistrate has ordered physical possession of property on an application filed by SBI under section 14 of SARFAESI Act. In the section 10 application filed by the corporate guarantor, SBI filed an IA prayed for dismissal of application as the same was filed with malicious intention. AA disposed of the application of SBI and held that the corporate guarantor had filed application with fraudulent and malicious intention in terms of section 65 of the Code and imposed a penalty of Rs.1 lakh. On appeal, the issue for consideration before NCLAT was whether filing of an application by the corporate guarantor under section 10 IBC can be termed as initiation of proceedings with fraudulent and malicious intent. The NCLAT observed that for allowing section 65 application i.e., fraudulent and malicious intention of CIRP, two elements are required to be proved – (i) to commit a wrongful act in absence of any justification and (ii) intent of causing a particular harm. Thus, it held that merely proceeding under section 13(2) and 13(4) of the SARFAESI Act are initiated by the FC prior to filing of section 10 application under the Code, it cannot be a ground to hold that the said application is filed with malicious and fraudulent intent. While allowing the appeal, it held that mere fact that section 10 application is filed, consequent of which the recovery proceedings, cannot lead to conclusion that intent and purpose of the application is malicious and fraudulent.
After approval of the resolution plan with 100 percent votes, a group of homebuyers, who has been awarded decree by UPRERA prior to initiation of CIR process of the CD, preferred an appeal seeking amendment in the IM and restoration of status of their units which were shown as cancelled in the records of the CD. The issue for consideration before the NCLAT was whether the decree holders, in the interest of natural justice, could get the IM amended in order to get back their allotted status as homebuyer? The NCLAT while dismissing the appeal, observed that the homebuyers had submitted their claim and participated in the CIRP and were aware of their cancelled status. It noted that decree holders started litigating after knowing about the treatment given to them in the approved resolution plan wherein, they were given allotment against the cancelled units on payment of full amount as opposed to the initial allotment before CIRP. It was further observed that despite several opportunities to challenge their cancelled status even up to approval of such resolution plan, the decree holders failed to do so. Since the decree holders had accepted partial amount towards the satisfaction of decree passed by UPRERA prior to CIRP of the CD and that CoC in its commercial wisdom approved the resolution plan, IM cannot be allowed to be amended.
The e-auction conducted several times for the sale of CD as a going concern during the liquidation process did not yield successful bidders. The scheme of compromise proposed by the ex-director under section 230 of Companies Act, 2013 (CA ) failed as the sole FC did not approve the same. The liquidator of the CD, in order to manage the CD as going concern, sub-leased the plant and machinery and land allotted to it by MPIDC to a lessee for a period of eleven months upon some consideration. MP Industrial Development Corporation Limited (MPIDCL), the lessor/owner of the land, issued a notice to liquidator for the breach of the lease agreement, as the sub-lease was done without any prior approval contemplated under the terms of lease agreement. The liquidator challenged the same before AA who dismissed the IA. On appeal filed by the liquidator, the issue for consideration before NCLAT was whether section 238 of the Code would override the ability of a public body to regulate its lands in accordance with relevant statutory provisions? NCLAT while disposing the appeal observed held that mere plant and machinery can not be leased without the land over which the factory is situated. Further, it observed that in terms of section 35(1)(d) of the Code liquidator was not entitled to grant sub-leases over properties not owned by the CD and therefore section 238 of the Code cannot be interpreted in a manner that has the effect of overriding the MPIDCL’s duty to enforce the relevant Rules on how public lands are to be regulated. While dismissing the appeal, it held that “the statutory powers of a public body to regulate public lands cannot be overridden by provisions of the Code.”
Central Transmission Utility of India Limited (CTUIL) issued a termination letter to CD for not opening the letter of credit as required. The RP challenged the termination by filing a petition before Central Electricity Regulatory Commission (CERC). However, the said proceedings before CERC were disposed of as infructuous, as the CD deposited cash of Rs.108.44 crores instead of opening letter of credit for complying with the pre-deposit of the said sum. Meanwhile, CIRP was initiated against CD. Post CIRP, CTUIL invoked the security deposit for adjustment towards the pre-CIRP dues. CD challenged such invocation of security before AA, which was allowed by AA. CTUIL preferred an appeal against such order of AA. Issue before NCLAT was whether a deposit lying with a third party, CERC can be adjusted by CTUIL against the pre-CIRP dues during the pendency of CIRP? NCLAT emphasized that as per section 14(1)(c) of the Code, there is prohibition for any action to foreclose, recover or enforce any security interest created by the CD. Thus, while dismissing the appeal it was held that the recovery of past dues is specifically prohibited, moreover, the specified procedure envisaged provides that the creditor must file their claims before the IRP/RP through the prescribed procedure.
D.D. International Private Limited & Anr. Vs. Rajesh Kumar Agarwal Liquidator, Divine Alloys and Power Company Limited & Ors. [CA(AT)(Ins) No. 1559 of 2023]
On the issue whether the AA can forfeit 50% of the EMD towards damages in the event of failure to pay the full sale consideration by the highest bidder in the e-auction sale conducted by the liquidator, was dealt by the NCLAT. In the facts of the case, the highest bidder having paid EMD and refundable participation deposit in the e-auction conducted by the liquidator, subsequently raised concern that a piece of land on which a plant is situated, did not belong to the CD. Thereafter, the liquidator forfeited both the sums for not making the balance payment on time. The bidder filed an application before AA under section 60(5) of the Code. AA, although, observed error on the part of the liquidator in non-disclosing the status of ownership of CD over the land, observed that bidder had access to virtual data room and had even inspected the site, before participating the e-auction and thus, due diligence was required from the bidder. The NCLT ordered the forfeiture of 50% of EMD and refundable participation deposit as damages caused to CD. The highest bidder filed appeal before NCLAT. The NCLAT observed that although the virtual data room was provided to bidder, exact details of the property put for sale were not disclosed to the bidder. It held that there is no procedure for imposing damages; for the sake of argument, even if it is presumed that AA has jurisdiction to impose damages, the Tribunal is firstly required to quantify the damages caused to CD and how the said damages can be compensated. While allowing the appeal, it held that forfeiting the deposit amounts towards damages is arbitrary and directed the liquidator to return the deposited amounts.
NCC Limited Vs. Golden Jubilee Hotels Private Limited & Ors. [CA(AT)(Ins) No. 426, 430, 432 & 710 of 2020]
The appeals were filed by some OCs challenging the approved resolution plan of Golden Jubilee Hotels Pvt. Ltd-CD on the grounds that the plan was discriminatory, as it provided full payments to certain OCs who were categorized as “Special Operational Creditors” (SOC), while other OCs received nothing. The SOC comprising of Telangana State Tourism Corporation Limited (TSTCL) and Shilparamam Arts, Crafts & Cultural Society were deemed critical to the CD’s survival due to their role as lessors of the land on which the hotel was constructed. The key issues in this case were whether sub-classification within the category of OCs is permissible under the Code and whether differential treatment among creditors within the same class is justified.
The NCLAT ruled in favour of the resolution plan, emphasizing the paramountcy of the CoC’s commercial wisdom. It stated that subclassification is permissible as long as it is based on reasonable criteria, such as the criticality of certain creditors to the CD’s survival. Payments to SOC were upheld, as their role in sustaining the CD’s operations justified their prioritization. It clarified that the Code requires fairness and equity in creditor treatment but does not mandate equality or proportionate distribution. The resolution plan provided nil payment to most OCs, as the same is justified by the nil liquidation value in terms of section 53 of the Code. FCs faced significant haircuts, recovering only 40% of their claims. However, the plan ensured payments to SOC to maintain essential assets for the debtor’s operations. In a broader observation, the tribunal suggested revising the waterfall mechanism to allow smaller OCs to receive a minimum recovery, emphasizing the need for legislative amendments to address systemic inequities.
Straw Commodities LLP Vs. Anram Agro Trading Private Limited [CA(AT)(Ins) No. 2292 of 2024]
The AA, on the basis of various communications between the parties on WhatsApp concluded that there were pre-existing disputes and dismissed the OC’s application. The OC filed an appeal before NCLAT. The issue for consideration is whether there were preexisting disputes between the parties. The NCLAT observed that although the CD has not responded to the notice issued under section 8 of the Code, there were pre-existing disputes between the parties as evidenced by the conversation between the OC and CD through WhatsApp. The NCLAT has not considered the submission of the OC that these messages have to meet with provision of section 65B of Indian Evidence Act. It observed that the OC has not denied the conversation between the parties in the grounds of appeal. NCLAT while dismissing the appeal of OC held that there were pre-existing disputes between parties and noted that WhatsApp is a common mode of communication.
4. National Company Law Tribunal
UCO Bank Vs. Subrata Das [CP(IB) No. 286 of 2024]
FC filed an application against the PG to CD under section 95 of IBC, while no CIRP was initiated against the CD. AA dealt with the following issues: (i) Whether proceedings filed against PG under section 95 of the Code is maintainable even when no CIRP proceedings have been initiated against the CD (ii) Whether application filed under section 95(1) of the Code would be maintainable before NCLT, or should the creditor approach the DRT for relief? The AA considered various judgments of SC, HC and NCLAT on the issue and observed that proceedings under section 94 / 95 of the Code before NCLT will commence when there is a CIRP initiated or pending against the CD; and in the absence of CIRP “initiated” or “pending” or “concluded” against CD, an application under section 95 to initiate IRP against a PG to a CD will not be maintainable before the NCLT. The recovery proceedings will lie only before the DRT having territorial jurisdiction.
