Supreme Court
Laxmi Pat Surana Vs. Union Bank of India & Anr. [CA No. 2734/2020]
An FC had extended a credit to a proprietorship firm, which failed to repay the amount. The credit was guaranteed by a company. The FC filed an application under section 7 for CIRP of the CD (guarantor company). The application was contested on the ground that the principal borrower was not a corporate person. The AA admitted the application as the CD was coextensively liable to repay the debt, and the NCLAT confirmed it. While dismissing the appeal, the SC held: “The principal borrower may or may not be a corporate person, but if a corporate person extends guarantee for the loan transaction concerning a principal borrower not being a corporate person, it would still be covered within the meaning of expression “corporate debtor” in Section 3(8) of the Code.” In law, the status of the guarantor, who is a corporate person, metamorphoses into CD, the moment principal borrower, regardless of not being a corporate person, commits default in payment of debt which has become due and payable.
The appellant filed an application under section 7 of the Code. The respondent filed an application under section 8 of the Arbitration Act seeking a direction to refer the parties to arbitration. The AA allowed the section 8 application and dismissed section 7 application observing that there was no default. The appellant filed the SLP contending that the AA erred in entertaining section 8 application in the backdrop of the legal duty cast on it to proceed strictly in accordance with the procedure contemplated under section 7. The SC held that a dispute will be non-arbitrable when a proceeding is in rem and a proceeding under the Code is in rem only after it is admitted. It observed: “On admission, third party right is created in all the creditors of the corporate debtors and will have erga omnes effect. The mere filing of the petition and its pendency before admission, therefore, cannot be construed as the triggering of a proceeding in rem.” It further observed: “.. the process cannot be defeated by a corporate debtor by raising moonshine defence only to delay the process. In that view, even if an application under Section 8 of the Act, 1996 is filed, the Adjudicating Authority has a duty to advert to contentions put forth on the application filed under Section 7 of IB Code, examine the material placed before it by the financial creditor and record a satisfaction as to whether there is default or not.” If the irresistible conclusion by the AA is that there is default and the debt is payable, the bogey of arbitration to delay the process would not arise despite the position that the agreement between the parties indisputably contains an arbitration clause. Since the AA had concluded that there was no default, dismissal of section 7 application was justified.
The AA approved resolution plan, vide order dated March 3, 2020, with certain modifications. The SC, while dealing with appeals related to resolution plan, inter-alia, held as under:
(a) The role of CoC is akin to that of a protagonist, giving finality to the process (subject to approval by the AA), who takes the key decisions in its commercial wisdom and the consequences thereof. The power of judicial review in section 31 of the Code is not akin to the power of a superior authority to deal with the merits of the decision of any inferior or subordinate authority. The AA has limited jurisdiction in the matter of approval of a resolution plan, which is well defined and circumscribed by sections 30(2) and 31 read with the parameters delineated by the SC in its various judgments. Within its limited jurisdiction, if the AA finds any shortcoming in the resolution plan vis-à-vis the specified parameters, it would only send the resolution plan back to the CoC for resubmission after satisfying the parameters delineated by Code and exposited by the SC.
(b) The process of simultaneous voting over two plans for electing one of them cannot be faulted. The legislature itself has made the position clear by way of a later amendment with effect from August 7, 2020, by specifically making stipulations for simultaneous voting over more than one resolution plan by the CoC, particularly with amendment of sub-regulation (3) of regulation 39 of CIRP Regulations and insertion of sub-regulations (3A) and (3B) thereto.
(c) The dissenting financial creditor is entitled to receive the amount payable in monetary terms and not in any other term. It cannot be forced to remain attached to the CD by way of equities or securities.
(d) The homebuyers as a class having assented to the resolution plan of NBCC, any individual homebuyer or any association of homebuyers cannot maintain a challenge to the resolution plan and cannot be treated as a dissenting FC or an aggrieved person.
In exercise of the powers under Article 142, the SC extended the time for completion of CIRP by 45 days while extending opportunity to the resolution applicants (Suraksha Realty and NBCC) to submit modified/fresh resolution plans, which are compliant with the requirements of the Code and the CIRP Regulations and are in accord with the observations and findings in this judgment.
The petitioners had prayed for several reliefs. The SC had granted interim relief earlier not to declare the accounts of respective borrowers as NPA. While disposing of the petitions and vacating interim relief, the SC observed that it is neither within the domain of the courts nor the scope of judicial review to embark upon an enquiry as to whether a particular public policy is wise or whether better public policy can be evolved. Nor are the courts inclined to strike down a policy at the behest of a petitioners merely because it has been urged that a different policy would have been fairer or wiser or more scientific or more logical. Wisdom and advisability of economic policy are ordinarily not amenable to judicial review. Legality of the policy, and not the wisdom or soundness of the policy, is the subject of judicial review. The SC further observed that no writ of mandamus can be issued directing the Government/ RBI to announce/declare particular relief packages and/or to declare a particular policy, more particularly when many complex issues arise in the field of economy for which the courts do not have any expertise. Whether there shall be a waiver of interest during the moratorium period or whether there shall be sector-wise relief packages and/or RBI should have issued directions which are sector specific and/or whether the moratorium period should be extended beyond August 31, 2020 or the last date for invocation of the resolution mechanism, namely, December 31, 2020 provided in the August 6, 2020 circular should be extended are all in the realm of the policy decisions. Therefore, the petitioners shall not be entitled to any reliefs, namely, (i) total waiver of interest during the moratorium period; (ii) to extend the period of moratorium; (iii) to extend the period for invocation of the resolution mechanism; (iv) that there shall be sector-wise reliefs provided by the RBI; and (v) that the Central Government/RBI must provide for some further reliefs over and above the relief packages already offered.
The SC, however, observed that once the payment of instalment is deferred as per circular dated March 27, 2020, non-payment of the instalment during the moratorium period cannot be said to be willful and, therefore, there is no justification to charge the interest on interest for the period during the moratorium. Therefore, there shall not be any charge of interest on interest for the period during the moratorium from any of the borrowers.
The circular dated March 27, 2020 shall be applicable to all banks, non¬banking financial companies, housing finance companies and other financial institutions compulsorily and mandatorily.
Sesh Nath Singh & Anr. Vs. Baidyabati Sheoraphuli Co-operative Bank Ltd. & Anr. [CA No. 9198/2019]
The FC declared the account of the CD as NPA on March 31, 2013. It initiated proceeding under the SARFAESI Act, 2002 in January 2014. The CD challenged the SARFAESI notice through a writ. The HC passed an interim order on July 24, 2017 restraining the FC from taking steps against the CD under the SARFAESI until further orders, on having a prima facie view that the FC being a Cooperative Bank could not invoke the SARFAESI. The FC filed an application under section 7 on August 27, 2018 for initiation of CIRP of the CD. The AA admitted the application. In the appeal before the NCLAT, it was contended that the application was filed on August 27, 2018, after almost five years and five months from the date of accrual of the cause of action, and was, therefore, barred by limitation. While dismissing the appeal, the NCLAT held that the respondent had bona fide, within the period of limitation, initiated proceedings against the CD under the SARFAESI and was thus entitled to exclusion of time under section 14(2) of the Limitation Act.
The SC considered two issues in this appeal:
(a) Whether delay beyond three years in filing an application under section 7 can be condoned, in the absence of an application for condonation of delay made under section 5 of the Limitation Act, 1963? The SC observed that section 5 of the Limitation Act, 1963 does not speak of any application. It enables the Court to admit an application or appeal if the applicant satisfies the Court that it had sufficient cause for not making the application, within the time prescribed. Although, it is the general practice to make a formal application under section 5 of the Limitation Act, 1963 to enable the Court to weigh the sufficiency of the cause for the inability of the appellant to approach the Court within the time prescribed by limitation, there is no bar to exercise by the Court of its discretion to condone delay, in the absence of a formal application.
(b) Whether section 14 of the Limitation Act, 1963 applies to applications under section 7 of the Code? The SC observed that section 238A of the Code makes the provisions of the Limitation Act, as far as may be, applicable to proceedings under the Code. All provisions of the Limitation Act are applicable to proceedings in the NCLT/NCLAT to the extent feasible. Section 14 excludes the time spent in proceeding in a wrong forum, which is unable to entertain the proceedings for want of jurisdiction. Therefore, the entire period consumed during SARFAESI proceedings should be excluded.
The SC further held: “Legislature has in its wisdom chosen not to make the provisions of the Limitation Act verbatim applicable to proceedings in NCLT/NCLAT, but consciously used the words ‘as far as may be’. The words ‘as far as may be’ are not meant to be otiose. Those words are to be understood in the sense in which they best harmonise with the subject matter of the legislation and the object which the Legislature has in view. The Courts would not give an interpretation to those words which would frustrate the purposes of making the Limitation Act applicable to proceedings in the NCLT/NCLAT ‘as far as may be”.
Arun Kumar Jagatramka Vs. Jindal Steel and Power Ltd. & Anr. [CA No. 9664/2019]
Upholding the constitutional validity of regulation 2B of the Liquidation Process Regulations, the SC held that prohibition in section 29A and section 35(1)(f) of the Code must also attach to a scheme of compromise or arrangement under section 230 of the Companies Act, 2013 (scheme), where a company is undergoing liquidation under the Code. Even in the absence of said regulation, a person ineligible under section 29A read with section 35(1)(f) is not permitted to propose a scheme for revival of a company undergoing liquidation under the Code. In case of a company undergoing liquidation pursuant to the provisions of Chapter III of the Code, a scheme is a facet of the liquidation process. It would lead to a manifest absurdity if the very persons who are ineligible for submitting a resolution plan, participating in the sale of assets of the company in liquidation or participating in the sale of the corporate debtor as a ‘going concern’, are somehow permitted to propose a scheme. The same rationale which permeates the resolution process under Chapter II (by virtue of the provisions of section 29A permeates the liquidation process under Chapter III (by virtue of the provisions of section 35(1)(f).
The SC clarified that three modes of revival are contemplated under the Code. The first is in the form of the CIRP elucidated in the provisions of Chapter II. The second is where the CD or its business is sold as a going concern within the purview of clauses (e) and (f) of regulation 32. The third is when a revival is contemplated through the modalities provided in section 230 of the Companies Act. It further clarified that the scheme cannot certainly be equated with a withdrawal simpliciter of an application, as contemplated under section 12A of the Code.
Alok Kaushik Vs. Mrs Bhuvaneshwari Ramanathan and Ors. [CA No. 4065/2020]
The NCLAT set aside initiation of CIRP and remanded the matter to the AA to decide on CIRP costs. The appellant who is a registered valuer filed an application before the NCLT under section 60(5) challenging non-payment of its fees. However, the NCLT dismissed the application concluding that it had been rendered functus officio. The NCLAT declined to exercise its appellate jurisdiction. The SC held that it is an incorrect reading of the jurisdiction of the AA under the Code. It ordered that the AA is sufficiently empowered under section 60(5)(c) of the Code to determine the amount which is payable to an expert valuer as an intrinsic part of the CIRP costs.
The AA had also observed that the IBBI is the competent authority to deal with allegations against the RP. The SC observed that the availability of a grievance redressal mechanism against an IP does not divest the AA of its jurisdiction under section 60(5)( c) to consider the amount payable to the appellant. The purpose of grievance redressal mechanism is to penalise errant conduct of the RP and not to determine the claims of other professionals which form part of the CIRP costs.
Kalpraj Dharamshi & Anr. Vs. Kotak Investment Advisors Ltd. & Anr. [CA Nos. 2943-2944/2020]
The SC observed: (a) Time taken in diligently pursuing a remedy in a wrong court is a bona fide mistake and should be excluded; (b) Waiver is an intentional relinquishment of a right and there can be no waiver unless the person is fully informed of his rights and with full knowledge, intentionally abandons them; and (c) There is an intrinsic assumption that FCs are fully informed about the viability of the CD and feasibility of the proposed resolution plan. The opinion expressed by CoC in its meetings as per voting shares is a collective business decision and so the Code deliberately provides no ground to challenge the commercial wisdom. It is non-justiciable and not to be interfered with, excepting the limited scope as provided under sections 30 and 31 of the Code.
Gujarat Urja Vikas Nigam Limited Vs. Amit Gupta & Ors. [CA No. 9241/2019]
The SC held that the NCLT/NCLAT can exercise jurisdiction under section 60(5)(c) of the Code to stay termination of contracts solely on account of CIRP being initiated against the CD. The NCLT/NCLAT correctly stayed the termination of the Power Purchase Agreement (PPA), since allowing it to terminate the same would certainly result in the corporate death of the CD. The NCLT has jurisdiction to adjudicate disputes, which arise solely from or which relate to the insolvency of the CD. However, in doing so, the NCLT/ NCLAT must ensure that they do not usurp the legitimate jurisdiction of other courts and tribunals when the dispute is one which does not arise solely from or relate to the insolvency of the CD. The SC left the broader question of validity / invalidity of ipso facto clauses in contracts open for the legislative intervention and appealed the legislature to provide concrete guidance.
Jaypee Kensington Boulevard Apartments Welfare Association & Ors. Vs. NBCC (India) Ltd. & Ors. [CA No. 3395/2020]
The SC was appalled with the developments leading to arrest of the IRP, who was working pursuant to the order passed by the Court and entrusted with the functioning of the CD. It observed that the police official dealing with the case is not familiar with the provision of privilege of IRP appointed by the Court in terms of section 233 of the Code. While directing immediate release of the IRP, the SC directed the Investigation Officer not to take any coercive action against the IRP.
P. Mohanraj & Ors. Vs. M/s. Shah Brothers Ispat Pvt. Ltd. [CA No. 10355/2018]
On commencement of CIRP, the AA stayed further proceedings in the two criminal complaints filed under section 138 of the Negotiable Instruments Act, 1881. The NCLAT, however, set aside this order, holding that section 138, being a criminal law provision, cannot be held to be a ‘proceeding’ within the meaning of section 14. The SC considered whether the institution or continuation of a proceeding under section 138 of the Negotiable Instruments Act can be said to be covered by the moratorium under section 14. It held as under:
(a) A quasi-criminal proceeding which would result in the assets of the CD being depleted as a result of having to pay compensation which can amount to twice the amount of the cheque that has bounced would directly impact the CIRP in the same manner as the institution, continuation, or execution of a decree in such suit in a civil court for the amount of debt or other liability. Judged from the point of view of this objective, it is impossible to discern any difference between the impact of a suit and a section 138 proceeding, insofar as the CD is concerned, on it getting the necessary breathing space to get back on its feet during the CIRP.
(b) Section 14(1)(a) refers to monetary liabilities of the CD and section 14(1)(b) refers to the CD’s assets, and together, these two clauses form a scheme which shields the CD from pecuniary attacks against it during the moratorium period so that the CD gets breathing space to continue as a going concern in order to ultimately rehabilitate itself. Any crack in this shield is bound to have adverse consequences.
(c) A moratorium does not extinguish any liability, civil or criminal, but only casts a shadow on proceedings already initiated and on proceedings to be initiated, and such shadow is lifted when the moratorium period comes to an end.
(d) A section 138 proceeding can be said to be a “civil sheep” in a “criminal wolf’s” clothing, as it is the interest of the victim that is sought to be protected, the larger interest of the State being subsumed in the victim alone moving a court in cheque bouncing cases.
(e) A quasi-criminal proceeding contained in Chapter )(VII of the Negotiable Instruments Act would, given the object and context of section 14 of the Code, amount to a “proceeding” within the meaning of section 14(1)(a) and therefore, the moratorium attaches to such proceeding.
(f) Moratorium would apply only to the CD, and the natural persons mentioned in section 141 of the Negotiable Instruments Act, 1881 shall continue to be statutorily liable under Chapter )(VII of the Act.
A Navinchandra Steels Pvt. Ltd. Vs. SREI Equipment Finance Ltd. & Ors. [CA Nos. 4230-4234/2020]
The SC, while dealing with an insolvency application in respect of CD, against whom a winding up petition has already been admitted, observed that the Code is a special statute dealing with revival of the companies under distress and winding up only being resorted to in cases where all attempts of revival of the CD fail. The Companies Act, 2013 is a general statute; whereas the Code is not only a special statute which must prevail in the event of conflict, but also has a non-obstante clause contained in section 238, which makes it clear that in case of conflict, the provisions of the Code will prevail. The SC held that a petition either under section 7 or 9 of the Code is an independent proceeding which is unaffected by winding up proceedings that may be filed qua the same company. Given the object sought to be achieved by the Code, only where a company in winding up is near corporate death, no transfer of the winding up proceeding would take place to the AA to be tried as a proceeding under the Code.
Kridhan Infrastructure Pvt. Ltd. Vs. Venkatesan Sankaranarayan & Ors. [CA No. 3299/2020]
The order of liquidation was stayed earlier by the SC based on submission of the RA that it would deposit ` 50 crore by February 25, 2021. The RA submitted that it would be unable to raise funds from the term lenders who are insisting that the status of the CD should change from a company under liquidation to an active status. The SC observed that ultimately, what the request of the RA reduces to, is that it would raise funds on a mortgage of the assets of the CD and unless the CD is brought out of liquidation, it would not be able to raise funds, and this is unacceptable. It further observed that time is a crucial facet of the scheme under the Code and to allow such proceedings to lapse into an indefinite delay will plainly defeat the object of the Code. A good faith effort to resolve an insolvency is a preferred course. However, an RA must be fair in its dealings as well. Accordingly, the SC forfeited the sum of ` 20 crore already deposited by the RA and vacated the stay on liquidation.
Committee of Creditors of AMTEK Auto Ltd. through Corporation Bank Vs. Dinkar T Venkatasubramanian & Ors. [IA No. 58156/2020 in CA No. 6707/2019]
While dismissing an IA filed by Deccan Value Investors (DVI), the SC had ordered on June 18, 2020: “The application made by the applicant for withdrawal of the offer is hereby rejected and in case he indulges in such kind of practice, it will be treated as contempt of this Court in view of the various orders passed by this Court at his instance.” Subsequently on July 9, 2020, the AA passed an order approving the resolution plan submitted by DVI. DVI filed an appeal before the NCLAT challenging the order of the AA. While the appeal was pending, DVI, vide mail dated September 3, 2020, sought termination of resolution plan in view of outbreak of COVID-19 which constituted a ‘Force Majeure Event’. It filed an IA on September 10, 2020 in the pending appeal before the NCLAT seeking cancellation and return of the performance bank guarantee. The CoC filed a contempt petition on the ground that DVI was in breach of the order of the SC dated June 18, 2020 by seeking to withdraw the resolution plan, while DVI filed an application for rectification of the order dated June 18, 2020 of the SC.
Dismissing the application for rectification, the SC observed that the application is an attempt to renege from the resolution plan which DVI submitted and to resile from its obligations. This is a devious attempt which must be disallowed. The SC noted that plea seeking to re-examine the impact of the pandemic and to re-negotiate the terms of the resolution plan makes it clear that DVI was not willing to fulfill its obligations. To assert that there was any scope for negotiations and discussions after the approval of the resolution plan by the CoC would be plainly contrary to the terms of the Code.
The SC concluded that undoubtedly, the conduct of DVI has not been bona fide. It noted the statement on behalf of DVI that it will not set-up a plea of force majeure. It held: “However lacking in bona fides the conduct of DVI was, we must be circumspect about invoking the contempt jurisdiction as setting up an untenable plea (force majeure) should not in and by itself invite the penal consequences which emanate from the exercise of the contempt jurisdiction. Likewise, the default of DVI in fulfilling the terms of the resolution plan may invite consequences as envisaged in law. On the balance, we are of the considered view that it would not be appropriate to exercise the contempt jurisdiction of this Court.”
Ramesh Kymal Vs. M/s. Siemens Gamesa Renewable Power Pvt. Ltd. [CA No. 4050/2020]
The appellant issued a demand notice on April 30, 2020 specifying April 30, 2020 as the date of default. He filed an application under section 9 on May 11, 2020. During the pendency of the application, an Ordinance was promulgated on June 5, 2020 which inserted section 10A prohibiting filing of applications for CIRP for defaults arising on or after March 25, 2020. The AA did not admit the application. The NCLAT upheld the decision of the AA. The issue before the SC was whether section 10A prohibits an application filed before June 5, 2020 in respect of a default that occurred after March 25, 2020. While upholding the order of the NCLAT, the SC observed that the substantive part of section 10A is to be construed harmoniously with the first proviso and the explanation. Reading the provisions together, it is evident that Parliament intended to impose a bar on the filing of applications for the commencement of CIRP in respect of a CD for a default occurring on or after March 25, 2020. It further observed that the retrospective bar on the filing of applications for the commencement of CIRP during the stipulated period does not extinguish the debt owed by the CD or the right of creditors to recover it.
Phoenix ARC Pvt. Ltd. Vs. Ketulbhai Ramubhai Patel [CA No. 5146/2019]
The CD, by a pledge agreement, pledged 40160 shares of its subsidiary, Gondwana Engineers Limited, in favour of the creditor who had granted a credit facility to another company. The creditor filed a claim in respect of the credit facility in the CIRP of the CD. The RP did not consider the creditor as an FC as the CD’s liability was restricted to pledge of shares. The SC held that a person having only security interest over the assets of CD, even if falling within the description of ‘secured creditor’ by virtue of collateral security extended by the CD, would not be covered by the definition of ‘financial creditor’ under the Code. The creditor in such a case will at best be secured creditor qua the security/CD but shall not be an FC qua the CD.
Manish Kumar Vs. Union of India & Anr. [WP (C) No. 26/2020]
The SC upheld the Insolvency and Bankruptcy Code (Amendment) Act, 2020 and made important findings and observations as under:
(i) First proviso to section 7: The legislative policy reflects an attempt at shielding the CD from what it considers would be either frivolous or avoidable applications. The amendment is likely to ensure that the filing of an application is preceded by a consensus at least by a minuscule percentage of similarly placed creditors that the time has come for undertaking a legal odyssey which is beset with perils for the applicants themselves apart from others. As regards the percentage of applicants contemplated under the proviso, it cannot be dubbed as an arbitrary or capricious fi
(ii) Second proviso to section 7: (a) ‘allotment’ means allotment in the sense of documented booking as mentioned in section 11(1)(b) of the RERA. A person to whom allotment of a plot, apartment, or a building has been made is an allottee. The allottee would also include a person who acquires the allotment either through sale, transfer or otherwise; (b) To successfully move an application under section 7, there must be a default. Such default need not be qua the applicant or applicants. Any number of applicants, without any amount being due to them, could move an application under section 7, if they are FCs and there is a default, even if such default is owed to none of the applicants but to any other FC; (c) In the case of a joint allotment of an apartment, plot or a building to more than one person, the allotment will be treated as a single allotment. The objective is to ensure that there is a critical mass of allottees, who agree that the time is ripe to submit to the inexorable processes under the Code, with all its attendant perils. If an apartment is taken in the names of 100 persons, the allottees of that apartment would not represent a critical mass of the allottees of the project; and (d) The law does not interdict the creation of a class within a class absolutely. Should there be a rational basis for creating a sub-class within a class, it is not impermissible. A class within a sub-class is, indeed, not antithetical to the guarantee of equality under Article 14.
(iii) Third proviso to section 7: (a) If a petitioner moves application in respect of the same default, as covered in its earlier application under unamended section 7, within a period of two months from the date of the order, in compliance with either the first or the second proviso under section 7(1), it will be exempted from payment of court fees; and (b) If an application under (a) above is accompanied by an application under section 5 of the Limitation Act, 1963, the period of delay shall be condoned for the period, during which the earlier application was pending with the AA.
(iv) Explanation II to section 11: The intention of the legislature was always to target the CD only insofar as it purported to prohibit application by the CD against itself, to prevent abuse of the provisions of the Code. It could never had been the intention to create an obstacle in the path of the CD, in any of the circumstances contained in section 11, from maximizing its assets by trying to recover the liabilities due to it from others. Not only does it go against the basic common-sense view, but it would frustrate the very object of the Code. The impugned Explanation clearly amounts to a clarificatory amendment. Being retrospective in nature, a clarificatory amendment will certainly apply to all pending applications also.
(v) Section 32A: Attaining public welfare very often needs delicate balancing of conflicting interests. As to what priority must be accorded to which interest must remain a legislative value judgement and if seemingly the legislature in its pursuit of the greater good appears to jettison the interests of some, it cannot, unless it strikingly ill squares with some constitutional mandate, suffer invalidation.
Rajkumar Brothers and Production Pvt. Ltd. Vs. Harish Amilineni Shareholder and erstwhile Director of Amilionn Technologies Pvt. Ltd. & Anr. (CA No. 4044/2020]
The AA admitted an application of an OC. On appeal, the NCLAT set aside the admission as there were pre-existing disputes. It directed the OC to pay the CIRP costs and fees. On further appeal, the SC upheld the impugned order and observed that the CD having succeeded cannot be saddled with the costs of CIRP initiated at the behest of the OC, and fees of the IRP.
Phoenix ARC Private Limited Vs. Spade Financial Services Ltd. & Ors. (CA No. 2842/2020]
The SC held: (a) The collusive commercial arrangements between FCs and the CD would not constitute a ‘financial debt’; (b) The objects and purposes of the Code are best served when the CIRP is driven by external creditors, so as to ensure that the CoC is not sabotaged by related parties of the CD. The purpose of excluding a related party of a CD from the CoC is to obviate conflicts of interest; (c) Exclusion under the first proviso to section 21(2) is related not to the debt itself but to the relationship existing between a related party FC and the CD.; and (d) The FC, who in praesenti is not a related party, would not be debarred from being a member of the CoC. However, in case where the related party FC divests itself of its shareholding or ceases to become a related party in a business capacity with the sole intention of participating in the CoC and sabotage the CIRP, it would be in keeping with the object and purpose of the first proviso to section 21(2), to debar the former related party creditor.
High Courts
CA V. Venkata Siva Kumar Vs. The Union of India and Ors. (WP Nos.11059 and 11062/2019]
The petitioner sought a direction to Union of India to constitute committees to look into the suggestions made by him vide his letters dated October 27, 2018 and November 18, 2018. The HC observed that it cannot issue any direction to the legislature to incorporate any suggestion put forth by the petitioner or to the executive as to the manner, in which bodies organized under the Act ought to function. The appropriate authorities will look into the matter and it will be completely open to such authorities to incorporate or reject the petitioner’s suggestions or any part thereto.
The petitioner filed an application under section 9 with the AA. However, the Registrar did not list the application on the ground that the threshold of the pecuniary jurisdiction of the AA has now been amended by a notification dated March 24, 2020, from `1 lakh to `1 crore. The HC held that the question as to whether the AA has jurisdiction to entertain a particular case or not cannot be determined by the Registrar in the administrative capacity. The Registrar would have to place the matter before the AA for the said question to be judicially determined. The question as to whether the notification dated March 24, 2020 applies to a particular application that has been filed prior to the said notification or not is also a question to be determined by the AA and not by the Registrar.
National Company Law Appellate Tribunal
D & I Taxcon Services Private Limited Vs. Mr. Vinod Kumar Kothari, Liquidator of Nicco Corporation Limited (CA(AT)(Ins.) No. 1347/2019]
The NCLAT held that determination of valuation of claims falls within the domain of the Liquidator. Once it is found that the appellant is not an OC, it cannot seek declaration to adjudge a sale transaction affected by the Liquidator in respect of liquidation estate as being void. Further, the appellant is also not a member or partner of the CD. Therefore, it has no locus standi to seek any direction against the Liquidator as regards alleged undervalued sale transaction.
Supertech Township Project Ltd. Vs. Inderpal Singh Khandpur HUF (CA(AT)(Ins.) No. 17/2021]
The AA directed the CD to provide information about the allottees of the project to the respondent for meeting the threshold criteria to initiate the class action. While dismissing the appeal, the NCLAT observed that no legal right vested in the CD has been infringed by such direction and no prejudice can be claimed by the CD on account of providing such information. It directed the CD to display the information about the allottees with full particulars on its website within two weeks.
Himadri Foods Ltd. Vs. Credit Suisse Funds AG (CA(AT)(Ins.) No. 1060/2020]
The AA disposed of an application under section 7 in terms of the settlement arrived at between the parties after taking the settlement terms on record. As the appellant did not comply with settlement terms, the respondent sought revival of the application. The AA, in exercise of the powers conferred by rule 11 of the NCLT Rules, 2016, revived the application. The appellants preferred an appeal on the ground that revival could not be allowed by invoking rule 11. The NCLAT held that once the terms of settlement providing a repayment schedule was incorporated in the order, thereby making it an order/ decree of the Court, the respondent can seek revival of application in case of noncompliance with the terms of settlement.
Sri D. Srinivasa Rao Vs. Vaishnovi Infratech Ltd. (CA(AT)(Ins.) No. 880/2020]
An OC served a demand notice on the CD. The notice returned undelivered as the addressee refused to accept the service. The AA rejected the application for initiation of CIRP on the ground that the demand notice was not served to the CD. On appeal, the NCLAT observed that the AA erred in arriving at a finding that the demand notice was not served on the CD. Where the CD refused to accept delivery of notice, the AA would not be justified to conclude that notice had not been served on the CD. The only inference available in the circumstances is that the CD was aware of the consequences and it deliberately refused to acknowledge the notice. The fault lies on the part of the CD for which it cannot be rewarded. The NCLAT set aside the order and remanded the matter to the AA to pass an order under section 9.
Shubham Jain Vs. Gagan Ferrotech Ltd. & Anr. (CA(AT)(Ins.) No. 1008/2020]
The AA admitted an application under section 9, after demand notice was served on one of the directors of the CD and two demand notices sent to registered address and functional address of the CD returned with remarks ‘addressee moved’ and ‘unclaimed’ respectively. An appeal was preferred on the ground that the demand notice was not served on the CD. The NCLAT observed that the unclaimed notice must be treated as service of notice. It held that under section 2(59) of the Companies Act, 2013, a director is an officer and under section 20 of the Act, a document served on a company or an officer thereof is service recognised. Therefore, the service of notice on the director of the CD would satisfy the requirements of the Code and the same would be a valid service.
Mr. Shailendra Sharma Vs. Ercon Composites & Ors. (CA(AT)(Ins.) No. 159/2020]
The NCLAT observed that the proceedings under section 138 of the Negotiable Instruments Act, 1881 pertain to criminal liability for dishonour of cheques and do not bar an application under section 9. Likewise, the pendency of proceedings under Order 37 of the Civil Procedure Code, 1908 will not prohibit an application under section 9.
Ranjeet Kumar Verma Vs. Committee of Creditors of Straight Edge Contract Pvt. Ltd. (CA(AT)(Ins.) No. 1129/2020]
The CoC decided to replace the IRP with 100% of voting share. The NCLAT
Ranjeet Kumar Verma Vs. Committee of Creditors of Straight Edge Contract Pvt. Ltd. [CA(AT)(Ins.) No. 1129/2020]
The CoC decided to replace the IRP with 100% of voting share. The NCLAT held that the IRP has no locus standi to maintain an appeal against the decision of the CoC to replace him with another RP. He cannot claim invasion of any of his legal rights under the Code as he has no vested legal interest and is not a stakeholder. Also, he cannot argue that the constitution of CoC was bad as it was constituted by himself.
Prakash Shanker Mishra & Ors. Vs. Ashok Kriplani & Anr. [CA(AT)(Ins.) No. 34/2020]
It was submitted that the AA did not appoint persons selected by the CoC to serve as an RP and authorised representatives and instead appointed persons of its choice. Setting aside the order of the AA on appeal, the NCLAT held that the AA has no power to impose RP of its choice.
Harkirat Singh Bedi Vs. The Oriental Bank of Commerce & Ors. [CA(AT)(Ins.) No. 40/2020]
The appellant had submitted a resolution plan, which was rejected by the CoC on the ground that it was a wilful defaulter thus being ineligible under section 29A(b). In appeal, it contended that it was declared a wilful defaulter by SBI, State Bank of Travancore and Oriental Bank of Commerce without following the guidelines of RBI. The NCLAT held that determination of wilful defaulter is outside its jurisdiction. The RP cannot go into the correctness or incorrectness of declaration as wilful defaulter and can only rely on the present status of the resolution applicant. The appellant claimed the advantage of section 240A exempting applicability of section 29A. The NCLAT observed that the exemption is available only in respect of clause (c) and (h) of section 29A and not 29A(b).
Sodexo India Services Pvt. Ltd. Vs. Chemizol Additives Pvt. Ltd. [CA(AT)(Ins.) No. 1094/2020]
The AA disposed of an application filed under section 9, directing the CD, in the first instance, to make endeavours for resolution in respect of outstanding debt, failing which the appellant would be at liberty to invoke arbitration clause. The NCLAT found that the finding by the AA is unique and is not in conformity with the provisions embodied in section 9(5). It observed that the AA has only two options, either to admit application or to reject the same and no third option or course is postulated by law. As regards observation of the AA that the CD prima facie appears to be a solvent company, the NCLAT observed that the Code does not permit the AA to make a roving enquiry into the aspect of solvency or insolvency of the CD except to the extent of the FC or the OC, who sought triggering of CIRP.
The NCLAT observed that the Liquidator under the Code is not required to file income-tax return and there is no question of claiming refund of TDS deducted under section 194-IA of the Income-tax Act. It directed R1 to refund the amount of TDS to the Liquidator.
Adish Jain Vs. Sumit Bansal and Anr. [CA(AT)(Ins.) No. 379/2020]
The NCLAT observed that the ‘power of review’ is not an inherent power and has to be granted by statute and, therefore, it cannot be exercised. It clarified that the error must be a ‘patent error’ which is ‘manifest’ and ‘self-evident’ and the case in hand would amount to reappraisal of evidence and findings of fact, which cannot be revisited within the limited scope of exercise of powers under rule 11 of the NCLAT Rules, 2016.
Tuf Metallurgical Pvt. Ltd. Vs. Impex Metal & Ferro Alloys Ltd. & Ors. [CA(AT)(Ins) No. 190 of 2020]
The NCLAT observed that section 20(2)(e) gives power to the IRP (subsequently RP) to take all actions as are necessary to keep the CD as a going concern. In managing the business operations of the CD, if advance payments for supply of goods is received, it cannot be treated as raising an interim finance. It is an advance for payment of goods which the CD, as a going concern, may be manufacturing. The goods are either to be supplied, or the amount should be returned. If the goods are not supplied, the purchaser cannot be made to run for his money. If this approach is not changed, it will become difficult to keep the CDs as a going concern. Such amount received as an advance payment for the supply of goods during the CIRP would have to be treated as CIRP costs.
Mr. Avil Menezes, RP of AMW Auto Component Ltd. Vs. Shah Coal Pvt. Ltd. [CA(AT)(Ins.) No. 63/2021]
The AA allowed the application of respondent to include it in the category of FC. The RP filed an appeal against the impugned order. The NCLAT observed that it is fiabbergasting to find that the appeal has been preferred by the RP who is part of the CIRP mechanism. In terms of section 21(1), he is only supposed to collate the claims. He is not vested with any adjudicatory powers and all actions taken by him are subject to control of the AA. Even a decision taken by the Liquidator regarding admission or rejection of the claim cannot be questioned by the Liquidator in appeal and it is only the creditor who can assail the same, being aggrieved party. The RP cannot be an aggrieved party and has no locus to maintain this appeal.
Kuldeep Verma Vs. State Bank of India and Ors. [CA(AT)(Ins.) No. 98/2021]
The NCLAT observed that even after the lapse of 981 days and repeated compliance by the RP of the direction of the AA, the AA has not yet considered initiation of liquidation as per section 33. It noted that whatever power vests in the AA is always available to the Appellate Authority. It passed the order for liquidation.
Surinder Kaur & Ors. Vs. International Recreation and Amusement Ltd. through RP [CA(AT)(Ins.) No. 208/2021]
It was submitted that the resolution plan was pending approval before the AA since 2019 and the matter has been adjourned as many as 18 times. The NCLAT directed the AA to take a call and pass an order on merit on the resolution plan within two weeks. It observed that there is need to introduce provision in the legal framework to vest power of superintendence and control qua AA in the Appellate Tribunal.
Pinakin Shah, Liquidator of Brew Berry Hospitalities Pvt. Ltd. Vs. The Assistant Commissioner of State Tax & Anr. [CA(AT)(Ins.) No. 32/2021]
R1 advised R2 (Kotak Mahindra Bank) to freeze the bank account of the CD under section 44 of the Gujarat Value Added Tax Act, 2003. The Liquidator filed an application with the AA for unfreezing the bank account. The AA dismissed the application and directed the Liquidator to approach the competent authority to redress his grievances. On appeal, the Liquidator contended that R1 is an OC and one OC cannot march over the other claimants without standing in queue under section 53 of the Code. All the creditors are entitled to get their dues only in terms of section 53 and different creditors cannot be allowed to resort to different proceedings and enactments. Further, the Code will override anything inconsistent contained in any other enactment. The Liquidator cannot be made to run to the parties and Authorities under the Sales Tax Act to get the account defreezed. The NCLAT accepted the submissions of the appellant. It set aside the impugned order and directed R2 to defreeze the bank account of the CD.
Ravindra Chaturvedi (Liquidator of Excel Glasses Ltd.) Vs. Kopran Ltd. [CA(AT)(Ins.) (TR) No. 36/2021]
While disposing of a matter, the AA made certain observations and disparaging remarks against the Liquidator. On appeal, the NCLAT observed: “Deviation from the procedural requirements would not tantamount to an act of misconduct of such magnitude which would scar a person for life. The conclusion in regard to there being a collusion between the liquidator and the applicant is not justied. The remarks of the Adjudicating Authority scarring the Liquidator as a tainted person cannot be supported.” It accordingly expunged the disparaging remarks. It directed that if any action was initiated or contemplated to be initiated against the Liquidator, the same shall stand dropped.
National Company Law Tribunal
Mr. Dinesh Changela Windfield Vs. Berkmann Wine Cellars India Pvt. Ltd. [CP(IB) 1420/I&BP/MB/2019]
The applicant had advanced an unsecured short-term interest-free loan to the CD on specific understanding that upon resignation of the applicant from the board of directors of the CD and upon a demand thereafter being made for the same, the CD would immediately repay the said loan without any demur or delay. On failure to repay the amount, the applicant filed an application under section 7. The AA noted that a debt becomes financial debt if it is disbursed against time value of money, while the amount disbursed in the instant case was not against time value of money. Accordingly, it dismissed the application.
Subrata Monindranath Maity (Bhatia Coke and Energy Ltd.) Vs. Surender Singh Bhatia & Ors. [IA/05/2021 in IBA/307/2019]
The AA observed that if every RP is bombarded with criminal prosecution and police investigation, then no RP shall be able to conduct CIRP without fear or favour. For lawful discharge of duty as RP, accelerating criminal charges and using police to register complaint of criminal nature is not appropriate. If there are any irregularities on the part of the RP or his team, the erstwhile directors could have filed necessary complaints with the IBBI. The AA advised that the RP and his family members shall be given adequate protection. It permitted the police to proceed as per Criminal Procedure Code but directed that no action or harassment or arrest shall be made until the disposal of the application.
IFCI Limited & Ors. Vs. M/s BS Ltd. (in liquidation) [IA No. 1148/2020 in CP(IB) No. 278/7/HDB/2018]
The AA considered whether a Liquidator can be removed by the FCs as members of erstwhile CoC for the actions of Liquidator which have been considered beyond the scope of his powers and duties under the Code. It was held that the erstwhile CoC members have no role to play, and they remain simply a group of claimants and that they cannot move an application for removal of Liquidator as there is no such provision under the law.
State Bank of India Vs. Rajendra Bhuta, IRP of Prabhat Technologies (India) Ltd. & Ors. [IA No. 440/2020 in CP No. 1874/MB/2019]
The AA observed that the amount raised under a Forward Purchase Agreement (FPA) would not come within the definition of a ‘financial debt’ unless it bears the dual attributes of having been disbursed against the consideration for time value of money and has the commercial effect of a borrowing. It held that since the FPAs in the present case were essentially forward contracts for supply of goods, the deed of guarantee executed by CD to pay the outstanding dues, if any, under the said FPAs would amount to an operational debt under section 5(21).
M/s. Propyl Packaging Limited Vs. Mr. George Varkey, RP [MA No. 162/KOB/2020 in IBA No. 52/KOB/2019]
The applicant sought a direction to RP to permit the Advocate, Chartered Accountant, Company Secretary of the CD to attend the meetings of CoC and to provide the copies of all documents in connection with the CIRP to these professionals. The AA held that no purpose will be served in allowing these professionals to attend CoC meetings. The RP, in his discretion, may appoint accountants, legal and other professionals following the due process as specified by the IBBI under section 25(2)(d). He is not permitted to disclose any information pertaining to the CIRP to any third-party including Advocate/CA/Company Secretary of the CD.
National Aviators’ Guild Vs. Ashish Chhawchharia, RP & Anr. [IA No. 1862/MB/2020 in CP(IB) No. 2205/MB/2019]
The AA held that employees of the CD are neither entitled to receive a copy of the resolution plan submitted to the AA, nor to be heard while the resolution plan is considered by the AA for approval. The payments as to their wages and gratuity and other terminal benefits shall be in accordance with the law and in terms of the resolution plan guided by the provisions under the Code. The AA further held that the creditors who are not part of the CoC are only entitled to be informed, within 15 days of the order of the AA approving the plan, of the principle or formula for the payment of their debt under the plan.
K.G. Somani & Co. Vs. Arvind Garg, Liquidator [IA No. 06/2019 connected with IB/302/(ND)/2017]
The applicant was appointed as forensic auditor by an FC on July 18, 2017 while the CIRP commenced on September 25, 2017. The AA held that the work assigned to the applicant by the FC was prior to commencement of CIRP and could not be considered as forming part of CIRP costs.
M/s Punjab National Bank Vs. M/s. KSK Mahanadi Power Company Limited & Ors. [IA No. 32/2020 in CP(IB) No. 492/07/HDB/2019]
The AA observed that if it directs CoCs and RPs of different CDs to resolve insolvencies of different CDs together, there will be a chaotic situation relating to consolidation of assets and liabilities of all the CDs. The inherent jurisdiction of the AA under rule 11 of the NCLT Rules cannot be used to create such a situation. The AA further observed that in its limited jurisdiction, it cannot direct consolidation of CIRPs of different CDs.
George Vinci Thomas & Ors. Vs. Sasitharan Ramaswamy, RP, India Techs Limited & Ors. [IA No.218/KOB/2020 in TIBA/14/KOB/2019]
The suspended directors of the CD filed an application seeking extension of CIRP by 90 days in order to get a potential RA. Dismissing the application, the AA observed that the RP can file an application for extension of the period of the CIRP, only if instructed to do so by a resolution passed at a meeting of the CoC by a vote of 75% of the voting shares.
Gaurav Jain Vs. Sanjay Gupta, Liquidator of Topworth Pipes and Tubes Pvt. Ltd. [IA No. 2264/2020 in CP (IB) No. 1239/MB/2018]
The AA noted that even though there is no specific provision in the Code for “sale of the Company as a going concern”, the Liquidation Process Regulations provide guiding principles in dealing with the case. It held that “going concern” sale, in normal parlance, is transfer of assets along with the liabilities. However, as far as the ‘going concern’ sale in liquidation is concerned, there is a clear difference that only assets are transferred and the liabilities of the CD has to be settled in accordance with section 53 of the Code and hence the purchaser of the assets takes over the assets without any encumbrance or charge and free from the action of the creditors. The legal entity of the CD survives and the assets with claims, limitations, licenses, permits or business authorisations remain with the CD. Only the ownership of the CD is acquired by the successful bidder and all creditors of the CD get discharged.
Shri Shakti Dyeing Works Vs. Berawala Textiles Private Limited. [CP(IB) No. 854/NCLT/AHM/2019]
A sole proprietorship concern filed an application under section 9. The AA held that a proprietorship concern is not a person under section 3(23) and hence the application is not maintainable.
M/s. Biogenetics Drugs Private Limited Vs. Themis Medicare Limited [CP(IB) No. 696/9/NCLT/AHM/2019]
An OC secured a decree through a civil suit for recovery of its dues from the CD. It filed an application under section 7 based on the said decree. The AA observed that though a decree holder is classified as creditor under section 3(10), the Code does not spell whether a decree holder be classified as FC or OC for the purpose of filing application. Relying on NCLAT order in the matter of Sh. Sushil Ansal Vs. Ashok Tripathi and Ors., the AA held that a decree holder cannot initiate CIRP with an object to execute a decree.
Phoenix Tech Power Pvt. Ltd. Vs. Dr. K. V. Srinivas & Ors. [IA No. 555/2020 in CP(IB) No. 143/7/HDB/2019]
An FC filed an application seeking removal of Telangana State Trade Promotion Corporation Ltd. (TSTPCL) from CoC, as it was a related party of the CD, holding 11% of shares in the CD, and having two nominee nonexecutive directors on the board of the CD. The AA noticed that decisions in matters referred to (a) to (r) in Article 61 of the Articles of Association of the CD are required to be taken by affirmative votes of three or more directors, including one director nominated by TSTPCL. It held that the nominee directors of TSTPCL have significant infiuence in the functioning of the CD. It accordingly found TSTPCL to be a related party as per clauses (a), (h), (j), (l) and (m) of section 5(24) of the Code and directed the RP to reconstitute the CoC by treating TSTPCL as a related party.
Santosh Choraria, RP of Suraj Fabrics Industries Limited Vs. Bipin Kumar Vohra & Ors. [IA(IB) No. 750/KB/2020 in CP(IB) No. 1635/KB/2018]
RP filed an application seeking directions to respondents to repay jointly and severally a sum to the CD in terms of section 44. The AA noted that as per regulation 35A of the CIRP Regulations, RP is required to make determination within 115 days and make an application before the AA within 135 days of commencement of CIRP. It observed that the RP filed the application on the th 389 day of the CIRP. He filed the application after he filed application for approval of resolution plan. He did not make any determination, rather he has heavily relied on the Forensic Auditor’s Report and has not given any independent reasons for determination of preferential transactions. The AA observed: “The feeling is inescapable that the RP has filed the application under section 43 read with section 44 of the Code only to avoid adverse scrutiny on the part of the IBBI and not with any real intention to pursue the alleged preferential transactions to their logical end.” Accordingly, it dismissed the application.
M/s I. A. Dhas Vs. Hemant Sharma, Liquidator Vishwa Infrastructures Finance and Services Private Limited [IA No. 88/2021 in CP(IB) No. 329/7/HDB/2017]
The Liquidator rejected claim of the applicant on the ground that it was filed much later than permissible under the law. The applicant contended that section 38(1) provides for receiving or collating the claims of the creditors within a period of thirty day from the date of commencement of liquidation and there is no express bar that claims cannot be received after stipulated date. It prayed for condonation of delay of 540 days in filing the claim and for directing the Liquidator to accept his claim. The AA observed that there was an abnormal delay in filing the claim before the Liquidator. The applicant has not furnished any justifiable reasons for the delay. It is not convincing to believe that the person who is to get the substantial amount is not keeping track of happening in the CD. Accordingly, the AA dismissed the application.
Yuvaraj Agarwal & Anr. Vs. Aspek Media Pvt. Ltd. [CP No. IB/221/ND/2019]
Two OCs filed a joint application under section 9. The AA observed that the application should be filed by OCs individually and not jointly. It held that a joint application by one or more OCs is not maintainable.
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