Supreme Court
Devarajan Raman Vs. Bank of India Limited [Civil Appeal No. 3160 of 2020]
The AA directed the financial creditor (FC) to pay an amount of 5,00,000/- plus GST towards the fee of the RP On an appeal by RR contending inadequacy of the fee, NCLAT dismissed the appeal and observed that fixation of fee is not a business decision depending upon the commercial wisdom of the CoC. SC while setting aside the orders of AA and NCLAT noted that NCLAT has proceeded in an ad hoc manner. It further held that both the orders suffer from an abdication in the exercise of jurisdiction, as, in the absence of any reasons either in the order of the AA or the NCLAT, it is impossible for the court to deduce the basis on which the payment of an amount of 5,00,000/- together with expenses was found to be reasonable.
Bank of Baroda & Anr. Vs. MBL Infrastructures Limited & Ors. [Civil Appeal No. 8411 of 2019]
The judicial interpretation of section 29A(h) of the Code was an issue in this appeal before the SC. Loans/ credit facilities were obtained by the CD from a consortium of banks (State Bank of Mysore, now State Bank of India as lead bank). On the failure of the CD to act in tune with the terms of repayment, some of the lender banks were forced to invoke the personal guarantees extended by promoter of the CD for the credit facilities availed by it. Lenders including RBL Bank issued a notice under section 13(2) of the SARFAESI Act after duly invoking the personal guarantee of the promoter. Later, RBL Bank initiated CIRP under section 7 against the CD which was admitted by AA. Two resolution plans were received by the RP of which, one was authored by the personal guarantor promoter prior to the introduction of section 29A of the Code.
AA, vide its order dated December 18, 2017 held that the personal guarantor was eligible to submit a resolution plan, notwithstanding the fact that he did extend his personal guarantees on behalf of the CD which were duly invoked by some of the creditors. It ruled that in as much as the personal guarantee having not been invoked and the personal guarantor merely having extended his personal guarantee, as such there is no disqualification per se under section 29A(h) of the Code as the liability under a guarantee arises only upon its invocation. Thus, only those guarantors who had antecedents which might adversely impact the credibility of the process are alone to be excluded. As debt payable by personal guarantor was not crystalized, he could not be construed as a defaulter for breach of the guarantee. While the appeal was pending before NCLAT against this order of AA, section 29A(h) went through an amendment which came into effect from January18, 2018 whereby it was declared that a person shall not be eligible to submit a resolution plan if he has executed an enforceable guarantee in favour of a creditor, in respect of a CD against which an application for insolvency resolution made by such creditor has been admitted under the Code.
The resolution plan of promoter was approved by CoC with 78.50% voting and the pending appeal before the NCLAT was withdrawn on February 27, 2018. The AA approved the resolution plan by its order dated April 18, 2018 inter alia holding that the issue qua the eligibility under section 29A(h) decided already, coupled with the resolution plan crossing the requisite threshold of approval by the CoC i.e., 75% vote share, having considered the technoeconomic viability and feasibility of the plan, the application filed for approval of the resolution plan submitted by the promoter was liable to be allowed. A direction was accordingly given, holding that the approved resolution plan shall come into force with immediate effect.
NCLAT confirmed the order of AA. On appeal, SC observed that:
- Once a person executes a guarantee in favour of a creditor for credit facilities availed by a CD, and the matter has been admitted, and the guarantee having been invoked, the bar qua eligibility under section 29A(h) would certainly come into play;
- What is required to earn a disqualification under the said provision is a mere existence of a personal guarantee that stands invoked by a single creditor, notwithstanding the application being filed by any other creditor seeking initiation of CIRP; and
- If the submission of the plan is maintainable at the time when petition was filed, and thereafter, by the operation of the law, a person becomes ineligible, which continues either till the time of approval by the CoC, or adjudication by AA, then the subsequent amended provision would govern the question of eligibility.
SC held that the resolution plan submitted by the promoter of CD was not maintainable due to his ineligibility under section 29A(h) of the Code. However, SC disposed of the matter without disturbing the approved plan on merits considering socio economic factors viz., the employment of several workers and that the CD is a running concern.
The appellant executed a project with Chennai Metro Rail Limited (CMRL) under which it placed orders with the respondent and an advance was paid by CMRL to the respondent. On termination of the project the advance amount was repaid by the appellant to CMRL, intimating this to the respondent and requesting them to refund the said payment as it had already encashed the cheque for advance payment. On default, the appellant filed an application under section 9 of the Code against the respondent which was admitted by AA. NCLAT reversed the decision of the AA. On appeal, SC observed that section 5(21) defines operational debt as a claim in respect of the provision of goods or services and, the operative requirement is that the claim must bear some nexus with a provision of goods or services, without specifying who is to be the supplier or receiver. Referring to its decision in Pioneer Urban Land and Infrastructure Ltd. Vs. Union of India, it observed that a debt which arises out of advance payment made to a CD for supply of goods or services would be considered as an operational debt. It set aside the order of NCLAT and held that the appellant is an OC underthe Code.
Amit Katyal Vs. Meera Ahuja and Ors. [Civil Appeal No. 3778 of 2020]
Three home buyers filed application under section 7 of the Code against the builder before the threshold on number of home buyers was brought into force by amendment to the Code. AA admitted the application on November 28, 2019. NCLAT upheld the admission order passed by AA. In appeal filed by the promoter, the admission order was stayed by SC. While the matter was pending before SC, the applicant home buyers filed another application before the SC praying for withdrawal of CIRP owing to the settlement reached between majority of the home buyers.
SC observed that if the original applicants and the majority of the home buyers are not permitted to close the CIRR it would have a drastic consequence on the home buyers as there would be a moratorium under section 14 which would bar institution of fresh proceedings against the builder, including proceedings by home buyers for compensation due to delayed possession or refund. If the CIRP is successfully completed, the home buyers will be subjected to the pay outs provided in the resolution plan, since resolution plans provide for high percentage of haircuts in the claims, the effect of such haircuts may be harsh and unjust on home buyers. If the CD goes into liquidation the home buyers being unsecured creditors stand to lose all their monies that are either hard earned and saved or borrowed at high rate of interest. It was also observed that the reason for introducing the threshold of at least 100 or 10% of the total home buyers of the same project to jointly file an application under section 7, was to tackle the problem of a single home buyer derailing the entire project by filing an insolvency application. SC observed that the object and purpose of the Code is not to kill the company and stop/stall the project, but to ensure that the business of the company runs as a going concern. Considering the peculiar facts and circumstances of the case, it allowed the withdrawal of CIRP proceedings by exercising its powers under Article 142 of the Constitution.
High Court
On the issue of applicability of default of threshold limit of Z1 crore on or after March 24, 2020, Kerala HC held that that the minimum amount of default is statutorily fixed, with power available to the Government to refix, upto a sum of Z1 Crore and once the Government has exercised the said power by issuance of a notification fixing the minimum amount of default as Z1 Crore, the section will have to be read by replacing the words one lakh rupees by rupees one crore. Once that is the position, the application of Part II itself is taken away with effect from March 24, 2020, as far as defaults less than Z1 Crore are concerned and hence no application can be filed after March 24, 2020, regarding an amount where the default is less than Z1 Crore.
National Company Law Appellate Tribunal
Kiran Shah Vs. Enforcement Directorate [Company Appeal (AT)(Insolvency) No. 817/2021]
NCLAT observed that section 14 of the Code is not a hindrance for the authority and the officers under the PM LA to deny a person of the tainted proceeds of crime. PM LA is to fulfill the country’s obligation in adhering to the United Nations Resolutions and in regard to assets/properties being the proceeds of crime, it takes a primacy and precedence over the Code. The purpose of the Code and PM LA even though at the first blush appear to be at logger heads, there is no repugnancy and inconsistency between them, in lieu of the fact the text, shape and its colour are conspicuously distinct and different, operating in their respective spheres. NCLAT held that filing of application under section 60(5) of the Code is not an all pervasive one, thereby conferring jurisdiction to an AA to determine any question/issue of priorities, question of law or facts pertaining to CD when in reality in law, the AA is not empowered to deal with the matters falling under the purview of another authority under PMLA.
On the issue as to whether the successful bidder can withdraw from the bid after payment of the EMD and seek for refund of the amount paid on the ground that the offer made by the bidder was a ‘conditional offer’, NCLAT noted that by paying the EMD amount and accepting the bid, the successful bidder cannot say that it was not a concluded contract. The bidder is bound by the terms and conditions of the bid document and no communication to the liquidator stating that it is a conditional offer, is sustainable. If the bidder is allowed to withdraw from the bid at this stage and seek refund on the ground that their conditional offer has not been accepted, then the liquidation process would be a never ending one, defeating the scope and objective of the Code. NCLAT dismissed the appeal, holding that the bidder cannot wriggle out of the contractual obligations arising out of acceptance of his bid and he cannot be entitled to the EMD amount, and the amount paid towards the bid purchase document, if he does not comply with the terms of the contract.
Srei Multiple Asset Investment Trust Vs. IDBI Bank Ltd. & Ors. [Company Appeal (AT) (Ins) No. 593 of 2020]
An appeal was filed against the order of AA that approved the resolution plan submitted by Arcelor Mittal India Private Limited (AMIPL), on the ground that AMIPL is the SRA of Essar Steel India Ltd. (ESIL) who is one of the shareholders of the CD, thereby making it ineligible to be a resolution applicant of CD under section 29A of the Code. NCLAT noted that AMIPL took over the management and control of ESIL on December I6, 2019, whereas the resolution plan with regard to the CD was submitted by AMIPL in November, 2019 which came to be approved by the CoC on December 6, 2019, i.e., prior to taking over the management and control of ESIL. NCLAT observed that the SRA who takes over the company as the going concern unless and otherwise declared as ineligible under the provisions of the Code cannot be treated as ineligible. NCLAT while dismissing the appeal, observed that section 29A(c) would not be applicable to resolution applicants who acquire a CD pursuant to a prior resolution plan approved underthe Code.
On the issue as to whether copy of NCLT approved resolution plan be provided to the workmen, NCLAT observed that scheme of the Code indicates that after resolution plan is approved byAA, it no longer remains a confidential document, so as to preclude Regulator and other persons from its access. It further observed that workmen who have challenged a resolution plan under section 61(3) of the Code is entitled to know the contents of the resolution plan to effectively prosecute its appeal. Resolution plan even though, is not a confidential document after its approval, cannot be made available to each and to anyone who has no genuine claim or interest in the process and, its access can be denied in proper and appropriate cases. NCLAT held that the appellant is entitled for the relevant part of the resolution plan relating to the claim of the workmen and employees and, directed the SRA to share it with the appellant.
AA allowed the avoidance transaction application filed under section 66 holding that CoC has consciously decided that the money realised through the avoidance transactions would accrue to the members of the CoC and it has ascribed the value of Z1 to fraudulent transactions, and if any positive money recovery is made, the same would go to the SRA. It held that: “COC exercising its Commercial Wisdom have accepted, approved the Resolution Plan including the monies to be recovered if any from the Fraudulent Transactions. Therefore, we as Adjudicating Authority reluctant to substitute our wisdom at this stage as against their Commercial Wisdom of the CoC. Further by following the judicial precedents, discipline and various Judgements of the Hon’ble Supreme Court we restrain ourselves from interfering with the commercial decision of the CoC”.
NCLAT allowed the appeal and held that the CoC’s decision to approve a resolution plan which contains such unlawful stipulations, is illegal making the plan unsustainable. The resolution plan was sent back to the CoC for reconsideration with the following observations:
- The Code does not have any provision restricting the resolution applicant to avail the benefits of avoidance proceedings initiated under section 66, but it can’t be presumed that the Code authorizes the resolution applicant for the same.
- The purpose of providing transactions and penalizing improper trading actions are primarily aimed at swelling the asset pool available for distribution to creditors and, the Code allows the AA to restore the position prior to such transaction or trading by inter-alia investing the recoveries with the CD.
- Any decision taken by the CoC which strikes at the very heart of the Code cannot simply be upheld under the garb of commercial wisdom.
- The CoC cannot countenance incorporating any term in the resolution plan which is contrary to the law or which otherwise makes the resolution plan illegal.
- The law does not permit CoC to exercise judicial function. There is a vast difference between the exercise of commercial wisdom during CIRP and the exercise of adjudicatory powers by the AA under the Code.
Erstwhile directors/guarantor of DHFL filed an appeal against Ms order that disentitled them to attend the CoC meetings as member of the erstwhile Board of Directors. On the difference between the ‘supersession of directors’ under the RBI Act and the ‘suspension of directors’ under the Code, NCLAT observed that in ‘supersession’, the Board of Directors vacates their office and there is finality attached to it. The superseded directors who have been removed or deemed to have demitted office, are not holding the position of director on the CIRP commencement date and cannot be considered a director simpliciter to benefit from participating in the meeting of CoC. It further observed that “after vacation or removal from the office of the Director, the said person cannot claim their entitlement to participate in the CoC of the Corporate Debtor. A removed Director from the Board of Directors cannot interfere in the Company’s affairs per contra a suspended Director always remains on the Board.”
State Bank of India, Stressed Asset Management Branch Vs. Mahendra Kumar Jajodia, Personal Guarantor to Corporate Debtor [Company Appeal (AT) Insolvency No. 60 of 2022]*
AA rejected an application filed against personal guarantor of the CD under section 95(1) of the Code on the ground that no CIRP or liquidation process is pending against the CD so as to maintain the said application within the provisions of section 60(2) before the AA. In appeal, NCLAT observed that, “the use of words ‘a’ and ‘such’ before National Company Law Tribunal clearly indicates that Section 60(2) was applicable only when a CIRP or Liquidation Proceeding of a Corporate Debtor is pending before NCLT. The object is that when a CIRP or Liquidation Proceeding of a Corporate Debtor is pending before ‘a’ NCLT the application relating to Insolvency Process of a Corporate Guarantor or Personal Guarantor should be filed before the same NCLT. This was to avoid two different NCLT to take up CIRP of Corporate Guarantor… when CIRP or Liquidation Proceeding are not pending with regard to the Corporate Debtor there is no applicability ofSection 60(2)”.
Note: SC, vide its order dated March 21, 2022, has stayed the operation of this order.
Union Bank of India Vs. Mr Dinkar T. Venkatasubramanian, Resolution Professional of Amtek Auto Limited & Ors. [Company Appeal (AT) (Insolvency) No. 729 of 2020]
AA rejected the application filed by FC for modification of the approved resolution plan that provided for a deduction of Z 34 crores, i.e., the amount paid to the vendors of the CD against the ‘Letter of Credit Bank Guarantee’ facility which continued during the CIRP period, under the instructions of the RP to keep the CD as a going concern, out of the distribution amount payable to the FC under the resolution plan. NCLAT observed that the phrase used in section 17(I)(d) of the Code that financial institution “shall act on the instructions of the IRP” does not mean that it authorizes IRP/RP to compel the financial institution for maintaining the accounts of the CD to continue the non-fund based facility comforted by bank guarantee, and non-compliance with such instructions of RP cannot be considered a violation of section 17(1)(d) of the Code. It directed that the said amount be treated as CIRP costs and should not be deducted out of the distribution amount payable to the FC underthe resolution plan.
Mr. Vallal RCK Vs. M/s Siva Industries and Holdings Ltd (In Liquidation) & Anr. [Company Appeal (AT)(CH)(Insolvency) No. 211 &212/2021]*
NCLAT, in an appeal against Ms order rejecting the settlement proposal of promoter and ordering liquidation of the CD, noted that the promoter of the CD being ineligible to submit a resolution plan by virtue of section 29A
of the Code had embarked upon the aspect of furnishing a settlement proposal which is akin to a resolution plan. It further observed that if the CIRP is initiated, it cannot be set aside or withdrawn except for any illegality, to be exhibited or if it is without jurisdiction or for some other justiciable ground; and just because a promoter desires to pay all dues including the default amount, it cannot be a ground to set aside the CIRR While concurring with the order of AA, NCLAT observed that projected settlement proposal plan of the promotor is not a settlement simpliciter as envisaged under section I 2A of the Code rather it is a business restructuring plan. It upheld the liquidation order of the AA.
*Note: SC vide its order dated March 11, 2022 has stayed the operation of this order.
Mrs. Nidhi Rekhan Vs. M/s. Samyak Projects Private Limited [Company Appeal (AT) (Ins) No. 1035 of 2020]
AA rejected section 7 application holding that appellant who in pursuance of an agreement invested certain sums in return of flats and an assured return of 24% per annum with absolute discretion to cancel or rescind the allotment of flats booked through the agreement, is not a FC under the Code. On appeal, NCLAT observed that the said agreement did not have the necessary elements of a builder-buyer agreement, but it is an agreement which is more in the nature of detailing and protecting an investment made by the appellant. It further observed that the status of FC cannot be provided to a person who, in the garb of an allottee comes in the project as a speculative investor and for no reason cancels the allotment. Upholding the order of AA, it held that the appellant, who is a speculative investor, cannot claim status and benefits as FC under explanation (i) of section 5(8)(f) of the Code.
Union Bank of India Vs. Mr. Kapil Wadhawan & Ors., [Company Appeal (AT) (Insolvency) 370, 376-377 & 393 of 2021]
The issue before the NCLAT was as to whether after approval of the resolution plan by the CoC and pending Ms approval, the AA can direct the CoC to convene a meeting and place the settlement proposal for consideration. NCLAT while relying on the ratio of the SC’s judgment in Ebix Singapore Private Limited Vs. Committee of Creditors of Educomp Solutions Ltd., observed that there was no scope for negotiations between the parties once the CoC has approved the resolution plan. The contractual principles and common law remedies, which do not find a rope in the wording or the intent of the Code, cannot be imported in the intervening period between the acceptance of the CoC approved resolution plan and the approval by the AA. It further observed that once the requirements of the Code have been fulfilled, the AA and the NCLAT are duty-bound to abide by the discipline of the statutory provisions and they do not have an unchartered jurisdiction in equity.
Ravi Iron Ltd. Vs. Jia Lal Kishori Lal & Ors. [Comp. App. (AT)(Ins.) No. 122 of 2022]
The issue for consideration was whether the mediation order and postdated cheque can extend the date of limitation for filing an application by an OC under the Code. In this case, the appellant had filed an application under section 9 mentioning the date of default as January 10, 2008. AA dismissed the application on the grounds of limitation. In appeal the appellant claimed that although the date of default was mentioned as January 10, 2008 in the application under section 9 but there was District Court Mediation on November 16, 2015 wherein the Respondent accepted their liability and the post-dated cheques issued were also dishonored. Last cheque was dishonored on December 31, 2016. Hence, the application filed was within time. NCLAT, while dismissing the appeal, observed that “the purpose of mediation order and post-dated cheques are different and the fact that the cheques were dishonoured may give right to the appellant to take appropriate proceedings but that shall not give extension of the limitation for the appellant under section 9 of the code to make it within time.”
Amit Arora Vs. Tourism Finance Corporation of India & Anr. [Company Appeal (AT) (Insolvency) No.60 of 2021]
The issue, whether a right to convert the outstanding debts into equity is available to the FC in terms of loan agreements came up for consideration in this case. NCLAT upheld the order of AA and observed that the lenders shall have the right to convert the outstanding amount into fully paid equity shares in accordance with the loan agreement. Thus, the FC has chosen to exercise its rights under the Code in the event of default in repayment which is certainly permissible in law.
Jet Aircraft Maintenance Engineers Welfare Association Vs. Shri Ashish Chhawchharia Resolution Professional for Jet Airways (India) Ltd. & Ors. [Company Appeal (AT) (Insolvency) No. 628 of 2020]
AA had allowed the sale of CD’s encumbered immovable non-core asset during the moratorium period to generate the cash flow required for obtaining the title of six aircrafts that were taken by CD on financial lease. On sale of the encumbered property, the secured creditor relinquished its charge on payment of its dues. The grounds of challenge before NCLAT was that the injunction in section 14 is mandatory and there is no discretion vested with AA. NCLAT observed that prohibition in transferring the assets of the CD is on the CD and the said prohibition ipso-facto does not prohibit RP or CoC, who are empowered by specific provision of the Code to undertake any such sale. It also observed that despite declaration of moratorium under section 14( I )(b), the RP is empowered to conduct sale of unencumbered assets, if he is of the opinion that it is necessary for better realization of the value. The decision of RP to proceed with the sale after CoC’s approval was permissible and was not interjected by virtue of declaration of moratorium under section I 4(I)(b). It further held that due to provision under section 14(1)(c), secured creditor could not have realized its dues during ongoing CIRP but since the resolution plan is approved, NCLAT declined to reverse the transaction at this stage.
Standard Surfa Chem India Pvt. Ltd. (formerly known as M/s Portia Ventures Private Limited) Vs. Kishore Gopal Somani, The Liquidator of Advanced Surfactants India Ltd. [Company Appeal (AT) (Insolvency) No.684 of 2021]
AA and the Liquidator had refused to grant extension of time for payment to the successful bidder in view of timeline specified in regulation 47A of the Liquidation Regulations. The issue for determination was as to whether the appellant is entitled to the exclusion of time during period of lockdown due to Covid 19. NCLAT while setting aside the order of AA held that regulation 47A of Liquidation Regulations deals with the model timeline for liquidation process. It is only directory in nature and cannot be considered a deadline. In exceptional circumstances, such a time limit can be extended.
AA imposed a penalty of TS lakh on each of the two ex-directors under the provisions of the Companies Act, 2013 for withdrawal of 32 lakh during moratorium and non -cooperation by them. NCLAT remanded the matter back to the AA for taking a decision under the provisions of the Code after giving an opportunity to the appellant to present their case and giving due consideration of the facts of the case. It also held that the penalty can be imposed only under Chapter VII of the Code under which officers of the CD can be penalized and not under the Companies Act, 2013.
Dr. Periasamy Palani Gounder Vs. Mr Radhakrishnan Dharmarajan Resolution Professional, Appu Hotels Limited & Anr. [Company Appeals (AT) (CH)(Insolvency) No.164, 176, 218 & 219 of 2021]
NCLAT observed that statutory requirements in regulating a matter of practice and procedure are mandatory and that the resolution plan approved by AA is in contravention of section 30 (2) of the Code. It made following observations:
- Valuers appointed by IRP did not physically verify the CD’s assets despite regulation 35 (I) (a) of the CIRP Regulations mandates that the estimated fair value and liquidation value shall be computed after physical verification of the assets of the CD.
- A valuation consisting of mere naked values without a detailed report is not valid. The existence of a valid and accurate valuation report is a sine qua non for the CoC to exercise its commercial wisdom.
- Approved resolution plan discriminates between related party unsecured FC and other unsecured FCs, likewise related party OCs and other OCs.
- Submission of the revised resolution plan for approval before the AA without CoC’s approval violates the statutory provision of section 30(2) and (3) of the Code and has vitiated the entire CIRP and made the resolution plan void ab initio.
- Regulation 36(2) of CIRP Regulations provides the mandatory condition for publication of ‘Form-G’ on the CD’s website and the website designated by the Board for the purpose. Non-publication of notices of Form G is a material irregularity in exercise of the powers by RP during the CIRP period.
- The related party financial or operational creditor cannot be discriminated under the resolution plan, denying their right to get payments under the resolution plan only on being a related party. By getting only payment under the resolution plan, related party creditors could in no way sabotage the CIRP
IP filed appeal claiming that IBBI has no jurisdiction and AA ought not to have sought recommendations of IBBI on the professional fee of IF! NCLAT observed that “IBBI is fully clothed with jurisdiction to regulate payment of remuneration of RP and IRP both by framing regulation or by issuing executive instructions till regulation are not framed can regulate the subject”… “The mere fact that IBBI has been asked to submit its recommendations by the AA, in the present case, there is no reason to question the jurisdiction of IBBI to submit a recommendation. The recommendations may be helpful to determine the issue in accordance with guidelines and circulars issued by the IBBI in this respect, if any.”
Mukesh N. Desai Vs. Piyush Patel & Ors. [Company Appeal (AT) (Insolvency) No. 780 of 2020]
The issue for consideration before NCLAT was whether a landowner intending to share profits emanating from the agreed venture, byway of an MoU, would fall within the ambit of the definition of ‘financial creditor’ under section 5(8) of the Code. AA observed that the amount paid by appellant had no time value of money by way of interest or repayable along with interest, as the amount was paid towards development and construction of the project and in return he is entitled to get 25 percent out of the net profit, as reflected in the MoU. NCLAT upheld the order of AA holding that section 7 application filed under the Code would not be maintainable as there is no sum(s) i.e., owed, assigned or transferred to in compliance of the provisions of section 5(8) of the Code.
Vilcram Puri (Suspended Director) & Anr. Vs. Universal Buildwell Private Limited & Anr. [Company Appeal (AT) (Insolvency) No. 1018 of 2021]
The issue was whether the AA wh le exercising jurisdiction under the Code is empowered to issue non-bailable warrant against any person or party. NCLAT observed that the provision of rule 77 of the NCLAT Rules, 2016 read with Order XVI Rule 10 of Civil Procedure Code, 1908 fully empowers the AA to issue a non-bailable warrant for enforcing attendance of a person. It further observed that the proceedings under the Code are proceedings of special nature and AA is empowered to take appropriate measures for ensuring compliance of the provisions of the Code and for ensuring that all personnel extend co-operation to IRP/ RP.
M/s. G.L. Engineering Industries Pvt. Ltd. Vs. Supreme Engineering Ltd. [Company Appeal (AT) (Insolvency) No. 431 of 2021]
AA had dismissed a section 9 application due to insufficiency of documents to establish any outstanding operational debt. Further, it observed that dishonor of cheques is a subject matter of the Negotiable Instruments Act, 1881 (NI Act) and does not relate to any outstanding amount due from the respondent by way of any operational debt. NCLAT, while dismissing the appeal, observed that the journal entries not supported by any other additional evidence cannot be ‘solely’ relied upon to prove that the amount claimed arises out of ‘supply of goods and services’ to fall within the ambit of operational debt under section 5(21) of the Code. Further, the dishonor of cheques is a subject matter of the NI Act and recovery of these amounts cannot be said to be paid towards the supply of goods and services, specifically in the light of the absence of any such agreement or invoices to that effect.
M/s. Brand Realty Services Ltd. Vs. M/s. Sir John Bakeries India Pvt. Ltd. [Company Appeal (AT) (Insolvency) No. 958 of 2020]
The issue for consideration was whether the CD is precluded to raise the issue of pre-existing dispute before the AA, in case CD failed to submit reply within 10 days from the receipt of the notice under section 8 of the Code. NCLAT observed that the statutory scheme under section 8 and 9 does not indicate that in an event reply to notice is not filed within 10 days by CD or no reply under section 8(1) has been given, the CD is precluded from raising the question of dispute. It also observed that section 9(5)(ii) provides that the AA can reject the application if- “notice of dispute has been received by the Operational Creditor or there is a record of dispute in the information utility”. The record of dispute in the IU can very well be pointed out by the CD before the AA when notice is issued under section 9 as well as in its reply to the application to indicate that there are pre-existing disputes in existence prior to issuance of demand notice.
Sikander Singh Jamuwal Vs. Vinay Talwar and Ors., [Company Appeal(AT) (Ins)No. 483 of 2019]
The issues for consideration before NCLAT were whether the provident fund dues (PF dues) are the assets of the CD and whether there is any conflict between the provisions of the Employees Provident Funds and Miscellaneous Provident Fund Act, 1952 and the Code.The ex-employees had challenged the order of AA approving the resolution plan of CD inter-alia on the ground that the resolution plan is discriminatory as it fails to consider the payment of PF dues as computed by the Assistant Provident Fund Commissioner which was 71,35,06,391/-; whereas the provision of 778 lakh only was made in the approved resolution plan. NCLAT referred to section 17-B of the Employees Provident Funds and Miscellaneous Act, 1952, and directed that the resolution applicant is liable to pay the contribution and other sums due from the employer under any provisions of the said Act for the period up to the date of such transfer. This aspect is justiciable as a duty has been casted on the RP/AA/ NCLAT and it is not a commercial wisdom as compliance of law is a must. It was further observed that PF dues are not the assets of the CD as amply made clear by the provisions of section 36(4)(a)(iii) of the Code and that there is no conflict between the provisions of both the Acts.
Ramesh Kumar Chaudhary & Anr. Vs. Anju Agarwal & Ors. [CompanyAppeal (AT) (Insolvency) No. 957 of 2021]
In this case, a scheme of compromise or arrangement (Scheme) under section 230 of the Companies Act, 2013 was filed, however, the Stakeholders Consultation Committee (SCC) had not accepted the Scheme. The Liquidator treating herself absolved from consideration of the Scheme proceeded with the e-auction of the assets of the CD. The AA directed the Liquidator to consider the Scheme and that no further steps be taken with regard to the auction of the assets of the CD. On appeal, NCLAT made some important observations in the factual context of the case:
- The action of the Liquidator in placing the Scheme before the SCC was uncalled for and is not in accordance with the provisions of the Code and the Regulations.
- The SCC was not a competent forum for obtaining any advice with regard to scheme of compromise or arrangement submitted under section 230 of the Companies Act, 2013.
- When an advice of rejection of the Scheme is not by 66%, there was no question of following the said advice of the SCC by the Liquidator and act of Liquidator in relying on the said advice amounts to abdication of her own duty to consider the Scheme and shield herself on misconception of law rejecting the Scheme.
- Under sub-regulation (9) of Regulation 31A, SCC shall advice the Liquidator by a vote of not less than 66% of the representative of the consultation committee, present and voting. Thus, percentage has to be computed on the members of the SCC present and voting and not from value of claims of the FC.
- Obligation to obtain the consent of 75% of the Creditors is on the person who proposes the Scheme.
NCLAT concluded that there was neither any consideration of the Scheme nor there is any valid reason for rejecting the Scheme by the Liquidator. The consequential action, after rejection of the Scheme, to proceed with the auction is unsustainable since the decision to proceed with auction was consequent to rejection of the Scheme which was contrary to the statutory scheme and statutory requirements
M/s. Adriatic Sea Foods Pvt. Ltd. Vs. Suresh Kumar Jain [Company Appeal (AT) (Insolvency) No. 1057 of 2021]
NCLAT, on an appeal filed by a purchaser of property against the order of AA by which a sale transaction was reversed as the same was a preferential and undervalued one, observed that fact of pendency of application under section 25 read with section 60(5) for declaration of sale deed as null and void, will have no bearing on application filed under section 43 and 45 of the Code. NCLAT, dismissing the appeal, noted that the possession of the property was handed over to the appellant by the CD at meagre payment of 25 Lakh for which NOC was issued by the mortgagee bank for sale of an amount of not less than 717.86 crore, this indicates that it was a preferential transaction as well as undervalued transaction. Further noted that the AA itself has not directed for cancellation of the sale rather cancellation of sale deed was inferred on account of non-payment of balance consideration and entry made by the Bank in its books of accounts. It was directed that the possession of the property be handed over to the RP. The contention of the purchaser that since an application filed by RP for declaring the transaction void is pending, the AA could not have issued any direction, was not conceded.
M/s. Radico Trading Ltd. Vs. Tarun Batra (Insolvency Professional) & Ors. [Comp. App. (AT) (Insolvency) No. 139 of 2022]
NCLAT on the issue whether there has to be a mandatory appointment of an expert by the AA in applications filed under section 46(1) of the Code, held that it is not necessary to appoint expert for all applications filed under section 46(1) of the Code. The appellant being purchaser of property challenged the order stating that the appellant was a bona fide purchaser for value and transactions, which have been declared undervalued. The CD had transferred its fixed assets just before the initiation of CIRP by the way of book entries. It was revealed that the directors of the CD were aware of the fact that CIRP applications is pending against CD. It was observed that the book value of the machinery stood at 1.56 crore whereas the sale of the plant and machinery was for 21 lakh and which is clearly undervalued transaction. While dismissing the appeal, NCLAT held that the appellant was in fact the beneficiary of the undervalued transaction.
Mukul Agarwal Vs. Royale Resinex Pvt. Ltd. & Anr. [Company Appeal (AT) (Insolvency) No. 777 of 2020]
Suspended director of CD challenged the admission order passed by AA, inter alia on the grounds that the CD is a going concern having a good turnover and that there is no operational debt due on the CD as the application is based on a decree passed by a civil court. NCLAT observed that “the mere fact that when the Corporate Debtor did not pay the amount, suit for recovery was filed in the year 2016 by the Operational Creditor, which was also Decreed, does not in any manner effect the transaction out of which the amount fell due. The fact that amount was adjudicated and a Decree was passed, in no manner take away the nature of ‘operational debt”. It held that OC is entitled to invoke section 9, and the application filed by OC cannot be said to be non-maintainable on the ground that CD is a going concern.
National Company Law Tribunal
Anil Vora HUF Vs. Kavya Build-Con Private Limited [CP(IB) No.2076/NCLT/MB-IV/2019]
In this case, an OC filed an application under section 9 of the Code, seeking initiation of CIRP against the CD on the ground that the CD had failed to make payment oft’ 75,00,000/- to the applicant under the retirement deed between the applicant and the partnership firm i.e., Kavya KCD Developers. The CD was also a partner in the partnership firm. The question which arose before AA was whether the retirement amount arising out of the agreement with the partnership firm constitutes the operational debt. AA held that “even the liability of the Corporate Debtor is proved in all aspect, the IBC does not protect the interest or claim of the Partner against another Partner or the Firm”. It further observed that the OC may be liable to the claims against the CD not under the Code but under any other law which provides the remedy to OC.
CBRE South Asia Private Limited Vs. M/s. United Concepts and Solutions Private Limited [(IB)-797(ND)202 1]
An application was filed under section 9 of the Code, whereby the applicant had claimed a total amount of ZI ,39,84,400/- as operational debt, out of which 88,50,886/- was the principal amount and Z5 1,33,5 14/- was the interest. AA observed that, “interest” can be claimed as ‘financial debt’, but neither there is any provision nor there is any scope to include the interest to constitute as the ‘operational debt’. It held that the interest amount cannot be clubbed with the principal amount of debt to arrive at the minimum threshold of Z I crore for complying with the provision of section 4 of the Code.
Bank of India Vs. Agnipa Energo Pvt. Ltd. [IA No. 10 of 2021 in CP (IB) No. 37-GB-2019]
AA observed that it is neither commercial wisdom nor a commercial decision of the CoC /FC to reject a resolution plan which offers to them an amount of twenty times more than the liquidation value. It rejected the prayer made by the RP for liquidation of the CD and directed the RP /CoC to start afresh CIRP and to find out a viable resolution plan within the stipulated timeline underthe Code.
Bank of Baroda Vs. Ms. Divya Jalan [CP (IB) No. 363/KB/2021]
The question, as to whether the FC is entitled to recover dues of the CD from the legal heirs of the PG was considered by AA. AA observed that when a section 95 application is filed, the assets of the PG is hit by moratorium and if the legal heirs of the deceased PG are put into the shoes of the PG, then their personal assets will also get automatically hit by moratorium, which will cause grave prejudice to the rights of the third party. There is no provision in the Code which envisages the concept of legal heirs stepping into the shoes of the deceased PG. It further observed that the legislature is very much clear in defining the term ‘personal guarantor’, as the Code talks about the estate/assets of the PG only and the definition does not include the legal heirs. The petition was dismissed holding that the petitioner FC can take appropriate steps to recover the guaranteed amount from the assets/estates of the deceased PG rather than the personal assets of the legal heirs of the PG.
Laxmi Kantha Rao Thota Vs. IRIS Electra Optics Pvt Ltd. [IA 785, 857 &858/ 2019 & IA 72,193 & 629/2020 CP(IB) No.181/7/HDB/2019]
Bank of India, one of the FCs of the CD filed an application that inter-alia sought recalling of the admission order passed by AA with respect to the CD. Bank of India alleged that allotment of 36.05% of the voting share in CoC to 3rd respondent (another FC of CD) was illegal as his wife was a director of the CD. AA noted that the long-standing business as well as the matrimonial relationship between the 3rd respondent and the director of the CD has enabled them to indulge in commercial contrivances to seek entry into the CoC and control the CoC and thus, unfairly benefit the CD and jeopardise the pending recovery process. It further observed that the real intention of the 3rd respondent behind filing the petition is not resolution of insolvency, but to take shelter/undue advantage under the shield of moratorium, and to gain entry into CoC, jeopardize/dodge the lawful measures initiated by the applicant bank, for recovery of public money lent to the CD where his wife is a director. AA further observed that RP acted at the behest of the 3rd respondent who was the applicant in the main petition. In light of the above, it was held that respondent no. 3 is a related party to the CD, and he is debarred from any right of representation in the CoC. AA while recalling its admission order, imposed a penalty of 1 crore on the 3rd respondent, under section 65 of the Code for initiating CIRP fraudulently and with malicious intent.
The issue that came up before AA was, whether insolvency resolution process can be initiated against the PG of a NBFC/Financial Services Provider (FSP) before initiation and/or irrespective of CIRP against the NBFC? AA observed that for initiation of insolvency resolution and liquidation proceedings, the asset size of the NBFC should be 500 crore or more, as per last audited balance sheet. It further observed that insolvency resolution process(es) can be initiated against the PG(s) of a NBFC / FSP irrespective of CIRP against the NBFC, provided that the concerned NBFC falls within the category of those FSPs having assets size of Z 500 crore or more, thus being included in the definition of CD under Code. AA held that the asset size as per last audited balance sheet of the principal borrower is less than 500 crore, it is therefore, excluded from the ambit of the FSP. Further, the principal borrower does not stricto sensu qualify within the tight definition of ‘corporate person’ under the Code, as the said definition excludes FSP. Hence, such principal borrower does not qualify as a CD.
Sarvesh Kashyap, as Liquidator of Komorebi Exports Pvt Ltd Vs. Bank of India (Sole Member of Committee of Creditors) [IA No.05/ALD/2021 in CP (IB) No.344/ALD/2018]
On an application filed by liquidator that sought directions against the CoC to release the CIRP cost and the liquidation cost, AA observed that, “We are pained to note that in many cases, the creditors sitting on the CoC and on the Stakeholders Consultation Committee do not loosen their purse strings easily to meet even the bare minimum CIRP costs. In the vast majority of the cases, the insolvency professional and the professional team assembled by him for various activities have to wait for months on end to get reimbursements or their fee, even after the CoC had already approved incurring the expense in question. After patiently waiting for several months, the desperate and hapless insolvency professional is constrained to knock on the doors of the Adjudicating Authority for his basic fee and expenses, again entailing a legal cost which could have been avoided had the fee been paid on time… The time spent in such matters can be more profitably utilised by the Adjudicating Authority in determining questions that really require some application of mind and interpretation of the various provisions, instead of on issuing directions in matters that ought not to have crossed into the courthouse in the first instance. Delay defeats the very purpose of the IBC”. AA suggested that IBBI may consider issuing appropriate instructions to the banks in this regard.
Punjab National Bank Vs. Saptarishi Hotels Pvt Ltd [IA (IBC) 200/2022 in CP(IB) No. 599/7/HDB/2019]
On an application filed bythe RP seeking extension of CIRP for 60 days inter alia awaiting CD’s renewal of lease of immovable property by the State Government for a further period of 33 years, AA noted that the CoC instead of rejecting the conditional resolution plans submitted by the PRAs is rigorously pursing their cause by seeking exclusion and extension of time. It also observed that since the plans of PRAs were conditional, the RP ought to have insisted the PRAs to make their plans unconditional and ought to have not included them in eligible prospective PRAs. Further, both CoC and the RP have actively indulged in not only promoting free negotiation of the terms of the resolution plan put forth by the parties/PRAs but also seeking time to fulfil the contractual terms dictated by the PRAs, in utter disregard of the CIRP Regulations, and the intent of the Code. It further observed that time bound resolution is the prime aim and objective of the Code and the members of CoC and RP are responsible for the loss of time prescribed under the Code.
Debt Recovery Tribunal
State Bank of India and Ors. Vs. Mr. Prashant S. Ruia &Anr. [IA No. 106 of 2020 in Original Application No. 650 of 2018]
The issue which came for consideration before DRT was on jurisdiction and maintainability of the Original Application filed by the applicant banks under section 19 of the Recovery of Debts and Bankruptcy Act, 1993 seeking recovery of debts, by invoking the personal guarantees executed by the promoter/directors in favour of the applicant bank. The key issues before DRT were as follows: –
- Having assigned the “debt” as defined u/s 2(g) of the Recovery of Debts and Bankruptcy Act, 1993, for valuable consideration, as part of the resolution plan under the Code, is the Original Application maintainable?
- Having relinquished its rights and/or entitlement to pro-rata receive the cash balance (profit) earned by the principal borrower i.e. Essar Steel India Limited (ESIL), are the defendants discharged of their liability under the personal guarantees?
- Whether in absence of the existence of jurisdictional fact, namely, “debt” as defined in section 2(g) of the Recovery of Debts and Bankruptcy Act, 1993, either on account of assignment and/or extinguishment and/or discharge by relinquishment, does DRT has the jurisdiction to entertain the Original Application?
Referring to the ratio laid down in “Lalit Kumar Jain’s case”, and also the deed of guarantee and the approved resolution plan, the DRT held that the secured FCs have assigned their entire ‘debt’ from ESIL to the successful resolution applicant i.e., ArcelorMittal India Private Limited (Arcelor) under the resolution plan and have also accepted the amounts paid to them by Arcelor in discharge of the total debt owed by the ESIL. Hence, the debt owed by the ESIL to the said FCs stood fully and finally satisfied. Accordingly, it was held that the Original Application does not survive as the cause of action for recovery of alleged debt of the FC has come to an end on assignment of the entire debt to the CD by FC in favour of Arcelor.
IBBI
Disciplinary Orders: The DC passed a few orders with a variety of directions for contraventions of the provisions of law.
| SI. No. | Order Against | Professional Member of | Contraventions found | Directions |
| I. | IIV India Registered Valuers Foundation, RVO | NA | Chairperson of Governing Board of the RVO is not an Independent Director. | RVO shall not enroll any new member for a period of sbc months. |
| 2. | Mr. Anil Goel, IP | IIIP ICAI | No material non-compliance observed | No directions |
| 3. | Mr. Mahesh Chand Agarwal, RV | IOVRVF | Concealment of material facts of chargesheet being filed against RV and non-cooperation with the Authority | Cancellation of registration |
| 4. | Ms. Esther Rani Jakkul, RV |
IOVRVF | No material non-compliance observed | No directions |
| 5. | Mr. Vishwanath Shridhar Prabhu, RV | IIV RVF | Pendency of the criminal proceeding against RV. | Suspending the registration as a registered valuer till exonerated of the charges. |
| 6. | Ms. Rita Gupta, IP | IIIP ICAI | Withdrawal of money towards fee of IRP/RP without the approval of the CoC | Suspension for a period of I year. |
| 7. | Mr. Umesh Garg, IP | IIIP ICAI | No material non-compliance observed | No directions |
| 8. | Mr. Rajiv Chalcraborty, IP | IIIP ICAI | Engaging two firms for the same task of identification of resolution applicant and eligibility under section 29A of the Code. | Arrange to refund
pre-CIRP cost of Z 14,57,193/-in the account of CD. IP is suspended for a period of I year. |
Source- The Quarterly Newsletter of the Insolvency and Bankruptcy Bank of India January-March, 2022.
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