ORDERS

SUPREME COURT

Duncans Industries Ltd. Vs. A. J. Agrochem [Civil Appeal No. 5120/2019]

The AA rejected an application under section 9 on the ground that the provisions of the Code are not applicable unless the OC seeks consent of the Central Government, in view of section 16G(1)(c) of the Tea Act, 1953, which provides that no proceeding for winding up can be initiated except with the consent of the Central Government. The NCLAT allowed an appeal against the said order holding that no permission of the Central Government is required for initiation of CIRP of the CD. The SC upheld the NCLAT judgment holding that the CIRP cannot be equated with winding up proceedings and hence no prior consent of the Central Government would be required for initiation of the proceedings under section 7 or 9.

Committee of Creditors of Essar Steel India Limited Through Authorised Signatory Vs. Satish Kumar Gupta & Ors. [Civil Appeal No. 8766-67/2019 Diary No. 24417/2019 with other Civil Appeals and WP(C)s]

While setting aside the judgment of the NCLAT and upholding the constitutional validity of the Insolvency and Bankruptcy Code (Amendment) Act, 2019, the judgement emphasises that the legislature must have free play in the joints in economic legislations. Apart from the presumption of constitutionality, the Courts must give a certain degree of deference to the legislative judgment in economic choices. The judgement provides clarity as  to the roles of various stakeholders, namely, RP, resolution applicant, CoC, and the AA and the NCLAT, qua resolution plan in a CIRP. It settled several issues as under:

Supremacy of CoC: The CoC is supreme in commercial matters relating to a CIRP. It must decide whether to rehabilitate the CD by accepting a resolution plan, and the manner of resolution. What is left to the majority decision of the CoC is the feasibility and viability of a resolution plan, which obviously takes into account all aspects of the plan, including the manner of distribution of realisations under a resolution plan among the various classes and sub-classes of creditors. Its decisions, however, must reflect that it has taken into account maximising the value of assets of the CD and that it has adequately balanced the interests of all the stakeholders. It cannot delegate its responsibility. It does not act in any fiduciary capacity to any group of creditors. On the contrary, it is to take a business decision based upon ground realities by a majority, which then binds all stakeholders, including dissenting creditors.

Jurisdiction of AA: The limited judicial review available to AA can in no circumstance trespass upon a business decision of the majority of the CoC. The residual jurisdiction of the AA under section 60(5)(c) cannot, in any manner, whittle down section 31(1) of the Code, by the investment of some discretionary or equity jurisdiction in the AA outside section 30(2) of the Code, while adjudicating a resolution plan. The AA is to decide on whether a resolution plan passes muster under the Code and there is no residual jurisdiction not to approve a resolution plan on the ground that it is unfair or unjust to a class of creditors, so long as the interest of each class has been looked into and taken care of.

Fair and equitable: Protecting creditors in general is, no doubt, an important objective. Protecting creditors from each other is also important. If an “equality for all” approach recognising the rights of different classes of creditors as part of a CIRP is adopted, secured FCs will, in many cases, be incentivised to vote for liquidation rather than resolution, as they would have better rights if the CD is liquidated. This would defeat the objective of the Code which is resolution of distressed assets. The amended regulation 38 does not lead to the conclusion that FCs and OCs, or secured and unsecured creditors, must be paid the same amounts, percentage wise, under the resolution plan before it can pass muster. Fair and equitable dealing of OCs rights under regulation 38 of the CIRP Regulations involves the resolution plan stating as to how it has dealt with the interests of OCs, which is not the same thing as saying that they must be paid the same amount of their debt proportionately. So long as the provisions of the Code and the Regulations have been met, it is the commercial wisdom of the requisite majority of the CoC which is to negotiate and accept a resolution plan, which may involve differential payment to different classes of creditors, together with negotiating with a prospective resolution applicant for better or different terms which may also involve differences in distribution of amounts between different classes of creditors. The Code and the Regulations, read as a whole, together with the observations of expert bodies and the SC’s judgment, all lead to the conclusion that the equality principle cannot be stretched to treating un-equals equally, as that will destroy the very objective of the Code to resolve stressed assets. Equitable treatment is to be accorded to each creditor depending upon the class to which it belongs: secured or unsecured, financial or operational.

Subrogation: Section 31(1) makes it clear that once a resolution plan is  approved by the CoC, it shall be binding on all stakeholders, including guarantors. This provision ensures that the successful resolution applicant starts running the business of the CD on a fresh slate as it were. It is difficult to accept the argument that, the part of the resolution plan which states that the claims of the guarantor on account of subrogation shall be extinguished, cannot be applied to the guarantees furnished by the erstwhile directors of the CD.

Claims: All claims must be submitted to and decided by the RP so that a prospective resolution applicant knows exactly what must be paid in order that it may then take over and run the business of the CD. A successful resolution applicant cannot suddenly be faced with “undecided” claims after the resolution plan submitted by him has been accepted as this would amount to a hydra head popping up which would throw into uncertainty amounts payable by it.

Profit during CIRP: The Request for Resolution Plans had provided that profits made during the CIRP would not go towards payment of debts of any creditor and therefore, this amount cannot be given to creditors.

Timeline: It upholds the sanctity of overall timeline of 330 days for a CIRP, except in exceptional cases. While taking note of the judicial adage that time taken in legal proceedings cannot possibly harm a litigant if the Tribunal itself cannot take up the litigant’s case within the requisite period for no fault of the litigant, it held that the CIRP must “ordinarily” be completed within the outer limit of 330 days from the insolvency commencement date unless extended by the court on sufficient cause. Hence, the term “mandatorily” inserted in section 12 of the Code by way of Amendment Act, 2019 was struck down as being manifestly arbitrary under Article 14 of the Constitution and as being an unreasonable restriction on the right of the litigant to carry on business under Article 19(1)(g) of the Constitution.

Priority of Payment: Section 30(2)(b) is a beneficial provision in favour of OCs and dissenting FCs as they are now to be paid a certain minimum amount, the minimum in the case of OCs being the higher of the two figures calculated under sub-clauses (i) and (ii) of clause (b), and the minimum in the case of dissentient FC being a minimum amount that was not earlier payable. Prior to the amendment, secured FCs could cramdown unsecured FCs who were dissenting. But after the amendment, such FCs are now to be paid the minimum amount mentioned. The order of priority of payment of  creditors mentioned in section 53 is not engrafted in sub-section (2)(b) of the said section, as amended. Section 53 is only referred to in order that a certain minimum amount be paid to different classes of OCs and FCs.

Rahul Jain Vs. Rave Scans Pvt. Ltd. & Ors. [Civil Appeal No. 7940/2019]

The NCLAT had held that the AA failed to notice that the NCLAT had declared the unamended regulation 38(1)(c) of the CIRP Regulations, which stipulated the liquidation value for dissenting FCs, as illegal. It observed that the resolution applicant did not bring the amended regulation to the notice of the AA. It modified the resolution plan to treat a dissenting FC at par with other creditors. On an appeal by a dissenting FC, the SC held that the resolution process began well before the amendment to regulation 38 and the resolution plan was prepared and approved before that event, and thus the observation of NCLAT was not justified.

Jaiprakash Associates Ltd. & Anr. Vs. IDBI Bank Ltd. & Anr. [D. No. 27229/2019 with Civil Appeal No. 6486/2019]

The order of NCLAT, which excluded 90 days from CIRP period, was appealed against. The SC noted: “It is however, noticed from several  amendments made to the I & B Code from time to time that the Legislature has also continually worked upon introducing changes to the I & B Code so as to address the problems faced in implementation of the new legislation introduced as recently as in 2016. The case on hand is classic example of how the entire process has got embroiled in litigation initially before this Court and now before the NCLT and NCLAT respectively, because of confusion or lack of clarity in respect of foundational processes to be followed by the CoC.” It held: “That delay is attributable to the law’s delay”. It further noted that an extraordinary situation had arisen because of the constant experimentation which went about at different level due to lack of clarity on matters crucial to the decision-making process of CoC. By invoking its powers under Article 142 of the Constitution to do complete justice, it held: “…we need to and must exercise our plenary powers to make an attempt to revive the corporate debtor (AIL), lest it is exposed to liquidation process under Chapter III of Part II of the I & B Code.” It directed to complete the CIRP within 90 days from the date of passing the order instead of the date of commencement of the Insolvency and Bankruptcy Code (Amendment) Act, 2019. It also applied the principle underlying Regulation 36B(7) of the CIRP Regulations to permit IRP to issue request for resolution plans to the two bidders (Suraksha Realty and NBCC) and / or call upon them to submit revised resolution plan(s), which can then be placed before the CoC for its consideration.

Captain Anant Dewan Vs. M/s Air India Limited [Special Leave Petition (Civil) Diary No. 31664/2019]

An OC filed application before the AA, which deferred its decision since identical disputes were pending as also the SC was seized of the disputes, and allowed the OC to seek clarification with respect to the same from the SC. The SC held: “…issues though relatable to Section 9A of the Industrial Disputes Act, 1947 would have a vital bearing on payments to be made ultimately to the petitioner as a pilot and are pending in this Court. It is open for Air India to take this up as a defence in the application that is filed by the petitioner before the NCLT. The NCLT order, therefore, is set aside and the NCLT will now go into the Section 9 application filed by the petitioner afresh, after considering objections by the respondent.”

Hindustan Construction Company Limited & Anr. Vs. Union of India & Ors. [WP(Civil)No. 1074/2019 with other Civil Appeals]

The SC held: “…what is clear is that NHAI is a statutory body which functions as an extended limb of the Central Government, and performs governmental functions which obviously cannot be taken over by a resolution professional under the Insolvency Code, or by any other corporate body. Nor can such Authority ultimately be wound-up under the Insolvency Code. For all these reasons, it is not possible to … either read in, or read down, the definition of ‘corporate person’ in Section 3(7) of the Insolvency Code.”

M/s Embassy Property Development Pvt. Ltd. Vs. State of Karnataka & Ors. [Civil Appeal No. 9170-9172/2019]

The IRP sought the benefit of deemed extension of the mining lease beyond May 25, 2018 up to March 31, 2020. As there was no response, he filed a writ petition before the HC seeking a declaration that the mining lease should be deemed to be valid up to March 31, 2020 in terms of section 8A(6) of the MMDR Act, 1957. During the pendency of the writ, the Government of Karnataka (GoK) rejected the proposal for deemed extension, on the ground that the CD had contravened not only the terms and conditions of the Lease Deed but also the provisions of statutory Rules. The RP withdrew the writ and filed an application before the AA seeking a declaration that the lease should be deemed to be valid up to March 31, 2020. The AA directed GoK to execute Supplement Lease Deeds in favour of the CD. Aggrieved by the order of the AA, GoK moved a writ petition before the HC, which set aside the order of the AA and remanded the matter back to the AA for a fresh consideration. The AA again directed GoK to execute Supplemental Lease Deeds in favour of the CD. The GoK again moved a writ petition before the HC. While allowing the RP time to get instruction, the HC by an interim order stayed the order of the AA. The SC considered the appeal against the said
interim order in this matter.

The SC held that the AA did not have jurisdiction to entertain an application against the GoK for a direction to execute Supplemental Lease Deeds for the extension of the mining lease. Since the AA chose to exercise a jurisdiction not vested in it in law, the HC was justified in entertaining the writ petition. It further held that though the AA and the NCLAT have jurisdiction to enquire into questions of fraud, they would not have jurisdiction to adjudicate upon
disputes such as those arising under MMDR Act, 1957 and rules issued thereunder, especially when the disputes revolve around decisions of statutory or quasi-judicial authorities, which can be corrected only by way of judicial review of administrative action. Hence, the HC was justified in entertaining the writ petition.

Mr. Anand Rao Korada Resolution Professional Vs. M/s. Varsha Fabrics (P) Ltd. & Ors. [Civil Appeal Nos. 8800-8801/2019]

The RP filed an appeal before the SC challenging the order of the HC for auction of assets on the ground that CIRP had already commenced, the proceedings before the HC ought to be stayed. The SC observed: “In view of the provisions of the IBC, the High Court ought not to have proceeded with the auction of the property of the Corporate Debtor…, once the proceedings under the IBC had commenced, and an order declaring moratorium was passed by the NCLT…If the assets of the Respondent No.4- Company are alienated during the pendency of the proceedings under the IBC, it will seriously jeopardise the interest of all the stakeholder”.

State Bank of India Vs. M/s Accord Life Spec Private Limited Through Director & Ors. [Civil Appeal No. 9036/2019]

The NCLAT set aside the order of the AA approving the resolution plan proposed by the resolution applicant for the resolution of the CD, as the resolution plan value was less than the liquidation value. The SC stayed the aforesaid order of the NCLAT in the meantime.

HIGH COURTS

Action Ispat & Power Pvt. Ltd. Vs. Shyam Metalics & Energy Limited & Ors.[Co. App 11/2019 & CM No. 31047/ 2019, CM No. 34726/ 2019]

A winding up petition was filed under sections 433(e) and (f) of the Companies Act, 1956 on the ground of CD’s inability to pay its debts. The petition was admitted, and an official liquidator was appointed in respect of the CD. During the pendency of the petition and much before the passing of the winding up order on August 27, 2018, the Code came into force. An FC filed application under section 7 seeking CIRP of the CD and sought transfer of the winding up proceeding to the AA for proceeding under the Code. The appointment of the official liquidator was revoked and winding up proceedings was transferred to NCLT. The power of the company judge to transfer the proceeding was appealed against. The HC held that the company judge rightly recalled the order of appointment of official liquidator. It observed: “…the proceedings under IBC are independent and have an object different from the one envisaged under the scheme of liquidation provided in the Company Law. The former aims resolution by way of revival in a manner that benefits all stakeholders, the creditors as well as the company. Thus, the scope of the proceedings before the NCLT is wider – with the object of preserving the company and its business/ commercial activities. When transfer of winding up petition can aid in achieving the  aforementioned objective, it ought to be allowed in the interest of justice. The court must be sensitive to the scheme and object of the Code; running of parallel proceedings will indeed be futile, create chaos and confusion…”.

Mahender Kumar Khandelwal Vs. Insolvency and Bankruptcy Board of India and Anr. [W.P.(C) 12189/2019 & CM APPL. 49819/2019]

Disciplinary Committee (DC) of the Board, vide an order, directed Mr.Mahender Kumar Khandelwal, an IP not to accept any new assignment either as IRP or RP till he deposits the monetary penalty of Rs. 29,24,167 with the Board as well as produce evidence to the Board of deposit of Rs. 12,09,90,185 in the CD’s account, by securing reimbursement of the same from members of the CoC. On a writ petition, the HC directed the CoC to deposit Rs. 12,09,90,185 with the Registry without prejudice to its rights and contentions, after noting that the IP has already deposited Rs. 29,24,167 with the Court and stayed the operation of the impugned order, in so far as it prevents the IP from accepting a new assignment in the meantime.

Kamal K. Singh Vs. Union of India and Ors. [WP (L) No. 3250/2019]

It was submitted that an application under section 7 of the Code was filed and on hearing the parties, the AA reserved the order. It was not listed on October 22, 2019 (the date of passing the order) in the cause list for ‘pronouncement’. An additional cause list dated October 22, 2019 was created on November 5, 2019, which featured only one item under “Order” and was uploaded on the website of the AA. An IP took charge of the CD on November 8, 2019 on the basis of the order of the AA purportedly passed on October 22, 2019, which according to the petitioner is non est. The HC observed that the impugned order was passed in violation of rules 150 and 152 (2) of the National Company Law Tribunal Rules, 2016. While issuing writ of certiorari, it set aside the impugned order on the ground that the same is a nullity. It, however, clarified that it shall not affect the proceedings before the AA. The application under section 7 can be pursued and decided in accordance with law afresh. The HC further observed that one of the measures to make the working and functioning of the tribunals litigant friendly and effective is by placing trained staff at the disposal of the judicial members. The staff ought to be drawn from legal field and the AA lacks such a staff.

Flipkart India Private Limited Vs. Cloud Walker Streaming Technologies Pvt. Ltd. [F.R. No. 50726/2019 (WP) (GM-RES)]

The order of initiation of CIRP of the CD was challenged. It was submitted that the AA can only entertain applications wherein the debt is admittedly payable, while the application was filed for damages for which it has no jurisdiction. The HC stayed operation of the impugned order.

NATIONAL COMPANY LAW APPELLATE TRIBUNAL

Abhay N. Manudhane Vs. Gupta Coal India Pvt. Ltd. [CA(AT)(Ins) No. 786/2019]

The liquidator filed an appeal against the order of the AA rejecting an application filed by him under section 60(5) of the Code for institution of a suit or other legal proceedings on behalf of the CD under liquidation in the Courts / Tribunals. While dismissing the appeal, the NCLAT held that in terms of section 11(d), a CD under liquidation is not entitled to make application to initiate CIRP.

Note: The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019 has since clarified that section 11 does not prevent a CD from initiating CIRP against another CD.

Mr. S. Rajendran, Resolution Professional of PRC International Hotels Private Limited Vs. Jonathan Mouralidarane [CA(AT)(Ins) No. 1018/2019]

On an application by an FC against the determination of claim by the RP, the AA accepted the claim. The RP challenged the decision of the AA accepting the claim. While dismissing the appeal, the NCLAT held that the RP has no jurisdiction to determine a claim. He can only collate it, based on evidence and the record of the CD or as filed by the FC. If an aggrieved person moves before the AA and , after going through the records, if it comes to a  conclusion that certain claimed amount is payable, the RP should not have moved the appeal, as in any manner, he is not affected.

Jindal Steel and Power Limited Vs. Arun Kumar Jagatramka & Anr. [CA(AT) No. 221/ 2018]

An unsecured creditor of the CD preferred an appeal under section 421 of the Companies Act, 2013 against the order of the AA for taking steps for financial scheme of compromise and arrangement between the promoter and the CD through the Liquidator. The issue whether the promoter is eligible to file application for compromise and arrangement, while he is ineligible under section 29A of the Code to submit a resolution plan, the NCLAT, relying on the judgment of the SC in Swiss Ribbons Pvt. Ltd. & Anr. Vs. Union of India & Ors., held that promoter, if ineligible under section 29A, cannot make an application for compromise and arrangement for taking back the immovable and movable property or actionable claims of the CD.

Note: The Liquidation Process (Amendment) Regulations, 2020 now clarifies that a person, who is not eligible under the Code to submit a resolution plan for insolvency resolution of the CD, shall not be a party in any manner to a compromise or arrangement of the CD under section 230 of the Companies Act, 2013.

DBS Bank Ltd., Singapore Vs. Mr. Shailendra Ajmera & Anr. [CA(AT)(Ins)No. 788/ 2019]

According to the Appellant, it voted against the resolution plan and in terms of amended sub-section (2)(b)(ii) of section 30, it is entitled to minimum amount as payable in the event of liquidation of the CD. However, it did not challenge the approval of the resolution plan, but challenged distribution made therein inter-se among FCs of the CD. The NCLAT held that since the appellant was not challenging the resolution plan, the question of applicability of amended section 30(2) did not arise. The manner of distribution has been prescribed under the amended sub-section (4) of section 30, which has not been given prospective effect. Therefore, the distribution cannot be alleged to be in violation of the said amended sub-section (4) of section 30. It observed that no FC, including a secured creditor, can dissent on the ground that if it dissents against the resolution plan, in spite of plan being feasible and viable and in accordance with section 30(2), just to get more amount than the other secured creditor, cannot take advantage of the amended section 30(2)(b)(ii).

Reliance Industries Ltd. Vs. Ajay Joshi & Ors. [CA(AT)(Ins)No. 942/2019]

The successful resolution applicant submitted that it has been exempted from obligations under delisting regulations by SEBI and there is no requirement of permission from SEBI. This was opposed by minority shareholders. The SEBI submitted that delisting regulations shall not apply to any delisting of equity shares of a listed entity made pursuant to a resolution plan approved under section 31 of the Code subject to certain conditions, if such plan, (a) lays down any specific procedure to complete the delisting of such share; or (b) provides an exit option to the existing public shareholders at a price specified in the resolution plan. The NCLAT held that in view of the specific plea taken by the SEBI, no further clarification is required.

JSW Steel Ltd. Vs. Mahender Kumar Khandelwal & Ors. [CA(AT)(Ins)No. 957,1034,1035,1055,1074/2019]

In its order dated October 14, 2019, the NCLAT stayed the order of attachment passed by the Deputy Director, Directorate of Enforcement (DoE) with regard to certain part of the property of the CD (Bhushan Power & Steel Limited), considering the fact that the stand taken by the DoE is contrary to the stand taken by the Government of India. It prohibited DoE from attachment of any property of the CD without its prior approval. It directed that the property already attached by them be released in favour of the RP immediately.

In its order dated October 25, 2019, the NCLAT held a prima facie view that if the assets seized by the DoE were purchased out of the proceeds of crime, the amount as may be generated out of the assets would come within the meaning of operational debt payable to the DoE for which it may file claim in terms of the Code.

Note: The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019, with effect from December 28, 2019, insulates the corporate debtor and its property from liability of offences committed prior to CIRP commencement subject to certain conditions.

M/s. B.R Traders Vs. Venkataramanarao Nagarajan & Ors. [CA(AT)(Ins)No. 189/2019 with other CAs]

One of the appellants had filed an application before the AA for directions to RP to handover certain plant and machinery owned by it, which were lying at the premises of the CD. The AA rejected the application, which was challenged before the NCLAT. It was contended that either party – CD or the appellant – was entitled to terminate the agreement if the other party entered into bankruptcy or liquidation as agreed between them. The appellant sent a termination notice to IRP, who responded that after initiation of CIRP, it was not open to the appellant to terminate the agreement as in terms of the provisions of section 20(1) of the Code, he was liable to make every endeavour to protect and preserve the value of the property of the CD and manage the operations of the CD as a going concern. The NCLAT noted that even during liquidation process, the liquidator is to ensure that CD remains a going concern. It held that if no arrangement or scheme framed under sections 230-232 of the Companies Act, 2013 becomes possible or the CD is not sold in its totality along with the employees and there is no option but to sell the assets of the CD and to distribute the same amongst the creditors in terms of section 53 read with section 52 of the Code, the appellant may ask the liquidator to return the plant and machinery at that stage.

State Bank of India Vs. Anuj Bajpai (Liquidator) [CA(AT)(Ins) No. 509/2019] 

The issue was whether a secured FC, while opting out to realise the secured assets under section 52(1)(b) of the Code out of liquidation process, is barred from selling the secured assets to the promoters or its related party or the persons who are ineligible in terms of section 29A of the Code. The NCLAT held that if it comes to the notice of the Liquidator that a secured creditor intends to sell the assets to a person who is ineligible in terms of section 29A, it is always open to reject the application under section 52(1)(b) read with section 52(2) and (3) of the Code.

Note: The Liquidation Process (Amendment) Regulations, 2020 now clarifies that a secured creditor cannot sell or transfer an asset, which is subject to security interest, to any person, who is not eligible under the Code to submit a resolution plan for insolvency resolution of the CD.

Asset Reconstruction Company (I) Limited (ARCIL) Vs. Mr. Koteswara Rao Karuchola & Ors. [CA(AT)(Ins)No. 633/2018]

The AA directed the RP to revise the claim submitted by the claimant. The order was challenged before the NCLAT stating that the claimant is not an FC and there were ongoing proceedings under the PMLA, 2002. It held:

“… while we hold that there is a dispute as to whether Mahal Hotel Private Limited comes within the meaning of ‘Financial Creditor’ or not, we hold that after constitution of the ‘Committee of Creditors’, without its permission, the ‘Resolution Professional’ was not competent to entertain more applications after three months to include one or other person as ‘Financial Creditor’.

Further, once a decision was taken by the ‘Committee of Creditors’ to call for a meeting for removal of Mr. Koteswara Rao Karuchola as an ‘Resolution Professional’, it was improper for him to include Mahal Hotel Private Limited as ‘Financial Creditor’ of the Member of the ‘Committee of Creditors’.” It also noted that since money laundering case had been initiated against Mahal Hotel Private Ltd., it cannot be allowed to be a member of the CoC.

Tirumala Balaji Alloys Private Limited Vs. Sumit Binani [CA(AT)(Ins) No. 600/2018 & CA(AT)(Ins) No. 601/2018]

The AA directed the appellants to restore entire transferred amount along with 12% interest till date of realisation on an application of the RP in respect of preferential transactions. While rejecting an appeal against the said direction, the NCLATheld:“…as it is not in dispute that the promoters of the ‘Corporate Debtor’ hold 99.4% shareholding in ‘Excello Fin Lea Limited’ and 50% shareholding in ‘Tirumala Balaji Alloys Pvt. Ltd.’ and rest of the 50% shareholding of the ‘Tirumala Balaji Alloys Pvt. Ltd.’ is with the relatives of the promoters of the ‘Corporate Debtor’ i.e. ‘Rungta Family’, we are of the view that all the transactions made during the period of two years preceding date of Insolvency Commencement Date i.e., 18th July, 2017 come within the meaning of ‘preferential transactions’.”

Vinod Mittal Vs. Rays Power Experts & Anr. [CA(AT)(Ins)No.851/2019]

The application filed under section 9 was admitted by the AA. A shareholder / director of the CD appealed against the admission on the ground that there was a pre-existing dispute. The NCLAT found that there was a pre-existing dispute and that the AA had specifically asked for various correspondence, which was not provided by the applicant by claiming that “presently the communication is not retrievable”. It observed that starting of CIRP against a functional company is a serious matter and parties cannot be allowed to play hide and seek. It imposed a cost of Rs.5 lakh on the OC and Rs.2.5 lakh on Mr. Rahul Gupta, son of a director of the OC.

Sunil S. Kakkad Vs. Parag Sheth, Resolution Professional/Liquidator & Anr. [CA(AT)(Ins) Nos. 1260-1261/2019 and CA(AT)(Ins) Nos. 1283-1284/2019]

The promoter appellant challenged the order of liquidation passed by the AA and stated that since the initiation of the CIRP, the IRP/RP has not taken any steps in accordance with the provisions of the Code within the statutory time-period. The Appellant submitted that if the whole period is excluded and certain time is allowed to re-start the process in accordance with law, it would yield a number of resolution plans. The NCLAT observed that since the time CIRP was initiated almost about two years have elapsed, it is not inclined to set-aside the order for re-starting the CIRP, even if there is some infirmity in the impugned order / process. It observed: “If the Members who are waiting in que including the Appellant Sunil S. Kakkad and M/s. Tejmalbhai & Co. are ready to provide ‘Scheme’ to take over the ‘Corporate Debtor’, move any application in terms of Section 230(a) of the Companies Act, 2013 for ‘Arrangement and Scheme’ and bring it to the notice of the ‘Liquidator’, the ‘Liquidator’ will consider the same and will proceed in accordance with decision of this Tribunal in Y. Shivram Prasad vs. S. Dhanapal & Ors. (supra).”

Saumil A. Bhavnagri Vs. Messers Nimit Builders & Anr. [CA(AT)(Ins) No.710/2019]

The CD moved the AA to recall the order of admission claiming that it was an NBFC (Non-Banking Finance Company) and hence could not have been admitted. The AA declined to recall the order for reasons, including that it is not vested with power to revisit the final order of admission, by way of review or recall. The NCLAT found that the CD is an NBFC and being FSP, section 7 application could not have been admitted against it. It set aside not only the impugned order but also the original order admitting the application. Note: The Insolvency and Bankruptcy (Insolvency and Liquidation Proceedings of Financial Service Providers and Application to Adjudicating Authority) Rules, 2019 notified on November 15, 2019 provides a framework for resolution of FSPs under the Code.

Tourism Finance Corporation of India Ltd. Vs. Rainbow Papers Ltd. & Ors. [CA(AT)(Ins) No. 354/2019 and other appeals]

The NCLAT disposed of four appeals with the following findings:

(a) It was contended that the RP did not classify the appellant as a secured creditor, due to which it got less amount as compared to secured creditors. While dismissing the appeal, the NCLAT observed that whether a person is a secured or unsecured creditor is a question of fact normally determined by the RP or the CoC. It has no jurisdiction to decide the same in an appeal preferred under section 61(3) of the Code.

(b) As regards distribution of amount in resolution plan, the NCLAT found that the CoC has made the distribution in terms of section 30(4) and it has no jurisdiction to question the distribution so made.

(c) The Sales Tax Officer made a claim in terms of section 48 of the Gujarat Value Added Tax, 2003, which creates a first charge over the property of the CD having a security interest. The NCLAT held: “In view of Statement of Objects and Reasons of the ‘I&B Code’ read with Section 53 of the ‘I&B Code’, the Government cannot claim first charge over the property of the ‘Corporate Debtor’. Section 48 cannot prevail over Section 53. Therefore, the Appellant- ‘State Tax Officer- (1)’ do not come within the meaning of ‘Secured Creditor’ as defined under Section 3(30) read with Section 3(31) of the ‘I&B Code’. It further held that as ‘Sales Tax Department filed its claim at belated stage after the plan had been approved by the CoC, the RP had no jurisdiction to entertain the same and rightly not entertained.

(d) The Regional Provident Fund Commissioner submitted that ssuccessful resolution applicant is supposed to pay the total provident fund amount, but only a part of the amount has been allowed by the RP. The NCLAT observed that as no provision of the Employees Provident Funds and Miscellaneous Provision Act, 1952, is in conflict with any of the provisions of the Code and, in terms of section 36(4)(iii), the ‘provident fund’ and the ‘gratuity fund’ are not the assets of the CD, the application of section 238 of the Code does not arise. It directed the successful resolution applicant to release full provident fund and interest in terms of the provisions of the Employees Provident Funds and Miscellaneous Provision Act, 1952.

Amit Gupta Promoter/ Shareholder M/s. Varanasi Auto Sales Pvt. Ltd. Vs. Yogesh Gupta, Resolution Professional of M/s. Varansi Auto Sales Pvt. Ltd. [CA(AT)(Ins)No. 903/2019]

The AA found that the appellant had failed to establish that CD was an MSME. Hence the CD is not exempted from the provisions of section 29A in terms of section 240A of the Code. The NCLAT observed that there is no reason why the prospective resolution applicant who claims eligibility on the basis that the CD is an MSME should not provide necessary Memorandum Certificate. The RP cannot go into investigations and enquiries whether or not a CD is an MSME and the AA is also not expected to make such investigations, enquiries on such evidence or give findings on such issues. It observed: “Under the MSME Act, even if getting Memorandum Certificated for a given enterprise may be optional, if advantage is to be taken of MSME Act, the Applicant must take pains to get the Memorandum Certificate to seek benefits under IBC.”

Arcelormittal India Pvt. Ltd. Vs. Abhijit Guhathakurta, Resolution Professional of EPC Construction India Ltd. & Ors. [CA(AT)(Ins) No. 524/2019]

The Appellant submitted that approval of plan is in contravention of the mandatory requirement under the proviso to section 31(4) of the Code requiring resolution applicants to obtain approval of the CCI prior to approval by the CoC. The NCLAT held that proviso to sub-section 31(4) of Code which relates to obtaining the approval from the CCI under the Competition Act, 2002 prior to the approval of such resolution plan by the CoC, is directory and not mandatory. It is always open to the CoC, which looks into viability, feasibility and commercial aspect of a resolution plan to approve the resolution plan subject to such approval by CCI, which may be obtained prior to approval of the plan by the AA under section 31 of the Code.

JM Financial Asset Reconstruction Company Ltd. Vs. Finquest Financial Solutions Pvt. Ltd. and Ors. [CA(AT)(Ins)No.593/2019]

A secured FC filed an application under section 60(5) read with section 52 of the Code and regulation 37 of the Liquidation Process Regulations to sell off its secured assets to realise its security interest in the liquidation proceeding. The AA directed the liquidator to handover symbolic possession of the assets to the secured FC. The NCLAT held that only one secured creditor can enforce its right for realisation of its debt out of the secured assets as per section 52. It also held that the AA has no jurisdiction to entertain the application under section 52(6) in absence of any cause of action as per section 52(5). It noted that for realisation of securing interest by a secured creditor, it has to inform the liquidator and the liquidator is required to verify such security interest and permit the secured creditor to realise it. If a secured creditor directly applies the AA for recovery of secured assets under section 52(6), such application is not maintainable. It remitted the matter to the liquidator to proceed in accordance with section 53 read with section 52 of Code.

Principal Commissioner of Income Tax Central -2, Chennai Vs. C. Ramasubramaniam, Resolution Professional for Surana Corporation Ltd. [CA(AT)(Ins) No. 1290/2019]

The Appellant submitted that in terms of the provisions of the Income-tax Act, 1961, it is a secured creditor and in terms of the Code, it is an OC. The Form B in CIRP Regulations has no provision for OC to claim that CD has created security interest. The NCLAT allowed the appellant to make a claim before the liquidator as a secured creditor.

Note: IBBI (Insolvency Resolution Process for Corporate Persons) (Third Amendment) Regulations, 2019 has amended Form B and inserted “a. any security held, the value of security and its date”.

Union of India, Through Serious Fraud Investigation Office (SFIO) Vs. Maharashtra Tourism Development Corporation & Anr. [CA(AT)(Ins) No. 964-965/2019]

The NCLAT considered whether the AA has jurisdiction to direct the SFIO to investigate about the fraud or siphoning of funds, if any, committed by the CD. The NCLAT held that the section 212 of the Companies Act, 2013 does not empower the NCLT or AA to refer the matter to the Central Government for investigation by SFIO even if it notices the company defrauding creditors and others. However, in terms of section 213(b) of the said Act, it can direct the Central Government to investigate through inspectors and after investigation, if case is made out, it may decide the matter to be investigated by SFIO. It held that the AA is not competent to straight away direct any investigation to be conducted by the SFIO.

V. Hotels Limited Vs. Asset Reconstruction Company (India) Limited [CA(AT) (Ins) No. 525/ 2019 and 627/2019]

The NCLAT observed that for the purpose of filing a suit or application in respect of any property or right, an acknowledgment of liability in respect of such property or right has to be made in writing duly signed by the party against whom such property or right is claimed. In this matter, the FC failed to bring on record any acknowledgment in writing by the CD acknowledging the liability in respect of debt. The NCLAT held that the Books of Account cannot be treated as an acknowledgment of liability in respect of debt payable to the FC signed by the CD.

M/s. Kotak Mahindra Prime Ltd. Vs. Mr. Bijay Murmuria & Ors. [CA(AT)(Ins) No. 47-50/2019]

The NCLAT held that it is always open to a creditor to proceed with the suit or arbitration proceeding, if pending, on completion of the moratorium. However, once a creditor files its claim before the RP and the same is considered by the successful resolution applicant and the resolution plan provides the same treatment as has been given to the other similarly situated creditors, it cannot take the benefit of section 60(6) of the Code nor can pray to pursue the suit or arbitration proceeding or to file a fresh suit or arbitration proceeding for the same claim.

NATIONAL COMPANY LAW TRIBUNAL

In the matter of SK Wheels Private Limited [MA No. 2319/2019 in CP(IB) 4301/ 2018]

The AA noted that the RP did not take any decision, even after four months of submission of claim by the applicant of his claim. It held that the action or rather inaction by the RP in not taking a decision on the claim is his abuse of the power under the Code, and contrary to justice and public policy. It directed the RP to hand over possession of the premises forthwith to the applicant and pay the amount claimed by him with a cost of one lakh rupees to the applicant.

M/s. Alpfly Private Limited [CA No. 448-C/3-ND of 2019 in C.P. IB No. in 358/ND/2018]

The IRP moved the AA stating that the application filed by the CD under section 10 of the Code was based on fraud and non-disclosure of material particulars. While holding that the application had been actuated by fraudulent and malicious intent, the AA recalled the order of admission and initiation of CIRP. It pierced the corporate veil to identify the persons behind fraudulent initiation of CIRP. It imposed a penalty of ten lakh rupees on each of the four suspended directors to be disbursed to 3280 customers of the CD on pro-rata basis. Further, all fees and expenses of the IRP shall be borne by the suspended directors.

In the matter of Aviva Life Insurance Co. India Ltd. [(IB)-1885(ND)2019]

An OC filed an application for initiation of CIRP. The CD contested the maintainability of the application on the ground that it is an insurance company and, therefore, not covered by the Code. While admitting the application, the AA observed: “… the CD cannot use the provisions of Section 3 of the Insolvency and Bankruptcy Code. 2016 as a blanket cover to claim exclusion from IBC Proceedings on the ground that it is a financial service provider.”

In the matter of Meenakshi Energy Ltd. [CP(IB) 184/7/HDB/2019]

In the application under section 7 of the Code, the CD contended that by invocation of the pledged shares, the FC and other lenders became 95% of its shareholders and thus the entire dues of the CD stood discharged. The AA admitted the application and held: “…this Adjudicating Authority has arrived at the conclusion that mere invocation of pledge of shares will not result in automatic conversion of debt into equity and repayment of debt, we hold that the Petitioner i.e., State bank of India is ‘Financial Creditor’ of the Corporate Debtor.”

In the matter of Gee Ispat Pvt. Ltd. [CA-666/2019 in (IB)-250(ND)/2017]

The AA considered the issue whether the liquidator is required to deposit capital gains on sale of secured assets and include it in the liquidation cost and distribute the balance amongst the claimants. The AA noted that upon realisation of the liquidation estate of the CD, it has to be distributed in accordance with the waterfall mechanism under section 53. The dues towards Government, be it tax on income on or sale of properties, would qualify as operational debt and has to be dealt with accordingly. It observed: “If the capital gain is first to be provided for, and then be included as liquidation cost, it would create an anomalous situation in the Secured Creditor getting a lesser remittance than what they could have realised had they not released the security into the common corpus. It is for this purpose that the provision of Section 178 of the Code has been amended giving priority to the waterfall mechanism over government dues.”

In the matter of Aircel Limited [MA-337/2018 in C.P. (IB)-298/(MB)/2018 and MA-336/2018 in C.P. (IB)-302/(MB)/2018]

The question was whether the Telecom Licence granted by the Department of Telecom (DoT) to the applicant under section 4 of the Indian Telegraph Act, 1885 can be cancelled because the latter is under CIRP. The AA observed that a resolution applicant would show interest in the business of the CD if it holds licence. Since no other valuable asset is available to the CD, no resolution applicant would show interest in its business revival. Licence is, thus, sine qua non for getting good resolution plan. Section 14(1)(d) of the Code prohibits recovery of any property by an owner or lessor in possession of the CD. This prohibition is also applicable to DoT. Use of licence / spectrum is akin to “essential goods or services” without which the CD cannot run its telecom business. The AA instructed the DoT not to make any attempt to cancel the CD’s licence.

In the matter of M/s. Sikka Papers Ltd. & Ors. [(IB)-939(PB)/2018]

The AA directed that in all cases under the Code and company petition, the Union of India, shall be impleaded as a party respondent so that authentic record is made available by the officers of the MCA for proper appreciation of the matters. This shall be applicable throughout the country to all the benches of NCLT.

Note: The order of the AA has been stayed by the NCLAT vide its order dated December 10, 2019.

In the matter of Kiran Global Chem Limited [MA/1298/2019 in IBA/130/2019]

The RP sought permission to have access to GST Portal Account to file GST Returns during CIRP and to pay the net GST liability from the date of commencement of CIRP till its completion, notwithstanding non-payment of arrears for the period prior to CIRP. The AA observed that the Tax authority cannot raise an objection saying since no provision has been made in GST or in its software to accept such accounts, the business happening in the market after initiation of CIRP through debtor company will come to stand still and in such situation no company under CIRP can function as going concern. It directed the authorities to allow the CD to have access to its GST Net Portal Account and permit the RP to file GST Returns of the CD generated after commencement of CIRP without insisting upon payment of past dues.

In the matter of Skipper Textiles Pvt. Ltd. [CA(IB)No. 1328/KB/2019 in CP(IB) No. 1702/KB/2019]

The issue was whether the amount of uninvoked corporate guarantee could be considered as claim as per the provisions of the Code. The AA noted that claim has wider scope than debt. A claim may be due or may not be due, but debt must be a claim which is due. Application under section 7 or 9 can be filed in respect of default of debt, whereas, no such action can be taken in respect of claim unless it becomes due and payable and default occurs. It observed that even accounting and business practice do not recognise uninvoked corporate guarantee as a debt due or ascertained liability as on a particular date. Viewed from this angle uninvoked corporate guarantee cannot be considered as debt due and payable. Even if uninvoked corporate guarantee is considered as claim, the same cannot be considered for determining voting share of an FC.

In the matter of M/s. GNB Technologies (India) Private Limited [C.P.(IB) No. 167/BB/2019]

The CD filed an application under section 10 read with section 33 seeking CIRP/ liquidation. It submitted that it did not have any operations in the past five years, its liability was Rs.42.89 crore, and it did not have any assets. The AA directed liquidation of the CD without admission and appointment of IRP. It observed: “…there is hardly any possibility of any Resolution plan likely to be received during first stage of CIRP, if initiated, and thus it would be just and proper to put the Corporate Applicant Debtor under the liquidation process, in order to liquidate the Company, rather than to put it in CIRP in the first instance.”

In the matter of Dewan Housing Finance Corporation Ltd. [C.P. (IB)-4258/MB/2019]

The RBI, as appropriate regulator, submitted an application to initiate CIRP against DHFL, an FSP on default in repayment of the ECB advanced by SBI, Singapore. On finding that the debt in question is qualified to be a financial debt, the AA admitted the application.

Vinod Tarachand Agrawal (M/s J R Diamonds P Limited) Vs. Registrar of Companies, Gujarat [Co. Appeal No. 53/252(3)/NCLT/AHM/2019]

Being aggrieved by an order of the RoC striking down the name of the CD from the register of companies, the liquidator filed an appeal seeking restoration of the same. While allowing the appeal, the AA observed that the name was struck off when the company was under CIRP and thereafter gone into liquidation process by an order under section 33. It held that striking off the name of the company by RoC during CIRP cannot be treated as legal and just.

Bank of India Vs. Mandhana Industries [C.P.(IB)- 1399/(MB)/2017, MA 2326/2019, MA 2124/2019]

Three applications were filed, one by the erstwhile RP claiming the CIRP costs, another filed by the successful resolution applicant challenging the resolution plan on the ground that the entire information had not been provided to them. The third application was by the CoC seeking possession of the CD and handing it over to a third party with proper maintenance to prevent any value depletion. Pending decision on merit, the AA ordered the successful resolution applicant to hand over possession of the CD to the CoC, and the CoC in turn to hand over the same to erstwhile RP and the restoration of the CIRP.

R. G. Steels Vs. Berrys Auto Ancillaries (P) Ltd. [IB-722/ND/2019]

A sole proprietary concern, as OC filed an application under section 9. The AA dismissed the application on the ground that a sole proprietary concern, not being a person under section 3(23) of the Code, cannot file application and that there is a pre-existing dispute.

M/s Concord Infrastructure Pvt. Ltd. Vs. M/s Shubhkamna Buildtech Pvt. Ltd. [CA No. 257/ND/2019 in CP No. IB-1059/ND/2018] Order dated 30.09.2019

NOIDA had executed a lease deed with the CD transferring a plot for 90 years. It filed an application before the AA to admit its lease premium as financial debt and to allow it to exercise voting rights as an FC. The AA held: “After considering various terms of the types of financial lease versus operational lease, we are of an undoubtable view that present lease deed dated 30.07.2010 is not a financial lease as per the terms laid down under guidelines of ‘Indian Accounting Standards’ and the applicant cannot be granted the status of financial creditor and cannot exercise voting rights on COC.”

IBBI

In the matter of Mr. Mahender Kumar Khandelwal, Insolvency Professional (IP) (Order dated November 14, 2019)

The DC imposed a penalty of Rs.29 lakh on Mr. Mahender Kumar Khandelwal, IP for various lapses. It directed him to secure reimbursement of Rs.12 crore, which he paid to legal counsel of creditors on the understanding that if such payment is found irregular by the IBBI, the creditors would reimburse the same.

In the matter of Registration of IP (Order dated December 5, 2019)

Mr. X submitted an application for registration as IP claiming that he has the required managerial experience. On scrutiny it was found that he had experience in teaching, which is not the same as managerial experience. IBBI accordingly rejected his application.

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