The Insolvency and Bankruptcy Code (IBC) of 2016 has significantly altered India’s financial and corporate realms, streamlining insolvency and bankruptcy procedures to enhance business operations. This pivotal legislation’s interpretation and enforcement are dynamically shaped by a series of critical judgments from the Supreme Court, High Courts, National Company Law Tribunal (NCLT), and National Company Law Appellate Tribunal (NCLAT). Moreover, the Insolvency and Bankruptcy Board of India (IBBI) plays a crucial role in its implementation. This article offers a succinct overview of the latest case law related to IBC 2016 from October to December 2023, focusing on significant Supreme Court judgements, High Court judgments, and decisions from the NCLT and NCLAT. It aims to equip legal professionals, academics, and industry stakeholders with essential insights into the recent judicial developments and their implications for insolvency proceedings and corporate restructuring. By delving into these cases, readers will gain a deeper understanding of the IBC’s evolving application, enhancing their ability to navigate the complexities of bankruptcy code and its impact on the legal and financial ecosystem in India.
Orders
Supreme Court
Vishal Chelani & Ors. Vs. Debashis Nanda [Civil Appeal No.3806 of 2023]
The issue before SC was whether there could be different treatment of allotees in the resolution plan for the one who had invoked RERA and of others who did not approach RERA? SC while setting aside the order of NCLAT held that allottees who approached UP RERA were FCs under explanation to section 5(8)(f) of the Code. It was observed that per se there can be no distinction between different classes of FC for the purposes of drawing a resolution plan. Such a distinction is artificial and amounts to hyper classification, is thus contradictory to Article 14 of the Indian Constitution. It further observed that ‘to treat a particular segment of that class differently for the purposes of another enactment, on the ground that one or some of them had elected to take back the deposits together with such interest as ordered by the competent authority, would be highly inequitable’.
Tottempudi Salalith Vs. State Bank of India & Ors. [Civil Appeal No. 2348 of 2021]
In the facts of the case, several banks have advanced credit facilities to CD on different dates. CD having failed to repay the debt dues, FCs initiated recovery before Debt Recovery Tribunal (DRT) including action under the SARFAESI Act, 2002. Later, recovery certificates were issued by the respective DRTs. Meanwhile, the application filed under IBC by one of FC i.e. SBI was admitted by AA The MD of the CD appealed before NCLAT against AAs admission order on the grounds that the debt was time-barred. NCLAT while dismissing the appeal observed that while clause (a) of sub-section (I) of section 14 of the Code prohibits the institution of suits or continuation of pending suits or proceedings against the CD, it does not preclude a decree holder from initiating CIRP if they are entitled to do so. On appeal filed by the MD of CD before SC, it observed that Doctrine of Election, which precludes the FC from pursuing its right in two different forums based on the same cause of action, does not apply to FCs to initiate CIRP after a recovery certificate is issued by DRT. SC while dismissing the appeal held that, a recovery certificate in terms of the Recovery of Debts and Bankruptcy Act, 1993 is clothed with the characteristics of deemed decree and FCs can proceed with the CIRP of the CD.
Review petitions were filed before SC seeking review of the judgment passed in Rainbow paper case, wherein SC had held that state government having first charge over the property is construed as a secured creditor under the Gujarat Value Added Tax Act, 1974 and would be treated as secured creditor under section 53( I )(b)(ii) of the Code for the waterfall mechanism. The question that arose before SC was whether the decision in Rainbow Papers is amenable to the review jurisdiction? SC while dismissing the review petition upheld the position given under State Tax Officer v. Rainbow Papers Limited, that a resolution plan which doesn’t meet the requirements of section 30(2) would be invalid. Further, it observed that ‘the scope of review petitions is limited in the sense that a co-ordinate Bench cannot comment upon the discretion exercised or judgment rendered by another co-ordinate Bench of the same strength. To Bench does not accept as correct the decision on a question of law of another Bench of equal strength, the only proper course to adopt would be to refer the matter to the larger Bench, for authoritative decision, otherwise the law would be thrown into the state of uncertainty by reason of conflicting decisions’.
IFCI Ltd. Vs. Sutanu Sinha & Ors. [Civil Appeal No. 4929 of 2023]
IVRCL (Parent Company of CD – ICTL) entered into a Concession Agreement for construction of highway projects, under which IFCI invested through Compulsorily Convertible Debentures (CCDs) under Debenture Subscription Agreement. Post admission of section 7 application, IFCI filed its claim in the CIRP of CD as unsecured FC. RP rejected the claim on the ground that CCDs were to be treated as equity. Aggrieved by which, IFCI filed an application before AA which has upheld the decision of RP and dismissed the application. On appeal, NCLAT concurred with the order of AA. Later, IFCI filed an appeal before SC. The issue before the court was whether CCD should be treated as debt or equity for the purpose of the Code? SC while dismissing the appeal held that the investment was in the nature of debentures which were compulsorily convertible into equity. There was no provision stating that these CCDs would partake the character of financial debt on the happening of a particular event. SC held that, IFCI cannot seek a recovery of the amount, assuming the position of CD’s creditor.
Dilip B Jiwrajka Vs. Union of India & Ors. [W. P. (C) No. 1281 of 2021]
384 tagged petitions were clubbed in this case whereby constitutional validity of sections 95 to 100 of the Code pertaining to individual insolvency were challenged. The SC decided the following issues:
- Interim moratorium under section 96 is in respect of a debt. It restrains the initiation or the continuation of legal action or proceedings against the debt. Its purpose is protective.
- RP does not possess an adjudicatory function in terms of section 99. He is a facilitator who gathers relevant information on the application submitted by debtor or creditor and to submit a report recommending the acceptance or rejection of the application.
- The RP may require the debtor to prove whether the debt remains unpaid or has been paid. Thus, process before RP is not an ex-parte process. He is empowered to seek further information or explanation only in connection with the application from the debtor or the creditor which means he cannot conduct a roving enquiry.
- The adjudicatory function of the AA commences, after the submission of a recommendatory report by the RP. Section 100 does not explicitly mention hearing for a debtor, the requirement of a hearing has to be read in section 100.
RP filed an application before AA seeking approval of resolution plan. AA kept the approval of resolution plan of Successful Resolution Applicant (SRA) in abeyance and directed the official liquidator to provide exact figures/value of CD’s assets. Aggrieved by the said order, SRA filed an appeal before the NCLAT which was dismissed with the observation that an avoidance transaction of approximately 1000 crore had come to light and the matter justifies interference by AA. Aggrieved by the orders, SRA filed an appeal before SC. The issue was regarding the AAs jurisdiction to order revaluation of assets, when no objection was raised by RR SRA or CoC? SC, while setting aside orders of NCLAT and AA, observed that the valuation of CD’s assets was already done by RP as per the provisions of the Code and the final resolution plan also provided for the monetization proceeds of the land as also the avoidance amount to be paid to the FC(s) of the CD. SC reiterated that approval of resolution plan was well within the commercial decision of the CoC. SC held ‘In the case at hand, we find that there was no occasion before the Adjudicating Authority NCLT to be swayed only on the per se ground that the hair-cut would be about 94.25% and that it was not convinced that the fair value of the assets have been projected in proper manner as the bid of the appellant was very close to the fair value of the assets of ACIL. Ordering revaluation of the assets, by the OL, Ministry of Corporate Affairs, Government of India, in-charge of the area, cannot be justified’.
In the matter of Hari Babu Thota [Civil Appeal No.4422 of 2023]
CD was registered as a Micro, Small and Medium Enterprise (MSME) entity post initiation of CIRP. RP filed an application before AA seeking approval of resolution plan submitted by promoters of MSME duly approved by CoC. AA rejected the resolution plan holding that MSME certificate was obtained post commencement of CIRP, and the promoters of the CD were not entitled to avail section 240A of the Code. NCLAT while upholding the AA’s order, held that in the cases where the MSME certificate was obtained after the commencement of the CIRP such an unauthorised application cannot be considered to tide over ineligibility to submit resolution plan by the promoters of CD. RP filed an appeal before SC challenging the order of NCLAT. SC while allowing the appeal, observed that even if the MSME registration was obtained during CIRP, the promoter of such CD would be eligible to submit a resolution plan as RA in terms of section 240A of Code, if it had secured MSME certificate as on the date of submission of plan. Thus, the promoter of the CD was not disqualified from presenting the resolution plan under section 29A of the Code. Further, SC clarified that NCLAT judgment in Digamber Anand Rao Pingle v. Shrikant Madanlal Zawar & Ors. lays down the incorrect position of law.
In the instant case, FC had issued sale certificate to the auction purchaser after conclusion of auction under the provisions of the SARFAESI Act, 2002. Subsequently the AA passed an order of admission against the CD on application filed by an operational creditor (OC). During the CIRP on the application of erstwhile Director of the CD, AA held that issuance of sale certificate, handing over of the property was illegal and the auctioned property shall continue to be the asset of the CD. The appeal filed by the FC against the AAs order was dismissed by the NCLAT. Later, the auction purchaser filed an appeal before the SC. The Apex court while allowing the appeal observed that neither the erstwhile director, nor the FC dispute about the fact of conclusion of sale under the SARFAESI Act, 2002 nor any defect or default in forwarding the sale certificate in terms of section 89(4) of the Registration Act, 1908 was made before the commencement of moratorium under the Code. It held that such ‘..properties cannot be treated to be part of liquidation assets of CD for the purpose of further steps to be taken in the liquidation proceedings’.
Smt. K. Malathi Vs. State Tax Officer & Ors. [WP. Nos. 19728 of 2020 & Ors.]
State GST Officer visited the factory premises of the CD for inspection, after passing of order of liquidation of CD vide order dated September 7, 2017 of AA. Considering the vicarious liability of directors and subsequent inspection of the CD’s factory, the Authorities issued a demand order dated September 28, 2020 against suspended director for recovery of input tax credit for the year 2018-19. Suspended director challenged the order of GST department before Madras HC. The issue for consideration before Madras HC was whether any demand for tax, interest or penalty for the period before initiation of CIRP can be levied after liquidation of CD. HC while setting aside such demand order held that even if such demand was passed based on the irregularities taking place prior to the period of commencement of CIRP against CD, the right course available for the GST department would be to file appropriate claim before the official liquidator.
Tata Steel Limited Vs. Deputy Commissioner of Income Tax [W.P.(C) No. 13188 of 2018]
After approval of resolution plan on May 15, 2018, a notice dated August 28, 2018 was issued by the Income Tax Department towards payment of principal, interest and penalty for A.Y. 2001-2002, 2009-2010, 2010-11 and 2013-14. Although certain objections were raised against such notice, Income Tax Department passed order dated October 17, 2018 in pursuance of such notice. A writ petition challenging such notice and order dated August 28, 2018 and October 17, 2018 respectively was filed by the SRA before Delhi HC. Issue before the HC was whether the Income Tax Department is entitled to recover dues for the period preceding the date of approval of the resolution plan by the NCLT. HC observed that demand raised for the dues prior to the approval of resolution plan and all such claims stand extinguished as the Income Tax Department failed to lodge a claim with the RR. It further held that A successful applicant is, in law, provided with a “clean slate”; therefore, dues for the period prior to the date when the resolution plan was approved cannot be recovered. The courts have recognized this principle in more than one case’.
Jeny Thanlcachan Vs. Union of India & Ors. [W.P(C) No.31502 of 2023]
FC initiated proceedings against the PG to CD under provisions of the SARFAESI Act, 2002 to take possession of the secured assets of the guarantor. Subsequently, the said guarantor filed an application for initiating insolvency resolution process under section 94 of the Code, wherein only diary number was assigned in respect of his application. Aggrieved by the recovery steps taken by the FC under the SARFAESI Act, 2002, after initiating application under section 94 of the Code, the said guarantor filed writ petition before HC seeking stay on recovery proceeding under the SARFAESI Act, 2002. The issue was whether mere filing of application by PG to CD would invoke an interim moratorium as contemplated under section 96( I )(b)(i) of the Code? While dismissing the writ petition, HC observed that AA has not treated the application filed by PG to CD as a valid application, further no regular case number was provided by the Tribunal for invoking interim moratorium under section 96 of the Code, and that the application filed by the PG to CD should be complete in all respects, without any procedural defects.
Pooja Menghani Vs. Insolvency and Bankruptcy Board of India & Anr. [W P. (C) 8696 of 2022]
An application for registration as an IP was rejected by IBBI. Aggrieved by the said order, a writ petition was filed before Delhi HC. The HC while dismissing the said petition made following observations:
- As per regulation 4 of the IBBI (Insolvency Professionals) Regulations, 2016 (IP Regulations), the Board is empowered to consider any consideration it deems fit in selecting a candidate.
- Whether a person is suitable for a job or not cannot be laid down in a straight-jacket formula and the same be left to the appointing authority.
- HC observed that the writ courts do not sit as an appellate authority over the subjective satisfaction arrived at by the authorities.
- Further observed that it may interfere with such decision where the issue relates to the concern, whether the satisfaction has been arrived at any irrelevant consideration or by ignoring relevant materials. The HC held that An Insolvency Professional in fact becomes the heart and brain of the company under the insolvency resolution process and a person having slightest of disqualification cannot be permitted to be appointed as an Insolvency Professional otherwise the entire purpose of the IBC will get vitiated’.
Ashok B. Jeswan & Ors. Vs. Redington India Limited [Crl. M.P. No. I 7044 & 24506 of 2023]
The directors of the company were convicted for the offence under section 138 of the Negotiable Instruments Act, 1881 (NI Act). Thereafter, suspension of the sentence was allowed in the appeal filed by them on the condition to deposit 20% of the compensation amount. Directors did not comply with the condition citing the pendency of their applications under section 94(a) of the Code. The memo of appeal contained inter alia prayer for stay of further proceedings in the appeal in view of provisions viz., sections 94, 96 and 101 of the Code, which provide for an interim moratorium from any legal action or proceedings pending in respect of any debt. The instant case pertains to the petition filed against the rejection of memo on the grounds that conditions imposed were not complied with by the directors. The Court observed that application under section 94 of the Code was filed after the directors were found guilty of the offence under section 138 of the NI Act. Law laid down in the P Mohanraj and others v. Shah Brothers !spat Pvt. Ltd. was also brought to the notice of the Court, to which it was stated that the judgment is not applicable to the instant case because the moratorium in terms of section I 4(3)(b) of the Code is applicable only in respect of the CD and not to the sureties in a contract of guarantee to a CD. The Court held that directors as guarantor, signatory or person responsible for the affairs of the company, which has issued cheque to discharge their liability cannot have the advantage of their application to declare them as insolvent as an individual to seek moratorium. Moreover, it was made clear that moratorium imposed on the CD under Chapter 11 of Part II will not cover the individuals, who are the guarantors or directors. Similarly, moratorium given to an individual under Chapter III of Part III will not cover the proceedings initiated against them as directors or guarantors of any company.
Subrata Monindranath Maity Vs. The State represented by Deputy Director, Industrial Safety Health-II [Crl.O.P. No. 23906 of 2023]
In the instant case, after CD was admitted to CIRP RP became the occupier of CD’s factory as per the Factories Act, 1948. Seven criminal petitions were filed under section 482 of the Code of Criminal Procedure, 1973 for quashing criminal proceedings initiated under section 92 of the Factories Act, 1948 against the occupier (RP) for not following the safety measures in the factory while CD was run as a going concern. Section 233 of the Code was invoked to protect the RP from being prosecuted for the criminal liability. The factory was inspected by the Safety Authorities, and a report was also prepared pertaining to the violations found in the factory premises of the CD. Whereafter, a show cause notice (SCN) was issued to the RP and seven days’ time was granted for reporting compliance. RP delayed in filing the reply to the Deputy Director of Industrial Safety and Health; however, after carrying out rectification, a compliance report was submitted. Aggrieved by the criminal prosecution initiated by Deputy Director of Industrial Safety and Health, criminal original petitions were filed before Madras HC. The issues before the HC were firstly whether the RP can also become the ‘occupier’ of the factory and secondly whether the RP is protected from criminal prosecution under section 233 of the Code. It was held by the HC that RP on appointment takes control of the property and business of the CD, therefore ‘for all purpose’ the RP will be the occupier of the factory and has the responsibility to provide safety measures in the factory as per the statutory requirement. For the second issue the HC held that protection under section 233 of the Code can be provided to the RP only in respect of the ‘act done or intended to be done in good faith’, referring to the facts of the case the HC held that ‘failure or omission to provide safety measures in the factory cannot be stretched to inaction’. Additionally, it was also observed that RP will be responsible for the criminal proceedings initiated against RP in his capacity as occupier; however, the Trial Court may take into consideration the rectification and compliance report filed by the RR. HC while disposing of the original petition observed that the proceedings before Trial Court will not be covered under section 14 or 233 of the Code.
Dr. Arun Mohan Vs. Central Bureau of Investigation [W.P.(CRL) 544 of 2020 & CRL.M.A. 4088 of 2020]
In this case, an FIR was registered by Central Bureau of Investigation against RP of FR Tech Innovations Pvt. Ltd., under section 7 and 7A of the Prevention of Corruption Act, 1988 (PC Act) read with section 1208 of the Indian Penal Code. Later on, Special judge ordered judicial remand for two weeks considering the RP as public servant under section 2(c) of the PC Act. Aggrieved by which RP filed the writ petition to quash FIR before Delhi HC. The question before HC was whether the RP is a public servant under the PC Act. HC while quashing the FIR held that RP does not fall within the meaning of ‘public servant’ as ascribed in any of the clauses of section 2(c) of the PC Act. HC further observed that because the IP is vested with certain roles, responsibilities and duties which could partake the nature of ‘public duties’, it is not a necessary conclusion or a definite inference that the same are being discharged in the nature of ‘public character’. The IP undergoes transition from an IRP to an RP and thereafter becomes Liquidator. It was held that it would not be prudent to characterize the duties although it appears to be in the nature of ‘public character’.
Venkata Siva Kumar Vs. Insolvency and Bankruptcy Board of India & Ors. [W.R.No. 21186 of 2023 and WM P.No.20596 of 2023]
CIRP against CD (M/s Jeypore Sugar Limited) failed, and liquidation proceedings against the CD commenced vide order of the AA. An IA was preferred by one of the FC seeking replacement of liquidator on ground that the liquidator acted against the interest of CD by sharing the valuation report with the prospective scheme proponents. Thereafter, AA issued directions for removing liquidator of CD. Consequently, the IBBI issued SCN against the liquidator in this regard. Aggrieved by the order of AA and subsequent action of Board, the liquidator filed the instant writ petition challenging the action of IBBI, stating it to be arbitrary, illegal and violative of Article 14, 19, 20(2) and 21 on ground that the IBBI is incompetent to invoke Code against liquidator appointed by the NCLT and justified liquidatior’s act as a possibility to compromise under section 230 of the Companies Act, 2013. Issue for consideration before Madras HC was whether the SCN which the IBBI has served to the petitioner is legally sustainable? Madras HC elaborates the scheme of IBC in detail and observed that a liquidator so appointed by the AA in CIRP is governed by the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (CIRP Regulations). Further, regulation 34(5) requires the liquidator to prepare an asset memorandum which includes valuing the asset of the CD and enables sharing of the information only with the Board and the SCC but it nowhere authorises the liquidator to share the asset memorandum with the potential purchasers of the corporate assets of the CD. HC while dismissing the writ petition observed that ‘liquidation of a CD is not alien to the scheme of IBC. And, Regulation 2B of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, enables reading Sec.230 of the Companies Act into it’ and ‘the IBC and the Regulations made thereunder are anxious to protect the information leak on the valuation of the corporate assets both by the Resolution Professional or by the liquidator’. HC further clarified that IBBI has the jurisdiction to initiate disciplinary proceedings, and thus, it is not established to be a malafide exercise of statutory power.
National Company Law Appellate Tribunal
Vinay Kumar Singhal RP for PG Advertising Pvt. Ltd. Vs. Mahesh Bajaj [IA. No. 2602 & 2141 of 2023 in C.A. (AT)(Ins.) No. 645 of 2023]
An application was filed by OC before AA praying for copies of information memorandum and other relevant documents and the same was allowed. On appeal being filed by RP before NCLAT, the issue whether copy of information memorandum can be provided to the OC who is merely a participant in the CoC and not a member, came up. NCLAT set aside the order of AA and observed that the Code and regulations are totally silent about the supply of information memorandum to the participant. It has a provision for providing a copy of the information memorandum to the member of the CoC and the resolution applicant; but not to the participant of the meeting of the CoC, as there is no reasonable nexus attached with the supply of information memorandum to the participant such like OC.
Ankur Narang & Ors. Vs. Nilesh Sharma [CA. (AT)(Ins.) No. 1240 of 2023]
In this case, during the pendency of approval of resolution plan by AA, homebuyers/allottees of CD’s real estate project challenged the resolution plan on the ground that the same was discriminatory and contrary to the Code. AA dismissed the said application. Aggrieved by which they have filed an appeal before the NCLAT. The Appellate Tribunal upheld the AAs order and held that a minority group of homebuyers, could not challenge the resolution plan approved by the majority of homebuyers. The CoC’s approval of the resolution plan represented the collective decision of the class and was not subject to judicial review. The NCLAT also relied on SC judgment in Jaypee Kensington Boulevard Apartments Welfare Assn. v. NBCC (India) Ltd. which emphasised the majority vote within a class of creditors was binding and that dissenting minority creditors could not challenge the resolution plan.
Fervent Synergies Limited Vs. Manish Jaju & Ors. [CA. (AT) (Ins.) No.1338 of 2023]
CD availed credit facilities for its project, which was mortgaged with the FC. As per the mortgage deed the sale of flats by CD could be done only after obtaining No Objection Certificate (NOC) from the FC. Fervent Synergies Limited (Appellant) and CD entered into agreement for the sale of 10 flats in CD’s project. Subsequently, CIRP against CD commenced in which appellant submitted its claim for 10 flats. Later on, RP came to know that appellant had not secured NOC from the FC, therefore he rejected the claim. During the resolution plan stage, the resolution provided for two categories of homebuyers, (a) affected homebuyers who had not obtained NOC from FC and (b) unaffected homebuyers who had NOC from the FC. Appellant being of the affected homebuyer category challenged the resolution plan before AA on the grounds of being discriminatory and in breach of the promissory estoppel by RP. AA dismissed the application and observed that since the resolution plan has been approved by the homebuyers as a class, appellant cannot individually object to the resolution plan. In the appeal before NCLAT, the question was whether the doctrine of promissory estoppel can be pressed in respect to a resolution plan, submitted by resolution applicant and approved by the CoC in its commercial wisdom? While dismissing the appeal, it observed that resolution plan was based on the list of creditors, admitted claims of the creditors under the Code, but the principle of promissory estoppel cannot be pressed against the resolution applicant, who had submitted the resolution plan relying on the information memorandum, the list of creditors and other aspect of the matter. It held that the doctrine of promissory estoppel cannot be applied against the resolution applicant who has not extended any promise to the FC of the CD that the claim submitted by FC or any other creditor shall be accepted in total.
ICICI Bank Limited Vs. BKM Industries Limited & Ors. [CA. (AT)(Ins.) No. 405 of 2023]
CoC approved a resolution plan with 78.79% voting wherein distribution of amount among secured creditors was done in proportion of their admitted claims. Dissenting FC filed an IA before the AA, challenging the distribution scheme opted in the resolution plan approved by CoC. Through such IA, FC proposed that instead of distribution in proportion of admitted claims, the distribution of funds should be made as per security interest as well as after taking into account the priority assigned to the dissenting FC, who are also secured creditors. The said IA was rejected byAA. An appeal was preferred against order of AA. While disposing of the appeal, NCLAT observed that the calculation as per all the three alternatives — ‘outstanding dues’, ‘security interest’ and ‘liquidation value as per 53( I )’; was taken into consideration in 15th CoC meeting and therefore, distribution arrived at was as per the decision of CoC. NCLAT while upholding the order of AA further observed that ‘the scheme of Section 53, sub-section ( I ), clearly indicates distribution as per the debt and in the legislative scheme there is no scope of distribution of assets among the Financial Creditors as per security interest’.
Puro Naturals JV Vs. Warana Sahakari Bank & Ors. [CA. (AT) (Ins.) Nos.661-663 of 2023]
In this case, the dissenting FCs of the CD filed objection to the proposed resolution plan. AA rejected the resolution plan on the ground that the plan seeks to extinguish the personal guarantees and securities without the consent of dissenting FC. Aggrieved by which the SRA filed an appeal before the NCLAT. The issue for consideration before NCLAT was, whether resolution plan providing for extinguishment of security interest and the guarantees of the FC including dissenting FC is contrary to the provision of section 30(2) of Code and the CIRP Regulations? NCLAT while relying on SVA Family Welfare Trust & Anr. v. Ujaas Energy Ltd. & Ors., set aside the AAs order and approved the resolution plan. NCLAT observed that in the instant case, CoC deliberated over the issue and on such deliberation and inputs, the SRA submitted revised resolution plan and the plan dealt with security interest and the personal guarantee also thereby do not contravene any provisions of section 30(2) of the Code as well as CIRP Regulations.
Sanjay D. Kakade (Suspended Director) Vs. HDFC Ventures Trustee Company Ltd. & On. [CA. (AT) (Ins.) No. 48 I of 2023]
CD entered into share subscription and shareholders agreement to raise money for development of its real estate project. When promoters of CD failed to comply with said agreement, matter was referred to arbitrator wherein consent terms in favour of the investors was passed. Based on which investors filed section 7 application for the commencement of the CIRP. Sanjay Kakade (Suspended Director of CD) filed an appeal before NCLAT challenging admission order passed by AA. The issue before NCLAT was whether the investment made by the FC in the CD by means of share subscription cum shareholders agreements was financial debt in default for the purpose to initiate the CIRP? NCLAT noted that the amount raised by CD through share subscription cum shareholding agreement had commercial borrowing effect with CD’s business. Further, it noted that the transactions between the parties indicated that there was a debt, which is due and payable therefore a financial debt under the Code.
Vikas Jeph Vs. Anoop Bhatia RP of Jeph Bev Pvt. Ltd. [CA. (AT)(Ins.) No. 1608 of 2023]
An IA was filed before AA by RP of CD inter alia submitting that despite initiation of CIRP vide order dated September 16, 2022, the suspended directors transferred an amount of 22,0 1 ,373/- to various accounts between September 16, 2022 to September 22, 2022. In reply, it was pleaded that initiation of CIRP against CD was brought to the knowledge of suspended directors only on September 22, 2022. AA vide order dated September 19, 2023 held that ‘ignorance of fact can be excused, ignorance of law is not permissible’ and issued directions against the suspended directors to reinstate the CD, in the same position as was at the time of initiation of the CIRP which includes the assets and the bank balance as on September 16, 2022, within a period of 10 days. On appeal filed by suspended director against order of AA, NCLAT while upholding the order of AA clarified that once the order of admission was passed and moratorium is imposed under section 14 of the Code, the powers of the Board got suspended and management and affairs of the CD vests with the IRP.
Mehul Parekh & Ors. Vs. Unimark Remedies and Ors. [CA. (AT) (Ins.) No. 839 of 2023]
AA while approving the resolution plan, issued directions to RP for re-determination of CIRP cost. An appeal was filed before NCLAT. The issues before the NCLAT were that whether AA erred in issuing directions for re-determination of the CIRP cost by the CoC? NCLAT, while setting aside the directions of AA, observed that section 28 of the Code does not mandate the approval of CIRP cost for running CD’s business by the CoC. AAs direction to re-determine CIRP cost was not valid. On another issue, whether AA was right in issuing direction to CoC to pursue the avoidance application pending for adjudication before the AA? It held that after the approval of the resolution plan, AA is fully empowered to issue any direction, as to how the avoidance applications should be pursued. It further observed that the determination of CIRP cost and payment of CIRP cost to those entitled to receive the payments, is a process independent from any recovery from promoters/ Key Managerial Personnel, and hence such determination and payment cannot be made subject to avoidance proceedings.
FC made an investment by providing loan to CD through an inter-corporate deposit of 7 crore, which was not registered as required under section 34 and Article 5(h)(A)(iv) of the Maharashtra Stamp Act. AA after considering the debt and default, admitted CD into CIRP. Suspended director of the CD filed an appeal before NCLAT against the admission order passed by AA. NCLAT observed that 7 crore debt due and payable has been admitted and the same is duly reflected in the audited financial statements by the CD as unsecured loan and further corroborated by the NeSL report which reflected the inter-corporate deposit as a loan. The appellate authority while dismissing the appeal held that when other material exists on record to prove existence of default in the payment of debt, non-stamping of document does not invalidate the CIRP application filed against CD.
Jubilee Metal Pvt. Ltd. Vs. Mr. Surendra Raj Gang, RP of Metenere Ltd. & Anr. [CA. (AT)(I ns.) No. 1550-1552 of 2023]
Resolution plan of Jubilee Metal Private Limited (SRA)was approved by CoC on July 27, 2021. Later, it was informed to RP by the director of one of the group companies of SRA that there is a change in directorship and constitutionality pattern of resolution applicant. Pursuant to such change in directorship, two Ms were filed before AA by RP- (a) on behalf of CoC seeking withdrawal of resolution plan and (b) seeking extension/exclusion of time. AA vide order dated November 21, 2023 dismissed the IA seeking approval of resolution plan and allowed IA seeking withdrawal of resolution plan and exclusion of time was allowed. Three appeals challenging the orders dated November 21, 2023 of AA were filed before NCLAT by SRA. Issue before NCLAT was – Can CoC seek withdrawal of resolution plan in case where there are implications of the sale of resolution plan approved by the CoC to a third party? NCLAT observed that SRA is a company whose 100% shares are owned by Shoora Minerals Pvt. Ltd. The said Shoora Minerals Pvt. Ltd. was in turn 100% owned by ‘Shoora Capital FZE’ which was 100% owned by Mr. Gaurav Gupta. After change of such directorship, Mr. Gaurav Gupta ceased to be director of `Shoora Capital FZE.’ It apprised the fact that there was existence of specific clause under terms of Letter of Intent (Lo1), moreover an undertaking/addendum provided that SRA will not dilute its investment in all/any of the subsequent chain entities. NCLAT while upholding the order of AA observed that The very basis and substratum of the Resolution Applicant which led the CoC to approve the Resolution Plan has been knocked out by changing the shareholding and directorship of the Resolution Applicant’, and held that the SRA has committed a breach of the addendum and the conditions included in the Lot. AA further directed the RP to invite fresh resolution plans by issuing fresh Form-G and upheld that forfeiting the performance security was in accordance with RFRP.
National Company Law Tribunal
Mr. Satyabrata Mitra & Ors. Vs. Earth Towne Infrastructure Pvt. Ltd. [C.R (IB) No. 196 of 2023]
An application under section 7 of Code was jointly filed by 146 homebuyers against CD for initiation of CIRP. It was observed by AA that as per master data of CD available at website of MCA, name of the company has been ‘struck off’. The issue for consideration before AA was whether CIRP of the CD can be initiated against a company with the status ‘struck off’? AA observed that due to the action of striking off taken by the Registrar of Companies (RoC), CD ceases to have the legal existence and the certificate of incorporation also stands cancelled. Any assets of the company shall have to be vested in the state on the principle of ‘Bona Vacantia’ which can be made available for discharge of its liability. Thus, the liability, if any has to be discharged under section 248(7) of the Companies Act, 2013 by the directors, members, managers but not by the company. In terms of section 248(8) of the Companies Act, 2013, the Tribunal may order winding up of a company; but no power can be exercised by the Tribunal for insolvency resolution under the IBC, unless the name of the company is restored by the RoC in its records in terms of procedure laid down under section 252 of the Companies Act, 2013. It directed the homebuyers to take appropriate steps to seek restoration of name of CD in the register of companies to proceed with the present application for admission of CIRP under the Code.
Ranjit Das & Ors. Vs. MSX Mall Private Limited [IA. No. 2003/ND/2022 in CP(IB) No. 334 (ND) of 2018]
Post initiation of CIRP against the CD, RP filed an IA under section 66 and 67 of Code against suspended directors and one of its group companies having common directors for the fraudulent transactions amounting to 47,86,49,550/-. On the strength of forensic report, AA analysed each transaction and ‘PU FE transactions’ or ‘fraudulent transactions’ aggregating to 45,66,27,593/- were determined and allowed. AA while allowing the IA issued direction to the suspended directors for contribution to the account of CD.
ICICI Prudential Real Estate AIF Vs. Nandi Vardhan Infrastructure Ltd. [C.P. (IB) 276 MB 2023]
The resolution plan submitted by CD itself was approved by AA. Under the terms of resolution plan, CD undertook to pay the maturity amount of the non-convertible debentures held by FC. The issue that arose before AA was, whether any undertaking made by SRA in a resolution plan to pay certain money to the creditors of the CD can be equated with a financial debt? AA while dismissing the application observed that the liability of the SRA to pay creditor cannot be equated with a financial debt in terms of section 5(8) of the Code. It observed that when SRA fails to implement the plan, the performance guarantee furnished by it can be forfeited and can also be prosecuted under section 74 of Code but not by initiating CI RP against SRA.
State Bank of India Vs. Mr. Kari Venkateswarlu DA(IBC)/1517/2022 in C.P. (IB) No. I 98/9/HDB/2017]
FC filed an application seeking the replacement of liquidator of CD, on the grounds of irregularities in the auction process. The Board imposed a penalty on the liquidator for certain contraventions in the auction process. The issue for consideration in this case was whether a liquidator can be removed/ replaced under the provisions of the Code? The AA while disposing of the application of FC, expressed concern over delays in the liquidation process due to the liquidator’s litigation initiatives. Further there is no specific provision of the removal of the liquidator under the Code. However, it replaced the liquidator by invoking the provisions of the General Clauses Act, 1897, and the Companies Act, 2013, which empower the authority to remove the liquidator based on perceived shortcomings.
IBBI
Disciplinary Orders
During the quarter, the Disciplinary Committee of the IBBI disposed of 9 SCNs issued to the IPs for contravention of the provisions of law by passing suitable orders.
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