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Insolvency Law in Review – February 2021

Insolvency Law in Review – February 2021

The enactment of the Insolvency and Bankruptcy Code 2016 (Code) has had significant ramifications on the corporate insolvency landscape. Over time, the Code has witnessed a manifold increase in litigation, and consequently in the number of decisions. This has made it difficult for insolvency practitioners to stay updated with developments in the field. The purpose of this column is to fill this gap by providing brief summaries of latest decisions, from the various fora dealing with Insolvency Law.

These case summaries are not an exhaustive review of the cases under the Code; only significant rulings on the Code in the month of February 2021 have been summarized. However, this does not negate the possibility of some important decisions being missed on account of human error. Further, since the purpose of this endeavor is to keep practitioners abreast of relevant developments, the decisions summarized have not been comprehensively analyzed.

I. Supreme Court

In Committee of Creditors of AMTEK Auto Limited Through Corporation Bank v. Dinkar T Venkatasubramanian & Others, the Supreme Court held that any assertion that there is any scope for negotiations of the resolution plan after its approval by the committee of creditors (CoC) is against the terms of the Code, and any attempt to renege from the terms of the resolution plan post its approval must be disallowed. The Supreme Court further held that upon approval of a resolution plan by the CoC under S. 30(4) of the Code, the role of the Adjudicating Authority under S. 31(1) of the Code is limited to checking whether the resolution plan meets the requirements as provided in S. 30(2) of the Code and whether the resolution plan has provisions for its effective implementation. There is no scope for the re-negotiation of the resolution plan after the approval of the resolution plan by the CoC.

In Ramesh Kymal v. M/s Siemens Gamesa Renewable Power Pvt. Ltd, the Supreme Court held that S. 10A of the Code, which was inserted on June 05, 2020, has retrospective effect from March 25, 2020 and will bar even those applications under Ss. 7, 9 and 10 of the Code that were instituted on or after the cut-off date of March 25, 2020. In coming to this conclusion, the Supreme Court adopted a purposive interpretation of S. 10A of the Code and noted that S. 10A has been inserted in the Code to address the financial repercussions faced by corporate enterprises on account of the COVID-19 pandemic.

In Phoenix Arc Private Limited v. Spade Financial Services Limited & Others, the Supreme Court held that the proviso to S. 21(2) of the Code has to be given a purposive interpretation so as to include within its ambit financial creditors, which were related parties to the corporate debtor at time of the transaction incurring the debt, but subsequently became non-related parties in order to be a part of the CoC of the corporate debtor. The Supreme Court further held that because the transactions entered into between the corporate debtor and the parties claiming to be financial creditors were collusive in nature, intending to divert the property from the corporate debtor to the creditors, the parties in question could not be considered as financial creditors to the corporate debtor.

In Phoenix ARC Private Ltd v. Ketulbhai Ramubhai Patel, the Supreme Court relied on Anuj Jain, Interim Resolution Professional for Jaypee Infratech Ltd v. Axis Bank Ltd, and held that a person having only security interest over the assets of the corporate debtor, even if falling within the description of 'secured creditor' will not qualify as a financial creditor solely on the basis of the security advanced. In this case, the Supreme Court rejected the appellant's argument that the security by way of pledge provided by the corporate debtor to secure a credit facility was in essence a guarantee for the financial debt advanced by the appellant and therefore, the appellant was a financial creditor. The Supreme Court noted that S. 5(8)(i) of the Code contemplates inclusion of any liability in respect of any guarantee or indemnity provided for the items referred to in S. 5(8)(a) to S. 5(8)(h) of the Code within the definition of 'financial debt'. The Supreme Court observed that by pledging its shares the corporate debtor had not entered into a contract to perform the promise, or discharge the liability of the borrower in case of default, so as to constitute a guarantee.

II. National Company Law Appellate Tribunals

In Sodexo India Services Pvt. Ltd. v. Chemizol Additives Pvt. Ltd, the National Company Law Appellate Tribunal (NCLAT), New Delhi observed that the Adjudicating Authority under S. 9(5) of the Code has only two options to either admit the application if it has fulfilled all the requirements under the Code or to reject it if it has not fulfilled all the requirements under the Code. The availability of other remedies available under the law or the solvency of the corporate debtor is immaterial to the decision of admitting the application by the Adjudicating Authority. The NCLAT further held that the mere presence of an agreement providing for arbitration in case of a dispute will not be a disabling provision for an operational creditor considering that S. 238 of the Code has an overriding effect over existing laws or existing contracts.

In Ravinder Kumar Kalra (Director of Suspended Board of Evershine Solvex Pvt. Ltd.) v. Ricela Health Foods Ltd. & Others, the NCLAT, New Delhi observed that the Adjudicating Authority is obligated to issue a limited notice to the corporate debtor before the admission of an application under S. 9 of the Code. The NCLAT, New Delhi further stated that the object behind issuing the limited notice is for the Adjudicating Authority to be satisfied that there is no pre-existing dispute/arbitration/suit pending qua the operational debt before the receipt of the demand notice by the corporate debtor.

In Om Prakash Agrawal, Liquidator of S. Kumars Nationwide Ltd v. Chief Commissioner of Income Tax (TDS) & Another, the NCLAT, New Delhi held that the provisions pertaining to the tax deducted at source (TDS) under S. 194 IA of the Income Tax Act, 1961 (IT Act), which enable the Income Tax Department dues to be collected in priority to other creditors in case of distribution of sale proceeds of the liquidation assets of the corporate debtor, are inconsistent with S. 53(1)(e) of the Code, which provides that the government dues (including dues of the Income Tax Department) come fifth in the order of priority in case of distribution of sale proceeds of the liquidation assets of the corporate debtor. The NCLAT, New Delhi held that by virtue of S. 238 of the Code, S. 53(1)(e) of the Code will have an overriding effect on S. 194 IA of the IT Act. The NCLAT, New Delhi, while holding that the successful bidder here could not be required by the Income Tax Department to deduct one percent as the TDS under S. 194 IA of the IT Act from the sale consideration of the liquidation assets, observed that the liquidator of a corporate debtor is not required to file any income tax return.

In Adish Jain v. Sumit Bansal and Worldwide Metals Pvt. Ltd., the NCLAT, New Delhi held that the NCLAT does not have the inherent power to review its own orders. The NCLAT, New Delhi further observed that the power to review cannot be exercised under Rule 11 of the National Company Law Appellate Tribunal Rules, 2016, which spell out the inherent powers of the NCLAT, and that the power to review can only be conferred upon the NCLAT by a statute or by necessary implication. The NCLAT, New Delhi, further held that, even otherwise, the error assailed in a review application must be patent, manifest, and self-evident, and a re-appraisal of the evidence and finding of facts in the garb of a review application was not permissible.

In Tuf Metallurgical Pvt. Ltd. v. Impex Metal & Ferro Alloys Ltd. & Others, the NCLAT, New Delhi observed that S. 20 of the Code mandates the interim resolution professional (IRP)/resolution professional (RP) to take all steps necessary to keep the corporate debtor as a going concern, after the initiation of the corporate insolvency resolution process (CIRP). The NCLAT, New Delhi further observed that any amount(s) received by the corporate debtor as advance payment(s) in lieu of the supply of goods during the CIRP will have to be treated as insolvency resolution process costs under S. 5(13) of the Code. The NCLAT, New Delhi also observed that Regulation 30 of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 (Liquidation Process Regulations) mandates the Liquidator to verify, and subsequently, accept/reject any claim received by her/him within 30 days from the receipt of the claim, and that she/he does not have the right to sit on the claim. The NCLAT, New Delhi finally observed that S. 40 of the Code obligates the liquidator to communicate the decision of acceptance/refusal of the claim within 7 days from the said decision having been made.

In Union Bank of India v. Siripuram Developers Private Limited & Others, the NCLAT, New Delhi set aside the order of the National Company Law Tribunal (NCLT), Hyderabad, which directed the applicant bank to not take any coercive steps under the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (SARFAESI), such as sale of the properties mortgaged by the subsidiary companies of the corporate debtor in favor of the applicant bank until the completion of the liquidation proceedings of the corporate debtor. The NCLAT noted that as the security provided by the subsidiary companies cannot form a part of the liquidation estate due to the operation of S. 36(4)(d) prohibiting the inclusion of the assets of any Indian or foreign subsidiary of the corporate debtor in the liquidation estate, the applicant bank can initiate proceedings against the subsidiary companies of the corporate debtor under the SARFAESI.

In Mr. Avil Menezes, Resolution Professional of AMW Auto Component Limited v. M/s. Shah Coal Private Limited, the NCLAT, New Delhi held that the RP has no locus standi to file an appeal assailing the decision of an Adjudicating Authority on the grounds that a claim admitted by the Adjudicating Authority came within the purview of an operational debt and not an operation debt. The court noted that the RP was not an aggrieved party here, as the RP is only required to collate the claims received against the corporate debtor in terms of S. 21(1) of the Code.

In Srinivasa Reddy Velagala v. Sravanthi Infratech Private Limited, the NCLAT, New Delhi, held that in the present case, a perusal of the correspondence between the parties and the clauses/articles specified in the contract in question evinced that the contract had not been terminated by either parties and the contract was still subsisting, and therefore, the application filed by the operational creditor was not barred by limitation. The NCLAT, New Delhi further rejected the argument of the corporate debtor pertaining to the frustration of the contract due to efflux of time, by noting that the contract was still subsisting and that there was no such clause in the contract regarding frustration or termination of the contract due to efflux of time.

III. National Company Law Tribunals

In an application by the liquidator of M/s SGP Software Solutions Pvt. Ltd., the NCLT, Bengaluru, upon a reading of Ss. 54 and 60 of the Code, along with Regulation 45 of the Liquidation Process Regulations, observed that the ultimate objective of the Code is either to facilitate a resolution plan, or to dissolve the corporate debtor as expeditiously as possible. Consequently, on a consideration of, inter alia, the fact that the corporate debtor's assets had completely been liquidated, and all that remained was the closing of its bank accounts and the payment of the liquidator's fees, the NCLT, Bengaluru directed the dissolution of the corporate debtor.

In Sunit Jagdishcandra Shah, RP for Sungracia Tiles Pvt. Ltd. v. Sungracia Tiles Pvt. Ltd., the NCLT, Ahmedabad relied on the decisions of the Supreme Court in K. Sasidhar v. Indian Overseas Bank & Others., and Committee of Essar Steel India Ltd. v. Satish Gupta & Others, to reiterate the settled position of law that the Adjudicating Authority has no power to question the autonomy of the CoC regarding commercial matters and decisions taken by it, and that the Adjudicating Authority's scope of enquiry is limited to ensuring that the CoC had complied with the objects of the Code, viz. keeping the corporate debtor as a going concern during the CIRP, maximizing the value of its assets, and taking care of all stakeholders' interests.

In Anand Rathi Global Finance Limited v. Doshi Holdings Private Limited, the NCLT, Mumbai relied on the decision of the NCLAT, New Delhi in State Bank of India v. Athena Energy Ventures Private Limited and permitted the initiation of the CIRP against the corporate debtor, who was a co-borrower/pledgor under three different loan cum pledge agreements despite the initiation of the CIRP against the principal borrower, on the grounds that the loan cum pledge agreements confirmed that the liability of the corporate debtor was co-extensive as well as joint and several with the principal borrower. The NCLT, Mumbai, while noting that the principles of promise of payment under a pledge under S. 172 of the Contract Act, 1872 are akin to the principles of a contract of surety under S. 126 of the Contract Act, 1872, rejected the contention of the corporate debtor that the CIRP could not be initiated against it, as no money had been disbursed to it by the creditor and it was merely performing the role of a pledgor to secure the loans of the principal borrower.

In Sujata Shekhar Shah v. Mirador Constructions Private Limited, the NCLT, Mumbai, inter alia, held that purely contractual disputes arising between the allottees and the real estate company cannot be decided under S. 7 of the Code in a summary proceeding.

In National Aviators Guild & Others v. Ashish Chhawchharia, Resolution Professional for Jet Airways (India) Ltd. & Another, the NCLT, Mumbai held that the employees of the corporate debtor are neither entitled to receive a copy of the resolution plan submitted to the Adjudicating Authority for approval, nor entitled to be heard while the resolution plan is considered by the Adjudicating Authority. In the present case, the applicants, who were workmen and employees of the corporate debtor, filed applications seeking directions to be provided to the RP to furnish a copy of the resolution plan approved by the CoC to the applicants and to be provided with an opportunity to be heard during the consideration of the resolution plan by the Adjudicating Authority, failing which will result in the violation of the principles of natural justice. The NCLT, Mumbai held that applicants, being the workmen and employees of the corporate debtor, are operational creditors under the Code, and that the Code being a complete code in itself, there are no provisions under the Code, which allow for the operational creditors to receive a copy of the resolution plan or be heard before its approval.

In Mr. Dinesh Changela v. Berkmann Wine Cellars India Pvt. Ltd., the NCLT, Mumbai held that a debt on which no interest is payable and for which no time has been fixed for the purpose of repayment, does not meet the definition of 'financial debt' under S. 5(8) of the Code, as it is not disbursed against the consideration of time value of money. Here, the applicant charged an interest only on the failure of the respondent to repay the interest free debt to the applicant in accordance with the terms of their understanding that the respondent would repay the applicant upon the resignation of the applicant from the board of directors of the respondent and a demand thereafter being made by the applicant. The NCLT, Mumbai noted that the correspondence and the various balance sheets relied upon by the applicant demonstrate that there was no interest payable on the loan and no time was fixed the repayment of the loan for the loan to be considered to be disbursed against the consideration for the time value of money.

In K.G. Somani & Co. v. Arvind Garg, Liquidator of Carnation Auto India Private Limited, the NCLT, New Delhi held that the expenses incurred by the applicant on account of forensic audit activity undertaken by it on the instructions of the financial creditor cannot be considered to form a part of the insolvency resolution process cost (IRPC) within the ambit of S. 5(13) of the Code, as the applicant was appointed prior to the initiation of the CIRP even though the forensic audit continued during the CIRP. The NCLT, New Delhi relied on Circular No. IBBI/IP/013/2018, issued by the Insolvency and Bankruptcy Board of India on June 12, 2018, which clarifies the scope of the IRPC and states that the IRPC shall not include any fee or other expense incurred before the commencement of the CIRP or to be incurred after the completion of the CIRP.

In Syndicate Bank v. RS Builtwell Private Limited, the NCLT, New Delhi, relied on the decision of the NCLAT, New Delhi in Ishrat Ali v. Cosmos Cooperative Bank Limited & Another, to reiterate that the action taken under the SARFAESI cannot be excluded from the computation of the period of limitation as per S. 14 of the Limitation Act, 1963, which prescribes the exclusion of the time of proceedings pursued bona fide in a court without jurisdiction from the computation of the period of limitation. The NCLT, New Delhi rejected the contention of the applicant bank that the date of default would be construed as August 2, 2019 basis the action initiated by the applicant bank against the corporate debtor under the provisions of the SARFAESI as well as the Recovery of Debts Due to Bank and Financial Institutions, 1993, and the order of the Debt Recovery Tribunal dated July 2, 2019 directing the corporate debtor to pay the amount within thirty days from the date of the order. The NCLT, New Delhi noted that the date of default is the date of the asset being declared as a non-performing asset, which was April 05, 2008 and as such the application was barred by limitation.

In State Bank of India v. Shri Lal Mahal Limited, the NCLT, New Delhi held that it is beyond the purview of the Adjudicating Authority to venture into the question of the reason for the default and the intention behind the default. Here, the NCLT, New Delhi rejected the corporate debtor's contention that the default was not intentional or due to incapacity of the corporate debtor but was due to the actions of a statutory authority resulting in the victimisation of the corporate debtor, which were subsequently determined illegal by a court of law.

In Punjab National Bank v. M/s KSK Mahanadi Power Company Limited, the NCLT, Hyderabad held that the consolidation of the CIRP of the corporate debtor with the CIRP of other two companies was not tenable, as the concept of group insolvency is unknown to the Code. The NCLT, Hyderabad distinguished the present case from the decision of the NCLAT in Edelweiss Assets Reconstruction Company Limited v. Sachet Infrastructure Private Limited and the decision of the NCLT, Mumbai in State Bank of India v. M/s Videocon Industries Limited & Others, by noting that a joint hearing of the company petitions against various corporate debtors of the same group and not consolidation of the CIRP of different corporate debtors was sought in those cases. The NCLT, Hyderabad noted that the consolidation of the CIRP of different corporate debtors will create a difficult situation relating to consolidation of assets and liabilities of the corporate debtors, and the inherent jurisdiction of the Adjudicating Authority under Rule 11 of the National Company Law Tribunal Rules, 2016 cannot be used to create such a situation.

In Sanker P. Panicker v. M/S Orieon Kuries and Loans Private Ltd, the NCLT, Kochi allowed private sale of land owned by the corporate debtor during the liquidation proceedings after a 25% reduction in the sale price from the reserve price. Regulation 33(2) the Liquidation Process Regulations allows private sale of assets by the corporate debtor provided such sale is done with prior permission of the relevant Adjudicating Authority and is carried out with a non-related party, in accordance with the guidelines laid down under Schedule I of the Code. While noting that the sole bidder, after three rounds of e-auction had only expressed interest in buying a portion of the property, the NCLT, Kochi relied on regulation 33(2) and Clause I(4)(A) of Schedule I of to allow the sale.

In M/S Shree Gannayak Minerals and Chemicals v. M/S Clavecon India Private Ltd, the NCLT, Allahabad dismissed an application under S.9 of the Code by an operational creditor on the ground that the debit notes issued by the corporate debtor established a dispute regarding the quality of raw materials supplied by the operational creditor. The applicant had supplied raw material on credit basis upon submission of purchase order by the corporate debtor. The corporate debtor contended that the goods provided were sub-standard and a dispute existed regarding their payment, which was also reflected in issuance of several debit notes by corporate debtor and for which the applicant had allowed discount on the payment for the goods supplied. The applicant, however, argued that as per the purchase order, a 10% deduction on the quoted price was allowed for goods supplied below the applicable international standard and the corporate debtor was still liable to pay the remaining 90% dues. The NCLT, Allahabad noted that in the rejoinder, the applicant had acknowledged giving discounts pursuant to debit notes issued by the corporate debtor in relation to the invoices that had been relied on by the applicant for its demand. On this basis, the NCLT, Allahabad found that a dispute regarding the quality of goods supplied was pre-existing and dismissed the application.

In V Con Integrated Solutions Private Ltd v. Acharya Tecno Solutions, the NCLT, Kochi held that the dues payable under Ss. 7A, 7Q and 14B of the Employees Provident Funds and Miscellaneous Provisions Act, 1952 (EPF Act) are statutory dues and not claims that can be submitted to the liquidator and that the Employee's Provident Fund Organisation (EPFO) was entitled to priority in payment out of the assets and over other debts of the corporate debtor as per S. 11 of the EPF Act. In this regard, the NCLT, Kochi held that the EPFO need not file Form G of the Liquidation Process Regulations before the liquidator for claiming the dues, as the outstanding dues under the EPF Act are not claims, and further directed the liquidator to determine the amount of dues for stakeholders in view of the letter submitted by the EPFO.

In M/S Al Sadiq Sweets v M/S Krisenter Impex Private Limited the NCLT, Kochi allowed an application under S. 9 of the Code filed on the basis of a default in delivery of goods by the corporate debtor, for which the operational creditor had paid in advance. The underlying contract pertained to the supply of Indian kernels cashew for which payment was made on December 01, 2019 with January 03, 2020 as the agreed upon date of dispatch. Thereafter, due to failure of the delivery of goods, the applicant terminated the contract on April 25, 2020 and issued a demand notice for the refund of payment along with interest. Rejecting the corporate debtor's contention that the agreed date of delivery was extended to April 25, 2020, and the debt became due and payable after the contract was terminated, the NCLT, Kochi held that the default would be on the date on which the corporate debtor failed to fulfil its obligation to dispatch goods i.e. January 03, 2020. The NCLT, Kochi also found that the Ministry of Corporate Affairs notification dated March 24, 2020 enhancing the minimum amount for default under the Code to INR One Crore, is prospective in effect and an event of default preceding the notification will not be covered. (On the question whether an advance paid for supply of goods is operational debt also see NCLAT decision in Smt Andal Bonumalla v. Tomato Trading LLP & Others.)

In George Vinci Thomas & Ors. v. Resolution Professional in the matter of India Techs Limited & Ors., the NCLT, Kochi dismissed an application by the members of the suspended board of directors, for extension of the period of the CIRP. The application was filed to seek time for a prospective resolution applicant to file an expression of interest (EoI). The NCLT relied on the decision of the NCLAT, New Delhi in Quantum Limited v. Indus Finance Corporation Limited, to hold that an application for the extension of time under S. 12 of the Code can only be filed on the basis of a CoC resolution in this regard passed with 75% majority. The NCLT, Kochi further observed that the resolution applicant, on whose behalf the directors had sought the extension, had not shown sufficient cause for the delay in the filing of the EoI, and merely assigning the delay to COVID-19 without specifying how it had caused the delay in this context was insufficient.

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