27 Jun 2021 11:52 AM GMT
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. This column fills this...
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. This column fills 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 May 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 are summarized and not comprehensively analyzed.
In Lalit Kumar Jain v. Union of India and Others, the Supreme Court upheld the notification dated November 15, 2019 issued by the central government, which brought into force certain provisions on the insolvency of personal guarantors under the Code. The Supreme Court held that the notification by the central government was not an instance of legislative exercise, or impermissible and selective application of provisions of the Code. The Supreme Court noted that there was no compulsion in the Code to be made applicable to all individuals, (including personal guarantors) at the same time. The Supreme Court also noted that Ss. 2(e), 5(22), 60 and 179 of the Code sufficiently indicate that personal guarantors, though forming part of the larger grouping of individuals, in view of their intrinsic connection with corporate debtors, are to be dealt with differently, through the same adjudicatory process and by the same forum (though different insolvency provisions) as the corporate debtors. Further, it was also held that approval of a resolution plan does not ipso facto discharge a personal guarantor of the corporate debtor of her or his liabilities under the contract of guarantee – as the release or discharge of a principal borrower from the debt owed by it to its creditor, by an involuntary process, i.e. by operation of law, or due to liquidation or insolvency proceedings, does not absolve the guarantor of his or her liability, which arises out of an independent contract.
In India Resurgence ARC Pvt. Ltd. v. M/S. Amit Metaliks Limited & Anr., the Supreme Court, citing its judgment in Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta & Ors., held that the considerations required to be taken into account by the committee of creditors (CoC) as provided in S. 30(4) of the Code are only guidelines enabling fairness of distribution among similarly situated creditors and viability and feasibility of resolution plans. These guidelines are meant to provide more teeth to the CoC while arriving at a business decision which does not warrant any intervention from the Adjudicating Authority unless similarly situated classes of creditors are denied fair and equitable treatment. Further, the Supreme Court held that though a dissenting financial creditor can choose to enforce its security interest, if it is a secured financial creditor, the amount receivable is limited by the provisions of S. 30(2)(b) of the Code. The amount paid to different classes and subclasses of creditors depends on the commercial wisdom of the CoC and a dissenting financial creditor cannot claim a higher amount with reference to the value of the security interest held by it.
In M/s Dreams India Infra Pvt. Ltd. v. The Competent Authority, the High Court of Karnataka, while interpreting S. 238 of the Code as giving the Code an overriding effect over other legislations, held that the Code shall prevail over the Karnataka Protection of Interest of Depositors in Financial Establishments Act, 2004. Consequently, the High Court of Karnataka quashed proceedings that had been initiated against the petitioner under the said Act after commencement of the insolvency resolution process (CIRP).
In Sirpur Paper Mills Limited v. I.K. Merchants Private Limited (Formerly known as I.K. Merchants), the Calcutta High Court held that the approval of a resolution plan under S. 31 of the Code will result in the extinguishment of the claim of any award-holder. The Calcutta High Court noted that the view of the Supreme Court, as crystallised in Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta and Others and Ghanashyam Mishra and Sons Private Limited v. Edelweiss Asset Reconstruction Company Limited and Others, is that pre-existing and undecided claims, which have not featured in the collation of claims and are not part of the resolution plan, shall be treated as extinguished upon approval of the resolution plan under S. 31 of the Code.
In the matter of Vivek Raheja, Resolution Professional, the National Company Law Appellate Tribunal (NCLAT), New Delhi held that extension of time beyond 330 days for the completion of the CIRP is permissible in exceptional cases, and that delays caused on account of the COVID-19-induced lockdown and pendency of judicial proceedings before the National Company Law Tribunal (NCLT), New Delhi, were exceptional circumstances that necessitated an extension of time to complete the CIRP.
In Bank of India and Ors. v. Mr. Bhuban Madan, the NCLAT, New Delhi held that once the claims of the creditors are filed before the resolution professional (RP), the creditors are not entitled to recover that money from the accounts of the corporate debtor, even if it has enough liquidity, during the continuation of CIRP. The NCLAT, New Delhi stated that any recoveries made, even if it is in the normal course of business, will result in unjust enrichment of a few creditors over others and is also against the provisions of S.14 of the Code.
In Ramasamy Palaniappan v. Radhakrishnan Dharmarajan and Ors., the NCLAT, Chennai held that the RP does not need to invoke Regulation 40C of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, which provides for exclusion of the period of lockdown from the CIRP, as a matter of routine. It can only be invoked when due to the lockdown any activity under the CIRP could not be completed within the prescribed time. The NCLAT, Chennai held that in an application for exclusion of the lockdown period made by the RP to the Adjudicating Authority, the shareholders of the corporate debtor are not necessary parties and hence do not have a right to be heard before the Adjudicating Authority. Further, the NCLAT , Chennai, relied on the Supreme Court judgment in Kalpraj Dharamshi v Kotak Investment Advisors Limited, to hold that though there might be material irregularities in the exercise of powers by the RP, as long as they have the seal of approval of the CoC, they cannot be interfered with considering the importance accorded to the commercial wisdom of the CoC under the Code.
In Lakshmi Narayan Sharma v. Punjab National Bank and Anr., the NCLAT, Chennai, held that the acknowledgement under S. 18 of the Limitation Act, 1963 (Limitation Act) does not have to be express or in any particular form, and that the "balance and security confirmation letters" executed by the guarantors of the corporate debtor are an acknowledgement of debt under S. 18 of the Limitation Act. Further the NCLAT, Chennai applied S. 19 of the Limitation Act to hold that a fresh period of limitation will start from the date of payment made by the corporate debtor on account of the outstanding debt.
In Kanwar Raj Bhagat v. Gujarat Hydrocarbons and Power SEZ Limited & Another, the NCLAT, New Delhi, while relying on the decision of the NCLAT, New Delhi in State Bank of India v. Athena Energy Ventures Private Limited, held that a financial creditor can apply for initiation of the CIRP against the principal borrower even though the CIRP against the corporate guarantor in respect of the same debt has already taken place. The NCLAT, New Delhi noted that it cannot be said that the financial creditor had accepted the amount in full and final settlement of all its dues. The NCLAT, New Delhi however, noted that the right of recovery of debt of the financial creditor available against the corporate guarantor had extinguished.
In Regional Provident Commissioner, Employees Provident Fund Organisation v. Vandana Garg & Another, the NCLAT, Chennai rejected the claims of the appellant that: (i) the provident fund dues ought to be given priority over all other dues owed by the corporate debtor under a resolution plan in view of the express provision of S. 36(4)(a)(iii) of the Code and S. 11 of the Employees Provident Fund and Miscellaneous Provisions Act 1952 (EPF Act); and (ii) any resolution plan which waives off any portion of the provident fund owed by corporate debtor is in violation of S.30(2)(e) of the Code. While noting that the claims as provided under the resolution plan shall stand frozen and will be binding on the corporate debtor and its employees, members, creditors including the central government, state government or local authority, guarantors and other stakeholders, the NCLAT, Chennai also held that the question of applicability of S. 36(4)(a)(iii) of the Code arises only at the stage of the formation of liquidation estate by the liquidator and not during the formulation of the resolution plan under the CIRP. The NCLAT, Chennai also relied on the proviso to S.14B of the EPF Act, which allows the central board constituted under the EPF Act to reduce or waive off the damages levied on an establishment which is a sick industrial company.
In Antanium Holdings Pte. Ltd. v. M/s.Sujana Universal Industries Limited & Another, the NCLAT, Chennai held that the Adjudicating Authority is required to record its analytical subjective satisfaction before approving the resolution plan. and the threadbare examination of the scheme is to be studied astutely before arriving at such subjective satisfaction. The NCLAT, Chennai further rejected the contention of the appellant that the observation of the NCLT, Hyderabad that "the resolution plan approved shall not construe any waiver to any statutory obligations/liabilities arising out of the approved resolution plan and same shall be dealt in accordance with the appropriate authorities as per relevant laws", was beyond the purview of its jurisdiction. The NCLAT, Chennai stated that said observation was not in the form of imposition of an additional condition and that the Adjudicating Authority is within its limits to express its views/opinion(s).
In Directorate of Economic Offences, Govt. of West Bengal v. Binay Kumar Singhania and Ors., the NCLAT, New Delhi held that the Code does not override the West Bengal Protection of Interest of Depositories in Financial Establishment Act, 2013 (WBPIDFE Act), since the said legislations operate in different fields and with different aims. The NCLAT, New Delhi further held that the director and property of the corporate debtor cannot, on the basis of the provisions of the Code, get immunity from prosecution/attachment under the WBPIDFE Act.
In the matter of Sandhhya Shipping Services Private Limited, the NCLT, Chennai held that the Interim Resolution Professional (IRP) appointed in a CIRP is not party to the proceedings for admission/dismissal of the insolvency application under the Code. In such circumstances, Rule 50 of the National Company Law Tribunal Rules, 2016, relating to service of certified copy of the admission order by the Registry to the parties, was held to be inapplicable to the IRP. Further, the NCLT, Chennai held that the extension of time period of CIRP could not be granted on the ground that the lodging of the intimation email sent by the Registry to the IRP about his appointment in the spam folder of the mailbox had caused delay.
In M/s BS Limited v. Mr. Rajesh Agarwal & Others, the NCLT, Hyderabad rejected an application filed by the liquidator against all financial creditors of the corporate debtor under S.66 (fraudulent trading or wrongful trading) of the Code as not maintainable. The NCLT held that the provisions of S.66 of the Code are for issuing directions to the suspended company management and related beneficiary parties who carried out the business of the corporate debtor in a fraudulent manner with an intent to defraud creditors. Accordingly, the NCLT held that the provisions of S.66 of the Code have to be used for the benefit of the creditors of the corporate debtor and not against them.
In Mr. N.V. Rama Raju v. Mr. Rajkumar Ralhan, Resolution Professional of Leo Meridian Infrastructure Projects and Hotels Limited, the NCLT, Hyderabad, inter alia, held that even though one of resolution applicants had been declared the highest bidder, before approving a resolution plan under S. 30 of the Code, the CoC was free to consider all resolutions plans presented to it by the RP. The NCLT, Hyderabad noted that the CIRP being a competitive process for all prospective resolution applicants, the RP and CoC were duty bound to consider all the eligible resolution plans received.
In Kamla Industrial Park Ltd. v Monitoring Committee of Corporate Debtor and Ors., the NCLT, Mumbai relied on the judgment of the Supreme Court in Committee of Creditors of Essar Steel India Limited vs. Satish Kumar Gupta and Ors. to hold that the new management of the corporate debtor, having taken over after the approval of its resolution plan, could not be held liable for the malfeasance and misfeasance of the former promoters/directors of the corporate debtor.
In Rajendra M. Ganatra, Resolution Professional for Sunshine Housing and Infrastructures Private Limited v. Slum Rehabilitation Authority and Ors., the NCLT, Mumbai relied on the judgments of the Supreme Court in Alchemist Asset Reconstruction Company Limited v. Hotel Gaudavan Private Limited and Ors., and K. Bhutta v. Maharashtra Housing and Area Development Authority and Anr., to hold that, in light of Ss. 14 and 238 of the Code, no authority is permitted to take any action against the corporate debtor or cause to divest any property in its occupation after the commencement of the CIRP.
In Bhadrashree Steel & Power Limited, Successful Resolution Applicant of Ambey Iron Private Limited (erstwhile Corporate Debtor) v. Maharashtra State Electricity Distribution Company Ltd. and Anr., the NCLT, Mumbai relied on the judgment of the Supreme Court in Manish Kumar v. Union of India to hold that, in light of S. 32A of the Code, the new management of the corporate debtor, having put the approved resolution plan into effect, was not liable to pay any arrears claimed by any authority. Consequently, the NCLT directed the Maharashtra State Electricity Distribution Company Ltd. to return/adjust against future bills the amount credited to it by the new management under protest.
In Mr. Rohit Tole & Ors. v. Mantri Developers Pvt. Ltd., the NCLT, Bengaluru citing the judgment of the NCLAT in Sushil Ansal v. Ashok Tripathi & Ors., held that though decree holders are considered to be creditors under S. 3(10) of the Code, the amount claimed under a decree, being an adjudicated amount, is not a consideration for time value of money as required under S. 5(8) of the Code. The NCLT accordingly held that the decree holders do not fall under the definition of financial creditors and cannot file an application under S. 7 of the Code against a corporate debtor.
In M/S UKG Steel Private Limited v. Erotic Buildcon Private Limited, the NCLT, Delhi held that an inter-corporate loan disbursed in violation of S. 186 of the Companies Act 2013 (Companies Act) amounts to an ultra-vires act by the company and cannot be treated as a legally enforceable debt. The NCLT held that a financial creditor that is not recognized by the Reserve Bank of India to provide financial services, cannot disburse the loan in violation of the provisions for inter-corporate loans under the Companies Act. The NCLT dismissed the application under S. 7 of the Code after it found that the applicant financial creditor had not disclosed the debt as an inter-corporate loan in its balance sheet and had advanced the loan without meeting the requirements of approval by special resolution at an extraordinary general meeting as well as the prescribed ceiling of 60% (sixty per cent) aggregate of the paid-up share capital, free reserves and securities premium account for disbursing an inter-corporate loan under S. 186(2) of the Companies Act.
In M/s. Sundaram Consultants Private Limited v. M/s. Three C Properties Private Limited, the NCLT, New Delhi held that an application under S. 65 of the Code for dismissal of an insolvency application as fraudulent or malicious initiation of proceedings is not maintainable before the CIRP has been initiated. The NCLT accordingly dismissed the application under S. 65 of the Code filed at the stage of hearing for admission/dismissal of the application under S. 7 of the Code.
In Edelweiss Asset Reconstruction Company Ltd. v. Net 4 India Limited, the NCLT, New Delhi allowed the cancellation of an undervalued assignment of a trademark carried out before the initiation of the CIRP while holding that where such assignment is required to be set aside as an undervalued/fraudulent transaction under the Code, it need not be carried out by the trademark authority. The NCLT further held that for undervalued, preferential and fraudulent transactions under the Code, the RP is only an authority to report actions as apparent on record and is not required to place all positive evidence proving such transactions. The NCLT, New Delhi held that in accordance with S. 101 of the Indian Evidence Act, in such cases, the onus of proof would shift to the suspended management to establish that such transactions were: (i) carried out in the ordinary course of business; (ii) in compliance with the provisions of the Companies Act; and (iii) beyond the two (2) years lookback period prescribed under Ss. 43 and 47 of the Code.
In Arihant Techno Pack Private Limited v. Pritish Greens Agro Private Limited, the NCLT, New Delhi, held that where service of a notice under S. 8 of the Code or an application under S. 9 of the Code is made on the email and physical addresses of the corporate debtor registered on the website of Ministry of Corporate Affairs, the service will be deemed complete. The NCLT, New Delhi followed the decision of the Supreme Court in Madan & Co v Wazir Jaivir Chand, to hold that the return of the document with remarks 'addressee without instructions' would not affect completion of service.
In A2 Interiors Products Private Limited v. M/s. Ahluwalia Contracts India Ltd. the NCLT, New Delhi held that an operational creditor can file a consolidated application under S. 9 of the Code for claims arising out of separate work orders at different points in time. In this case, the application was filed in August 2019 and related to claims that arose between December 2017 and February 2019. The NCLT, New Delhi also followed the NCLAT, New Delhi decision in Aashish Mohan Gupta v. Hind and Hotels Ltd to hold that once the work is complete and the final bill is raised, the retention money deposited as security becomes due and payable to the operational creditor.
In Punjab National Bank v M/s. Dhir Global Industrial Private Limited, the NCLT, New Delhi followed the decision of the Supreme Court in Laxmi Pat Surana v. Union Bank of India & Anr. to hold that proceedings under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 and the Code are different in nature, and admissibility of an application under S. 7 of the Code is not affected by the quashing of the declaration of the loan of the corporate debtor as a non-performing asset (NPA). The NCLT, New Delhi further held that in case of quashing of the NPA classification of the underlying loan, the date of default for a S. 7 application under the Code will be as recorded in the certificate of information utility services.
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