Insolvency Law in Review – June 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. 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 June, 2021 have been summarized. However, this does not negate the possibility of some important decisions being missed out 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.

1. HIGH COURTS

In Gouri Prasad Goenka v. State Bank of India, the Calcutta High Court held that the moratorium envisaged under S. 14 of the Code creates no hindrance to a wilful defaulter declaration proceeding. This pertains to the dissemination of credit information related to the wilful defaulters for cautioning the banks and financial institutions so as to ensure that further bank finance is not made available to them and not for the recovery of the debts or assets of the corporate debtor, which could hamper the corporate insolvency resolution process (CIRP). The High Court further noted that an act of wilful default, if committed by a promoter/whole-time director/guarantor of the corporate debtor, who was in charge at the relevant period, is not obliterated automatically by the filing of an application under S. 7 of the Code, and the declaration of a whole-time director/promoter/guarantor as a wilful defaulter cannot adversely affect the resolution process in any manner whatsoever.

In East India Enterprise Through Proprietor Rajeshbhai Bholabhai Ramani v. Ministry of Finance Department of Revenue Through the Director, the Gujarat High Court held that the statutory amounts due from the corporate debtor in respect of the vehicles, which were sold by the liquidator corporate debtor, cannot be recovered in terms of the provisions of the Motor Vehicles Act, 1988 and the rules framed thereunder. It can only be recovered under the provisions of the Code, i.e., the waterfall mechanism under Section 53 of the Code.

2. NATIONAL COMPANY LAW APPELLATE TRIBUNALS

In Mr. Rakesh Kumar Agarwal and Others v. Mr. Devendra P. Jain, the National Company Law Appellate Tribunal (NCLAT), New Delhi held that the government notification dated June 1, 2020, concerning the changes to the classification of micro, small and medium enterprises (MSME) under the Micro, Small and Medium Enterprises Development Act, 2006, will be applicable to the corporate debtors, whose liquidation process was still pending under the Code. The NCLAT, New Delhi, while reiterating that the main objective of the Code is to resolve the insolvency and that the liquidation of the corporate debtor is only a last resort, set aside the order of the adjudicating authority which had found the notification inapplicable to the corporate debtor since it came into effect at a later date on July 1, 2020.

In Jayanta Banerjee v. Shashi Agarwal Liquidator of INCAB Industries Ltd and Another., the NCLAT, New Delhi held that the word 'collation' under S. 21(1) of the Code means verification of the claims of the creditors, or in other words, the comparison of a copy with its original in order to verify its correctness. The NCLAT, New Delhi held that a meeting of the committee of the creditors (CoC) cannot be held without verification and the admission of the claims of the creditors and followed by the assignment of voting shares to such creditors. Further, the NCLAT, New Delhi held that the exercise of the commercial wisdom of the CoC cannot be used as a pretext for validating the decisions taken by the CoC, whose very formation has been found to be against the provisions of the Code.

In Vivekanand Jha v. Punjab National Bank and Another, the NCLAT, New Delhi held that an offer for a one-time settlement by the corporate debtor in case of a debt which is due and has been defaulted upon, will not result in the shifting of the date of default for the calculation of the limitation period. The NCLAT, New Delhi instead held that such offers for one-time settlements will act as an acknowledgement of the debt due under S. 18 of the Limitation Act, 1963, thereby, resulting in a fresh start of the limitation period from the date of such acknowledgement.

In Hytone Merchants Pvt. Ltd. v. Satabadi Investment Consultants, the NCLAT, New Delhi held that even an application that is otherwise compliant with the requirements of S. 7 of the Code can be dismissed by the National Company Law Tribunal (NCLT), under S. 65 of the Code, if the said application is found to be filed collusively.

In The Assistant Commissioner of Central Tax v. Mr. V. Shanker and Others, the NCLAT, New Delhi, while observing that delays in the CIRP affect the maximisation of the value, held that a mere letter addressed to the NCLT for the purposes of condonation of delay in the submission of a claim cannot be said to fulfil the requirements of Part III of the National Company Law Tribunal Rules, 2016, S. 60 of the Code, the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016, and the Insolvency and Bankruptcy Board of India (IBBI) (Insolvency Resolution Process for Corporate Persons) Regulations, 2016.

In Earth Gracia Buildcon Pvt. Ltd. v. Earth Infrastructure Ltd., the NCLAT, New Delhi, while relying upon the decision of the Supreme Court in Phoenix Arc Pvt. Ltd. Vs. Spade Financial Services Ltd. & Others., held that a sham/round-tripped transaction will not classify as a 'financial debt' for the purpose of the Code.

In Dwarkadhish Sakhar Karkhana Limited v. Pankaj Joshi, Resolution Professional of KGS Sugar & Infra & Another, the NCLAT, New Delhi upheld the decision of the NCLT, Mumbai setting aside the decision of the CoC to accept the expression of interest (EoI) of a resolution applicant after the due date, on the grounds that the CoC did not assign any reasons for revisiting its earlier decision of rejecting the EoI of the resolution applicant. The NCLAT, New Delhi held that the CoC, in the shelter of maximisation of the value of the assets, cannot be permitted to take any decision at any point of time in the name of commercial wisdom. The court distinguished the case at hand from the decision of the Supreme Court in the case of Kalpraj Dharamshi v. Kotak Investment Advisors, by stating that in the case of Kalpraj. the actions of RP, including the acceptance of the resolution plan after the due date had been consciously approved by the CoC.

In M/s. Manipal Media Network Limited v. M/s. Vishwakshara Media Private Limited, the NCLAT, New Delhi, on the issue of whether the appellant can invoke the provisions of the Code if the underlying agreement provides for arbitration under the Arbitration and Conciliation Act, 1996, held that it is not for the Adjudicating Authority to direct the parties to go for arbitration if the matter was not referred to arbitration by either of the parties.

3. NATIONAL COMPANY LAW TRIBUNALS

In Pratiksh Pramod Rai v. Mylaw Learning Resources Pvt. Ltd., the NCLT, Mumbai refused to admit a company into CIRP on the grounds that while the company had time and again tried to settle the dues owed to the operational creditor, it was the operational creditor which refused to enter into any settlement. The NCLT, Mumbai held that the Code cannot be used as a recovery mechanism and is only for the purpose of insolvency resolution. With no record of the company being financially unsound and unable to repay its debts, the NCLT, Mumbai dismissed the petition of the operational creditor.

In Edelweiss Asset Reconstruction Company Limited v. Chemstar Organics (India) Limited, the NCLT, Mumbai, following the decision of the Supreme Court in Jignesh Shah v. Union of India, held that the filing of the recovery proceedings within the period of limitation does not result in the extension of the period of limitation for the proceedings under the Code. Further, the NCLT, Mumbai, following S. 34 of the Indian Evidence Act, 1872, held that in the absence of any supporting evidence, mere entries in the books of accounts of the petitioner will not be enough to prove debt due to the creditor.

In M/S Asset Reconstruction Company India Limited v. M/S Manoharamma Hotel Investments Pvt. Ltd., the NCLT, Chennai, following the decisions of the NCLAT, New Delhi in State Bank of India v. Athena Energy Ventures Private Limited and Edelweiss Asset Reconstruction Company Ltd. v. Sachet Infrastructure Ltd., held that the CIRP can be simultaneously initiated against two corporate guarantors or against the principal borrower and the corporate guarantor under the Code. Further, the NCLT, Chennai, citing the judgment of the Supreme Court in Laxmi Pat Surana v. Union Bank of India & Another, held that the limitation period for the right to initiate action against the guarantor will also get extended when the corporate debtor acknowledges its liability to pay the outstanding dues before the expiry of the period of limitation. However, in this case, due to the failure to mention the date of default and the absence of any averments by the financial creditor regarding the extension of the period of limitation, the NCLT, Chennai found the debt to be time barred.

In Mr. Srinivas Manthena and Anr. v. M/s Emaar Hills Township Pvt. Ltd., the NCLT, Hyderabad relied upon the judgment of the Supreme Court in Manish Kumar v. Union of India and Others, to hold that an application filed by a single allottee prior to the amendment of the third proviso to S. 7(1) of the Code shall continue to be maintainable even after the said amendment, and that allottees in the same project against the same corporate debtor could pursue their applications under the Code jointly.

In Jose Pradeep v. CA, Jasin Jose and Others., the NCLT, Kochi, while relying on the judgment of the Supreme Court in Rahul Jain v. Rave Scans Pvt. Ltd. and the NCLAT, New Delhi in QVC Exports Ltd. v. United Tradeco FZC, held that there can be no modification to the terms of a resolution plan that has been approved by the NCLT.

In Goodwood Products v. Kitply Industries Ltd., the NCLT, Guwahati followed the judgment of the Supreme Court in Committee of Creditors of Essar Steel India Ltd. v. Satish Kumar Gupta and Others and Ghanshyam Mishra and Sons Pvt. Ltd. through the Authorized Signatory v. Edelweiss Asset Reconstruction Company Ltd. through the Director and Others, to hold that once the resolution plan is approved by the NCLT in respect of the corporate debtor, it becomes binding on all stakeholders and that the claims not dealt with shall stand extinguished.

In Bharat Heavy Electricals Limited v. V. Mahesh, Liquidator, M/s. Nagarjuna Oil Corporation Limited, the NCLT, Chennai dismissed the application filed by an operational creditor against the decision of the liquidator of the corporate debtor rejecting the submission of the claim of the operational creditor in its entirety, on the grounds that the scheme in relation to the corporate debtor under S. 230 of the Companies Act, 2013 read with the attendant provisions of the Code had already been approved by the NCLT, Chennai. The NCLT, Chennai, while relying on the decision of the Supreme Court in Committee of Creditors of Essar Steel Limited v. Satish Kumar Gupta & Others, noted that the successful scheme proponent cannot be suddenly faced with an undecided claim.

In Andhra Pradesh State Financial Corporation v. S. Rajendran, Liquidator of M/s. Krishna Industrial Corporation Limited, the NCLT, Chennai held that given the NCLT is constituted by virtue of and in terms of the provisions of a statute and not under the Indian Constitution, the NCLT does not have the powers to strike down any provisions of the Code nor the rules and regulations framed thereunder. However, the NCLT, Chennai noted that the NCLT will not be detracted from going into the issue of any inconsistency prevalent between the Code and the rules and regulations framed thereunder for the limited purposes of its interpretation. In this context, the NCLT, Chennai, rejected the contention of the applicant here to strike down Regulation 21A of the IBBI (Liquidation Process) Regulations, 2016 (Liquidation Regulations), which, inter alia, requires a secured creditor, who has opted to realise the security interest on its own, to contribute to the liquidation costs. However, the NCLT, Chennai, while harmoniously construing Ss. 52 and 53 the Code with Regulation 21A of the Liquidation Regulations, held that a secured creditor opting to realise the security interest on its own, has to contribute to the liquidation costs in proportion to the debts owed to it, on the grounds that the secured creditor opting to realise the security interest on its own, is required to take the assistance of the liquidator in case of a surplus arising out of the appropriation in order to have the surplus included in the liquidation estate as well as in case of a deficit arising out of the appropriation in order to realise the balance amount from the liquidation estate in terms of Ss. 52 and 53 of the Code.

In M/s. Ostberg India Private Limited v. M/s. Udeshtech Equipments & Engineering Private Limited, the NCLT, Chennai held that the failure on the part of the corporate debtor in relation to non-adherence to the time schedule stipulated in the joint memorandum of compromise entered into between the parties, based on which the Adjudicating Authority was induced to dispose of the petition filed earlier, proved that the corporate debtor had committed default in the payment of the amount due to the operational creditor and as such the adjudicating authority was left with no option rather than to initiate the CIRP of the corporate debtor.

In M/s. State Bank of India v. Mr. Subrata M. Maity, the NCLT, Chennai held that there is no provision under the Code, which provides for any member of the CoC to vote in favour of a resolution plan "under protest". The NCLT, Chennai noted that there must be absolute clarity from the CoC members, whether to vote for or against the resolution plan, and there should never be any ambiguity regarding the viability of the resolution plan. If any CoC member has any doubts regarding the viability of the resolution plan, then the only option available is to vote against the resolution plan, as the CoC members are required to exercise their commercial wisdom with absolute clarity. Hence, the NCLT, Chennai rejected the stand of the CoC member that it had voted in favour of the resolution plan under protest and held that the CoC member having voted in favour of the resolution plan, is estopped from challenging the resolution plan.

In M/s. Sakthi Containers Private Limited v. M/s. Bnazrum Agro Exports Limited, the NCLT, Chennai rejected the contentions of the corporate debtor that:

(i) on the breach or violation of a settlement agreement, the applicant is required to file a fresh petition and cannot seek the restoration of the original petition; and

(ii) given that the default due to the non-payment of third instalment pursuant to the settlement agreement had arisen only on May 15, 2020 and the default amount in the instant case was below the increased threshold of INR One Crore for the purposes of initiating the CIRP which came into effect from March 24, 2020, the application of the operational creditor for the initiation of the CIRP was not maintainable.

The NCLT, Chennai held that if the corporate debtor fails to comply with the terms of the compromise and settlement, then the original insolvency application will be restored, and the Adjudicating Authority shall take the same up for adjudication. The NCLT, Chennai noted that if the insolvency application is not revived, then it will give further room to the corporate debtor to violate any settlement arrived before March 24, 2020.

In Assistant Commissioner of Customs v. Mr. Mathur Sabhapathy Viswanathan, IRP & Another, the NCLT, Chennai held that even though Regulation 12(2) of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, prescribing a timeline for the submission of claims, is directory in nature, the creditor is required to furnish the reasons for the delay in the submission of its claim. Here, the NCLT, Chennai refused to condone the delay of 217 days by the applicant in the submission of its claim on the grounds that the applicant had failed to reason out the delay in the submission of its claim and the quantified amount of the claim was under dispute.

In Glix Securities Private Limited v. R.D. Rubber Reclaim Limited & Another, the NCLT, Kolkata noted that there is no specific provision in the Code, which specifies the course of action to be followed in case where a successful resolution applicant applies to the Adjudicating Authority for the extension of the timeline of the resolution plan either on account of force majeure circumstances or otherwise. Further, once a resolution plan has been approved by the Adjudicating Authority, the CoC ceases to exist, and therefore, the Adjudicating Authority cannot direct the CoC to consider the request. The NCLT, Kolkata stated that it is up to the Adjudicating Authority to decide in such instances by invoking Rule 15 (power to extend time) of the National Company Law Tribunal Rules, 2016.

In M/s. Siemens Financial Services Pvt. Ltd. v. Vinod Sehwag (Personal Guarantor of Xalta Food & Beverages Pvt. Ltd.), the NCLT, New Delhi, while noting that there is no straight-jacket formula applicable to the principles of natural justice, held that there is no requirement of giving a notice to the personal guarantor against whom an application has been filed under S. 95 of the Code at the initial stage of the appointment of the resolution professional ("RP") under S. 97 of the Code. The personal guarantor is provided with an opportunity to be heard before the RP under Ss. 99(2) and 99(3) of the Code and before the adjudicating authority when the RP submits his recommendation for approval of the application under S. 99(1) of the Code.

In M/s. Essjay Ericsson Pvt. Ltd. v. M/s. Frontline (NCR) Business Solution Pvt. Ltd., the NCLT, New Delhi, following the decision of the NCLAT, New Delhi in Neeraj Jain v. Cloudwalker Streaming Technologies Pvt. Ltd., held that it is not in the discretion of the operational creditor to issue demand notice either in Form 3 or Form 4. According to Rule 5(1) of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016, if the claim of the operational creditor is based upon invoices, he is required to serve demand notice only in Form 4 and not in Form 3. Further, the NCLT, New Delhi, held that even when no reply is sent to the demand notice in terms of S. 8(2) of the Code, the corporate debtor can raise a dispute by filing a reply before the Adjudicating Authority.