Insolvency Law In Review – January 2021

These case summaries are not an exhaustive review of the cases under the Code; only significant rulings on the Code in the month of January 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.

Supreme Court

In Manish Kumar v. Union of India, the Supreme Court affirmed the validity of the amendments to Ss. 7, 11 and 32A of the Code vide the Insolvency and Bankruptcy Code (Amendment) Act, 2020 by, inter alia, holding the following:

(i) In respect of the first and second provisos inserted by way of amendments to S. 7 of the Code – which provide that an application for initiating the corporate insolvency resolution process (CIRP) in case of (a) financial creditors falling within clauses (a) and (b) of S. 21(6A); and (b) financial creditors who are allottees under a real estate project, shall be supported by at least one hundred (100) of such creditors/allottees or ten percent (10%) of the total number of such creditors/allottees, whichever is less – the Supreme Court noted that the underlying legislative policy of the amendment reflects an attempt to shield the Corporate Debtor from frivolous or avoidable applications by ensuring that the filing of the application is preceded by a consensus at least by a minuscule percentage of similarly placed creditors. The Supreme Court stated that the legislative understanding underscores the need to treat creditors differently, bearing the hallmark of large numbers, in order to avoid indiscriminate litigation and uncontrollable docket explosion. The Supreme Court further noted that the conceptions of transferred malice and estoppel cannot be extended to the legislature.

(ii) In respect of the Explanation II to S. 11 of the Code – which states that a Corporate Debtor is not prevented from initiating the CIRP against another Corporate Debtor under S.11 – the Supreme Court observed that by enacting S.11 the legislature did not intend to create an obstacle in the path of the Corporate Debtor, in any of the circumstances contained in S. 11, from maximizing its assets by trying to recover the liabilities due to it.

(iii) In respect of challenge to S. 32A in the Code – which provides that in case of change in management or control of the Corporate Debtor post approval of a resolution plan, the Corporate Debtor and the assets of the Corporate Debtor covered under a resolution plan would not be liable for an offence committed before initiation of CIRP – the challenge against the provision was on the ground that it would jeopardize the interests of the creditors. Rejecting such challenge, the Supreme Court noted that the imperative need to attract resolution applicants offering fair value would warrant extinguishment of criminal liability to enable the new management to have a fresh start.

In Rajkumar Brothers and Production Pvt. Ltd. v. Harish Amilineni, the Supreme Court observed that the Corporate Debtor was not liable to pay the costs of the Interim Resolution Professional (IRP) and the CIRP, after the National Company Law Appellate Tribunal (NCLAT), New Delhi, had set aside the order of the National Company Law Tribunal (NCLT), Hyderabad admitting the application under S. 9 of the Code. The Supreme Court further observed that the Corporate Debtor could not be expected to be saddled with the said costs after succeeding in its appeal against the order of the NCLT, Hyderabad, for proceedings that were initiated at the behest of the operational creditor.

High Courts

In Skillstech Services Private Limited v. Registrar, National Company Law Tribunal, New Delhi and Anr., the Delhi High Court held that the determination of whether the NCLT has the jurisdiction to entertain a particular case cannot be made by the Registrar, in an administrative capacity, and that it is the duty of the Registrar to place the matter before the appropriate bench of the NCLT, for a judicial determination of the said question. The Delhi High Court further observed that even a determination of the applicability of the notification dated 24.03.2020, which amended the pecuniary threshold of the NCLT from Rs. 1 lakh to Rs. 1 crore, to any petition filed prior to the said notification, can only be made by the appropriate bench of the NCLT, and not by the Registrar.

In Kolkata Municipal Corporation & Another v. Union of India & Others, the Calcutta High Court held that the property seized by Kolkata Municipal Corporation can be the subject-matter of the corporation insolvency resolution process under the Code – as the seized property was not sub judice before a court or authority for the purpose of 'determination of ownership' as contemplated under S. 18(f)(vi) of the Code, and the claim of Kolkata Municipal Corporation, which had attained finality and fastened a liability upon the Corporate Debtor, constituted an 'operational debt' under S. 5(21) of the Code. The High Court observed that the parameters of powers of the NCLT, as an Adjudicating Authority under S. 60 of the Code (Adjudicating Authority), are defined and circumscribed by the scope of S. 18(f)(vi) of the Code.

In Deepak Cables (India) Limited v. Hubli Electricity Supply Company & Ors, the Karnataka High Court (Dharwad Bench), held that a Liquidator is empowered under S. 35(k) of the Code to institute proceedings on behalf of the Corporate Debtor. For this reason, the High Court concluded that the petition filed by the Liquidator on behalf of the Corporate Debtor under S. 11 of the Arbitration and Conciliation Act, 1996 for appointment of an arbitrator was maintainable.

In Rajpur Hydro Power Private Limited and another v. M/s Gangdari Hydro Power Private Ltd, the High Court of Himachal Pradesh held that the mere fact that a resolution plan has already been implemented with respect to the Corporate Debtor, would not bar a party against which the Corporate Debtor has filed a suit of specific performance, from raising a counter claim of non-payment of sums. Here, the Corporate Debtor which had successfully undergone a resolution plan, filed a suit for specific performance under an agreement. The defendant contended that the issue of non-payment of dues would have to be adjudicated by the relevant fora under the Electricity Act, 2003. The plaintiff/Corporate Debtor argued that, after the resolution plan had been approved, such claims that were not mentioned in the resolution plan would not survive, and therefore, the Defendant could not raise such a plea. The High Court rejected the plaintiff/Corporate Debtor's argument.

In Sumitra Devi Shah and Ors v. Tata Steel BSL Ltd. the High Court of Calcutta held that where the plaintiff-creditor sues the Corporate Debtor for unpaid dues, the Corporate Debtor would be said to have a substantial defence, if the plaintiff's claim does not find mention in the resolution plan approved during the CIRP of the Corporate Debtor. Here, the plaintiff argued that he was not aware of the insolvency proceedings, in view of the death of the original plaintiff, and therefore, his claim should be considered. The court, while rejecting the contention and relying on the decision of Committee of Creditors of Essar Steel India Ltd. v. Satish Gupta & Ors., held that since the plaintiff's claim does not find mention in the resolution plan, the Corporate Debtor's contention would constitute a substantial defence, and a leave to defend would have to be granted.

National Company Law Appellate Tribunals

In Ranjeet Kumar Verma (Erstwhile IRP) v. Committee of Creditors of Straight Edge Contract Pvt. Ltd. (Through Resolution Professional), the NCLAT, New Delhi held that an IRP has no vested legal interest or right to continue after the Committee of Creditors (CoC) had decided, with the requisite majority, to replace him. The NCLAT, New Delhi further observed that the IRP is not a stakeholder under the Code. The NCLAT, New Delhi finally observed that, since the CoC was constituted by the IRP himself, he would not be permitted to argue that its constitution was bad.

In Silvassa Cement Products Pvt Ltd v. Noor India Buildcon Pvt Ltd, the NCLAT, New Delhi held that if the operational creditor's application under S. 9 of the Code is incomplete or suffers from defects, then the Adjudicating Authority cannot outrightly dismiss the application without giving the creditor an opportunity to remove the defects, as per the proviso to S. 5(5) of the Code.

In MCC Concrete v. Northway Spaces Ltd, the NCLAT, New Delhi held that the mentioning of debt in the ledger statement constituted an acknowledgment, and therefore limitation would run from the date of such acknowledgement.

In Naresh Sevantilal Shah v. Malharshanti Enterprises, the NCLAT, New Delhi held that for the purpose of determining whether a pre-existing dispute contemplated under Ss. 8 and 9 of the Code exists, only the disputes raised prior to the issuance of the first demand notice, and not the second demand notice are relevant.

In Pratap Technocrats (P) Ltd. and Ors. v. Monitoring Committee of Reliance Infratel Limited and Anr., the NCLAT, New Delhi relied upon the Supreme Court's rulings in Swiss Ribbons Private Limited v. Union of India and Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta and Ors. to hold that operational creditors are not entitled to claim equitable treatment with financial creditors, since operational creditors are a separate class, and are entitled to a minimum payment being not less than the liquidation value, while no such stipulation applies to financial creditors. Consequently, while noting that even otherwise, the resolution plan had allocated a greater percentage out of the upfront payment amount to the Appellants-operational creditors than to the financial creditors in the present case. The NCLAT dismissed the appeal against the order approving the resolution plan.

In Sri D. Srinivasa Rao v. Vaishnovi Infratech Limited, the NCLAT, New Delhi held that a delivery of notice by an operational creditor would be deemed to be a valid delivery of notice under S. 8(1) of the Code in case of refusal on the part of the Corporate Debtor to acknowledge the notice. The NCLAT further noted that if the notice had been returned unserved on account of the addressee being not available on the given address or the venue of the addressee being non-existent or the delivery of notice being frustrated because of some reason other than that attributed to the Corporate Debtor, then it would constitute a case of non-issuance/non-delivery of mandatory statutory notice under S. 8(1) of the Code.

In Mohit Minerals Limited v. Nidhi Impotrade Private Limited, the NCLAT, New Delhi set aside the order of the NCLT, Ahmedabad which had held that the delivery of notice by the advocate of the operational creditor was not valid, as there was no due authorization backed by the board resolution of the operational creditor. The NCLAT noted that in the event of a demand notice being issued by an advocate duly instructed by his client, the requirement of the authority being backed by a board resolution would not be applicable. However, a board resolution would be required in case of a person other than an advocate delivering a demand notice under S. 8(1) of the Code.

In Kalinga Allied Industries India Private Limited v. Hindustan Coils Limited & Others, the NCLAT, New Delhi held that it is impermissible for the Adjudicating Authority during the pendency of an application for the approval of the resolution plan, to entertain an application of a person who has not participated in the CIRP, even if such person is willing to pay a higher amount in comparison to the successful resolution applicant. The NCLAT noted that the scope of judicial scrutiny by the Adjudicating Authority under S. 31 of the Code is limited and the statutory provision does not permit the Adjudicating Authority to interfere with the commercial wisdom of the CoC.

In Shailendra Sharma v. Ercon Composites & Others, the NCLAT, New Delhi held that a failure to serve a demand notice u/s 8 of the Code is not a curable defect, as a demand notice sets in motion the entire process leading to insolvency, and it is to be rigidly and narrowly construed. In the present case, the operational creditor had delivered a demand notice to the Corporate Debtor at its registered address but the same got returned as unserved on account of a change in the registered address of the Corporate Debtor. The NCLAT noted that a change in the address of the registered office of the Corporate Debtor cannot be a ruse for the failure of the concerned party to send/issue a demand notice u/s 8 of the Code, as the service of a demand notice to the Corporate Debtor u/s 8 of the Code is a mandatory requirement.

In Pondicherry Extraction Industries Private Limited v. Bank of Baroda, the NCLAT, New Delhi held that Rule 7 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016, which provides that a corporate applicant may file an application for the initiation of the CIRP under S. 10 of the Code accompanied with the specified documents and records, does not empower the Adjudicating Authority to examine the documents annexed to the application. The NCLAT stated that the Adjudicating Authority exceeded its jurisdiction by analysing the financial statements of the corporate applicant annexed to the application and holding that there are discrepancies in the financial statements. The NCLAT further reiterated that any action taken by the financial creditor under the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 against the Corporate Debtor or a pending suit or appeal against the Corporate Debtor under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 cannot be a ground to reject an application under S. 10 of the Code.

In Ravindra Chaturvedi (Liquidator of Excel Glasses Ltd) v Kopran Ltd, the NCLAT, Chennai expunged the observations against the Liquidator in an order dismissing a miscellaneous application passed by the NCLT, Chennai. The NCLAT observed that the observations of the Adjudicating Authority with respect to collusion between Liquidator and the Respondent, i.e. Kopran Limited were unwarranted, and would have serious consequences on the conduct of the liquidation proceedings as well as the reputation of the Liquidator. The NCLAT, Chennai held that deviation from procedure, i.e. the fact the Liquidator failed to implead the workmen on whose behest the application was filed, would not warrant an inference of collusion between the Liquidator and the respondent to defeat legitimate dues of the workmen.

In Shubham Jain v Gagan Ferrotech & Anr., the NCLAT, New Delhi followed its earlier decision in K.B. Polychem v Kaygee Shoetech Private Limited, to hold that service of demand notice to a director of the Corporate Debtor will be deemed delivery u/s 8 of the Code. The NCLAT cited its power to regulate procedure in accordance with principles of natural justice u/s 424 of the Companies Act, 2013 (Companies Act) while noting that the service to the registered address of the Corporate Debtor was returned with remarks 'unclaimed' and 'addressee moved'. The NCLAT held that in view of S.2(59) of the Companies Act, which includes a director within the definition of an 'officer', and S.20 of the Companies Act, which recognizes service of a document to a company or its officer, the service of notice on the director is good service.

In Satish Chand Gupta v Servel India Private Limited, the NCLAT, New Delhi held that a shareholder from whom the Corporate Debtor had accepted money against payment of interest, would fall within the purview of 'Financial Creditor' under the Code. The impugned order had dismissed the application under S. 7 of the Code on the grounds that such an amount was a 'deposit' under the Companies Act and not a financial debt under the Code, and as a result, the Applicant would have to proceed for refund of such deposit under Chapter V of the Companies Act read with the Company (Acceptance of Deposits) Rules, 2014. The NCLAT remanded the matter to the NCLT with a direction to admit the application under S.7 of the Code.

National Company Law Tribunals

In IFCI Ltd. v. Anil Mega Food Park Pvt. Ltd., the NCLT, Ahmedabad observed that a CIRP can simultaneously be instituted against both the Corporate Debtor(s) and the guarantor(s). In holding so, the NCLT, Ahmedabad followed the Supreme Court's judgment in State Bank of India v. V.Ramakrishnan and Ors. Consequently, the NCLT, Ahmedabad allowed the financial creditor's application under S. 7 of the Code.

In Veena Dilip Sharma, Prop. of VVM Chemical Company v. MAPS Enzymes Ltd., the NCLT, Ahmedabad held that in a commercial legislation such as the Code, technical defects ought not to be accorded too much importance. The NCLT, Ahmedabad, also held that it is a settled position that applications filed on behalf of sole proprietorships under the Code are maintainable.

In Parthiv Parikh, RP for M.V. Omni Projects (India) Ltd. v. Mathuraprasad C Pandey and Ors., the NCLT, Ahmedabad, while approving the resolution plan qua the Corporate Debtor, a micro, small and medium enterprise (MSME), noted that the rigours of. Ss. 29A(c) and 29A(h) of the Code are not applicable to MSMEs, in light of S. 240A of the Code. The NCLT, Ahmedabad also noted that the object of the Code clearly recognizes resolution as the rule, and liquidation as the exception, and followed the ruling of the Supreme Court in K. Sasidhar v. Indian Overseas Bank and Ors., wherein it was also held that NCLTs do not have the jurisdiction to analyze or evaluate the commercial decisions of the CoC.

In M/s Sri Ramani Resorts and Hotels Pvt Ltd v. M/s Sree Bhadra Parks and Resorts Limited, the NCLT, Kochi, while allowing an application for the revival/restoration of an application under S. 7 of Code, which had been disposed of consequent to a settlement arrived at between the parties; held that the Corporate Debtor is duty-bound to honour the terms of the settlement agreement, and cannot be permitted to raise allegations on the maintainability of the disposed of S. 7 application, after having defaulted on their obligations under the settlement agreement.

In M/s Propyl Packaging Ltd. v. Mr. George Varkey, Resolution Professional of Propyl Packaging Ltd., the NCLT, Kochi, upon a reading of Regulation 24 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, and S. 24 of the Code; held that no purpose shall be served by permitting the Corporate Debtor's Advocate/Chartered Accountant/Company Secretary to attend meetings of the CoC. The NCLT, Kochi further held that the admission of any such mentioned persons shall be subject to the discretion of the Resolution Professional (RP), and that the RP is prohibited from disclosing any information/documents pertaining to the CIRP to any third parties, including Advocates/Chartered Accountants/Company Secretaries.

In an application filed by the Liquidator in SREI Equipment Finance Ltd. v. M/s Viswa Infrastructures and Services Pvt. Ltd., the NCLT, Hyderabad, while following the law laid down by the NCLAT, New Delhi in Binani Industries Ltd. v. Bank of Baroda and Anr., observed that the object of the Code is resolution, not liquidation, and that, under S. 60(5)(c) of the Code, NCLTs can grant appropriate reliefs to realize this object, even during the process of liquidation. Consequently, the NCLT, Hyderabad permitted the liquidator to sell the Corporate Debtor as a going concern, in order to maximize the value of its assets.

In Ingersoll Rand Climate Solutions Pvt. Ltd. v. Prajay Engineers Syndicate Ltd., the NCLT, Hyderabad held that the mere existence of a signed Purchase Order, without any other acknowledgements/confirmations from the Corporate Debtor, of services rendered to it and consequent payments due, would not be adequate to establish the existence of an operational debt, falling foul of the requirements stipulated by the Supreme Court in Mobilox Innovations Pvt. Ltd. v Kirusa Software (P) Ltd. The NCLT, Hyderabad, further, relied on the judgement of the NCLAT, New Delhi in Palogix Infrastructure Pvt. Ltd. v. ICICI Bank Ltd., to hold that a Power of Attorney holder was incompetent to institute any applications on behalf of the financial creditor/operational creditor/corporate applicant, in the absence of a specific authorization in favour of the person seeking to file such applications.

In David John Jebarsingh & Selvi Rebecca Victoria v. Buoyant Technology Constellations Private Limited, the NCLT, Bangalore stated that the Adjudicating Authority cannot be used as a recovery forum by the Applicants, when the orders of a Real Estate Regulatory Authority or any other forum have not been complied with. The NLCT, Bangalore noted that the fact that other courses of action may be cumbersome cannot be a ground for taking recourse to the Code.

In Oriental Bank of Commerce & Another v. Prakash Asphaltings & Toll Highways (India) Limited, the NCLT, Indore held that a sponsorship support agreement, which provides for indemnification of any shortfall in the total outstanding liability, constitutes a 'Financial Debt' under S. 5(8)(i) of the Code. The NCLT, Indore further noted that the liability of the indemnifier commences only when the indemnified has actually suffered losses and not on the mere possibility of loss occurring. The NCLT, Indore also observed that the liability of the indemnifier matures or can be invoked only when the principal borrower or its guarantors, whose liability is co-extensive with that of the principal borrower, fail to repay the loan.