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...
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 November 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 Kaledonia Jute and Fibres Pvt. Ltd. v. Axis Nirman and Industries Ltd, it was held that any creditor of a company can seek the transfer of winding up proceedings pending before a High Court to a National Company Law Tribunal (NCLT) u/s 434 of the Companies Act, 2013. The court came to this conclusion after observing that the words 'party or parties' in the fifth proviso to sub-clause (c) of S. 434(1) of the Companies Act, 2013 would take within its ambit any creditor of the company in liquidation. The court further held that the transferability of winding up proceedings, other than those covered by the fourth proviso to sub-clause (c) of S. 434(1) of the Companies Act, 2013 would depend on the stage at which they are pending before the High Court and would need to be seen as per the Companies (Transfer of Pending Proceedings) Rules, 2016.
High Courts
In State Bank of India v. Kiran Gupta, the Delhi High Court held that the proceedings under the Code against the principal debtor cannot be considered to be a bar to institution or continuation of proceedings against the guarantor under the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (SARFAESI), as the liability of a guarantor is co-extensive with that of the principal debtor and not in the alternative. The court further noted that neither S. 14 nor S. 31 of the Code place any fetters on the banks/financial institutions for the initiation and continuation of the proceedings against the guarantor for recovering their dues.
In M/s Venus Recruiters Pvt. Ltd v. Union of India, the Delhi High Court held that an application filed u/s 43 of the Code for avoidance of preferential transaction would not survive beyond the conclusion of the resolution process, and that the NCLT would have no jurisdiction to hear the same. In coming to its conclusion, the court referred to the scheme of the Code and also looked at the purpose behind avoidance applications. Relying on S. 43 and S. 44 of the Code, the Court held that an avoidance application is meant to benefit the creditors of the Corporate Debtor, and the property recovered through orders passed u/s 44 of the Code is to form a part of the final resolution plan approved by the Committee of Creditors (CoC). The court also referred to the strict timelines prescribed under the Insolvency and Bankruptcy Board of India (IBBI) (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 to hold that the assessment by the Resolution Professional (RP) of objectionable transactions including preferential transactions cannot be an unending process, and he needs to form an opinion by the 75th day of the corporate insolvency resolution process (CIRP), and thereafter he needs to make a determination of the transaction by the 115th day of the CIRP before making an application to the NCLT u/s 44 by the 135th day of the CIRP. The court also held that an RP cannot continue filing applications beyond the conclusion of the CIRP, and once a resolution plan has been approved by the NCLT u/s 31 of the Code, the role of a RP comes to an end.
In CA V. Venkata Sivakumar v. Insolvency and Bankruptcy Board of India, the Madras High Court upheld the constitutional validity of Regulation 7A of the IBBI (Insolvency Professionals) Regulations, 2016 r/w Bye-Law 12A of IBBI (Model Bye Laws and Governing Board of Insolvency Professional Agencies) Regulations 2016, which require Insolvency Professionals to acquire an authorization for assignment from the concerned Agency in order to act as RP under the Code. In this case, the court held that IBBI had the power to frame the regulations u/s 196, 207, 208 and 240 of the Code and that it had not exercised this power arbitrarily. The court noted that making two authorities for regulating a professional will not by itself be unconstitutional. Furthermore, the Regulations did not treat any Insolvency Professionals or Agency unequally so as to violate Article 14 of the Indian Constitution. With respect to the seven-day time limit for filing an appeal against the decision of the Agency refusing an authorization for assignment under the Regulations, the court held that the same was not unconstitutional, however, the court stated that the same may be revisited by the IBBI through an amendment either providing for a larger time limit or by conferring power to condone delay for sufficient cause.
National Company Law Appellate Tribunal
In A. Balakrishnan v. Kotak Mahindra Bank Limited and Anr, the National Company Law Appellate Tribunal (NCLAT) reiterated the position of law laid down by it in Digamber Bhondwe v. JM Financial Asset Reconstruction, viz. that the date of default for the purpose of calculating the limitation period for an application u/s 7 of the Code is the date of declaration of non-performing asset (NPA), and not the date on which a recovery certificate is issued. The NCLAT also observed that the Adjudicating Authority was under an obligation u/s 3 of the Limitation Act, 1963, to suo motu consider whether an application u/s 7 of the Code was within limitation, by determining whether the debt said to be in default was within limitation.
In Ratna Singh and Anr. v. M/s Theme Export Pvt. Limited and Anr., the NCLAT held that an appeal against an order of liquidation can only be preferred on the grounds of material irregularity or fraud committed with regard to the order of liquidation, as laid down u/s 61 of the Code. The NCLAT further observed that there are further provisions in Part II, Chapter III of the Code (Ss. 43 to 51) to examine any wrongdoing during the liquidation process. Finally, the NCLAT observed the Code cannot be used for initiating proceedings to prevent oppression and mismanagement.
In Hindustan Oil Exploration Company v. Erstwhile Committee of Creditors JEKPL Pvt. Ltd., the NCLAT held that the Appellant, an unsuccessful Resolution Applicant, had no locus to challenge the implementation of the resolution plan that had been approved by the Adjudicating Authority. The NCLAT observed that the implementation of the resolution plan cannot be assailed on the grounds that the CoC had permitted the successful Resolution Applicant to alter certain terms of the approved resolution plan, to facilitate its implementation. The NCLAT finally observed that, in light of the COVID-19 pandemic and the consequent economic slowdown, requisite changes to the agreed terms of and extension of time to implement the resolution plan would be acceptable.
In UCO Bank v. G. Ramachandran, the NCLAT held that, once the CIRP had been initiated and the moratorium u/s 14 of the Code was in effect, it is not open to anyone to appropriate any money deposited by the Corporate Debtor towards their own dues. Consequently, the NCLAT upheld the order of the NCLT, Chennai, whereby the Appellant Bank had been directed to restore the credit amount to the Corporate Debtor's bank account, which amount the Appellant Bank had adjusted against the Corporate Debtor's fixed deposits, after the commencement of the CIRP. The NCLAT also observed that the Appellant Bank's lack of knowledge of the initiation of the CIRP would not be relevant.
In the matter of Hemant Sharma, Resolution Professional of Global Softech Ltd., the NCLAT allowed the application of the RP to exclude the lockdown restriction period from March 25, 2020 till September 15, 2020 while computing the period of 180 days for the purposes of the CIRP so as to make the resolution process meaningful and result oriented. The NCLAT noted that lockdown restrictions specific to the areas, where the registered office and corporate office of the Corporate Debtor are situated, continued up to September 15, 2020. Further, the NCLAT clarified that the extended period of 90 days beyond 180 days shall commence only after the prescribed period of 180 days after exclusion of the aforesaid period is over.
In IIFCL Mutual Fund v. Committee of Creditors of GVR Infra, the NCLAT disallowed the objection raised by the Appellant, a Financial Creditor, pertaining to the inclusion of uninvoked bank guarantees in admitted claims and allocation of INR 135 Crores with respect to uninvoked bank guarantees in favour of only four secured creditors on the grounds that the Appellant's approval of the resolution plan as an assenting Financial Creditor would estop it from questioning the same resolution plan. The NCLAT observed that in regard to the distribution mechanism pertaining to setting aside an amount of INR 135 Crores for uninvoked bank guarantees as a contingency fund, the commercial wisdom of the CoC would be binding on all constituents of CoC including the Appellant.
In Naveen Kumar Jain v. Committee of Creditors of K.D.K Enterprises Pvt. Ltd., the NCLAT held that the commercial wisdom of the CoC, which covers matters including the replacement of the RP, does not fall within the limited scope of judicial review and is not justiciable. The NCLAT further noted that the fee fixed for the Interim Resolution Professional (IRP) under Regulation 33(3) of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 cannot be interfered with, as the commercial wisdom of the CoC is beyond the pale of challenge.
In Stressed Assets Stabilization Fund v. Royal Brushes Pvt. Ltd., the NCLAT reiterated that the limitation period computed in terms of Article 137 of the Limitation Act, 1963 would commence from the date of default and in the event of an account being declared a NPA, the date of default would be the date when the account was declared as a NPA. The NCLAT noted that the subsequent restructuring of debt vide the negotiated settlement, which was admittedly aborted and failed, would not give a fresh cause of action to the Appellant.
In Sanjeev Kumar v. Aithent Technologies Private Limited, the NCLAT by a majority judgment held that the NCLT, Kolkata had rightly admitted the application filed u/s 9 of the Code by the lessor, as even though the dues arising from the lease of immovable property would not be classified as 'operational debt' under the Code, the dues arising from services pertaining to electricity, diesel, sewer and water provided by the lessor would be classified as 'operational debt' under the Code. The minority judgment observed that the application submitted by the Operational Creditor evinced that the petition was filed for the realisation of only the outstanding lease rent, and it did not contain any mention of outstanding dues on account of diesel, electricity and water charges. The minority judgment further noted that the petition filed u/s 9 of the Code for the realisation of the outstanding dues on account of lease rent was not maintainable on account of the existence of a prior dispute, and the question of whether lease rent falls under the category of 'operational debt' would lose its significance when the alleged lease rent itself was disputed—as the undisputed claim is the sine qua non for initiating the CIRP u/s 9 of the Code.
In Amit Katyal v. Meera Ahuja & Others, the NCLAT, inter alia, held that no penalty can be saddled either u/s 65(1) or u/s 65(2) of the Code without recording an opinion that a prima facie case is established to suggest that a person fraudulently or with malicious intent, for the purpose other than the resolution of insolvency or liquidation, or with an intent to defraud any person, has filed the application. The NCLAT noted that an application satisfying the requirements of S. 7 or S. 9 of the Code cannot be dismissed arbitrarily under the guise of S. 65 of the Code, i.e., that the application is filed for the recovery of debt and not for the resolution of insolvency—as penal action under S. 65 can be taken only when the provision of the Code has been invoked fraudulently, with malicious intent.
In State Bank of India v. Athena Energy Ventures Pvt. Ltd., the NCLAT held that simultaneous initiation of CIRP against a principal borrower and its corporate guarantor is permissible under the Code. In coming to its conclusion, the NCLAT raised doubts on the correctness of its earlier decision in Vishnu Kumar Agarwal v. Piramal Enterprise Ltd., in which it had held that simultaneous proceedings would not be permissible. The NCLAT referred to S. 60(2) and S. 60(3) of the Code to come to its conclusion. The NCLAT also relied on the Insolvency Law Committee's report of February, 2020, which has recommended that the initiation of the CIRP against the principal borrower and the corporate guarantor at the same time should be maintainable.
In Promila Taneja v. Surendri Design Pvt. Ltd., the NCLAT held that a landlord of an immovable property could not claim as an Operational Creditor under the Code, and that the default on payment of rent on immovable property would not qualify as 'operational debt' under the Code. In coming to its conclusion, the NCLAT noticed that there were two conflicting judgements of the NCLAT on this point, and it held that the view taken in Mr. M Ravindranath Reddy v. Mr. G. Kishan was the correct law, and it disagreed with the view taken in the case of Anup Sushil Dubey v. National Agricultural Cooperative Marketing Federation of India Limited. The NCLAT stated that the bench in the Anup Sushil Dubey case had misread portions of the Supreme Court's judgement in Mobilox Innovations Pvt. Ltd v. Kirusa Software Pvt. Ltd. in coming to its conclusion.
In State Bank of India v. Krishidhan Seeds Pvt. Ltd., the NCLAT held that there could not be two defaults in respect of the same debt, one for the purpose of claim filed before the Debts Recovery Tribunal and the other for the purpose of the Code based on a settlement proposal of the Corporate Debtor. In this case the date of default was June 10, 2014, on account of which, the Financial Creditor had filed a claim before the DRT in 2015 and before the NCLT in 2018. Thereafter, the Corporate Debtor had proposed a one time settlement offer on November 6, 2015, based on which it was argued that the Corporate Debtor had acknowledged its liability, thus, extending the limitation period for filing an application under the Code. The NCLAT rejected this argument and held that the Financial Creditor's application was time barred as the date of default could not be extended on account of the acknowledgement made in the settlement proposal.
In Pegasus Asset Reconstruction Private Limited v. Yashomati Hospitals Private Limited, the NCLAT held that S. 3 of the Limitation Act, 1963, which imposes a duty on the Adjudicating Authority to examine suo moto whether the application is within limitation, should be read with S. 7(5) of the Code, which provides that the Adjudicating Authority shall, before rejecting the application, give a notice to the Applicant to rectify the defect in his application. Thus, the NCLAT stated that on a combined reading of S. 3 of the Limitation Act and S. 7(5) of the Code, if the Adjudicating Authority is of the opinion that the application does not adequately demonstrate the existence of the debt and whether the application is within the prescribed period of limitation, then the Adjudicating Authority would be required to call upon the Applicant to rectify the defect.
In Amrit Kumar Agrawal v. Tempo Appliances Private Limited, the NCLAT held that an obligation to pay under a settlement agreement entered into between the guarantor of the principal borrower and the creditor pursuant to the failure of the principal borrower to discharge his outstanding liabilities, would not constitute a 'financial debt' within the purview of S. 5(8) of the Code—as there is no disbursement against the consideration for the time value of money. The NCLAT reiterated that corporate insolvency resolution proceedings stand at a different footing and cannot tantamount to recovery proceedings.
In Anuj Khanna v. Wishwa Naveen Traders, the NCLAT reiterated that the Adjudicating Authority cannot be a substitute for the recovery forum and observed that the disputed questions of law and facts in the present case as to whether the Corporate Debtor paid the dues to the Operational Creditor, or whether the cheques returned dishonoured were issued by the Corporate Debtor as a security, or whether any instructions were given to the Corporate Debtor to make payments to the personal accounts of the employees of the Operational Creditor, should be decided by an appropriate forum and do not come within the purview of the Adjudicating Authority under the Code.
In Facor Alloys Limited v. Bhuvan Madan, the NCLAT held that an approved resolution plan can deal with the related party claim and extinguish the same, which shall ensure that the successful Resolution Applicant can take over the Corporate Debtor on a clean slate. Here, the Appellants, who belong to the erstwhile promoter group of the Corporate Debtor, challenged the resolution plan on the grounds that the resolution plan dealt with the shareholding of the Appellants in the subsidiary company of the Corporate Debtor. The NCLAT, while noting that the Appellants' objection regarding the inclusion of the subsidiary company of the Corporate Debtor in the resolution plan is not sustainable, stated that the related parties are being kept out to ensure continuity of operation of the Corporate Debtor and the subsidiary company.
In Narinder Bhushan Aggarwal v. M/s. Little Bee International Private Limited, the NCLAT held that the remuneration of the Liquidator falls within the realm of the CoC in terms of Regulation 39D of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016. The NCLAT noted that it is immaterial which provision of the Code squarely governs the passage of the order of liquidation for the purposes of the determination of the remuneration of the Liquidator.
In Shri Vijay Kumar Singh v Shri Anil Kumar & Ors. the NCLAT held that at the time of passing the liquidation order, the NCLT has the discretion to replace the RP as the Liquidator under S. 34(4), and should consider an application of the CoC to appoint a new Liquidator while taking such decision. In this case, the CoC had filed an application under S. 60(5) for replacement of the RP/Liquidator, while relying on observations of the CoC members in a joint lenders' meeting. The NCLAT allowed such application holding that the RP/Liquidator acted in trust of the CoC members and observations of the CoC in a joint lenders' meeting expressing dissatisfaction toward the manner of conducting the CIRP should have been considered as relevant under S. 27 of the Code before passing the liquidation order.
National Company Law Tribunals
In Girija Sugars and Agro Private Limited v. Pankaj Sham Joshi and Anr., the NCLT, Mumbai observed that the adherence to the specific timeline for resolution is essential to bring about the successful resolution of a Corporate Debtor under the Code. Consequently, the NCLT, Mumbai dismissed the application filed by the prospective Resolution Applicant, which had belatedly filed its Expression of Interest (EOI) after the extended deadline, and had sought a direction to enable its EOI to be considered by the RP. The NCLT, Mumbai also observed that a mere reference to the COVID-19 pandemic would not be adequate to explain the delay in submitting the EOI since it was not shown how the COVID-19 pandemic had affected the Applicant's ability to submit the EOI on time.
In Mr. Nandkishor Vishnupant Deshpande v. Director of Revenue Intelligence and Anr., the NCLT, Mumbai held that the claim to the Corporate Debtor's money by the Directorate of Revenue Intelligence (DRI) would be an 'operational debt', and being government dues, it would not take precedence over the dues of secured Financial Creditors. The NCLT, Mumbai further held that the DRI's order of attachment against the margin money deposited by the Corporate Debtor in a government notified agency would be stayed upon commencement of the CIRP, by virtue of s. 14 of the Code. Finally, the NCLT, Mumbai held that a strict reading of Ss. 238 and 248 of the Code had an overriding effect on S. 142A of the Customs Act, 1962, and as such, directed the vacation the DRI's order of attachment against the Corporate Debtor's margin money deposited with an agency nominated by the Director General of Foreign Trade, Government of India.
In Meghalaya Forest Products v. Stressed Assets Stabilization Fund (SASF) and Anr., the NCLT, Guwahati held that the character of debts cannot be changed from operational debts to financial debts by mere book entries, which were made after the initiation of the CIRP. The NCLT, Guwahati, thus, refused the present application which sought to change the Applicant's classification from an Operational Creditor to a Financial Creditor. In so refusing, the NCLT, Guwahati noted that the concerned debts arose out of the supply of goods, which were operational debts, and that a letter sent by the Applicant to the Corporate Debtor after the initiation of the CIRP, seeking to portray the said debt as a loan debt without any basis, will not be a ground to change its status to that of a Financial Creditor.
In Autonix Lighting Industries Private Limited v. Moser Baer Electronics Limited, the NCLT, New Delhi held that any shortfall in the gratuity dues and in deposits of the provident fund with the Employees' Provident Fund Organisation (EPFO) of the ex-employees of the Corporate Debtor has to be made by the RP. The NCLT, New Delhi, while relying on the decision in Alchemist Asset Reconstruction Co. Ltd. v. Moser Baer India Limited, noted that the provident fund dues, pension funds dues and gratuity fund dues would not be treated as a part of the liquidation estate and would not, therefore, be recovered u/s 53 of the Code, which provides for the waterfall mechanism. The NCLT, New Delhi allowed the application of the authorised representative of the ex-employees of the Corporate Debtor and directed the RP to release the dues including gratuity dues of the ex-employees and deposit the provident fund with the EPFO.
In Bank of Baroda v. Baghauli Sugar & Distillery Limited, the NCLT, Allahabad, allowed the application of the Corporate Debtor filed through its suspended director to liquidate all dues and settle the matter with the creditors by filing a fresh one-time settlement proposal before the RP so that it may be placed before the CoC. The NCLT, Allahabad noted that the objective of the Code, which is to find an appropriate solution for stressed assets and save the Corporate Debtor from corporate death, would be achieved if the Applicant settles and liquidates the outstanding dues of the Corporate Debtor.
In Bhavarlal M Jain v Metal Link Alloys Limited & Ors., the NCLT, Ahmedabad held that the moratorium under S. 14 of the Code ends on the commencement of the liquidation. The case involved an application for stay on an order for recovery of goods and service tax (GST) dues. The proceedings for GST dues had commenced before the initiation of the CIRP, and continued during the CIRP. However, the NCLT rejected the stay application on the grounds that both assessment and recovery orders were passed after the NCLT had passed a liquidation order and legal proceedings were permissible during the liquidation process under S. 33(5) of the Code.
In alignment with the NCLAT's judgment In re Sudip Bhattacharya, Resolution Professional of Reliance Naval and Engineering Ltd last month, the NCLT, Ahmedabad excluded the period of lockdown from the period of resolution process for various companies, including for Vicor Stainless Steel Limited, and UIC Corporation.
The NCLT, Ahmedabad, in its order In re Kiran Shah RP for KSL Industries Limited, applied the Supreme Court judgment in CoC of Essar Steel India Limited v Satish Kumar Gupta, to extend the period of resolution process beyond 330 days. The NCLT had appointed a RP to overcome a stalemate within the CoC. This order was challenged by the IRP, where the NCLAT issued an order to maintain status quo. Pursuant to the status quo order, the CoC members did not attend CoC meetings until the NCLAT issued a clarificatory order that the status quo pertained to continuation of the appointed RP and did not have any bearing on the CIRP. In Essar Steel, the Supreme Court had held that the CIRP could be extended beyond 330 days, in exceptional cases, where the delay could largely be attributed to the time taken by legal proceedings before the NCLT or the NCLAT. Owing to obstruction of the CIRP during the period between issuance of the status quo order and clarificatory order, and the period that elapsed due to stalemate within the CoC, the NCLT ruled that the case, at hand, fell within the exception carved out under the Essar Steel judgment and warranted the exclusion of 233 days from the CIRP, in addition to the exclusion of the lockdown period and a lapse of 330 days.
In Adroit Structural Engineers (P) Ltd. v Vee Rubber India (P) Ltd, the NCLT, Ahmedabad admitted an application under S. 9 of the Code for the pending GST dues pursuant to the new GST regime implemented in 2017. The dues were pending under two work orders placed by the Corporate Debtor in 2016, before the new GST regime was implemented on July 1, 2017. Despite communication of the change in applicable tax regime, the Corporate Debtor had continued paying dues under the work order at the agreed rate of 6% instead of 9% state goods and service tax (SGST) and 9% central goods and service tax (CGST) post commencement of the new GST regime. In 2019, the Applicant had raised a demand notice for INR 1.47 Crore, which included the GST receivables of INR 1 Crore. Rejecting the Corporate Debtor's contention for liquidated damages owing to delay in completion of work as an afterthought, the NCLT highlighted the following provisions of the work order: (i) both parties had agreed that a change in tax structure would be considered at the stage of actuals; and (ii) a specific covenant that the Applicant would responsible for statutory compliance including VAT, cess, service tax etc. In view of these provisions, the NCLT held that the Corporate Debtor was bound to pay the difference of the GST.
The NCLT, Ahmedabad, in Sanguine Management Services (P) Limited v Cengres Tiles Limited, rejected an application under S. 7 of the Code on the grounds that the amount that the Applicant had transferred to Corporate Debtor's account was not backed by sufficient documentary evidence to establish it as a 'financial debt' under the Code. The underlying debt pertained to an arrangement between the parties pursuant to which the Applicant had advanced INR 1 Crore on the condition that a repayment of the amount along with 7% interest would be made on demand. The repayment demand of the Applicant was met by five cheques totalling to INR 1.20 Crore, which were dishonoured. The Applicant supplemented its claim with a cheque return memo, copy of the bank statement and a letter of confirmation signed on behalf of the respondent. The NCLT, Ahmedabad found that there was nothing on record, such as a request letter, contract, or record of default with the information utility to show that the money advanced by the Applicant was a debt that was repayable on a fixed date and had time value of money.
In Manpower Group Services India (P) Ltd v Euphoria Technologies (P) Ltd., the NCLT, Ahmedabad held that the signatory to a demand notice under S. 8 of the Code should have an authority letter or board resolution to initiate action under the Code. The NCLT, Ahmedabad rejected the application under S. 9 of the Code, as bad in the eyes of law, on the grounds that the demand notice issued by the Applicant was signed by an unauthorised person. While the signatory to the demand notice was a director of the Applicant Company, the NCLT, Ahmedabad rejected the application on the grounds that the authority letter/ board resolution empowering the director to initiate action under the Code was passed subsequent to the issuance of the demand notice.
In Rare Asset Reconstruction v Jyoti Limited, the NCLT, Ahmedabad rejected an application for intervention by an asset reconstruction company that had acquired the loan asset of one of the Applicants under S. 7 of the Code. The application under S.7 of the Code had been jointly filed by two members of a consortium, one of whom had assigned its entire debt to an asset reconstruction company. The intervention application was accompanied with a prayer to stay the proceedings, as the Intervening Applicant was in talks with the remaining lenders of the consortium to acquire 100% financial debt of the Corporate Debtor. However, the NCLT rejected the intervention application and admitted the application. The basis of rejection was that the Intervening Applicant had not acquired the entire debt of the Corporate Debtor and so long as the debt and the default existed towards a Financial Creditor, recourse to CIRP under S. 7 of the Code was available.
In M/s. Sundaram BNP Paribas Home Finance Limited v. M/s. MPL 2 Wheelers Pvt. Ltd., the NCLT, Chennai, relying on the NCLAT's judgements in Rakesh Kumar Gupta v. Mahesh Bansal and in Harkirat S. Bedi v. Oriental Bank of Commerce, held that the pendency of actions under the SARFAESI Act by the Financial Creditor would not be a bar for filling an application u/s 7 of the Code due to S. 238 of the Code. The NCLT, relying on the Supreme Court's judgement in Innoventive Industries v. ICICI Bank and Mobilox Innovations Pvt. Ltd v. Kirusa Software Pvt. Ltd., further held that in relation to a S. 7 application, where the NCLT finds a 'financial debt' and its default in excess of Rs. 1,00,000/-, then it is bound to admit the application and to trigger the CIRP, and any defence of set off or counterclaim put forth by the Corporate Debtor cannot be entertained. In this case, the 'financial debt' was a house loan taken by the Corporate Debtor, who argued that the Financial Creditor had sent a demand notice under the SARFAESI in this regard and had also taken over the secure assets of the Corporate Debtor in furtherance of the same.
(Siddharth and Akshata are advocates based out of Delhi, and Pranav and Karan are advocates based out of Mumbai. The present compilation represents the exclusive work of the authors in their personal capacities, and is not linked to any of the institutions/firms that they may be associated with)