Insolvency Law In Review – September 2020

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

Supreme Court

In Sagufa Ahmed & Ors. v. Upper Plywood Products Pvt. Ltd & Ors, the Supreme Court held that the limitation period of 45 days prescribed under S.421(3) of the Companies Act, 2013, for appealing an order of the NCLT before the NCLAT, starts only from the date on which a copy of the order is made available to the aggrieved person.

In SREI Equipment Finance Limited v. Rajeev Anand & Ors , the Supreme Court held that an admission made in a counter affidavit of the Corporate Debtor, in a prior S.7 application, can be relied upon by the creditor in future S.7 applications for the purpose of establishing that a default has occurred. In this case, an application under S.7 was filed. The Corporate Debtor in its counter affidavit stated that instalment payments that were agreed upon had not yet matured. For this reason, S.7 application was withdrawn. However, the counter affidavit made an admission with respect to another loan that been taken by the corporate debtor from the financial creditor. Subsequently, the creditor filed another S.7 application, relying, inter alia, on the admission in the counter affidavit. The NCLT admitted the application. However, on appeal, the NCLAT set aside the order on the premise that a 'document' filed in the earlier petition that was dismissed as withdrawn could not have been relied upon by the adjudicating authority.

In Karad Urban Cooperative Bank Ltd v. Swwapnil Bhingardevay & Ors, the Supreme Court followed its prior decisions in Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta and K. Sashidhar vs. Indian Overseas Bank, to hold that where all the factors that need to be taken into account for determining whether or not the Corporate Debtors can be kept running as a going concern have been placed before the Committee of Creditors ('CoC'), and where the CoC approves the resolution plan, then the Adjudicating Authority cannot set aside such decision on the ground of 'viability' and 'feasibility'.

High Court

In Sandip Kumar Bajaj & Anr. v. State Bank of India, the Calcutta High Court ruled that the prohibition on institution or continuation of suits and other proceedings during the moratorium period under S. 14 (3) (b) of the Code would not extend to the surety of the corporate debtor.

In Sundaresh Bhatt v. Associate Commissioner of Income Tax & Anr, the tribunal held that S.238 read with S.14(1)(a) of the Code would override S.44 of the Gujarat Value Added Tax Act (GVAT Act), barring recovery of pre-CIRP tax dues during the resolution process. The NCLT allowed the application of the resolution professional of Sterling Biotech Ltd. seeking a refund of tax dues from the Assistant Commissioner of Income Tax, which had been deducted directly from the Corporate Debtor's bank account during the resolution process.

In Vachaspati and Ors. v. Insolvency and Bankruptcy Board of India and Ors, the Delhi High Court held that compliance with Regulation 7 of the IBBI (Grievance and Complaint Handling Procedures) Regulations, 2017 requires the Complainant to be informed as to whether IBBI has formed a prima facie opinion in favour of the complainant or against it. Mere communication to the Complainant that appropriate action is being initiated on the basis of the complaint does not satisfy the requirements of Regulation 7.

National Company Law Appellate Tribunal

In Phoenix ARC Private Limited Trustee FY 16 v. Kotak Mahindra Prime Limited & Anr, the NCLAT, in its majority opinion, held that a 'direction' by NCLT , to the resolution professional, to 'reconsider' the claim of the Applicant creditor did not constitute an 'order' and is therefore not appealable. Further, the NCLAT affirmed another direction of the NCLT, in which it held that the Applicant Bank is entitled to adjust the EMI dues against the corporate debtor's Electronic Clearing Service's account during the subsistence of the moratorium. It was further held, that if subsequently, it is realized that the Applicant has received 'preferential payments', then the resolution professional may file an application under S.43 of the Code, which concerns avoidance of preferential transactions. However, in the minority opinion, it was held that such an order permitting the applicant to adjust its claims against the corporate debtor's deposit would be in contravention of S.14 of the Code, which imposes a Moratorium on the transfer of the debtor's assets.

In Yogeshkumar Jashwantlal Thakkar v. Indian Overseas Bank and Another, the Appellant, a suspended Director of the Corporate Debtor, had assailed the NCLT Ahmedabad's order allowing the application filed by the Respondent 1 Bank u/s 7 of the Code for being beyond the limitation period. The NCLAT, while dismissing the appeal, noted that the limitation period stood renewed by numerous letters of revival and debit confirmation letters executed after the date of default by the Appellant/the guarantor. In support of this contention, S. 18 of the Limitation Act was relied on. S. 18 provides for the computation of a fresh period of limitation from the date of a signed acknowledgement of liability in respect of a property or right. The NCLAT noted that S. 18 employs the phrase "where, before the expiration of the prescribed period for a suit or application in respect of any property or right…". Thus, the NCLAT found that the ingredients of S. 18 were applicable for both a 'suit' and an 'application', and treated the debit confirmation letters as the Appellant's acknowledgement of his liability, consequently renewing the period of limitation with effect from the date of the last debit confirmation letter. In coming to this conclusion, the NCLAT also referred to S. 5 of the Limitation Act, which allows the extension of the limitation period upon showing sufficient cause.

In Deepakk Kumar v. M/s Phoenix ARC Pvt. Ltd. and Another, a review application assailed the NCLAT's order dated 05.03.2020 (impugned order). The NCLAT dismissed the review application, by holding that the power to 'review' was not an inherent power, and must be sourced to a law, either explicitly or by necessary implication. The NCLAT studied Rule 11 of the NCLAT Rules, 2016 (inherent power of the NCLAT to pass such orders as to meet ends of justice/prevent abuse of process), and S. 420(2) of the Companies Act, 2013 (NCLAT's power to rectify mistakes apparent from the record). It then came to the conclusion that the NCLAT Rules, 2016 do not contain an explicit provision for 'review', and that the power to review cannot be sourced to the NCLAT's inherent powers under Rule 11. Further, the NCLAT held that the Code does not contain any provision for 'review', and also that a provision similar to S. 420 of the Companies Act is absent in the Code. The NCLAT concluded its opinion by opining that it would be appropriate for the Review Applicant to approach the Supreme Court against the impugned order.

Naresh Kumar Sharma and Others v. Shekhar Resorts Ltd. and Another was an appeal against an order of the NCLT, Delhi that approved the Resolution Plan submitted by the 2^nd Respondent (M/s NCJ Infrastructure Pvt. Ltd.), which had been approved by the Committee of Creditors, with 100% of the Committee having voted in favour of the Plan. The Appellants assailed the NCLT's order primarily on the ground of valuation, viz. that the corporate debtor's assets, comprising of three properties, had a circle rate value of Rs. 410 crores, while the Resolution Plan made an approval for only Rs. 143 crores. It was contended that the fair value was Rs. 157 crores, while the liquidation value was assessed only at Rs. 125 crores. The NCLAT, while dismissing the appeal as not being maintainable, accepted the submission of the Respondents and held that the approval of the Resolution Plan by the Committee of Creditors was a business decision, on the basis of the commercial wisdom of its members, and is consequently not amenable to judicial review. In so holding, the NCLAT relied on K. Sashidhar v. Indian Overseas Bank and Others, wherein the Supreme Court had emphasised the need to defer to the commercial wisdom of the Committee in these matters. The NCLAT observed that the only grounds of challenge to a Resolution Plan are enumerated u/s 61(3) (i) to (v) of the Code, and that none of these grounds were made out in the present case so as to amount to any irregularity in the Resolution Plan.

Indian Overseas Bank v. Arvind Kumar was an appeal against an order of the NCLT, Chandigarh. The NCLAT, while partially allowing the appeal, set aside the NCLT's order directing the Appellant to release the margin money. In holding so, the NCLAT noted that the moratorium mandated by S. 14 of the Code, which covers, inter alia, actions to foreclose, recover or enforce any security interests, is inapplicable to the invocation of bank guarantees. In support of this, the NCLAT relied on its judgment in Company Appeal (AT) (Insolvency) No. 319 of 2018, wherein it was observed that, according to the proviso to S. 3(31) of the Code, a 'security interest' does not include a performance guarantee. Further, the NCLAT, in the present case, observed that 'margin money' is not a security, and any charge on it does not need to be registered u/s 77 of the Companies Act. In concluding, the NCLAT noted that once the bank guarantee had been invoked by the beneficiary in the present case, the margin money couldn't have been demanded by the Respondent (Resolution Professional), since the same had been used to honour the bank guarantee; consequently, the Respondent was not entitled to the margin money, since even the Corporate Debtor would not have been entitled to claim it, had the moratorium period not been in effect.

It may be noted that the NCLAT had held in February 2020 that the appropriation of margin money by a bank after the initiation of the CIRP was impermissible u/s 14 of the Code.

In E.C John v. Jitendra Kumar Jain & Ors, the NCLAT held that that even if S.33(5) of the Code bars the institution of suits against the corporate debtor, once a liquidation order has been passed; the adjudicating authority does not have the power to quash the civil proceedings. In addition, the Tribunal clarified that the liquidator would need to move to the concerned civil court and seek quashing of proceedings by quoting the relevant provisions of the Code.

In Rita Kapur v. Invest Care Real Estate LLP & Ors the NCLAT held that once debt is converted into capital, it cannot be termed as 'Financial Debt' and an equity holder cannot be termed as a 'Financial Creditor'. On this basis the application filed under S.7 was rejected. However, it was also held that the an application could not be rejected for the mere fact that it was filed by the advocate as the holder of the power of attorney.

In Makalu Trading Ltd v. Rajiv Chakraborty RP Uttam Value Steel Ltd & Anr, the NCLAT held that the mere fact that approval of the Competition Commission of India ('CCI'), as prescribed under the proviso to S.31(4) of the Code, was not taken at the time of the approval of the resolution plan, would not result in the resolution plan being set aside, if CCI's approval is taken subsequently. The Tribunal followed its prior decision in Arcelor Mittal India Pvt. Ltd. v. Abjijit Guhathakurta, 2019 SCC Online NCLAT 92, in which it had held that the approval under proviso to S.31(4) is 'directory' and not 'mandatory'.

In Prakash Kalash v. Apeejay Surrendra Park Hotels, the NCLAT held that proceeding ex parte against the corporate debtor based on substituted service through newspaper is permissible only when it is shown that the corporate debtor is purposefully avoiding service. In this case, the court notice was not served on account of incorrect address, after which the NCLT ordered publication of notice in the newspaper and proceeded ex parte against the corporate debtor based on the notice in the newspaper. The NCLAT observed that since the notice had been returned due to insufficient address and there was no service attempted via email or any other means, the substituted service could not be said to be proper.

In Bishal Jaiswal v. Asset Reconstruction Company & ors., the NCLAT referred the five (5) judge bench decision of the NCLAT in V. Padamakumar Vs. Stressed Assets Stabilization Fund (SASF) & Anr. to another five-judge bench for review. In Padamakumar, the NCLAT held that an entry in the balance sheet of the Corporate Debtor cannot be treated as an acknowledgement of debt for the purpose of allowing a fresh period of limitation under S.18 of the Limitation Act, 1963. A three-judge bench of the NCLAT in Bishal Jaiswal held that the majority view in Padamakumar is against settled Supreme Court and High Court Judgements and thus requires reconsideration.

National Company Law Tribunals

In Novex Communications Private Limited v. Four Pillars Event Management Services Private Limited, NCLT Mumbai held that dues payable in lieu of licensing of non-exclusive public performance rights did not constitute 'operational debt'. Here, the Petitioner was the assignee of copyrights over certain songs. The Petitioner, in turn, licensed the non-exclusive public performance rights to the corporate debtor for a single event. It was alleged that the corporate debtor failed to pay dues under the agreement. Accordingly, the petitioner filed an application, in the capacity of an operational creditor under S.9. The petition was rejected by the NCLT, Mumbai on the ground that the claim under the agreement did not constitute 'operational debt' as defined under S.5(12) of the Code. It was held that amount payable with respect to licensing of public performance rights did not constitute a "claim with respect to provision of goods and services" and therefore did not constitute 'operational debt'.

In Hiten Mukundbhai Parikh RP for Tiger v. COC of Tiger Surgical Disposable Pvt Ltd, NCLT Ahmedabad, held that the approval of a resolution plan under S.30 does not result in the automatic waiver or dismissal of legal proceedings that are pending by or against the corporate debtor, and that they are to be decided by the concerned Court.

In State Bank of India v. CLS Industries, NCLT Ahmedabad admitted an application for initiation of resolution process after the Debt Recovery Tribunal ('DRT') had quashed SARFAESI proceedings, on the ground that the date of classification of Corporate Debtor's loan as a non-performing asset (NPA) on 28 June 2017 was wrong. The NCLT admitted the S.7 Application notwithstanding the fact that the date of default mentioned in the application was the same as the date of classification of corporate debtor's loan as an NPA. While caveating that it was not expressing any contrary opinion to the DRT order, the NCLT held that proceedings under the Code were not for loan recovery, and the only relevant factor for admitting the application was whether the corporate debtor had committed a default on its loan payment before 24 March 2020. The NCLT relied on the default established by the Information Utilities default record of the corporate debtor, to hold the application was maintainable.

Ex-Excel Glasses Association v. Ravindra Chaturvedi was an application filed u/s 33 r/w S. 53 of the Code, r/w Rules 11 and 32 of the National Company Law Tribunal Rules, 2016. The NCLT, Kochi, while dismissing the present application, noted that, according to Regulation19(4) of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016, it is open to the Liquidator to admit the claims of employees on the basis of the corporate debtor's books of account, even if such employees/workmen did not make claims. Consequently, the NCLT noted that the Applicant could approach the NCLT by way of an appeal, since a decision taken by the Liquidator by way of an order u/s 40(2) of the Code is appealable u/s 42. In support of this, the NCLT relied on the decision of the High Court of Kerala in OP (C) 484 of 2020. 

Shri Babu Phutane Sakamani and Others v. Bhagyalakshmi Homes LLP was an application u/s 7 of the Code, r/w Rule 4 of the I & B (Application to Adjudicating Authority) Rules, 2016, seeking, inter alia, the initiation of the CIRP qua the Respondent. The NCLT, Bengaluru dismissed the application, observing that the Applicants had failed to make out a prima facie case for the initiation of the CIRP. The Tribunal noted that there were irregularities in the execution of the agreements as well as the subsequent letters of cancellation, casting doubts over their legal validity and enforceability. It was noted that, even otherwise, the Applicants had failed to take recourse according to the dispute resolution clause in the agreements to sale, and had directly approached the NCLT, without succeeding in even prima facie proving that the Respondent was insolvent. Thus, the application was not maintainable u/s 7 of the Code, as ifailed to show that the applicant was a financial creditor, and that the Respondent had committed a default giving rise to an unpaid, legally payable, debt. Finally, the NCLT observed that the procedure under the Code is summary in nature, and that the NCLT was not permitted to make roving enquiries in disputed questions of fact.

In M/S Jai Balaji Industries v. Orissa Minerals Development Company Ltd., NCLT Kolkata adjudicated the question whether S.9 proceedings under the Code could be initiated if no challenge under Ss.34 and 37 of the Arbitration and Conciliation Act 1996 (A&C Act) is pending as on the date the amount became due and payable. The facts involved an application under S.9 of the Code based on an arbitral award issued against the corporate debtor. Challenge to the award under S.34 of the A&C Act was dismissed, and appeal under S.37 of the A&C Act was dismissed in default by the High Court. The applicant filed S.9 three months after the dismissal of the S.37 appeal which was disputed by the corporate debtor. Thereafter, the High Court restored the S.37 appeal. NCLT admitted the S.9 application while ruling that no 'dispute' was pending by way of arbitral proceedings or otherwise on the date of default or on the date of filing the S.9 application. Since the application for restoration of the S.37 appeal was pressed by the corporate debtor after the operational creditor had initiated proceedings under the Code, NCLT observed that this indicated abuse of legal process to evade liability. The Supreme Court in K. Kishan v. Vijay Nirman Company Private Limited had held that proceedings under S.9 of the Code cannot be initiated if proceedings under Ss.34 or 37 of the A&C Act are pending. In this regard, the NCLT distinguished the case at hand as no proceedings were pending under Ss.34 & 37 on the date of filing, hence remedy under S.9 of the Code was available.

In M/s. SC Jain Construction Pvt. Ltd. v. Vandana Garg, the NCLT held that a creditor could claim interest on the operational debt amount from the corporate debtor, even in the absence of a separate clause in the agreement authorizing the same.

In Bank of India v. V. Mahesh & Ors., the NCLT Chennai held that the liquidator does not need to afford a personal hearing to each and every creditor of the corporate debtor before admitting or rejecting their claims under S.40 of the Code, and as long as the liquidator records his reasons in writing for such admission or rejection, the principles of natural justice will be satisfied.

In National Polyplast Pvt. Ltd. v. M/s. Manpasand Beverages Ltd., the NCLT Ahmedabad held that a demand notice issued by a lawyer on behalf of the Creditor without a letter of authority or a board resolution is void, and a Petition under S.9 based on such a demand notice is not maintainable.

In Edelweiss Asset Reconstruction Co. Ltd. v. M/S K.K. Kadri Paper Mills Pvt. Ltd. , the NCLT Ahmedabad held that even though the CoC is empowered under S.33 of the Code to authorize liquidation of the corporate debtor, they need to show relevant material to throw light on the need for liquidation, and in the absence of such supporting material the CoC's decision for liquidation cannot be accepted by the NCLT.