Insolvency Law in Review – September 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 September 2021 have been summarized. However, this does not negate the possibility of some important decisions being missed on account of human error. Further, since the purpose of this endeavor is to keep practitioners abreast of relevant developments, the decisions are summarized and not comprehensively analyzed.

SUPREME COURT

In Rajendra Narottamdas Sheth & Another v. Chandra Prakash Jain & Another, the Supreme Court noted that a general authorisation given to an officer of the financial creditor by means of a power of attorney, would not disentitle such officer to act as the authorised representative of the financial creditor while filing an application under Section 7 of the Code, merely because the authorisation was granted through a power of attorney. The Supreme Court further reiterated that that non-furnishing of information by the financial creditor at the time of filing an application under Section 7 of the Code need not necessarily entail in the dismissal of the application, and an opportunity can be provided to the financial creditor to provide additional information required for the satisfaction of the adjudicating authority with respect to the occurrence of the default.

In National Spot Exchange Limited v. Mr. Anil Kohli, Resolution Professional for Dunar Foods Limited, the Supreme Court held that considering the specific statutory provision contained in Section 61(2) of the Code, which provides that delay beyond fifteen days in preferring the appeal is not condonable, the same delay cannot be condoned even in exercise of powers under Article 142 of the Constitution of India. The Supreme Court noted that what cannot be done directly under the statute as per the statutory provisions, cannot be permitted to be done indirectly, in exercise of powers under Article 142 of the Constitution of India.

In Anjali Rathi and Others v. Today Homes & Infrastructure Private Limited and Others, the Supreme Court held that the moratorium under Section 14 of the Code will not be applicable to the proceedings against the promoters of the corporate debtor. However, the Supreme Court noted that the court, at the present stage, could not pass any direction attaching the personal properties of the promoters of the corporate debtor as per the provisions of the resolution plan, as the resolution plan was yet to be approved by the adjudicating authority under the provisions of Section 31(1) of the Code.

In Ebix Singapore Private Limited v. Committee of Creditors of Educomp Solutions Limited & Another, the Supreme Court held that based on the plain terms of the Code, the adjudicating authority lacks the authority to allow the withdrawal or modification of the resolution plan by a successful resolution applicant or to give effect to any such clauses in the resolution plan. The Supreme Court further noted that enabling withdrawals or modifications of the resolution plan at the behest of the successful resolution applicant, once it has been submitted to the adjudicating authority after due compliance with the procedural requirements and timelines, would create another tier of negotiations, which will be wholly unregulated by the statute. The Supreme Court stated that the residual powers of the adjudicating authority under the Code cannot be exercised to create procedural remedies, which have substantive outcomes on the process of insolvency.

In K.N. Rajakumar v. V Nagarajan, the Supreme Court held that after the order to withdraw the corporate insolvency resolution process (CIRP), as contemplated under Section 12A of the Code, has been passed by the adjudicating authority, then the office of the resolution professional (RP) and the committee of creditors (CoC) in relation to the management of the corporate debt become functus officio.

HIGH COURTS

In Surendra B Jiwrajka and Others v. Omkara Assets Reconstruction Private Limited, the Bombay High Court held that the adjudicating authority, after receiving the report of the RP, cannot pass an order as contemplated under Section 100 of the Code, before hearing both parties. It was further held that the report to be prepared by the RP under Section 99 of the Code, needs to be completed within a definite timeline.

In M/s Nag India Pvt Limited & Others v. Mohammed Siraj, the Guwahati High Court followed the Supreme Court Judgment in P. Mohanraj and Others v. Shah Brothers Ispat Private Limited, to hold that the moratorium imposed under Section 14 of the Code is only applicable to the proceedings under Sections 138 and 141 of the Negotiable Instruments Act, 1881 to the extent of the proceedings initiated against the corporate debtor. It was clarified that the moratorium would not be applicable to the extent that such proceedings are initiated against the directors of the corporate debtor.

In Hindustan Unilever Limited v. S. Shanthi & Others, the Madras High Court, inter alia, observed that a suit for fraud or misstatement under Section 35 of the Companies Act, 2013 cannot be instituted or continued against a company undergoing the CIRP in view of the moratorium under Section 14 of the Code.

NATIONAL COMPANY LAW APPELLATE TRIBUNALS

In Dinesh Gupta v. Vikram Bajaj Liquidator M/s Best Foods Limited, the National Company Law Appellate Tribunal (NCLAT), New Delhi held that once any change or alteration has been undertaken with respect to an already submitted resolution plan, then the plan would again have to be examined and certified by the RP, before such resolution plan can be placed before the CoC for approval.

In Sai Peace and Prosperity Apartment Buyers Association v. ASK Investment Managers (P) Ltd. & Others, the NCLAT, New Delhi held that the exception for financial service providers carved out under the second proviso to section 21(2) of the Code from the bar laid down for 'related parties' of the corporate debtor becoming the CoC members of the corporate debtor, would not enure benefit to the financial service providers, which hold equity shares of the corporate debtor not solely on account of any conversion or substitution of debt into equity shares or instruments convertible into equity shares prior to the insolvency commencement date. The financial creditor/respondent in this case was a portfolio manager registered with the Securities and Exchange Board of India, representing several investors, which had jointly invested INR 50,00,00,000 (Indian Rupees Fifty Crores), by subscribing equity shares aggregating to 8% (eight percent) of the shareholding in the corporate debtor and the remaining amount in optionally convertible debentures. The NCLAT, New Delhi noted that the respondent had all the trappings of being a 'related party' of the corporate debtor on account of the various provisions of the equity investment agreement, which gave its nominee directors on the board of the corporate debtor a participatory role in the corporate debtor's policies. (The Supreme Court has issued notice in the civil appeal filed by the respondent against this judgment on October 04, 2021.)

​​In Jayesh N. Sanghrajka erstwhile R.P. of Ariisto Developers Pvt. Ltd. v. Monitoring Agency nominated by Committee of Creditors of Ariisto Developers Pvt. Ltd., the NCLAT, New Delhi upheld the decision of the adjudicating authority to set aside the 'success fee' of INR 3,00,00,000 (Indian Rupees Three Crores) charged by the RP that was approved by the CoC as a part of the resolution plan. The NCLAT, New Delhi held that the provisions of the Code, the Insolvency and Bankruptcy Board of India (IBBI) (Insolvency Professionals) Regulations, 2016 read with the Code of Conduct for Resolution Professionals indicate that the quantum of fees payable is justiciable before the adjudicating authority, if it is found to be unreasonable. The NCLAT, New Delhi also referred to the IBBI circular dated June 12, 2018, which had directed the RPs to charge a reasonable fee determined on an arms' length basis, in consonance with the requirements of integrity and independence. In light of this requirement, the NCLAT, New Delhi held that the 'success fee' charged by the RP, which was in the nature of a speculative payment and not chargeable under the provisions of the Code, would interfere with the independence of the RP.

In M/s Air Travel Enterprises Private Limited v. Union Bank of India & Ors., the NCLAT, New Delhi held that existence of a one-time settlement agreement (OTS Agreement) with a promise to pay as per an agreed schedule, after the corporate debtor had stopped servicing the term loan, would be construed as a jural relationship between the parties and an acknowledgment of debt under Section 18 of the Limitation Act, 1963. The NCLAT, Principal Bench examined OTS Agreement between the parties and other OTS Agreements between the corporate debtor and other banks to conclude that the corporate debtor had made several efforts to resolve its debt and must be provided further time of six (6) months to mitigate the adverse impact of COVID-19 on the travel dependent service sector. The NCLAT, New Delhi accordingly set aside the admission order.

In Telangana State Trade Promotion Corporation v. A.P. Gems & Jewellery Park Private Limited & Another, the NCLAT, Chennai held that the appellant/financial creditor was a 'related party' of the corporate debtor under sub-clauses (f) and (l) of Section 5(24) of the Code on the grounds that the nominee directors appointed by the appellant had a vital influence in regard to the working of the corporate debtor and the appellant had control in regard to the arrangement of the board of directors of the corporate debtor respectively. The NCLAT, Chennai noted that given the appellant was a 'related party', the view arrived at by the RP to include the appellant as member of the CoC, was unsustainable in law.

In Sree Bhadra Parks and Resorts Limited v. Sri Ramani Resorts and Hotels Private Limited, the NCLAT, Chennai held that the promise by the corporate debtor under a settlement agreement to repay the advance sum paid to it for a share purchase transaction along with interest, constitutes a 'financial debt' under the Code.

In Fipola Retail Limited v. M2N Interiors, the NCLAT Chennai, following the order of the NCLAT, New Delhi in Neeta Saha v. Ram Niwas Gupta, held that proprietorship firms are included within the definition of 'persons' under Section 3(23) of the Code, and that an application for the initiation of the CIRP by such firm was maintainable.

In M/s Ergomaxx (India) Private Limited v. The Registrar, National Company Law Tribunal, the NCLAT, Chennai held that an order passed by the National Company Law Tribunal (NCLT), which was not pronounced, would be nullity in the eye of law.

In M/s Dynamic Engineers Limited v. M/s Muhlenbau Equipments Private Limited, the NCLAT, Chennai held if the corporate debtor evades liability by not acknowledging the service of notice under Section 8 of the Code, and separately asks the operational creditor to withdraw its application and provide a credit note, then the adjudicating authority ought not to have directed the corporate debtor to settle the claim of the operational creditor within a period of three (3) months. The NCLAT, Chennai further held that where the debt and the default have been proved and the corporate debtor has failed to establish any pre-existing dispute, the adjudicating authority is obligated to admit the insolvency application under section 9 of the Code. The NCLAT, Chennai accordingly directed the adjudicating authority to admit application under section 9 of the Code.

NATIONAL COMPANY LAW TRIBUNALS

In State Bank of India v. Shreem Corporation Limited, the NCLT, Mumbai held that Section 5 of Limitation Act, 1963 – which grants extension of the prescribed period of limitation in any appeal or application, if the appellant or the applicant satisfies the court that he had sufficient cause for not preferring the appeal or making the application within such period – is applicable to an application under the Code. Here, the NCLT, Mumbai held that the applicant had demonstrated the following sufficient causes for the condonation of delay: (a) there was uncertainty in law with respect to the applicability of the Limitation Act, 1963 to the Code; (b) the applicant had not been negligent in the exercise of its rights for the recovery of the debt from the respondent, and there were no mala fides attributable to the applicant; and (c) the applicant being a public sector undertaking of the Government of India, represented the collective cause of the community.

In the matter of Wadhwa Buildcon LLP, the NCLT, Mumbai, while setting aside the decision of the RP to accept the claims of six landowners who provided the land for the real estate project of the corporate debtor, held that the landowners of a real estate project did not constitute 'financial creditors' under the Code even though the landowners were to be allotted one hundred and seventeen flats and twenty commercial shops in the project as a consideration for the developmental rights. The NCLT, Mumbai noted that the landowners did not fulfil the two prerequisites provided under Section 5(8)(f) of the Code, namely that: (i) the amount should be raised from an allottee; and (ii) it should be an 'allottee' under a 'real estate project', as defined under the Real Estate (Regulation and Development) Act, 2016 (RERA). The NCLT, Mumbai observed that under the development agreement between the corporate debtor and the landowners, no amount was raised by the corporate debtor and no amount was ever disbursed against the consideration of 'time value of money'. Further, the NCLT, Mumbai noted that as per the provisions of the RERA, the landowners are mandatorily classified as the 'promoters' and not as 'allottees' in a real estate project.

In President Engineering Works v. Kelvion India Private Limited, the NCLT, Mumbai held that the corporate debtor having used the material supplied by the operational creditor, cannot take the plea of inferior quality of the material and cannot claim the presence of a pre-existing dispute under Section 8 of the Code. The NCLT, Mumbai noted that the plea of a pre-existing dispute raised by the corporate debtor was not legally sustainable and was liable to be rejected, as it was only an afterthought.

In S. Lakshmanan v. Green Peace Construction Pvt Limited, the NCLT, Chennai considered whether the non-refunded booking amount for a flat, would amount to a 'financial debt' owed to a creditor, who had filed an application under Section 7 of the Code as an individual creditor and not as a homebuyer. The NCLT, Chennai examined the list of documents set out under Regulation 8 of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, which may be relied on to prove the existence of a financial debt, and held that it was incumbent on the applicant to furnish a financial contract as defined under Rule 1(d) of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules 2016 along with its application to demonstrate that the nature of transaction is a disbursal of a financial debt, including the quantum of the disbursed loan, the applicable interest as well as the tenure of such loan. The NCLT, Chennai in the absence of such documents, dismissed the application.

In Srishaila Constructions Private Limited v. M/s. Marg Limited, the NCLT, Chennai followed the decision of the Supreme Court in Babulal Vardharji Gurjar v. Veer Gurjar Aluminium Industries Pvt Limited & Another, to dismiss an application under section 9 of the Code as time barred, where the last payment with respect to underlying dues had been made on May 31, 2012. The NCLT, Chennai further held that a demand letter sent by the operational creditor to the corporate debtor without any seal or proof of service to the corporate debtor, cannot be relied on to establish acknowledgment of debt by the corporate debtor.

In M/s India Infoline Home Finance Limited v Sri Subha Lakshmi Infra Private Limited, NCLT, Chennai dismissed an application under section 7 of the Code, where the financial creditor had disbursed a housing loan to an individual with the corporate debtor as a co-borrower. The NCLT, Chennai observed that while a loan agreement had been executed between the corporate debtor and the financial creditor, the underlying mortgage deed was not in the name of the corporate debtor, and there was no document placed to demonstrate the disbursal of the loan to the corporate debtor or any executed deed of guarantee to establish that the corporate debtor had furnished a guarantee to secure such loan.

In Dhananjay Balwant Joshi v Alectrona Energy Pvt Limited, NCLT, Chennai held that the notification dated March 24, 2020 issued by the Central Government enhancing the minimum default amount from INR 1,00,000 (Indian Rupees One Lakh) to INR 1,00,00,000 (Indian Rupees One Crore) under the Code, would also bar cases where an insolvency application was filed and dismissed before the said notification, with the liberty to file a subsequent application under the Code. The NCLT, Chennai held that any liberty granted to an applicant is to be exercised in consonance with the procedure established, and hence, an application filed pursuant to the liberty granted by the adjudicating authority, cannot be in derogation of the law in force at the time, i.e. the notification dated March 24, 2020. The insolvency application filed under section 9 was accordingly dismissed.