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Insolvency Law In Review – April 2021

Insolvency Law In Review – April 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. 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 April 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.

I. Supreme Court

In Ghanashyam Mishra and Sons Private Limited v. Edelweiss Asset Reconstruction Company Limited, the Supreme Court held that an approved resolution plan binds all stakeholders, including the central/state governments and any other local authorities, and their claims, if not a part of the resolution plan, shall stand extinguished upon the National Company Law Tribunal's (NCLT) acceptance of the resolution plan. The Supreme Court also held that no proceedings shall lie in respect of such dues of the central/state governments and any local authorities for the period prior to the acceptance of the resolution plan. The Supreme Court further held that the amendment to S. 31 of the Code (whereby the resolution plan was made binding on central/state governments and any local authorities) by way of the Insolvency and Bankruptcy Code (Amendment) Act, 2019, is clarificatory and declaratory in nature, and shall operate retrospectively with effect from the inception of the Code.

In Sandeep Khaitan, Resolution Professional for National Plywood Industries Ltd. v. JSVM Plywood Industries Ltd. and Anr., the Supreme Court held that the exercise of the inherent jurisdiction of the High Courts under S. 482 of the Code of Criminal Procedure, 1973 (CrPC) cannot undermine statutory dictate, and that it is incumbent upon the High Courts to consider the provisions of Ss. 14 and 17 of the Code before passing any orders under S. 482 of the CrPC.

In Asset Reconstruction Company (India) Limited v. Bishal Jaiswal & Another, the Supreme Court held that balance sheet entries can constitute an acknowledgment of debt under S. 18 of the Limitation Act, 1963. The Supreme Court noted that it will depend on the facts of each case as to whether an entry made in a balance sheet qua any particular creditor is unequivocal or has been entered into with caveats, which then has to be examined on a case by case basis to establish whether an acknowledgement of liability has, in fact, been made, and thereby, extending limitation under S. 18 of the Limitation Act.

II. High Courts

In Ruchi Soya Industries Limited v. Union of India and Another, the Madras High Court, inter alia, held that though the definition of 'operational debt' in S. 5(21) of the Code is not intended to include 'crown debt' such as taxes and duties payable to the government, the High Court is bound by the interpretation placed in the decision of the Supreme Court in Ghanashym Mishra and Sons v. Edelweiss Asset Construction and in the light of the amendment to the Code by way of the Insolvency and Bankruptcy Code (Amendment) Act, 2019, which provide that once a resolution plan is approved by the Adjudicating Authority, all such claims/dues owed to the state/central government or any local authority including tax authorities, which are not part of the resolution plan shall stand extinguished. The High Court directed the petitioner to approach the relevant NCLT and obtain a clarification as to whether the crown debts like the differential customs duty payable to the respondent were treated as an operational debt by the resolution applicant.

III. National Company Law Appellate Tribunals

In Mazda Agencies (Partnership Firm) v. Hemant Plastics and Chemicals Ltd., the National Company Law Appellate Tribunal (NCLAT), New Delhi, held that the appellant, which had approached the civil court upon seeking permission from the Board for Industrial and Financial Reconstruction after the formulation of a rehabilitation scheme under the erstwhile Sick Industrial Companies (Special Provisions) Act, 1985 (SICA), could not aver a suspension of its right of remedy against the respondent in terms of S. 22(1) of the SICA. Consequently, the NCLAT, New Delhi held that the appellant could not claim exclusion of the time spent by it in the SICA proceedings while computing the limitation period. Thus, the NCLAT, New Delhi upheld the dismissal of the appellant's application under S. 9 of the Code by the NCLT, Ahmedabad.

In The Directorate of Enforcement v. Sh. Manoj Kumar Agarwal and Ors., the NCLAT, New Delhi held that the moratorium imposed under S. 14 of the Code also applies to proceedings for attachment of properties by the Adjudicating Authority under the Prevention of Money Laundering Act, 2002 (PMLA). The NCLAT, New Delhi, further held that, in view of S. 238 of the Code, the attachment of a corporate debtor's properties under the PMLA cannot have the effect of hindering the interim resolution professional (IRP)/resolution professional (RP)/liquidator from exercising their duties under the Code in a time-bound manner. The NCLAT, New Delhi, further held that there was no conflict between the PMLA and the Code, and that even properties attached under the former should be made available during proceedings under the latter till a resolution/sale or liquidation asset occurs in terms of S. 32A thereof.

In Ashish Mohan Gupta v. The Liquidator of M/s. Hind Motors India Ltd. (In Liquidation), the NCLAT, New Delhi held that S. 230 of the Companies Act, 2013 (power to compromise or make arrangements with creditors and members) does not apply in the case of a corporate debtor undergoing liquidation under the Code. The NCLAT, New Delhi also observed that, for a corporate debtor to seek the benefit of being a micro, small and medium enterprise, it is mandatory for it to possess a memorandum under the Micro, Small and Medium Enterprises Act, 2006 or to be classified to that effect by the central government.

In Tek Travels Private Limited v. Altius Travels Private Limited, the NCLAT, New Delhi held that authorisation to file a S. 9 application under the Code may be given even prior to the enactment of the Code. The NCLAT, New Delhi, while rejecting the contention that lack of authorization is a non-curable defect, held that it is mandatory under the Code to provide an opportunity to the applicant to rectify the defects in his application to the Adjudicatory Authority.

In Technology Development Board v. Anil Goel, the NCLAT, New Delhi held that the order of the NCLT, Ahmedabad holding that the inter-se priorities in terms of first and second charge holders amongst the secured creditors would remain valid and prevail in distribution of assets in liquidation, cannot be sustained. The NCLAT, New Delhi noted that a conjoint reading of Ss. 52 and 53 of the Code demonstrates that the legislature in its wisdom deemed it proper to provide an option to the secured creditor armed with a security interest to choose out of the two options, viz. either enforce the security interest against the asset out of liquidation estate which is the subject of the security interest, or relinquish the same and claim as a secured creditor in the manner set out under S. 53(1)(b)(ii) ranking equal to other secured creditors. The NCLAT, New Delhi noted that whether the secured creditor holds first charge or second charge is material only if the secured creditor elects to realise its security interest.

In Joseph Jayananda v. Navalmar (UK) Limited & Another, the NCLAT, New Delhi, while rejecting the corporate debtor's main contention that the amounts paid by the operational creditor and its financial statements do not match, held that it is not for the Adjudicating Authority to ascertain, investigate, or fix the exact amount of liability at the admission stage. The NCLAT, New Delhi noted that after the admission of the petition, it is the duty of the RP to collate the claims and ascertain the liability.

In Next Orbit Ventures Fund Limited v. Print House India Private Limited & Others, the NCLAT, New Delhi held that if the resolution plan contemplates a change in the nature of business to another line when the existing business is obsolete or non-viable, it cannot be construed that the resolution plan is not 'feasible or viable'. The NCLAT, New Delhi noted that Ss. 30(2) and 31 of the Code, and Regulations 37, 38 and 39 the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 do not prevent a resolution applicant from changing the present line of business to adding value or creating synergy to the existing assets and converting an obsolete line of business to a more 'viable and feasible' option.

In AKJ Fincap Limited v. Bank of India, the NCLAT, New Delhi, while setting aside the order of the NCLT, Guwahati, held that the Adjudicating Authority has the power to set aside an ex parte order provided that the respondent satisfies the Adjudicating Authority that the notice regarding the hearing was not duly served, or that he was prevented by any sufficient cause from appearing (when the petition or the application was called) for hearing in terms of Rule 49 of the National Company Law Tribunal Rules, 2016 (NCLT Rules).

In Mr. KN Rajakumar v. V. Nagarajan, the NCLAT, Chennai held that the RP has no adjudicating power under the Code to alter the committee of creditors (CoC) once it is formed. Here, the NCLAT, Chennai dismissed the appeal of the appellant, who had sought that the CoC should be reconstituted on the basis of the updated list of creditors and had challenged the order of the NCLT, Chennai on the grounds that the NCLT, Chennai had erred in directing the RP to convene a meeting of the originally constituted CoC without taking into account that some of the initial financial creditors were no longer the creditors of the corporate debtor.

In M/s Renganayaki Agencies v. Sreenivasa Rao Ravinuthala, Resolution Professional, the NCLAT, Chennai, while relying on the decision of the Supreme Court in Kalpraj Dharamshi & Another v. Kotak Investment Advisors Limited & Another, held that the Adjudicating Authority does not have the authority to invite fresh bids for the submission of the resolution plan once the resolution plan has been approved by the CoC. Here, the NCLAT, Chennai set aside the order of the NCLT, Hyderabad directing the CoC to invite fresh bids for the submission of the resolution plan from the two existing resolution applicants with a view to fetch a better resolution amount from the two resolution applicants.

In SMS Integrated Facility Services Private Limited v. Expat Educational Institute, the NCLAT, Chennai held that if the Adjudicating Authority is satisfied that notice of the application against the corporate debtor is sufficiently serviced, then it is duty-bound to record such absence and proceed to deal with the matter ex parte as per Rule 49 of the NCLT Rules, 2016. Proceeding with the matter ex parte in such a situation will not amount to a violation of the principles of natural justice. Further the NCLAT, Chennai also held that the consideration of whether the corporate debtor has complied with statutory requirements under the Companies Act, 2013 and the rules made thereunder are not to be taken into account by the Adjudicating Authority while deciding on the admissibility of an application made under the Code.

In Union of India v. Vijaykumar V. Iyer, the NCLAT, New Delhi, inter alia, held that the telecom licence and the right to use spectrum are the intangible assets of the licensee/corporate debtor and can be subject to insolvency/liquidation proceedings under the Code. The NCLAT, New Delhi further noted that the duties of the IRP to monitor and control the assets of the corporate debtor includes intangible assets such as the right to use spectrum. The NCLAT, New Delhi also held that while a licence can be transferred as an intangible asset of the licensee/corporate debtor in ordinary circumstances as per the Code, any trading that is subject to clearance of dues by the transferor/transferee cannot qualify for transfer under the Code in the instance of the transferor/transferee being in default. In this regard, the NCLAT, New Delhi noted that the dues payable in respect of the grant of license by the government would constitute operational debt under the Code. The NCLAT, New Delhi also held that the right to use spectrum cannot be utilised without payment of requisite dues, as the same cannot be wiped off by the trigger of the corporate insolvency resolution professional (CIRP) under the Code.

In New Okhla Industrial Development Authority v. Mr. Anand Sonbhadra (Resolution Professional), the NCLAT, New Delhi held that a lease of land, which does not transfer substantially all the risks and also rewards incidental to ownership of the asset, cannot be considered or treated as a financial lease under the Indian Accounting Standards and thus cannot be construed as a financial debt under S. 5(8)(d) of the Code. Here, the NCLAT, New Delhi held that the lease of land between the developing authority and the builders cannot be considered or treated as a financial lease, as the lease only transferred risks and liabilities to the lessee without transferring any rewards incidental to ownership.

In Mr Sunil Kewalramani v. Kestrel Import & Export Private Limited, the NCLAT, New Delhi set aside the observation of the NCLT, Mumbai, which stated that there was a collusion between the financial creditors and the corporate debtor, as the financial creditors held one-third of the shares of the corporate debtor and had effective control over the corporate debtor. Here, the NCLAT, New Delhi noted that there was nothing on record to show that the proceedings under S. 7 of the Code were initiated by the financial creditors for the purpose other than seeking a resolution, which is the sine qua non for initiation of proceedings under S. 65 of the Code (fraudulent or malicious initiation of proceedings) and that the appellants had filed an application for the initiation of the CIRP under S. 7 of the Code in their capacity as the financial creditors of the corporate debtor.

IV. National Company Law Tribunals

In TJSB Sahakari Bank Ltd. v. Mr. Kshitiz Gupta and Ors., the NCLT, Mumbai followed its judgement in State Bank of India and Anr. v. Videocon Industries Ltd. and Ors. and held that the factors to be considered before ordering a consolidation of CIRPs for group companies include: common control, common directors, common assets, common liabilities, interdependence, inter-lessening of finance, pooling of resources, coexistence of survival, intricate link of subsidies, intertwining of accounts, interloping of debts, singleness of economic of units, cross shareholding, interdependence due to intertwined consolidated accounts, and common pooling of resources, among others.

In Samata Nagari Sahkari Patsantha Maryadit, Kopargaon v. Yeshodeep Infrastructure Pvt. Ltd., the NCLT, Mumbai held that, in terms of S. 19 of the Limitation Act, 1963 (effect of payment on account of debt or of interest on legacy), the period of limitation applicable to petitions under the Code would be freshly calculated, if, within the prescribed period of limitation, a payment has been made towards clearing the debt, and such payment is accompanied by a written acknowledgement from the payer. The calculation of limitation would commence afresh from the date of such payment/acknowledgement.

In Edelweiss Assets Reconstruction Company Ltd. v. Nishiland Park Ltd., the NCLT, Mumbai held that, for S. 18 of the Limitation Act, 1963 (effect of acknowledgment in writing) to apply, it is a pre-requisite that the acknowledgment of liability is made before the expiry of the prescribed period of limitation for a suit/application. The NCLT, Mumbai further held that S. 25(3) of the Indian Contracts Act, 1872, would not be an exception to S. 18 of the Limitation Act, and that at any rate, such a contention could only be raised in recovery proceedings.

In Surendra Singh Hada & Ors. v. Arafat Petrochemicals, the NCLT Ahmedabad held that any scheme approved under the SICA is to be considered as an approved resolution plan under the Code following S. 252 and the Eighth Schedule of the Code. Therefore, any party, other than the corporate debtor, whose interests have been prejudiced due to the non-implementation of a scheme under the SICA should apply under S. 33(3) of the Code instead of making a fresh application under S. 7 or 9 of the Code.

In Tom K Thomas & Ors. v. Kerala Chambers of Commerce and Industry, the NCLT, Kochi, following a decision by the NCLAT, New Delhi in Mamatha v. AMB Infrabuild Pvt. Ltd. & Ors., held that in case of joint ventures in real estate projects, where the parties decide to work jointly and form an independent corporate entity for the development of the land and the allotment of the premises, an application under S. 7 will be maintainable against both the parties jointly and not separately against each party. In this case, the NCLT, Kochi, inter alia, held that since the application under S. 7 of the Code was made only against one of the parties to the joint venture by the allottees, it was not maintainable.

In Asset Reconstruction Company India Limited v. Venkatramanrao Nagarajan, the NCLT, Chennai held that once a secured creditor chooses to recover its money by standing outside the liquidation process following the process laid down in S. 52 of the Code, the liquidator is duty bound to hand over the physical possession of the property to such secured creditor. Further, such asset is only to be handed over in case where the secured creditor has the 'exclusive charge' or 'sole first charge' over such asset according to S. 52(1)(b) of the Code.

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