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Insolvency Law in Review – July 2021

Insolvency Law in Review – July 2021
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A round-up of significant rulings on the Insolvency and Bankruptcy Code, 2016 in the month of July.

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 the 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 July 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 endeavour is to keep practitioners abreast of relevant developments, the decisions are summarized and not comprehensively analyzed.

I. SUPREME COURT

In M/s Orator Marketing Private Limited v. M/s. Samtex Desinz Private Limited, the Supreme Court held that the definition of 'financial debt' in Section 5(8) of the Code does not expressly exclude an interest-free loan. The Supreme Court noted that the National Company Law Tribunal (NCLT), New Delhi and the National Company Law Appellate Tribunal (NCLAT), New Delhi overlooked the words 'if any' in the definition of 'financial debt', which reads as "a debt along with interest if any which is disbursed against the consideration of the time value of money and includes money borrowed against the payment of interest." The Supreme Court further stated that the term 'financial debt' has to be construed to include interest-free loans advanced to finance the business operations of a corporate body, and if there is no interest payable on the loan, then only the outstanding principal would qualify as a financial debt.

In Franklin Templeton Trustee Services Private Limited and Anr. v. Amruta Garg and Ors., the Supreme Court refused to entertain the arguments of the unitholders, who wanted to be treated as financial creditors under Regulation 41(2)(b) of the Security and Exchange Board of India (Mutual Funds) Regulations, 1996. The unitholders of the wound-up mutual fund schemes had argued that following the judgement in Pioneer Urban Land and Infrastructure Limited v. Union of India, homebuyers are treated as financial creditors under the Code, and hence, the principle of parri passu should be made applicable in their case. Differentiating between homebuyers under the Code and unitholders of mutual funds, the Supreme Court held that unlike unitholders, homebuyers do not partake in the risks in gains or losses, and hence, are not entitled to the benefits of profits or losses suffered. Pertinent to mention that under Regulation 41(2)(b) unitholders receive payments only after the liabilities due and payable to the creditors under the scheme have been met.

II. HIGH COURTS

In Rohit Nath @ Rohit Rabindra Nath v. KEB Hana Bank Ltd., the Madras High Court held that the adjudicating authority for a personal guarantor under the Code, would be the Debt Recovery Tribunals set up under the Recovery of Debts and Bankruptcy Act, 1993 except in the cases where such personal guarantor is covered by Section 60 of Part II of the Code. Under Section 60 of the Code, the adjudicating authority in the case of a personal guarantor will be the NCLT established under Section 408 of the Companies Act, 2013, where the corporate insolvency resolution process (CIRP) pertaining to the principal debtor has been filed or commenced. Further, the Madras High Court held that by virtue of the overriding operation of the Code under Section 238 and the notification of the provisions relating to insolvency resolution of personal guarantors under the Code, even though Section 243 of the Code, repealing the provisions of the Presidency Towns Insolvency Act, 1909 and the Provincial Insolvency Act, 1920, has not been notified, insolvency proceedings against guarantors to corporate debtors may not be carried out under these acts.

In Ideal Surgicals v. National Company Law Tribunal & Ors., the Kerala High Court held that a writ petition under Section 226 of the Constitution of India against an order of the NCLT is not maintainable. The Kerala High Court came to this conclusion based on the decisions of the Supreme Court in Innoventive Industries Ltd v. ICICI Bank and Swiss Ribbons Pvt.Ltd and another v. Union of India and others and the decision of the division bench of the Kerala High Court in Sulochana Gupta and others v. RBG Enterprises Pvt. Ltd., which held that the Code is a self contained code in itself and that the interference of the High Court under Section 226 will defeat the entire objective of the Code, which was enacted with a view to consolidate and amend the laws relating to insolvency resolution.

III. NATIONAL COMPANY LAW APPELLATE TRIBUNALS

In Anil Kumar, ex-IRP v. Allahabad Bank & Ors., the NCLAT, New Delhi approved the actions of the NCLT in using its inherent powers under Rule 11 of the National Company Law Tribunal Rules, 2016 (NCLT Rules) to appoint an interim resolution professional (IRP) when the Committee of Creditors (CoC) could not do so due to lack of consensus among the members of the CoC. The NCLT chose to do so as one of the objectives of the Code is time bound resolution of insolvency and the lack of consensus in the CoC was hampering the achievement of such an objective. The NCLAT, New Delhi, upholding the decision of the NCLT, held that since the time stipulated for the CIRP process was running out, the NCLT had rightly exercised its jurisdiction under Rule 11 of the NCLT Rules in appointing the IRP.

In C&C Construction Ltd. v. Power Grid Corporation of India Ltd., the NCLAT New Delhi, held that on invocation of the bank guarantees provided by the corporate debtor undergoing CIRP, the amount will go out of the funds of the bank and not from the funds of the corporate debtor. Section 14(1)(c) of the Code provides that any security interest created by the corporate debtor in respect of its property is covered under moratorium. Thus, on a combined reading of Section 14(1)(c) and Section 14(1)(b) of the Code, such bank guarantees, if liquidated, shall be restricted to the full value of the guarantee minus the margin money provided by the corporate debtor to the banker for availing that bank guarantee.

In Anuj Tejpal v. Rakesh Yadav & OYO Hotels and Homes Private Limited, the NCLAT, New Delhi held that Section 12A of the Code comes into play only after the constitution of the CoC in matters of withdrawal subsequent to a settlement. Further, the NCLAT, New Delhi held that Regulation 30A(1)(a) of the Insolvency and Bankruptcy Board of India (IBBI) (Insolvency Resolution for Corporate Persons) Regulations, 2016 (CIRP Regulations), which provides the procedure to be followed for withdrawal before the constitution of the CoC, is directory in nature. The NCLT or the NCLAT can also exercise its powers under Rule 11 of the NCLT Rules, 2016 to allow the withdrawal of applications on the basis of a settlement reached even prior to the constitution of the CoC.

In Digambar Anandrao Pingle v. Shrikant Madanlal Zawar, the NCLAT, New Delhi, relied on the judgment of the Supreme Court in Arun Kumar Jagatramka v. Jindal Steel and Power Ltd. to hold that the management of a corporate debtor cannot resort to back-door entries into the CIRP. Consequently, the NCLAT, New Delhi, held that the appellant (ex-director/promoter of the corporate debtor) could not be allowed to take advantage of his own wrongful act of applying for a micro, small and medium enterprise (MSME) certificate for the corporate debtor, after the initiation of the CIRP without the knowledge of the IRP/Resolution Professional (RP), to tide over the ineligibility under Section 29A of the Code.

In Mukul Kumar v. M/s RPS Infrastructure Ltd., the NCLAT, New Delhi held that the IRP/RP is bound to reject a claim filed after the extended period provided in Regulation 12(2) of the CIRP Regulations and that the legislation has not provided any discretion to the RP to admit any claim made after the said extended period. The NCLAT, New Delhi also relied upon the judgment of the Supreme Court in Committee of Creditors of Essar Steel India Ltd. v. Satish Kumar Gupta and Ors. to observe that the entertaining of new claims after the approval of the resolution plan by the CoC would jeopardise the CIRP, and defeat the purpose of the Code, viz. value maximization of the corporate debtor's asset(s).

In Anoop Kumar Chhawchharia v M/s. Emgreen Impex Limited & Anr., the NCLAT, New Delhi rejected an appeal against an order initiating CIRP while holding that a counter-claim for supply of goods, which is unsubstantiated by relevant invoice, purchase order, and is raised only at the stage of replying to a notice issued under Section 8 of the Code, cannot be a valid dispute under the Code. The Corporate Debtor averred that its counter-claim arose out of the goods supplied by the corporate debtor to the operational creditor in June 2018 for which it raised invoices, made goods and service tax (GST) payments and filed the relevant GST returns in July, 2018. The NCLAT, New Delhi rejected this contention while observing that in view of absence of a purchase order or subsequent confirmation of account towards such supply by the operational creditor, the payment of GST in itself was no proof of supply of goods by the corporate debtor to the operational creditor.

In Sudip Bhattacharya v M/S E-Complex Pvt Ltd & Ors., the NCLAT, New Delhi held that a right to maintain an appeal under the Code would not arise against an order only because the adjudicating authority issued a notice on an application seeking stay of CIRP but did not pass any interim order pursuant to such application.

In Smt. Aruna Patel v. Punjab National Bank & Anr, the NCLAT, New Delhi held that appeals made under Section 61(2), are not maintainable if 45 days have passed since the date of the order against which the appeal has been made.

In M.P. Industrial Development Corporation v. Mr Jagdish Parulkar & Anr, the NCLAT, New Delhi held that where the amounts due to the operational creditor form a part of the "Insolvency Resolution Cost" as referred to in Regulations 31 and 32 of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulation 2016, Regulation, combined with Section 5(13)(e) and 14(2) of the Code; then the principal amount of such dues would be required to be settled.

In Mr Chandraiah Subramaniyan v. Digjam & Ors, the NCLAT, New Delhi held that where the resolution plan has already been approved, the alleged creditor cannot challenge the entire CIRP on appeal.

In Mr. S Irudaya Nathan v. G.V Ravikumar & Ors, the NCLAT, Chennai held that it is justifiable on the part of the adjudicating authority to order the prospective bidder to file an affidavit certifying eligibility under Section 29A of the Code, in a scenario wherein the bidder proposed a scheme of arrangement under Section 230 of the Companies Act, 2013.

In M/s. Orbit Electro Equipments Pvt. Ltd. and Anr. v. Mr. Kapil Dev Taneja and Anr., the NCLAT, Chennai held that the adjudicating authority has no authority under the Code to send an approved resolution plan back to the CoC and direct its reconsideration as after the approval of the resolution plan the CoC becomes functus officio. Further, the NCLAT, Chennai held that on the failure of the implementation of a resolution plan, the Code provides for liquidation of the corporate debtor under Section 33(3) and Section 33(4) of the Code.

IV. NATIONAL COMPANY LAW TRIBUNALS

In Tudor India Private Limited v. Servotech Power Systems Limited, the NCLT, New Delhi, while deciding on the question of whether a demand notice based on invoices issued in Form 3 and not in Form 4 is in compliance with Rule 5 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016, held that in a situation where an operational debt arises out of the provision of goods and services and pursuant to which invoices are raised, there is no illegality in choosing Form 3 as provided in Rule 5(1)(a) of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 for sending the demand notice provided that the unpaid invoices forming part of the transaction are annexed therewith.

In M/s Vipul Greens Residents Welfare Association v. Vipul Limited, the NCLT, New Delhi held that the application filed by a resident welfare association having 300 (three hundred) flat buyers as its members, satisfied the requirement of the proviso to Section 7 of the Code, which requires an application to be filed jointly by not less than 100 (one hundred) allottees of a real estate project or ten per cent of the total number of such allottees under the real estate project, whichever is less. The NCLT, New Delhi rejected the contention of the corporate debtor that the application was not maintainable, as all the allottees had not individually authorised the association to file an application under Section 7 of the Code. The NCLT, New Delhi noted that given the applicant, a registered association, duly represented 300 (three hundred) flat buyers and there was a resolution passed by the association to pursue the matter, the applicant fulfilled the requirements set out under Section 7 of the Code. The NCLT, New Delhi further noted that the maintenance security deposit taken from the home buyers on which the corporate debtor was required to pay interest in terms of the agreement, constituted a 'financial debt' under the Code.

In Insolvency and Bankruptcy Board of India v. Mr. Manoj Kumar Singh, Interim Resolution Professional, the NCLT, New Delhi, held that though in the normal scenario, only the CoC is empowered to consider and recommend change of the IRP under Sections 22 and 27 of the Code, the application filed here by the IBBI for the change in the IRP under Section 60(5)(c) of the Code was maintainable due to the unusual situation in the present case, where the meeting of CoC had not been convened subsequent to its first meeting. The NCLT, New Delhi noted that the prayer made by the IBBI, raised a question of priority in relation to the CIRP of the corporate debtor, which deserved to be decided on merits and the same was in line with Section 60(5)(c) of the Code. The NCLT, New Delhi further noted that the contention of the IRP that the present application filed under Section 60(5) of Code against him was not maintainable, did not merit consideration, as the proceeding under the Code is a proceeding in rem.

In Mr. Vivek Shukla v. Mr. Mohan Lal Jain, Liquidator & Another, the NCLT, New Delhi held that the nomination of applicant as a representative of the shareholder on the Stakeholders Consultation Committee was wrongly rejected by the liquidator in terms of Regulation 31A(3) of the IBBI (Liquidation Process) Regulations, 2016 (Liquidation Regulations). The NCLT, New Delhi noted that the applicant's nomination was supported by three out of five shareholders having 24.99% shareholding and that the plea taken by the liquidator that no nomination was made by the other two shareholders having 75% shareholding did not merit consideration, as Regulation 31A(3) of the Liquidation Regulations do not prescribe any criteria for nomination in terms of the value of the shareholding. The NCLT, New Delhi further noted that the IBBI is advised to notify the guidelines regarding the criteria and the process of nomination of representatives under Regulation 31A(3) of the Liquidation Regulations to avoid any ambiguity in the future.

In Bikram Singh Gusain, Interim Resolution Professional v. Mr. Rohtas Kumar Rohit & Others, the NCLT, New Delhi held that it is not the duty of the IRP to run after the members of CoC to attend the meeting and pursue the CIRP. The NCLT, New Delhi further noted that in the circumstances, when the IRP is unable to carry forward the CIRP for want of cooperation/participation from the sole member of the CoC, it is appropriate to terminate the CIRP of the corporate debtor by exercising jurisdiction under Section 60(5) of Code along with inherent power under Rule 11 of the NCLT Rules.

In Girwar Singh Jakhar & Others v. Earth Infrastructure Limited & Others, the NCLT, New Delhi held that given the applicants are dissenting financial creditors and have a valid and legally enforceable decree from the National Consumer Disputes Redressal Commission in their favour, the resolution plan should have provided for the full discharge of the decretal amount. The NCLT, New Delhi rejected the contention that the applicants' interests have been protected in the plan by providing for flats for them, by noting that a dissenting financial creditor cannot be forced to accept the discharge of a debt in any mode other than money in view of the Supreme Court decision in Jaypee Kensington Boulevard Apartments Welfare Association & Others v. NBCC (India) Limited & Others.

In Knight Riders Private Limited v. Global Fragrances Private Limited, the NCLT, New Delhi held that incorporeal rights like trademarks, copyrights, patents and rights in personam capable of transfer or transmission, are included in the ambit of goods. The NCLT, New Delhi further noted that in the present case, the guaranteed minimum royalties to be paid quarterly by the corporate debtor as a consideration to the grant of license and the right to use the trademark of the operational creditor on its licensed products for manufacture and sale purpose, is an 'operational debt' under the Code.

In M/s. P Manickam & Co. v. M/s/ KH Foges India Private Limited, the NCLT, Mumbai, held that a decree holder, while being included in the definition of a 'creditor' under Section 3(10) of the Code, does not fall under the definition of an 'operational creditor' under Section 5(20) of the Code. The NCLT, Mumbai, further held that the decree of the Micro and Small Enterprises Facilitation Council is not a decree within the meaning of Section 2 of the Civil Procedure Code, 1908 and that the council is not a civil court under the meaning of the Civil Courts Act.

In Satish Agro Industries v. The Maharashtra Agro Industries Development Corporation Ltd., the NCLT, Mumbai upon a combined reading of Section 2(45) of the Companies Act, 2013 defining a 'government company" and Section 3(7) of the Code defining a 'corporate person' held that there is no specific exemption for government companies from the ambit of the Code. Section 2(1) of the Code provides that the provisions of the Code apply to all companies incorporated under the Companies Act, 2013 and all previous company laws. The NCLT, Mumbai further relied on Hindustan Construction Company Limited v. Union of India to note that the concept of government companies is subsumed in the definition of 'corporate person' under the Code. The NCLT, Mumbai held that the provisions of the Code will not be applicable, only in cases of companies performing sovereign functions and government companies which are instrumentalities of the state.

In Mrs. Rajshree Vora & Ors. v. Makwana Properties Private Limited, the NCLT, Mumbai on a reading of the agreement between a home buyer and the real estate builder held that the home buyer is to be treated as an allottee in a real estate project under the Code, despite the fact the agreement providing that the home buyer is to be treated as an investor/ financial creditor in the real estate project. The NCLT, Mumbai came to this conclusion relying on the facts that: (i) the agreement did not provide for a fixed return on the amount invested; (ii) the return was conditioned on the completion of various stages of the real estate project; and (iii) no payment would be due in the event of a force majeure issue, which according to the NCLT, Mumbai are of a typical home buyer's agreement.

In the matter of R. Natarajan v. Mr. Radhakrishnan Dharmarajan, the NCLT, Chennai refused to accept the claims of the creditors of the corporate debtor after the approval of the resolution plan. Following the judgement of the Supreme Court in Committee of Creditors of Essar Steel India Ltd. v. Satish Kumar Gupta and Ors., the NCLT, Chennai held that acceptance of claims post the approval of the resolution plan would create uncertainty over the amounts payable by the successful resolution applicant. Further, the NCLT, Chennai, held that the entire CIRP process has to be completed within 330 days and that the Code also consists of timelines that have been fixed for the submission of claims by the creditors. The NCLT, Chennai, therefore, refused to condone the delay of the creditors in submitting their claims before the RP.

In Sri Supriyo Kumar Chaudhary (Liquidator of JVL Agro Industries) v State Bank of India, the NCLT, Allahabad held that non-saleable assets such as the accumulated cash profits lying in the bank account of the corporate debtor, could be distributed to stakeholders under Section 53 of the Code, after the filing of the asset memorandum and the list of stakeholders in accordance with Regulation 42 of the Liquidation Regulations. The NCLT, Allahabad further clarified that since the corporate debtor was not a going concern, there was no bar on the distribution of the liquid assets that were in excess of the estimated costs of liquidation.

In COC of Torque Automotive Pvt Limited v. Parag Sheth of Torque Automative Pvt Limited, the NCLT, Ahmedabad held that there need to be proper and reasoned decisions behind the replacement of the insolvency professional.

About The Authors: Siddharth is an advocate based out of Delhi. Karan is an advocate based out of Mumbai. Soham is pursuing his B.A., LL.B. (Hons.) programme at NALSAR University of Law. Akshata is an advocate based out of Delhi. Rahul is an advocate 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.

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