Insolvency Law In Review - December 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 December 2020 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 Action Ispat And Power Pvt. Ltd v. Shyam Metalics And Energy Ltd, the Supreme Court held that, even after a winding up petition has been admitted, and a liquidator has been appointed (with such liquidator taking over the assets of the company), the Company Court can, in its discretion, transfer such proceedings to the National Company Law Tribunal ('NCLT') as an application under the Code. It was clarified that the criteria, on the basis of which the Company Court will exercise its discretion to transfer (or not transfer) proceedings, would be if irreversible actions have already been undertaken by the liquidator (such as the sale of assets).

High Court

In Dr. Abdul Rasheed v. IFCI Limited & Ors, the Kerala High Court held that mere pendency of moratorium, in lieu of the insolvency proceedings of the Corporate Debtor, would not bar the initiation of proceedings under the SARFAESI Act against the personal guarantor/managing director of the Corporate Debtor. To arrive at this conclusion, the Kerala High Court followed the Supreme Court's decision in State Bank of India vs. V. Ramakrishnan and another.

National Company Law Appellate Tribunal

In Anubhav Anilkumar Agarwal v. Bank of India & RNA Corp Pvt Ltd., it was held that findings of fact, howsoever erroneous, cannot be revisited or substituted within the limited scope of 'inherent powers' under Rule 11 of the National Company Law Appellate Tribunal Rules, 2016. It was further clarified that the Appellate Tribunal's power to review decisions could only be exercised in cases of "error apparent on the face of record". Finally, it was observed that the substitution of findings through a reappraisal of evidence, can only be undertaken in the exercise of appellate jurisdiction.

In Mohan Lal Jain v. Lalit Modi & Ors, the National Company Law Appellate Tribunal ('NCLAT') held that allegations with respect to the undertaking of preferential and fraudulent transactions are required to be scrutinized by the Adjudicating Authority itself, and that the Adjudicating Authority cannot refer the matter for investigation to the Ministry of Corporate Affairs.

In Apya Capital Services Private Limited v. Guardian Homes Private Limited, the NCLAT held that once the liability in respect of a particular sum, above one (1) lakh is admitted, and the same is not discharged by the Corporate Debtor, the dispute in regard to the quantum of the debt would be immaterial at the stage of admission of application of a S. 7 application unless the debt due and payable falls below the minimum threshold limited prescribed by the Code.

In Sh Rajendra Narottamdas Sheth & Anr v. Sh Chandra Prakash Jain & Anr, the NCLAT held that a general power of attorney holder can file an application under the Code, even where such power of attorney was executed before the enactment of the Code. Further, placing reliance on S. 238A of the Code, it was held that S. 19 of the Limitation Act, 1963 (Limitation Act) would be applicable to proceedings under the Code. On this basis, it was concluded that in cases where part-payment is made, the limitation period to determine whether debts are time-barred (for the purposes of the Code) would stand extended, in view of the application of S. 19 of the Limitation Act, 1963.

Note: See also Bishal Jaiswal v. Asset Reconstruction Company (India) Ltd & Anr and Palogix Infrastructure Pvt Ltd. v. ICICI Bank Ltd.

In Jay Overseas Pvt. Ltd. v. George Samuel and Anr., the NCLAT observed that no harm will be caused if an attempt is made to save the Corporate Debtor from liquidation, and consequently permitted a Resolution Applicant to submit its Resolution Plan before the CoC, notwithstanding the fact that the said Resolution Plan had been formulated after the decision of the CoC to pass a resolution for liquidation of the Corporate Debtor. Resultantly, the NCLAT directed the Resolution Professional (RP) to take the requisite steps to place the Resolution Plan before the CoC.

In Bishal Jaiswal v. Asset Reconstruction Company (India) Ltd. and Anr., a 5-member bench of the NCLAT held that a decision passed by it vide a coordinate bench in V. Padmakumar v. Stressed Assets Stabilization Fund ('V. Padmakumar') did not suffer from any infirmity, insofar as the said decision had held, by a 4:1 majority, that entries in the balance sheets of Companies cannot be treated as acknowledgement of debt for the purposes of S. 18 of the Limitation Act, 1963. The present decision also reiterated that the resolution process (CIRP)cannot be treated as being akin to recovery proceedings, and that the adjudication of civil disputes and complex issues is impermissible within the ambit of the Code. Consequently, the present decision expressed its strong disapproval of the order of reference by a 3-member bench doubting the correctness of the decision in V. Padmakumar. The present decision noted that a smaller bench cannot sit in appeal to appreciate the correctness of a previous decision passed by a larger bench, and that judicial discipline and propriety demanded that the smaller bench ought to merely express its doubts as to the correctness of the decision of the larger bench, and to accordingly make a reference to a bench of the same strength as the one that delivered the decision under reference.

In KVR Industries Private Limited v. M/s P.P. Bafna Ventures Private Limited, the NCLAT observed that the NCLTs have the power to conduct preliminary inquiries under S. 340 of the Code of Criminal Procedure, 1973 (CrPC) into any offence referred to in S. 195(1)(b) of the CrPC, for the purpose of deciding whether to make a complaint in writing to the Magistrate. Consequently, the NCLAT set aside the observations of the NCLT, Amaravati, insofar as it had observed that it did not have the jurisdiction to order criminal prosecution.

In M/s Neesa Infrastructure Limited v. State Bank of India & Anr, the NCLAT held where an application for initiation of CIRP under S. 10 of the Code is filed, the same would liable to be dismissed if the pre-requisite of approval by special resolution, as enshrined in S. 10(3)(c) of the Code, had not been fulfilled. It was further held that an application under S. 10 was liable to be rejected, if it was apparent that such proceedings are sought to be initiated merely to frustrate debt recovery proceedings initiated against the Corporate Debtor, under other enactments. It was additionally observed that the requirement of Form 6 under Rule 7 of the Insolvency and Bankruptcy Board of India (IBBI) (Application to Adjudicating Authority Rules), 2016 of details of directors is a mandatory prescription, irrespective of whether all the directors of the Company were suspended under S. 164 of the Companies Act, 2013 (as was the factual scenario in the present case).

In Rajnish Jain v. Manoj Kumar (IRP) & Ors., the NCLAT was seized with the questions whether (i) under S. 21 of the Code, the CoC could determine the status of a claim as 'financial debt' or 'operational debt'; (ii) the RP's obligation to maintain an updated list of claims under S. 25 (e) of the Code would include re-classification of a claim from 'financial debt' to 'operational debt' based on sua sponte review. The NCLAT held that, owing to a serious conflict of interest, the CoC had no role in deciding the status of a creditor or claim, and that such an exercise cannot be treated as an exercise of its 'commercial wisdom'. Hence, the Interim Resolution Professional (IRP) cannot change the status of a creditor from financial to operational based on a resolution passed by a majority of the CoC. On the second question, the NCLAT differentiated between 'updating claims' and 'review' of claims to hold that the IRP/RP is only authorised to 'add to' existing claims, or reject/admit further claims, and she/he cannot arbitrarily overturn the earlier decision and re-classify a creditor from 'financial' to 'operational'. The NCLAT further held that the IRP/RP cannot delegate its duty to collate claims under S. 18 of the Code to the CoC.

National Company Law Tribunals

In Lampex Electronics v. AMI Tech (India) Private Limited, the NCLT, Mumbai held that that where the Corporate Debtor had acknowledged the outstanding due of the operational creditor, but the quantum of the amount acknowledged was lesser than the claim of such operational creditor, such acknowledgement is not "acknowledgment" in the strict legal sense, and therefore would not attract the rigours of S.18 of the Limitation Act.

In Jenis Vora, through duly constituted attorney v. HBS View Private Limited, the NCLT, Mumbai followed the NCLAT's decision in Palogix Infrastructure Private Limited v ICICI Bank Limited, to hold that a holder of a power of attorney could not file an insolvency application on behalf of the applicant. Further, the NCLT, Mumbai observed (but did not hold), that a Memorandum of Understanding ('MoU') is ordinarily non-binding and non-enforceable. On this basis, the NCLT, Mumbai implied that liability could not be imposed upon the breach of a MoU. Further, the NCLT, Mumbai limited the scope of 'Operational Debt' under S. 5(21) of the Code to those instances where the Petitioner had supplied goods to the Corporate Debtor, and not vice-versa.

In State Bank of India v. M/s Fedders Electric & Engineering Ltd., the NCLT, Allahabad observed, following the NCLAT's ruling in Quinn Logistics India Pvt. Ltd. v. Mack Soft Tech Pvt. Ltd. and Ors., that upon an application by the RP/CoC/any aggrieved persons, it would be open for the NCLT/NCLAT to exclude certain periods of time while calculating the total period of the CIRP. Consequently, in light of delays caused primarily on account of the lockdown induced by COVID-19, the NCLT, Allahabad permitted a 4 (four) month extension to the time period for the CIRP.

In an application filed by the RP in Standard Chartered Bank v. JVL Agro Industries Ltd., the NCLT, Allahabad relied on Alchemist Asset Reconstruction Company v. Moser Baer India Ltd. to observe that gratuity amounts due to the employees of a Corporate Debtor do not form part of the liquidation estate. Consequently, the NCLT, Allahabad directed the Liquidator to pay employees eligible as per the gratuity policy, and to buy a new policy to cover all eligible employees.

In the matter of : Sundresh Bhatt, Liquidator of ABG Shipyard Limited, the NCLT, Ahmedabad held that the benefit of the amendments to Clauses 12 and 13 of the Schedule I of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016, which extended the period for the payment of balance sale consideration by the highest bidder under the liquidation process from fifteen (15) days to ninety (90) days, cannot be granted retrospectively, in view of the clarification made by the IBBI, pursuant to circular dated August 20, 2019.

In Bhadreshwar Vidyut Private Limited v. Maheshwari Handling Agency Private Limited, the NCLT, Ahmedabad held that excess payment made by the Applicant for work committed and to be done by the Corporate Debtor does not fall within the category of "Operational Debt" under the Code. The NCLT, Ahmedabad noted that excess payment amounts to unintentional over-payment or advance payment, and cannot be treated as a liability, as the excess payment would appear as credit to the account of the corporate debtor.

In Pani Logistics v. Sona Alloys Private Limited and Another, the NCLT, Ahmedabad refused to consider an application seeking the substantive consolidation of the Corporate Debtor and the respondent companies holding substantial shares in the Corporate Debtor into a single proceeding, solely for the purpose of the CIRP, on the grounds that the respondent companies were not group companies, and that mere common shareholding does not make them group companies. The NCLT, Ahmedabad further noted that substantive consolidation as a remedy should always be treated as an exception rather than the rule.

In Ample Project Private Limited v. Parthiv Parikh, Resolution Professional for Jaihind Projects Limited, the NCLT, Ahmedabad held that an application by a sub-contractor of an operational creditor of the Corporate Debtor was not maintainable for want of locus standi. The NCLT, Ahmedabad further noted that if there is any claim, the sub-contractor ought to raise the same before the contractor, and no one else.

In Pinakin Shah, Liquidator of Brew Berry Hospitalities Private Limited v. The Assistant Commissioner of State Tax and Another, the NCLT, Ahmedabad held that an application by the Liquidator to release the account of the Corporate Debtor attached by the Assistant Commissioner of State Tax was not maintainable, as the state tax authority has ample powers to take cognizance of the matter and pass appropriate orders. The NCLT, Ahmedabad also noted that the Liquidator had failed to respond to the notice of the state tax authority within the stipulated time period, and that it is the prime duty of the Liquidator to apprise the competent authority of the present status and issue an appropriate reply to the notice. While dismissing the application, the NCLT, Ahmedabad gave the Liquidator liberty to approach the competent authority for redressal.

In M/s. AP Securitas Private Limited v. M/s. E-Complex Private Limited, the NCLT, Ahmedabad noted that in respect of running contracts, correspondences reflecting some differences/requirements/non-performance cannot be deemed to be in the nature of disputes automatically for the purposes of determining the existence of a pre-existing dispute on an application for the initiation of the CIRPby an Operational Creditor.

In Zielem Industries Private Limited v. Sintex-BAPL Limited, the NCLT, Ahmedabad, in the context of determining the existence of a pre-existing dispute on an application for the initiation of the CIRP by an Operational Creditor, noted that merely because time is essence of the contract, every delay by itself would not become an instance of dispute or such standard terms and conditions in itself would not create a dispute unless there are crystallised issues between the parties on the issue, namely that the Corporate Debtor has rejected the supplies, or returned the supplies, or claimed damages. In the present case, the NCLT, Ahmedabad observed that the delay by the operational creditor had been condoned by the Corporate Debtor by accepting the goods and consuming them for its manufacturing activities.

In Shah Coal Private Limited v. Avil Menezes, Interim Resolution Professional for AMW Auto component Limited, the NCLT, Ahmedabad held that a letter of credit, which is considered to be as a financial benefit to the buyers, is a kind of short-term loan to an importer by an overseas lender for the purchase of goods and services. The NCLT, Ahmedabad noted that in the present case, the Applicant, by opening a letter of credit in favour of the Corporate Debtor to enable the Corporate Debtor to purchase goods from the market, has essentially advanced a 'financial debt' under the Code.

In Manoj Khattar, Liquidator of Vimal Oil & Foods Limited v. State Tax Officer and Another, the NCLT, Ahmedabad directed the state tax officer to release the property of the Corporate Debtor attached during the pendency of the CIRP in favour of the Liquidator. The NCLT, Ahmedabad observed that the state tax officer may lodge its claim before the Liquidator. Further, the NCLT, Ahmedabad noted that in view of S. 238 of the Code, if there is any inconsistency between the Code and any other law, the Code will prevail.

In RK Scrap v. Ramchandra D Choudhary, Liquidator for Anil Limited, the NCLT, Ahmedabad held that Regulation 47A of the IBBI (Liquidation Process) Regulation, 2016, which provides that subject to the provisions of the Code, the period of lockdown imposed by the Central Government in the wake of COVID-19 outbreak shall not be counted for the purposes of computation of the time-line for any task that could not be completed due to such lockdown in relation to any liquidation process, includes the imposition of interest on the delayed payment of the balance amounts under the liquidation process and any interest attributable to the lockdown period. The NCLT, Ahmedabad noted that Regulation 47A is intended for the benefit of all stakeholders at large and not only in respect of the Liquidator for the compliance of timelines in relation to the tasks of the liquidation process.

In the matter of M/s Kaula Agro Foods Private Limited, the NCLT, Kochi, while denying the application of the Resolution Applicant seeking certain concessions and waivers under the Resolution Plan, opined that no general power can be granted to any Resolution Applicant, absolving it of the liabilities of the Corporate Debtor without knowing about the liability against which exemption is sought. The NCLT, Kochi further noted that if the Resolution Applicant wants to obtain any concession from any authorities, which have not been granted by the Tribunal, it is at liberty to approach the competent authorities for relief as per law.

In the matter of M/s. MIC Electronics Limited, the NCLT, Hyderabad approved the rescheduling of the Resolution Plan payment period to secured Financial Creditors in view of the basic objective of securing the resolution of insolvency under the Code. The NCLT, Hyderabad noted that 81.41% of the total secured Financial Creditors had agreed to the extension of the payment schedule owing to the difficulties experienced by the Resolution Applicant in raising the resources for honouring its commitment due to the COVID-19 pandemic situation.

In Shappoorji Pallonji and Co. (P) Ltd v Shore Dwelling (P) Ltd, the NCLT, Bengaluru bench dismissed a S.9 application under the Code on the ground that negotiations between parties were ongoing and the Code was not a mode of recovery and could not be used prematurely. The Corporate Debtor had defaulted on an amount due under a Construction Contract. The Parties, vide settlement agreement dated 11.12.2019 had agreed for the Corporate Debtor to pay a settlement amount in three (3) instalments between 31.12.2020- 30.06.2020. This period was later modified to 15.02.2020-30.06.2020 by the applicant on 03.1.2020, on the request of the Corporate Debtor. Post expiration of the repayment period, the Corporate Debtor vide letter dated 18.07.2020 refused to 'sign' the revised Settlement Agreement in view of the slowdown in the real-estate sector owing to COVID-19. The Corporate Debtor offered a flat in one if its projects as an alternative to payment of debt due. On lack of a response by the Corporate Debtor to demand notice dated 05.08.2020, the applicant filed a S.9 application under the Code. The NCLT, Bengaluru dismissed the application on the ground that the Code was not a mode of recovery and could not be used prematurely or for extraneous considerations. The NCLT, Bengaluru observed that the negotiation between the parties with respect to the settlement had not concluded since the Corporate Debtor had offered to make repayment. While acknowledging the challenge posed by the COVID-19 lockdown, the NCLT, Bengaluru observed that the two of repayment instalment dates had fallen within the lockdown period, and pushing the Corporate Debtor into CIRP or liquidation may not entirely prove fruitful.

In M/S State Bank of India v M/S Bharath Infra Exports and Imports Ltd, the NCLT, Bengaluru directed the applicant to reconcile the dispute regarding debt owed under working capital facilities before filing an application under S.7. The NCLT, Bengaluru held that since proceedings under S.7 were summary in nature, a reconciliation of actual debt figures due under the fund-based and non-fund based loan facilities was required before approaching it under the Code. The NCLT, Bengaluru also followed the NCLAT judgment in Brig E. S. Krishnamurthy & Ors. v M/S Bharath High Tech Builders Pvt. Limited, where the NCLAT had taken a liberal approach towards the infrastructure development sector owing to the pandemic. The NCLT, Bengaluru disposed of the application with the liberty to approach the NCLT again while holding that the Corporate Debtor, that had been classified as NPA on 17.01.2017, was in the infrastructure development sector which involves investment from several homebuyers that was impacted by the COVID-19 pandemic and was willing to pay dues after reconciliation of the disputed amount.

In Corporation Bank v Mindlogicx Infratec Limited, the NCLT, Bengaluru dismissed an application under S.9 holding it was not the purpose of the Code to refer viable and profit-making entities into insolvency for the purposes of recovery of debt. Noting that the respondent had been paying part of the debt under the directions of the High Court and the debt recovery tribunal, and had made an offer for a one time settlement, the NCLT, Bengaluru dismissed the application as premature on the ground that the respondent was keen to repay the loan and was only constrained by the temporary lull caused by the COVID-19 pandemic.

In Madras Steel Tubes v M/S IOTA Automation Pvt Limited, the NCLT, Chennai admitted an application under S.9 of the Code, while dismissing objections on the ground that a settlement offer was pending and the delay in payment was due to the COVID-19 pandemic and the ensuing financial distress. The NCLT, Chennai held that there was existence of debt and the default had taken place before the pandemic, and could not be attributed to the COVID-19 pandemic.

In Re M/S Balakrishanan Venkatachalam (RP, M/S ABT (Madras) Pvt. Limited ), the NCLT, Chennai allowed an application for extension of CIRP while excluding the period of lockdown pursuant to Regulation 40C inserted vide the third amendment to the CIRP Regulations vide circular dated 29.03.2020. The NCLT, Chennai read Regulation 40C which states that 'period of lockdown imposed by the Central Government in the wake of COVID-19 outbreak' to mean the period from 25.03.2020 to 31.10.2020 for the State of Tamil Nadu, and accordingly excluded such period from the period of resolution process.

In Hira International v M/S Girdharilal Sugar & Allied Industries Limited, the NCLT, Indore dismissed an application under S.9 of the Code on grounds of limitation while holding that for a debt of INR59,75, 055 which was due from July 2015, payment of a sum of INR 2 (two) lacs allegedly by the Corporate Debtor on 24.11.2017 would not extend the period of limitation of all debt, as each supply made by the operational creditor was an independent contract. In addition, the NCLT, Indore noted that such payment had been made from the account of a party other than the Corporate Debtor.