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 August 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.
1. SUPREME COURT
In Dena Bank (now Bank of Baroda) v. C. Shivakumar Reddy and Another, the Supreme Court held that the statement of accounts/balance sheet/financial statements and the offer of a one-time settlement of a claim made within the period of limitation, constituted an acknowledgement of debt under Section 18 of the Limitation Act, 1963 (Limitation Act). The Supreme Court further stated that a judgment and/or decree for money in favour of the financial creditor, passed by the Debt Recovery Tribunal, or any other tribunal or court, or the issuance of a certificate of recovery in favour of the financial creditor, would give rise to a fresh cause of action for the financial creditor, to initiate proceedings under Section 7 of the Code. The Supreme Court also noted that there is no bar to amendment of pleadings in an application under Section 7 of the Code, or to the subsequent filing of additional documents with application under Section 7 of the Code. However, in case of inordinate delay, the adjudicating authority may decline the request of an applicant to file additional pleadings and/or documents, and proceed to pass a final order.
In Pratap Technocrats (P) Ltd. & Others v. Monitoring Committee of Reliance Infratel Limited & Another, the Supreme Court held that the jurisdiction of the adjudicating authority under Section 31(1) of the Code is to determine whether the resolution plan, as approved by the committee of creditors (CoC), complies with the requirements of Section 30(2), and there is no equity-based jurisdiction with the adjudicating authority under the provisions of the Code. The Supreme Court noted that under the Indian insolvency regime, it appears that a conscious choice has been made by the legislature to not confer any independent equity-based jurisdiction on the adjudicating authority other than the statutory requirements laid down under Section 30(2) of the Code. Hence, the Supreme Court rejected the contention that the treatment of the operational creditors had not been fair and equitable, by noting that as long as the payment under the resolution plan was fair and equitable amongst the operational creditors as a class, it satisfied the requirements of Section 30(2)(b) of the Code.
In Kay Bouvet Engineering Limited v. Overseas Infrastructure Alliances (India) Private Limited, the Supreme Court held that in order to determine the 'existence of a dispute' between the corporate debtor and the operational creditor in terms of Section 8(2)(a) of the Code, the adjudicating authority is required to examine whether there is a plausible contention, which requires further investigation, and that the dispute is not a patently feeble legal argument or an assertion of fact unsupported by evidence. However, the adjudicating authority is not required to be satisfied as to whether the defence is likely to succeed. The Supreme Court also noted that the adjudicating authority cannot go into the merits of the dispute except to the extent specified above. The Supreme Court further stated that so long as a dispute truly exists in fact and is not spurious, hypothetical, or illusory, the adjudicating authority has no other option but to reject the application under Section 9(5)(ii)(d) of the Code.
2. NATIONAL COMPANY LAW APPELLATE TRIBUNALS
In Ravi Ajit Kulkarni v. State Bank of India, the NCLAT, New Delhi held that when an application for initiation of personal insolvency is filed under Section 95 of the Code, the Adjudicating Authority should send a "limited notice" to the personal guarantor so as to secure his presence. This would be followed by appointment of the Resolution Professional (RP) and submission of a report by the RP to the Adjudicating Authority. The purpose of this "limited notice" would be to intimate the personal guarantor about the filing of the application and the initiation of interim moratorium. However, no right of hearing will be provided to the debtor before the Adjudicating Authority at this stage.
In Ishita Halder v. Mr. Siba Kumar Mohapatra & Ors., the National Company Law Appellate Tribunal (NCLAT), New Delhi, citing the judgment of the Supreme Court in Dena Bank (now Bank of Baroda) v. C. Shivakumar Reddy and Another, held that the one-time settlement offers (OTS) by the corporate debtor would be considered as an acknowledgment under Section 18 of the Limitation Act, and hence, would extend the period of limitation from the date of such OTS proposal. The NCLAT, New Delhi further held that the fact that the payments are made in order to induce the bank to consider the OTS proposal, will not make a difference as to the applicability of Section 19 of the Limitation Act.
In Parag Sheth v. Sunil Kumar Agarwal & Others, the NCLAT, New Delhi held that Section 20(2)(b) of the Code authorizes the RP to only re-enter into such contracts, concerning the corporate debtor, which were entered into before the commencement of corporate insolvency resolution process (CIRP). In this case, the NCLAT, New Delhi held that the RP/interim resolution professional (IRP) did not have the power to enter into a new contract for insurance, which was at a higher premium rate without the authorization of the CoC.
In M/s Unicorn Buildtech v. Aishwarya Mohan Gahrana, the NCLAT, New Delhi, citing the decision of the Supreme Court in Arcelormittal India Pvt. Ltd. v. Satish Kumar Gupta & Others, held that the resolution applicant does not have any vested or fundamental right to have its resolution plan approved. In this case, the NCLAT, New Delhi refused to interfere with the decision of the CoC, which in its commercial wisdom, had decided not to grant further time to the resolution applicant to present its resolution plan before the CoC.
In Pawan Kumar v. Utsav Securities & Others, the NCLAT, New Delhi held that the requirement of a financial contract under Rule 3(1)(d) of the Insolvency and Bankruptcy Board of India (Application to Adjudicating Authority) Rules, 2016 (Adjudicating Authority Rules) is essential for satisfying the adjudicating authority on when the debt and interest become due and payable. The NCLAT, New Delhi held that in the absence of a written agreement, the applicant, which was a non-banking financial company (NBFC), had failed to establish that the transaction in question was a loan transaction. The NCLAT, New Delhi followed its previous decision in Prayag Polytech Pvt. Ltd. v. Gem Batteries Pvt. Ltd., to hold that: (i) the proof of tax deducted at source (TDS) at the time of payment of interest, is not sufficient proof for establishing loan disbursal for the time value of money; and (ii) in view of the mandatory requirement for a financial contract under Rule 3(1)(d) of the Adjudicating Authority Rules, Section 10 of the Indian Contract Act, 1872, which recognises the validity of an oral agreement, cannot be relied on for making an application under Section 7 of the Code. In this regard, the NCLAT, Delhi also noted the Reserve Bank of India guidelines dated February 18, 2013 to NBFCs for fair practices, which require NBFCs, such as the applicant, to convey the terms and conditions of the loan transaction in writing by way of a sanction letter or otherwise.
In Vinod Sehwag v. Siemens Financial Services Private Limited & Another, the NCLAT, New Delhi, while following its previous decision in Mr. Ravi Ajit Kulkarni vs. State Bank of India, held that at the stage of the appointment of the RP under Section 99 in order to make recommendations for acceptance or rejection of an application under Section 95(1) of the Code, the adjudicating authority cannot record its finding on whether there has been a default by the debtor. The NCLAT, accordingly, partly allowed the appeal to set aside the finding of the adjudicating authority with respect to the existence of default in the repayment of loan by the debtor.
In West Bengal Financial Corporation v. Bijoy Murmuria & Others, the NCLAT, New Delhi held that in the instance, where a resolution plan is not approved by the CoC within the prescribed time frame for a resolution process under the Code, all efforts should be made for the resolution of the corporate debtor keeping in view the main objective of the Code. In this case, the CoC had not followed the timeline provided by the adjudicating authority for approving the resolution plan. The NCLAT, New Delhi, however, rejected the appellant's plea that in view of Section 33 of the Code, the only consequence of non-completion of the resolution process within such limited time frame is liquidation. The NCLAT, New Delhi upheld the adjudicating authority's exercise of discretion to not pass an order of liquidation in view of the resolution plan being under consideration by the CoC.
In Asset Reconstruction Company (India) Limited v. Mohammadiya Educational Society, the NCLAT, New Delhi held that a society registered under the Andhra Pradesh Society Registration Act, 2001 (AP Act) cannot be subject to insolvency resolution process for corporate persons laid down under Part II of the Code. The Appellant contended that pursuant to Section 18 of the AP Act, a society registered under the AP Act was rendered the status of a body corporate and was, therefore, amenable to the jurisdiction of the adjudicating authority under the Code, in view of the definition of a corporate person under Section 3(7) of the Code. The NCLAT, Delhi held that Section 2 of the Code, which prescribes entities to whom the Code applies, is to be read along with Section 3(7) of the Code. The NCLAT, New Delhi rejected the appeal while holding that a society under the AP Act not being an incorporated entity, in view of Section 2 of the Code, does not fall within the definition of a 'corporate person' under Section 3(7) of the Code.
In Vipul Dilip Shah & Others v Parinee Developers Pvt. Ltd., the NCLAT, New Delhi set aside the order of the National Company Law Tribunal (NCLT), Mumbai, rejecting an application under Section 12A of the Code for withdrawal of the admitted insolvency application, after consideration and approval by the CoC of a settlement offered by the promoters. While setting aside the order, the NCLAT, New Delhi held that once a settlement has been approved by 99.9% of the CoC, it is not appropriate for the adjudicating authority to reject the application for withdrawal on the ground that the timeline provided under the Code for various stages, had not been followed by the CoC.
3. NATIONAL COMPANY LAW TRIBUNALS
In National Engineering Industries Limited v. Windals Auto Private Limited, the NCLT, Mumbai held that the admission by the corporate debtor of its liabilities in the minutes of the meetings, constitutes an acknowledgement of debt under Section 18 of the Limitation Act.
In Global Advertisers v. Sai Estate Consultants Chembur Private Limited, the NCLT, Mumbai, while admitting an application filed under Section 9 of the Code, held that the deduction of TDS by the corporate debtor on all the invoices raised by the operational creditor on the corporate debtor including unpaid invoices, proved that the debt was due and payable by the corporate debtor to the operational creditor. The NCLT, Mumbai rejected the argument of the corporate debtor that the deposit of TDS was at best an acknowledgment of an expected liability, and by itself, it does not give any basis for claiming recovery of dues/monies.
In Wellspring Helathcare Private Limited v. Jatoyah Investments & Holdings Limited, the NCLT, Mumbai held that the amount claimed by the applicant in terms of mutually agreed, genuine, pre-determined compensation for the cost incurred due to the premature termination of leave and licence agreement by the corporate debtor, does not constitute an 'operational debt' and does not qualify the applicant as an 'operational creditor' under the Code.
In Dinesh Gupta v. Rolta India Limited, the NCLT, Mumbai rejected the withdrawal application under Section 12A of the Code filed by the original applicants/operational creditors on the grounds that the claims of the financial creditors and certain ex-employees were still outstanding. The NCLT, Mumbai held that the financial creditors and the ex-employees could intervene and oppose any settlement arrived at between the applicants/operational creditors and the promoter director, on the grounds that proceedings of the CIRP are in rem, and any decision regarding the continuation or withdrawal of the CIRP has to be decided in the interest of all stakeholders. The NCLT, Mumbai noted that even in the event of the original creditors of the corporate debtor settling their disputes prior to the constitution of the CoC, the adjudicating authority has sufficient jurisdiction to reject an application under Section 12A of the Code, if the facts and circumstances of the case warrant such rejection.
In Insta Capital Private Limited v. Ketan Vinod Kumar Shah, the NCLT, Mumbai held that a financial creditor cannot initiate the insolvency resolution proceedings against the personal guarantor in the absence of any CIRP or liquidation process against the corporate debtor. The NCLT, Mumbai noted that Section 60(2) of the Code contains a non-obstante clause, which specifies that only where a CIRP or liquidation process of a corporate debtor is pending before the adjudicating authority, an application initiating the insolvency resolution process against the personal guarantor of such corporate debtor shall be filed before such adjudicating authority. The NCLT, Mumbai further observed that while an application under Section 7 of the Code can be filed by the financial creditor against the corporate debtor and the corporate guarantor, an application under Section 95 of the Code can be filed by the financial creditor only against the personal guarantor of such corporate debtor, which is undergoing the CIRP or is in liquidation.
In Gannon Dunkerley & Co. Ltd. v. Sangeeta Aviation Services Private Limited, the NCLT, Mumbai followed the NCLAT, New Delhi decision in M/s Ugro Capital Limited v. M/s Bangalore Dehydration and Drying Equipment Co. Pvt. Ltd., to allow an insolvency application by a financial creditor on the basis of a decree passed by the Bombay High Court against the corporate debtor (see also Sushil Ansal v. Ashok Tripathi and Others).
In EVA Agro Feeds Private Limited v. Sunil Mohan Acharya, Liquidator of M/s Amrit Feeds Limited (in Liquidation), the NCLT, Kolkata held that the liquidation process under the Companies Act, 2013, pursuant to which the vetting of the notice of auction and the final confirmation of sale is in the hands of the High Court, cannot be compared with the liquidation process under the Code. The NCLT, Kolkata, on a reading of Clause 1(12) of Schedule I of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 (Liquidation Regulations), held that the liquidator does not have unlimited discretion to cancel the auction or to revisit the invitation to the highest bidder once the highest bidder has been identified.
In Onemax Yarn Merchants Private Limited v. Nandlal Kamal Kishore Vyapaar Private Limited, the NCLT, Kolkata held that if the RP is unable to form an opinion regarding preferential, undervalued, extortionate or fraudulent transactions within the timeline stipulated under Regulation 35A of the Insolvency and Bankruptcy Board of India (Corporate Insolvency Resolution for Corporate Persons) Regulations, 2016 (CIRP Regulations), it can approach the adjudicating authority for appropriate relief under the provisions of law, but an application for exclusion of time till the availability of books of accounts and details from the personnel of the corporate debtor in order to form an opinion, will not be the appropriate course of action. The NCLT, Kolkata further held that although the adjudicating authority has been provided with the discretion of extending the deadline for completion of the CIRP, such discretion is to be exercised sparingly and judiciously. It has to be demonstrated that the corporate debtor is on the verge of resolution and that extending the time period would be in the interest of all stakeholders.
In M/s Kaledonia Jute and Fibres Pvt. Ltd. v. M/s Axis Nirman and Industries Ltd., the NCLT, Allahabad allowed the filing of an application under Section 7 of the Code despite the fact that the Company Court had passed a winding up order against the corporate debtor. Citing the decision of the Supreme Court in A. Navinchandra Steels Private Limited v. SREI Equipment Finance Limited & Others, the NCLT, Allahabad held that a proceeding under Section 7 of the Code is an independent proceeding and has an overriding effect over winding up proceedings under the Companies Act, 2013.
In M/s. Laxmi Engineering Works v. Mr. Raghavendran, the NCLT Chennai, while condoning the delay in filing an appeal by the applicant against the decision of the liquidator rejecting its claim, held that filing the claim within the time period stipulated under the Code and the Liquidation Regulations is a mandatory requirement. The NCLT, Chennai held that as per the Liquidation Regulations, only the claims of workmen and employees are required to be admitted by the liquidator from the books of accounts of the corporate debtor, if they do not file a claim, and such a facility is not extended to any other creditor of the corporate debtor. The requirement of filing a claim within the mandated time is necessary since the liquidation process under the Code is a time-bound process, and as per Regulation 44(2) of the Liquidation Regulations, the liquidator is held accountable for exceeding the time provided to liquidate the corporate debtor.
In M/s. Tulsyan Nec Limited v. M/s. Rai Ispat Private Limited, the NCLT, Chennai held that the flow of goods and services has to be from the operational creditor to the corporate debtor for the creditor to be classified as an operational creditor. The NCLT, Chennai further held that failure to repay an advance amount would not fall within the meaning of 'operational debt' under Section 5(21) of the Code.
In Regional Provident Fund Commissioner v. S. Kannan, the NCLT, Chennai held that the dues of the provident funds do not form a part of the liquidation estate, and hence, the liquidator cannot reject any such claims of provident fund authorities. The NCLT, Chennai further held that claims of penal damages and interest under Section 14B and 7Q of the Employees Provident Fund & Miscellaneous Provisions Act, 1952 (EPF Act) would form a part of 'any amount due' under Section 11(2) of the EPF Act, and hence, being outside the liquidation estate would not be covered by the waterfall mechanism.
In the matter of Ultra Tile Pvt. Ltd, the NCLT, Chennai held that the commercial wisdom of the CoC cannot override the procedures provided in the CIRP Regulations. In this case, the CoC, in its second meeting, had passed a resolution for the liquidation of the corporate debtor before the appointment of registered valuers to ascertain the fair value and the liquidation value of the corporate debtor as required under Regulation 27 of the CIRP Regulations. The NCLT, Chennai, in this case, directed the IRP to convene a meeting of the CoC and to appoint two (2) registered valuers in order to ascertain the fair value and liquidation value of the corporate debtor.
In LK Sivaramakrishnan v. RB Srinivasan, the NCLT, Chennai held that the NCLTs do not fall under the definition of 'special courts' established under Chapter 28 of the Companies Act, 2013, but are constituted under Section 408 of the Companies Act, 2013. Only special courts established under Chapter 28 of the Companies Act, 2013 can take cognizance of offences under the Code as per Section 236(2) of the Code. The NCLT, Chennai further held that under Section 236(2) of the Code, the complaint is required to be filed by the Insolvency and Bankruptcy Board of India or the Central Government or any person authorized by the Central Government, and hence, the complaint by the RP was not maintainable in this case.
In B. Parameshwara Udpa v. DBS Bank India Ltd. & Ors., the NCLT, Chennai held that if a financial creditor wants to continue as a member of the CoC, it would be mandatory for it to contribute towards the CIRP costs, which are incurred. The NCLT, Chennai in this case directed the removal of the financial creditors, who were unwilling to contribute to the CIRP costs, from the CoC.
In Avantha Power & Infrastructure Pvt Ltd v Axis Bank Ltd, the NCLT, Hyderabad admitted an application under Section 7 of the Code filed against the corporate guarantor while rejecting the contention of the corporate debtor that the applicant had already filed its claim before the IRP of the principal borrower and such claim formed part of the principal borrower's resolution plan. While underlining that the amount recovered under a resolution plan should not be claimed in an insolvency application as the primary requirement for admission of an insolvency application filed pursuant to the invocation of a corporate guarantee, the NCLT, Hyderabad reiterated the settled principle that approval of a resolution plan of the principal borrower does not per se extinguish the liability of the guarantor (see also Lalit Kumar Jain v. Union of India).
About The Authors: Siddharth Sunil is an advocate based out of Delhi. Karan Sangani is an advocate based out of Mumbai. Soham Chakraborty is pursuing his B.A., LL.B. (Hons.) programme at NALSAR University of Law. Akshata Singh is an advocate based out of Delhi.
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.