Insolvency Law In Review – January 2022

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 January 2022 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.

I. SUPREME COURT

In Devarajan Raman v. Bank of India Limited, the Supreme Court set aside the order of the National Company Law Appellate Tribunal (NCLAT), New Delhi, which provided for a payment of an amount of Rs. 5,00,000/- plus goods and service tax towards the fee of the resolution professional as being reasonable, on the grounds that the NCLAT failed to consider the basis of the claim and its reasonableness. The Supreme Court noted that the NCLAT order suffered from an abdication in the exercise of jurisdiction, as the NCLAT merely proceeded in an ad hoc manner on the grounds that the amount of Rs 5,00,000/- as fee, in addition to the expenses, appeared to be reasonable.

In Bank of Baroda & Another v. MBL Infrastructures Limited & Others, the Supreme Court held that what is required to earn a disqualification under Section 29A(h) of the Code is a mere existence of a personal guarantee that stands invoked by a single creditor, notwithstanding the application being filed by any other creditor seeking initiation of insolvency resolution process. The Supreme Court noted that the manner of invocation can never be a factor for the adjudicating authority to adjudge, as the ineligibility under Section 29A(h) is to the participation in the resolution process of the corporate debtor and not qua one creditor as against others. The Supreme Court further held that if the submission of the plan is maintainable at the time at which it is filed, and thereafter, by the operation of the law, a person becomes ineligible, which continues either till the time of approval by the committee of creditors (CoC), or adjudication by the authority, then the subsequent amended provision would govern the question of eligibility of resolution applicant to submit a resolution plan.

II. HIGH COURTS

In Angre Port Private Ltd. v. TAG 15 (IMO. 9705550) & Another, the Bombay High Court held that Section 33(5) of the Code (which provides that no suit or legal proceeding shall be instituted by or against the corporate debtor when a liquidation order is passed) does not in any way prohibit the institution of a suit or other legal proceeding against a ship/vessel owned by the corporate debtor under the admiralty jurisdiction of the court. The Bombay High Court noted that under the Admiralty (Jurisdiction and Settlement of Maritime Claims) Act, 2017 (Admiralty Act), the vessel is treated as a separate juristic entity, which can be sued without joining the owner of the said vessel to the proceeding. The action against the vessel under the Admiralty Act, is an action in rem and a decree can be sought against the vessel without suing the owner of the vessel.

In M/s. Nag Leathers Private Limited v. M/s. Muzain Hides and Others, the Madras High Court, citing the judgment of the Supreme Court in P. Mohanraj and Others v. Shah Brothers Ispat Pvt. Ltd., held that upon the imposition of a moratorium under Section 14 of the Code, no proceeding under Section 138 and 141 of the Negotiable Instrument Act, 1881 (NI Act) can be initiated or continued against the corporate debtor. In the instant case, the Madras High Court quashed the criminal proceedings under the NI Act against the corporate debtor but allowed the proceedings against directors/management to continue as the moratorium imposed under Section 14 applies only to the corporate debtor.

In The Sirpur Paper Mills Limited & Another v. Union of India & Others, the Telangana High Court, following the judgment of the Supreme Court in Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta, held that claims of the income tax department which stood outside the resolution plan would stand extinguished upon the approval of the plan by the adjudicating authority. The Telangana High Court further held that from the date of approval of the resolution plan, the plan would prevail over the claims of the income tax department prior to the date of approval. As a result, the Telangana High Court quashed notices issued by the income tax department, seeking to initiate assessment proceedings under Section 143(3) of the Income Tax Act, 1961, as the resolution plan contained a clause extinguishing any demand from the income tax department from a period prior to the approval of the resolution plan by the adjudicating authority.

III. NATIONAL COMPANY LAW APPELLATE TRIBUNALS

In Visisth Services Limited v. Mr. S. v. Ramani and Others, the NCLAT, New Delhi held that sale as a 'going concern' under Regulation 32 A of the IBBI (Liquidation Process) Regulations, 2016 means sale of assets as well as liabilities and not assets sans liabilities, if it is stated on 'as is where is basis'. The NCLAT, New Delhi further held that the bidder-appellant is bound by the terms and conditions of the bid document and no communication to the liquidator stating that the bid is a conditional offer, is sustainable The NCLAT, New Delhi noted that having participated, the bidder-appellant cannot propose certain conditions subsequent to its participation and putting in its bid.

In State Bank of India v. Mahendra Kumar Jajodia, the NCLAT, New Delhi held that the National Company Law Tribunal (NCLT), Kolkata erred in holding that since no corporate insolvency resolution process (CIRP) or liquidation proceeding of the corporate debtor were pending, the application against the personal guarantor before the NCLT, Kolkata under Section 95(1) of the Code was not maintainable in view of Section 60(2) of the Code. The NCLAT, New Delhi held that Section 60(2) does not in any way prohibit filing of proceedings under Section 95 of the Code even if no proceeding are pending before the NCLT, as Section 60(2) of the Code provides that when proceedings are pending in 'a' NCLT, any proceeding against personal guarantor should also be filed before 'such' NCLT with the intent that both proceedings should be entertained by one and the same NCLT. [Note: The said order has been currently stayed by the Supreme Court in Mahendra Kumar Jajodia v. State Bank of India.]

In Rishi Kapoor v Kashi Vishwanathan Sivaraman, Resolution Professional of Kindle, the NCLAT, New Delhi held that an order passed in terms of Rule 150 of the National Company Law Tribunal Rules, 2016 (NCLT Rules) would be effective from the date of pronouncement. The effect and consequence of the order dated shall not remain suspended solely on the basis that the order was uploaded on the website at a later date after its pronouncement. In the instant case, the NCLAT, New Delhi rejected the contention of the appellant that the order would become effective only when it is communicated to the interim resolution professional or has come to the knowledge of the public in general.

In Dheeraj Wadhwan v. The Administrator, DHFL, the NCLAT, New Delhi differentiated between a director superseded by the Reserve Bank of India using its powers under Section 45IE of the Reserve Bank of India Act, 1934 and a 'suspended' director under Sections 17(1)(b) and 24(3)(b) of the Code. The NCLAT, New Delhi held that in respect of the former, the directors are deemed to have vacated office from the date of supersession. A superseded director cannot claim parity with a suspended director under the Code, and hence, he/she does not have any entitlement to participate in the meetings of the CoC of the corporate debtor. The NCLAT, New Delhi further held that in the absence of any confidentiality undertaking and keeping in mind the confidentiality requirements under the Code, there is no requirement of sharing the submitted resolution plans before their approval by the adjudicating authority, with the superseded directors.

In Association of Aggrieved Workmen of Jet Airways v. Jet Airways, the NCLAT, New Delhi held that according to Section 24 of the Code, only those who are entitled to participate in the meetings of the CoC are entitled to a copy of the resolution plan. The NCLAT, New Delhi referred to Rule 114 of the NCLT Rules and held that when a resolution plan is submitted to the adjudicating authority with an application to accept the plan, the said plan becomes a part of the record of the case and there is a statutory right to inspection. Further, the NCLAT, New Delhi, in view of Sections 31(3) and 196(1) of the Code, rejected the contention that even after the resolution plan is approved by the adjudicating authority, it remains a confidential document. Lastly, the NCLAT, New Delhi held that to appeal against the approval of a resolution plan under Section 61(3) of the Code, the appellant has to be aware of the contents of the resolution plan. Hence, its contents cannot remain confidential after approval.

In Srei Multiple Asset Investment Trust v. IDBI Bank, the NCLAT, New Delhi held that since the respondent was not in control of a 'connected person' of the corporate debtor on the date of submission of the resolution plan for the corporate debtor, the ineligibility under Section 29A(j) of the Code would not attach to it. The NCLAT, New Delhi further held that the ineligibility under Section 29A(c) of the Code will not be applicable to resolution applicants, who acquire a corporate debtor pursuant to a prior resolution plan approved under the Code.

IV. NATIONAL COMPANY LAW TRIBUNALS

In State Bank of India v. Savita Satish Gowda, the NCLT, Mumbai considered the question of whether a petition filed for initiation of insolvency proceedings against the personal guarantor is maintainable in view of Section 60(2) of the Code, when the resolution plan is already approved by the NCLT. The NCLT, Mumbai, while rejecting the objection of the personal guarantor that the CIRP has culminated by way of approval of resolution plan, held that even when the resolution plan is approved, the NCLT has the territorial jurisdiction to hear any applications filed by the monitoring committee. Therefore, the NCLT is vested with the jurisdiction to entertain the petition related to personal guarantors of the corporate debtor.

In Anil Vora v. Kavya Build-con Private Limited, the NCLT, Mumbai held that the retirement dues arising out of a partnership firm do not constitute an 'operational debt' under the Code. Here, the applicant and the corporate debtor were partners of a firm, and the firm jointly and severally agreed to pay a lumpsum consideration to the applicant for retirement from the firm in full and final settlement of the applicant's claim in capital, goodwill, profits and assets and interests in the capital, business, rights and properties of the firm. The NCLT, Mumbai noted that even though the partners of a firm are jointly and severally liable and even if the liability of the corporate debtor is proved, the Code does not protect the interest or the claim of one partner against another partner or the firm.

In Siemens Financial Services Pvt. Ltd. v. Rakesh Saxena, the NCLT, New Delhi noted that the scheme of the Code does not contemplate appointment of a resolution professional suggested by an applicant initiating insolvency proceedings against a personal guarantor under Section 95 of the Code.

In Oriental Bank of Commerce v. KMG A to Z System Pvt. Ltd., the NCLT, New Delhi allowed a period more than the stipulated period of ninety days from the liquidation order to complete the compromise or arrangement under Section 230 of the Companies Act, 2013. The NCLT, New Delhi reaffirmed the decision of the NCLAT, New Delhi in the case of Shivram Prasad v. S. Dhanpal & Ors., wherein three steps were envisaged during the liquidation process for the purposes of revival and continuation of corporate debtor, namely: (a) compromise or arrangement with the creditors in terms of Section 230 of the Companies Act, 2013; (b) on failure, selling the business of the corporate debtor as a going concern; and (c) lastly, liquidation of the corporate debtor. The NCLT, New Delhi also placed reliance on the NCLAT, New Delhi decision in the case of M/s. Khitiz Gupta v. Asset Reconstruction Company & Ors. to hold that it is open to the adjudicating authority to grant a period of more than ninety days in order to complete the proceedings under Sections 230 of the Companies Act, 2013.

In M/s. Sahaj Bharti Travels v. M/s. HCL Technologies Limited, the NCLT, New Delhi admitted an application under Section 9 of the Code and held that the adjudicating authority only needs to determine the existence of the debt and the default of the debt, and need not engage in determining the extent or details of the debt. The NCLT, New Delhi placed reliance on the decision of the Supreme Court in Innoventive Industries Ltd. v. ICICI Bank & Ors., wherein it was held that the Code is triggered the moment there is a default and the application must be admitted when the same occurs.

In Deepika Surana v. V. K. Aggarwal & Co. Pvt. Ltd., the NCLT, New Delhi held that a Section 9 application is maintainable even if the name of the corporate debtor is struck off from the register of the Registrar of Companies (RoC). The NCLT, New Delhi examined Section 250 of the Companies Act, 2013, and held that Section 250 admits of two exceptions with respect to a company struck off from the register of the RoC, namely: (a) for the purpose of realizing the amount due to the company; and (b) for the payment or discharge of the liabilities or obligations of the company. The NCLT, New Delhi also placed reliance on the decision of the NCLAT, New Delhi in the case of Mr. Hemang Phophalia v. The Greater Bombay Co-Operative Bank Limited & Ors. and held that an application against such a company is maintainable.

In CBRE South Asia Private Limited v. M/s. United Concepts & Solutions Private Ltd., the NCLT, New Delhi held that though 'interest' can be claimed as a 'financial debt' under the Code, under no circumstances, it is contemplated under the Code that it can be included within the ambit of an 'operational debt'. The NCLT, New Delhi placed reliance on the judgment of the NCLT, Chandigarh Bench in M/s. Wanbury Ltd. Vs. M/s. Panacea Biotech Ltd., wherein it was held that 'operational debt' and 'financial debt' operate in two different domains and the 'interest' component is limited to the latter only.

In State Bank of India v JKS Construction Pvt. Ltd., NCLT, Chennai followed the NCLAT, New Delhi decision in Sh. Bijay Pratap Singh v Unimax International and Another, to hold that notices issued by the Registry to the registered office of the corporate debtor, which were returned with the endorsement 'returned as unclaimed', would be deemed as sufficient notice to the corporate debtor of the insolvency application.

In G4S Secure Solutions (India) Private Limited v. Heavy Engineering Corporation Private Limited, the NCLT, Kolkata held that in an application under Section 9 of the Code, the dispute must exist before the receipt of the demand notice by the corporate debtor. Further, the NCLT, Kolkata held that an operational creditor can file a single application for separate claims arising against the corporate debtor.

In ICICI Bank v. Hindustan Small Tools Private Limited, the NCLT, Kolkata, on a finding that the financial creditor had disbursed excess amounts to the principal debtor than what had been agreed upon without the consent of the guarantor, invoked its inherent powers under Rule 11 of the NCLT Rules to admit the application against the guarantor to the extent of the amount initially agreed upon and not the amount disbursed.

Karan Sangani is an advocate based out of Mumbai. Shubhaankar Ray and Soham Chakraborty are pursuing their B.A., LL.B. (Hons.) programme at NALSAR University of Law. Akshata Singh is an advocate based out of New 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/offices that they may be associated with.