Weekly Digest Of IBC Cases: April 10th To April 17th, 2022

INSOLVENCY RESOLUTION PROCESS AGAINST LEGAL HEIRS OF PERSONAL GUARANTOR BY FINANCIAL CREDITOR NOT PERMISSIBLE

Case title: Bank of Baroda v Ms. Divya Jalan

Case No: C.P. (IB) - 363/2021

The National Company Law Tribunal ("NCLT"), Kolkata Bench Consisting of Shri Rajasekhar V.K. (Judicial Member) and Shri Balraj Joshi (Technical Member) while dismissing an application filed by the Bank of Baroda (Financial Creditor), held that the application is not maintainable against legal heirs of the Personal Guarantor under the IBC. As per regulation 3(1)(a)(e) of 'Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rules, 2019', a personal guarantor to a Corporate Debtor is a person against whom guarantee has been invoked and there is outstanding dues left, partly or fully. The definition does not include the 'legal heirs'.

It was further observed that when an application under Section 95 of IBC is filed, the assets of the Personal Guarantor are hit by moratorium. If the legal heirs of the deceased Personal Guarantor are put into the shoes of the Personal Guarantor, then their personal assets would also get automatically hit by moratorium, which would cause grave prejudice to the rights of the third party. It further held that there is no provision in the IBC which envisages that the concept of legal heirs stepping into the shoes of the deceased Personal Guarantor.

2.  INSOLVENCY AND BANKRUPTCY BOARD OF INDIA

IBBI NOTIFIED THE AMENDED INSOLVENCY AND BANKRUPTCY BOARD OF INDIA (VOLUNTARY LIQUIDATION PROCESS) REGULATIONS, 2017

The Insolvency and Bankruptcy Board of India ("IBBI") had issued a Press Release on 08.04.2022 notifying the public that amendments have been made to Insolvency and Bankruptcy Board of India (Voluntary Liquidation Process) Regulations, 2017 ("Voluntary Liquidation Regulations"). The amendments are as follows:

a. The Liquidator shall prepare the list of stakeholders within 15 days from the last date for receipt of claims, where no claim from creditors has been received till the last date for receipt of claims.

b. The Liquidator shall distribute the proceeds from realization within 30 days the receipt of the amount to the stakeholders.

c. The Liquidator shall endeavour to complete the liquidation process of the corporate person within 270 days from the liquidation commencement date, where the creditors have approved the resolution under Section 59(3)(c) of IBC or Regulation 3(1)(c), and 90 days from the liquidation commencement date in all other cases.

3. NCLT DELHI

NCLT, DELHI ISSUED CIRCULAR REGARDING DEFECTIVE APPLICATIONS AND PETITIONS BASED ON RULE 28 (2) OF NCLT RULES, 2016

A circular has been issued by the National Company Law Tribunal ("NCLT"), Delhi, on 07.04.2022, in view of Rule 28 (2) of NCLT Rules, 2016. The circular states on scrutiny, if an Application is found to be defective, after notice to the party, the same shall be returned for compliance. If the defects are not complied within 7 days, the Registrar may pass appropriate orders. This notice was issued since there was a failure to remove the defects raised by the registry and to comply with the direction regarding the list of 'Common Objections' published in the website of NCLT dated 17.3.2022, 25.3.2022 and 4.4.2022

4. INSOLVENCY AND BANKRUPTCY BOARD OF INDIA (IBBI)

IBBI DISCIPLINARY COMMITTEE RESTRAINS INSOLVENCY PROFESSIONAL FROM RENDERING SERVICES FOR TWO YEARS

Case No: IBBI/DC/91/2021

In a matter before the Disciplinary Committee of the IBBI, an Insolvency Professional, namely Mr. Manoj Kumar Singh, has been found to be dispensing his duties as an Interim Resolution Professional in contravention of the Insolvency and Bankruptcy Code, 2016 ("IBC") and its regulations. The Disciplinary Committee, vide an order dated 08.04.2022, has directed Mr. Singh to not seek or accept any process or assignment; or render any services under the IBC for a period of two years from the date when the said order comes into force.

The Committee had observed that Insolvency Professional ("IP") had failed to conduct the Corporate Insolvency Resolution Process ("CIRP") as per the provisions of the IBC and its Regulations, as no proper actions were taken by him to constitute the Committee of Creditors. The Committee held that the IP has acted in contravention to the provisions of Sections 17, 18, 20, 25, 208(2)(a) and (e) of the IBC, regulations 16B, 27, 35A, 36, 36A and 40A of CIRP Regulations, Regulation 7(2)(a) and (h) of the IP Regulations and clauses 1, 2, 10, 13 and 14 of the Code of Conduct specified in First Schedule of the IP Regulations.

5. NATIONAL COMPANY LAW APPELLATE TRIBUNAL (NCLAT)

NCLAT STAYS THE CONSTITUTION OF COMMITTEE OF CREDITORS OF SUPERTECH LIMITED

Case Title: Ram Kishor Arora Suspended Director of Supertech Ltd. v Union Bank of India & Anr.

Case No: Comp. App. (AT) (Ins) No. 406 of 2022

The NCLAT Principal Bench comprising of Justice Ashok Bhushan, Dr. Alok Srivastava (Member Technical) and Ms. Shreesha Meerla (Member Technical) stayed the constitution of committee of creditors and adjourned the appeal preferred by suspended director of Supertech Limited against the order dated 25.03.2022 of NCLT New Delhi which initiated the Corporate Insolvency Resolution Process ("CIRP") against Supertech Limited to 19.04.2022.

The suspended Director of Supertech Limited submitted that company has 30 ongoing projects and default has occurred only qua one project. Also, the settlement project is pending consideration with the Financial Creditor, i.e. Union Bank of India. While the Homebuyer Association submitted that they are not in favour of CIRP of their project. It was further prayed that the Resolution Professional shall not constitute Committee of Creditors till the next date of hearing since the Union Bank is still considering the settlement proposal by Supertech Limited, however, the Union Bank of India submitted that it has rejected the settlement proposal.

6. SUPREME COURT

'DECREE HOLDERS' CAN'T BE TREATED AT PAR WITH 'FINANCIAL CREDITORS' UNDER IBC

Case Title: Shubhankar Bhowmik v Union of India & Anr.

Case No: SLP 6104/2022

The Supreme Court Bench comprising of Justice SK Kaul and Justice MM Sundresh, upheld a Tripura High Court judgment wherein it was held that "decree-holders" cannot be treated at par with "financial creditors" under the Insolvency and Bankruptcy Code, 2016 ("IBC").

The Tripura High Court had held that the decree-holder gets a statutory status as a creditor under Section 3(10) of the IBC, by virtue of the decree. Since the decree cannot be executed by operation of the moratorium under Section 14, the IBC makes a provision to protect the interests of a decree holder by recognizing it as a creditor. The interest recognized is that in the decree and not in the dispute that leads to the passing of the decree. This is apparent from the fact that decree holders as a class of creditors are kept separate from "financial creditors" and "operational creditors". No divisions or classification is made by the statute within this class of decree holders. Therefore, the IBC treats decree holders as a separate class, recognized by virtue of the decree held. The IBC does not provide for any malleability or overlap of classes of creditors to enable decree holders to be classified as financial or operational creditors. It was further held that once a decree quantifies a debt due the nature of the dispute that resulted in the quantification ceases to exist. In the books of a corporate debtor, it will show only as a liability and not as a financial debt or operational debt. The same cannot be said to be arbitrary, or unreasonable.

The Supreme Court Bench dismissed the Special Leave Petition filed against the aforesaid High Court judgment and upheld the decision of the High Court.

7. NCLT KOLKATA

RESOLUTION PROFESSIONAL CANNOT PROSECUTE PREFERENTIAL TRANSACTIONS AFTER APPROVAL OF RESOLUTION PLAN

Case title: Bank of India v Amrit Fresh Pvt. Ltd

Case No: C.P. (IB) - 263/2018

The National Company Law Tribunal ("NCLT") Kolkata Bench comprising of Shri V K Rajasekhar (Member, Judicial) and Shri Balraj Joshi (Member Technical) held that an application for preferential transactions cannot be pursued either by the erstwhile Resolution Professional ("RP") or the new Management of the Corporate Debtor after the approval of the Resolution Plan by NCLT.

The Bench held that it is incumbent upon the RP to adhere to Section 43 of the Insolvency and Bankruptcy Code, 2016 read with Regulation 35A of the IBBI (Insolvency Resolution Process for the Corporate Debtor Persons) Regulations, 2016, which mandates that the RP has to form an opinion whether the Corporate Debtor has been subjected to preferential transaction within or on 75^th day of the Corporate Insolvency Resolution Process ("CIRP") commencement date. Thereafter, the RP has to make a determination and file an application before the 135^th day.

8. NCLT KOLKATA

AMOUNT DISBURSED BY NBFC UPON ORAL AGREEMENT NOT COVERED IN FINANCIAL DEBT

Case title: Narendra Promoters & Fincon Private Limited v Vinline Engineering Private Limited

Case No: CP (IB) No.749/KB/2020

The National Company Law Tribunal ("NCLT"), Kolkata Bench comprising of Shri Rajasekhar V.K. (Judicial Member) and Shri Balraj Joshi (Technical Member) while deciding a petition under Section 7 of the Insolvency and Bankruptcy Code, 2016 ("IBC"), has held that a disbursement made by a Non Banking Financial Institution ("NBFC") over an oral agreement cannot be construed as the existence of a financial debt, when there is nothing on record to show that it was disbursed as a loan. The petition was dismissed by the Bench vide an order dated 23.02.2022.

The Bench observed that a sum of Rs. 10,00,000/- was disbursed by the Financial Creditor to the Corporate Debtor as per financial statements. However, the disbursal cannot be construed as the existence of financial debt since the written terms and conditions between the parties are not on record to show that such disbursement was a loan. Further, the Bench placed reliance on the RBI guidelines on Fair Practices Code for NBFCs, dated 18.02.2013, wherein it has been stated that the NBFCs should convey in writing to the borrower the amount of loan sanctioned, along with the terms and conditions. It was held that as RBI's circulars have statutory force, hence, it was mandatory on the part of Financial Creditor, being an NBFC, to keep the terms and conditions recorded in writing.

9. NATIONAL COMPANY LAW APPELLATE TRIBUNAL (NCLAT)

QUANTUM OF DEBT NOT TO BE DECIDED AT THE STAGE OF ADMISSION OF A SECTION 7 PETITION UNDER IBC

Case Title: Rajesh Kedia v Phoenix ARC Private Limited

Case No: Company Appeal (AT) (Insolvency) No. 996 of 2021

The NCLAT Bench comprising of Justice Ashok Bhushan (Chairperson), Dr. Alok Srivastava (Technical Member) and Ms. Shreesha Merla (Technical Member), while adjudicating an appeal has held that the quantum of debt is not be considered at the stage of admission of a petition under Section 7 of the Insolvency and Bankruptcy Code, 2016 ("IBC").

The Bench opined that it is not within their domain to decide the 'amount of debt' at the stage of admission of an application under Section 7 of IBC. It was further observed that the Appellant's contention that the debt amount is exaggerated cannot be a ground for rejection of an application under Section 7 of the IBC. The only requirement for admission is that the minimum outstanding debt should be more than the threshold amount provided for under the IBC. The actual amount of 'Claim' is to be ascertained by the Resolution Professional after collating the 'Claims' and their verification, which comes at a later stage.