Contributors to the Issue………………………………………………………………………………………………………………

Manoj K. SinghDaizy ChawlaKumar DeepJatin KapoorNeha Mittal

Sandesh Kumar

Disclaimer: The present newsletter Insolvency Round-Up, is an in-house publication of S&A highlighting the recent changes in the I&B code 2016 and other regulations w.r.t. Insolvency, brief of Judgments orders passed by various Coutts/Tribunal. All information, interpretation, opinions are that of the contributors and should not be read or understood as professional advice in any manner of S& A. the esteemed readers are advised to seek professional advice before relying on any of the contents of this present newsletter.

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CIRCULARS/NOTIFICATIONS ISSUED BY IBBI

1. The Insolvency and Bankruptcy Code (Amendment) Ordinance 2020

An Ordinance was passed on 5th June 2020, by the President of India in furtherance to the announcement earlier made by Hon’ble Finance Ministry w.r.t suspension of Fresh cases to be filed under Section 7, 9 and 10 of Insolvency and Bankruptcy Code, 2016 (“I&B Code”) due to the impact of COVID-19 pandemic on business, financial markets and economy all over the world, including India and the uncertainty and stress for business been created due to the reasons beyond the control of anybody. Vide the Ordinance the I&B Code 2016 is amended and a new Section 10A is inserted after Section 10. The newly inserted Section 10A reads as:

Notwithstanding anything contained in sections 7, 9 and 10, no application for initiation of corporate insolvency resolution process of a corporate debtor shall be filed, for any default arising on or after 25th March 2020 for a period of six months or such further period, not exceeding one year from such date, as may be notified in this behalf:

Provided that no application shall ever be filed for initiation of corporate insolvency resolution process of a corporate debtor for the said default occurring during the said period.

Explanation: For the removal of doubts, it is hereby clarified that the provisions of this section shall not apply to any default committed under the said sections before 25th March 2020.

That prior to amendment when the announcements were made of suspension of fresh insolvency application, there was confusion about what all will be exempted. Now it is clear that the bar will be only w.r.t those defaults which have occurred on or after 25th March 2020 till the period the suspension remains. Further, w.r.t defaults which occurred during the period suspension period no proceedings under I&B Code 2016 will ever be taken. W.r.t this forever exemption more clarity is still required.

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Another amendment made via Ordinance is the insertion of sub-section (3) in Section 66 which deals with Fraudulent trading or wrongful trading. Section 66 provides right to Resolution Professional to file an application before Adjudicating Authority to pass the needful order if it is found that any business of the Corporate Debtor has been carried on with intent to draft creditors. The newly inserted sub-section (3) reads as

(3) Notwithstanding anything contained in this section, no application shall be filed by a resolution professional under sub-section (2), in respect of such default against which initiation of corporate insolvency resolution process is suspended as per Section 10A.

2. Minimum Default under I&B Code raised to Rupees One Crore.

Vide notification dated 24.03.2020 by the Ministry of Corporate Affairs (“MCA”), in a major amendment made to the Insolvency and Bankruptcy Code, 2016 (“I&B Code”), the Central Government has raised the minimum amount of the default to INR 1 Crore from INR 1 lakh. Section 4 of the I&B Code has been accordingly amended. This means that a Corporate Insolvency Resolution Process can be commenced w.r.t a company if there is a non-payment of debt of INR 1 crore or more.

The reasons for this amendment, as notified by government were:

1. The banks may look at other options for recovering loans before invoking the I&B Code, especially in those cases where the amount of bad loans is not significant.

2. In few sectors applications are filed by the single class borrower, wherein, an otherwise well-func-tioning company comes to NCLT and mostly faces CIRP.

3. To prevent the abuse of the I&B Code and ensure that only genuine applications are filed.

4. To unclog the judicial system that has been congested by numerous applications being filed under the I&B Code, that could have been resolved outside the I&B Code’s purview.

3. Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) (Second Amendment) Regulations, 2020.

The Insolvency and Bankruptcy Board of India (“IBBI”) has amended the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 vide notification dated 20th April 2020, effective from 25th March 2020.

IBBI vide this notification has amended Regulation 40B, wherein sub-regulation (4) has been substituted. Regulation 40B provides for filing of forms concerning each stage and period covered under the Code, by the insolvency professional, interim resolution professional or resolution professional, as the case may be

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on an electronic platform of the Board, as per the timelines stipulated against each Form with respect to each stage and period covered under the Code.

Post this substitution, the delay in filing of any form under Regulation by the Insolvency Professional, Interim Resolution Professional, or Resolution Professional, whether by correction, updation or otherwise, shall lead to a fee of INR 500 per Form for each calendar month of delay after 1st October 2020. Hereinafter, a Form filed after 30th October 2020, from 31st October 2020 shall attract a fee of INR 500. Before this amendment, the fee was attracted after a delay of a calendar month after 1st April 2020.

4. Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) (Third Amendment) Regulations, 2020.

The Insolvency and Bankruptcy Board of India (“IBBI”) has amended the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 vide notification dated 20th April 2020, effective from the date 29th March 2020.

IBBI vide this notification has inserted Regulation 40C, wherein it provides that the timelines contained in these regulations, subject to the provisions in the I&B Code, during the period of lockdown imposed by the Central Government in the wake of COVID-19 outbreak shall not be counted for the timeline for any activity that could not be completed due to such lockdown, in relation to a CIRP.

5. Insolvency and Bankruptcy Board of India (Liquidation Process) (Second Amendment) Regulations, 2020.

A new regulation, namely, “Regulation 47A: Exclusion of period of lockdown” was inserted vide the said regulations, whereby the period of lockdown imposed by the Central Government in the wake of Covid-19 outbreak was excluded from being counted for computation of the timeline for any task that could not be completed due to such lockdown, in relation to any liquidation process.

The amended regulation was deemed to have come into force, w.e.f 17th April 2020, to clarify to the stakeholders regarding the model timeline in the completion of various tasks in the liquidation process. No person is adversely affected by giving retrospective effect.

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CIRCULARS ISSUED BY OTHER AUTHORITIES

1. New Requirement under Central Goods and Services Tax Act, 2017 for IRP/RP of Corporate Debtor.

The Ministry of Finance vide its Notification No. 11/2020 – Central Tax dated 21.03.2020 stated that those Registered persons who are undergoing the corporate insolvency resolution process under the provisions of the Insolvency and Bankruptcy Code, 2016, and the management of such Companies whose affairs are being undertaken by interim resolution professionals (“IRP”) or resolution professionals (“RP”) should follow a special procedure, from the date of the appointment of the IRP/RP till the period they undergo the corporate insolvency resolution process. The notification offers special provisions w.r.t Registration, Return, and Input Tax Credit.

2. NCLT makes Default Record from an Information Utility mandatory for both Fresh and pending applications under Section 7 Of the I& B Code.

The National Company Law Tribunal vide its order dated 12th May 2020 directed that any new insolvency petitions filed by the financial creditor under section 7 of the I&B Code 2016 must be accompanied by a default record from an Information Utility failing which no petitions will be entertained.

Further, it clarified that this order is not only applicable for fresh filing but also all the insolvency applications pending for admission.

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SUO MOTO COGNIZANCE OF LOCKDOWN ON PROCEEDINGS BY JUDICIARY

1. Cognizance for extension of limitation by the Apex Court.

SUO MOTU WRIT PETITION (CIVIL) No(s).3/2020

The Hon’ble Supreme Court vide its order dated 23rd March 2020, took suo motu cognizance of the difficulties faced by the country on account of COVID- 19 pandemic by which the litigants are facing challenges in filing their petitions/applications/suits/ appeals/all other proceedings within the period of limitation. In exercise of its powers under Article 142 read with Article 141 of the Constitution, the apex court ordered that the period of limitation in all such proceedings shall stand extended with effect from 15th March 2020 till further orders, and declared that the order should be a binding order within the meaning of Article 141 on all Courts/Tribunals and authorities.

2. NCLAT on Exclusion of Time

The National Company Law Appellate Tribunal (NCLAT) vide order dated 30th March 2020 took suo motu cognizance of the unprecedented situation arising from the COVID-19 pandemic and the difficulties faced by various stakeholders to comply with the prescribed timelines for taking the ‘Resolution Process’ to its logical conclusion. Pursuant to its powers under rule 11 of the National Company Law Appellate Tribunal Rules, 2016 (NCLAT Rules 2016), the NCLAT, decided that the period of lockdown declared/ordered by the Central Government and the State Governments, including the period as may be extended either in whole or part of the country, where the registered office of the corporate debtor may be located, shall be excluded for counting of the period for Resolution Process under section 12 of the Code, in all cases where CIRP has been initiated and pending before any Bench of the NCLT or in appeal before NCLAT. It further ordered that any interim order/ stay order passed by the NCLAT in anyone or the other appeal under the Code shall continue until the next hearing.

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IMPACT OF PANDEMIC ON WORKING OF THE TRIBUNALSCovid-19 deeply affected the working of the tribunals under the I&B Code as well. Below is a timeline of all the Notices issued by NCLT/NCLAT in light of the same:

S.No. Date Notices1. 19.03.2020 Filing counters of all the NCLT benches were closed till 27.03.2020.2. 20.03.2020 NCLAT issues notice for preventive measure for containment of Corona Virus

stating from 21.3.20-01.4.20 only urgent matters will be taken up by Bench, further stating that Tribunal on 25.03.2020 and 01.04.2020 will consider urgent matters

3. 20.03.2020 NCLAT issues composition of Bench on 25.03.2020 and 01.04.20204. 22.03.2020 NCLT notice in view of COVID – 19 breakout all NCLT benches shall remain closed

from 23.03.2020 to 31.03.2020 for judicial work, as to unavoidable urgent matters, on application by the aggrieved, through e-mail to the registry NCLT Chennai after service of notice to the other side, Hon’ble Acting President sitting singly at Chennai will examine and pass necessary orders on Wednesday and Friday

5. 24.03.2020 NCLAT issued a notice in continuation of the Notice dated 20.03.2020, which provided that in view of complete lockdown/shutdown, the Roster published regarding hearing of urgent matter/s on 25.03.2020 and 1st April 2020 was withdrawn and NCLAT complied with the limitation period prescribed by SC as per order dated 23.03.2020 in Suo Motu Writ Petition (Civil) No(s).3/2020

6. 24.03.2020 NCLT notice w.r.t application of limitation period as prescribed by SC in its order dated 23.03.2020 to the Tribunals

7. 28.03.2020 NCLT notice - in light of nationwide lockdown for 21 days NCLT notice dated 22.03.2020 was extended until 14.04.2020

8. 30.03.2020 NCLT notice w.r.t the matters, which were to be listed from 23.03.2020 to 14.4.2020 to be suitably listed from 15.04.2020 onwards before respective NCLT Benches

9. 14.04.2020 NCLT notice dated 22.03.2020 was further extended till 03.05.2020.10. 15.04.2020 NCLAT notice w.r.t suspension of court work till 03.05.2020, except for urgent

matters.11. 20.04.2020 NCLT clarified that w.e.f 21.04.2020 the Tribunal would take up urgent matters

through video conference till the lockdown ends and the same was subsequently pronounced or notified in the notice dated 3rd May 2020

12. 03.05.2020 NCLAT notice w.r.t suspension of court work until further orders except for urgent matters.

13. 03.05.2020 NCLT notice w.r.t only urgent matters to be heard through video conferencing.14. 19.05.2020 In continuation of the notice dated 03.05.2020, NCLAT notice w.r.t suspension of

court work until further orders except for urgent matters.

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ARTICLE

Whether a Sole Proprietorship Firm is eligible to file Application Under Section 7 and Section 9 of Insolvency and Bankruptcy Code, 2016 (“I&B Code”) and entitled to initiate Corporate Insolvency Resolution Process (“CIRP”) against Corporate Debtor?

An Analysis:

There have been contradictory views of various National Company Law Tribunal (“NCLT/ Adjudicating Authorities”) Benches on the subject matter “Whether a sole proprietorship Firm comes under the classification of Operational Creditor and Financial Creditor.”

First and foremost, it is relevant to look into the important definitions prescribed under the I&B Code.

According to Section 5(7) of the I&B Code, the term “Financial Creditor” means any person to whom a financial debt is owed and according to Section 5 (20) of the I&B Code, the term “Operational Creditor” means a person to whom an operational debt is owed.

According to Section 3 (23) of the I&B Code, the term “Person” Includes:

a) an individual

b) a Hindu Undivided Family

c) a Company

d) a trust

e) a partnership

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f) a limited liability partnership and

g) any other entity established under a statute.

Consequently, on a plain reading of the above definition of “Person,” it is evident that “Sole Proprietorship Firm” is not included. Be that as it may, be, according to clause (g) of Section 3(23) of the I&B Code, the term person includes any other entity established under a statute.

An entity established under a Statute can be considered as Person for Section 3(23) of the I&B Code. There are various statutes under Indian Law, that can be applied to a sole proprietorship business. Having registration under those statutes can be a binding proof of the existence of such an entity. Some examples of the lawful registrations under the statutes are as follows:

i. Issuance of PAN issued under the Income Tax Act.

ii. Issuance of MSME Registration Certificate issued by the Government of India under the MSME Act.

iii. Issuance of GST Registration Certificate issued by the Government of India under the GST Act.

iv. Issuance of Shop and Establishment License issued under Shops & Establishments Act.

v. Opening of Bank Account under the name of Proprietary Concern.

Therefore, in view of the definition of “Person” under the I&B Code and lawful endorsements of a sole proprietor under various statutes, it can be construed that, if a Sole Proprietary firm is registered under any Statute, then such proprietor Firm can be said to have been recognized under a statute.

The Hon’ble NCLT took the above view, Hyderabad Bench in Shruti Impex vs. Jeevan Polymers Pvt. Ltd. [CP (IB) No. 123/9/HDB/2018], wherein it was held that since the Operational Creditor has filed a copy of provisional GST registration Certificate and the Certificate was issued under the provisions of an Act; hence Operational Creditor has to be treated as a Person under clause (g) of Section 3(23).

In another finding by Hon’ble NCLT, Kolkata Bench in Kishore and Company v. Sri Balaji Metallics (P.)Ltd. [CP (IB) No. 165/KB/2018], the corporate debtor objected to the fact that the petition had been filed by a sole proprietorship concern. In response to this, the NCLT noted that the application filed by M/s. Kishore and Company, being represented by its sole proprietor, is legal and is maintainable. The objection regarding the maintainability raised on the side of the corporate debtor was found to be unsustainable.

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Thus, on construing of Section 2(f) and Section 3(23) together, it can be safely understood that the Sole Proprietorship Firm comes under the definition of Person. The equivalent interpretation has been taken by the Hon’ble NCLAT vide its order dated 25th February 2020 in the matter of Neeta Saha vs. Mr. Ram Niwas Gupta [191(IBC)156/2020].

The Hon’ble NCLAT in the above order overruled the decision of Hon’ble Adjudicating Authority, New Delhi Bench, in “RG Steels Vs. Berry Auto Ancillaries (P) Ltd IB-722/ND/2019”, wherein the Adjudicating Authority rejected the petition on the ground that Sole Proprietorship concern is not included in the definition of Person. Further Hon’ble Appellate Authority in Neeta Saha (supra) case observed that “Section 2 of IBC provides that the provisions of the Code apply, inter alia, to “proprietorship firms.” Further, the definition of “person” in Section 3(23) of IBC is inclusive.”

Henceforth, the Applications filed by the Sole Proprietorship Firm under the provisions of Section 7 and Section 9 of the I&B Code to initiate CIRP against the Corporate Debtor are flawlessly maintainable.

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ORDERS UNDER INSOLVENCY AND BANKRUPTCY CODE, 2016 WRT CORPORATE PERSONS

1. Notification u/s 4 of the Code raising the minimum default limit will do not apply to the applications pending for admission

Foseco India Limited Vs. Om Boseco Rail Products Limited

[CP (IB)No.1735/KB/201]

In the present case, the National Company Law Tribunal, Kolkata Bench (“NCLT”) vide its order dated 20.05.2020 admitted the application filed under section 9 of the Insolvency and Bankruptcy Code, 2016 (“I&B Code”) stating that the Central Government Notification u/s 4 of the Code dated 24.03.2020, raising the minimum default limit will do not apply to the applications pending for admission.

An application was filed by the Foseco India Limited (“Operational Creditor”) under section 9 of the Code against Om Boseco Rail Products Limited (“Corporate Debtor”) for the default of payment against the invoices raised by the Operational creditor. NCLT allowed the application by ex-parte order due to the absence of the Corporate Debtor with a direction to pay Rs. 1 lakh and directed to submit a reply within ten days from the date of order. Finally, when the matter was taken for final hearing on 13.03.2020, the Corporate Debtor requested seven days to settle the matter allowed by NCLT. During this time, COVID-19 Pandemic

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disrupted the working of the judicial work, and accordingly, this matter was taken up on 20.05.2020 through video Conference.

When the matter was taken up by NCLT through video Conference, the counsel for the Corporate Debtor argued that the amendment to Section 4 of the I&B Code vide Notification, where the minimum amount of default limit was increased from one lakh to one crore for initiating CIRP shall be considered as a retrospective and the application filed by the Operational Creditor should be dismissed for want of pecuniary jurisdiction as the amount involved was below one crore.

Accordingly, the question dealt before NCLT was whether the Notification u/s 4 of the I&B Code raising the minimum default limit will apply to the pending applications for admission. NCLT stated that it is well settled in law that the statue is presumed to be prospective unless it is held to be retrospectively given expressly or by necessary implication. It was further stated that the amendment made to Section 4 of the I&B Code nowhere mentioned that it would be applied retrospectively. Accordingly, the application was admitted.

2. The resolution plan approved by the COC is binding on all stakeholders, including the central state or local departments.

Ultra Tech Nathdwara Cement Ltd Vs. Union of India through the Joint Secretary, Department of Revenue, Ministry of Finance and Ors

[D.B. Civil Writ Petition No. 9480/2019]

The Hon’ble High Court of Rajasthan vides its order reaffirmed the supremacy of the Insolvency and Bankruptcy Code, 2016 (IBC) over any other law for the time being in force and categorically observed that the provisions of an approved resolution plan would be binding on all stakeholders of the corporate debtor, including statutory creditors.

In the present case, CIRP was initiated against Binani Cements Limited under the terms of Section 7 of the I&B Code, 2016 vide the order passed by the NCLT Kolkata Bench. Accordingly, Shri Vijay Kumar V. Iyer was appointed as the IRP. He collated and verified all the claims following the due process of law and with due diligence in which one the claims were of Revenue department amounting to INR 72.85 Crores.

Further, the resolution plan was also approved by the NCLAT vide its order dated 14.11.2018 which was further challenged by the Bank of Baroda (Financial Creditor) in the Apex court, but the apex court affirmed the order passed by the NCLAT thus giving finality to the approval of resolution plan .Pursuant to this order of Apex court, the petitioner (Ultratech Tech Nathdwara Cement Ltd Successful resolution applicant) took over the management of the Corporate Debtor and implemented the terms of the approved resolution Plan and made payments to all the creditors accordingly.

Despite the finality of resolution plan, the Revenue Department raised many demand notices in relation to the amounts and interest which became due and payable by the Corporate debtor prior to the date of

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commencement of its CIRP. The petitioner vide letter dated 26th November 2018 intimated to the Revenue Department that the due are paid according to the resolution plan. The residual debt will stand extinguished as per the policy. However, there was no positive response from the Revenue department on the same. Consequently, the petitioner filed a writ petition seeking to quash the demand notices and restrain them from raising any future demands from the petitioner towards the goods and service tax for the period before the resolution plan being finalized.

The petitioner argued that all the creditors’ claims were settled as per the terms of the RP’s approved resolution plan, which attained finality post the Apex court order. Accordingly, the Revenue Department does not have the jurisdiction to raise Demand Notices in relation to those debts which have already been settled under the terms of the resolution plan.

The Hon’ble High court observed that it is by virtue of the amended Section 31 of IBC that the Central Government, State Government, and local authorities have been put under the umbrella purview of the Approved Resolution Plan binding on them and their departments. The object of IBC is to ensure that industry under distress does not fade into oblivion and can be revived by virtue of the resolution plan and to secure this objective, and the IBC prescribes that the settlement of statutory dues as specified in an Approved Resolution Plan becomes binding on all such authorities to whom such dues are payable by the corporate debtor, and in this case, the Interests of the Department are better protected under the Ultratech Resolution Plan. Accordingly, it was held that the Department’s action of addressing Demand Notices was illegal, arbitrary, and could not be sustained with that this writ appeal was allowed.

3. Statutory freeze under Section 14(1)(d) of the I&B Code shall also apply to the land possessed by the Corporate Debtor for development under Joint Development Agreement.

Rajendra K. Bhutta Vs. Maharashtra Housing and Area Development Authority And Another

[CIVIL APPEAL NO. 12248 OF 2018]

The Hon’ble Apex Court vide its judgment set aside the observations made by the NCLAT stating that Section 14(1)(d) of the I&B Code prohibits recovery of property “occupied,” it does not refer to any rights or interests created in property, but the only actual physical occupation of the property will be considered.

The Hon’ble Apex Court rejected the contention of Maharashtra Housing and Area Development Authority (“MHADA”) that it had executed a Joint Development Agreement (“JDA”) with the Corporate Debtor to execute the necessary operations. It was only a license given to the Corporate Debtor w.r.t land and not the rights or interest was created therefore it can terminate such license during the CIRP process and is not barred under Section 14(1)(d) of the I&B Code 2016. The contention of MHADA was also upheld by Ld’ NCLT, as well as NCLAT.

The Apex Court held that a bare reading of Section 14(1)(d) of the I&B Code, clearly states that it does not deal with any of the assets or legal right or beneficial interest in such assets of the corporate debtor and only

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refers to “recovery of any property.” When recovery of property is to be made by an owner (in present case MHADA) under Section 14(1)(d), such recovery would be of property that is “occupied by” a corporate debtor which is barred.

4. Failure to hand over the unit’s possession within the committed period due to force majeure doesn’t make the corporate debtor liable.

Parvesh Magoo Vs. Ireo Grace Realtech Private Limited

[Company Appeal (AT) (Insolvency) No. 1141 of 2019]

In this case, Appeal was preferred by Parvesh Magoo - Financial Creditor against IREO Grace Realtech Private Limited (“Corporate Debtor/Respondent”) who had booked a unit, No. 203, in Tower No. A6, having a super area of 1726.91 sq. ft., in the Real Estate project, being developed by the Respondent under the name of “The Corridors” situated at Sector 67A, Gurgaon, Haryana. Allotment letter was issued to the Financial Creditor on 7th August 2013 after collecting Rs.17,00,000/- (Rupees Seventeen Lacs Only) from him. Subsequently, Apartment Buyer’s Agreement was executed on 3rd June 2014. As per Clause 13.3 of the agreement, the unit’s possession was supposed to be delivered by July 2017 (i.e., 42 months from the date of approval of building plans). But the Corporate Debtor failed to deliver the possession as on that date.

Financial creditor paid all the installments promptly as per the terms of the agreement as and when the money was demanded, which is equal to Rs.1,59,29,016/- (Rupees One Crore Fifty Nine Lacs Twenty Nine Thousand and Sixteen only). Subject to failure to deliver the unit within the prescribed time Financial Creditor terminated the agreement vide e-mail dated 8th December 2018 and sought for a refund of the total amount which is paid along with the interest amount which equals to Rs.2,07,57,385/- (Rupees Two Crores Seven Lacs Fifty Seven Thousand Three Hundred and Eighty-Five only). Pursuant to that, Financial Creditor filed an Application under Section 7 of the I&B Code,2016, for initiation of the Corporate Insolvency Resolution Process, which was rejected.

NCLAT observed and noted that though the building plan’s approval was received on 23rd July 2013, the said project could not be started as approvals from the Ministry of Environment and Fire Safety, which was mandatory before the commencement of construction, were not obtained. The Corporate Debtor obtained both the approvals on 12th December 2013 and 27th November 2014, respectively. Accordingly, the date of handover of possession was to be computed from the date of the grant of second approval. Therefore, the proposed time for handing over the possession, i.e., five years, was to expire on 27th November 2019.

Further, it was noted that the Corporate Debtor was supposed to handover the possession of the apartment within 60 months, i.e., 42 months (commitment period) + 6 months grace period + 12 months extended period from the date of approval of building plan and on fulfillment of the pre-conditions imposed thereunder as per the agreement. Before such said period, the letter for handing over possession was already issued to the Applicant.

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The Bench referred to the judgment passed by the Hon’ble Supreme Court in Pioneer Urban Land and Infrastructure Limited &Anr. v. Union of India &Ors [WRIT PETITION (CIVIL) NO. 43 OF 2019] and stated that the Adjudicating Authority has to see whether the delay is due to the Corporate Debtor and in case the delay is not due to the Corporate Debtor, but force majeure as the situation, in this case, it cannot be alleged that the Corporate Debtor defaulted in delivering the possession.

The NCLAT held that the proviso inserted in sub-Section (1) Section 7 of the I&B Code, which came to be in force since 28th December 2019, though not applicable in this Appeal, the Adjudication Authority was required to take notice of the said provision. The Bench stated that it would be desirable to determine whether the allottees had come to claim the money or get their apartment by way of resolution. If the allottees’ intention were only for recovery of the money and not for resolution for possession by apartment, the Developer would bring this to the notice of the Adjudicating Authority. Thus the NCLAT did not find any justification to interfere in the Impugned Order passed by the NCLT, and accordingly, the appeal was dismissed.

5. Adjudicating Authorities cannot go into the commercial wisdom of the COC.

Rai Bahadur Shree Ram and Company Pvt. Ltd. and Anr. Vs. Mr. Bhuvan Madanm Resolution Professional of Ferro Alloys Corporation Ltd and Ors

[CA(AT)(Ins) 207-208 of 2020]

In the above case before Hon’ble NCLAT, the Appellants pleaded for a judicial review of the Resolution Plan which was submitted by Sterlite Power Transmission Ltd. (SPTL) and duly approved by 95.15% of voting share of the Committee of Creditors (CoC) and which was further approved by the Ld’ NCLT, Cuttack Bench. The Appellants also claimed that the settlement proposal emanating from the Appellants had been rejected by the Committee of Creditors with the requisite majority leaving no scope for the Adjudicating Authority to direct reconsideration of the settlement proposal. Appellants were of the view that NCLT failed to consider whether the approved Resolution Plan conformed with Section 30 of Insolvency and Bankruptcy Code, 2016 (“I&B Code”), and its objective i.e., maximization of value of assets of the Corporate Debtor.

The Hon’ble NCLAT was, however, of the view, “that Committee of Creditors acting based on the evaluation of Proposed Resolution Plan and assessment made by their team of experts, expressed their opinion after due deliberations in CoC Meetings through voting as per voting share which is a collective business decision. The commercial wisdom of the Financial Creditors individually or their collective decision is beyond the pale of the challenge before the Adjudicating Authority. The same has been made non-justiciable.”

The Appellate Authority opined that the Committee of Creditors’ commercial wisdom with the requisite voting majority is non-justiciable, and the discretion on Adjudicating Authority is circumscribed to the scrutiny of Resolution Plan as approved by the requisite majority voting share of the Financial Creditors. The inquiry postulated under Section 31 of the I&B Code is limited to matters covered under Section 30(2)

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of the I&B Code when the Resolution Plan does not confirm the stated conditions. The Hon’ble NCLAT did not find any material irregularity in the Corporate Insolvency Resolution Process as contended by the Appellants and held that the conformity of the approved Resolution Plan with the conditions stated in Section 32 of the I&B Code could not be questioned.

6. Claims which are not dealt with under the resolution plan would stand extinguished.

Santosh Wasantrao Walokar Vs. Vijay Kumar V. Iyer and Anr.

[CA (AT)(Ins) No. 871-872/2019]

The Hon’ble NCLAT, while dealing with appeals raised in the common impugned order dated 22.07.2019, passed by the Ld’ NCLT, Mumbai Bench, which involves a common question of law, heard together and disposed of by this common judgment. One of the issues raised in the appeal was whether those claims that are not dealt with under the resolution plan could be held to be extinguished under the provisions of the I&B Code 2016.

The Appellant, the workers of the paper unit and solvent extraction industrial units of Murli Industries Ltd.(“Corporate Debtor”) alleged that the NCLT has erroneously approved the Resolution Plan submitted by Dalmia Cement (Bharat) Limited (“Successful Resolution Applicant”) vide the impugned order dated 22.07.2019. The approved Resolution Plan has been alleged to be discriminatory and threatening the livelihood of 1184 workers of the paper unit and solvent extraction industrial units of the Corporate Debtor by not paying outstanding wages and compensation for retrenchment. It is submitted by the Appellant that the claim has rejected by Vijay Kumar V.Iyer (“Resolution Professional”), inadvertently on account of lack of knowledge and proper advice, and the said claim was submitted in an incorrect form.

The NCLAT, relying on the Judgement, passed by the Hon’ble Supreme Court in Committee of Creditors of Essar Steel India Limited Vs. Satish Kumar Gupta & Ors. And K.Sashidhar Vs. K. Sashidhar v. Indian Overseas Bank and Ors.C held that all claims must be submitted to and decided by the Resolution Professional so that a prospective resolution applicant knows precisely who has to be paid take over and run the business of the Corporate Debtor. The NCLAT also reiterated that NCLT should not be involved in the Committee of Creditors’ commercial wisdom area, particularly in the approval of the commercial side of the Resolution Plan.

Accordingly, it was decided that the claims which have not been submitted to Resolution Professional or claims which have not been accepted or dealt with by the Resolution Professional in the resolution plan and such resolution plan submitted by the Resolution Professional have been approved, then such claims would stand extinguished.

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7. Acknowledgment of a Debt in the Minutes of Meeting of the Board of Directors would constitute an Acknowledgement under section 18 of the limitation act, 1963.

Rupesh Kumar Gupta Vs. Punjab National Bank & Anr.

[Company Appeal(AT) (Insolvency) No. 1119 of 2019]

The Appeal was filed against the impugned order of the NCLT Chandigarh, where the Ld’ NCLT admitted the application filed by the financial creditor on the ground that even though the application has been filed beyond the period of three (3) years from the date of NPA however, the restructuring documents and the Minutes of Meeting of Board of Directors of the Corporate Debtor can be taken as an acknowledgment under Section 18.

The Hon’ble NCLAT after considering the facts observed that the Minutes of Meeting of the Board of Directors could be clearly considered as an acknowledgment of the debt by the Corporate Debtor under Section 18 of Limitation Act and hence appeal rejected.

8. The Committee of Creditors cannot move an application for removal of Liquidator once an application for liquidation has been accepted.

Punjab National Bank Vs. Mr. Kiran Shah, Liquidator of ORG Informatics Ltd.

[CA (AT)(Ins) No. 102/2020]

The NCLT, Ahmedabad Bench, vide order dated 20.11.2019, had accepted the application (as moved by Resolution Professional) for Liquidation of M/s. ORG Informatics Limited (“Corporate Debtor”) and appointed Resolution Professional as Liquidator. The application for the liquidation of the Corporate Debtor has been moved in pursuance to the decision taken by the Committee of Creditors (“CoC”) of the Corporate Debtor.

The Appellant, Punjab National Bank, was the lead bank in the CoC, which had been formed during the Corporate Insolvency Resolution Process (“CIRP”) of the Corporate Debtor. The Appellant had raised objections with respect to the LiquidatorLiquidator’s appointment through this appeal filed before the National Company Law Appellate Tribunal (“NCLAT”).

The Hon’ble NCLAT was of the view that after the acceptance of an application for liquidation, the CoC also gets liquidated, and thus such CoC has no role to play. In such a situation, the members are only considered to be claimant whose matters are to be determined by the Liquidator. Therefore, the member of the liquidated CoC has no right to move such an application. The NCLAT also of the view that under the Insolvency and Bankruptcy Code, 2016, no provision has been provided therein which provides for making such an application. Accordingly, the NCLAT found no merit in this appeal, and thus it was dismissed.

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9. Fees and costs of the IRP are to be borne by the CoC itself and not by the Operational Creditor in case of a Liquidation order.

Committee of Creditors, M/s. Smartec Build Systems Pvt. Ltd. Vs. B. Santosh Babu & Ors.

[CA (AT)(Ins) No. 48/2020]

The NCLT, Hyderabad Bench (“NCLT”), on the recommendation of the Committee of Creditors (“CoC”) of M/s. Smartec Build Systems Private Limited (“Corporate Debtor”), has passed the order of liquidation of Corporate Debtor on 13.11.2019. The NCLT vide order dated 13.11.2019 also directed the CoC to pay the fees and cost incurred by Mr. B. Santosh Babu, the Interim Resolution Professional (“IRP”).

The CoC, aggrieved by the direction of the NCLT to pay the fees and cost incurred by the IRP, filed this appeal before the National Company Law Appellate Tribunal (“NCLAT”) and submitted that the fees and costs of the IRP are to be borne by the Applicant (“Operational Creditor”) who filed an application under Section 9 of the Insolvency and Bankruptcy Code, 2016 (“IBC”).

The NCLAT has observed that the IRP has performed his duty and constituted the CoC. Thereafter, it continued to function as IRP even beyond 30 days till the order passed by the NCLT for liquidation and not allowing him to continue as Liquidator. The NCLAT also observed that in case the IRP would have been allowed to continue as Liquidator, then in such case, the payment could have been made to him as Liquidator in terms of Section 34(8) of the IBC.

Relying on the order of the NCLAT, the NCLAT also of the view that the Operational Creditor, who moved an application, may not receive any amount during liquidation as such creditors are not secured, the creditor. Accordingly, the NCLAT rejected the submission of the COC and dismissed the appeal. Further, the NCLAT also imposed a cost of INR 1,00,000 on the CoC for filing the frivolous application.

10. Resolution Applicant should be made aware of the existing contingent right of any person.

Indian Renewable Energy Development Agency Limited Vs. Mr. T.S.N. Raja

[CA (AT)(Ins) No. 899/2019]

Indian Renewable Energy Development Agency Limited (“Appellant”) has filed an appeal before NCLAT against the impugned order dated 17.07.2019 passed by the NCLT Hyderabad Bench. The Appellant had filed an application for relief under Section 60(5) of the Insolvency and Bankruptcy Code, 2016 (“IBC”) before the NCLT inconsequent to rejection of its claim by the Resolution Professional (“RP”) in the Corporate Insolvency Resolution Process (“CIRP”) of M/s VBC Industries Limited (“Corporate Debtor”). The NCLT had dismissed the said application of the Appellant by upholding the order conveyed by the RP.

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In the present case, the Appellant had extended Term loan of INR 65 crores in favor of M/s Orissa Power Consortium Limited (“OPCL”) on 18.11.2015. Against the said loan, the Corporate Debtor had created charge in favor of the Appellant by mortgaging its property.

As the CIRP has been initiated against the Corporate Debtor, the Appellant filed its claims with the RP for the money yet to be recovered from OPCL. However, considering that OPCL has not defaulted in payment of the installments to the Appellant, the RP had not admitted the AppellantAppellant’s claim. Further, on the same ground, the NCLT upheld the order of RP and dismissed the Appellant’s applicationAppellant.

Aggrieved with the order of the NCLT, the Appellant has filed this appeal before the NCLAT on the ground that, if the CIRP goes through and the claim of Appellant is not kept in view, tomorrow if there is default then the Appellant would lose the benefit of having the mortgage in its favor.

The Appellant in its submission referred Section 3(6) of the IBC, which provides that claim also means a right to remedy for breach of a contract if such breach gives rise to a right to payment whether or not such right is matured. The Appellant also relied on the judgment of the Hon’ble Supreme Court in “Essar Steel India Limited vs. Satish Kumar Gupta & Others” Civil Appeal No.8766-67 of 2019 wherein it was observed that a successful resolution applicant could not suddenly be faced with “undecided” claims after the resolution plan submitted by him has been accepted as this would amount to a hydra head popping up which would throw into uncertainty amounts payable by a prospective resolution applicant who successfully takes over the business of the corporate debtor.

The NCLAT, relying on the judgment of the Hon’ble Supreme Court as stated above, also of the view that the Resolution Applicant in a CIRP who submits the Resolution Plan should not face any dubious claims after the Resolution Plan has been submitted by him.

The NCLAT raised its concern with the Learned Counsel for RP as to what happens in case after the Resolution Plan has been approved and the default is committed thereafter by OPCL and in which situation what would be the benefit Appellant having the security of mortgage the Appellant has taken. In response to the concern of the NCLAT, the Learned Counsel for RP stated that it would be only hypothetical and that the amount has not been due and, as such, cannot be taken into account, and the only remedy of the Appellant would be to proceed against the Principle Borrower.

As Resolution Plan concerning the Corporate Debtor has already been approved, and the same is before the NCLT and orders have been reserved, the NCLAT considered that the successful Resolution Applicant should be made aware of the existing contingent right of the Appellant. Accordingly, the NCLAT directed the Appellant to bring the existing contingent right to the notice of the successful Resolution Applicant by applying the NCLT. Further, NCLAT also directed the NCLT to note of the said right of the Appellant while considering the Resolution Plan and then making a decision after hearing the Successful Resolution Applicant.

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11. The interest of all the stakeholders, including the Operational Creditor, has to be taken care of in the Resolution Plan.

Hammond Power Solutions Private Limited Vs. Mr. Sanjit Kumar Nayak RP

[Company Appeal (AT) (Ins) No.606 of 2019]

The Hon’ble NCLAT in its recent order, while hearing an appeal filed by an Operational Creditor, pronounced that giving NIL to Operational Creditors would certainly not balance the interest of all stakeholders or maximize the value of assets of the Corporate Debtor if it becomes impossible to continue running its business as a going concern.

An appeal was filed before the Hon’ble NCLAT by an Operational creditor against the Resolution Plan submitted by the Resolution Applicants and which came to be approved by the Adjudicating Authority i.e., National Company Law Tribunal, Kolkata Bench in Company Petition (IB) No. 628/KB/2018 along with CA (IB) No. 366 & 367/KB/2019 dated 09.05.2019.

The Appellant pleaded before the Hon’ble Appellate Tribunal that the Resolution plan approved by COC was not in compliance with the provisions of Insolvency & Bankruptcy Code, 2016 (IBC) and that it is wrong on the part of Committee of Creditors (COC) to approve a Resolution Plan which only provided for the payment to members of COC and gave nothing to other stakeholders of the Corporate Debtor.

While pleading its case, the Appellant placed the reliance on the decisions in the “Committee of Creditors of Essar Steel India Limited Vs. Satish Kumar Gupta & Ors.” And “Swiss Ribbons Private Limited and Anr. V/s UOI & Ors.” Passed by Hon’ble Supreme Court.

The Hon’ble Appellate Tribunal, while deliberating decisions made in Essar Steel & Swiss Ribbons, stated the Hon’ble Supreme Court has laid down the law with regard to treatment to be given to the Operational Creditors in the Resolution Plans. The COC decision must reflect the fact that it has taken into account maximizing the value of the assets of the Corporate Debtor and the fact that it has adequately balanced the interests of stakeholders, including Operational Creditors.

In the present case, the Hon’ble NCLAT on perusal of the minutes of COC meeting dated 14.03.2019, where the COC took up and approved the revised Resolution Plan placed before it, came out with the view that the COC had approved the revised Resolution Plan of the resolution applicant without giving any reasons to demonstrate that it has taken care of the interest of all stakeholders.

Hon’ble NCLAT in its conclusion held that “There is no dispute that so many of the Operational Creditors have been left high and dry giving them nil amount which Hon’ble Supreme Court has observed that giving NIL to Operational Creditors “would certainly not balance the interest of all stakeholders or maximize the value of assets of the Corporate Debtor if it becomes impossible to continue running its business as a going concern.”

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In view of above findings, the Hon’ble Appellate Tribunal set aside the order dated 09.05.2019 and remitted the matter back to by Adjudicating Authority with a direction to send back the Resolution Plan to the Committee of Creditors to resubmit the Plan after satisfying the parameters as laid down by the Hon’ble Supreme Court in the Judgement in the matter of “Essar Steel” regarding balancing the interest of all stakeholders or maximize the value of assets of a corporate debtor and ensuring that the corporate debtor keeps operating as a going concern during the insolvency resolution process and must, therefore, make past and present payments to various operational creditors without which such operation as a going concern would become impossible.

12. The Liquidator cannot be forced to defend and surrender to action or legal proceedings depending upon the given set of facts.

Reliance Infra Power Fund, Reliance Capital Vs. Raj Kumar Ralhan

[CA (AT) (Ins) No. 318/2020]

Hon’ble NCLAT dismissed an appeal against an order dated 11.02.2020 passed in CA No. 1096 (PB)/2020 in CP (IB)-540 (PB)/2017, wherein Su Kam Power Systems Ltd. is undergoing liquidation proceedings. The Hon’ble Appellate Tribunal held that the duty of the Liquidator to defend any suit, prosecution or other legal proceedings against the Corporate Debtor as defined under the terms of Section 35(1)(k) of the IBC also includes any conscious decision that a liquidator may take whether, in the given set of facts, he needs to defend any proceedings or not.

In the present case, a time before the CIRP of Su-Kam Power system Ltd. had started, the Appellant had initiated arbitration proceedings against the Corporate Debtor, which was hit by moratorium after the order of initiation of CIRP. Later, when the authority passed the liquidation order, the Appellant desired to proceed with the arbitration proceedings. Still, the Liquidator only appeared once to inform the Arbitrators regarding the liquidation proceedings and, thereafter, did not participate, which brought the arbitration proceedings to a standstill.

The counsel for the Appellant before the Hon’ble Appellate Tribunal took the plea that as required under section 35 (1)(k) of the IBC, the Liquidator must defend any suit, prosecution or other legal proceedings and further submitted that the Appellant would not have claimed anything if it was a private individual. Still, according to the Counsel, under law, the Liquidator is bound to defend the proceeding.

Counsel for the Liquidator defended its case by submitting that the arbitration proceeding relates to the inter-shareholders dispute of the Corporate Debtor, which was started before CIRP proceedings were initiated, and the Corporate Debtor has nothing to do with such inter se dispute. Therefore, the Liquidator has decided that he need not contest the said arbitration proceedings on behalf of the Corporate Debtor.

The Hon’ble Appellate Tribunal after hearing the pleas of both the parties agreed that duty cast on the Liquidator is to institute or defend any suit, prosecution or other legal proceedings. However, the same would include any conscious decision that a liquidator may take whether or not, in the given set of facts, he

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needs to defend any proceedings. Therefore, the decision made by the Liquidator in the present case for the reasons stated, the Appellant has no right to force the Liquidator to come, defend and surrender to the actions in the arbitration proceedings.

13. CIRP cannot be initiated on a subsistence of service disputes.

Gourav Kishor Shinde Vs. Uday Yashwant Nayak & Others

[Company Appeal (AT) (Ins) No.1107 of 2019]

The present appeal was filed before Hon’ble NCLAT arising out of order passed by Ld’ NCLT. In the said order, the application filed by Mr. Uday Yashwant Nayak (“Operational Creditor/Respondent No. 1”) under section 9 of the I&B Code 2016 was admitted by the Ld’ NCLT against Godawat Consumer Product LLP (“Corporate Debtor’/ Respondent No. 2”). Accordingly, the CIRP was initiated for the Corporate Debtor.

This Appeal was filed by an employee of the Corporate Debtor, and various grounds were provided to show that there were already pre-existing disputes. The Appellant submitted that such pre-existing disputes were also brought to the notice of the NCLT; however, the same was not discussed by the NCLT before admitting the Application under section 9 of the I&B Code. The Appellant claimed that the Operational Creditor was in a Senior Post, and within a year of joining the service, the resignation was tendered. As per the Corporate Debtor requirements, certain formalities were required to be completed at the time of resignation, which was laid down in the Appointment Order. The Operational Creditor, even though aware of such operating procedures, did not follow them and hence was asked by the management to clear the issues as per procedures. The formal acceptance of the resignation was provided by the Corporate Debtor informing him to follow the procedures and ensure proper handover basis which, he would be relieved from the system, and full and final payment, subject to clearance from all concerned departments would be made. The records are shown by the Appellant explicitly proved that there existed disputes regarding requirements that were still pending.

The NCLAT observed that there were more than sufficient records to show pre-existing disputes regarding handing over of the charge and the entitlements before the Notice sent by the Operational Creditor under Section 8 of the I&B Code. Further, there were certain disputes with respect to leave entitlement and performance incentives. Hence, it was clear that there were pre-existing disputes between the parties when Notice under section 8 of the I&B Code was sent, and Application under Section 9 of the I&B Code was filed. Thus, the NCLAT was of the view that the Application under Section 9 should not have been admitted as the disputes were service disputes. Accordingly, the Appeal was allowed, and it was ordered to quash the order of NCLT, and actions taken by IRP/RP were be set aside, and the Corporate Debtor was allowed to function independently.

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14. Revival of Company is the I&B Code’s priority, despite the resolution for liquidation being passed by the COC and approved by NCLT.

Mr. Vijaykumar v. Mr. Gopalsamy Ganesh Babu & Ors.

[CA(AT)(Ins) No. 1207/ 2019]

The Hon’ble NCLAT, while setting aside the order of Ld’ NCLT, Chennai of Liquidation ordered the revival of the Corporate Debtor on the plea made the Corporate Debtor through a representative that it had already settled the dues of sole Financial Creditor and also with OC on whose Section 9 Application the CIRP was initiated. The CD also submitted that there are few more OCs who have also given the consent that once the CD will be revived and business will start, their debts will also be paid.

The Hon’ble NCLAT observed that the object of I&B Code is resolution and that effort should be made to revive the Corporate Debtor rather than to eliminate the same, found that this was a fit case for exercising their inherent powers under Rule 11 of National Company Law Appellate Tribunal Rules, 2016 in the interest of justice.

Accordingly, the NCLAT set aside the liquidation Order as well as the CIRP proceedings and allowed the Corporate Debtor to function independently through its Board of Directors.

15. Lease Rent does not qualify as an Operational Debt; notice for eviction amounts to pre-existing dispute.

Mr. M. Ravindranath Reddy v. Mr. G. Kishan & Ors.

[Company Appeal (AT) (Insolvency) No. 331 of 2019]

This Hon’ble NCLT dismissed an appeal filed against the impugned order dated passed by the NCLT Hyderabad Bench, wherein the Ld’ NCLD held that the payment due to the Lessor classifies as Operational Debt under the Insolvency and Bankruptcy Code, 2016 (I&B Code).

The NCLAT observed that NCLT had failed to look into the meaning of “Operational Debt” or “Operational Creditor” and stated that for an amount to classify as Operational Debt, three requirements had to be fulfilled:

(i) The amount falls under the definition of a claim under Section 3(6) of the I&B Code.

(ii) Such a claim should be within the confines of the definition of debt as given under Section 3(11) of the I&B Code; that is, the amount should be owed as an obligation or liability.

(iii) Such a debt should fall within the ambit of “operation debt,” as defined under Section 5(21) of the I&B Code.

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NCLAT referred to various judgments, including Jindal Steel & Power Ltd. v. DCM International Ltd. Company Appeal (AT)(Insolvency) No 288/2017, wherein the following was held:

“Admittedly, the Appellant being a tenant, having not made any claim in respect of the provisions of the goods or services and the debt in respect of the repayment of dues does not arise under any law for the time being in force payable to the Central Government or State Government, we hold that the Appellant tenant does not come within the meaning of ‘Operational Creditor’ as defined under sub-section (20) read with sub-Section (21) of Section 5 of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to ‘I&B Code’) for triggering Insolvency and Bankruptcy Process under Section 9 of the ‘I&B Code’”In addition to this, the Appellate Authority referred to the general meaning of the word operation and goods and services to hold that:

“any debt arising without nexus to the direct input to the output produced or supplied by the corporate debtor, cannot, in the context of Code, be considered as an operational debt, even though it is a claim amounting to debt.”

Further, the NCLAT also referred the Bankruptcy Law Reforms Committee Report (“BLRC Report”) for November 2015 and observed that though the BLRC Report recommended the treatment of lessors/landlords as operational creditors, the Legislature did not completely adopt the BLRC Report and the definitions did not give scope to interpret rent dues as operational debt.

NCLAT also addressed the maintainability of the petition w.r.t pre-existing dispute, which, according to NLCAT, was overlooked by NCLT. The Petitioner/Respondent had issued a legal notice under section 106 of the Transfer of Property Act, 1882 calling upon to vacate the premises and thereafter issued a Demand Notice under Section 8 of the I&B Code. Having received no response or dues as demanded, the Petitioner/Respondent filed a petition before the NCLT, which was admitted by the NCLT.

In view of the above, it was held that there was a pre-existing dispute based on which the application filed under Section 9 of the I&B Code could not have been admitted and hence allowed the appeal.

16. Failure to write “without Prejudice” in OTS does amount to an acknowledgment of the debt by the Corporate Debtor.

Bimalkumar Manubhai Savalia v. Bank of India and Anr.

[CA (AT)(Ins) No. 1166/2019]

The Hon’ble NCLAT while allowing the appeal filed by the Corporate Debtor against the order of the National Company Law Tribunal, Ahmedabad (“NCLT”) whereby the Corporate Insolvency Resolution Process initiated on an application of a Financial Creditor was challenged by the Corporate Debtor for being time-barred, in one of its observation held that “the OTS Proposal dated 01.06.2016 there was no use of the word “without Prejudice” and hence it could be treated as an acknowledgment for limitation.” In the case in hand, it was not considered as acknowledgment because the said OTS was not accepted by the Financial Creditor. It cannot be treated as an acknowledgment under section 18 of the Limitation Act, 1963.

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17. Statutory due is classified as operational debt only when it is to be paid to the relevant authority and not otherwise.

Shri IRK Raju v. Immaneni Eswara Rao & Ors.

[CA (AT)(Ins) No. 1058/2019]

The Hon’ble NCLAT, while admitting the appeal filed by the Appellants, held that Section 5(21) makes a provision of payment of statutory dues as ‘operational debt’ to the relevant authority only, and not when it is repaid to a party that has paid such statutory authority. The amendment of Section 5(21), wherein the word “repayment” in the context of statutory dues was replaced with the word “payment” made it more prominent that the intent of the Legislature that a statutory due becomes operational debt only when the same is to be paid to the relevant authority and not otherwise.

18. NCLAT upholds its jurisdiction vide Section 242 of Companies Act; Orders payment to Shareholders on pro-rata basis overlooking Section 53 of the IBC to protect the public interest.

Union of India v. Infrastructure Leasing & Financial Services Ltd. & Ors.

[CA (AT)No. 346 of 2018 with other appeals]

The Hon’ble NCLAT delivered an important judgment in the matter of Infrastructure Leasing and Financial Services Limited’ (“ILFS”) wherein it approved the resolution framework proposed by the Union of India and refused to follow the provisions under Section 53 of the Insolvency and Bankruptcy Code, 2016 (“I&B Code”).

The NCLAT, reversed the order passed by NCLT wherein Central Government’s request to grant moratorium against ILFS and the Group Companies was refused, stating that that the provisions of the Code does not apply to IL&FS, a financial service provider, and also refused to give any interim orders under section 242 of the Companies Act, 2013. However, NCLAT granted a stay of institution or continuation of suits or any other proceedings under the I&B Code, any action under SARFAESI and other reliefs, and effectively a moratorium was imposed by NCLAT Taking into consideration the nature of the case, larger public interest and economy of the nation and interest of the Company and Group Companies, vide order dated 15.10.2018. The interim order continued for almost one year. It must be noted that ILFS admitted that the total debt due across the IL&FS and its Group was approximately INR 91,000 crores as on 31.03.2018. NCLAT observed that ILFS management suppressed material information and led to overexposure of loans and borrowings. It further observed that the management of ILFS had not only failed to manage the affairs but was also involved in operation cover-up leading to damage and financial loss to various stakeholders.

In the present case, NCLAT reiterated that vide its previous order dated 15th October 2018, it had excluded the 133 Offshore Group Entities of ILFS from the purview of the interim order and allowed the ‘resolution’ of these Entities subject to the decision of the Board of Directors and supervision of the Hon’ble Justice (Retd.) D.K. Jain (whose appointment was allowed by NCLAT to supervise the operation of the resolution

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process). Twenty-two entities were classified as ‘Green Entities,’ who were in a position to clear the dues of many of the Secured Creditors including the Interveners/ Respondents, 13 entities were declared “Amber Entities” who had the ability for making payment to some of the Senior Secured Creditors as and when fall due. Many of them had the cash flow sufficiency to meet current operational payments. Only 55 Red Entities were left with regard to whom the resolution process was yet to be started.

Thereafter, time to time interim orders were passed, enabling the Entities to resolve to pay the dues of the Senior Secured Creditors, Financial Creditors, and other Lenders.

Subsequently, it was questioned whether the Shareholders’ permission was required for resolution and distribution. Union of India requested to allow the Shareholders to take the amount and get their shares. The basic objection here was not to allow the Shareholders, who have formed a Company to derive any advantage out of the resolution process, and it was at that stage, the jurisdiction of the Tribunal was challenged w.r.t the interim order passed by NCLAT dated 15th October 2018.

Arguments related to the jurisdiction of the NCLAT were presented by various Senior Counsels, for instance, Mr. Kapil Sibal, Mr. Dushyant Dave, Dr. Abhishek Manu Sanghvi and like. However, the Union of India and IL&FS justified the interim order passed by the Appellate Tribunal on 15th October 2018 and pleaded that those who have already derived advantage of the interim order should not be allowed to object at this belated stage. They further highlighted the benefits of the interim order derived by the parties during the last one year by way of resolution of different Companies and payment of dues to Secured Creditors/ Financial Creditors and other Creditors.

NCLAT after hearing all the submissions, observed that the affairs of the six Companies of IL&FS & Group Companies were being conducted in a manner prejudicial to the public interest, and there is a likelihood of the winding up of the Company for the reasons in view of the facts of this case. Therefore, the Tribunal held that it was required to pass final order, which in view of Section 242 ‘Powers of Tribunal’ and 424 ‘Procedure before Tribunal and Appellate Tribunal’ of the Companies Act, 2013, must comply with principles of natural justice and other provisions of the ‘Companies Act, 2013’ or the ‘Insolvency and Bankruptcy Code, 2016’ and of any rules made thereunder for regulating its procedure.

Referring to the celebrated case of Swiss Ribbons Private Limited & Anr v. Union of India & Ors., the NCLAT held:

“It cannot be said that NCLT while dealing with winding up matter or a matter under Section 241 r/w Section 242 particularly in a case under Section 241(2), which relates to the public interest, the principle of Insolvency and Bankruptcy Code cannot be followed.”

Considering that about 169 Companies, which are in the resolution process and the parties were allowed to move an application under Section 7, or 9, or 10, NCLAT observed that there would be an equal number of cases being filed before the NCLTs at different places and Benches, which would not be clubbed together due to absence of any power under the Companies Act or I&B Code. This, in turn, would give rise to

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several cases and consume much time of different Tribunals, and the process would be much longer and would lead to multiplicity of litigation.

Hence, the NCLAT held that the Tribunal/ Appellate Tribunal has ample power to pass an interim order in terms of Section 242(4) of the Companies Act as passed on 15th October 2018 and required no modification/ recall. Thereafter, the NCLAT held that ‘Shareholders’ could not be paid by following the procedure under Section 53 of the I&B Code as it would be against the public interest as the money invested by them is public money, who are the shareholders. Hence, NCLAT allowed for pro-rata distribution as suggested by the Union of India and the procedure as suggested by it to complete the resolution process. Further, 15th October 2018 is the date of the interim order, was to be treated as the initiation of the resolution process of the IL&FS and Group Companies.

NCLAT ordered Union of India, ILFS, and Committee of Creditors already constituted, or which may be constituted to conclude resolution of all the Entities, preferably within 90 days.

19. The apprehension of Bias expressed by the ‘Corporate Debtor’ qua the appointment Of ‘Interim Resolution Professional’ at the instance of the Financial Creditor cannot be dismissed Offhand.

State Bank of India Vs. Metenere Ltd

[Company Appeal (AT) (Insolvency) No. 76 of 2020]

The Hon’ble NCLAT vide its judgment upheld the order passed by NCLT Principal Bench, New Delhi over the appointment of a former State Bank of India (SBI) official as resolution professional in CIRP of the Corporate debtor.

NCLT Principal Bench, New Delhi based on the objections raised by the CD w.r.t of RP’s appointment who had served the financial creditor for 39 years, created apprehension of Bias as he may not act fairly and not be expected to act as an Independent Umpire. Aggrieved by this order an appeal was preferred by the Financial creditor

After hearing the facts, the NCLAT held that the fact that the proposed Resolution Professional had a long association of around four decades with the Financial Creditor and currently drawing pension coupled with the fact that the ‘Interim Resolution Professional’ is supposed to collate all the claims submitted by Creditors, though not empowered to determine the claims besides other duties as embedded in Section 18 of the ‘I&B Code’ raised apprehension in the mind of ‘Corporate Debtor’ that the proposed ‘Interim Resolution Professional’ was unlikely to act fairly justifying the action of the Adjudicating Authority in passing the impugned order to substitute him by another Insolvency Professional. Observations of the Adjudicating Authority in the impugned order with regard to ‘IRP’ to act as an Independent Umpire must be understood in the context that acting fairly qua the discharge of his statutory duties irrespective of the fact that he is not competent to admit or reject a claim.

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Accordingly, the NCLAT was of the opine from the given set of circumstances, that the apprehension of Bias expressed by the ‘Corporate Debtor’ qua the appointment of ‘IRP’ at the instance of the Financial Creditor cannot be dismissed and seeking substitution of same to ensure that the CIRP was conducted in an unbiased manner was justified, and this Tribunal could not find any legal flaw in the impugned order passed by the NCLT Principal Bench, New Delhi which is free from any legal infirmity and has to be upheld.

Accordingly, in the absence of any merits, this appeal was dismissed.

20. Retention money falls within the definition of Operational Debt as defined in Section 5(21) of the I&B CODE.

Aashish Mohan Gupta Vs. Hind Inn and Hotels Ltd. & Anr.

[Company Appeal (AT) (Insolvency) No. 1282 of 2019]

The Hon’ble NCLAT vide its judgment held that retention money is a part of the Bill, which is retained by the Corporate Debtor, as per the terms of the work order, and the same is released after the defect liability period ends. Accordingly, it held that retention money falls within operational debt as defined in section 5(21) of the I&B Code.

In the present case, CTC Projects Private Limited (Operational Creditor) was awarded work on 19.11.2011 by Hind Inn and Hotels Ltd (Corporate Debtor) for civil work of construction. In terms of the work order Retention Money of 5% would be retained from every Running Account to be released after completion of Defects Liability Period of one year from the date of award of Completion Certificate and issue of Defect Liability Certificate to be issued by the Corporate Debtor to the Operational Creditor.

The Operational Creditor’s claim herein is that the Corporate Debtor retained the Retention Money and had not paid the same even after the Defects Liability Period. Accordingly, the Operational Creditor issued a Demand Notice to the Corporate Debtor demanding Rs. 24,75,085/- along with 18% interest per annum. The Corporate Debtor took a stand that the bill and Demand Notice is barred by principles of delay and latches and stated that the claim is stale beyond limitation as per the Limitation Act. Accordingly, the Operational Creditor filed Application before the Adjudicating Authority claiming an amount of Rs. 24,74,085/-., the adjudication authority considering the facts in the Application admitted it and initiated CIRP, including the declaration of Moratorium.

Main Issues raised by the Appellant were

i) That the Retention Money does not fall within the definition of Operational Debt as defined in Section 5(21) of IBC).

ii) Retention Money should have been raised only after the successful completion of work.

iii) The Operational Creditor does not fall within the definition of Operation Creditor, as defined in Section 5(20) of IBC.

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iv) The default accrued on 01.04.2013, whereas the Application was filed before the Adjudicating Author-ity, i.e., beyond three years, and hence the claim is time-barred.

v) There is pre-existence of dispute

Observations of the NCLAT

NCLAT noted that there was no record or document to establish that there was any dispute or raised any dispute by the Corporate Debtor; hence, it concluded that there is no pre-existing dispute. Further observed that the Operational Creditor had awarded the work and the retention money cannot be treated as separate money. The retention money is a part of the main Bill, which was retained by the Corporate Debtor as per the terms of the Work Order, and the same shall be released after completion of the work and issuance of the Completion Certificate. Further, the Defect Liability Period completed on 01.04.2015, and thereafter the Operational Creditor had requested the Corporate Debtor to release money. We are of the view that it is not barred by limitation. Learned Adjudicating Authority rightly observed and held that the debt fell due from 27.07.2015 when the mail was sent by Ginjar Hotel of the Corporate Debtor stating that the Operational Creditor had attended to all the concerns and rectified the same. The other submission of the learned Counsel for the Appellant that debt does not fall within the definition of Section 5(21) of IBC is concerned, the Operational Creditor had rendered services, and there is no dispute with regard to the said services, and we cannot accept that the said claims will not fall under the definition of Operational Debt. And regarding retention money, it is considered as a part of the main Bill, thereby the Operational Creditor is well within the definition of Section 5(20) IBC.

After considering the issues raised, the NCLAT held that the operational creditor mentioned here falls under the category of Operational Creditor as defined under Section 5(20) of the I&B Code, and the ‘debt’ is an Operational Debt as per law, which is due and payable. And regarding the issues of limitation and pre-existence of dispute, it was held that there is no pre-existence of dispute, and Application is not barred by limitation.

Accordingly, the appeal was dismissed as there was no illegality in the order passed by the learned Adjudicating Authority, in admitting the application under Section 9 of IBC.

21. Application under Section 7 of the I&B CODE can be filed against a company that is Guarantor to a Proprietorship Firm.

Laxmi Pat Surana Vs. Union Bank of India

[Company Appeal (AT) (Ins) No. 77 of 2020]

The Hon’ble NCLAT rejected the appeal filed by the Corporate Debtor through its representative wherein it submitted that Application under Section 7 could not be considered against it, in view of the definition of corporate guarantor as stated in Section 5A of IBC,2016 since it is a guarantor to sole proprietorship firm and not to the corporate Person.

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The Appellate Tribunal, after considering the facts that the Corporate Debtor being a Corporate Person and registered under the Companies Act, 2013, had guaranteed ‘Surety’ with regard to Contract with Proprietary firm. Section 145 of the Indian Contract Act, 1872, clearly states that in respect of every Contract of Guarantee, there is an implied Promise of the Principal Debtor to indemnify the Surety. The Appellant took a stand that the Corporate Debtor as a Corporate Person being a company under the Companies Act, 2013 and had given Surety but in relation to a Contract or Guarantor or Corporate suffice it to make a pertinent mention that a corporate debtor had guaranteed Surety regarding this Contract where debtor firm was a proprietor concern. Besides these, a corporate debtor cannot stay away from his liability to pay the debt to the financial creditor/ bank and also that the corporate debtor had taken guarantee in respect of Section 5(8) of the IBC, 2016 and M/s Mahaveer Construction had borrowed the money against the payment of interest from the Bank. The proceedings under Section 7 of the IBC, 2016, can be triggered by a financial creditor who had taken a guarantee in respect of debt against the guarantor for failure to repay the money borrowed by the principal borrower.

It was clarified that the term ‘Financial Debt’ includes a debt owed to a creditor by a principal and a guarantor. An omission or failure to pay on the part of a guarantor to the financial creditor, when the principal sum is claimed/demanded, would come with the scope of default under Section 3(12) of the Code. And by virtue of a deed of guarantee, corporate debtor being a ‘Corporate Person’ owes a debt to the Bank. ‘Corporate Debtor,’ according to Section 3(8) of the IBC, 2016 means a Corporate Person who owes a person’s debt. Accordingly, the application was dismissed

22. Inviting the Operational Creditor to a meeting of unsecured creditors for approval of Amalgamation of the Corporate Debtor is a valid proof for pre-existing dispute.

Megamet Steels Private Limited v. Agarwal Mittal Concast Private Limited

[C.P (I.B) No. 533/9/NCLT/AHM/2018]

While rejecting the contention made by Corporate Debtor that there exists the pre-existing dispute, the Ld’ NCLT, Ahmedabad bench held that since the OC was invited by the Corporate Debtor to the meeting held for Amalgamation wherein the OC had objected to the scheme. Hence this was proof enough of acknowledgment of the debt due by the CD to the OC and rejected the CD’s plea w.r.t any pre-existing dispute.

23. Section 69(2) of the Indian Partnership Act 1932 applies only to suits and not proceedings.

M/s NN Enterprises Vs. Relcon Infra Projects Limited

[CP (IB) 3980/MB/C-IV/2018]

An application was filed under section 9 of the I&B Code, 2016 by an Operational Creditor, through Partner as the OC was a Partnership before NCLT, Mumbai seeking to initiate CIRP against Corporate Debtor. The Corporate debtor contended that the Operational Creditor, being an unregistered partnership

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firm cannot maintain the present petition under the I&B Code. The relevant section 69(2) of the Indian Partnership Act, 1932, relied upon by the Corporate Debtor which reads as

(2) No suit to enforce a right arising from a contract shall be instituted in any Court by or on behalf of a firm against any third party unless the firm is registered. The persons suing are or have been shown in the Register of Firms as partners in the firm.”

The Corporate Debtor contended that the “partnership firm” referred to in section 3(23) of the IBC essentially means a registered partnership firm and not an unregistered one.

The Tribunal noted that a plain reading of the provisions of section 69(2) of the Indian Partnership Act, 1932, reveals that the term “suit” has been used instead of the term “proceedings” also it relied on the decision of the Hon’ble Apex court in the case of Gaurav Hargovindbhai Dave Vs. Asset Reconstruction Company and Sagar Sharma vs. Phoenix ARC Private Limited to conclude that the provisions of section 69(2) of the Indian Partnership Act, 1932, applies to “suits” and, therefore, cannot apply to “proceedings” under the I&B Code.

***

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NOTES

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NOTES

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NOTES

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