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Insolvency Law In Review – March 2021

first_imgColumnsInsolvency Law In Review – March 2021 Siddharth Sunil,Karan Sangani,SohamChakraborty&Akshata Singh4 May 2021 10:01 PMShare This – xThe 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. The purpose of this column is to fill 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 February 2021 have been summarized. However, this does not negate the possibility of some important decisions being missed on account of human error. Further, since the purpose of this endeavor is to keep practitioners abreast of relevant developments, the decisions summarized have not been comprehensively analyzed.Supreme Court In P. Mohanraj & Ors. v MS Shah Brothers Ispat Pvt Ltd, a three-judge bench of the Supreme Court held that institution or continuation of a proceeding under Section 138/141 of the Negotiable Instruments Act 1881 (‘NI Act’) would be covered within the ambit of the moratorium under S. 14 of the Insolvency and Bankruptcy Code, 2016 (‘Code’). The National Company Law Tribunal (‘NCLT’) had stayed proceedings arising of criminal complaints against the corporate debtor for the dishonour of cheques. On appeal, the National Company Law Appellate Tribunal, Delhi (‘NCLAT, New Delhi’) had set aside the NCLT’s order, while holding that a criminal law provision would not fall within the purview of ‘proceedings’ in S. 14 of the Code. Referring to the purpose of a moratorium set out in the February 2020 report of the Insolvency Law Committee, the Supreme Court held that the purpose of the moratorium was to prevent the depletion of the corporate debtor’s assets during the Corporate Insolvency Resolution Process (‘CIRP’). Therefore, quasi-criminal proceedings which could possibly result in the depletion of assets as a result of having to pay compensation for the dishonor of cheques would impact the CIRP in the same manner as a suit in a civil court for the amount of debt or other liability. Hence, the Supreme Court held that the meaning of ‘proceedings’ under S.14 could not be limited to civil proceedings. The Supreme Court also observed that S. 32A (which extinguishes criminal liability with change in management), included the liability for all offences committed prior to initiation of the CIRP, including S. 138 proceedings, which would cease to be an offence qua the corporate debtor if a new management comes in. While dealing with moratorium vis-a-vis other statutes, the Supreme Court also held that the Delhi High Court’s judgment in Power Grid Corporation of India Ltd. v Jyoti Structures Ltd., qua the inapplicability of moratorium to Section 34 proceedings under the Arbitration and Conciliation Act, 1996 (‘Arbitration Act’), was an incorrect statement of the law. In Laxmi Pat Surana v. Union Bank of India & Anr., the Supreme Court held that an application under S. 7 of the Code is maintainable against a corporate guarantor to a loan, even when the principal borrower is not a corporate person, and that the debt owed in such a case would be a “financial debt” within the meaning of S. 5(8) of the Code. The Supreme Court also observed that the status of a guarantor, being a corporate person, metamorphoses into that of corporate debtor, upon the principal borrower having defaulted in the payment of its debt. The Supreme Court further held that the limitation period for filing an application under S. 7 of the Code shall be computed afresh from the date of acknowledgement of the debt by the principal borrower from time to time, as also by the corporate guarantor. In Alok Kaushik v. Mrs. Bhuvaneshwari Ramanathan and Ors., the Supreme Court held that the NCLT has the jurisdiction under S. 60 (5)(c) of the Code to adjudicate as an insolvency cost the monetary claim of a professional (a valuer, in this case) appointed by the Resolution Professional (‘RP’) during the CIRP, even after the CIRP is set aside. The Supreme Court also observed that the NCLT’s jurisdiction is mutually exclusive from the jurisdiction of the Insolvency and Bankruptcy Board of India (‘IBBI’) to penalize errant conduct of an RP pursuant to a complaint under S. 217 of the Code. In Arun Kumar Jagatramka v. Jindal Steel and Power Ltd. & Another, the Supreme Court held that a person ineligible under S. 29A read with S. 35(1)(f) of the Code is not permitted to propose a scheme of compromise or arrangement under S. 230 of the Companies Act of 2013, when the company is undergoing liquidation under the auspices of the Code, since proposing a scheme of compromise or arrangement under S. 230 of the Companies Act of 2013 (‘Companies Act’), while the company is undergoing liquidation under the provisions of the Code, lies in a similar continuum. The Supreme Court further held that the proviso to Regulation 2B of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 (‘Liquidation Regulations’), stipulating that a person ineligible under the Code to submit a resolution plan for insolvency resolution of the corporate debtor shall not be a party in any manner to the compromise or arrangement scheme, is clarificatory in nature and constitutionally valid, and that the IBBI did not transgress its authority by inserting the proviso to Regulation 2B of the Liquidation Regulations. In Gujarat Urja Vikas Nigam Limited v. Mr. Amit Gupta and Others, the Supreme Court held that as the dispute, in the present case, pertaining to the termination of a power purchase agreement, had arisen solely on the grounds of the insolvency of the corporate debtor, the NCLT was empowered to adjudicate the dispute under S. 60(5)(c) of the Code. The Supreme Court further held that, given that the terms used in S. 60(5)(c) of the Code are of wide import, the NCLT was empowered to restrain the appellant from terminating the power purchase agreement in the factual matrix of the present case, since it was the sole contract for the sale of electricity entered into by the corporate debtor and allowing the termination of the power purchase agreement would have certainly resulted in the corporate death of the corporate debtor. Furthermore, the Supreme Court left open the broader question of the validity/invalidity of ipso facto clauses in contracts, which allow a party to terminate the contract if the counterparty enters into some form of insolvency resolution process, for legislative intervention. In Indus Biotech Private Limited v. Kotak India Venture (Offshore) Fund & Ors, the Supreme Court held that, when an application under S. 8 of the Arbitration Act is made while an application under S. 7 of the IBC is pending before the NCLT for admission, the NCLT should first decide whether the S. 7 application is to be admitted, while keeping the application under S. 8 of the Arbitration Act in abeyance. In case the application under S. 7 of the IBC is admitted by the NCLT, the proceedings under the Code become a “proceeding in rem” and the matter henceforth will not be arbitrable because of the moratorium under S. 14 of the Code. The Supreme Court further reiterated that mere filing of an application under S. 7 of the Code will not trigger the CIRP, and it is only when the NCLT admits the application upon a finding of a debt due and a default in payment that the insolvency proceedings shall commence. In A. Navinchandra Steels Private Limited Vs. SREI Equipment Finance Limited & Ors., the Supreme Court held that proceedings under Ss. 7 or 9 of the Code are independent proceedings, and hence will not be affected by any existing winding up proceeding against the corporate debtor. The Supreme Court further held that it was only in an instance where the corporate death of the company is inevitable that there could be no transfer of a winding up proceeding to the NCLT to be tried under the Code. The provisions of the Code shall prevail over the provisions of the Companies Act in the event of a conflict, since the Code is a special statute vis-a-vis the Companies Act, and also on account of the non-obstante clause in Section 238 of the Code. The Supreme Court further held that under the Companies Act, only winding up can be ordered, while under the Code a compromise can be entered into under Section 230 of the Companies Act, even when liquidation is ordered. The Supreme Court also held that the primary purpose of the Code is the revival of the corporate debtor, and that every effort should be made for such revival in larger public interest. In the matter of Sesh Nath Singh and Another v. Baidyabati Sheoraphuli Co-operative Bank Ltd. and Another, the Supreme Court held that, as S. 238A of the Code makes the provisions of the Limitation Act, 1963 (‘Limitation Act’), as far as may be, applicable to proceedings before the NCLT and the NCLAT, Ss. 6, 14, 18 and any other provision of the Limitation Act are applicable to proceedings under the Code in the NCLT or the NCLAT, to the extent feasible. Here, the proceedings initiated by the financial creditor against the corporate debtor under the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (‘SARFAESI Act’) were stayed by the Calcutta High Court by an interim order, on the prima facie satisfaction that the proceedings initiated by the financial creditor, a co-operative bank, were without jurisdiction. In this regard, the Supreme Court stated that the expression ‘court’ in S. 14(2) would be deemed to mean any forum for a civil proceeding, including any tribunal or any forum under the SARFAESI Act, and consequently, the period from the date of institution of the proceedings under the SARFAESI Act till the date of filing of the application under S. 7 of the Code could be excluded as per S. 14 of the Limitation Act. The Supreme Court further noted that the exclusion of time under S. 14 of the Limitation Act shall be available, even if the proceedings before the wrong forum have not been terminated. In Kridhan Infrastructure Pvt Ltd ((Now known as Krish Steel and Trading Pvt Ltd) v. Venkatesan Sankaranarayan and Others, the Supreme Court, while rejecting the appeal of the resolution applicant and holding that the management of the corporate debtor will revert to the liquidator from the resolution applicant due to the failure of the resolution applicant to comply with the terms of the resolution plan for a period of over eight months, noted that time is a crucial facet of the scheme under the Code, and to allow proceedings to lapse into an indefinite delay will plainly defeat the object of the Code. In Jaypee Kensington Boulevard Apartments Welfare Association and Others v. NBCC (India) Ltd. and Others, the Supreme Court held that in the adjudicatory process concerning a resolution plan under the Code, there is no scope for interference with the commercial aspects of the decision of the Committee of Creditors (‘CoC’), and that there is no scope for substituting any commercial term of the resolution plan approved by the CoC. The Supreme Court also noted that, only if the NCLT or the NCLAT, as the case may be, within their limited jurisdiction, found any shortcoming in the resolution plan vis-à-vis the specified parameters, would the resolution plan be sent back to the CoC, for re-submission after satisfying the parameters delineated by Code, and exposited by the court. The Supreme Court also noted that for a proper and meaningful implementation of the approved resolution plan, the payment to dissenting financial creditors as envisaged by the second part of S. 30(2)(b) of the Code could only be payment in terms of money, as the dissenting financial creditor cannot be forced to remain attached to the corporate debtor by way of provisions in the nature of equities or securities. In Kalpraj Dharamshi & Anr v Kotak Investment Advisors Limited & Anr., the Hon’ble Supreme Court held that, where a party invokes the writ jurisdiction of the High Court to make a bona fide challenge to NCLT proceedings for the breach of principles of natural justice, S. 14 of the Limitation Act can be invoked to extend the period of limitation to file an appeal under the Code. In the context of the process of finalisation and approval of a resolution plan, the Supreme Court also held that if the CoC approves a resolution plan accepted by RP after the due date mentioned under the Notice inviting Expression of Interest under the Code, there can be no interference with such exercise of commercial wisdom of the CoC. However, the Supreme Court also held that if a resolution applicant objects to the submission and consideration of a resolution plan beyond the specified due date, the subsequent participation of such applicant in submitting a revised resolution plan would not amount to waiver of its initial objection.National Company Law Appellate Tribunals In Kuldeep Verma v. State Bank of India and Ors., the NCLAT, New Delhi held that time is of the essence under the Code, and that the NCLT must keep the same in mind, and not delay the initiation of Liquidation proceedings, despite the lapse of 981 days since the initiation of the CIRP and the rejections of multiple proposed Resolution Plans by the CoC. The NCLAT, New Delhi further observed that it is settled law that it can exercise the same powers that are available to the NCLT, and consequently directed the initiation of Liquidation proceedings of the corporate debtor. In Kolla Koteswara Rao Vs. Dr. S.K. Srihari Raju and Anr., the NCLAT, New Delhi held that the amount owed by a seller to a purchaser under an agreement of sale, wherein the purchaser as consideration had agreed to pay off the loan owed by the seller to a financial creditor, will be considered as a financial debt under S. 5(8)(f) of the Code, provided that the debt fulfills the three-fold criteria of: i) Disbursal, ii) Time value of money, and iii) Commercial effect of borrowing, as laid down by the Supreme Court in Pioneer Urban Land and Infrastructure Ltd. and Anr. v. Union of India and Ors. The NCLAT, New Delhi further held that there is no requirement that the corporate debtor must utilize the money that has been disbursed. In the instant case, the money was paid by the purchaser to the lender pursuant to a one-time settlement entered into between the lender and the seller. In addition to this, the agreement of sale required the seller to refund the money to the purchaser with interest in case of failure to execute or register the sale deed. These factors were considered by the NCLAT as having satisfied the three-fold criteria required for a debt to be classified as a financial debt under S. 5(8)(f) of the Code. In Radico Khaitan Ltd. v. BT & FC Pvt. Ltd. & Ors., the NCLAT, New Delhi, following the judgment of the NCLT, Mumbai in SBI Vs Videocon Industries Ltd. allowed the consolidation of two CIRPs, since there existed i) Common control, ii) Common directors, iii) Common assets, iv) Common liabilities, v) Interdependence on each other, vi) Pooling of resources, vii) Intricate links between the companies, and viii) Common financial creditors. In the instant case, the application for consolidation of the CIRPs was made by the operational creditor of one of the corporate debtors, and was opposed on the ground that an operational creditor has no locus standi to make such an application, since the operational creditor is not a part of the CoC. However, the NCLAT refused to entertain the said objection, and on the facts of the case, found it to be a fit case for consolidation of the CIRPs. In Gabs Megacorp Limited v Sutanu Sinha & Anr., the NCLAT, Chennai held that where the impugned order by the NCLT pertained to adjournment simpliciter of two interlocutory applications, the person challenging such order could not be characterized as an Appellant aggrieved with an order within the meaning of S. 61 of the Code. In Himachal Pradesh State Electricity Board v CA Jalesh Kumar Grover, the NCLAT, New Delhi held that its paramount consideration was to maintain the corporate debtor as a going concern, and that straddling the corporate debtor with heavy instalments towards clearing liabilities, even if they were incurred during the CIRP, would not benefit anyone, and could have the effect of ceasing the operations of the corporate debtor.. The Appellant was the State Electricity Board (State Board), which had assailed a direction by the NCLT ordering it to not disconnect electricity supply of the corporate debtor, as long as the monthly electricity bills were paid, along with an instalment of INR 10,00,000 (Ten Lakhs) towards payment of outstanding electricity dues during the CIRP period. The State Board challenged the said direction on the ground that the quantum of INR 10,00,000 (Ten Lakhs) per month would not be adequate towards clearing electricity dues, as the NCLT had overlooked late payment surcharge mandated by the applicable tariff order. The NCLAT, New Delhi enhanced the monthly instalment to INR 12,00,000 (Twelve Lakhs). In Indian Overseas Bank v M/S RCM Infrastructure Limited & Ors., while holding that the assets of the corporate debtor cannot be proceeded against under the SARFAESI Act after imposition of the moratorium under S. 14 of the Code, the NCLAT, New Delhi upheld the setting aside of the sale of corporate debtor’s assets under the said Act, which had been conducted before the initiation of the CIRP. The Appellant took over possession of the corporate debtor’s assets, and conducted an auction sale. The issuance of sale certificate under the SARFAESI Act, and transfer of 25% consideration towards sale of the corporate debtor’s assets, had taken place before the initiation of the CIRP. However, upon initiation of the CIRP, the Appellant had filed its claim for the entire outstanding amount, and thereafter received the balance 75% consideration towards sale of the corporate debtor’s assets. The NCLAT, New Delhi held that the sale was not complete, as the total sale price was not paid before the CIRP was initiated, and therefore the continuation of the sale process during the moratorium was illegal and liable to be set aside.National Company Law Tribunals In DMI Finance Private Limited v. M/s Abloom Infotech Pvt. Ltd., the NCLT, Delhi relied upon the judgment of the NCLAT, New Delhi in State Bank of India v. Athena Energy Pvt. Ltd., whereby the NCLAT, New Delhi departed from its previous judgment in Dr. Vishnu Kumar Agarwal v. M/s Piramal Enterprises Ltd., to hold that the CIRP could be commenced against both the guarantor and borrower simultaneously. Further, the NCLT, Delhi, relied upon the Supreme Court’s judgment in Innoventive Industries Ltd. v ICICI Bank and Anr. to reiterate that it had a limited scope of inquiry while considering applications seeking the initiation of the CIRP by financial creditors, and that it only needed to be satisfied that a) There was a financial debt; b) A default had occurred; and c) The application is complete. In Yuvraj Agarwal and Anr. v. M/s Aspek Media Pvt. Ltd., the NCLT, Delhi, while following the NCLAT’s judgment in Uttam Galva Steels Limited v. DF Deutsche Forfait AG and Anr., held that the issuance of a Demand Notice and filing of an application under Ss. 8 and 9 of the Code, respectively, can be done by operational creditors only in their individual capacities, and not jointly. Consequently, the NCLT, Delhi dismissed an application that had been preferred under S. 9 of the Code, jointly by a individual and a company. In Sarita Jain Proprietor of Pratham Traders v. Silvertoan Papers Ltd., the NCLT, Delhi relied on the judgment of the NCLAT, New Delhi In Ishrat Ali v. Cosmos Cooperative Bank Ltd. and Anr. to hold that the limitation period of three years applies to applications filed under the Code, by virtue of Article 137 of the Limitation Act. Further, the NCLT, Delhi relied upon the Supreme Court’s judgment in Babulal Vardharji Gurjar v. Veer Gurjar Aluminum Industries Pvt. Ltd. to hold that a fresh computation of limitation upon an acknowledgement of liability in terms of S. 18 of the Limitation Act, is inapplicable to proceedings under S. 7 of the Code. In Amluckie Investment Co. Ltd. v. Skil Infrastructure Ltd., the NCLT, Mumbai held that S. 18 of the Limitation Act, which permits the calculation of a fresh limitation period upon acknowledgement of liability prior to the expiry of the limitation period, and S. 19 of the Limitation Act, which permits the calculation of a fresh limitation period upon payment on account of a debt or of interest on a legacy prior to the expiry of the limitation period, are applicable to proceedings under the Code. In the instant case, since the corporate debtor made interest payments within three years of the limitation period commencing from January 01, 2015, and continued to make such payments intermittently till March 31, 2019, the NCLT, Mumbai held that a fresh period of limitation would be computed from March 31, 2019 on account of Ss. 18 and 19 of the Limitation Act. In Gangamai Industries & Construction Limited v. Mr. Pankaj Joshi, the NCLT, Mumbai, held that the actions of the RP and the CoC of accepting the resolution plan of a resolution applicant after the expiry of the deadline for the submission of the resolution plan, which plan had earlier been rejected by the CoC, were prejudicial and beyond the scope of the Code. The NCLT, Mumbai observed that, after the expiry of the deadline for submission of the resolution plan, the RP with the approval of CoC, could have extended the timeline for submission of bids by issuing a fresh invitation for the expression of interest in order to provide a fair opportunity to all applicants to participate in the process. In Doha Bank Q.P.S.C v. Anish Nanavaty (Resolution Professional of Reliance Infratel Limited) and Others, the NCLT, Mumbai held that, when a financial debt is due, irrespective of whether the payment of the same has been defaulted or not, a claim can be made to the interim resolution professional (‘IRP’)/RP during the CIRP. The NCLT, Mumbai noted that if the proposition of the applicant, viz. that no claim can be made before the IRP/RP until the payment of the debt has been defaulted, is accepted, it would lead to a situation where only the defaulted debts of the creditors can be claimed, and the other creditors will end up remediless. The NCLT, Mumbai also rejected the contention of the applicant that the individual lenders, who had a beneficial interest in but not a legal title to the security (which vested with the security trustee) under the deed of hypothecation, were not entitled to file claims with the IRP/RP, holding that filing a claim before the IRP/RP cannot be construed as tantamount to enforcement of security interest. In Doha Bank Q.P.S.C v. Manish Dhirajlal Kaneria, (Insolvency Resolution Professional of Reliance Infratel Limited) and Others, the NCLT, Mumbai reiterated that the Code is a self-contained legislation providing for a specific procedure for the collation of claims, and that neither the RP nor any authority under the Code can deviate from the procedure prescribed thereunder. Consequently, the NCLT, Mumbai noted that without proper submission of documents before the IRP, and without proper verification by the IRP, the respondents could not be deemed as the financial creditors of the corporate debtor. The court further noted that the transactions covered under the corporate guarantees in question would not come within the purview of preferential transactions within the meaning of S. 43 of the Code, since the execution of the corporate guarantees was not a transfer of property or an interest of the corporate debtor for the benefit of one of its creditors or a body thereof. In Mahavir Interchem, through its proprietor, Samir Kumbhani v. Lakeland Chemicals (India) Limited, the NCLT, Mumbai held that the eligibility of a person for taking part in any process or activity under the Code has to be taken into consideration as per the timeline provided in the Code for such activity or participation. In the instant case, the NCLT, Mumbai allowed the application of the suspended director and promoter of the corporate debtor, to submit a resolution plan for the corporate debtor, as the applicant was freed from the ineligibility prescribed under S. 29A(c) of the Code, as on the stipulated timeline of the date of the submission of the resolution plan, i.e., 01.07.2020 the corporate debtor had been categorized as a micro, small and medium enterprise (MSME), vide the Central Government’s notification dated 01.06.2020. In M/S Ranasaria Poly Pack Pvt. Ltd v. M/S Uniworld Sugars Private Limited, the NCLT, Allahabad held that it is a settled position of law that the commercial wisdom of a resolution plan is not open to judicial review; and that, as long as the resolution plan meets the requirements of S. 30(2) of the Code, it would be considered valid.Siddharth is an advocate based out of Delhi. Karan is an advocate based out of Mumbai. Soham is pursuing his B.A., LL.B. (Hons.) programme at NALSAR University of Law. Akshata is an advocate based out of Delhi. The present compilation represents the exclusive work of the authors in their personal capacities, and is not linked to any of the institutions/firms that they may be associated with. TagsInsolvency and Bankruptcy Code 2016 (Code) Negotiable Instruments Act 1881 (‘NI Act’) National Company Law Tribunal (‘NCLT’) Next Storylast_img read more