NCLAT at a Glance: December 2019

NCLAT

The National Company Law Appellate Tribunal is the Apex Tribunal in the country dealing with all aspects of corporate law. The judgments pronounced by the Appellate Tribunal in the areas of Insolvency, Competition and Company law regulate all elements of a company’s functioning in India; from its registration to its functioning, and operation to its interaction with the market and various stakeholders, to its insolvency and potential resuscitation.

This monthly column seeks to cover the landmark judgments delivered by the National Company Law Appellate Tribunal and to offer a brief summary of the same in a capsule-form for the benefit of the reader.

The judgments of the National Company Appellate Tribunal (NCLAT) have been demarcated into those dealing with the provisions of the Insolvency and Bankruptcy Code, 2016 (Code), the Competition Act, 2002 and that of the Companies Act, 2013 (Act). The judgments dealing with the Code have been further categorized and dealt with in the following three stages i.e. Pre-admission stage, Corporate Insolvency Resolution Process (CIRP’) stage and the Liquidation stage.

A. Pre - Admission Stage

In Ashok Raja v. Arun Kumar Gupta & Anr. [Judgment dated 11.12.2019 in Company Appeal (AT) (Insolvency) No. 1082 of 2019], the NCLAT held that the withdrawal of a case pending before the Labor Court by the operational creditor would not mean that no dispute existed before issuance of notice under Section 8 of the Code. In the present matter, while an application was pending before the Labor Court, the operational creditor issued a notice under Section 8 of the Code. Subsequently, the application before the Labor Court was withdrawn and an application for initiation of CIRP was filed before the NCLT; which admitted the application. The NCLAT set aside such admission on the ground of there being a pre-existing dispute and held that the fact, that the application before the labor court was withdrawn by the operational creditor would not make the application under Section 9 of the Code maintainable.

In V Hotels Limited v. Asset Reconstruction Company (India) Limited [Judgment dated 11.12.2019 in Company Appeal (AT) (Insolvency) No. 525 of 2019], the NCLAT held that a financial creditor cannot derive any benefit of the action taken under the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (SARFAESI Act) for demonstrating that the application filed under Section 7 of the Code was within limitation, since the SARFAESI Act, 2002 is guided by separate provisions of limitation.

In M.S. Jain v. TVG Limited and Kiran Global Chem Limited [Judgment dated 11.12.2019 in Company Appeal (AT) (Insolvency) No. 952 of 2019], the NCLAT held that for the dues of operational debt, claimed against a Corporate Debtor, proceedings under Section 9 against a guarantor for such operational debt are not maintainable.

In Sales Tax Department, State of Maharashtra v. Calyx Chemicals and Pharmaceuticals Ltd. & Ors.[Judgment dated 06.12.2019 in Company Appeal (AT) (Insolvency) No. 670 of 2019], the NCLAT held that Sales Tax dues under the Maharashtra Value Added Tax Act (Levy and Amendment) Act, 2005 would be in the nature of an operational debt.

In Dilip Singh Sisodiya v. Ramchandra D. Choudhary [Judgment dated 13.12.2019 in Company Appeal (AT) (Insolvency) No. 1179 of 2019], the NCLAT held that a time share membership, i.e. a membership which is given to the creditor by the Corporate Debtor with a condition that for a given period of years, every year for seven days, the creditor/member will be entitled to enjoy the benefits of stay at given apartments and resorts, would not amount to a financial debt and would instead fall under the category of operational debt.

B. Corporate Insolvency Resolution Process Stage

In Arcelor Mittal India Pvt. Ltd v. Abhijit Guhathakurta, Resolution Professional of EPC Constructions India Ltd. & Ors. [Judgment dated 16.12.2019 in Company Appeal (AT) (Insolvency) No. 524 of 2019], the NCLAT held that an unsuccessful resolution applicant has no vested right to challenge the decision of the Committee of Creditors (hereinafter referred to as the ‘COC’) which rejected its resolution plan and approved another resolution plan which is under consideration of the NCLT and has not been finally decided by the NCLT. The NCLAT further held that the proviso to sub-section (4) of Section 31 of the Code which relates to obtaining the approval from the Competition Commission of India (hereinafter referred to as ‘CCI’) under the Competition Act, 2002 prior to the approval of such resolution plan by the COC, is directory and not mandatory. It was held that it was open to the COC, to look into the viability, feasibility and commercial aspect of a resolution plan and to approve the resolution plan subject to such approval by the CCI, which may be obtained prior to approval of the plan by the NCLT under Section 31 of the Code.

In JSW Steel Limited v. Ashok Kumar Gulla & Ors.[Judgment dated 4.12.2019 in Company Appeal (AT) (Insolvency) No. 467 of 2019], the NCLAT held that as regards the subsidiaries, associate companies and joint ventures of the Corporate Debtor are concerned, if any of them had any privilege or claim or assets to which they are entitled from the Corporate Debtor prior to approval of the resolution plan, such right of privilege, claim or rights over the assets stood extinguished after the approval of the resolution plan under Section 31. The NCLAT also struck down the condition imposed by the NCLT while approving the resolution plan that with regard to right to receivables, any amount recovered by the Corporate Debtor due from any third party which had been written off as bad debts or which stood in the books but had not been recovered as on the date the NCLT approved the plan before being put to any other use would be used to pay the balance amount to dissenting financial creditors.

The NCLAT held that that the NCLT had no jurisdiction to impose such conditions with regard to amount as may be recoverable by the Corporate Debtor in future.

JSW Steel Limited v. Ashok Kumar Gulla & Ors

NCLT had no jurisdiction to impose such conditions with regard to amount as may be recoverable by the Corporate Debtor in future.

In Stressed Assets Stabilization Fund (SASF) v. Bijay Murmuria, Resolution Professional & Ors. [Judgment dated 19.12.2019 in Company Appeal (AT) (Insolvency) No. 1187 of 2019], the Appellant raised the contention that Section 48 of the Transfer of Property Act, 1882 would apply to the resolution plan and that, thereby a preference was to be granted to the first charge holder over the security of others. It was argued that a first charge holder would have to be treated on a different footing than other secured creditors. The NCLAT rejected the aforesaid argument and held that the question of giving benefit to a first charge holder did not arise both on the question of facts as well as the law and that the Appellant could not derive any benefit from either Section 40 or 48 of the Transfer of the Property Act, 1882.

In Tourism Finance Corporation of India Ltd. v. Rainbow Papers Ltd. & Ors. [Judgment dated 19.12.2019 in Company Appeal (AT) (Insolvency) No. 354 of 2019], the NCLAT held that the NCLT or the NCLAT has no jurisdiction to decide the question of fact relating to whether a creditor is a secured creditor or unsecured creditor, in an appeal preferred under Section 61(3) of the Code.

In Edelweiss Asset Reconstruction Company Limited v. Sai Regency Power Corporation Pvt. Ltd. and Ors.[Judgment dated 20.12.2019 in Company Appeal (AT) (Insolvency) No. 887 of 2019], the NCLAT dismissed the challenge of an unsecured financial creditor to the Order of the NCLT directing the unsecured financial creditor/Appellant to furnish a letter of comfort in favor of the Corporate Debtor so that the Interim Resolution Professional could raise interim finance in terms of the resolution passed by the majority of the COC. The NCLAT further held that when the COC, in a meeting of the Financial Creditors, by requisite majority takes a decision with regard to CIRP costs which includes execution of responsibility put by law on the Resolution Professional (hereinafter referred to as ‘RP’) to keep the company a going concern, the same cannot be treated as forcing an unsecured financial creditor to part with property or forcing to incur liability. It was held that the unsecured financial creditor had itself sought to be part of COC and joined it. The NCLAT observed that nobody was forcing the unsecured financial creditor to file claim and/or to be part of COC. If the unsecured financial creditor is part of COC and wants to remain part of COC, the unsecured financial creditor could not expect to only claim benefits from the process and claim that it would not take any of the liabilities and responsibilities which in the present matter, were apparently based on legal provision. It was further held that in a COC meeting, the financial creditor has a right to dissent but if the decision is still taken by majority, provided under the statute, all of COC members are duty bound to abide by the decision.

In Amit Gupta , Promoter/Shareholder, M/s. Varanasi Auto Sales Pvt. Ltd. v. Yogesh Gupta, Resolution Professional of M/s. Varanasi Auto Sales Pvt. Ltd. [Judgment dated 20.12.2019 in Company Appeal (AT) (Insolvency) No. 903 of 2019], the NCLAT held that the RP cannot launch an enquiry into whether or not a Corporate Debtor falls under the classification of Medium, Small Scale or Micro Enterprise (hereinafter referred to as ‘MSME’) and the NCLT is also not expected to make such investigations, enquiries on such evidence or give findings on such issues.

Thereby, it was observed that an Applicant purporting to be an MSME must take pains to obtain and produce the Memorandum Certificate to seek benefits of being a MSME under the Code.

RESOLUTION PROFESSIONAL

RP cannot launch an enquiry into whether or not a Corporate Debtor falls under the classification of Medium, Small Scale or Micro Enterprise (hereinafter referred to as ‘MSME’) and the NCLT is also not expected to make such investigations, enquiries on such evidence or give findings on such issues

In Indiabulls Housing Finance Ltd v. Mr. Samir Kumar Bhattacharya Resolution Professional, Network Industries Ltd. and Gloster Ltd. [Judgment dated 18.12.2019 in Company Appeal (AT) (Insolvency) No. 830 of 2019], the NCLAT considered the effect of non-registration of charge on the status of a financial creditor. The NCLAT upheld the decision of the COC holding that since registration of charge had not been done at the relevant time, the financial creditor could not be treated as a secured financial creditor and would merely be an unsecured financial creditor. It was further held that a charge registered after resolution plan is approved could not be considered to assign the status of a secured financial creditor to the financial creditor.

C. Liquidation Stage

In JM Financial Asset Reconstruction Company Ltd. v. Finquest Financial Solutions Pvt. Ltd and Ors.[Judgment dated 11.12.2019 in Company Appeal (AT) (Insolvency) No. 593 of 2019], the NCLAT held that only one secured creditor could enforce its right for realization of its debt out of the secured assets as per Section 52 of the Code. It was further held that except in the manner as prescribed under sub-section (2), (3) and (4) of Section 52, if a secured creditor were to directly apply before the NCLT seeking recovery of the secured assets under sub-section (6) of Section 52, such application is not maintainable.

II. Companies Act, 2013

In Joint Commissioner of Income Tax (OSD), Circle (3)(3)-1, Mumbai v. Reliance Jio Infocomm Ltd. & Ors [Judgment dated 20.12.2019 in Company Appeal (AT) (Insolvency) No. 113 of 2019], the NCLAT held that without placing any evidence or substantiating the allegation of avoidance of tax by appearing before the NCLT, it was not open to the income tax department to hold that the composite scheme of arrangement amongst the petitioner companies and their respective shareholders and creditors is giving undue favour to the shareholders of the company and also the overall scheme of arrangement results into tax avoidance. The NCLAT observed that mere fact that a scheme may result in reduction of tax liability does not furnish a basis for challenging the validity of the same.

In Cyrus Investments Pvt. Ltd. v. Tata Sons Ltd. & Ors. [Judgment dated 18.12.2019 in Company Appeal (AT) (Insolvency) No. 254 of 2018], the NCLAT held that in the context of Indian Law, it is only to be seen whether the power exercised by a majority in circumstances to which the minority can reasonably say that it is ‘prejudicial’ or ‘oppressive’ to their interest or interest of any member or interest of the Company or the public interest. It was observed that the Indian Law i.e., Sections 241 & 242 of the Companies Act, 2013, does not recognize the term legitimate expectations to hold any act prejudicial or oppressive.