NCLAT Fortnightly: Important orders on IBC (June 16 - 30, 2023)

The following is a snapshot of the important orders passed by the National Company Law Appellate Tribunal (“NCLAT”), under the Insolvency and Bankruptcy Code, 2016 ("Code”), during the period between June 16, 2023 to June 30, 2023.

For ease of reference, the orders have been categorized and dealt with in the following categories i.e., Pre-admission stage and Corporate Insolvency Resolution Process (“CIRP”) stage.

Pre-admission stage

1. In G. Sundaravadivelu v. Indian Overseas Bank Company Appeal (AT) (CH) (INS.) No. 143 of 2022, the NCLAT held that at the time of consideration of a Section 7 application, the Adjudicating Authority is only required to ascertain the existence of default. If the liability is more than the limit prescribed under Section 4 of the Code, the Adjudicating Authority should not reject a Section 7 application, without being concerned about any dispute pertaining to the exact quantum, which determination is left for the Resolution Professional at the time of the admission of a claim.

The NCLAT also held that restriction on the creation of any third party right in respect of a property of the corporate debtor was not a bar on the Adjudicating Authority to admit a Section 7 application filed by a financial creditor.

2.  In V. Duraisamy v. Jeyapriya Fruits and Vegetables Commission Agent and Ors. (Company Appeal (AT)(CH)(Ins) No.25/2022), the NCLAT held that where no claim has been filed, a committee of creditors (CoC) cannot be constituted with the applicant (on whose basis the application was admitted) as a sole member of the CoC if such applicant-creditor has itself also not filed any claim with the resolution professional.

3. In B.V. Gautam v. Clarke Energy India Private Limited and Anr. (Company Appeal (AT) (CH) (Ins) No. 148/2022), the NCLAT held that the arguments of the corporate debtor justifying a delay of thirteen months for raising issues with respect to the quality of the engine, on the grounds that engine efficiency could only have been ascertained after ‘only after a lapse of some time’ and since that the Memorandum of Understanding between the relevant parties did not provide for a specific time period within which any dispute was to be raised, were not acceptable. The NCLAT held that the defenses raised by the corporate debtor were spurious, hypothetical, and illusory and that there were no pre-existing disputes.

4. The NCLAT, in Sterling and Wilson Private Limited v. Embassy Energy Private Limited (Comp. App. (AT) (CH) (Ins.) No. 161 of 2022), held that where the agreement between the principal employer and the contractor specified that a sub-contractor of the contractor would not have any contractual relationship with the principal employer and would not be entitled to prefer any claims against the principal employer, a sub-contractor who is not a party to the principal agreement would not be entitled to maintain a claim for recovery of unpaid dues on the basis of a letter of comfort issued by the principal employer in favour of the sub-contractor, agreeing therein to directly pay the sub-contractor any amount remaining due from the contractor.

The NCLAT further noted that the scope and objective of the Code is not to send a commercially solvent company, like the corporate debtor, to insolvency and on basis the above the NCLAT rejected the appeal.

CIRP Stage

1. In International Asset Reconstruction Company Private Limited v. Viceroy Hotels Limited and Anr. (Company Appeal (AT)(CH)(Ins) No.325/2021 IA Nos. 674 & 675 /2021 and 26 &151/2022), the NCLAT rejected a challenge filed by the minority members of the committee of creditors questioning the justifiability of withdrawal of appeal filed by the majority members of the CoC, which appeal had challenged the decision of the Adjudicating Authority to reject the resolution plan approved by the CoC.

The NCLAT further noted that an appeal filed by a concerned aggrieved person could be withdrawn by it/him ‘simpliciter’ for reasons best known to him/it, considering that the axiomatic principle in law is that in a legal proceeding before a court of law, it is for the petitioner/plaintiff to be the dominus litis and he or it stands or falls on his/its own legs.

2. In Consortium of Prudent ARC Limited v. Ravi Shankar Devarakonda and Ors. (Company Appeal (AT) (CH) (Ins) No. 37/2023), the NCLAT held that, the restriction contained under  Regulation 39(1A) of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 which allowed for the modification to a resolution plan only once, does not bar the committee of creditors from accepting a increased revised bid pursuant to running of a challenge mechanism, especially where all other applicants were given an opportunity to participate in the challenge process.

3. In Michael Meenator v. PT Joy, Insolvency Resolution Professional Mir Realtors Private Limited (Comp App (AT) (CH) (Ins) No.162/2023), the NCLAT held that even where the corporate debtor had only constructed apartments on behalf of and at the cost of the appellant, which cost was paid as consideration thereto, handing over the possession of the apartment during moratorium would be barred and such a transfer may also attract the application of Section 43(2)(b) of the Code, if such transfer results in alienating/ disposing/ transferring of the assets or beneficial interest or any legal rights arising thereto in a manner which would have the effect of placing such creditor/ surety/ guarantor in an advantageous position than it would have otherwise been at the time of distribution of assets under Section 53 of the Code.

4. In Central Board of Trustees v. Shri Kumar Rajan (Company Appeal (AT) (CH) (Ins) No. 268/2021) wherein the approved resolution plan treated the provident fund dues as operational debt and provided for a only part-payment of the admitted amount, relying on Jet Aircraft Maintenance Engineers Welfare Association v. Ashish Chhawchharia, Resolution Professional of Jet Airways (India) Limited & Ors (Company Appeal (AT) (Insolvency) Nos. 752, 643, 792, 801 915 of 2021, 361, 771 & 987 of 2022), the NCLAT held that both provident fund dues and gratuity dues are required to be paid in full without any haircut.

About the authors: Arka Majumdar is a Partner; Juhi Wadhwani is a Senior Associate; Vikram Chaudhuri and Ayush Chaturvedi are Associates at Argus Partners.