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NCLAT at a glance: Judgments passed in October 2019

NCLAT at a glance: Judgments passed in October 2019

Bar & Bench

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 (hereinafter referred to as the ‘NCLAT’) have been demarcated into those dealing with the provisions of the Insolvency and Bankruptcy Code, 2016 (‘Code’) and that of the Companies Act, 2013. 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.

Insolvency and Bankruptcy Code, 2016

Pre-Admission Stage

In Neeraj Saluja & Anr. vs. State Bank of India[1], the NCLAT held that wherein a petition under section 7, the debtor has alleged that it should be entitled to set off the financial debt against subsidy which should have been made available to the corporate debtor by an application to be filed by the financial creditor with the Government and which has not been done, the National Company Law Tribunal (NCLT) cannot decide the question of liability of one or other party relating to asking for subsidy from the central government which cannot be claimed as a matter of right and which will be depending on the functioning of the company.

In Amit Gupta, RP of Unimark Remedies Ltd. vs. Corporation Bank & Anr.[2], the NCLT division bench had delivered a split decision but had not referred the dispute to a third member. In appeal, the NCLAT permitted the appellant to bring to the notice of the NCLT division bench which had passed the split verdict, the need for reference to a third member. The NCLT was directed to take steps to refer the matter to the third member in accordance with law and if so required, after necessary permission of the President, NCLT. The appellant was also directed to bring the facts to the notice of the President, NCLT who might pass the appropriate order to place the matter before the third member.

In Padmaiah Vuppu vs Reliance Capital AIF Trustee Company Pvt. Ltd. & Ors.[3], the NCLAT held that even where the corporate guarantee was given by the managing director of the corporate debtor against the provisions of Section 185 of the Companies Act, 2013 and no board or special resolution had been passed but where it is not in dispute that the corporate guarantee was executed long before the application under section 7 was filed and since then the matter had not been challenged by any of the shareholders/directors of the corporate debtor before any competent authority or court of law, then in such circumstances, it is not open to any shareholder/ director/ managing director to raise such issue in petition under Section 7 of the Code, as the NCLT has no jurisdiction to decide the question of legality and propriety of the corporate guarantee executed by the corporate debtor.

In Raj Singh Gehlot, Director of Ambience Pvt. Ltd. vs. Vistra ITCL(India) Ltd. & Anr. [4], the NCLAT set aside an order of the NCLT which had been heard and reserved by a division bench. Subsequently, the technical member retired and the judgment was pronounced by the judicial member. It was contended that the matter having been heard by two members, the final order could not have been passed by the judicial member, in light of section 419(3) of the Companies Act and Rule 152(4) of NCLT Rules, 2016. The NCLAT agreeing with the contention remitted back the matter to the NCLT to be heard and decided afresh.

In M/s Saregama India Limited vs M/s Home Movie Makers Private Limited[5], the NCLAT held that under the Code, the NCLT will not go into the aspects of the veracity of the agreement, its breach, voidability etc. The NCLAT held that the NCLT is not a civil court to decide the breach of the contract between the parties and that the Code is a code by itself and the tribunals will have to go strictly by the provisions of the Code.

In Karan Goel vs. M/s Pashupati Jewellers & Anr.[6], the NCLAT held that in an application under section 7 of the Code, it was not open to the NCLT to deliberate on the issue whether an e-stamp is a forged document or not. Merely because a suit has been filed by the appellant and is pending, cannot be a ground to reject the application under section 7 of the Code. Pre-existing dispute cannot be a subject matter of Section 7, though it may be relevant under Section 9 of the Code.

Corporate Insolvency Resolution Process Stage

In Anurag Nirbhaya vs Anuj Maheshwari & Ors.[7], the NCLAT while deciding an IRP’s (Hereinafter referred to as the “IRP”) claim for fees that were claimed at the rate of Rs.12 lakhs for the first month and Rs.11 Lakhs per month for the period of two and half months, held that the IRP had made an exorbitant claim. It was stated that in general circumstances, fee at the rate of Rs.1 lakh per month to the IRP was allowed by the NCLAT and as more than that sum had been paid to the IRP, no further sums were due.

In John Varghese vs. Value Designbuild Pvt. Ltd. and Ors.[8], the NCLAT held that a disputed question as to whether the voting share is less than 90% or not cannot be decided by the NCLAT. It was further held that percentage of voting share if 89.95% can be rounded off to 90%. The NCLAT also held that that in the interest of home buyers, if a majority of the home buyers/allottees decide to vote in favour of section 12A to return the corporate debtor to the original promoter for completion of the project, at the instance of one person normally it should not be stopped. It was further determined that it was also open to the NCLT to dismiss the application under section 7, if admitted claim amount is not accepted by one of the financial creditors and the financial creditor makes hindrance, which otherwise affects a large number of home buyers/allottees especially when the home buyers have decided to vote in favor of section 12A application.

In Sobodh Kumar Agrawal vs. EIH Ltd.[9], the NCLAT had the occasion to decide on the applicability of moratorium in a factual scenario where the claimant had filed a claim against the corporate debtor vide arbitration proceedings and a counterclaim had also been filed by the corporate debtor vide separate arbitration proceedings against the claimant. The NCLAT held that even though the counter-claim made by the corporate debtor is a separate proceeding than that of the arbitral proceedings filed by the claimant but they cannot be segregated. The claim of the claimant as against the corporate debtor cannot be determined by the arbitral tribunal during the period of moratorium passed by the NCLT. In such a situation, wherein it cannot be decided as to what amount can be taken as the claim amount and counter-claim amount, the NCLAT held that the counter-claim filed by the insolvent corporate debtor also cannot proceed. The NCLAT distinguished its judgment in Jharkhand Bijli Vitran Nigam Ltd. vs. IVRCL Ltd. (corporate debtor) & Anr.[10], wherein it had held that the arbitral tribunal could proceed with the claim and counter-claim of the parties but if on determination, if it is found that the corporate debtor is liable to pay certain amount, in such case, no recovery can be made during the period of moratorium, and stated that in the aforesaid case, the claim petition was filed by the corporate debtor and not the counter-claim. The order of moratorium passed by the NCLT was not applicable to such arbitration proceedings where the corporate debtor is the claimant. However, the moratorium would apply where the corporate debtor is not the claimant as in the instant case.

In Mr. S. Rajendran, Resolution Professional of PRC International Hotels Private Limited vs. Jonathan Mouralidarane.[11], the Resolution Professional (Hereinafter referred to as ‘RP’) collated the claim of the financial creditor and held the claimed amount was Nil. Against the determination, the financial creditor filed an application under section 60(5) of the Code before the NCLT which after considering the records and notice to the RP, accepted the total claim as contended by the financial creditor. The RP appealed against the acceptance of claim and the appeal was dismissed on the ground that the RP had no jurisdiction to determine the claim as pleaded in the appeal. The RP could have only collated the claim, based on evidence and the record of the corporate debtor or as filed by the financial creditor. If an aggrieved person thereof moves before the NCLT and the NCLT after going through all the records, comes to a definite conclusion that certain claimed amount is payable, the RP should not have moved in appeal, as in any manner, the RP would not be affected.

In Gujarat Urja Vikas Nigam Ltd. vs Mr. Amit Gupta[12], the NCLAT had the opportunity to examine the effect of initiation of CIRP on existing contracts of the corporate debtor. In the instant case, the appellant was the only purchaser of electricity generated by corporate debtor. in view of the initiation of CIRP, the appellant sought to terminate the power purchase agreement with the corporate debtor. On application by the RP, the NCLT prohibited the appellant from terminating the power purchase agreement, with liberty to terminate, if the corporate debtor goes into liquidation and against such order, the instant appeal was preferred. The NCLAT held that to keep the corporate debtor a going concern, which is generating electricity and supplying only to the appellant, the NCLT rightly asked appellant not to terminate the power purchase agreement. The NCLAT made it clear that the appellant, being purchaser of the electricity cannot terminate the power purchase agreement solely on the ground that the CIRP has been initiated against the corporate debtor which is generating electricity and supplying it when there is no default in supplying electricity and that during the CIRP, the appellant is liable to pay the dues of the corporate debtor for the electricity supplied by the corporate debtor. The NCLAT also deleted the observation of the NCLT wherein it was observed that the appellant may terminate the power purchase agreement if the corporate debtor goes into liquidation, as the NCLAT held that even during the liquidation process, the liquidator is to ensure that the corporate debtor remains a going concern.

In Rajiv Dhamija vs. Alliance Broadband Services Pvt. Ltd. & Anr[13], the NCLAT refused to allow the appellant to settle with the financial creditor on whose behalf CIRP was initiated against the corporate debtor despite the fact that the committee of creditors had not been constituted. This was so as the application of the financial creditor for initiation of CIRP had been allowed by the NCLT but there were several other petitions praying for initiation of CIRP before the NCLT which were not entertained as the order of initiation of CIRP had already been passed. These creditors had been asked to file their claims before the IRP. The IRP also submitted that she had received claims amounting to Rs.118 Crores approximately. In the facts and circumstances, the NCLAT held that it was not inclined to allow the corporate debtor to settle the matter with only one Financial Creditor but give liberty to the appellant to move before the IRP by filing an application for settlement under Section 12A of the Code.

In E. Shanmugam vs. Bank of India & Ors.[14], the NCLAT held that an ex-managing director who had been working until the new management came in due to initiation of CIRP, would be excluded from the committee of creditors as there was a possibility of conflict of interest.

In Committee of Creditors vs. Mrs. Sonu Jain, Resolution Professional for Marina Projects Pvt. Ltd. & Ors.[15], the NCLAT held that even with the consent of the operational creditor, the corporate debtor cannot pay the fees of the IRP. The NCLAT approved the direction of the NCLT directing the committee of creditors to pay the fees of the IRP, and the same could be adjusted from the insolvency resolution process which includes the fee of the IRP.

Liquidation Stage

In Jindal Steel and Power Limited vs Arun Kumar Jagatramka & Anr [16], the NCLAT held that in a liquidation proceeding under Code, a petition under Section 230 to 232 for compromise and arrangement under the Companies Act, 2013 is maintainable but the Promoter, if ineligible under Section 29A cannot make such an application for compromise and arrangement.

In Sri Ch. Sridhar vs. Dr. G.V. Narasimha Rao & Ors.[17], the NCLAT held that non-provision of documents relating to fair value and liquidation value to the promoter of the corporate debtor cannot be a ground to interfere with an order of liquidation. However, since the order of liquidation had been passed, the NCLAT was of the view that all the stakeholders, including the promoters/shareholders are entitled to know the fair value/ liquidation value of the corporate debtor and directed the provision of such documents to the appellants.

Companies Act, 2013

In Axestrack Software Solutions Pvt. Ltd. vs. Harman Singh Arora and Ors.[18], it was held that the member complaining of oppression or mismanagement must make out a prima facie case warranting grant of relief in the nature of an interim order. The making of an interim order by the NCLT under Section 242 (4) of the Companies Act, 2013 envisages a scenario wherein the affairs of the company have not been or are not being conducted in accordance with the provisions of law and the Articles of Association. To prove a prima facie case, the applicant alleging oppression and mismanagement has to demonstrate that he has raised fair questions in the company petition which requires probe. Fairness of questions depends on the nature of allegations which, if proved, would entitle the member complaining of oppression and mismanagement to final relief in terms of provisions of Section 242. It was further held that the NCLT is required to disclose in an order granting interim relief, the material which was taken into consideration for arriving at a conclusion that the allegations in the Company Petition stood prima facie substantiated. The NCLT must be satisfied that apart from the merits of the allegations of oppression and mismanagement which may have occurred in the past, the present state of affairs, of the company warrants passing of interim directions to regulate the conduct of the affairs of the company. It was also held that in appropriate cases, the NCLT may even grant interim relief having the attributes of a final order but in such cases, the applicant would have to establish a strong prima facie case in addition to other legal considerations like an imminent legal injury of irreparable nature and balance of convenience lying in favour of the applicant.

In Surinder Kumar Batra & Anr. vs. Daffodills India Pvt. Ltd. & Ors.[19], the appellants alleged oppression and mismanagement and had stated that money was siphoned off using blank cheques signed by one of the appellants. The NCLAT held that appellants having issued a pre-signed cheque, they cannot allege, in the absence of any record, that the cheques have been misappropriated. It was also held that the appellants should not have issued blank pre-signed cheque and such act is against the provisions of the Negotiable Instruments Act, 1881 and is a violation of the Statute.

Swaroop George is an independent advocate practicing at New Delhi

NCLAT at a glance: Judgments passed in October 2019

[1] Judgment dated 16.10.2019 in Company Appeal (AT) (Insolvency) No. 226 of 2018

[2] Judgment dated 17.10.2019 in Company Appeal (AT) (Insolvency) No. 1078 of 2019

[3] Judgment dated 14.10.2019 in Company Appeal (AT) (Insolvency) No. 1025 of 2019

[4] Judgment dated 25.10.2019 in Company Appeal (AT)(Ins) No. 971 of 2019

[5] Judgment dated 23.10.2019 in Company Appeal (AT)(Insolvency) No. 359 of 2019

[6] Judgment dated 1.10.2019 in Company Appeal (AT)(Insolvency) No. 1021 of 2019

[7] Judgment dated 14.10.2019 in Company Appeal (AT)(Insolvency) No. 1024 of 2019

[8] Judgment dated 16.10.2019 in Company Appeal (AT) (Insolvency) No. 898 of 2019

[9] Judgment dated 24.10.2019 in Company Appeal (AT) (Insolvency) No. 1122 of 2019

[10] Judgment dated 3.08.2018 in Company Appeal (AT) (Insolvency) No. 285 of 2018

[11] Judgment dated 1.10.2019 in Company Appeal (AT) (Insolvency) No. 1018 of 2019

[12] Judgment dated 15.10.2019 in Company Appeal (AT) (Insolvency) No. 1045 of 2019

[13] Judgment dated 22.10.2019 in Company Appeal (AT) (Insolvency) No. 1002 of 2019

[14] Judgment dated 16.10.2019 in Company Appeal (AT) (Insolvency) No. 1053 of 2019

[15] Judgment dated 23.10.2019 in Company Appeal (AT) (Insolvency) No. 1115 of 2019

[16] Judgment dated 24.10.2019 in Company Appeal (AT) (Insolvency) No. 221 of 2018

[17] Judgment dated 25.10.2019 in Company Appeal (AT) (Insolvency) No. 1132 of 2019

[18] Judgment dated 1.10.2019 in Company Appeal (AT) No. 323 of 2018

[19] Judgment dated 22.10.2019 in Company Appeal (AT) No. 284 of 2019