NCLAT Fortnightly: Important orders on IBC (April 16 – April 30, 2024)

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 April 16, 2024 to April 30, 2024.

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

1. In Pawan Kumar Manguturam Bairagra v. Encore Asset Reconstruction Company Limited (Company Appeal (AT) (Insolvency) No. 701 of 2023), the NCLAT held that an asset reconstruction company which has acquired the assets of a corporate debtor in terms of Section 5(1) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 pursuant to a registered assignment deed, would be considered a lender for purpose of maintainability of a Section 7 application even when the registered deed is pending stamp duty adjudication.

2. In Noil Christuraj v. State Bank of India (Company Appeal (AT) (CH) (INS) No. 284 of 2023), the NCLAT held that there is no bar in initiating simultaneous or independent Section 7 proceedings against the principal borrower and guarantor.

3. In Bhavit Sheth v. Madan Bajrang Lal Vaishnawa (Company Appeal (AT) (Insolvency) No. 328 of 2024), the NCLAT held that failure by the corporate debtor to raise the defense of Section 10A of the Code would not bar the Adjudicating Authority from rejecting an application which is otherwise barred under Section 10A of the Code.

4. In SRV Techno Engineering Private Limited v. Purvanchal Vidyut Vitran Nigam Limited (Comp. App. (AT) (Ins) No. 1651 of 2023 & I.A. No. 5952, 5954, 5955 of 2023), in the context of determination of existence of a pre-existing dispute, the NCLAT observed that seeking relief under MSME Act, 2006 cannot be considered as a pre-existing dispute. It was further observed that where a dispute arose post the date of initial filing but before the date of curing the defects of the application, such a dispute cannot be treated as a pre-existing dispute for the purpose of a Section 9 application. Finally, the NCLAT observed that substantial rights of a party cannot be prejudiced on account of mere technicalities and an attempt made by the operational creditor to rectify such a procedural defect cannot be held against the operational creditor and become a ground for dismissal of a Section 9 application.

5. In Milind Kashiram Jadhav v. State Bank of India and Ors. (Company Appeal (AT) (Insolvency) No. 1589 of 202), the NCLAT observed that where the account of the corporate debtor was declared NPA prior to the period covered under Section 10A of the Code, mere issuance of loan recall notice during the period covered under Section 10A of the Code would not attract the bar on the initiation of CIRP vis-à-vis such a loan. It was further observed that partial payment made post the NPA classification did not cure the default status.

6. In JC Flowers Asset Reconstruction Private Limited v. Laxmi Oil and Vanaspati Private Limited (Comp. App. (AT) (Ins) No. 1052 of 2022 and I.A. No. 4514 of 2022), the NCLAT held that unless a corporate debtor has committed a default in making the payment of the ‘debt’, no corporate insolvency resolution process can be initiated against such a corporate debtor under the Code, and that merely because a ‘debt’ is ‘due and payable’, it is not justification to initiate a corporate insolvency resolution process against the corporate debtor.

It was further observed that where the account of the corporate debtor was declared to be an NPA on account of non-submission of stock statement, it would not amount to a default under the Code as default is required to take place with respect to ‘debt’ which is outstanding and payable.

1. In Hemant Shantilal Shah v. Care Office Equipment Limited (Company Appeal (AT) (Insolvency) No. 26 of 2023), the NCLAT held that where the CoC had duly considered and deliberated upon two valuation reports obtained before deciding not to have any report from a third valuer, it would be a considered business decision of the CoC which cannot be questioned by the personal guarantor for the debt owed by the corporate debtor.

In the context of a resolution plan protecting the right of the financial creditor to proceed against personal guarantors by extinguishing the subrogation rights of the guarantor, the NCLAT observed that there is no specific bar under the Code that a creditor cannot claim its remaining debt from the guarantor which has not been recovered from the corporate debtor. It also observed that where the resolution provided for the continued rights of the financial creditor against the personal guarantor and did away with the subrogation rights of the personal guarantors, the liability of the personal guarantors, not being in sync with the commercial wisdom of the CoC, should not stand extinguished.

Finally, the NCLAT rejected the challenge raised by the personal guarantors who submitted that the successful resolution applicant did not intend to keep the corporate debtor as a going concern, by observing that the resolution plan outlined a future business plan by the new management which provided for change in the product portfolio.

2. In Namdev Hindurao Patil v. Virendra Kumar Jain, Liquidator (Comp. App. (AT) (Ins) No. 858 of 2023 & I.A. No. 2925 of 2024), while noting that promoters of MSMEs are only exempted from sub-section (c) and (h) of Section 29A in terms of Section 240A (Application of this Code to micro, small and medium enterprises), the NCLAT held when that the promoters of an MSME, who were identified as willful defaulters in accordance with the guidelines of the Reserve Bank of India and when there was no stay on such determination as on the date of submission of the plan, such promoters were ineligible to be a resolution applicant in terms of Section 29 A(b) of the Code.

3. The NCLAT, in Durdana Aabid Ali v. Vijay Kumar V Iyer (Company Appeal (AT) (Insolvency) No. 27 of 2024 & I.A. No. 89 of 2024), by observing that Section 14(1)(d) of the Code can only preserve status quo and cannot create a fresh right to renew the lease of property which has expired prior to the commencement of the CIRP, held that the resolution professional of a lessee did not have a right to inspect property owned by a third party where the lease in favour of the corporate debtor had expired prior to the commencement of CIRP. It was further observed that a resolution professional is not permitted to decide the fact of the corporate debtor being in possession of a property based on assumptions and presumptions.

4. In Pooja Mehra v. Nilesh Sharma (Company Appeal (AT) (Insolvency) No. 1511 of 2023), in the context of admissibility of a claim belatedly filed by the purported homebuyers after approval of the plan by the CoC but pending approval of the Adjudicating Authority, the NCLAT relied on the decision of Supreme Court of India in RPS Infrastructure Limited v. Mukul Kumar & Ors (Civil Appeal No. 5590 of 2021) for the proposition that the mere fact that the Adjudicating Authority has not yet approved the plan does not imply that the plan can go back and forth, thereby, making CIRP an endless process.

While considering a challenge to the application of the ratio in RPS Infrastructure (Supra) to a claim belatedly filed by a non-commercial entity, the NCLAT observed that the said decision cannot be misread to say that the said ratio applies only where the belated claim is filed by a commercial entity; and that if the belated claim is allowed to be filed by a non-commercial entity, then the plan can go back and forth and the timelines prescribed in the Code would no longer be sacrosanct. It was further observed that the above ratio of RPS Infrastructure (Supra) cannot be truncated in its application to cases of belated claims by commercial entities on one hand and non-commercial entities on the other hand.

5. In Pradeep P. Agarwal v. Indiabulls Asset Reconstruction Company Limited and Ors. (Company Appeal (AT) (Insolvency) No.607 of 2024), the NCLAT took note of the circulars issued by the President of the Adjudicating Authority specifying that when a matter is reserved for judgment upon the change in the constitution of the Bench, the same cannot be re-notified for de novo hearing and if such an order has been passed, it would have to be recalled. It was further observed that the power vested in the President for the constitution of a special Bench did not impose a fetter on the jurisdiction of the Adjudicating Authority to entertain interim applications pertaining to cases which have been reserved for orders.

In this case, the NCLAT also took note of the powers of an appellate court and noted that although a lis between the parties has to be decided on the date when proceedings were initiated, the appellate court can take into account subsequent events as well as a change in the law to arrive at a conclusion different from the one concluded by the lower court.

6. The NCLAT, in Unity Small Finance Bank Limited v. Sripatham Venkatasubramanian Ramkumar, Resolution Professional for Privilege Industries Limited and Anr. (Company Appeal (AT) (Insolvency) No. 601 of 2024), observed that Section 3(31) of the Code which defines ‘security interest’ does not provide for the registration of a charge under Section 77 of the Companies Act, 2013, for the purposes of considering a financial creditor to be a ‘secured creditor’ or an ‘unsecured creditor.'

In the context of identification of a secured creditor, the NCLAT has also observed that based on security created by the guarantors, a lender cannot be considered a secured creditor of the corporate debtor purely on the basis of the sanction letter containing security creation terms. In this regard, it was further observed that the security interest can be created only pursuant to a transaction and the mere execution of a sanction letter would not amount to a transaction which secures the payment or performance of an obligation.

7. In Principal Commissioner of Customs and Ors. v. Pratim Bayal RP for M/s. B.K.M. Industries Limited (Company Appeal (AT) (Insolvency) No. 1053 of 2023), the question before the NCLAT was, whether the initiation of moratorium before the expiry of the time limit for the payment of a redemption fine to release goods confiscated under Section 113 of the Customs Act, 1962 (“Customs Act”) would give the resolution professional the right to seek release of such confiscated goods. After analysing the scheme of the Customs Act, the NCLAT observed that upon confiscation, such goods vest upon the Central Government independent of whether the period within which the redemption fine could have been paid has expired or not. In the instant case, as the resolution professional had not paid the redemption fine to redeem the goods, the application filed by him to seek release of the confiscated goods was denied.

This decision may be distinguished with the observation of the NCLAT in Pimpri Chinchwad Municipal Corporation v. Jayanti Lal Jain, IRP of Windals Auto Private Limited (Company Appeal (AT) (Insolvency) No. 654 of 2024), wherein, in the absence of a provision analogous to the Section 113 of the Customs Act in Maharashtra Municipal Corporation Act, 1949, the NCLAT allowed the release of some property attached by the tax authority for the realization of property tax dues prior to the initiation of the CIRP, by observing that such attachment did not vest the rights in the property in favour of the tax authority. The NCLAT had further observed where a claim has already been filed by the tax authority and accepted by the resolution professional, the resolution professional would be entitled to deal with the property in whatever manner irrespective of the attachment.

1. In AAA Insolvency Professionals LLP v. Edelweiss Asset Reconstruction Private Limited (Comp. App. (AT) (Ins.) No. 153 of 2024 & I.A. No. 486, 487, 488, 1254, 1940, 1945 of 2024), the NCLAT held that the requirement to obtain written consent of the proposed liquidator in Form AA of the Schedule II in accordance with Regulation 31A(11) of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 is mandatory and that a failure to obtain the same before the filing of an application for the replacement of a liquidator before Adjudicating Authority is not a curable defect.

The NCLAT further held that the Adjudicating Authority has sufficient power to remove the liquidator under Sections 33 (Initiation of liquidation) and 34 (Appointment of liquidator and fee to be paid) of the Code, if it finds it fit, just, valid and proper, whether or not the appointment of an alternate liquidator was approved by the stakeholder consultation committee.

The NCLAT further held that a proposed/ prospective liquidator has no inherent right to be appointed as the liquidator and does not qualify as an “aggrieved person” under Section 61 of the Code to challenge his non-appointment.

2. In Cosmos Cooperative Bank Limited v. Edelweiss Asset Reconstruction Company and Ors. (Company Appeal (AT) (Insolvency) No.499 of 2023), the NCLAT allowed an appeal against the order of the Adjudicating Authority directing the liquidation of the Corporate Debtor on account of a purported failure of the SRA to implement the approved resolution plan, despite the CoC advocating for granting additional time to the SRA to complete the implementation.

In the course of the decision, the NCLAT reiterated that an extension of time for the implementation of a resolution plan does not amount to a modification of the plan. It was further observed that the CoC’s decision to not liquidate and instead provide additional time to the SRA is a commercial decision of the CoC, which could not have been easily interfered with. It was further observed that without giving an opportunity to the SRA to rebut allegations of contravention of the plan, an order passed for liquidation is not maintainable.

1. In Mr. Arvind Dham v. State Bank of India and Anr. (Company Appeal (AT) (Insolvency) No. 509 of 2024), the NCLAT observed that when an application for initiating the insolvency resolution process of a personal guarantor under Section 95 of the Code has been filed before the Adjudicating Authority not having appropriate jurisdiction, no moratorium under Section 96 of the Code can commence in relation to the debts owed by the personal guarantor.

In the same case, it was also observed by the NCLAT that the limitation to proceed against a personal guarantor starts from the date of the invocation of guarantee and not from the date when the account of the principal borrower was declared an NPA.

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