NCLAT Fortnightly: Important orders on IBC (December 1 – December 15, 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 December 1, 2023 to December 15, 2023.

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

1. In Sushma Paranjpe v. Rohan Developers Private Limited (Company Appeal (AT)(Insolvency) No. 520 of 2023), the NCLAT held that where the default was committed prior to the Section 10A period, mere issuance of a letter calling for loan repayment during the Section 10A period would not bar CIRP proceedings.

2. Whether a sum provided by one joint venture partner to another would constitute a financial debt for maintainability of a Section 7 application was addressed by NCLAT in a couple of cases during the period under review.

In the first one, titled Ansal Housing Limited v. Samyak Projects Private Limited (Company Appeal (AT)(Insolvency) No. 542 of 2023), NCLAT ruled against treating such amount as a financial debt, where the amount was disbursed by the developer of a real estate project to land-owner under an inter-corporate deposit agreement which was envisaged to be adjusted against future profit.

The same view was also reiterated in the case of Realpro Realty Solutions Private Limited v. Sanskar Projects and Housing Limited (Company Appeal (AT)(Insolvency) No. 374 of 2023), where the NCLAT noted there was common participation and sharing of profits and losses in the construction and development of real estate project.

3. In Milan Aggarwal v. Saudi Basic Industries Corporation (SABIC) (Company Appeal (AT) (Insolvency) No.231 of 2023), the NCLAT held that an application filed by the operational creditor would be maintainable despite the amount receivable from the corporate debtor having been discharged by the insurance company. It went on to observe that such payment made to the operational creditor by the insurance company does not discharge the payment obligation of the corporate debtor towards the operational creditor, where the operational creditor is under an obligation to subrogate the amount realized from the corporate debtor to the insurer.

4. In Vistra ITCL (India) Limited v. Bhrugesh Amin (Company Appeal (AT) (Insolvency) No.627 of 2023), the corporate debtor had provided certain additional security in connection with a loan availed by a principal borrower. The agreement for providing such additional security, to which only the appellant and corporate debtor were the party and did not involve the principal debtor, provided that the corporate debtor had made available the additional security to secure the debenture payment and secured obligations under the relevant transaction documents.

Clause 4 of the relevant agreement provided that in addition to and without prejudice to what is stated in Debenture Trust Deed (DTD) and transaction document, the corporate debtor would be liable to repay the secured obligations under the said DTD. The agreement also provided that the failure to repay the same would amount to an event of default, and upon the occurrence of such an event of default, the debenture trustees would be entitled to enforce additional securities without prejudice to other rights.

The principal issue that the NCLAT was concerned with was whether the terms of the agreement could be construed as deed of guarantee which would have resulted in the appellant being treated as financial creditor of corporate debtor. After evaluating the various clauses, the NCLAT observed that the agreement would have to be read as a whole and that clause 4 of the agreement dealing with repayment obligations has to be read along with other relevant clauses. It went on to observe that when additional security was provided, such security interest was created to repay secured obligations only to the extent of additional security created under the agreement, and there was no averment in the entire agreement that the corporate debtor was undertaking to repay the entire liability of the principal borrower. Accordingly, the NCLAT held that giving of additional security in terms of agreement did not amount to giving any guarantee within the meaning of Section 126 of the Indian Contract Act, 1872 and hence the rejection of a claim filed by the appellant-financial creditor for the entire amount (as opposed the limiting the claim to the value of claim to additional security) was justified.

5. In Vijay Kumar Singhania v. Bank of Baroda (Company Appeal (AT) (Insolvency) No.1058 of 2023), the NCLAT observed that record of default recorded with the Information Utility is not the only document to establish debt and where such debt can be proved by other supporting documents, a Section 7 application cannot be rejected on account of failure to supply information of the debt from Information Utility. While making this observation, the NCLAT rejected the submission that compliance with the regulation 20(1A) of the IBBI (Information Utilities) Regulations, 2017, which required filing of information of default with a Information Utility before filing an application to initiate CIRP, was mandatory. 

The NCLAT also went on to observe that a Section 7 application cannot be denied admission on ground of the debt being disputed by the corporate debtor or filing of a counterclaim or money suit by the corporate debtor against the financial creditor. Further, it was observed that non-disclosure of such a counterclaim or money suit filed against financial creditor did not have any impact on a Section 7 application.

Finally, the NCLAT observed that a One Time Settlement (OTS) proposal does not cease to be an acknowledgement of liability merely because the said proposal was given on “without prejudice” basis.

1. The requirement to submit a refundable bank guarantee in terms of requirements specified under a Request for Resolution Plan (RFRP) and the legality of such a request was considered by the NCLAT in Rakesh Ranjan v. Fanendra Harakchand Munot & Another (Company Appeal (AT) (Insolvency) No. 1352 of 2023) and Satish Dhondiram Chavan v. Vishal Ghisulal Jain & Ors. (Comp. App. (AT) (Ins) No. 190 of 2023 & I.A. No. 696, 697 of 2023).

In Rakesh Ranjan (supra), the NCLAT rejected a challenge against the submission of such a refundable bank guarantee as being in contravention of Regulation 36 B (4A) of the CIRP Regulations, 2016, by observing that such regulation only prohibits obtaining non-refundable bank guarantees.

Based on the aforesaid understanding, in both the cases, the NCLAT went on to observe that a prospective resolution applicant who has failed to submit the refundable bank guarantee in terms of the RFRP is prohibited from challenging the non-consideration of a plan submitted by them.

2. In Vikas Jeph v. Anoop Bhatia (Comp. App. (AT) (Ins) No. 1608 of 2023), the NCLAT held that post the admission of CIRP, withdrawal of money from the bank account of the corporate debtor by the suspended board would be in contravention of the moratorium provisions, even where such amount was alleged to be withdrawn to discharge statutory liabilities.

3. In Amit Kumar Pandey v. Pardeep Kumar Sethi (Company Appeal (AT) (Insolvency) No. 1364 of 2023), the NCLAT observed that where the workers of a sub-contractor had filed their claim as vendor, they cannot be allowed to transpose such claim to be a claim of workmen at a belated stage. The NCLAT further observed that a resolution plan cannot be faulted for differentiating between payment to workmen as well as to the operational creditors.

4. In Hira Lal & Sons v. Anish Niranajan Nanavaty (Company Appeal (AT) (Insolvency) No.1603 of 2023), the NCLAT held that a moratorium does not bar rent escalation in accordance with a lease agreement, where the corporate debtor continues to be in possession of the property during the moratorium.

5. In Income Tax Department v. G. Madhusudhan Rao (Company Appeal (AT) (Insolvency) No. 1302 of 2023), the NCLAT observed that a resolution plan not treating the dues owed to the income tax department as dues owed to a secured creditor cannot be faulted with, as there is no basis to contend that income tax department is a secured operational creditor.  

6. In two separate decisions, namely Partha Sarathy Sarkar v. Specified Undertaking of Unit Trust of India Limited (SUUTI) (Company Appeal (AT) (Insolvency) No. 1340 of 2023) and Kairav Anil Trivedi, IRP of Parenteral Drugs India v. State Bank of India (Erstwhile CoC and Anr) (Company Appeal (AT) (Insolvency) No. 1439 & 1440 of 2023), the NCLAT upheld the supremacy of Committee of Creditors' (CoC's) decision to replace resolution professional by observing that, neither can such decision be questioned nor the reasons behind such replacement be sought for.

7. In Pankaj Khandelwal v. A. Gangwal Real Estate L.L.P (Company Appeal (At) (Insolvency) No. 879 of 2021), the NCLAT explained the concept of ledger by observing that it contains a detailed record of all financial transactions based on which the balance sheet is prepared. It further observed that while a ledger is an important financial record, the same may not be looked into in cases where disputes are raised about the existence or settlement of a financial debt, based on the balance sheet.

8. In Amita Saurabh Bihani and Ors. v. E&G Global Estates Limited (Company Appeal (AT)(Insolvency) No. 1214 & 1215 of 2023), the NCLAT has observed that only a resolution professional - not a creditor or an unsuccessful resolution applicant - is entitled to file and pursue an avoidance application.

It was further observed that the pendency of avoidance application does not bar the approval of a plan under consideration.

1. The NCLAT, in CA Jai Narayan Gupta v. Radhasiriya Properties Private Limited (Company Appeal (AT) (Insolvency) No.1473 of 2023), held that a liquidator is not entitled to charge his fees to a scheme proponent where a scheme of compromise or arrangement has been filed under Section 230 of the Companies Act, 2013 read with Regulation 2B of the IBBI (Liquidation Process) Regulation, 2016 (“Liquidation Regulations”).

For arriving at the conclusion, the NCLAT noted the difference between cost and fees and observed that the term ‘cost’ in Regulation 2B of the Liquidation Regulations does not include liquidator’s fee.

2. In V. Ganesan v. Prudent ARC (Company Appeal (AT) (CH) (Ins) No. 396/2023 (IA No. 1212/2023), the NCLAT held that the liquidator does not have any personal right to continue in a liquidation process and the Adjudicating Authority has the inherent right under Section 60 (5) of the Code to replace the liquidator.

This case is also relevant in context of the NCLAT refusing the exclusion of time under Section 14 of the Limitation Act, 1963 where the liquidator chose to file writ before High Court and subsequently a special leave petition against dismissal of such a writ, without pursuing the statutory remedy of filing appeal against the order of the Adjudicating Authority under the Code.

3. In the matter of Paschimanchal Vidyut Vitran Nigam Limited v. HSA Traders (Company Appeal (AT) (Insolvency) No.527 of 2023), the NCLAT held a successful auction purchaser cannot be liable to pay arears of electricity dues owed by the erstwhile corporate debtor, even where the sale was on an as is where is basis, as is what is, whatever there is and without recourse basis.

1. In Real Estate Regulatory Authority v. D.B. Corp Limited (Company Appeal (AT) (Insolvency) No.1172-1173 of 2022), the NCLAT observed that where the moratorium period directly prevents the implementation of an order issued by real estate regulatory authority (“RERA”), such authority would be an “aggrieved person” in terms of Section 61 of the Code for maintaining the challenge against an admission order. In this context, the NCLAT further observed that the question of locus of an aggrieved person to file an appeal is different from question of its potential success.

In this case, the NCLAT further had occasion to examine if a Section 9 application can be initiated based on non-fulfilment under a barter agreement, which does not involve any obligation to make payment. After considering the definition of operational debt, NCLAT observed that as the definition includes a right to payment, such payment can only refer to payment of money, and not to anything equivalent in nature of barter. Accordingly, it concluded that a Section 9 application is not maintainable on account of breach of a barter arrangement.

2. In Rajnish Gupta v. Delicious Coco Water Private Limited (Company Appeal (AT) (Insolvency) No. 1499 of 2023 & I.A. No. 5394 of 2023), the NCLAT held that where the operative part of the order was pronounced in an open court, the limitation period starts from the date of pronouncement of order and not from the date when such order was uploaded on the website.

3. In Aarif Ahsan Khan v. Jayesh Sanghrajka & Ors. (Company Appeal (AT) (Insolvency) No. 1429 of 2023 & I.A. No. 5116 of 2023), the NCLAT held that the limitation period for filing an appeal against an original order, against which a review preferred has been denied, shall start from the date of the original order and not from the date of rejection of review.

4. In Bharat Pipe Fitting Company v. Prowess International Private Limited (Company Appeal (AT)(Insolvency) No. 1070 of 2022 & I.A. No. 3042 of 2022), the NCLAT held that no proceeding can be initiated in respect of a claim which was not part of an approved resolution plan or was not preferred at the relevant time.

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