NCLAT Fortnightly: Important orders on IBC (November 1 – November 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 November 1, 2023 to November 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 and miscellaneous.

1. In Lata Gole v. LCL Logistix (India) Private Limited & Ors. (Company Appeal (AT) (Insolvency) No. 1421 of 2023), the NCLAT noted that where the debt was due and payable, in a Section 9 application the Adjudicating Authority need not be concerned about whether cheques issued by the Corporate Debtor were security cheques or not, which determination is part of proceedings under the Negotiable Instruments Act, 1881.

2. In Hytera Communications Corporation Limited v. Simoco Telecommunications (South Asia) Limited (Company Appeal (AT) (Insolvency) No.1116 of 2022), the principal bench of the NCLAT held that a failure to obtain permission for remittance of amount overseas would not be a valid defense against a corporate debtor’s default in repayment.

Interestingly, the NCLAT in the instant case took note of decision of Chennai bench in Maulik Kirtibhai Shah v. United Telecoms Limited (Company Appeal (AT) (CH) (Ins.) No. 268/2023 IA No. 834/2023), which had observed that a claim arising out of a settlement agreement would not be an operational debt. Despite the principal bench in Ahluwalia Contracts (India) Limited v. Jasmine Buildmart Private Limited (Company Appeal (AT) (Insolvency) No. 345/2023 & IA No. 11164/2023), itself taking a view contrary to the Chennai bench, the NCLAT did not offer any further comments upon the legality of the aforesaid observation.

3. The NCLAT, in Rahul Maroo v. Bruck Pharma Private Limited (Company Appeal (AT) (Insolvency) No. 1156 of 2022), held that share application money received by the corporate debtor without following the procedural requirements of issuing a private placement offer under Section 42 of the Companies Act, 2013, would not attract Section 42(6) (repayment of share application money by the company at interest on failure to allot securities within prescribed time period) and hence, in absence of any time value of money, such share application money would not qualify as financial debt.

While in the eventual conclusion, the NCLAT held that the share application money paid in violation of the procedure specified under Section 42 of the 2013 Act did not qualify as financial debt, it appears that NCLAT had proceeded on the presumption that an unpaid share application money would partake the character of financial debt as long as such money was received by the corporate debtor in compliance with the statutory norms. It may be noted that the jurisprudence is not yet settled as to whether unpaid share application money would be considered a financial debt, especially considering that money received is paid towards shares, which is ‘goods’ and would ideally qualify as an operational debt.

4. In Loramitra Rath v. JM Financial Asset Reconstruction Company Limited (Company Appeal (AT)(Insolvency) No. 1359 & 1360 of 2023), the NCLAT observed that reserving and pronouncement of a judgment is a continuation of the same process and hence filing of an interim application after the reservation of the judgment, is not entertainable.

The NCLAT further held that where the corporate debtor had accepted the assignment agreement concluded between a financial creditor and an asset reconstruction company under an OTS proposal, it could not be allowed to deny its liability on the basis that the corporate debtor’s balance sheet continued to show the debt owed to the assignor-creditor and not to the assignee-applicant.

5. In Rajesh Kumar Pandey v. KK Steels (Comp. App. (AT) (Ins) No. 96 of 2023 & I.A. No. 383, 386, 387 of 2023), the NCLAT held that merely on the basis of appropriation of tax benefits by the corporate debtor, no operational debt liability can be fastened on it. The NCLAT further noted that the dispute raised by the corporate debtor regarding the quality of the goods supplied does not get waived merely on the basis of a corporate debtor placing subsequent orders.

1. In ICICI Bank Limited v. BKM Industries Limited (Company Appeal (AT) (Insolvency) No.405 of 2023), while rejecting the locus of a dissenting financial creditor to challenge the distribution mechanism approved by the Committee of Creditors (CoC) and while upholding the CoC’s decision to distribute the plan proceeds on the basis of the admitted claim (as opposed to the value of security interest), the NCLAT held that, in terms of the scheme of Section 53(1) of the Code, distribution can be made only as per the debt and that in the legislative scheme, there is no scope for distribution of assets among financial creditors as per security interest.

It may be noted that the Adjudicating Authority has routinely upheld the commercial decision of CoC in adopting the distribution mechanism based on security interest, with a recent example of such plan being approved in the context of Birla Tyres by the Calcutta bench of Adjudicating Authority. With NCLAT holding that distribution under Section 53 can be made only in terms of debt admitted, all such plans providing distribution on the basis of security interest may come under judicial scrutiny.

2. In Chaitanya Sevabhavi Sanstha v. Manoj Kumar Agarwal (Company Appeal (AT) (Insolvency) No.1323 of 2023), the NCLAT held that as group insolvency cannot be undertaken vis-à-vis partnership firms, a claim for money invested in the partnership firms of the corporate debtor under the control of the same group cannot be taken up in the CIRP of the corporate debtor.

3. In Vish Wind Infrastructure LLP v Mr. Shailen Shah (Company Appeal (AT) (Insolvency) No.241 of 2023), the NCLAT held that inventory which is in the possession of the corporate debtor can be used by the resolution professional as per his wisdom.

Further, the NCLAT held that where a claim of advance has been filed by an operational creditor and admitted by the resolution professional in the CIRP of the corporate debtor and certain dues are pending from the operational creditor to the corporate debtor in relation to which arbitration proceedings are pending, the operational creditor cannot also claim the inventory in relation to which such an advance has been paid.

4. In Rajendra Surana v. Jayesh Sangharika (Company Appeal (AT) (Insolvency) No. 795 of 2023), the NCLAT held that a clause in the resolution plan which barred the real estate regulatory authority from entertaining claims against the corporate debtor prior to the effective date of resolution plan, did not amount to a violation of the provisions of the law to attract Section 30(2)(e) of the Code.

5. In Sabari Realty Private Limited v. Sivana Realty Private Limited (Company Appeal (AT) (Insolvency) No.1162 of 2023), the NCLAT held that the decision of a resolution professional to classify an entity as related party merely on the basis of a declaration made in a claim form could not be questioned even though share transfer was not recorded by the registrar of companies. The NCLAT further held that an individual or class of homebuyers could not be allowed to challenge the resolution plan which was approved by the majority of homebuyers.

It was further observed that a plan that classifies homebuyers in different classes based on whether the relevant homebuyer had obtained prior permission of the lender of the developer does not violate any principle of law to attract Section 30(2) of the Code. This principle was reiterated by NCLAT in the following case titled Fervent Synergies Limited v. Manish Jaju & Ors. (Company Appeal (AT) (Insolvency) No.1338 of 2023).

6. In Fervent Synergies Limited v. Manish Jaju & Ors. (Company Appeal (AT) (Insolvency) No.1338 of 2023), the NCLAT held that the doctrine of promissory estoppel cannot be pressed against the resolution applicant who has submitted the resolution plan relying on the information memorandum, and the list of creditors, and who has not extended any promise to the creditors of the corporate debtor that the claim submitted by any creditor shall be accepted in toto.

7. In Sita Chaudhary v. Haryana Telecom Limited (Company Appeal (AT)(Insolvency) No. 727 728 of 2023), the NCLAT observed that the scope of interference with an order approving the resolution plan is very limited and can only be challenged before the Appellate Authority on limited grounds in terms of Section 61(3) of the Code. It further went on to observe that an incorrect constitution of CoC was not one of the grounds on which the resolution plan can be challenged.

1. In State Bank of India v. Dharamraj Aluminium Industries Private Limited (Company Appeal (AT) (Insolvency) No.93 of 2023), the NCLAT held that the benefit of exclusion in computing the limitation period under Section 14 of Limitation Act, 1963 cannot be provided to the financial creditor if a parallel proceeding (winding up) was filed by a third party. The NCLAT further observed that the financial creditor cannot raise an extension based on an OTS for the first time during the appellate stage, without giving the corporate debtor an opportunity to defend.

2. The NCLAT, in Kunwer Sachdev v. Su-Kam Power Systems Limited (Company Appeal (AT) (Insolvency) No. 1177 of 2023) held that if the acquisition plan so provides, a successful auction purchaser of a going concern sale can pursue the avoidance application filed.

3. In City Union Bank Limited v. Amier Hamsa Ali Abbas Rawther (Comp App (AT) (CH) (Ins) No. 327/2023), the NCLAT held that where notice served at the branch office has been responded to by the corporate debtor, non-service of the notice at the registered office cannot be a ground to challenge a Section 9 application, even where the lease deed between the parties specified that any notice shall be served at the registered office only.

4. The NCLAT, in Rita Singh v. Atul Kumar Kansal (Company Appeal (AT) (Insolvency) No.736 of 2023) refused to entertain any challenge to the transaction of an assignment of a debt by a foreign financial creditor on the ground that such assignment was not in accordance with the Master Direction – External Commercial Borrowings, Trade Credits and Structured Obligations dated March 26, 2019, issued by the Reserve Bank of India.

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