NCLAT Fortnightly: Important orders on IBC (October 1 – October 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”) between October 1 and October 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 Suresh Khola v. Abdulhadi Almailem Trading Company W.L.L (Comp. App. (AT) (Ins) No. 1063 of 2023 & I.A. No. 3673, 3674, 4537 of 2023), the NCLAT held that where the goods supplied were defective, a Section 9 application to recover the amount paid towards such defective goods is non-maintainable as a claim of damages does not fall within the purview of ‘debt.'

2. In Amour Infrastructure LLP v. Digital Integrated Technologies Private Limited (Company Appeal (AT) (Ins.) No. 884 of 2022), the NCLAT observed that an application under Section 65 of the Code (fraudulent or malicious initiation of proceedings) requires adequate pleadings and findings and in the absence of such adequate pleadings and findings, a Section 7 application cannot be rejected on the basis of mere allegations.

3. In Yogesh Agarwal Sole Proprietor of Agarwal Steels v. Shapoorji and Pallonji Company Private Limited (Comp. App. (AT) (Ins) No. 641 of 2023), the NCLAT noted that while a recall application is maintainable against the dismissal of an application on the ground of non-appearance, where the dismissal is on merits, only an appeal lies against such order and not a recall application.

1. In Ajit Kumar v. Alpha (India) Properties Private Limited (Comp. App. (AT) (Ins) No. 404 of 2021), the NCLAT relied upon the proviso to Section 21(2) of the Code, which specifies that a related party of the corporate debtor would not have any right of representation, participation or voting in a meeting of  committee of creditors, to hold that the view of the Adjudicating Authority allowing related party financial creditors, whose claims were accepted by the resolution professional, to participate in the meeting of committee of creditors, was palpably wrong.

2. In Sunil Tangri v. Ashu Gupta (Company Appeal (AT) (Insolvency) No. 1070 of 2021 & I.A. No. 4532 of 2022 & I.A. No. 981 of 2023), the NCLAT observed that if a person has been a promoter, or in the management, or control of the corporate debtor in which preferential, undervalued, fraudulent and extortionate transactions have taken place, and in respect of which an order has been made by the Adjudicating Authority under the Code, such person would become ineligible to submit any resolution plan under Section 29A(g) of the Code and such eligibility cannot be restored back by paying off the debts of the corporate debtor. 

Accordingly, in the instant case, the rejection of a resolution plan filed by the successful resolution applicants who were the suspended board of directors of the corporate debtor and who were found to be ineligible under Section 29(A)(g) of the Code on account of being involved in preferential, undervalued, fraudulent and extortionate transactions, was upheld. 

The NCLAT further held that a finding in the forensic audit report regarding the existence of a fraudulent transaction does not become unreliable merely on account of the statutory auditor of the corporate debtor failing to identify the existence of any such fraudulent transactions.

3. In G. Balasubramaniam v. B. Jeevarathinam (Company Appeal (AT) (CH) (Ins) No.309/2023), the NCLAT held that the commercial wisdom of the committee of creditors cannot be interfered with except in the limited purview, as specified, under Section 30(2) of the Code. The NCLAT further held that where the ingredients of regulation 36C of Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 were fulfilled, and evidence of wider publicity through advertisement was present, it could not be contended that no specific or certain effort was undertaken by the resolution professional with a view to finding a better prospective resolution applicant. 

The NCLAT noted that the Adjudicating Authority is not empowered to have the jurisdiction of a civil court to ascertain if a resolution applicant which is incorporated under applicable law, has been legally and validly constituted.

It was further noted that shareholders do not have locus to challenge the approval of a resolution plan or question the CIRP costs incurred.

4. In Sunil Kumar v. Mohit Goyal & Ors. (Company Appeal (AT) (Insolvency) No.1291 of 2023), the NCLAT held that where the authorized representative of home buyers had voted in favour of the approval of a resolution plan based on the approval of majority of homebuyers, such a resolution plan cannot be challenged by minority home buyers. A similar view was taken by the NCLAT in Ashok Gosavi & Ors. v. Manoj Kumar Agarwal & Ors. (Company Appeal (AT) (Insolvency) No.1094/2023), which we have covered in our August 16 to August 31, 2023 round-up.

5. The NCLAT, in Pratim Bayal v. Tata Motors Finance Solutions Limited (Company Appeal (AT) (Insolvency) No. 1309 of 2023 & I.A. No. 4631 of 2023), held that the date of payment by a cheque is the date on which a cheque is handed over and not when the cheque is encashed. Hence, where a cheque was issued prior to the CIRP admission but encashed during moratorium, such payment was not held to be violative of the moratorium.

6. In Regional Provident Fund Commissioner, Vatwa, Employees Provident Fund Organization v. Shri Manish Kumar Bhagat (Company Appeal (AT) (Insolvency) No. 808 of 2022), the NCLAT held that an assessment order passed by a statutory authority under the Employees Provident Fund Miscellaneous Provisions Act, 1952 (“EPF Act”), cannot be challenged in a proceeding under the Code. 

However, payment of damages imposed under an order passed by the statutory authority under the EPF Act post the initiation of CIRP is not required to be paid, considering a moratorium was imposed.

Further, the NCLAT held that it has the power under Section 32B of the EPF Act to make a recommendation to the Central Board to waive off 100% of the payment of damages imposed under an order passed by the statutory authority under Section 14B of the EPF Act pre-initiation of CIRP.

The NCLAT also held that claims under Section 7A of the EPF Act and the interest component claimed under Section 7Q of the EPF Act are to be paid in full considering that the interest is also a part of amount to which the appellant is entitled.

Finally, the NCLAT held that as the claims filed by the workmen and employees would have included the claims towards provident fund and gratuity dues, where the resolution plan provides for payment against such claims admitted, only such portion of provident fund and gratuity dues which remains unpaid after the payment of workmen dues would have to be paid.

7. In Devesh Saraf v. Rama Tent House (Company Appeal (AT)(Insolvency) No. 51 of 2023), the NCLAT observed that the wordings in an email communication issued by the corporate debtor which simply stated that the corporate debtor was in the process of reconciliation of accounts, could not be interpreted to mean that such corporate debtor had denied or disputed the existence of the outstanding debt qua the operational creditor. 

The NCLAT further observed that while issues relating to snags in the performance of the operational creditor were raised by the corporate debtor in communications, the corporate debtor had not linked the performance of the operational creditor to issues of payment of outstanding debts, whereas the operational creditor had consistently and unfailingly raised the issues of payment. The NCLAT therefore, held no pre-existing dispute existed and refused to intervene with the admission of the Section 9 application.

8. In Diwakar Sharma v. Anand Sonbhadra-RP of Shubhkamna Buildtech (Company Appeal (AT) (Insolvency) No. 1182 of 2023), the NCLAT noted that an ex-director of the corporate debtor, who had resigned much before the initiation of the CIRP, was not entitled to a copy of the resolution plan.

1. In Chinar Steel Segments Centre Private Limited v. Samir Kumar Agarwal (Company Appeal (AT) (Insolvency) No. 1355 of 2022), the NCLAT held that once a claim is dealt under liquidation process, such claim gets extinguished, and the creditor cannot be allowed to renew the claim and insist for payment of entire dues which has been dealt in the liquidation process. Accordingly, NCLAT held that a successful auction purchaser could not be fastened with past electricity dues, for which the claim was already filed and which stood satisfied as per the distribution carried out by the liquidator under section 53 of the Code.

2. In Ethenic Agencies Private Limited v. K.G. Somani, Erstwhile Liquidator of Delicious Coco Water Private Limited (Company Appeal (AT) (Insolvency) No. 1305 of 2023), the NCLAT observed that where  the claim filed by a creditor was rejected by the liquidator and upheld by the  Adjudicating Authority, such creditor cannot claim to be a financial creditor and seek a right to vote on the approval of the scheme of compromise, merely on the basis of a reflection of such debt in the balance sheet of the corporate debtor.

1. In Raj Television Network Limited v. Thaicom Public Company Limited (Company Appeal (AT) (CH) (Ins) No. 325/2023 (IA No.991/2023)), the NCLAT held that if an amendment in a pleading is a bonafide one and done to protect a party from suffering on account of a technicality of law, it could be allowed.

2.  In State Bank of India v. India Power Corporation Limited (Company Appeal (AT) (CH) (Ins) No.87/2023), the Adjudicating Authority had taken on record a rejoinder filed by the financial creditor with the observation that any additional factual assertions not pleaded in the main petition, if found to have been introduced under the rejoinder would not be taken into consideration and be eschewed.

The NCLAT, observing that when a petitioner sets up its case under Section 7, Section 9 or Section 10 of the Code, then as per Rule 41 of the National Company Law Tribunal Rules, 2016 (“Rules”), the respondent is required to specifically admit, deny or rebut the facts as stated in the application, and state such additional facts as may be found necessary in the reply as per Rule 42 of the Rules, and in such case, the Adjudicating Authority is allowed to permit the petitioner to file a rejoinder pertaining to those additional facts. The NCLAT noted that in no way the petitioner could be allowed to set up a new case altogether which was not a part of the main petition, as it would again require a reply by the respondent and the process would never end. Therefore, the appellate tribunal held that the appellant could not be allowed to enlarge the scope of the petition by adding a new ground in the rejoinder, as the purpose of a rejoinder is not to fill the gaps left by the petitioner in the pleadings. 

3. In Rakesh Arora v. Sare Gurugram Private Limited (Company Appeal (AT) (Insolvency) No. 889 of 2023 & I.A. No. 3008 of 2023), the NCLAT held that the additional 15 days period provided for filling an appeal under the to Section 61(2) of the Code did not stand suspended during the summer vacations and, therefore, cannot be excluded while computing the limitation period. 

4. In Raiyan Hotels and Resorts Private Limited v. Unrivalled Projects Private Limited (Company Appeal (AT) (Insolvency) No. 1071 of 2023 & I.A. No.3694 of 2023), the NCLAT held that the limitation period for preferring an appeal against the order of an Adjudicating Authority starts to run from the date when the order was pronounced and not from the date when the appellant became aware of the contents of the order.

However, in Kamlesh Mehta v. Mirage Ceramics Private Limited & Ors. (Company Appeal (AT) (Insolvency) No.1222 of 2023 & I.A. No. 4284 of 2023), the NCLAT held that where the order sheet specified that a detailed order will follow, the limitation period does not start from the date of pronouncement of order but from the date when the detailed order is uploaded.

5. In Raiyan Hotels and Resorts Private Limited v. Unrivalled Projects Private Limited (Company Appeal (AT) (Insolvency) No. 1071 of 2023 & I.A. No.3694 of 2023), the NCLAT reiterated that the additional 15 days period provided for filling the appeal under proviso of Section 61(2) of the Code, did not stand suspended during the summer vacations and therefore cannot be excluded while computing limitation period.

 6. The NCLAT, in Vinay Kumar Singhal v. Mahesh Bajaj (Comp. App. (AT) (Ins) No. 645 of 2023 & I.A. No. 2602, 2141 of 2023) held that an operational creditor representing 10% of the debt of the corporate debtor is only a participant in the meeting of committee of creditors and not a member of the committee of creditors. Hence, an operational creditor does not have the right to seek a copy of the information memorandum, the appellate tribunal said.

7. The NCLAT, in Mukesh Goel v. Aldous Commodities Private Limited (Company Appeal (AT) (Insolvency) No.1235 of 2023), held that a patently feeble argument is not a pre-existing dispute and mere issuance of a cheque cannot be considered as admission of debt.

8. In our earlier roundup for the period between July 16, 2023-July 31, 2023, we had questioned the correctness of the decision of the Chennai Bench of the NCLAT, in Mr. G. Balasubramaniam and Another v. P. Eswaramoorthy and Another (Company Appeal (AT) (CH) (Ins) No.209/2023 IA Nos.694, 695 & 696/2023), for its failure to consider the view expressed by the Hon’ble Supreme Court in Safire Technologies Private Limited v. Regional Provident Fund Commissioner and Anr. (Civil Appeal No 2212 of 2021), while determining the start of the limitation period for filing of an appeal by a non-party to the original proceeding. Fortunately, the Principal Bench of NCLAT, in the case of Kalyan Dombivli Municipal Corporation v. Reliance Infratel Limited and Anr. (Company Appeal (AT) (Insolvency) No.1260 of 2023), seems to have undertaken the relevant course correction. While the NCLAT did not refer to the Safire decision, it nevertheless, went on to observe that, even where the appellant had no knowledge of the date of passing of the order, the limitation period would commence from the date when order is passed and not not depend on the date when the appellant came to know of the order.

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