NCLAT Fortnightly: Important orders on IBC (April 1 – April 15, 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 1, 2024 to April 15, 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 Pankaj Mehta & Ors v. Ansal Hi-Tech Townships Limited (Company Appeal (AT) (INS) No. 248 of 2023), the NCLAT noted that where a Section 7 application has been filed by a group of allottees against a corporate debtor having multiple projects registered as separate and independent projects under Real Estate (Regulation and Development) Act, 2016, for ascertaining the threshold specified under the second proviso to Section 7(1) of the Code [which requires an application to be filed jointly by not less than one hundred of such allottees under the same real estate project or not less than ten per cent of the total number of such allottees under the same real estate project, whichever is less], allottees from different projects cannot be clubbed together as such allottees of different projects do not constitute creditors of a class concerning any particular project. In the instant case, noting that the group of allottees did not meet the relevant threshold, the NCLAT upheld the order of the Adjudicating Authority dismissing the Section 7 application.

2. In Shweta Sharma v. SREI Equipment Finance Limited (Company Appeal (AT) (Insolvency) No. 370 of 2024 & I.A. No. 1260 of 2024), the NCLAT held that while entertaining a Section 7 application, the Adjudicating Authority is only required to look into the debt and default and where debt and default is proved, the Adjudicating Authority has to admit the application unless it is incomplete.

3. In Mukund Rajhans v. Rajasthan Patrika Private Limited (Company Appeal (AT) (Insolvency) No. 1398 of 2023), the NCLAT held that a corporate debtor cannot pass on its liability by contending that it is merely an agent and by taking recourse under Section 230 of Indian Contract Act, 1872 [Agent cannot personally enforce, nor be bound by, contracts on behalf of principal], where the creditor is not party to any tripartite agreement governing such arrangement. It was further held that as the IBC proceedings are self contained, without any agreement in place, the responsibility to repay the invoices issued in the name of the corporate debtor cannot be shifted to the purported principal.

In the instant case, NCLAT had also observed that where the corporate debtor has duly represented and defended his case, he cannot question the failure of proof of the service of the statutory demand notice, without disputing the address on which the demand notice was issued.

4. In Warm Forgings Private Limited v. Surya Testing Services Limited (Company Appeal (AT) (Insolvency) No. 245 of 2024), the NCLAT held that the contemporaneous financial statement of the corporate debtor immediately after the disbursal of the amount reflects the true nature of transactions and understanding between the parties, and where the amount purported to be disbursed by the financial creditor for the purpose of acquisition of shares of a third party was reflected as unsecured borrowing, such amount would qualify as a financial debt.

5. In Tulip Hotel v. JC Flowers Asset Reconstructions (CA(AT) (Ins) No. 1146 of 2023), the NCLAT, relying on Sameer Bansal v. Canara Bank (CA(AT)(Ins) No. 1188 of 2022), held that a person authorized by a general power of attorney which is referable to a board resolution is a duly authorized person and can file a Section 7 application for the initiation of CIRP in terms of Rule 4(1) of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016.

In the same case, applying the ‘Doctrine of Indoor Management’, the NCLAT held that the financial creditor cannot be prejudiced due to any irregularities in the internal procedure of the appellant-corporate guarantor (“Appellant-CG”). The NCLAT held that the financial creditor was right in inferring that the board resolution authorizing the signing of the deeds of guarantee was legitimately passed even if the internal requirements and procedures had not been complied with by the Appellant-CG, especially when the Appellant-CG had not sufficiently challenged the deeds of guarantee before the appropriate fora.

The NCLAT further noted that under Section 127 of the Contract Act, past consideration is sufficient consideration for the contract of guarantee and the grant of loan to the principal borrowers by the creditor need not necessarily be contemporaneous with the execution of guarantees.

In the instant case, the NCLAT also considered the impact of not obtaining prior NOC from the existing charge holder before the creation of a fresh security in favour of the financial creditor and rejected the challenge by observing that when such security has been duly registered with the RoC without being challenged, such failure to obtain prior NOC does not impact the claim of a financial creditor.

Finally, the NCLAT observed that the issue of whether the guarantee deed executed is a forged and fabricated one can only be raised in a civil suit and not before the Adjudicating Authority exercising a summary jurisdiction.

6. The NCLAT, in Arunkumar Jayntilal Muchhala v. Awaita Properties (CA(AT)(Ins) No. 121 of 2023) interpreted the expression ‘time value for money’ in Section 5(8) of the Code expansively to include not just a regular or timely return received for the duration for which the amount is disbursed as an amount in addition to the principal, but also any other form of benefit or value accruing to the creditor as a return for providing money for a long duration. In holding thus, the NCLAT upheld the finding of the Adjudicating Authority that the money advanced towards meeting working capital needs of the corporate debtor was a disbursal against the consideration for time value of money. The NCLAT also held that the absence of a loan agreement which determines the payment of interest and the rate thereof is not a ground for assuming that a loan is not interest-bearing.

It was further observed that reliance cannot be placed upon an MoU which was merely a draft format and without any evidence of the same having been signed, executed or acted upon to establish the relationship between the parties thereto.

7. In Paulose Nechupadam Construction Private Limited v. Kerala State Electricity Board Limited [Company Appeal (AT) (CH) (Ins) No.108/2024 (IA No.296/2024)], the NCLAT held that merely because the petitioner was given permission to sue the corporate debtor for realization of debts owed by a third party to the petitioner, it would not make the entity being sued (the corporate debtor in the instant case) a debtor  of the petitioner for maintainability of a CIRP application.

8. In Prem Prakash Bansal v. IDBI Bank Limited and Anr. (Comp. App. (AT) (Ins) No. 1541 of 2022), the NCLAT considered the issue of whether a guarantee extended by the corporate guarantor in favour of its group entity, could be defeated by taking refuge under non-compliance with the provisions of Section 186 of Companies Act, 2013 (Loan and Investment by Company), which required board and shareholders approval as a pre-condition for extension of such a guarantee. Rejecting the arguments of the appellant (a shareholder of the corporate debtor, which had provided a corporate guarantee to another group company owned by him and his family members), the NCLAT observed that while non-compliance with provisions of Section 186 of Companies Act may attract punishment under Section 186 (13) of Companies Act, it would not make the deed of guarantee void to avoid financial obligations towards the consortium of lenders.

In the same case, rejecting the challenge based on lack of privity of contract between the corporate guarantor and the petitioning creditor, the NCLAT had upheld the right of non-signatory lender/ beneficiary to file a Section 7 application on account of breach of the guarantee deed executed in favour of the security trustee, by observing that where a contract has been executed between two parties to make one of them a trustee for a third, the latter may sue to enforce the trust in its favour.

1. In Anil Matta v. Greater Noida Industrial Development Authority (Company Appeal (AT) (Insolvency) No. 1147 of 2023), the NCLAT upheld the categorization of the dues owed to the Greater Noida Industrial Development Authority (GNIDA) as dues to a secured creditor by observing that statutory charge is created as soon as an amount (under lease deed in this case) becomes payable by virtue of law and where it is not dependent upon the issuance of any recovery notice or registration of a charge under Section 77 of the Companies Act.

2. In Rishima SA Investments LCC (Mauritius) v. Sarga Hotels (CA(AT)(Ins) No. 143 of 2024), the NCLAT upheld the Adjudicating Authority’s order which held that a debt arising out of a foreign award will be treated as an ‘other debt’ and not a ‘financial debt’ and the allocation of a meagre sum to such creditor is not violative of provision of Section 30(2) of the Code where the liquidation value is NIL.

The NCLAT also clarified that where the approved plan provided for keeping the value ascribed against such contingent claim in an escrow, it is only the value proposed under the plan against such claim and not the entire claim which is to be kept in the escrow.

1. In Shristi Infrastructure Development Corporation Limited v. Avishek Gupta (Company Appeal (AT) (Insolvency) No. 70 of 2024), where approval of certain reliefs and concessions to give unfettered access to assets in relation to shared utilities and services, including any movable assets located on the land of the erstwhile holding company of the corporate debtor was challenged, the NCLAT held that considering the corporate debtor was being acquired on a going concern basis, such shared utilities and services are required by the corporate debtor for running on the same terms and in the same manner that it was running prior to CIRP. The NCLAT further observed that it was neither necessary nor appropriate to enter into respective rights and claims of the parties and the Adjudicating Authority should have left the parties to settle its rights and obligations before the competent court in accordance with law and grant of any such reliefs and concessions did not fetter the right of the appellant to enter into a fresh agreement with successful resolution applicant with regard to the use of shared utilities.

2. The NCLAT, in Shristi Infrastructure Development Corporation Limited v. Avishek Gupta (Company Appeal (AT) (Insolvency) No. 71 of 2024) held that by virtue of a registered lease deed, a corporate debtor is granted leasehold rights to enjoy the property and erect a building on the land and such right is an ‘asset’ of the corporate debtor within the meaning of Section 18(1)(f) of the Code.

The NCLAT further held that a right to terminate a lease deed is also a right in immovable property and if such right is contained in an unregistered agreement, such a right need not be recognized.

1. In Potens Transmission & Power Private Limited v. Apex Buildsys Ltd (Comp. App. (AT) (Ins) No. 1543 of 2023), the NCLAT reiterated that if the terms of the auction process so allows, the liquidator is not barred under Section 74 of the Indian Contract Act, 1872 to forfeit all such amounts paid in furtherance of the unsuccessful auction process even if such amount is in excess of the earnest money deposit.

2. In Ashok Dattatray Atre v. State Bank of India (Company Appeal (AT) (Insolvency) Nos. 221 and 222 of 2024), the NCLAT held that an extension of timelines for complying with the financial obligations under an approved plan does not amount to modification and that the adjudicating authority has the jurisdiction to grant such extension.

In the instant case, relying upon its own judgement in State Bank of India and Ors. v. The Consortium of Mr. Murari Lal Jalan and Mr. Florian Fritsch and Anr., the NCLAT reiterated that financial creditors are required to take collaborative steps to ensure that the resolution plan is implemented.

3. In Bhanu Pratap Singh v. Rakesh Jindal (Liquidator) (Company Appeal (AT) (Insolvency) No. 105 of 2024& I.A. No.330 of 2024), the NCLAT observed that Schedule I of Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 (“Liquidation Process Regulations”) is directory in nature and not mandatory. The NCLAT further observed that when the mechanism of sale as specified in Regulation 32 of the Liquidation Process Regulations is changed (from going concern sale to a slump sale process), the liquidator is required to proceed afresh with the sale process under Schedule I. Having observed so, the NCLAT upheld the decision of the liquidator to reduce the value of the assets by another 25% from the last reserve price (as opposed to reduction of 10% allowed in terms of Liquidation Process Regulations, had it been the continuation process of the same sale process).

The NCLAT further observed that the Code does not allow the shareholders of the corporate debtor undergoing liquidation to sell its assets during the liquidation.

4. In Gupta Textiles v. Darshan Patel (Company Appeal (AT) (Insolvency) No. 408 of 2024) by observing that payment to certain operational creditors under the resolution plan is to be discharged in priority to the financial creditors only by way of cash payment and not by offering option of partly paid redeemable preference shares, the NCLAT modified such payment related provision of the plan to make it compliant with the provisions of law.

5. In Gokul Agro Resources Limited v. Supriyo Kumar Chaudhuri (Company Appeal (AT) (Insolvency) No. 1070 of 2023 & I.A. No. 3688 of 2023), the NCLAT held that where there was a delay in execution of a sale certificate and consequent handing over of the assets to the successful auction purchaser on account of a stay order of the Adjudicating Authority, such successful auction purchaser cannot maintain a claim against the liquidator claiming the interest earned on such amount deposited from the date of deposit till the issue of sale certificate and handover of assets, where the process memorandum has expressly disclaimed any liability falling upon the liquidator. In the instant case, the NCLAT has also distinguished this case from other cases cited by the petitioner by noting that in the instant case the sale was eventually concluded and is not a case where any direction had been issued for refund of the deposited sale consideration.

1. In Adisri Commercial Private Limited v. Reserve Bank of India (Company Appeal (AT) (Insolvency) No. 1074 of 2023 & I.A. No. 4628 of 2023), the NCLAT observed that in exercise of its power to recall the judgments, the NCLAT cannot review the merits of the judgement or rehear the case to find out any apparent error in the judgment.

2. The NCLAT, in Raj Radhe Finance v. Shrinathji Spintx (CA(AT)(Ins) No. 1485 of 2022), held that an assignee of an original applicant would qualify as an applicant within the meaning of Rule 2(4) of the NCLT Rules, 2016 and in terms of the Rule 48, would be permitted to maintain an application for restoration of the company petition which was dismissed in default on account of non-prosecution by the original applicant.

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