NCLAT fortnightly: Important orders on IBC (February 1 - 14, 2023)

The article provides a brief look at the important orders passed by the NCLAT under IBC during the period between Feb 01 and Feb 14. This article has been contributed by the IBC team of Argus Partners.

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 February 1, 2023 and February 14, 2023. For ease of reference, the orders have been categorized and dealt with in the following stages i.e., Pre-admission stage, Corporate Insolvency Resolution Process (CIRP) stage and Liquidation stage.

Pre-Admission Stage

1. In Rohit Motawat vs. Madhu Sharma, the primary question before the NCLAT was whether interest could be claimed on the basis of an invoice which was not signed by the corporate debtor. The NCLAT relied on its own judgement in S.S.Polymers vs. Kanodia Technoplast Limited and another decision of the Hon’ble Karnataka High Court in Jyothi Limited vs. Boving Fouress Limited to observe that where an invoice has not been signed by the corporate debtor, the operational creditor cannot rely on the same to claim interest amount specified therein. Further, the NCLAT observed that where the principal debt had been paid entirely, a Section 9 application to recover interest was not maintainable.

2. In Ashish Gupta vs. Delagua Health India Private Limited (Company Appeal , the NCLAT, held that majority shareholders of a company have the locus to challenge an admission of CIRP against the corporate debtor where the admission took place on account of collusion between present and ex-director of the corporate debtor. The NCLAT observed that there was a dispute surrounding breach of fiduciary duty by the appellant in the context of consultancy agreement and held that when there was a dispute with regard to payment of a debt to an operational creditor, the remit of the Adjudicating Authority under Section 9 of the Code, being summary in nature, could not inquire into details of the dispute. As such, pending the dispute surrounding the operational debt, the application under Section 9 of the Code, was liable to be rejected.

3. In Priyal Kantilal Patel vs. IREP Credit Capital Private Limited, the NCLAT held that that although a Section 7 application could not be filed on ground of default in payment of settlement agreement, it would be maintainable when it has been filed not only on the ground of default of the settlement agreement but also on the basis of original financial debt. The NCLAT observed that just because consent terms were arrived at between the corporate debtor and the financial creditor, the original financial debt extended to the corporate debtor would not get wiped out, nor would the nature and character of the financial debt be changed.

The NLCAT also went on to hold the mere fact that the majority debenture holders had not initiated any section 7 application does not preclude a single debenture holder who was entitled to initiate section 7 application on its own right.

4. In Greymatter Entertainment Private Limited vs. Pro Sportify Private Limited, the NCLAT held that, failure to file a rejoinder does not amount to admission of the pleas. Further, the NCLAT, after noting that there were claims and counter claims with regard to the payable amount in question, held that there exists a dispute which necessitates rejection of application without examining the merit of the dispute.

5. In State Bank of India vs. N.S. Engineering Projects Private Limited, the NCLAT overturned the Adjudicating Authority’s finding that the financial creditor was not entitled to maintain a Section 7 application where the default was occasioned on account of the financial creditor not disbursing a part of the sanctioned amount and thus holding the financial creditor guilty of contributory negligence. The NCLAT went on to observe that when the corporate debtor was unable to pay its debts, and committed a default, the Adjudicating Authority must admit the application and should not go into the reasons behind the default.

6. In Rourkela Steel Syndicate vs. Metistech Fabricators Private Limited, the NCLAT observed that Section 69(2) of the Partnership Act, 1932 inter alia bars institution of a suit by an unregistered partnership firm. Accordingly, the NCLAT held that, considering an application under Section 9 of the Code is not a suit, the bar under Section 69(2) does not prohibit an unregistered partnership firm from maintaining a Section 9 application.

CIRP Stage

1. In Bhavesh Gandhi vs. Central Bank of India, the NCLAT held that where an application under Section 95 of the Code is admitted against a personal guarantor, the interim moratorium in accordance with Section 96 of the Code bars the other creditors of the personal guarantor from initiating any legal action or proceedings in relation to all the debts from the date of admission of Section 95 application.

Further, in relation to the arguments by the creditors (other than the creditor on whose application interim moratorium has commenced) that failure to initiate relevant proceeding may result in their debts getting barred by limitation, the NCLAT held that Section 60(6) of the Code is required to be read in conjunction with Section 60(1) and extended the benefit of excluding the moratorium period for computation of the period of limitation under Section 60(6) to personal guarantors.

2. The NCLAT, in Singhania Buildcon Private Limited vs. Vinod Kumar Ambavat, held that partial admission of claim by the resolution professional cannot be treated as acknowledgement of debt of the corporate debtor within Section 18 of the Limitation Act, 1963.

3. In Department of State Tax vs. Zicom Saas Private Limited, the NCLAT took note that, while any sum payable under the Maharashtra Value Added Tax Act, 2002 (“MVAT Act”) constituted a first charge on the property of the payee such charge was “subject to any provision regarding creation of first charge in any central act”. The NCLAT went on to observe that, Section 53 of the Code, which provides for waterfall mechanism would result in the dues under the MVAT Act not being treated as a secured debt under the Code.

In our view, the aforesaid rationale is questionable as Section 53 of the Code only refers to a waterfall mechanism and does not create a first charge so as to affect the application of Section 37 of MVAT Act.

4. The NCLAT, in Insolvency & Bankruptcy Board of India vs. GTL Infrastructure & Ors, held that Insolvency & Bankruptcy Board of India (“IBBI”) lacks locus to file an appeal against an impugned order considering the litigation is between financial creditor and corporate debtor, hence, IBBI is not an aggrieved person.

5. In Kanti Mohan Rustagi vs. Redbrick Consulting Private Limited, the NCLAT relied upon Silpi Industries vs. Kerala State Road Transport Corporation and Anr and held that to avail the benefit of being treated as an MSME under Section 240-A of the Code, the successful auction purchaser is required to register itself as an MSME under the relevant notification of the Ministry. In our view, the aforesaid decision is questionable as the NCLAT focused on the MSME status of the auction purchaser as opposed to the MSME status of the corporate debtor.

Further, the NCLAT held that Section 29-A of the Code is also applicable to a successful auction purchaser (in the case of liquidation) so that backdoor entry of erstwhile management is not permissible.

6. The NCLAT, in Sandeep Kukkar vs. Siddharth Intercrafts Private Limited, held that the Adjudicating Authority is not inhibited to exercise its jurisdiction under Rule 11 of the NCLT Rules, 2016 and take cognizance of the settlement where the resolution professional has not filed a Section 12A application despite a settlement having been reached.

7. In a judgement passed in Mrs. C.G. Vijaylakshmi vs. Shri Kumar Rajan, Resolution Professional of Hindustan Newsprint Limited, the Chennai Bench of NCLAT observed that provident fund dues are not subject to distribution under Section 53(1) of the Code and the provident fund dues could not be treated as ‘secured debt’. The NCLAT further observed in the instant case, part payment of dues by the successful resolution applicant was unjustified keeping in view of Section 14B of Employees Provident Fund and Miscellaneous Provisions Act, 1952.

The NCLAT, therefore, placed reliance upon the recent judgement of the Hon’ble Supreme Court judgement in Civil Appeal No. 407/2023 in Jalan Fritsch Consortium vs. Regional Provident Fund Commissioner and held that the provident fund dues and gratuity dues are to be paid in full, and partial admission of the aforesaid dues would be violative of Section 30(2) of the Code. The NCLAT accordingly directed the successful resolution applicant to make payment of the unpaid provident fund dues and gratuity dues till the date of the initiation of the CIRP.

8. In Nikunj Udhyog vs. Mr. Anshul Gupta, the Adjudicating Authority had rejected the plan approved by the committee of creditors on the ground that the committee of creditors failed to consider a resolution plan which was submitted beyond the stipulated timeline. Allowing appeal against the aforesaid order, the NCLAT revived the resolution plan which was set aside, holding that the Adjudicating Authority had committed error in dismissing the aforementioned resolution plan by second-guessing the commercial wisdom of the committee of creditors.

9. In Venus India Asset Finance Private Limited vs. Suresh Kumar Jain, the NCLAT held that the Adjudicating Authority lacked jurisdiction to scrutinize the justness of the majority decision of the committee of creditors voting to replace the resolution professional.

Liquidation Stage

1. In DBS Bank India Limited vs. Kuldeep Verma, the NCLAT held that interest can be claimed only up to the liquidation commencement date as specified in Form-D and not till the date of realization of receipt of the sale.

2. In Kunwer Sachdev vs. Su-Kam Power Systems Limited, the NCLAT held that, while the (Liquidation Process) Regulations, 2016 does not require prior approval of the Adjudicating Authority in the context of a public auction, such approval becomes necessary, if obtaining of such approval forms part of the requirement of the process document for conclusion of the sale. The NCLAT further held that after conclusion of the auction sale, a bid with a higher offer cannot be accepted.  

3. In the case of Express Resorts and Hotels Limited vs. Amit Jain, Resolution Professional and others, the NCLAT held that once the committee of creditors had exercised their commercial wisdom and was satisfied with the financial offer provided by the resolution applicant, it would be bound by its own decision and could not pray for reconsidering the resolution plan again in order to receive a higher offer, as that would cause enormous delay, which would not be in the interest of the corporate debtor or the resolution process.

Arka Majumdar is a Partner; Adhip Ray, Juhi Wadhwani and Vikram Chaudhuri are Associates at Argus Partners.

Arka Majumdar, Juhi Wadhwani, Vikram Chaudhuri, Adhip Ray
Arka Majumdar, Juhi Wadhwani, Vikram Chaudhuri, Adhip Ray
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