NCLAT fortnightly: Important orders on IBC (January 15 - 31, 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 January 15, 2023 and January 31, 2023.

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, the Liquidation stage and Miscellaneous.

1. In Permali Wallace Private Limited v. Narbada Forest Industries Private Limited, (Company Appeal (AT) (Insolvency) No. 36 of 2023), NCLAT rejected the instant Section 9 application (under appeal), which was merely filed for recovery of the balance amount of interest portion pursuant to a settlement agreement and not for resolution of insolvency of the corporate debtor, by holding that the proceedings under the Code are not recovery proceedings.

2. In South Delhi Municipal Corporation v. MEP Infrastructure Developers Limited, (Company Appeal (AT) (Ins.) No. 461 of 2022), NCLAT has observed that when a contractor is engaged to collect toll tax, the amount payable as per toll collection agreement would fall within the ambit of ‘operational debt’.

3. In the case of Ashoka Hi-Tech Builders Private Limited v. Sanjay Kundra and another (Company Appeal (AT) (Insolvency) No. 46 of 2023), NCLAT has held that a land owner, who had entered into a joint development agreement with the developer of the land and is not entitled to area share, would not qualify as a financial creditor where there was no disbursement for time value of money.

4. The NCLAT, in Mr. Sanjay Bhausaheb Bhange Vs. Khushbu Dye Chem Private Limited (Company Appeal (AT) (Ins.) No. 621 of 2022), has held that, where the defence of dispute raised under Section 9 was not moonshine or illusory or a sham, the NCLT is not required to enter into final adjudication in relation to the existence of dispute between the parties regarding operational debt. The NCLAT has reiterated its views in Siraj Ali Patel vs. Epigram and Ors. (Company Appeal (AT) (Ins.) No. 1290 of 2022).

5. The NCLAT, in Shapoorji Pallonji Finance Private Limited vs. Rekha Singh (Company Appeal (AT) (Insolvency) No. 397 of 2022), has examined the issue of, whether the NCLT, which has assumed authority over a non-banking financial company to conduct insolvency resolution process, on account of such financial service provider (“FSP”) meeting the threshold specified by the Ministry of Corporate Affairs, as on the date of application, ceases to exercise such authority, if during the pendency of the application, the FSP’s asset size falls below the threshold.

The NCLAT observed that where there is a statutory pre-condition for exercise of jurisdiction by a tribunal, where such statutory pre-condition is fulfilled as on the date of exercise of such jurisdiction, such jurisdiction is retained till the application is finally decided, even if during the pendency of the proceeding, the statutory pre-condition is subsequently not being met. Accordingly, it was held by NCLAT that, NCLT retains jurisdiction over an FSP, even if during the pendency of proceeding, the entity’s asset falls below the threshold specified for the entity to qualify as an eligible FSP over which the NCLT could exercise control.

Furthermore, on the issue of whether an application can be filed under Section 95(1) of the Code against personal guarantors to an FSP where no CIRP was pending against the principal borrower, NCLAT held that such application against personal guarantor was fully maintainable.

6. In Vinay Gupta vs. Ashika Credit Capital Limited and Another (Company Appeal (AT) (Insolvency) No. 92 of 2023), rejecting the challenge that a revival application upon breach of a settlement agreement executed pursuant to an earlier Section 7 application is not maintainable, NCLAT held that where liberty for revival of such application was granted, such revival application cannot be denied basis the argument that a debt which is due for breach of settlement agreement cannot be a financial debt. In this regard, NCLAT observed default in settlement agreement, which was executed pursuant to a Section 7 application, need not affect the claim in the original application which was financial debt.

7. In Surendra Singh Hada and Ors. vs. Arfat Petrochemicals Private Limited (“APPL”) (Company Appeal (AT) (Ins)NO.578 OF 2021) with Arfat Petrochemicals Private Limited vs. Surendra Singh Hada and Ors. (Company Appeal (AT) (Ins) No.803 OF 2021), relying upon the judgement of Hon’ble Supreme Court in the matter of Spartek Ceramics India Limited vs. Union of India & Ors. (Civil Appeal 7291-7292 of 2018) and in its own decision in Pramod Kumar Pathak vs. Arfat Petrochemicals Pvt. Ltd. (CA(AT)(INS) No. 312 of 2022), held that as an application filed under Section 33 and Section 34 of the Code is not applicable to a rehabilitation scheme sanctioned under the erstwhile the Sick Industrial Companies (Special Provisions) Act, 1985, no application is maintainable under Section 33 of the Act in the event of breach of the approved rehabilitation plan.

8. In Niraj Kumar Singh vs. LI Digital Payments Pvt. Ltd. (Company Appeal (AT) (Ins.) No. 566 of 2022), the NCLAT while deciding on the requirements of the demand notice, held that where the demand notice was not addressed in the name of the corporate debtor specified in MCA under its CIN, the demand notice would not be deficient with regards to the nomenclature of the corporate debtor considering the name of the corporate debtor under its CIN was mentioned in the contents of the demand notice.

Further, the NCLAT held that delivery of demand notice to a branch office of the corporate debtor, as opposed to the registered office, can also constitute proper service of notice depending upon the relevant factual circumstances.

9. The NCLAT, in Mr. Shahi Md. Karim vs. Kabamy India LLP & Ors. (Company Appeal (AT) (CH) (Ins.) No. 16 of 2023), held that, while the NCLT does not have the power to review its order, it can, based on the facts and circumstances of the case recall the order.

The NCLAT also held that that presence of an arbitration clause in an agreement does not bar an operational creditor to file an application under Section 9 of the Code.

10. The NCLAT, in Vishal Agarwal vs. ICICI Prudential Real Estate AIF-I & Anr. (Company Appeal (AT) (Insolvency) No. 1016 of 2022), has held that, even where a date of default of repayment occurred during the prohibited period under Section 10A of the Code, where the defaults for earlier period have been clearly admitted, admission of CIRP cannot be denied.

1. The NCLAT in Jindal Stainless Limited v. Mr. Shailendra Ajmera, R.P. of Mittal Corp Limited and Others (Comp. App. (AT) (Ins.) No. 1058 of 2022), whilst observing that there cannot be any fetter on the power of the CoC to cancel or modify any negotiation with the Resolution Applicant including a challenge process, held that, after the adoption of swiss method challenge to find out the best plan, CoC could not be directed to accept a revised bid post closure of the challenge process.

2. In Shivashakti Elmech Private Limited v. Shiv Nandan Sharma & Ors. (Company Appeal (AT) (Ins.) No. 34 of 2021), the eligibility of the successful resolution applicant, which was a related party and had undergone a financial reorganization process subsequent to the approval of the resolution plan by the committee of creditors, was challenged. Rejecting the challenge, the NCLAT had held that (a) a successful resolution applicant which had undergone financial reorganization process post the submission and approval of the resolution plan, does not incur ineligibility under Section 29-A(c) on account of such financial reorganization process; and (b) that a related party of a corporate debtor, which is not otherwise disqualified under Section 29-A, does not become automatically disqualified to submit a resolution plan in relation to the corporate debtor on account of being a related party.

In the aforesaid judgement the NCLAT has also held that the ineligibility under Section 29-A(h) is attracted only where the guarantee has been invoked by the same class of creditor as the creditor who filed the application for initiation of CIRP against the corporate debtor. In other words, NCLAT held that where the CIRP against a corporate debtor has been initiated by an operational creditor, a guarantor to such corporate debtor would not be disqualified under Section 29-A(h) where such guarantee has been invoked by a financial creditor. In our view, the aforesaid observation is incorrect, as once CIRP proceeding is initiated against a corporate debtor it becomes a proceeding in rem, and hence the question of any identification of disqualification on the basis of which specific class of creditor had initiated the CIRP process becomes irrelevant.

3. The NCLAT, in Dharmindra Constructions Private Limited and Anr. v. Rajendra Kumar Jain (Company Appeal (AT) (Insolvency) No.1477 of 2022 & I.A. No.4658, 4610 of 2022), has held that, where liquidation value payable to the operational creditor is NIL, NIL payment to operational creditors under a resolution plan, does not contravene the Code.

4. The NCLAT, in Supriyo Kumar Chaudhuri & Ors. vs. Jhunjhunwala Oil Mills Ltd. & Ors. (Company Appeal (AT) (Ins) No. 794 of 2021), has held that a lease deed which has not been identified as critical for protecting and preserving the value of the corporate debtor, cannot be terminated during the moratorium on account of non-payment of rent.

In our view, such an interpretation is an incorrect application of Section 14(2-A) of the Code, which prohibits termination of supply of goods and services critical to protect the value of the corporate debtor as a going concern, except on account of the non-payment of dues during the moratorium period, as it incorrectly prioritizes a non-critical service over a critical one.

5. In Commercial Tax Department vs. Sajjan Kumar Dokania and others (Company Appeal (AT) (Insolvency) No. 1412 of 2022 & I.A. No. 4416 of 2022), the NCLAT denied the benefit of the decision of the Supreme Court in State Tax Officer (1) vs. Rainbow Papers Limited (Civil Appeal No. 1661 of 2020) to a secured creditor, which had failed to file the relevant claim before the approval of the relevant resolution plan by the committee of creditors.

1. In a judgement passed by NCLAT, New Delhi, in Nitin Jain v. Lucky Holdings Private Limited, Company Appeal (AT) (Insolvency) No. 1390 of 2022, the principal bench allowed a successful resolution applicant to withdraw from the auction process, and seek refund of the amount paid thereunder on account of attachment of the assets under the PMLA Act. However, the NCLAT refused such auction-purchaser’s application claiming interest on the refunded amount.

2. The NCLAT, in Mohinish Kumar & Ors vs. Premsons Super Steels Private Limited (Company Appeal (AT) (Insolvency) no. 279 of 2021), held that where application under Section 10 of the Code is in accordance with the requirements specified in Section 10 and Form-6, a mere irregularity would not contemplate ‘fraud’ or ‘malice’.

3. The NCLAT, in State Bank of India vs. Bhuvee Stenovate Private Limited and others, (Comp. App. (AT) (Ins.) No. 1013 of 2022), held that NCLT could not have concluded the sale of the corporate debtor by adopting a process of taking two bids, one by the applicant and another by intervenor without providing to the liquidator an opportunity to take steps for a private sale for maximisation of assets of the corporate debtor.

1. In Platinum Rent A Car (India) Private Limited vs. Quest Offices Limited (Condone Delay IA No. 1138/2022 in Comp App (AT) (CH) (Ins) No.448/2022), NCLAT, by observing that when a certain remedy is to be exercised with respect to a certain statute, in a particular manner and time, the same must be followed without any deviation, rejected the condonation application for delay, for filing the appeal beyond the permissible limit of ‘45’ days.

Interestingly, the NCLAT held that as the code is a self-contained one, Section 238 of the Code would override Section 12 of the Limitation Act, 1963. This, in our view, is an incorrect observation as it fails to take into account Section 238A of the Code, which makes the provisions of the Limitation Act applicable to an appeal before the NCLAT.

2. The NCLAT, in Arindam Kar v. Innovative Design Educational Kits and another (Company Appeal (AT) (Insolvency) No. 57 of 2023 & I.A. No. 215 of 2023), observed that limitation was to be calculated from the date when the order in a case is pronounced and not from the date when the order was communicated to the applicant by the resolution professional.

3. The NCLAT, in the matter of Maharashtra State Electricity Distribution Company v. NRC Limited and Another, Company Appeal (AT) (Insolvency) No. 13 of 2023 & I.A. No. 37 of 2023, held that it could not condone a delay of 244 days, since as per Section 61 of the Code, NCLAT’s power of condoning delays was limited to only 15 days. Whilst rejecting such condonation request, NCLAT also rejected the effort of the appellant to seek benefit of Section 17(1)(c) of the Limitation Act, 1963, by observing that Section 17(1)(c), which is applicable only to an application or a suit, does not come into play in an appeal when there is already a prescribed limitation for an appeal.

The same view was taken by the NCLAT in Mother Highlands Apartment Owners Association v. Mather Projects Private Limited and Others (Company Appeal (AT) (Insolvency) No. 1028 of 2022).

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