NCLAT Fortnightly: Important orders on IBC (March 1 - 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 March 1, 2023 and March 15, 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 Neha Khanna and another v. Tybros Infratech Private Limited, the NCLAT held that, where the appellant homebuyer could not establish that he was a financial creditor who had lent money to the corporate debtor, the petition under section 7 of the Code filed by such homebuyer was unmaintainable unless the homebuyer represented not less than one hundred or ten percent of allottees under a real estate project, whichever is less.

2. The NCLAT, in Fort Gloster Industries Limited & Ors. v. Resolution Professional of Fort Gloster Industries Limited, held that compliance of submission of claim along with proof of claim by individual employee/workman is mandatory, which filing could be made collectively with other employee/workman through an authorized representative. It also went on to hold that where the relevant claim has not been filed in compliance with the applicable regulations, the claimants cannot maintain a claim for the entire amount of gratuity, in excess of the amount earmarked in the resolution plan.

1. In Vistra ITCL (India) Limited v. Torrent Investments Private Limited and others, the NCLAT was faced with the critical issue of interpreting the provision contained in Regulation 39(1A) of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 which empowered resolution professionals to allow modification of the resolution plan, but not more than once or allowed them to use a challenge mechanism to enable resolution applicants to improve their plans.

While interpreting the aforesaid regulation, the NCLAT went on to observe as follows:

(i) there can be no fetter on the power of committee of creditors (“CoC”) to cancel or modify any negotiation with the resolution applicant including a challenge process, but it is the wisdom of the CoC to take a decision in this regard;

(ii) in view of subsection 4 of Section 30, which requires the CoC to vote on a plan ‘after considering its feasibility and viability’ implies that after receipt of the plan, subsequent to the challenge mechanism, a CoC is not obliged to put the plan to vote and Regulation 39(1A) does not prohibit CoC from negotiating with resolution applicants or asking Resolution Applicants to further increase the plan value; and

(iii) that even after completion of challenge mechanism under Regulation 39(1A)(b), the CoC retains its jurisdiction to negotiate with one or other Resolution Applicants, or to annul the Resolution Process and embark on to re-issue RFRP.

The NCLAT, further observed the following:

(i) the highest bidder in the challenge mechanism has no right to claim that its resolution plan be put to vote, without the CoC taking any further steps;

(ii) that a debenture trustee which holds 90% of the voting share in the CoC, is entitled to maintain an appeal against the order of Adjudicating Authority rejecting the CoC’s right to negotiate with the resolution applicants post the conclusion of challenge mechanism even in absence of a specific authorization of the underlying bond holders.

2. In Shibu Job Cheeran and others v. Mr. Ashok Velamur, liquidator of M/s Archana Motors Limited, the NCLAT laid down that a director would be personally liable to make contribution if (i) the corporate debtor was found to have conducted the business with intent to defraud creditors or for any fraudulent purpose; and (ii) where directors participated in carrying on the business despite knowing likely insolvency of the corporate debtor. In the course of the decision, the NCLAT identified the following instances which could indicate the existence of running the business with an intent to defraud creditors:

(i)   concealment of true financial position;

(ii)  creation of fictitious assets in the books; and

(iii) stipulation in the books of receivables from non-existing parties.

3. In Pray Projects Private Limited v. Rajender Kumar Girdhar, the NCLAT held that when interest in the property is transferred for the benefit of a creditor on account of liabilities owed by the corporate debtor, it would be considered as a preferential transaction under Section 43(2)(a) of the Code. The NCLAT further held that once a Section 7 application is filed and reserved for orders, the assets of a corporate debtor should not be interfered with, or reduced, in order to prevent detriment of its actual creditors and therefore, if the corporate debtor enters into such transactions, they may be considered as avoidance transactions, infringing Section 43 and 45 of the Code, even though the other parties may not be aware of such transactions.

4. In Sadashiv Nomaya Nayak & Ors. v. Gammon Engineers and Contractors Private Limited, the NCLAT upheld the order of the Adjudicating Authority rejecting the Section 9 petition filed jointly by three workmen, whose aggregate claim amount exceeded the threshold as specified under Section 4 of the Code, but the individual claims were below the relevant threshold.

5. In Ashmeet Singh Bhatia v. Sundrm Consultants Private Limited and Another, the NCLAT rejected the contention that an application under Section 65 is maintainable only after the admission of a relevant company petition and held that such an application is maintainable during the pendency of a petition filed under Section 7, 9 or 10 of the Code.

6. In Ram Kishan Saraf and Ors. v. Narender Kumar Sharma, Resolution Professional of Indirapuram Habitat Centre Private Limited, the NCLAT reiterated that the resolution professional has no adjudicatory authority to decide the status of a creditor and held that the Adjudicating Authority was wrong to remit the determination of the status of the creditor to the resolution professional, without deciding itself.

7. The NCLAT, in Yash Nachrani v. Pardesi Construction Private Limited and Another, observed that the provisions of the Code cannot be turned into debt recovery proceedings as the underpinning of the Code is to bring a corporate debtor on its feet and rejected the admission order passed by that the Adjudicating Authority noting pre-existence of dispute.

8. In E-Homes Infrastructure Private Limited and Ors. v. New Okhla Industrial Development Authority and Ors, the NCLAT held that the Adjudicating Authority has the jurisdiction to reject a resolution plan, which dealt with a land leased pursuant to a lease deed whose contractual terms were violated. The NCLAT further observed that, where no direction for consolidation of CIRP of two separate entities has been ordered, a resolution professional common to two such independent entities could not submit a composite resolution plan dependent on each other.

It was further observed that a resolution professional is duty bound to ensure that provisions of the Code and the relevant regulations are complied with and cannot question authority of the Adjudicating Authority to enquire issues which were deemed to violate any provision of law or is contrary to the interests of the stakeholders.

9. The NCLAT, in Posco India Pune Processing Center Private Limited v. Dhawal Jitendra Kumar Mistry and Ors., has held that the restriction under Section 29A (h) of the Code, which makes a person which has executed a guarantee in favour of a creditor in respect of a corporate debtor and which guarantee remains undischarged upon being invoked, ineligible to submit a resolution plan, would not apply to a person who has not executed a guarantee and had merely issued a letter stating that on failure of certain event at the instance of the corporate debtor, a guarantee may be executed.

1. In Haravtar Singh Arora, erstwhile promoter of James Hotel v. Navneet Gupta, Liquidator of James Hotel and another, the NCLAT held that the erstwhile Regulation 32A(4) of Liquidation Process Regulations, 2016 (since substituted with effect from September 16, 2022) which specified a period of 90 (ninety) days for the liquidator to sell the assets on a going concern basis did not preclude the Liquidator to conduct auction on a going concern basis beyond 90 days, where the auction sale notice had been issued on a date, which was a date prior to the insertion of provision of Regulation 32A.

2. In the matter of Mr. P. Eswaramoorthy v. the Deputy Commissioner of Income Tax (Benami Prohibition),the NCLAT has held that, an application by a liquidator seeking removal of provisional attachment order which was passed after the order of liquidation, by the authority under the Prohibition of Benami Property Transactions Act, 1988, is not maintainable before the Adjudicating Authority under Section 60(5) of the Code. It also went on to hold that a liquidator cannot take umbrage under Section 32A for avoiding such an attachment.

3. In Torrecid India Private Limited v. Arrhum Tradelink Private Limited, the NCLAT held that a liquidator is required to conduct liquidation process as per the Liquidation Regulation and as per the process document issued by the liquidator and cannot mechanically rely on the auction platform to determine who the highest bidder is, ignoring the stipulation contained in the process document.

4. In Mohan Fabtex Limited v. Rakesh Jhunjhunwala and Ors, the NCLAT observed that though maximization of the value of the corporate debtor is one of the objectives of the Code, such objective is required to be achieved within specified timelines. Accordingly, it rejected a subsequent higher offer when an auction offer was already approved.

1. In SMS Foundation & Investment LLP v. J. John Ohilvi, the NCLAT held that where the order of the Adjudicating Authority was pronounced in open court, the period of limitation would commence from the date of pronunciation of the order itself. Accordingly, an appeal which was filed beyond 45 days beyond the pronouncement of the order was held to be non-maintainable, as NCLAT has no power to condone the delay beyond the permissible period as provided for under Section 61 of the Code.

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