NCLAT Fortnightly: Important orders on IBC (March 1 – March 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 March 1, 2024 to March 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. The NCLAT, in Dhiraj Singh v. Piramal Capital and Housing Finance Limited (Company Appeal (AT) (Insolvency) No. 1255 of 2023), observed that a Section 7 petition filed against the guarantor cannot be denied merely based on subsequent issue of a notice of invocation during the period covered under Section 10A of the Code, when the guarantee was already invoked prior to the Section 10A period.

1. Where the entire admitted claim filed by the Provident Fund Department includes components of statutory interest under Section 7Q of the Employees’ Provident Funds and Miscellaneous Provisions Act 1952 (“EPF Act”) and damages under Section 14B of the EPF Act, can a successful resolution applicant provide differential treatment by making provision only towards the claim amount concerning unpaid contribution, while ignoring the claim towards interest and damages? This particular issue has attracted the attention of various benches of the Adjudicating Authority, with the recent trend suggesting the Adjudicating Authority favours a distinction between the interest and damages payable on one hand and the contribution payable towards the employees on the other hand, on the basis that unlike the contribution, the penalty and damages are not paid to the workmen or employees. In other words, it was noted that the claim of interest and damages are not payable to the employees of the corporate debtor and are instead payable to the government. The various benches (Mumbai, Bangalore, Kochi and Hyderabad) of the Adjudicating Authority had directed that claims towards damages and penalty be treated as operational debt which is due to the statutory authorities and which is to be dealt with in accordance with Section 53 of the Code.

In the Regional Provident Fund Commissioner, EPFO Regional Office v. Mamta Binani, Resolution Professional (Company Appeal (AT) (Insolvency) No. 245 of 2022), the NCLAT refused to make such a distinction and went on to observe that entire admitted claim of the Provident Fund Department would have to be paid by the successful resolution applicant without excluding any payment towards interest and damages.

2. In the matter of Anjani Kumar Prashar (Suspended Director of Grandstar Realty Pvt. Limited) v. Manab Dutta and Ors. (Company Appeal (AT) (Insolvency) No.1366 of 2023), the question before the NCLAT was whether a successful auction purchaser of a real estate project acquired under the SARFAESI Act, 2002 can defend a Section 7 application filed by the homebuyers of the real estate project on the ground that such auction purchaser was not a financial creditor vis-à-vis such allottees. Rejecting the argument of the auction purchaser, the NCLAT observed that the definition of financial creditor also includes a person to whom such debt has been legally assigned or transferred to. Thus, if the entity whose assets were purchased by the auction purchaser owed a financial debt to the homebuyers as an assignee, the auction purchaser would also qualify as a financial creditor vis-à-vis such allottees.

It was further observed that the filing of a claim in relation to ongoing CIRP of the erstwhile developer does not preclude the initiation of Section 7 proceedings against the current developer.

3. In Garodia Chemicals Limited (Company Appeal (AT) (Insolvency) No.1682 of 2023), the NCLAT observed that when an application has been filed under Section 54C of the Code for the initiation of pre-packaged insolvency, and such application is otherwise complete in all aspects, the Adjudicating Authority cannot consider the appropriateness of the base plan at the time of consideration of such an application for the initiation of pre-packaged insolvency. It further held that a rejection of an application under Section 54C, after entering into the merits of the base resolution plan, is contrary to the statutory scheme of Chapter IIIA.

In the same case, the NCLAT had also observed that there is no bar under the Code which prevents the corporate debtor from jointly submitting a base resolution plan along with any other person including its financial creditor.

1. In Canara Bank v. S. Rajendran (Company Appeal (AT) (CH) (Ins) No. 277/2023 and (IA No.851/2023), the NCLAT observed that a mortgagee, who had registered the mortgage with the office of the sub-registrar, cannot be denied the status of a secured creditor on account of its failure to register the mortgage with the Registrar of Companies (RoC) in accordance with Section 77 of the Companies Act, 2013. The NCLAT further noted that the rights of a mortgagee to enforce security interest on the basis of Section 58(f) of the Transfer of Property Act, 1882 and Rule 8 of the Security Interest (Enforcement) Rules, 2002 should not be diluted in terms of Regulation 21 of IBBI (Liquidation process) Regulations, 2016.

While we note that Regulation 21 of IBBI (Liquidation process) Regulations, 2016 does contain additional modes of proving security interest, none of the grounds covered therein (namely, records available in an information utility, certificate or registration of charge issued by RoC, or proof of registration of charge by CERSAI), includes registration with the sub-registrar’s office as a mode of establishing security interest. This begs the question as to whether the NCLAT was correct to introduce the additional mode of establishing security interest when the legislatures had not included the same as a ground.  

2. In Pavan Vikram Sajhwani v. Santanu T Ray, Liquidator of Oneworld Industries Private Limited (Company Appeal (AT)(Ins) No. 166 of 2024), the NCLAT refused to interfere with the order of the Adjudicating Authority, whereby the Adjudicating Authority had directed the appellant to handover vacant and peaceful possession of the premises licensed to the appellant by the corporate debtor. The NCLAT noted that the stay order passed by the Small Causes Court did not bar the Adjudicating Authority from passing an eviction order qua immovable properties forming part of the assets of the corporate debtor. Additionally, it was noted that since the order of the Small Causes Court was passed after commencement of the liquidation proceedings without obtaining prior approval of the Adjudicating Authority in terms of Section 33(5) of the Code, such action was vitiated.

1. Where the resolution plan provides for the assignment of a debt to a successful resolution applicant (as opposed to extinguishment of such debt), could the plan retain a right in favour of the financial creditor to proceed against the guarantor of such a debt, was the question which was raised before the NCLAT in the case of Vikas Aggarwal v. Asian Colour Coated Ispat Limited (Comp. App. (AT) (Ins) No. 1104 of 2020).

The aforesaid issue has attracted attention of courts across multiple jurisdictions, with the most famous decision being that of the High Court of Australia’s decision in Hutchens v. Deauville Investments Private Limited ([1986] 68 ALR 367) (“Hutchens”). In Hutchens, the High Court of Australia was pleased to note that an assignment of the underlying principal debt with an exclusion of guarantee results into the assignor being unable to invoke the guarantee based on two independent grounds. Firstly, that the assignment, by splitting the debt, adversely affects the right of the surety and secondly, that the assignment has the effect of fundamentally transforming the contract of guarantee in a manner such that it could no longer meaningfully be termed as a guarantee. The aforesaid decision has found audience in the decision of a division bench of the Gujarat High Court in the case of Prashant Sashi Ruia v. State Bank of India (SCA 11199 of 2019, decision dated December 16, 2021) and by a single bench of the Delhi High Court in the case of Vineet Saraf v. Rural Electrification Corporation Limited (WP(C) 3293/2023, decision dated July 21, 2023). However, in none of the aforementioned cases, a final decision was taken, and the nature of observations were held to be only prima facie in nature.

While faced with the same issue, however, it appears that NCLAT did not have the benefit of considering the decision of Hutchens or its subsequent treatment by the Gujarat and Delhi High Courts. That, however, did not stop the NCLAT from observing that the treatment of personal guarantors under the Code is different from the treatment of guarantors under the Indian Contract Act, 1872, with Section 238 of the Code nullifying the relief of subrogation available to a guarantor under Sections 140 and 141 of the Indian Contract Act, 1872.

While upholding the right of the financial creditors to proceed against the guarantors, it was further observed that where the resolution plan had specifically retained such a right in favour of the financial creditor, such retention of right would not qualify as a mere right to sue in order to attract a prohibition under Section 6(e) of the Transfer of Property Act, 1882.

Finally, the NCLAT refused to entertain the argument raised by the guarantors regarding the alleged non-existence of debts in the books of the financial creditors by observing that such treatment is a prerogative of the financial creditors and does not come to the rescue of the guarantors to escape their liability under the guarantee agreements.

2. In Sadique Islam v. Niraj Kumar Agarwal (Company Appeal (AT) (Ins.) No. 1081 of 2022 & I.A. No. 3178 of 2022), the NCLAT observed that as the ingredients of preferential, undervalued and fraudulent transactions are entirely different, the Adjudicating Authority is required to consider each transaction separately to ascertain the nature of transactions and that general observations should not be made without identifying the specific categories under which the transactions fall.

3. The NCLAT, in Katra Realtors Private Limited v. Rajesh Ramnani (Company Appeal (AT) (Insolvency) No. 382 of 2024) held that any application for replacement of the resolution professional dehors Section 27 of the Code can be entertained only when there are findings on the conduct of the resolution professional by the Adjudicating Authority or by some proved fact and not on the basis of mere allegations.

4. In Chanderpati v. Soni Realtors Private Limited (Company Appeal (AT) (Insolvency) No. 691 of 2023 & I.A. No.2302, 2303 of 2023) and Essel Finance Advisors and Managers LLP v. Pankaj Srivastava Liquidator (Company Appeal (AT) (CH) (INS) No. 332 of 2023), the NCLAT had observed that filing of a certified copy of the impugned order is mandatory for the maintainability of an appeal, and while the Adjudicating Authority has the jurisdiction to exempt such compliance, an appellant cannot on its own dispense with such requirement.

In Essel Finance Advisors and Managers LLP v. Pankaj Srivastava Liquidator (Company Appeal (AT) (CH) (INS) No. 332 of 2023), the NCLAT had observed that an appellant is not exempted from applying for a certified copy merely on the basis of its entitlement to receive a free copy and the time taken for obtaining the certified copy can only be excluded where the appeal is filed within limitation.

Additionally, in Chanderpati v. Soni Realtors Private Limited (Company Appeal (AT) (Insolvency) No. 691 of 2023 & I.A. No.2302, 2303 of 2023), the NCLAT had also considered the issue of whether an appeal would be ipso facto barred under limitation where the certified copy had been applied beyond the original 30 day-period for maintaining the appeal. After observing that there was no previous jurisprudence on this specific issue, the NCLAT went on to observe that where the application for receipt of certified copy was filed beyond 30 days and such delay was on account of sufficient reasons, the Authority has the power to condone such delay and direct the filing of the certified copy within a definite period.

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