NCLAT Fortnightly: Important orders on IBC (September 1, 2023 – September 15, 2023)

The article provides a brief look at important orders passed by the NCLAT under the IBC during the period between September 1 and September 15, 2023.
NCLAT Fortnightly: Important orders on IBC (September 1, 2023 – September 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 September 1, 2023 to September 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, and Liquidation stage.

Pre-admission stage

1. In IDBI Trusteeship Services Limited v. Direct Media Distribution Ventures Private Limited (Company Appeal (AT) Insolvency No. 850 of 2023), the NCLAT held that where the date of default fell within the period covered under Section 10A, any subsequent payment made after the Section 10A period does not shift the date of default to take the same outside the Section 10A period for a Section 7 application to be maintainable.

2. In Beetel Teletech Limited v. Arcelia IT Services Private Limited (Company Appeal (AT)(Insolvency) No. 1459 of 2022), the NCLAT held that where the default was committed prior to the Section 10A period and such default continues during such 10A period, any liability accrued during the aforesaid period could be aggregated with the principal for meeting the threshold. Notably, the same view was taken by NCLAT in Narayan Mangal v. Vatsalya Builders & Developers Private Limited (Company Appeal (AT) (Ins.) No. 294 of 2023.

The NCLAT, in the present case, further held that in light of Section 60 of the Indian Contract Act, 1872, which gives the creditor the discretion to appropriate the payment received against the interest, the Adjudicating Authority cannot question the manner of appropriation by the creditor where the debtor had not clearly stated anything otherwise.   

3. The NCLAT, in Vikram Kumar v. Aranca (Mumbai) Private Limited (Company Appeal (At) (Insolvency) No. 836 of 2023), held that a Section 7 application is not maintainable against a corporate guarantor where the corporate guarantee was invoked during the period specified under Section 10A of the Code.

4. In Venkat Rao Marpina v. Vemuri Ravi Kumar (Company Appeal (At) (Ch) (Ins.) No. 134/2022), the NCLAT upheld the decision of the Adjudicating Authority to admit the Section 7 petition, by observing that the advances given by a real estate buyer to the developer would be considered as a borrowing and such amounts raised from real estate buyers would amount to financial debt within the meaning of Section 5(8)(f) of the Code.

Interestingly, it appears that the financial creditor here was a sole homebuyer, and could not have maintained a Section 7 petition without meeting the threshold prescribed under the second proviso to sub-section (1) of Section 7 of the Code. However, it appears that both the Adjudicating Authority and the NCLAT had failed to give due attention to the said aspect.

5. In Avinash Totade & Ors. v. Sinew Developers Private Limited (Company Appeal (AT) (Insolvency) No.1131 of 2023 & I.A. No. 3941, 3899 of 2023), the NCLAT held that a Section 7 application is not maintainable solely for the recovery of interest.

6. Whether a CIRP application lies on account of a breach of a settlement agreement elicited two diametrically opposite views from the Principal Bench and Chennai Bench of NCLAT.

The Principal Bench, in Ahluwalia Contracts (India) v. Jasmine Buildmart Private Limited (Company Appeal (AT) (Insolvency) No. 345 of 2023), held that breach of a memorandum of settlement arising out of an underlying operational debt which only specifies the mode and manner of payment is capable of sustaining a Section 9 petition.

However, the Chennai Bench of NCLAT, in Maulik Kirtibhai Shah v. United Telecoms Limited (Company Appeal (AT) (CH) (Ins) No. 268/2023 IA No.834/2023 – For Exemption) took a different view. The Chennai Bench of NCLAT held that a settlement agreement does not come within the definition of operational debt and the claims arising under a memorandum of understanding loses the character of operational debt and becomes a debt simpliciter. It was further held that the definition of ‘operational debt’ cannot be given a wide interpretation to include any agreement between the parties which does not specifically pertain to supply of goods or services.

7. In Anuratan Textiles Private Limited v. Amaira International Pvt Limited (Company Appeal (At)(Ins) No.856/2021), the NCLAT relied upon the decision of the Supreme Court in Indus Biotech Private Ltd Vs Kotak India Venture (Offshore) Fund (earlier known as Kotak India Venture Limited) and others (Arbitration Petition (Civil) No. 48/2019), to reject a decision of the Adjudicating Authority to direct the parties to refer the matter to arbitration based on an application filed under Section 8 of the Arbitration and Conciliation Act, 1996. The NCLAT observed that when a petition is filed to initiate CIRP, before entertaining any application filed under Section 8 of the Arbitration Act, it needs to first adjudicate on the application filed under the Code by recording a satisfaction with regard to debt and default.

8. In the matter of Agarwal Polysacks Limited v. K. K. Agro Foods and Storage Limited (Company Appeal (AT) (Insolvency) No.1126 of 2022, while examining the issue of whether a written contract is a pre-condition for proving a financial debt, the NCLAT noted that the usage of the word ‘or’ in Regulation 8 of Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, (“CIRP Regulations”) would indicate that the said regulation does not contemplate execution of all the documents mentioned in such regulation and that the existence of debt can be proved by any of the documents referred to in sub-regulation (2).

Further, while noting that a financial debt could be proved from other relevant documents, and not necessarily a written contract, the NCLAT observed that Form 26AS entries could be used to prove financial debt if it corroborates to the claim of the financial debt.

CIRP Stage

1.  The NCLAT, in Engineering Mazdoor Parishad Devas Through Its General Secretary v. Teena Saraswat Pandey, Resolution Professional of S & H Gears Private Limited (Comp. App. (AT) (Ins.) No. 1200 of 2023) held that the resolution professional was justified in admitting the claim of workmen on the basis of the amount specified in the balance sheet of the corporate debtor, where the workmen failed to provide relevant records to substantiate their claim.

2. In Mayuras Industrial Services v. S R Shriraam Shekher (Company Appeal (AT) (CH) (Ins) No. 07/2023 (IA No. 45/2023), the NCLAT held that where the Committee of Creditors (CoC) has approved withdrawal of CIRP with more than 90% of voting share, such decision cannot be rejected by the Adjudicating Authority.

3. In Dauphin Cables Private Limited v. Praveen Bansal (Company Appeal (AT) Insolvency No. 971, 972 & 973 of 2023), the NCLAT relying upon Regulation 36 of CIRP Regulations, held that shareholder is not entitled to ask for documents and calculations on basis of which claim of the financial creditor has been admitted.

4. In Deputy Commissioner, UTGST, Daman v. Rajeev Dhingra (Company Appeal (AT) (Insolvency) No.1340 of 2022), the NCLAT held that the decision of resolution professional or CoC to reject a belated plan which contained various infirmities like non-submission of duly signed net worth certificate, audited financial statements, etc. could not be successfully challenged, even where such a plan was more viable than the accepted resolution plan. The NCLAT further held that where a plan is rejected by CoC, the Adjudicating Authority cannot question the commercial wisdom of the CoC nor deal with the merits of resolution plan unless it is found to be contrary to the express provisions of law and against the public interest.

Further, the NCLAT held that the decision of resolution professional to not accept a delayed statutory claim filed after the approval of the resolution plan by the CoC could not be challenged as the CIRP Regulations do not enable the resolution professional to admit a claim beyond the prescribed time period.

5. While analysing the definition of a corporate person, the NCLAT, in Nitin Pannalal Shah v. Vijay Raja (Company Appeal (AT) (Insolvency) No. 379 of 2021), noted that an entity which is registered as stock brokers under the SEBI Act, 1992 read with the SEBI (Stock-Brokers and Sub-Brokers) Regulations, 1992 would qualify as a financial service provider and would be outside the ambit of a corporate person defined under Section 3(7) of the Code and a corporate debtor defined under  Section 3(8) of the Code for a Section 7 application to be maintainable against such entity.

Further, on the point of maintainability of appeals filed by the NSE against an order of admission filed against a stockbroker, the NCLAT noted that NSE being the market regulator had the locus to maintain such an appeal.

6. In SAJ housing Private Limited v. Priyanka Chouhan (Company Appeal (AT)(Insolvency) No. 1093 of 2022), the NCLAT, relying upon the decision of the Supreme Court in Orator Marketing (P) Ltd. v. Samtex Desinz (P) Ltd (Civil Appeal No. 2231 of 2021), noted that that the concept of time value of money would also include a transaction that does not necessarily culminate into money being returned to the lender or interest being paid in respect of money that has been borrowed and can include anything which is equivalent to the money that has been loaned as long as commercial effect of borrowing or profit as the aim is discernible. It, therefore, held that a financial debt does not exclude an interest free loan and merely because there was no interest associated, the nature of financial debt would not change. However, eventually the NCLAT noted that no financial debt existed as the amount was invested as return of profit share.

Further the NCLAT held that the decision of the CoC to approve liquidation within 38 (thirty-eight) days of CIRP cannot be faulted where the corporate debtor was not in a running condition, nor had any employee or business activity.

7. The NCLAT, in Mr. Vijay Kumar Garg v. Power Grid Corporation of India Limited (Company Appeal (AT) (CH) (INS.) No. 260 of 2023), reiterated the well settled principle that bank guarantees are not assets or liabilities of the corporate debtor, and held that invocation of a bank guarantee cannot be limited by the moratorium, while refusing to interfere with a reasoned order of the Adjudicating Authority.

Liquidation Stage

1. In Pooja Deora v. Rajeev Sharma (Company Appeal (AT) (Insolvency) No. 1288 of 2022), the NCLAT held that where the CIRP period was coming to an end and there was no resolution plan, the decision of the CoC to liquidate the corporate debtor cannot be challenged.  

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

Arka Majumdar, Juhi Wadhwani, Vikram Chaudhari, Ayush Chaturvedi
Arka Majumdar, Juhi Wadhwani, Vikram Chaudhari, Ayush Chaturvedi

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