Bar & Bench Weekly IBC Diary #3: Power of NCLT/NCLAT to direct parties to settle debt, OTS offer as acknowledgment and more

The Bar & Bench Weekly IBC Diary aims to report crucial rulings of various courts and tribunals and important updates concerning the Insolvency & Bankruptcy Code (IBC), 2016

1. Air Travel Enterprises India Ltd v. Union Bank of India & Ors. (NCLAT, Delhi)

Issue involved:

Whether promissory notes and One Time Settlement (OTS) agreements constitute “acknowledgment of debt” for the purpose of extending the period of limitation? Further, can additional time be given to the corporate debtor to settle the matter with the financial creditor?

Provisions:

Section 7, 238A, IBC

Section 18, Limitation Act

Decision:

A promissory note and OTS agreement was entered into by the parties with the promise to pay the amount within the time frame, which constituted an ‘acknowledgement of debt’. Hence, Section 7 application filed by the financial creditor is within the period of limitation. Further, in the interests of justice, some time was given to the corporate debtor to settle the matter. During the pandemic, the travel dependent sector, which is the core business of the corporate debtor, has more than suffered. This opportunity was given to settle, which could help mitigate the blow. The appeal was disposed with a direction that if the corporate debtor fails to settle within six months, the respondent bank is at liberty to take appropriate steps.

Quick Analysis:

It must be noted that the issue whether OTS offers constitute an acknowledgment of debt is no longer res integra. It has been held in a recent decision of the Supreme Court in the case of Dena Bank v. C Shivakumar Reddy that an offer of One Time Settlement of a live claim, made within the period of limitation, should also be construed as an acknowledgment to attract Section 18 of the Limitation Act. An OTS offer/agreement indicates the existence of the relationship between the parties such as that of debtor and creditor.

Having said so, this decision is of interest because of the final order passed by the NCLAT, wherein despite confirming the period of limitation and default, the NCLAT has directed the parties to settle the outstanding amount. This has been done solely on the ground of the difficulties faced by the corporate debtor owing to the pandemic. This approach serves as a dangerous precedent which should be applied only in peculiar cases. In the present matter, even the financial creditor bank had not prayed for an opportunity to settle. The inherent risk in this approach is deterioration of economic value of the assets as well as the risk of siphoning of the assets to the detriment of creditors.

The Supreme Court in the case of Innoventive Industries Ltd v. ICICI Bank & Ors held that the moment the adjudicating authority is satisfied that a default has occurred, the application must be admitted unless it is incomplete. The approach of the NCLAT, respectfully, is at variance with the decision in this case.

2. M/s. Dyanamic Engineers Limited v. M/s Muhlenbau Equipments Private Limited (NCLAT, Chennai)

Issue involved:

Whether the Adjudicating Authority can direct parties to settle the matter when the operational debt as well as default are proved?

Provisions:

Section 9, IBC

Decision:

The Adjudicating Authority ought not to have directed the respondent to settle the claim of the petitioner. It is settled law that when a debt and default is proved, the Adjudicating Authority has to admit the application and initiate the corporate insolvency resolution process against the corporate debtor.

Quick Analysis:

This decision is in line with the judgment of the Supreme Court in Innoventive Industries, wherein it has been held that the moment the Adjudicating Authority is satisfied that a default has occurred, the application must be admitted unless it is incomplete. However, it is rather interesting to note the variance in approach between the Chennai Bench and the New Delhi Bench of the NCLAT, as is evident from a reading of the previous decision and analysis in Air Travel Enterprises India Ltd case.

3. Sree Bhadra Parks and Resorts Ltd v. Sri Ramani Resorts and hotels Pvt Ltd (NCLAT, Chennai)

Issue involved:

Whether outstanding dues along with interest under settlement agreement for share subscription advance constitute a ‘financial debt’?

Provisions:

Section 5(8), 7 IBC

Decision:

The advance paid under the share subscription agreement had to be refunded after failure of certain conditions. The amount being outstanding, the parties entered into a follow up settlement arrangement whereby the corporate debtor had to refund the advance along with interest. This constitutes a financial debt under Section 5(8) of the Code.

Quick Analysis:

This case has to be distinguished from the factual matrix where the investor initiates proceedings solely on the basis of the share subscription agreement. In that case, it has to be seen whether the advance had the commercial effect of borrowing under Section 5(8) and had a time value of money involved. As an example, if the subscription agreement has an internal rate of return, that may have time value of money embedded in the advance. In the current case, the proceeding was initiated on the basis of the settlement agreement which had an interest clause, though the same was absent in the share subscription agreement. Thus, it was easy for the authorities to categorise this as a financial debt. The position on share subscription advance remains debatable.

4. M/s. Ergomaxx (India) Private Limited v. The Registrar & Ors. (NCLAT, Chennai)

Issue involved:

Whether an order of the Adjudicating Authority is a nullity in law if the same was neither listed in the cause list nor pronounced in open court but merely communicated to the parties?

Provisions:

Rule 150, NCLT Rules, 2016

Decision:

If an order/judgment of a ‘Tribunal’ is not pronounced at all, the same is a nullity in the eye of law. Pronouncement of order is quite distinct from communicating/informing/intimating a deliverance of an order. The judicial function of a ‘Tribunal’ is to be transparent and per contra, it is not to be conducted/performed in an opaque manner.

Quick Analysis:

The purpose of the daily cause list is that people and litigants should know when orders are to be pronounced in cases which have been already heard. Ordinarily, pronouncement has to be done after notifying the parties in advance the date of such pronouncement. It must be noted that Rule 150 nowhere gives NCLT the power to dispense with the requirement of pronouncement. This decision furthers the cause of complete transparency, fair and just treatment to litigants and parties.

The author is a dually qualified professional. He is a Fellow Chartered Accountant and practices law in the courts of Delhi. He can be reached at mail@deepakjoshi.in