Sales
Tax Department Maharashtra v. Calyx Chemicals and Pharmaceuticals Limited [Co.
Appeal (AT) (Insolvency) No. 670/2019]
The NCLAT reiterated its position
in Pr. Director General of Income Tax v. Synergies Dooray Automotive Limited
[Co. Appeal (AT) (Ins.) No. 205/2017] that tax and other governmental dues
qualify to be an ‘operational debt’ within the meaning of Section 5 (20) of the
Code.
The NCLAT relied upon the
decision of the Supreme Court of India in Committee of Creditors of Essar
Steel India Limited v. Satish Kumar Gupta [Civil Appeal No. 8766-67/2019]
to observe that during the course of the CIRP and at the stage of examination
of the resolution plan, the ultimate discretion of what to pay and how much to
pay each class and sub-class of creditors is with the COC but the decision of
the COC must reflect the fact that it has taken into account the aspect of
maximisation of value of the assets of the CD and that all the interests of all
stakeholders (including operational creditors) has been adequately balanced.
The NCLAT in Pr. Commissioner
of Income Tax 6 Chennai v. Star Agro Marine Exports Private Limited [Co.
Appeal (AT) (Ins.) No. 717/2019] again reiterated the propositions laid down by
the Supreme Court of India in Essar Steel India Limited supra, that the
NCLT/NCLAT cannot interfere with the distribution made by the COC (which is
based on the commercial wisdom and is not based on the permissible grounds of
interference with resolution plan envisaged under Section 61 (3) of the Code.
It was further clarified in the Star
Agro Marine supra by the NCLAT that the question of distribution of
monies amongst the financial creditors and the operational creditors is within
the domain of the COC and the tribunal does not have the power to look into the
validity of the resolution plan. A similar view was adopted in Rai Bahadur Shreeram
and Company Private Limited v. Ferro Alloys Corporation Limited [Co. Appeal
(AT) (Ins.) No. 1397/2019] wherein the NCLAT upheld the view(s) of the AA that
any commercial decision of the COC with respect to a resolution plan need not
be interfered with; and that tribunals under the Code do not have the authority
to supervise the day to day processes of the CIRP.
FLSmidth
Private Limited v. The Liquidator, Savan Godiawala Lanco Infratech Limited [Co.
Appeal (AT) (Insolvency) No. 1287/2019]
The NCLAT upheld the view of the
AA that, during the course of the CIRP, all steps/actions/decisions taken by
the resolution professional must be based on the information available in the
books of the CD. In other words, aspects such as validation of claims of creditors,
invocation of guarantees, recovery of monies owed to the CD etc. must be based
on the information available in the books of the CD.
Good
Morning Fin-Advisory Private Limited v. PC Jain Textile Private Limited [Co.
Appeal (AT) (Insolvency) No. 859/2019]
In the said matter, the
operational creditor claimed to provide certain loan procurement relared
services to the CD and sought a service fee/commission of 1% of the loan amount
(based on industry standards). The NCLAT rejected the contention of the operational
creditor because of absence of the following documents: (i) documents
reflecting request for services by the CD; (ii) service/engagement letter or
agreement executed between the parties; (iii) invoice raised by the operational
creditor with the CD; and (iv) document reflecting that the CD consented to
payment of the alleged service fee of the operational creditor.
Jai
Kishan Gupta v. Green Edge Buildtech LLP & Others [Co. Appeal (AT)
(Insolvency) No. 969-70/2019]
The NCLAT while placing reliance on
Swiss Ribbons Private Limited v. Union of India (2019) 4 SCC 17, Brilliant
Alloys Private Limited v. S. Rajagopal & Others [2018 SCC Online SC
3154] and Regulation 30A of the Insolvency and Bankruptcy Board of India
(Insolvency Resolution Process for Corporate Persons) Regulations 2016, opined
that, post initiation of the CIRP, but prior to constitution of the COC, while
it is permissible for the CD to approach the AA directly for
settlement/withdrawal directly under Section 12A of the Code, however, the
discretion to allow such settlement/withdrawal vests entirely with the AA. Such
discretion can be exercised by the AA after hearing the concerned parties and
taking into account all relevant factors.
JSW
Steel Limited v. Ashok Kumar Gulia [Co. Appeal (AT) (Insolvency) No. 467/2019]
In the present matter, the AA,
while approving the resolution plan of the resolution applicant, unilaterally
imposed various conditions on issues pertaining to carry forward of losses,
right of receivables in future and transactions of the CD with its subsidiaries,
associate companies and joint ventures. The imposition of the said conditions
was questioned by the successful resolution applicant before the NCLAT.
As regards the ‘right to
receivables’ the AA has directed that any amounts recovered by the CD in the
future (post the approval of the plan), which were due from third parties,
would be first utilised for making payment to dissenting financial creditors.
The NCLAT set aide such a direction by observing that the AA had no
jurisdiction to impose such conditions with regard to amounts receivable in
future by the CD. Further, the NCLAT agreed with the contention of the
successful resolution applicant that such future receivables, being an asset of
the CD, ought to remain with the CD upon implementation of the resolution plan.
A resolution plan, once approved, becomes binding on all stakeholders,
including creditors, and no creditor should be permitted to claim any right
against the CD, including a right to set off.
As regards, the issue of ‘carry
forward of losses’ (enshrined under Section 79 of the Income Tax Act, 1961),
the NCLAT observed that if the successful resolution applicant is entitled to a
‘carry forward’ under Section 79 of the IT Act, then it is entitled to claim
such benefit in accordance with the procedure prescribed in the IT Act, thereby
inferring that any condition imposed by the AA contrary to the provisions of
the IT Act would be inconsequential.
As regards the issues of
subsidiaries, associate companies and joint ventures, the NCLAT observed that
any right accruing to such parties against the CD prior to the approval of the
resolution plan, would stand extinguished upon the plan’s approval under
Section 31 of the Code. However, if the CD has any right against such parties
prior to the approval of the plan, the successful resolution applicant after
taking over the CD (pursuant to the plan approval) would be entitled to take a
decision with respect to such right(s) and any condition by the AA in this
regard is unwarranted.
The NCLAT relied upon Essar Steel
India Limited supra which observed that claims which have not been
decided by the resolution professional during the CIRP cannot be rekindled
(under Section 60 (6) of the Code or in any other manner) since this would
militate against the rationale of Section 31 of the Code. A successful
resolution applicant, post approval of the plan, cannot be confronted with
undecided claims because in this way this issue would always be shrouded with
uncertainty and never attain finality.
Union
Bank of India v. EMC Limited [Co. Appeal (AT) (Insolvency) No. 1387/2019]
In the present case, a financial
creditor of the CD, Union Bank of India (UBI), which had initially approved the
resolution plan, subsequently assailed the same on the premise that while it
had approved the plan, it had not approved the distribution made thereunder.
The NCLAT observed that since the
bank was itself a member of the COC which had made the distribution, it was now
precluded from questioning the approval of the plan under Section 61 (3) of the
Code.
Jagdambey
International v. Visa Powertech Private Limited [Co. Appeal (AT) (Insolvency)
No. 468/2019]
In the said case, an interest
free loan had been advanced by the financial creditor to the CD through banking
channels, pursuant to an alleged oral agreement. The said amount reflected in
the balance sheets of the CD. However, no document existed to show interest
claimed by, paid to or received by the said financial creditor.
The AA had observed that
typically an interest free loan cannot qualify to be a financial debt under the
Code, in the absence of an element of ‘time value of money’. The AA further observed
that even in the case of an interest free loan, to come under the definition of
financial debt, it is critical for the financial creditor to show some sort of
direct or indirect monetary benefit behind the advance of the loan. The NCLAT
upheld the decision of the AA.
A similar view has also been
taken by the NCLAT in Anant Jain v. Kaushambi Paper Mills Private Limited
[Co. Appeal (AT) (Insolvency) No. 1400/2019].
R.B.
Synthetics v. Bee Celine Textile Mills Private Limited [Co. Appeal (AT)
(Insolvency) No. 286/2019]
In the present matter, an
application under Section 7 of the Code was preferred by the financial creditor
in the year 2017 for an alleged default which tool place in the year 2012. The
explanation for the delay in approaching the AA was a pending dispute for
oppression and mismanagement between the parties (under Section 241 and 242 of
the Companies Act, 2013).
The NCLAT while relying on the
principles laid down by the Supreme Court of India in B.K. Educational Services
Private Limited v. Parag Gupta [(2018) 1 IBJ (JP) 649 (SC)] rejected the above
said explanation offered by the financial creditor for delay in preferring the
application.
Further, the NCLAT, in passing,
also observed that may not be probable for members of a CD to qualify to be a
financial creditor competent to prefer an application under Section 7 of the
Code against the said CD.
Ami
Alloys v. Hi Tech Butterfly Valves India Private Limited [Co. Appeal (AT)
(Insolvency) No. 1388/2019]
The NCLAT reiterated that
pendency of a civil dispute between the parties amounts to ‘pre-existence of
dispute’ under Section 9 of the Code thereby making such an application
non-maintainable.
Ravi
Srinivas v. Super Agri Seeds Private Limited [Co. Appeal (AT) (Insolvency) No. 1200/2019]
The NCLAT observed that the AA
has no jurisdiction to decide any allegations either against the resolution
professional or the liquidator. Any grievance of a party against the resolution
professional or the liquidator needs to be brought to the attention of the IBBI
which is the competent authority to enquire into and take action.
Sushil
Trading Company v. International Mega Food Park Limited [Co. Appeal (AT)
(Insolvency) No. 694/2019]
In the said matter, a third party
to the CIRP preferred an application before the AA for return of certain goods
(lying with the CD) which it claimed to be in possession of the CD pursuant to
an alleged job work agreement executed between the parties prior to the
initiation of the CIRP.
The resolution professional, at
the time of making a determination of the allegations of the third party,
relied upon various records of the CD (such as tax invoices, ledger account,
GST returns, e-way bills etc.) to conclude that the transaction between the
parties was one of ‘sale-purchase’ and not of ‘job work’ (as alleged by the
third party) and hence the subject goods could not be returned in as much as
they fell outside the scope of the Explanation to Section 18 of the
Code.
The AA and NCLAT upheld the view
of the resolution professional. The NCLAT further observed that during the
course of the CIRP, a resolution professional is duty bound to go by the
records of the CD.
Vishal
Ghisulal Jain v. Amar Universal Private Limited [Co. Appeal (AT) (Insolvency)
No. 1324/2019]
The NCLAT opined that the
obligation of a resolution professional towards paying expenses for and on
behalf of the CD (such as payment of rent, payment to vendors etc.) is limited
to the period of the CIRP. All claims made by creditors of the CD for a period
prior to the initiation of the CIRP need not be satisfied by the resolution
professional.
In the present matter, the
resolution professional was directed to make payment of rent of the premises
leased by the CD, to its landlord, for the period of the CIRP.
Saumil
A Bhavnagri v. Nimit Builders [Co. Appeal (AT) (Insolvency) No. 710/2019]
In the said matter insolvency
proceedings were sought to be initiated against a non-banking financial company
which claimed to be registered with the Reserve Bank of India for carrying out
the business of a NBFC.
The NCLAT observed that the AA
does not have the jurisdiction to examine any violations of RBI regulations,
which have been alleged to have been committed by a NBFC during the course of
its business activities. A similar view was taken by the NCLAT in Punjab
National Bank v. Tathya Engineering & Infraproject Private Limited [Co.
App. (AT) (Ins.) No. 1384/2019] which indicates that the AA cannot hijack the
functions of a regulator. In the said matter, the NCLAT observed that the AA
did not have jurisdiction to seek an explanation from a bank as to how it
extended loans to its borrowers, such aspects being the exclusive domain of the
concerned regulator, i.e. in this case the RBI.
The NCLAT agreed with the
proposition that the AA, post admission of an application for initiating CIRP, does
not possess the jurisdiction to recall the same.
Union
of India v. Maharashtra Tourism Development Corporation & Anr. [Co. Appeal
(AT) (Insolvency) No.964/2019]
In the said matter, the NCLAT
considered the question whether the AA was authorised to direct the serious
fraud investigation office (SFIO) to investigate about the allegations of fraud
or siphoning off being made against the CD. The NCLAT while relying on
Lagadapati Ramesh v. Ramanathan Bhuvaneshwari [Co. App. (AT) (Ins.) No.
574/2019] held as follows:
a)
Section
212 of the Companies Act, 2013 does not empower the AA to refer a matter to the
central government for investigation by the SFIO, even if it notices
mismanagement of affairs of the CD.
b)
Section
213 of the Companies Act, 2013 deals with the aspect of investigation of the
affairs of a company at the instance of the tribunal/AA. Under Section 213, the
AA, on receipt of an application of alleged violation(s), and upon
consideration of the same, may refer the matter to the central government for
investigation by an inspector appointed by the central government. On such
investigation, if the investigation authority concludes that provisions of the
Companies Act or the Code have been violated, then the matter may be referred
to the special court by the central government or the IBBI. Further, after
investigation by the inspector, based on the gravity of the charges found
therein, if the central government feels that the matter requires investigation
by the SFIO, then it may refer the matter to the SFIO.
c)
The
AA is not competent to straightaway or unilaterally order an investigation by
the SFIO.
M.S.
Jain v. TVG Limited [Co. Appeal (AT) (Insolvency) No. 952/2019]
The NCLAT held that, unlike the
case of a financial debt, in a matter relating to an operational debt, a
guarantor of the CD cannot be roped in for the purpose of the Code. This is
because, under the Code, the definition of the term ‘financial debt’ includes
within its ambit a ‘guarantee’ (refer Clause 5 (8) (h) & (i) of the
Code). However, no such provision can be found in the definition of an
‘operational debt’.
Navneet
Jain v. Manoj Sehgal & Others [Co. Appeal (AT) (Insolvency) No. 1168/2019]
The NCLAT observed that, at the
stage of examination the resolution plan, the AA should abstain from passing
any observations on the eligibility of any resolution applicant, since the same
may interfere with the responsibilities and functions of the resolution
professional and the COC under Sections 30 (2) and 30 (4) respectively.
The NCLAT relied upon Arcelormittal
India Private Limited v. Satish Kumar Gupta [2018 SCC Online 1733] which, inter
alia, propagates the policy of strict construction of a person’s right to
move the AA, all in the interest of making the Code a workable legislation.
Ramesh Murji Patel v. Aramex India Private
Limited [Co. Appeal (AT) (Insolvency) No. 1447/2019]
The NCLAT reiterated that an
authorisation letter (on the strength of which the proceedings under the Code
were instituted) if even issued prior to the enactment of the Code, can be
taken into account for the purpose of preferring an application under the Code.
Shelandra
Kumar Sharma v. DSC Limited [Co. Appeal (AT) (Insolvency) No. 28/2019]
The NCLAT reiterated that
allegations pertaining to forgery of any document cannot be examined by the AA
under the Code.
Ashok
Kumar M Lulla v. Suryaa Chamball Power Limited [Co. Appeal (AT) (Insolvency)
No. 1054/2019]
In the said matter, a charge
created by an NBFC over a property of the CD in the year 2012 was not
registered by the NBFC with the registrar of companies (as required under
Section 77 of the Companies Act 2013). Further, the said property was not
recorded in the books of accounts of the CD. The existence of the property came
to light upon an investigation carried out by the resolution professional
during the CIRP. Subsequently, the NBFC sought to register the charge over the
property only post approval of the resolution plan. The COC observed that under
such circumstances, in the absence of a charge being registered qua the
property, the NBFC could not be treated as a secured financial creditor of the
CD. The NCLAT upheld the view of the COC of not recognising the creation of
security over the property.
Bank
of Baroda v. Deepa Venkat Ramani [Co. Appeal (AT) (Insolvency) No. 761/2019]
In the said matter, the CD had
given as security to the Appellant bank, the sums it was to receive from the
Southern Railways for certain projects executed by it. The bank had, in
proceedings against the CD before the DRT Chennai (and Madras High Court) secured
a deposit of Rs. 7.5 crores from Southern Railways (as a garnishee) in
connection with the above described security interest. Subsequently, in 2017
the CD slipped into insolvency and in 2019, liquidation orders were passed by
the AA against the CD.
During the course of the
liquidation proceedings, the AA permitted the liquidator to collect a sum of
Rs. 5.9 crores (plus interest) from the DRT Chennai for the purpose of being
dealt with under Section 53 of the Code,
despite the fact that the bank had not given up/relinquished its security
interest and had expressed an intention to take its security interest, stand
outside the liquidation process (under Section 52 of the Code) and not make
further claims from the CD.
The NCLAT post examination of
Sections 52 and 53 of the Code, upheld the contentions of the bank, set aside
the order of the AA and remanded the matter back to the AA for a prior
determination of the security interest of the bank before handing over any
assets of the CD to the liquidator for being administered under Section 53 of
the Code.
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Section of the Code
lists out the duties of the interim resolution professional during the CIRP. Inter
alia, the interim resolution professional is obligated to take control and
custody of any asset over which the CD has ownership rights. However, the Explanation
to Section 18 removes from its scope all assets owned by third parties.
Section 53 of the
Code prescribes the mode and manner in which the assets of the CD are to be
distributed amongst the creditors of the CD which is undergoing liquidation.
Section 52 of the
Code grants to a secured creditor a right to realize its security interest (in connection
with the CD) and then sit out of the liquidation process of the CD.
