NCLAT Fortnightly: Important orders on IBC (July 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 July 1, 2023 to July 15, 2023.

For ease of reference, the orders have been categorized and dealt with in the following categories, namely, Pre-admission stage, Corporate Insolvency Resolution Process (“CIRP”) stage, and Liquidation stage.

1. In Tejinder Pal Setia v. Kone Elevator India Private Limited Company Appeal (AT) (Insolvency) No. 262 of 2023 & I.A. No. 1122, 1124 & 1167 of 2023, the NCLAT observed that an operational creditor has the liberty to submit notice either in Form 3 or Form 4, and when a notice is issued in Form 3, no infirmity can be attributed if invoices were not attached.

2. In Intec Capital Limited v. Shwet Biotech Private Limited (Comp. App. (AT) (Ins) No. 1403 of 2022), the NCLAT reiterated that CIRP is maintainable against a corporate guarantor who has guaranteed the debt availed by a non-corporate borrower.

3. The NCLAT, in the matter of Asset Reconstruction Company (India) Limited v. Uniworth Textiles Limited (Company Appeal (AT) (Insolvency) No. 991 of 2020), noted that any time period spent in pursuing any proceeding under the Sick Industrial Companies (Special Provisions) Act, 1985 (“SICA”), needs to be excluded from the computation of the limitation period vide Section 22(5) of the SICA.

While considering whether a mere entry in the balance sheet of the corporate debtor would amount to an acknowledgment of debt, the NCLAT held that while a mere entry in the balance sheet cannot be taken as an unqualified acknowledgment of debt, every note or caveat regarding entries made in the balance sheet cannot be used as a ground to deny acknowledgment of debt and one would have to consider the overall scenario to ascertain the true intent of such entries and caveats.

Accordingly, by noting that out of 13 balance sheets from 2006-07 to 2018-19, where disputes were recorded in only 3 balance sheets, the NCLAT held that such entries could not deny acknowledgement of a debt by the corporate debtor.

4. The NCLAT, in Vipin Sharma v. Kaliber Associates Private Limited (Company Appeal (AT) (Insolvency) No. 113 of 2023), noted that entries in balance sheets and the financial statement of the corporate debtor depicting that the corporate debtor had borrowed short term loans from the financial creditor can be relied on for acknowledgment of a debt, and would override the unregistered MoU which mentioned that the amount advanced was merely an investment in the corporate debtor.

Further, the NCLAT held that an amount advanced by the promoter, director, or shareholder of the corporate debtor to improve the financial health of the corporate debtor would have the commercial effect of borrowing and, hence, would qualify as a financial debt, notwithstanding the fact that there was no provision for interest thereon.

5. In Anuj Sharma v. Rustagi Projects Private Limited (Company Appeal (AT) (Insolvency) No.550 of 2023), the NCLAT relied on the principle laid down in Prashant Agarwal vs. Vikash Parasrampuria & Anr (Company Appeal (AT) (Ins.) No. 690 of 2022) and noted that where parties have agreed upon the interest, such interest component can be added to the principal component for meeting the threshold for initiating CIRP.

Further, the NCLAT held that the bar on filing an application under Section 10A of the Code, would not apply in cases where the default has been committed before the period specified in Section 10A of the Code and where merely the demand notice has been issued during the period specified in Section 10A of the Code.

6. The NCLAT, in Securities and Exchange Board of India v. Rajesh Sureshchandra Sheth (Company Appeal (AT) (Insolvency) No. 1194 of 2022) held that the right conferred upon a financial creditor under the Code is not circumscribed on account of pendency of any proceeding against the corporate debtor in any other forum, such as pendency of a case under Maharashtra Protection of Interest of Depositors (In Financial Establishments) Act, 1999 and the pendency of a writ petition in the High Court.

7. The NCLAT, in Kalpesh Ramniklal Shah v. Mundara Estate Developers Limited (Company Appeal (AT) (Insolvency) No. 71 of 2023) held that an application under Section 7 cannot be rejected on the ground of alleged breach of the erstwhile Section 295 of the Companies Act, 1956 (corresponding to Section 185 of the Companies Act, 2013).

1. In Edelweiss Asset Reconstruction Company Limited v. Anuj Jain Company Appeal (AT) (Insolvency) No.517 & 518 of 2023, the NCLAT had observed the following:

(a) a third-party security holder, having security over the assets of the corporate debtor, would be equally bound by the provisions of moratorium and would be prohibited from enforcing security interest during the subsistence of moratorium;

(b) existence of security interest in assets of corporate debtor does not preclude the assets from being dealt with or sold in the resolution plan;

(c) where the principal borrower has not yet defaulted, a claim filed with the resolution professional of the surety could be admitted at nominal value;

(d) if the secured creditor files a claim with the resolution professional of a surety, there would not be any bar in dealing with securities held by such secured creditor under the plan. Conversely, where no claim has been submitted and the secured creditors decide to stay outside the CIRP, a plan cannot deal with such security.

(e) The decision of Supreme Court in Vistra ITCL (India) Ltd. and Ors. vs. Mr. Dinkar Venkatasubramanian and Anr., [Civil Appeal No. 3606 of 2020, decided on May 4, 2023] was rendered in the facts of that specific case and cannot be relied upon as a declaration of law within the meaning of Article 141 of the Constitution of India.

2. In the matter of Mukesh Kumar v. Ambrane India Private Limited and Anr. (Company Appeal (AT)(INS) NO.659/2022), the NCLAT agreed with the views of the Adjudicating Authority, that the board resolution of the financial creditor, whereby the financial creditor had agreed to disburse a loan to the corporate debtor on terms which specified, inter alia, the rate of interest, along with the financial creditor’s relevant bank statements and the balance sheet of the Corporate Debtor which showed amounts payable to the financial creditor, and certificate from the information utility were sufficient to prove a financial debt in the absence of a financial agreement between the parties.

The NCLAT further observed that only in the event of the rejection of a Section 7 application, reasons are required to be assigned and in the event of acceptance of the Section 7 application, no requirement of assigning detailed reasoning is required under the Code.

3. In Pradeep Kumar Kabra v. Assistant Commissioner, CGST & Central Excise, Kadi Division, Gandhinagar Commissionerate (Company Appeal (AT) (Insolvency) No. 409 of 2023 & Interlocutory Application No.1357 of 2023), the NCLAT held that the Adjudicating Authority has jurisdiction to issue direction to the statutory creditor to release the pre-CIRP attachment on the assets of the corporate debtor.

4. The NCLAT, in Manesh Agarwal v. Pramod Kumar Sharma (Company Appeal (AT) (Insolvency) No. 621 & 622 of 2023) noted that the term ‘undischarged insolvent’ has not been defined in the Code and, hence, until declaration by a competent court regarding the status of undischarged insolvency, a resolution applicant cannot be disqualified under Section 29A of the Code, merely on account of it being the sole shareholder and director of a company that had undergone liquidation.

5. In Akashganga Processors Private Limited v. Shri Ravindra Kumar Goyal & Ors. (Company Appeal (AT) (Insolvency) No.1148 of 2022), the NCLAT held that while a resolution plan can provide NIL payment to the operational creditors, such resolution plan cannot discriminate between same class of creditors by providing for payment to only some operational creditors to keep the corporate debtor as a going concern. To avoid such discrimination and to save the resolution plan from being invalidated, the NCLAT modified the resolution plan by directing that the amount stipulated for the selected operational creditors to be distributed to all the operational creditors.

The aforesaid direction shows a departure from the earlier hands off attitude of the NCLAT when it came to pleas for modification of a resolution plan.

6. In TP Central Odisha Distribution Limited v. Cos Board Industries Limited & Ors. (Company Appeal (AT) (Insolvency) No. 613 of 2022), the NCLAT held that the principle of equality in payment under the resolution plan is applicable only for the same class of creditors and, hence, an operational creditor cannot claim payment which is equal to the payment proposed to financial creditors.

Further, the NCLAT held that the regulations framed under OERC Distribution (Conditions of Supply) Code, 2019. which provides for the creation of a charge on a premises, do not change the status of electricity dues from operation debt to any different category of debt to attract a higher distribution in terms of Section 53 of the Code.

Interestingly, it may be noted that, while the NCLAT refused to consider the secured status of the electricity department on the basis of a charge it has on the premises, in a recent judgement of Paschimanchal Vidyut Vitran Nigam Limited v. Raman Ispat Private Limited & Ors. (CIVIL APPEAL NOS. 7976 OF 2019), the Hon’ble Supreme Court alluded to the fact that on a basis such as having security interest, the electricity department could claim the status of a secured creditor, which is a higher rank of creditor in the waterfall mechanism as compared to an operational creditor.

7.  In the matter of Nandamuri Meenalatha v. Quality Steels and Wire Products and Anr. (Company Appeal (AT) (CH) (INS.) No. 11 of 2023), the NCLAT observed that a dispute relating to the violation of an agreement/contract inter se the parties, as in the instant case, which related to non-submission of test certificates to the corporate debtor and the quality of raw materials supplied, does not constitute a ‘pre-existing dispute’ with respect to the sum payable in law.

The NCLAT observed that the proceedings under the Code are summary in character, and that the Adjudicating Authority, not being a recovery forum or court, where no elaborate enquiry is conducted like that of a regular trial of a civil case, the controversy/dispute/claim with respect to the ‘interest’ cannot be adjudicated.

The NCLAT further observed that, the quantification of the exact sum of the claim of an operational creditor is not relevant for an admission of an application, and the exact claim amount can be determined by the interim resolution professional in the course of the corporate insolvency resolution process.

The NCLAT also noted that whether the corporate debtor is a going concern, is not relevant for admission of a Section 9 application.  

1. In Naren Seth v. Sunrise Industries Company Appeal (AT) (Insolvency) No. 401 of 2023 with Marine Electrical (India) Limited v. Sunrise Industries Company Appeal (AT) (Insolvency) No. 695 of 2023, the NCLAT noted that even though no specific timelines have been given in the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 for giving notice of e-auction, normally a notice period of 30 days is required to be given to get best value and the appellate tribunal relied on Rule 8(6) of the SARFAESI Security Interest (Enforcement) Rules, 2002 to support this stipulation.

2. In Jasamrit Designers Private Limited v. Gian Chand Narang, Liquidator of Apex Buildsys Limited and Ors. (Company Appeal (AT) (Insolvency) No. 258 of 2023), the NCLAT held that, in a going concern sale, while the Adjudicating Authority has power to grant such reliefs / concessions/ directions which may be necessary for operationalization of the corporate debtor, such reliefs / concessions/ directions cannot be elaborate and general prayers and are required to be commensurate to and in accordance with the terms and conditions of the process document.

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