NCLAT at a Glance: August 2020

The National Company Law Appellate Tribunal is the Apex Tribunal in the country dealing with all aspects of Corporate law. The judgments pronounced by the Appellate Tribunal in the areas of Insolvency, Competition and Company law regulate all elements of a company’s functioning in India; from its registration to its functioning, and operation to its interaction with the market and various stakeholders, to its insolvency and potential resuscitation.

This monthly column seeks to cover the landmark judgments delivered by the National Company Law Appellate Tribunal and to offer a brief summary of the same in a capsule-form for the benefit of the reader.

The judgments of the National Company Appellate Tribunal (NCLAT) have been demarcated into those dealing with the provisions of the Insolvency and Bankruptcy Code, 2016 (Code), and that of the Companies Act, 2013 (Companies Act). The judgments dealing with the Code have been further categorized and dealt with in the following three stages i.e. Pre-admission stage, Corporate Insolvency Resolution Process (CIRP) stage and the Liquidation stage.

I. INSOLVENCY AND BANKRUPTCY CODE, 2016

A. PRE-ADMISSION STAGE

The NCLAT in Jagdish Prasad Sarda vs. Allahabad Bank, rejected the contention of the financial creditor that the period of limitation with regard to the financial debt would be extended from the date of part payment of the debt in terms of Section 19 of the Limitation Act, 1963. The NCLAT reiterated that the period of limitation would start running from the date the debt was declared as a Non-Performing Asset and would come to an end, three years from such date.

The NCLAT in Park Energy Pvt. Ltd. vs. Syndicate Bank & Ors., held that even though a financial debt may be due and payable, unless the Corporate Debtor has defaulted with regard to the debt, it would not be justifiable to initiate CIRP against the Corporate Debtor. The NCLAT further held that the onus of proof of default on the part of Corporate Debtor lies on the financial creditor and the financial creditor must demonstrate that default has occurred on account of failure on the part of the Corporate Debtor to discharge its liability. In the instant case, Corporate Debtor had been subjected to restructuring of credit facilities as well as an inter-creditor agreement and a True Retention Agreement account (‘TRA’). In terms of the aforesaid agreements, the Corporate Debtor’s deposit would go to the TRA account and before the Corporate Debtor could repay back the financial debt to its various lenders, it had to seek the approval of the Lead Bank i.e. Punjab National Bank. The Lead Bank had insisted that the financial creditor would have to issue a Letter of Credit (‘LoC’) before it would permit the release of payment by the Corporate Debtor, but the financial creditor refused to issue such a LoC. In light of the aforesaid facts, NCLAT held that the Corporate Debtor had fulfilled its obligation by placing its entire collection in the TRA account and the failure to release the funds to the financial creditor was not attributable to the Corporate Debtor but was a result of the agreement between the creditors. Thereby, the NCLAT set aside the initiation of the CIRP against the Corporate Debtor.

The NCLAT in Indison Agro Foods Ltd vs. Registrar & Anr., disposed of an appeal with a request to the President, National Company Law Tribunal (‘NCLT’), to constitute a bench consisting of both a judicial as well as a technical member to decide the matter instead of a bench comprising solely of a single judicial member, in conformity with and in compliance with the order passed by Supreme Court in the Writ Petition No. 722 of 2019 dated 20th June, 2019 wherein the Supreme Court in a similar matter had directed the matter to be heard by a Bench comprising of a Judicial Member and a Technical Member.

The NCLAT in Vipul Ltd. vs. Solitaire Buildmart Pvt. Ltd., reiterated that that a Joint Venture Project of development of a township wherein the costs and profits are to be shared by both the parties, if they are a corporate then they should be jointly treated as one for the purpose of initiation of CIRP. It was further observed that the Joint Development Agreement entered into between the parties, is a contract of reciprocal rights and obligations and both parties are admittedly ‘Joint Development Partners’, who entered into a consortium of sorts for developing an Integrated Township and for any breach of terms of contract, application under Section 7 of the Code is not maintainable as the amount cannot be construed as a ‘Financial Debt’ as defined under Section 5(8) of the Code.

The NCLAT in Sushil Ansal vs. Ashok Tripathi & Ors., refused to allow a withdrawal application filed by the parties to an appeal on the basis of a settlement arrived at prior to the constitution of the Committee of Creditors (‘COC’). The NCLAT had refused to set aside the CIRP of the Corporate Debtor which was a real estate company on the basis of the aforesaid settlement agreement as several claims had been received by the Interim Resolution Professional (‘IRP’) and the NCLAT held that allowing of withdrawal of application on the basis of such a settlement which was not all-encompassing and being detrimental to the interests of other creditors including the allottees numbering around 300 would not be in consonance with the object of the Code and the purpose of invoking of Rule 11 of the NCLAT Rules. The NCLAT observed that in a case where interests of the majority of stakeholders are in serious jeopardy, it would be inappropriate to allow settlement with only two creditors which may amount to perpetrating of injustice and such an exercise of inherent powers in such cases would be a travesty of justice. However, ultimately the NCLAT set aside the CIRP of the Corporate Debtor on the ground that the application under Section 7 of the Code for initiation of CIRP was not filed by the financial creditors. The NCLAT held that once the real estate allottees have obtained a recovery certificate from the Real Estate Regulatory Authority (‘RERA’) for the dues paid by them to the developer, they cannot claim to be an allottee so as to fall in the definition of ‘Financial Creditors’ under the Code since realization of the amount due under the Recovery Certificate tantamount to recovery effected under a money decree though the mode of execution may be slightly different. It was further held that though a decree holder falls under the category of a creditor, such a creditor would not be included in the definition of a ‘Financial Creditor’ and would not be entitled to file an application under Section 7 of the Code.

The NCLAT in Invent Assets Securitization and Reconstruction Pvt. Ltd. vs. Xylon Electrotechnic Pvt. Ltd., reiterated that the period of limitation for filing of an application under Section 7 of the Code would not be extended due to any proceedings by the creditor before the Debts Recovery Tribunal as long as the aforesaid forum could not be said to be a wrong forum and the initiation of such proceedings would also not lead to a continuing cause of action. The NCLAT also reiterated that the acknowledgement of liability by the Corporate Debtor in its balance sheet would not amount to an acknowledgement which would extend the period of limitation.

The NCLAT in Smt. Andal Bonumalla vs. Tomato Trading LLP & Ors., while rejecting the contention of the operational creditor that non-refund of the advance amount paid to the supplier would constitute an operational debt upon non-supply of the agreed-upon goods, reiterated that an advance payment paid to the supplier of goods or services does not come within the definition of an operational debt nor would the person paying the advance fall under the category of an ‘Operational Creditor’ as defined in the Code.

The NCLAT in Gaurang Nipinbhai Nagarsheth vs. POSCO – India Pune Processing Centre Pvt. Ltd., held that an objection to the operational creditor adjusting payments received by it, towards interest instead of the principal amount due would not be a dispute in terms of the Code in light of the legal principle that a creditor can adjust any payments made by the debtor, firstly, towards interest if no agreement to the contrary exists or if the provisions of Section 59 of the Contract Act, 1872, are not attracted i.e. the debtor while making the payment does not intimate that the payment is being made towards the principal amount or towards the interest. The NCLAT observed that such an objection was a patently feeble legal argument, does not require any investigation and was not supported by any evidence.

B. CORPORATE INSOLVENCY RESOLUTION PROCESS STAGE

The NCLAT in Shaji Purushothaman vs. S Rajendran RP of Empee Distilleries Ltd., dealt with the challenge by the promoters of the Corporate Debtor to the rejection of a settlement plan and adoption of a resolution plan by the COC. In terms of limitation, it was held that the period of limitation for filing a copy would only start from the date that the certified copy of the impugned judgement was supplied to the Appellant. The NCLAT further reiterated that the commercial wisdom of the COC regarding the viability and feasibility of the resolution plan is final and the NCLAT cannot substitute its view for the commercial wisdom of the COC. The NCLAT then went on to analyse the reasons behind the rejection of the resolution plan by the COC and held that the rejection was based on the deficiencies in the settlement plan such as the inability of the promoters to satisfy the COC qua generation of funds / mobilization of resources and specific and clear cut debt / claim satisfaction mechanism as well as ambiguity in regard to generation / raising of funds for translating the settlement plan into action and with regard to specific schedule of payment to various stakeholders. Thereby, the NCLAT held that no exceptional reasons existed for the NCLAT to review the decision of the COC and rejected the appeal by the promoters.

The NCLAT in Alchemist Asset Reconstruction Company Ltd. vs. Manoj Garg Resolution Professional Sunar Jewels Pvt. Ltd. & Anr., while dismissing the challenge to the rejection of the claim for penal interest by an assignee of a debt owed by the Corporate Debtor undergoing CIRP, held that the penal interest at 3% was leviable on excess drawing / temporary overdraft limit before assignment of debt to the Appellant / Assignee and charging of such penal interest against the Corporate Debtor after the assignment of debt would be a component of debt not covered by the assignment and that such a debt is not a crystallized debt in the hands of the Appellant / Assignee.

The NCLAT in Vistra ITCL India Ltd. & Ors. vs. Dinkar Venkatasubramanian & Ors., held that the creation of pledge of shares by the Corporate Debtor does not tantamount to a guarantee or indemnity. The NCLAT held that in the instant case, the creation of pledge of shares by the Corporate Debtor was with regard to the money lent to other parties and not the Appellants who are claiming to be the financial creditors of the Corporate Debtor undergoing the CIRP. The Appellants having not advanced any money to the Corporate Debtor,a financial debt would not be coming within the purview of financial creditor of the Corporate Debtor. The NCLAT further held that debt along with interest disbursed against time value of money constitute the basic ingredients of the financial debt as defined in the Code and since the same is lacking as regards any transaction between the Appellant and the Corporate Debtor, pledge of shares would not fall within the concept of guarantee and indemnity so as to bring it within the meaning of financial debt.

The NCLAT in Shree Sidhivinayak Cotspin Private Ltd. & Anr. vs. Resolution Professional of Maruti Cotex Ltd. & Anr., reiterated that a successful resolution applicant cannot suddenly be faced with undecided claims after the resolution plan submitted by the resolution applicant has been accepted. All claims must be submitted to and decided by the Resolution Professional (‘RP’), so that a prospective resolution applicant knows exactly, what has to be paid, so that it may then take over and run the business of the Corporate Debtor.

The NCLAT in Kanakabha Ray vs. Narayan Chandra Saha & Ors., upheld the Order of the NCLT removing the IRP as the IRP had been working for 34 years with one of the financial creditor banks. The NCLAT observed that the IRP may not presently be an employee of the financial creditor but the element of loyalty accruing due to past rendering of services could not be ignored, particularly in light of the fact that the IRP had by their actions deviated from the normal procedure and had admitted that the deviation was a mistake on their part. The NCLAT held that considering the aforesaid, no exception could be taken to the NCLT for removing the IRP independent of the opinion of the COC.

The NCLAT in Kotak Investment Advisors Ltd. vs. Krishna Chamadia (Resolution Professional in the matter of Ricoh India Ltd.) & Ors., held that while the COC had the right to approve or reject a resolution plan based on its commercial wisdom but the same would not mean that the RP was entitled to adopt a procedure in the conduct of CIRP which is, ab-initio illegal, arbitrary and against the principles of natural justice. In the instant case, the RP accepted the Expression of Interest from the successful resolution applicant after the expiry of the deadline for the submission of the same. Furthermore, the data room of the Corporate Debtor was made available to the successful resolution applicant exclusively while the other resolution applicants were barred from accessing the data room for the submission of the resolution plans after the cut-off date. The NCLAT held that while the COC has the power to extend the deadline for submission of the Expression of Interest but the same could only be done by following the due procedure under the law. The NCLAT observed that even though in the past when the deadline for submitting the Expression of Interest had been extended, fresh notices had been published to inform all the prospective resolution applicants. However, when the resolution plan submitted by the successful resolution applicant was accepted beyond the deadline, no fresh notice was issued as contemplated under the law. The NCLAT observed that the RP had failed to give any proper justification for such lapse. Thereby, the NCLAT held that this would be a case wherein there has been material irregularity in exercise of the powers by the RP during the CIRP and would thus, be a fit case for judicial intervention. Furthermore, the NCLAT observed that the impugned order had been passed by a division bench of the NCLT comprising of a judicial as well as the technical member. However, the NCLAT found that only the judicial member had heard the arguments of the Appellant regarding the challenges made to the successful resolution plan, but the impugned order was passed by the division bench as the bench had been reconstituted. The NCLAT took notice of the fact that the technical member had not heard the arguments with regard to the challenges made to the successful resolution plan by the Appellant but despite the aforesaid, the order rejecting the challenges made to the successful resolution plan by the appellant had been passed by the division bench which included the technical member. The NCLAT held that such a course was against the principles of natural justice as well as Rule 150(2) of the NCLT Rules, 2016. The NCLAT accordingly, set aside the order approving the resolution plan. It is also pertinent to note that the NCLAT observed that Regulation 36A(6) of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 which prohibits a resolution plan, received after the last date, from being considered would be applicable prospectively and not retrospectively and shall apply to CIRP commencing on or after 04^th July 2018 in terms of the notification No. IBBI/2018- 19/GN/REG031.

C. LIQUIDATION STAGE

The NCLAT in Edelweiss Asset Reconstruction Co. Ltd. vs. Shri Shyam Sundar Rathi & Anr., set aside the order of the NCLT directing the RP to produce details of assets of the Corporate Debtor along with the valuation report by two valuers within four weeks. The NCLAT observed that the application under Section 33 of the Code had been filed for liquidation of the Corporate Debtor in terms of the unanimous resolution and the recommendation of the COC in this regard was pending. The NCLAT also noted that that the Corporate Debtor was not a going concern and there being no resolution plan, the COC had unanimously recommended for liquidation. The NCLAT finally held that once the application under Section 33 of the Code was moved before the NCLT, in the given circumstances, it was left with no option but to order the liquidation of the Corporate Debtor and collection of material in regard to the assets of the Corporate Debtor and valuation reports etc. was not germane to the disposal of the application under Section 33 of Code.

The NCLAT in Bharat Heavy Electricals Ltd. vs. Anil Goel, Liquidator of Visa Power Ltd. & Anr., set aside an auction conducted during the liquidation process on several grounds inter alia improper valuation reports, failure of the liquidator to prescribe pre-bid qualifications, discrepancy in the reserve price, discrepancy with regard to the actual quantity of items sold, the irregular conduct of the liquidator, lack of control of the liquidator over the site where the assets were located etc. It was also found that the successful auction purchaser had been engaging in various illegal and criminal acts inter alia taking away of goods at the site which were not sold to the successful auction purchaser, intimidation of the security guards etc. Furthermore, the NCLAT had the occasion to decide whether a security interest would be created by an operation of the statute. The Appellant / Operational Creditor had alleged that security interest over the assets lying at the site had been created in favour of the Appellant / Operational Creditor by virtue of the operation of law even though there was no contract creating a security interest. The NCLAT while considering the provisions of the Sale of Goods Act, 1930 and the Transfer of Property Act, 1882, held that the provisions as well as the principles underlying the said provisions could be utilized subject to specific creation or provision of security interest by the parties and, if the benefit of lien / charge, etc. is to be taken, the same should be a conscious creation i.e. a contractual arrangement / transaction between the Corporate Debtor and the person claiming lien / charge.

The NCLAT in Sunil S. Kakkad vs. Atrium Infocomm Pvt. Ltd. & Anr., held that the decision of COC to liquidate the Corporate Debtor without taking any steps for resolution of the Corporate Debtor or taking steps to invite Expression of Interest, is permitted under explanation to sub-clause (2) of Section 33 of the Code and the same being a decision based upon commercial wisdom, is non-justiciable.

II. COMPANIES ACT, 2013

The NCLAT in K.V. Brahmaji Rao. vs. Union of India, Ministry of Corporate Affairs, set aside the Order of the NCLT allowing impleadment of the Appellants in the Company Petition filed against the Nirav Modi Group and Gitanjali Group of Companies as well as attachment of their assets on the ground that the person who may be the head of some other organizations cannot be roped in and his or her assets cannot be attached while exercising the powers under Sections 337 & 339 of the Companies Act. The NCLAT observed that the Appellants did not belong to or work for the Nirav Modi Group or the Gitanjali Group of Companies and thereby, the impugned order could not be sustained.

The author is an advocate practicing at New Delhi.