NCLAT at a Glance: February 2021

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, 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 Law Appellate Tribunal (hereinafter referred to as the ‘NCLAT’) have been demarcated into those dealing with the provisions of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as the ‘Code’), and that of the Companies Act, 2013 (hereinafter referred to as the ‘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 (hereinafter referred to as ‘CIRP’) stage and the Liquidation stage.

I. INSOLVENCY AND BANKRUPTCY CODE, 2016

A. PRE-ADMISSION STAGE

The NCLAT in Sodexo India Services Pvt. Ltd. v. Chemizol Additives Pvt. Ltd., held that mere existence of an alternative remedy such as arbitration would not disable an Operational Creditor from initiating CIRP. It was further observed that the mere fact that the Corporate Debtor was solvent qua other creditors would be irrelevant in determining whether CIRP was to be triggered as the Code did not permit the Adjudicating Authority to make a roving enquiry into the aspect of solvency or insolvency of the Corporate Debtor except to the extent of the Financial Creditors or the Operational Creditors, who sought to trigger the CIRP.

The NCLAT in Vekas Kumar Garg v. DMI Finance Pvt. Ltd. & Anr., held that third party intervention was not contemplated at the pre-admission stage and a dispute with regard to shareholding or inter se directorial issues could not be entertained prior to the admission of a petition under Section 7 of the Code seeking initiation of CIRP against a Corporate Debtor.

The NCLAT in Mateshwari Minerals v. Jet Granito Pvt. Ltd., held that even if the Adjudicating Authority were to be of the opinion that an application seeking initiation of CIRP would not be maintainable in the name of a proprietorship firm, such defect would be curable, and an opportunity should be provided to the creditor/applicant to appropriately amend their application.

The NCLAT in Ashok Agarwal v. Amitex Polymers Pvt. Ltd., held that a ‘Decree Holder’ is in, no way, excluded from coming within the classification of ‘Operational Creditor’ as per Section 5(20) of the Code and would be entitled to file an application for initiation of CIRP.

B. CORPORATE INSOLVENCY RESOLUTION PROCESS STAGE

The NCLAT in Anil Tayal Resolution Professional for Horizon Buildcon Pvt. Ltd. v. Committee of Creditors of Horizon Buildcon Pvt. Ltd., held that the period of time spent in pursuing the extension application before the Adjudicating Authority and the period for which the orders were reserved by the Adjudicating Authority on the application for extension of time is, justifiably, required to be excluded while counting and computing the period of CIRP.

The NCLAT in Krishna Garg & Anr. v. Pioneer Fabricators Pvt. Ltd., held that where the CIRP was withdrawn upon the filing of settlement terms, but if such settlement terms were not incorporated in the order of the Adjudicating Authority and had not assumed the character of the decree of the Court, a breach in such settlement terms could not entitle the Appellants/Financial Creditors to come back and seek revival of CIRP.

The NCLAT in Bharat Aluminium Co. Ltd. v. JP Engineers Pvt. Ltd. & Ors., held that a bank guarantee can be invoked even during the moratorium period issued under Section 14 of the Code in view of the amended provision under Section 14(3)(b) of the Code.

The NCLAT in Avil Menezes Resolution Professional of AMW Auto Component Ltd. v. Shah Coal Pvt. Ltd., held that the Resolution Professional has no locus to file an appeal to challenge a decision of the Adjudicating Authority allowing a claim to be classified as falling under financial debt.

The NCLAT in Indian Renewable Energy Development Agency Ltd. v. Bhuvnesh Maheshwari & Ors., rejected a challenge to the Resolution Plan on the ground that the Resolution Plan was in contravention of Section 48 of the Transfer of Property Act, 1882; as it treated all lenders equally ignoring the fact that the Appellant, along with certain other creditors, held first and prior pari passu charge over the assets of the Corporate Debtor. The NCLAT held that the NCLAT would interfere with the approval granted by the COC as the Code was a subsequent law and had overriding effect; and, since the COC had wide discretion with regard to commercial decisions and distribution of the proceeds recovered from the Corporate Debtor.

C. LIQUIDATION STAGE

The NCLAT in Union Bank of India v. Siripuram Developers Pvt. Ltd. & Ors., held that the assets of the subsidiaries of the Corporate Debtor are outside the purview of liquidation estate and, as such, cannot form part of the liquidation estate.

The NCLAT in JJE Adornment Pvt. Ltd. v. Pingle Builders Pvt. Ltd. & Anr., held that the liquidator is a quasi-judicial authority, who is empowered to admit or reject a claim, in whole or in part and such determination is subjected to appeal under the provisions embodied in Section 42 of the Code.

The NCLAT in TUF Metallurgical Pvt. Ltd. v. Impex Metal & Ferro Alloys Ltd & Ors., held that Section 40(2) of the Code mandates the Liquidator to communicate its decision of admission or rejection of a claim to the Creditor and the Corporate Debtor within seven days of admission or rejection of the claim. It was further held that Section 42 of the Code stipulated that a creditor may file an Appeal before the Adjudicating Authority against the Liquidator's decision to accept or reject the claim, within 14 days from receipt of such decision. The NCLAT observed that the Liquidator cannot simply sit on a claim without deciding the same one way or the other.

The NCLAT in Om Prakash Agrawal Liquidator Kumars Nationwide Ltd. v. Chief Commissioner of Income Tax TDS & Anr., held that the Liquidator of a Company in liquidation under the Code is not required to file the Income Tax Returns and thereby, there is no question of claiming any refund of TDS deducted under Section 194-IA of the Income Tax Act, 1961 by the liquidator. As a consequence, the NCLAT directed the refund of TDS deposited by the purchaser to the Liquidator.

II. COMPANIES ACT, 2013

In Union of India Ministry of Corporate Affairs v. Delhi Gymkhana Club Ltd. & Ors., the NCLAT while considering an appeal against interim relief granted by the National Company Law Tribunal ‘hereinafter referred to as the ‘NCLT’) in a petition alleging oppression and mismanagement made several pertinent observations as regards the law relating to oppression and mismanagement.

The NCLAT held that it would have to consider whether the finding or conclusion in regard to the existence of prima facie case has been reached by the NCLT upon consideration of relevant material and if it is so, whether such finding is justified. It was held that the impugned order could not be set aside without examining the material on record and recording a contrary finding qua the existence of a prima facie case and that the Appellate Tribunal would be loath in interfering with the finding unless it is demonstrated that the view taken by the NCLT is capricious or unreasonable and not merely because other view is possible.

Regarding filing of a petition alleging oppression and mismanagement by the Central Government, it was held that the Central Government is required to record its opinion as regards affairs of a company being conducted in a manner prejudicial to the public interest and that recording of such opinion is a sine qua non for applying to the NCLT under Section 241(2) of the Companies Act.

Regarding the scope of public interest, it was held that public interest cannot be construed as en masse interest of all citizens and that where interest of a component of general citizenry of any age group, gender or belonging to any strata of society is affected as a class public interest can safely be said to be involved, apart from the legal rights of individuals.

In K.V. Brahmaji Rao. v. Union of India, Ministry of Corporate Affairs, the NCLAT held that the person who may be the head of some other organizations, other than the Company against whom oppression and mismanagement is alleged, cannot be roped into such petition alleging oppression and mismanagement and his or her assets cannot be attached in exercising the powers under Sections 337 & 339 of the Companies Act.

The author is an advocate practicing at New Delhi.