NCLAT at a Glance: January 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.

I. Insolvency and Bankruptcy Code, 2016

A. Pre-Admission Stage

In Shri IRK Raju Vs Immaneni Eswara Rao & Ors. [1], the NCLAT interpreted Section 5(21) of the Code. It held that Section 5(21) makes a provision specifying payment of statutory dues as operational debt. However, the NCLAT observed that what is pertinent to mention is payment of statutory dues. It held that this by itself indicates that a statutory due is only operational in nature when it is paid to the relevant authority, and not when it is repaid to a party that has paid such statutory authority. In fact, the amendment of Section 5(21), where the word “repayment” in the context of statutory dues was replaced with the word “payment” makes clear the intent of the legislature that a statutory due becomes operational debt only when the same is to be paid to the relevant authority and not otherwise.

Consequently, the NCLAT held that statutory dues de hors of the invoice of the good or service cannot be claimed as an operational debt from a party, where the party is not a statutory authority.

In Landmark Realty Vs Siroya Developers Private Limited [2], the NCLAT held that when a suit has been filed prior to issuance of demand notice under Section 8 of the Code, regarding the debt even if the same is filed by the creditor and has not been disputed by the Corporate Debtor and the Corporate Debtor has allegedly admitted the claim, there would be existence of a pre-existing dispute and the application under Section 9 of the Code would be liable to be rejected.

In Radhika Mehra Vs Vaayu Infrastructure LLP & Ors, [3] the NCLAT held that Section 61(2) of the Code would overrule Section 5 of the Limitation Act, 1963 (hereinafter referred to as the ‘Limitation Act’) and the NCLAT could not condone a delay in filing an appeal beyond 45 days. In the instant case, the Appellant had initially moved the Hon’ble High Court of Bombay against the Order of the NCLT but had withdrawn the same with liberty to file an appeal. However, since the appeal was filed beyond 45 days and in light of the aforesaid finding that Section 61(2) of the Code would overrule Section 5 of the Limitation Act, the NCLAT dismissed the appeal.

In M/s Ugro Capital Limited Vs M/s Bangalore Dehydration and Drying Equipment Company Private Limited (BDDE) [4], the NCLAT held that since the definition of the word creditor in the Code includes decree-holder, thereby if a petition is filed for the realization of decretal amount, then it cannot be dismissed on the ground that Applicant should have taken steps for filing an execution petition in the Civil Court.

In Anjani Gases Vs B.P. Projects Private Limited [5], the NCLAT held that filing of a FIR against the Directors of the Creditor/Applicant Company for the same amount which was claimed qua Section 9 Application (of the Code) would constitute a dispute.

In Oriental Bank of Commerce Vs M/s Ruchi Global Limited [6], the NCLAT considered the impact of an inter-creditor agreement of a consortium of banks on the right of a bank to file an application under Section 7 of the Code. It held that an inter-creditor agreement being inter-se between the banks, the Corporate Debtor cannot take benefit of the clauses in that agreement, which are binding only on the banks. If there is a default by any member of the consortium, it would be a matter for the other banks to be aggrieved with and Corporate Debtor cannot take benefit of the same to raise grievance. If the creditor bank did not act in tune with the consortium agreement, it may be a matter of consideration for the other banks of the consortium and / or the Reserve Bank of India (hereinafter referred to as the ‘RBI’). However, the NCLAT held that there was no bar to file an application under Section 7 of the Code by the creditor bank. Even if there is a Clause that the bank which wants to take action should give notice of 30 days, if notice was not given that would be a matter for the lead bank to look into. However, that does not create any bar for the creditor bank to move an application under Section 7 of the Code.

In Mr. M. Ravindranath Reddy Vs Mr. G. Kishan & Ors. [7], the NCLAT held that the lease of an immovable property cannot be considered as a supply of goods or rendering of any services; thus, dues arising from the lease of an immovable property cannot fall within the definition of operational debt.

In iValue Advisors Private Limited Vs Srinagar Banihal Expressway Limited [8], the NCLAT held that merely because the creditor has initiated proceedings under the Micro, Small and Medium Enterprise Development Act, 2006 (hereinafter referred to as the ‘MSMED Act’) for recovery of the operational debt owed to it, but even if the conciliation mechanism under the MSMED Act had not started, such action would not result in the creation of a dispute so as to bar a petition under Section 9 of the Code. It was further held that even if the conciliation proceeding was to start, if the Corporate Debtor did not raise dispute regarding the supply of goods or quality of services, still it would be open for the NCLT to look into the question whether or not dispute as covered under the Code is attracted.

In Vivek Jha Vs Daimler Financial Services India Private Limited & Anr. [9], the NCLAT held that if a service of notice is sent through registered post at the correct address as shown in the master data, then, in law it is a correct mode of service and in this regard a bald assertion that the registered notice was not served would not be sufficient to discharge the onus cast on an aggrieved person. In the present case, notice was sent through registered post to the address of the Corporate Debtor as given in the Master Data but was returned with an endorsement as ‘Addressee Left’. The NCLAT held that since the Master Data of the debtor and as per records available with ROC, reflected the same address on which notice was sent and thereby, one can safely and securely come to a conclusion in the instant case that the service was avoided by the party concerned.

B. Corporate Insolvency Resolution Process

In Mr. Kaushal Ramesh Mehta Vs Metallica Industries Limited & Ors. [10], the NCLAT held that sub-section (3) of Section 61 of the Code specifies the grounds on which a Resolution Plan which has been approved by the NCLT can be challenged by any aggrieved person and any appeal which fails to makes out any ground as specifiedaforesaid would be liable to be dismissed.

In Raman Agarwal Vs Mohit Chawla & Ors., Resolution Professional J. R. Agro Tech Private Limited [11], the NCLAT held that there is no provision to file any company application under the National Company Law Tribunal Rules, 2016 (hereinafter referred to as ‘NCLT Rules 2016’). The NCLAT went on to issue a direction that henceforth, the NCLTs of the country were to never entertain company applications in insolvency matters as interlocutory applications are maintainable under the Code.

In Kundan Care Products Limited Vs Mr. Surya Kanta Satapathy & Ors., [12], the NCLAT held that the resolution applicant has no right for renegotiation or further negotiation. After the submission of the Resolution Plan, if it is found in order and in accordance with Section 30(2), it is required to be placed before the Committee of Creditors (hereinafter referred to as the ‘COC’). The process of evaluation is to be guided by the said criteria as set out in the request for Resolution Plan. If the evaluation criteria suggest that only top three resolution applicants should be negotiated, the resolution applicant/Appellant who ranked 6 th among the resolution applicants cannot have any right to participate for re-negotiation over the decision of the COC.

In Gouri Prasad Goenka Vs Surenda Kumar Agarwal & Anr. [13], the NCLAT held that the NCLT without disposing of an application filed by a creditor under Rule 11 of the NCLT Rules, 2016 for withdrawal of CIRP proceedings, has no jurisdiction to defer the matter and direct the Interim Resolution Professional (hereinafter referred to as the ‘IRP’) to constitute the COC so as to render the application filed under Rule 11 as infructuous. If the NCLT is of the view that the application under Rule 11 (of the NCLT Rules, 2016) is fit to be rejected then only after rejecting the same, could it have directed the IRP to constitute the COC.

In QVC Exports Private Limited Vs United Tradeco FZC and Ors. [14], the NCLAT held that the rectification of the Resolution Plan does not involve the question of priorities or any question of law or facts, arising out of or in relation to the insolvency resolution or liquidation proceedings of the Corporate Debtor or corporate person under this Code, and therefore it is not permissible to modify the Resolution Plan under the guise of inherent powers of the Tribunal.

In Santosh Wasantrao Walokar Vs Vijay Kumar V. Iyer Resolution Professional, Murli Industries Limited and Anr. [15], the NCLAT held that if claims are not submitted or are not accepted or dealt with by the Resolution Professional in the Resolution Plan and where such Resolution Plan submitted by the Resolution Professional is approved then those claims that are not submitted or are not accepted or dealt with would stand extinguished. It was further held that the NCLT does not have power to modify its own Order but can only correct mistakes apparent from the record.

C. Liquidation Stage

In Committee of Creditors, M/s. Smartec Build Systems Private Limited Vs B. Santosh Babu & Ors. [16], the NCLAT was considering the decision of the NCLT which had passed the Order of liquidation against the Corporate Debtor and had also directed the COC to pay the fees and costs incurred by the IRP. The COC argued that the fees and costs of the IRP is to be borne by the Applicant/Operational Creditor who filed the application under Section 9 of the Code. The NCLAT rejected the submission of the COC on the ground that the Applicant/Operational Creditor who moved the application praying for initiation of CIRP, may not receive any amount during liquidation as the Applicant/Operational Creditor was not a secured creditor and thereby could not be asked to pay the dues of the IRP.

In Punjab National Bank Vs Mr. Kiran Shah Liquidator of ORG Informatics Limited [17], the NCLAT held that after liquidation, the COC has no role to play and it is simply a claimant whose matters are to be determined by the Liquidator and further held that the COC cannot move an application for removal of Liquidator in the absence of any provisions under the law. In the Assistant Provident Fund Commissioner & Recovery Officer, Employees Provident Fund Organization Vs Florind Shoes Private Limited (CD) & Ors., 18 the NCLAT held that in terms of provisions ofSection 36(4)(d) of the Code, assets of the Corporate Debtor’s subsidiary did not fall within the ambit of liquidation estate.

II. Companies Act

In Bank of Baroda Vs Aban Offshore Limited, 19 the NCLAT held that intention of the legislature while promulgating Section 55 of the Companies Act, 2013 was to compulsorily provide for redemption of preference shares by doing away with the issue of irredeemable preference shares. Therefore, even though there is no specific provision stipulated under the Companies Act, 2013 through which relief can be sought by preference shareholders in case of non-redemption by the company or consequent non-filing of petition under Section 55 of the said Act, the intention of the legislature being clear and absolute, Tribunal’s inherent power can be invoked to get an appropriate relief by an aggrieved preference shareholder(s).

Alternatively, preference shareholders coming within the definition of ‘member(s)’ under Section 2(55) read with Section 88 of the Companies Act, 2013, may file a petition under Section 245 of the said Act, as a class action suit, being aggrieved by the conduct of affairs of the company. Thereby, it was held that preference shareholders are not remediless and for redemption of preference shares, they can file an application under Section 55(3) of the Companies Act, 2013 or in the alternative they may file application under Section 245 of the Companies Act, 2013 as a class action suit and the NCLT while exercising the inherent power viz. Rule 11 of NCLT Rules, 2016 can pass appropriate orders.

Swaroop George is an advocate practicing at New Delhi.

[1] Judgment dated 30.01.2020 in Company Appeal (AT) (Insolvency) No. 1058 of 2019

[2] Judgment dated 10.01.2020 in Company Appeal (AT) (Insolvency) No. 25 of 2020

[3] Judgment dated 30.01.2020 in Company Appeal (AT) (Insolvency) No. 121 of 2020

[4] Judgment dated 22.01.2020 in Company Appeal (AT) (Insolvency) No. 984 of 2019

[5] Judgment dated 29.01.2020 in Company Appeal (AT)(Insolvency) No. 661 of 2019

[6] Judgment dated 31.01.2020 in Company Appeal (AT) (Insolvency) No. 387 of 2019

[7] Judgment dated 17.01.2020 in Company Appeal (AT) (Insolvency) No. 331 of 2019

[8] Judgment dated 13.01.2020 in Company Appeal (AT) (Ins) No.1142 of 2019

[9] Judgment dated 13.01.2020 in Company Appeal (AT) Insolvency No. 756 of 2018

[10] Judgment dated 02.01.2020 in Company Appeal (AT) (Insolvency) No. 1437 of 2019

[11] Judgment dated 10.01.2020 in Company Appeal (AT) (Insolvency) No. 50 of 2020

[12] Judgment dated 30.01.2020 in Company Appeal (AT) (Insolvency) No. 11 of 2020 0

[13] Judgment dated 30.01.2020 in Company Appeal (AT) (Insolvency) No. 105 of 2020

[14] Judgment dated 28.01.2020 in Company Appeal (AT) (Insolvency) No. 1351 of 2019

[15] Judgment dated 24.01.2020 in Company Appeal (AT) (Insolvency) No. 871-872 of 2019

[16] Judgment dated 10.01.2020 in Company Appeal (AT) (Insolvency) No. 48 of 2020

[17] Judgment dated 21.01.2020 in Company Appeal (AT) (Insolvency) No. 102 of 2020

[18] Judgment dated 28.01.2020 in Company Appeal (AT) (Insolvency) No. 167 of 2020

[19] Judgment dated 29.01.2019 in Company Appeal (AT) No.35 of 2019