NCLAT Fortnightly: Important orders on IBC (August 16 2023 – August 31 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 August 16, 2023 to August 31, 2023.

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

1. In Anand Gupta and Anr. v. Vardhman Realtech Private Limited (Company Appeal (AT) (Insolvency) No. 1065 of 2023), the NCLAT did not interfere with the order of the Adjudicating Authority, which held that the money advanced by a joint venture partner would not amount to a financial debt for maintainability of Section 7 application.

2.  In Naresh Choudhary v. Sterling Enamelled Wires Private Limited and Another (Company Appeal (AT)(Insolvency) No. 39 of 2023 & I.A. No.137 of 2023), the NCLAT upheld the decision of the Adjudicating Authority holding that defense of pre-existence of dispute cannot be taken into account where after raising of such disputes, the corporate debtor had acknowledged its liability. The NCLAT further noted that any pre-existing dispute should have been brought to the pointed notice of the Operational Creditor and mere usage of words ‘subject to the claims lodged with you’ would not be sufficient to substantiate ‘pre-existing disputes.’

3. In Supreme Transport Organization Pvt. Ltd. v. Maharashtra Airport Development Company (Comp. App. (AT) (Ins) No.1056 of 2023), the NCLAT held that a Section 9 application is not maintainable for the recovery of earnest money deposit in connection with a tender as such earnest money did not fall under the ambit of ‘operational debt’, since had no nexus with provision of goods or services.

4. The NCLAT, in Narayan Mangal v. Vatsalya Builders & Developers Private Limited (Company Appeal (AT) (Ins.) No. 294 of 2023), held that where a default is committed prior to the period specified in Section 10A and where such default continues, there is no bar under Section 10A of the Code from recognizing the accrual of interest during such period and such interest accrued can be taken into account for computing the threshold under Section 4 of the Code.

5. Diametrically opposite views arose from the Principal and Chennai Bench of NCLAT on the question of whether an application for initiation of CIRP is maintainable based on a default in payment under a settlement agreement which occurred during the Section 10A period, where such settlement agreement was entered in relation to a default prior to Section 10A period.  

In Raghavendra Joshi v. Axis Bank Limited (Company Appeal (AT) Insolvency No. 914 of 2023), the corporate debtor had defaulted in discharging its commitment under an accepted One Time Settlement (OTS) during the period covered under Section 10A of the Code. While upholding the maintainability of a Section 7 application against such a default of an accepted OTS, the Principal bench of NCLAT held that the bar on initiation of CIRP under Section 10A is not applicable where the default had categorically occurred prior to the period specified in Section 10A of the Code and where default of OTS continues during the suspended period.

On the other hand, in Zhejiang Industrial Group Company Limited v. Al Badr Seafoods Private Limited (Company Appeal (AT) (CH) (INS.) No. 272 of 2023, the Chennai bench of NCLAT held that the bar on initiation of CIRP under Section 10A was applicable where the default in payment of instalment under a settlement agreement executed in relation to a default relating to pre-section 10A period, occurred during the Section 10A period.

6. In Zhejiang Industrial Group Company Limited v. Al Badr Seafoods Private Limited (Company Appeal (AT) (CH) (INS.) No. 272 of 2023), the Chennai Bench of NCLAT held that a Section 9 application filed on the basis of a default in payment of an instalment under a settlement agreement was not maintainable as such default in payment does not come within the definition of ‘operational debt’ under Section 5(21) of the Code. However, it may be noted that principal bench of NCLAT noted diametrically opposite view, and in our opinion the correct view, in Ahluwalia Contracts (India) Limited v. Jasmine Buildmart Private Limited (Company Appeal (AT) (Insolvency) No. 345 of 2023 & I.A. No.1164 of 2023.

7. In Madras Chemical and Polymers v. Vijay Aqua Pipes Private Limited (Company Appeal (AT) (CH) (INS.) No. 298 / 2021), the NCLAT held that where the corporate debtor failed to pay the principal amount for certain goods, a CIRP application filed by a del credere agent claiming to be a financial creditor would not be maintainable as such debt, while could qualify as operational debt, cannot be termed as financial debt. The NCLAT further held that a legal notice demanding payment was not equivalent to a Section 8 demand notice.

1. In Ashok Gosavi & Ors. v. Manoj Kumar Agarwal & Ors. (Company Appeal (AT) (Insolvency) No.1094/2023), the NCLAT held that, where the authorized representative of the home buyers had voted in favour of approval of a resolution plan based on the approval of the majority of the home buyers, such a resolution plan cannot be challenged by minority home buyers.

2. The NCLAT, in Ganesh Ores Private Limited v. Vijaykumar V. Iyer & Anr (Company Appeal (AT) (Insolvency) No.830 of 2023) held that a plan may make distinction between secured creditors and unsecured creditors in so far as their entitlement is considered. It further went on to hold that where a member of committee of creditors has approved the resolution plan itself, it cannot separately challenge the distribution mechanism specified in such a resolution plan.

3. In Indian Overseas Bank v. Rathi TMT Saria Private Limited & Ors (Comp. App. (AT) (Ins) No.1134 of 2023 & I.A. No. 3949 of 2023), the NCLAT held that committee of creditors cannot consider other resolution plans during the pendency of approval of a resolution plan before the Adjudicating Authority, when the plan has already been approved by the committee of creditors.

4. In Kotak Mahindra Bank v. RP of Universal Buildwell Pvt Ltd. (Company Appeal (AT) (Ins.) No. 1000 of 2021), the corporate insolvency resolution process was initiated on behest of a financial creditor (homebuyers). The appellant (being another financial creditor) filed an application after filing its claims for limiting the corporate insolvency resolution process only to a particular project of the corporate debtor. By this application, the appellant sought for the release the other projects from the rigours of the insolvency process.

The NCLAT noted that while the insolvency process could have been limited to one project, the Adjudicating Authority could not have modified and reviewed its order of admission against the corporate debtor and restricted the insolvency process to only one project based on the application of the appellant.

5. In Giriraj Enterprises v. Regen Powertech Private Limited and Anr. (Company Appeal (AT) (CH) (Ins) No. 323/2021), in a bunch of appeals, the NCLAT considered whether Regen Powertech Private Limited (“Holding Company”) and Regen Infrastructure and Services Private Limited (“Subsidiary Company”), were intertwined and whether the consolidation of the CIRP process of both the Holding Company and the Subsidiary Company could be done.

The NCLAT following the principles laid down in Oase Asia Pacific Pte Limited Vs. Axis Bank and other Financial Creditors & Ors. in Company Appeal (AT) (Ins) No. 783/2020 and Radico Khaitan Ltd. vs. BT & FC Pvt. Ltd. & 6 Ors.’ in Company Appeal (AT) (Ins) No. 919/2020, which inter alia included parameters such as common control, common directors, common assets, inter-dependence, etc. and examined the connection between the Holding Company and the Subsidiary Company to hold that both companies had interconnected business relationships. The NCLAT found that the Subsidiary Company, which was in the business of providing service to the customers of the Holding Company, was incorporated for the benefit of the Holding Company, and was dependent upon the Holding Company for funds.

The NCLAT, therefore, allowed consolidation of the two separate insolvency resolution process and held that the consolidation of CIRPs cannot be construed as an equity jurisdiction. The scope and intent of the Code is value maximization, which would be served by treating the Holding Company and the Subsidiary Company to be a single entity. However, the NCLAT clarified that this order has been passed keeping in mind the peculiar facts of the present case, and solely in regards to the scope and objective of the Code.

In this matter, the NCLAT also held that decree holder falls within the scope of creditor under Section 3(10) of the Code.

6. Whether a resolution plan can validly contain a provision for extinguishment of personal guarantees was the question which was dealt by NCLAT in SVA Family Welfare Trust v. Ujaas Energy Limited (Company Appeal (AT) (Insolvency) No. 266 of 2023). While examining the issue, the NCLAT took note of the decision of Supreme Court in Lalit Kumar v. UOI (Transferred Case (Civil) No. 245/2020), which had held that sanction of a resolution plan does not per se operate as a discharge of guarantors’ liability. The NCLAT opined that such a decision was not a precedent for laying down the law that personal guarantee can never be discharged in a resolution plan. Treating the decision of CoC to accept the value for relinquishment of personal guarantee as commercial decision of the CoC, the NCLAT further held that the Adjudicating Authority committed an error in rejecting the plan which provided for extinguishment of personal guarantee by allocating a value.

7. In Vinay Jain v. AVJ Developers (India) Private Limited (Company Appeal (AT) Insolvency No. 846 of 2023), the NCLAT held that an application for the approval of a resolution plan need not be deferred on the ground that PUFE (preferential, undervalued, fraudulent and extortionate transactions) applications are pending.  The NCLAT also held that, where the successful resolution applicant is one of the accused under the PUFE application, to avoid conflict of interest, the resolution professional can seek a direction to pursue such PUFE proceedings after the approval of the resolution plan, even where the plan provided for the successful resolution applicant to pursue such proceeding.

1.  In Tapadia Polyesters Private Ltd. v. Sales Tax Officer, Professional Tax Officer and Anr. (Company Appeal (AT) (Insolvency) No. 366 of 2023), the NCLAT observed that even when there is an attachment of assets of the corporate debtor prior to the initiation of the insolvency proceedings, and where such order of attachment had become final, the Sales Tax Department could not be treated as the owner of the assets, and the assets would continue to be owned by the corporate debtor, and be a part of the liquidation estate. The NCLAT further held that even where the property has been attached and the tax authority is considered as secured creditor, unless such secured creditor has exercised its right to remain outside the liquidation proceeding, it would have deemed to relinquish its security under regulation 21A of the IBBI (Liquidation Process) Regulations 2016.

1. The NCLAT, in Rakesh Kumar Gupta v. Straight Edge Contracts Private Limited (Comp. App. (AT) (Ins) No. 444 of 2022 & IA No. 3802 of 2022), held that the Adjudicating Authority has jurisdiction to recall its own order initiating CIRP proceedings where such an order was obtained by playing fraud upon the Adjudicating Authority.

2. In Harish Kumar v. Solitaire Infomedia Private Limited (Company Appeal (AT) (Insolvency) No. 348 of 2023 & I.A. No. 1174 of 2023), the NCLAT held that benefit of exclusion under Section 14 of Limitation Act, 1963 would not be applicable where the applicant had filed a restoration application rather than an appeal.

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