NCLAT Fortnightly: Important orders on IBC (February 1 – February 15, 2024)

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 February 1, 2024 to February 15, 2024.

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

1. In Jushya Realty Private Limited v. Ninety Properties Private Limited (Company Appeal (AT) (Ins.) No. 543 of 2023), the NCLAT held that the existence of a transaction evidencing transfer of money would not qualify as a financial debt in absence of any proof of such borrowing by the corporate debtor. The NCLAT also went on to observe that where no debt or default is made out, the question of default itself remains unsubstantiated. Finally, it was observed that the Code was not correct legal course of action for seeking the specific performance of an agreement.

2. In Piramal Capital & Housing Finance Limited v. Hydric Infrastructure Private Limited (Comp. App. (AT) (Ins) No. 851 of 2023 & I.A. No. 2904, 2905 of 2023), the NCLAT held that a Section 7 application filed simultaneously against the corporate debtor as well as the corporate guarantor on the same set of debt is maintainable.

3. In Prakash Kumar Raj (Suspended) Director, Mountain Edge Tours v. Shriram City Union Finance Limited (Company Appeal (AT) (Insolvency) No.1706 of 2023), the NCLAT held that where the existence of financial debt was proved, the reason for not paying an installment or for filling a police complaint alleging fraud cannot negate the financial debt or default.

4. In PV Potluri Ventures Private Limited v. Benita Industries Limited (Company Appeal (AT((CH) (Ins.) No. 444/2023), the NCLAT held that in absence of any document which establishes the consideration of time value for the money, a Section 7 application is not maintainable based on RTGS records in a bank statement indicating the transfer of funds from creditor to the corporate debtor.

1. In State Bank of India v. Mohit Chawla (Company Appeal (AT) (Insolvency) No. 702 of 2023), the NCLAT observed that once a resolution plan is approved by the Committee of Creditors (CoC), it cannot subsequently be allowed to be withdrawn by the resolution applicant. In view of this, the NCLAT found that the Adjudicating Authority was not permitted to remit back an application for withdrawal of a resolution plan by the Successful Resolution Applicant (SRA) to the CoC.

2. In Umesh Kumar v. Narendra Kumar Sharma (Company Appeal (AT) (Insolvency) No. 100 of 2024)), the NCLAT held that even though there are no adjudicatory powers vested on the resolution professional in respect of the claims filed before him, the CIRP Regulations enable him to seek information towards the establishment of the correctness of a claim and a creditor cannot refuse to substantiate a claim based on the lack of adjudicating power of the resolution professional. The NCLAT added that the resolution professional is not expected to rubber stamp claims filed by creditors without exercising due diligence while examining the invoices. The NCLAT also observed that the determination of validity and sustainability of a contract falls within jurisdiction of a civil court and outside the scope of the Adjudicating Authority and the NCLAT.

3. In Rosario D'Souza v. Union Bank of India (Company Appeal (AT) (Insolvency) No. 233 of 2023), the NCLAT held that a resolution plan cannot be faulted for making available additional amounts in favour of a sole secured financial creditor over and above the amount claimed by such creditor, while offering NIL monetary value to the shareholders of the corporate debtor.

4. The NCLAT, in Paridhi Finvest Private Limited v. Value Infracon Buyers Association and Anr. (Company Appeal (AT) (Insolvency) No. 654 of 2022) upheld the approval of a resolution plan submitted by the homebuyers of the relevant real estate project despite, (i) the CoC (which comprises the homebuyers in majority, having 97 percent voting shares) not insisting on performance security from the successful resolution applicant; and (ii) the successful resolution applicant not featuring in the final list of prospective resolution applicants. While coming to the aforesaid conclusion, the NCLAT duly took note of the fact that the flat buyers themselves constituted 97 percent of the voting shares of the CoC and the decision to not accept performance security was a commercial decision. It also took note of the fact that while the name of the successful resolution applicant was not a part of the final list of prospective resolution applicants, the resolution plan was submitted only based on the liberty granted by the Adjudicating Authority.

The NCLAT further held that a resolution plan providing for payment to a dissenting financial creditor based on its voting share does not violate the provisions of the Code, as a dissenting financial creditor cannot insist on the payment of an amount under the resolution plan as per the value of its security interest.

5. In Board of Trustees for Syama Prasad Mookerjee Port, Kolkata v. Sanjai Kumar Gupta (Company Appeal (AT) (Insolvency) No. 1009 of 2023), the NCLAT observed that a successful resolution applicant shall possess only those rights of the corporate debtor which the corporate debtor possessed on the land which was assigned to the corporate debtor. The NCLAT proceeded to find that the determination of rights of the parties of a land is not a subject matter of the CIRP process and that the approval of the resolution plan does not affect the determination of rights pending consideration in relation to such land before other courts, which shall proceed in accordance with law.

The NCLAT further held that where an operational creditor is being paid an amount which is not less than the liquidation value payable, the disparity in amounts to be paid to different stakeholders is in the domain of the CoC and cannot be interfered with by the Adjudicating Authority unless it violates the statutory provisions of the Code. 

6. In Ashmeet Singh Bhatia v. Pragati Impex India Private Limited (Company Appeal (AT) (Insolvency) No. 1413 of 2023), while delineating the scope of Section 65 (fraudulent or malicious initiation of proceedings), the NCLAT observed that the Adjudicating Authority is not denuded the power to entertain a Section 65 application simply because it had earlier admitted a Section 7 application based on the same facts. It also went on to observe, that an application under Section 65 cannot be rejected merely because the application was filed belatedly when the resolution plan was under consideration. Finally, the NCLAT observed that under Section 65 of the Code, the Adjudicating Authority could close the CIRP and pass consequential orders.  

7. In ODAT GmbH v. CA Santanu Brahma and Ors. (Company Appeal (AT) (Insolvency) No.1683 of 2023), the NCLAT held that common directorship with corporate debtor does not make one entity a related party of the corporate debtor, unless it be established such purported related party had advised, directed or instructed the promoter or manager of the corporate debtor. It was further observed that while assessing if there was any participation in the policy making decision, the actions of the common director cannot be attributed to the purported related party unless it can be proved that such actions of the common director was on behalf of the purported related party. Finally, a person having been authorized to file a claim on behalf of the entity is not a sufficient ground to assume that it is a relationship covered under Section 5(24)(h) (any person on whose advice, directions or instructions, a director, partner or manager of the corporate debtor is accustomed to act) of the Code.

8. In Rajesh Kumar Damani v. Committee of Creditors of Pami Metals Private Limited and Ors. (Company Appeal (AT) (Insolvency) No. 91 OF 2024), the NCLAT reiterated that the commercial wisdom of the CoC could not be interfered with and there are only limited grounds for interference. The NCLAT further noted, that adopting the Swiss challenge method Is not mandatory for the selection of a resolution plan, and that it is for the CoC to decide on the process of selecting the resolution plan. 

9. In, Stressed Assets Stabilization Fund (SASF) v. Piyush Periwal & Ors. (Company Appeal (AT) (Insolvency) No. 947 of 2021), the NCLAT considered quite a few issues in the context of admission of a Section 7 application, as well as the consequence of an error in the constitution of the CoC, for wrongful admission of a claim.

The first issue that the NCLAT considered was whether the appeal was maintainable consequent upon the death of the promoter-resolution applicant who had filed the appeal following the rejection of his resolution plan. The challenge against such continuation was rejected by observing that appeal was not filed by the promoter/ resolution applicant in his individual capacity, but in the capacity of the promoter of the corporate debtor. Accordingly, even after the death of the original promoter, the other promoters were held entitled to prosecute the appeal and also contest the appeals.               

Next, in the context of admission of Section 7 application, NCLAT observed that the Adjudicating  Authority could also factor in the conduct of the financial creditor to consider whether the application needs to be allowed or not. For instance, when a financial creditor prohibited the            principal borrower for making payment of the dues by creating restraint, an application to recover the entire outstanding dues from the personal guarantor was held to be non-maintainable. It was further observed, that a Section 7 application would not be maintainable if the intention was not to undertake insolvency resolution of the corporate debtor, but to recover one’s dues.

In the context of addressing the consequence of wrongful admission of a claim - resulting in disparage voting shares within the members of the committee of creditors - the NCLAT observed that when the voting shares of the financial creditors are not in accordance with law, the process undertaken by such committee of creditors cannot be approved, nor can the decision taken by such committee of creditors be validated.

In the instant case, the NCLAT had also considered the power of the Adjudicating Authority to suo motu replace the resolution professional and observed that where the resolution professional failed to correctly verify the claims of the financial creditor, despite directions from the Adjudicating Authority, the same constituted sufficient ground to replace the resolution professional de hors the provisions of Section 27 of the Code.

Finally, the NCLAT had observed that while adjudicating on an avoidance application, the Adjudicating Authority was permitted to take into consideration the fact that the corporate debtor was earning profits during the relevant period.

1. In Rakshit Dhirajlal Doshi v. Sumedha Management Solutions Private Limited (Company Appeal (AT) (Insolvency) No. 29 of 2024), the NCLAT noted that decision of the CoC to liquidate the corporate debtor in its very first meeting, without even publishing an expression of interest (EOI) for its CIRP, cannot be questioned unless any ground exists in terms of section 61(4) of the Code which allows an appeal against a liquidation order on grounds of material irregularity or fraud. NCLAT further noted that a liquidation order cannot be scrutinized under Section 30(2) or Section 61(3) of the Code, as these grounds are available only for questioning the approval of a resolution plan. Finally, the NCLAT observed that where the CoC has opted for liquidation, the resolution professional’s subjective views and feelings are irrelevant.

2. In CA Rajeev Bansal, Liquidator of Isolux Corsan India Engineering and Construction Private Limited (Company Appeal (AT) (Insolvency) No.1653 of 2023), the NCLAT noted that where the liquidator had been permitted under Section 33(5) of the Code to prosecute on behalf of the corporate debtor, no separate approval was required for filing of a writ petition on behalf of the corporate debtor.

1. In Monica Jajoo v. PHL Fininvest Private Limited (Company Appeal (AT) (Ins) No. 1344 & 1345 of 2022), which was covered in our earlier roundup, the NCLAT had observed that when an insolvency proceeding is pending before a particular bench of the Adjudicating Authority/ NCLT, the proceedings under Section 95 cannot be entertained by the another bench of the same Adjudicating Authority/ NCLT. 

While highlighting the ramification of this judgement, we had critiqued that “it probably was not the intention of the legislature that proceedings would have to be heard by the 'same' bench and as long as the proceedings were being heard by the same Adjudicating Authority/ NCLT, the composition of the bench should not matter. A fallout of this decision could be, where there has been change in the composition of the bench on account of change in members, one could come and argue that the bench which was in seisin of the proceeding against the corporate debtor was not the 'same' bench and hence lacks jurisdiction. We also note that one of the factors which influenced the decision of NCLAT was that a transfer petition was filed before Bench IV, NCLT, New Delhi for the transfer of a petition to Bench III, NCLT, New Delhi, which application was ignored. In our understanding, such a transfer application could have only been filed before the president of NCLT in terms of rule 16(d) of NCLT Rules, 2016 and not before any other bench of NCLT. However, the NCLAT appears to have overlooked the technical requirement.”

Our view stands vindicated with the recent decision of the NCLAT in Bhavesh Harkishandas Mehta v. Kookmin Bank (Company Appeal (AT) (Insolvency) No. 75 of 2024), wherein, while overruling its decision given in Monica Jajoo (supra), the NCLAT held that the word ‘NCLT’ used in sub-section (2) of Section 60 refers to the NCLT, including its benches, and was not referring to a particular court room. The NCLAT observed that the expression ‘a’ and ‘such’ used in Section 60(2) indicates that when the CIRP of a corporate debtor is pending before an Adjudicating Authority/ NCLT, an application relating to insolvency of a personal guarantor shall lie before the same Adjudicating Authority/ NCLT, without there being any right to claim that his application be heard by particular bench or courtroom of the NCLT.

Further, the NCLAT held that when an insolvency proceeding is pending in different courtroom of a particular bench of the Adjudicating Authority/ NCLT, the proceedings under Section 95 can be entertained by another court of the same bench as per the general or special order of the President and an order passed under Section 95 application by the court which different from the court where insolvency proceeding is pending, shall not be without jurisdiction.

2. In Paradise Consumer Products Limited v. J. Maheshkumar Petrochemichals Private Limited (Company Appeal (AT) (Insolvency) No. 901 of 2020), the NCLAT held that in view of Section 3 of the Limitation Act, 1963, a plea of limitation can be set up in defense at the appellate stage, even where the same was not set up before the Adjudicating Authority.

3. In Arcelormittal Nippon Steel India Limited v. Palco Recycle Industries Limited & Ors. (Company Appeal (AT) (Insolvency) No. 274 of 2024), where pursuant to the receipt of a direct communication by the Judicial Member of the Adjudicating Authority from an advocate representing a litigant, the Judicial and the Technical members recused themselves from the matter, the NCLAT observed that recusal based on the receipt of a private communication from advocate of a litigant cannot be interfered with in the exercise of appellate jurisdiction.

4. In Kumar Vocational Courses Academy Private Limited v. Pawan Kumar Agarwal, RP of KSBL Securities Limited and Another (Company Appeal (AT) (Insolvency) No.201 of 2024), the NCLAT observed that subsequent issue of notice under Section 66 of the Code would not result in the fresh computation of the limitation period for an order passed much earlier than the date of notice.

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