NCLAT Fortnightly: Important orders on IBC (February 15 - 28, 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 February 15, 2023 and February 28, 2023. 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 Kishore Shankar Signapurkar v. Prime Soles, (Company Appeal (AT) (Insolvency) No. 739 of 2018), the NCLAT held that where the existence of a pre-existing dispute was not raised before the Adjudicating Authority at the time of admission of the CIRP, such an issue cannot be raised for the first time at the appellate stage.

2. In Jal Engineers Private Limited v. Mr. Dinesh Kumar Aggarwal, (Company Appeal (AT) (Insolvency) No. 1457 & 1458 of 2022), the NCLAT held that money given as part of one’s share in the consortium would not constitute a financial debt vis-à-vis the other members of the consortium.

3. The NCLAT, in Rahul Arunprasad Patel v. Invesco Asset Management (India) Private Limited, (Company Appeal (AT) (Insolvency No. 346 of 2021), upheld right of debenture holders to maintain a Section 7 application independent of that of a debenture trustee. In the same case, the NCLAT further recognized the locus of an asset management company to initiate the CIRP on behalf of a mutual fund.

4. In the case of State of Rajasthan v. Arunava Sikdar, Resolution Professional for Jaipur Metals & Electricals Limited, (Company Appeal (AT) (Insolvency) No. 733, 734 and 996 of 2022), the NCLAT held that an order passed by the stamp authorities identifying deficiency of the stamp duty on the relevant financing agreements would not bar the resolution professional from admitting a claim, existence of which could be corroborated from other available documents, including the financial statements of the corporate debtor. The NCLAT also held that while the court does not give any fresh period of limitation for filing any application, nor gives any fresh lease of life to a stale or dead claim, if the claimant would seek exclusion of limitation on account of some other legislations, such benefit of exclusion of period of limitation would be available for maintaining a relevant application for initiating CIRP under the Code. Applying the aforesaid principle, NCLAT held that financial creditors were entitled to seek relief under the Rajasthan Relief Undertakings (Special Provisions) Act, 1961.

In the same decision NCLAT refused to exercise its inherent power, to remove the resolution professional on the basis of request of a minority member of the committee of creditors, where the rest of the members of the committee of creditors, were not keen on replacing the existing resolution professional.

1. In Guru Containers v. Jitendra Palande, (Company Appeal (AT) (Insolvency) No.106 of 2023), the NCLAT held that the creditors play a catalytic role in the resolution process and the fees of the insolvency professional could not be denied on the basis of lack of progress of the resolution process where such stalemate was account of non-participation by the management as well as the creditors. The NCLAT further held that in an event where the committee of creditors could not be constituted on account of non-receipt of any claim, including from the creditor on whose behest the CIRP was admitted, the CIRP expenses would have to be borne by the creditor whose application was admitted for initiating CIRP.

Similar duties of the committee of creditors in the functioning of the liquidation process was also noted by NCLAT in Pankaj Khetan v. Jammu & Kashmir Bank Limited, (Company Appeal (AT)(Insolvency) No. 515 of 2022).

2. In Shapporji Pallonji and Company Private Limited v. Kobra West Power Company, (Company Appeal (At) (Insolvency) No. 816 of 2019), the NCLAT, relying upon the Supreme Court’s order in the matter of Fourth Dimension Solutions v. Ricoh India Limited, dated January 21, 2022 allowed an operational creditor, whose claim was kept under verification by the resolution professional on account of pendency of arbitration proceeding, to continue such proceeding post approval of the resolution plan.

Such a decision, while supported by Supreme Court’s observation in the Fourth Dimension Solutions case goes against the clean slate theory central to the Code as well as to other prominent decisions including Ghanshyam Mishra, where continuation of proceedings post approval of the resolution plan was denied.

3. Overruling its decisions in Shailendra Sharma, Director of R&M International Private Limited v. Ercon Composites (Through IRP Mr. Nayana Premji Savala), (2021 SCC Online NCLAT 3), Sabari Inn Private Limited v. Rameesh Associates Private Limited, (2017 SCC Online NCLAT 350) and Mosmetro Story (FZE) v. BASF India Limited, (Company Appeals (AT) (Ins) No. 229 & 230 of 2017), a 3 judge bench of the NCLAT in Rajeev Srivastva v. Ahluwalia Contracts (India) Limited, (Company Appeal (AT) (Ins.) No. 976 of 2022), held that where an application has been transferred from the High Court to the Adjudicating Authority under Section 434(1)(c) of Companies Act, 2013, issuance of a fresh notice under Section 8 of the Code was not a mandatory requirement and could not be read as part of "submission of information", as provided in the first proviso to Rule 5 of Companies (Transfer of Pending Proceedings) Rules, 2016. Therefore, after a winding up proceeding was transferred via the Companies (Transfer of Pending Proceedings) Rules, 2016, due to the corporate debtor being unable to pay its debt, for treating the application under Section 9 of the Code, the operational creditor need not send a notice under Section 8 of the Code. The NCLAT further held that Section 434(c) of the Companies Act, 1956 allowed the tribunal to proceed with the proceedings from their stage before their transfer to the procedure under the Code.

4. The NCLAT, in Dharam Vir Malhotra v. Kaur Sain Spinners Limited, (Company Appeal (AT) (Insolvency No. 228 of 2021), NCLAT upheld the decision of the Adjudicating Authority rejecting the intervention application filed by a purported financial creditor, seeking intervention not on the ground that the Corporate Debtor defaulted in payment of amounts to them, but, on the ground that the original company petition filed was a malicious prosecution covered under Section 65 of the Code.

5. In Sanjai Kumar Gupta v. Gouri Prasad Goenka, (Company Appeal (AT) (Insolvency) No.70 of 2023), the NCLAT observed that prosecution under Section 236 of the Code, ‘is a different aspect of running CIRP’ and the mere fact that in an earlier application filed by resolution professional, liberty was granted only to file prosecution, does not preclude the Adjudicating Authority to consider a subsequent Application filed by the resolution professional due to continued non-cooperation by suspended directors.

6. In Rashi Peripherals Private Limited v. Savera Digital India Private Limited, (Company Appeal (AT)(Insolvency) No. 1153 of 2022), the NCLAT held that where the invoices basis which the Section 9 application was filed mentioned a due date which fell before the period covered under Section 10 A of the Code merely because some payment was made during the period covered under Section 10 A of the Code, could not attract the restrictions contained therein.

7. In D.P. Industries v. Deepak Thukral, (Company Appeal (AT) (Insolvency) No.143 of 2023 & I.A. No. 562 of 2023), while rejecting the application of the operational creditor requesting for a copy of the approved resolution plan, the NCLAT allowed the operational creditor to file an application before the Adjudicating Authority for seeking inspection of the resolution plan.

8. In Gouri Shankar Chatterjee v. State Bank of India, (Company Appeal (AT) (Ins) No. 695-696 of 2021), the NCLAT held that mere pendency of a proceeding before the high court challenging the legality of declaration of NPA by the financial creditor, does not bar admission of a Section 7 application filed by the same financial creditor, specially where the debts owed to the financial creditor are acknowledged in the balance sheet of the corporate debtor.

9. The NCLAT, in Indian Overseas Bank v. Ramesh Chandra Swain, (Company Appeal (AT) (Ins.) No. 534 of 2022), held that, even where the financial creditors were directly not party to an application filed by the resolution professional seeking avoidance of certain preferential transactions, they have the loci to file an appeal against rejection of such application in the capacity of an ‘aggrieved persons’.

10. In K K Sarachandra Bose v. Sel Manufacturing Company Limited, (Company Appeal (AT) (Insolvency) No. 1068 of 2022), the NCLAT relied on Mr. Keshav Agrawal v. Abhijit Guhathakurta, (C.A. (AT) Ins. No. 610 of 2021) and Section 30(2)(e) read with the explanation provided in relation to it and reiterated that shareholders’ approval is not required for reduction of shares in furtherance to a resolution plan.

11. In Rajasthan State Mines & Minerals Limited v. Parag Sheth, (Company Appeal (AT) (Insolvency) No. 170 of 2023), the NCLAT held that, without issuing a notice to the suspended management and related parties of the corporate debtor, no directions could have been passed by the Adjudicating Authority directing the suspended management and related parties to cooperate with the resolution professional.

12. The NCLAT, in Jagdish Kumar Parulkar v. Vinod Agarwal, (Company Appeal (AT) (Insolvency) No.483 of 2022), held that the timeline of 135 days prescribed under Regulation 35-A of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 for filing an application in relation to preferential and fraudulent transactions is directory and not mandatory. Non-compliance with such timelines will not render the application non-maintainable.

Further, it was held that, the following transactions conducted by the suspended management during the look back period were held to be preferential and fraudulent transactions:

(a)          repayment of personal loan;

(b)         transfer of funds for meeting emergent medical needs of an erstwhile director after a period of one year of the transfer;

(c)          reimbursement of business tour expenses where no documents were submitted for substantiating the expenditure; and

(d)         fraudulent sale of stocks and siphoning of funds.

1. In Chowgule SBD Private Limited v. Mr. Vijaykumar V. Iyer, Liquidator of Bharati Defence and Infrastructure Limited, (Company Appeal (AT)(Insolvency) No. 189 of 2023), the NCLAT held that, unlike in the context of an auction sale covered under Schedule 1 of the IBBI (Liquidation Process) Regulations, 2016, the Adjudicating Authority could not direct payment of interest in the context of a private sale. The NCLAT further held that even in a private sale, the beneficial provision contained under Section 32A(2) of the Code would be available.

2. In Pankaj Khetan v. Jammu & Kashmir Bank Limited, (Company Appeal (AT)(Insolvency) No. 515 of 2022), the NCLAT rejected the claim of a resolution professional who had claimed the same fees as that of the resolution professional while acting as a custodian of the corporate debtor in absence of a liquidator being appointed, noting that the matrix for evaluating the reasonability of fees of a resolution professional and that of a liquidator is different as their duties are different.

1. In Nirej Vadakkedathu Paul v. Sunstar Hotel and Estates Private Limited, (Company Appeal (AT) (CH) (Ins.) No. 142 of 2022 & I.A. Nos. 328,329,517 and 518 of 2022), the NCLAT upheld the decision of the Adjudicating Authority rejecting the right of a shareholder to seek intervention in a Section 7 application filed by a financial creditor.

Interestingly, the NCLAT also went on to observe that an appeal against admission of CIRP is not maintainable on behalf of shareholders. Such an observation may be questionable specially in view of the earlier precedents where appeal filed by the shareholders were entertained including in the case of Ashish Gupta v. Delagua Health India Private Limited, (Company Appeal (AT) (Ins.) No. 17 of 2022), which was covered in our earlier IBC round-up (available here).

2. In Primee Silicones (Chennai) Private Limited v. UCAL Fuel Systems Limited, (Company Appeal (AT) (CH) (Ins.) No. 299 of 2021), the NCLAT placed reliance on Wilsons Jacobs v. Lucid Prints, (2018 SCC OnLine BOM 1998), wherein it was held that for an account to be termed as a ‘running account’, it must be demonstrated that there are simultaneous or regular debit and credit entries and the balances are struck out with some periodicity, and held that an account cannot be termed as a running account where amounts are paid towards specific invoices.

Further, the NCLAT held that: (a) a cheque which has not been encashed; and (b) the emails which are in the nature of payment advice, does not construe as ‘acknowledgement of liability’ in terms of Section 18 of the Limitation Act, 1963.

It may be pertinent to note that there is a line of cases which advocates the proposition that once a cheque has been issued, the mere fact of such issuance constitutes an acknowledgement and whether or not the same was encashed or not is irrelevant. To that extent, the observation of the NCLAT holding that an encashed cheque does not constitute an acknowledgement may not be free from doubt.

Arka Majumdar is a Partner; Adhip Ray, Juhi Wadhwani and Vikram Chaudhuri are Associates at Argus Partners.