NCLAT Fortnightly: Important orders on IBC (February 16 – February 29, 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 16, 2024 to February 29, 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 and Miscellaneous.

1. In Surendra Kanhaiyalal Shah v. Magicon Impex Private Limited (Company Appeal (AT) (Insolvency) No. 1326 of 2023), a Section 7 petition was filed by a creditor based on the amount outstanding towards an interest-bearing refundable security deposit and a sales commission of one percent per month on monthly sales turnover, which was dismissed by the Adjudicating Authority. While upholding the decision of the Adjudicating Authority, the NCLAT did not interfere with the decision of the Adjudicating Authority to treat the interest bearing refundable security deposit as a financial debt, nor did it interfere with the finding that the amount payable towards commission on sale would not be treated as financial debt due to the absence of disbursement against consideration for time value of money as well as such commission not carrying the implications of commercial effect of borrowing. Finally, the NCLAT imposed a cost of one lakh rupees on the appellant for misusing the provisions of the Code to resolve a contractual dispute.

2. The NCLAT, in Gokul Kripa Colonizers and Developers Private Limited v. Radiant Hotels Private Limited (Company Appeal (AT) (Insolvency) No. 837 of 2022) held that where a transaction is essentially in the form of an arrangement to sell, market, promote and bring prospective allottees to a real estate project, the obligation to pay money under such an agreement of sale would not qualify as a financial debt due to the absence of disbursement for time value of money.

3. In Naman Infradevelopers Private Limited v. Metcalfe Properties Private Limited (COMPANY APPEAL (AT)(INS) No.74 of 2024), the NCLAT held that where the payment of advance for a purchase of residential plots has been made as a speculative investment, a Section 7 application to recover such advance would not lie, as a speculative investor cannot claim the status and benefits as a financial creditor under explanation (i) of Section 5(8)(f) of the Code.

1. In Jaitnder Pal Singh Hanjra v. Vivek Raheja, RP of J.P. Engineers Private Limited (Company Appeal (AT) (Insolvency) No. 1611 of 2023), the NCLAT observed that while maximization of the value of the corporate debtor is an object of the CIRP, the said maximization has to be achieved within the timeline provided under the Code. In furtherance of the aforesaid observation, the NCLAT observed that where the Committee of Creditors (CoC) had, taking into account that Form G had been issued multiple times till that point, refused to issue fresh Form G, the Adjudicating Authority could not have disregarded the commercial wisdom of the CoC to impose the requirement of issuing a fresh Form G as a condition precedent to the consideration of the sole resolution plan.

2. In Joinup Corporation v. R.Sugumaran (Company Appeal (AT) (CH) (Insolvency) No. 51/2023 (IA Nos. 175, 176, 177 & 178 and 413 / 2023), the Chennai bench of the NCLAT refused to allow the withdrawal of the CIRP based on the settlement proposal approved by the CoC, solely on account of the withdrawal application having not been made by the applicant creditor, based whose application the CIRP was admitted.

Whilst the decision cannot be faulted if one strictly goes by the literal interpretation of the statutory provisions contained under Section 12A of the Code, in our view such an approach should have been eschewed in favour of a more purposive interpretation. For instance, in this case, the withdrawal application was not allowed as the operational creditor had refused to sign the Form FA. If one considers that once the CoC is formed, the withdrawal requires the approval of at least 90 percent of voting in favour of such withdrawal, the effect of the literal interpretation is to make the entire process subject to the whims and fancies of one creditor who, in this instance being an operational creditor, was not even a part of the CoC. Considering that after admission, the CIRP transforms to an action in rem, the refusal of the bench to accept the commercial decision of the CoC, in favour of a technical and procedural requirement, appears to frustrate the scheme of the legislation.

3. In Kiran Martin Gulla (Company Appeal (At)((Ch)(Ins) No. 450/2023), the Chennai bench of the NCLAT observed that a period of pendency of proceeding is a ground to seek the exclusion of period when calculating the CIRP period and when an extension is granted to complete the CIRP, such period would be counted from the date on which the Adjudicating Authority passed the order for such an extension and not run retrospectively from the expiry of the CIRP period.

4. In One City Infrastructure Private Limited v. Pratham Expofab Private Limited (Company Appeal (AT) (Insolvency) No.287 of 2024), the NCLAT noted that where a resolution plan has been approved by the CoC and is pending for the approval of the Adjudicating Authority, the Adjudicating Authority could not have directed the consideration of a fresh settlement proposal (by an ex-director of the corporate debtor) without giving the successful resolution applicant an opportunity to be heard.

5. In CL Sharma v. Bank of Maharashtra (Company Appeal (AT) (Insolvency) No. 316 of 2024), the NCLAT held that as there is no adjudication contemplated at a stage when the resolution professional is appointed under Section 97(5) of the Code in relation to the initiation of the insolvency resolution process against personal guarantor, the Adjudicating Authority is not required to consider an issue pertaining to a jurisdictional fact, including the limitation aspect at that stage.

The NCLAT further held that whether a debt is time barred or not is a related question under Sections 94 and 95 of the Code and that the resolution professional, while recommending the admission or rejection of a Section 95 application, is entitled to give his recommendation as to whether a debt is time barred or not or whether any other jurisdictional fact is lacking in the application or if all jurisdictional facts have been fulfilled by the applicant.

The NCLAT further held that the question of adjudication of issues between the parties arises only at the stage of Section 100 and that the resolution professional’s role is limited to submitting a report and does not extend to him performing any adjudicatory function or making administrative decisions.

6. In Jaiprakash Associates Limited v. Jaypee Infratech Limited (Company Appeal (AT) (Insolvency) No. 548 of 2023 & I.A. No. 2643, 3702 of 2023), the NCLAT held that an erstwhile managing director of the corporate debtor and personal guarantors of loans given to the corporate debtor has the locus to challenge the approval of a resolution plan.

In the same case, the NCLAT rejected a challenge by the personal guarantor, who had challenged the extinguishment of the right of subrogation by noting that even where the debt against the corporate debtor has extinguished after the approval of the plan, such extinguishment shall not be with regard to the guarantors of the corporate debtor, who would be treated as per the express provisions under the plan.

The NCLAT further noted that the denial of certain reliefs and concessions by the Adjudicating Authority does not imply that the resolution plan is in violation of law, nor does such denial have any adverse effect on the validity of the resolution plan, nor can it be said that any illegality has been crept on such resolution plan on the above ground.

Finally, the NCLAT observed that intervenors are either to support the order which is the subject matter of challenge or support the appellant in their challenge, but cannot claim any relief for themselves.

7. In Mayank Goyal v. G. Madhusudhan Rao (Company Appeal (AT) (Insolvency) No. 147 & 148 of 2024), the NCLAT held that the CoC is empowered under Section 33(2) to liquidate the corporate debtor any time after its constitution and before confirmation of the resolution plan, including at any time before the preparation of the information memorandum.

While noting that the Adjudicating Authority cannot question the commercial wisdom of the CoC, the NCLAT held that the decision of the CoC to liquidate the corporate debtor cannot be challenged when no grounds under Section 61(4) of the Code have been made out.

8. In EBIX Singapore Pte. Limited v. Mahendra Singh Khandelwal (Company Appeal (AT) (Insolvency) No.167 of 2024), the NCLAT held that a successful resolution applicant cannot seek withdrawal from obligations under the approved resolution plan on the ground that there was a delay in the approval of the resolution plan by the Adjudicating Authority.

While noting the limited jurisdiction of the Adjudicating Authority to examine the commercial wisdom of the CoC, the NCLAT held that the Adjudicating Authority cannot be asked to undertake a feasibility and viability study of a resolution plan.

9. In Amit Tyagi v. Indirapuram Habitat Centre Private Limited (Company Appeal (AT) (Insolvency) No.272 of 2024), while noting that the rights of the allottees cannot be affected in the CIRP, the NCLAT noted that the allottees, cannot as a right claim the execution of a conveyance deed in their favor. The NCLAT further observed that the resolution professional has the sole prerogative to determine what part of the contract has to be carried out and what part of the contract cannot be carried out and that the home buyers cannot seek the issue of a direction akin to an order for allowing the specific performance of a contract.

10. In Ramesh Shah in consortium with Masitia Capital Services Private Limited v. Central Bank of India (Company Appeal (AT) (Insolvency) No. 1672-1673 of 2023), the NCLAT held that not having MSME status at the time of the commencement of CIRP proceedings does not disqualify the promoter of the corporate debtor from being a resolution applicant under Section 29A of the Code as long as the corporate debtor registers itself as a MSME before the submission of the resolution plan. The NCLAT further observed that the resolution professional is entitled to make an application for registering the corporate debtor as an MSME, as long as it is not inimical to the continued business operations of the corporate debtor.

While noting that questions related to MSME registration can only be dealt by the competent authority under the Micro, Small and Medium Enterprises Development Act, 2006, the NCLAT held that that the Adjudicating Authority does not have jurisdiction to hold an MSME registration certificate to be null and void on its own.

11. In Rare Asset Reconstruction Limited v. Avishek Gupta (Company Appeal (AT) (Insolvency) No. 1304 of 2023), the NCLAT held that while an assignee of a related party financial creditor is not ipso facto disqualified, if the assignment is with a fraudulent intent to vitiate the proceedings under the Code or when the assignee has been brought in for the sole purpose of participating in the CoC, such an assignee would also be subject to the disqualifications applicable to a related party of the corporate debtor as far as participation in the CoC is concerned.

The NCLAT further observed that as the resolution professional does not exercise any adjudicatory function and since his function is only to verify and collate the claim submitted by the creditors, he is not precluded from relying on any subsequent material which comes into his notice. Applying the aforesaid principle the NCLAT rejected a challenge raised by the appellant that the resolution professional could not supplement new reasons in support of his decision regarding identifying a creditor as a related party.

12. In Navayuga Engineering Company Limited v. Umesh Garg (Company Appeal (AT) (Insolvency) No.783 of 2023), the NCLAT held that the ineligibility mentioned under Section 29A to submit a resolution plan is not limited to only those persons who were in the management of the corporate debtor at the time when it was classified as a NPA, but also includes persons who are in the management and control of the affairs of the corporate debtor in the reasonably proximate point of time before the submission of the resolution plan, as they were also guilty of managing the affairs of the corporate debtor in a manner so as avoid paying off the debts of the non performing assets.

13. In Indereshwar Singh Paul v. Mohit Chawla & Ors. (Company Appeal (AT) (Ins.) No.374 of 2024 & I.A. No. 1276 of 2024), the NCLAT held that assets which are under CIRP cannot be touched to be included in any OTS proposal and that any such proposal which is based on the sale of the assets of the corporate debtor would not qualify as a proposal for consideration by the CoC.

14. The NCLAT, in Shrinivas Spintex Private Limited v. Hinganghat Infrastructure Private Limited (Company Appeal (AT) (Ins.) No.376 of 2024), observed that while opening of the resolution plan by the resolution professional is essential for the further process in the CIRP, there is no provision of law which requires a resolution professional to open the resolution plan only in the presence of CoC and the prospective resolution applicant.

15. The NCLAT, in Ramesh Singh Rawat v. SPG Global Distribution Private Limited (Company Appeal (AT) (Insolvency) No. 872 of 2023) held that the Adjudicating Authority has jurisdiction under Section 60(5) of the Code to determine the title of the property of the corporate debtor and to ascertain whether the property belongs to the corporate debtor or a third party.

1. In E.M. Najeeb Ellias Mohammed v. Union Bank of India (Company Appeal (At)(Ch.)(Ins.) No. 08 of 2024), the NCLAT held that an acknowledgement of a liability made by the principal borrower also extends the limitation period vis-à-vis a guarantor.

2. In Vijay Saini v. Devender Singh (Comp. App. (AT) (Ins.) No. 1194 of 2023 & I.A. No. 4200 of 2023), the NCLAT observed that for computing voting share on a Section 12A proposal, the vote of the home buyers who are financial creditors in class need not be computed by following the method under Section 25A(3A) of the Code. Rather such share needs to be calculated by taking into account the vote of each home buyer as per his voting share and by then adding all such vote shares of the creditor in class with other financial creditors.

The NCLAT further held that where the Adjudicating Authority has rejected the voting summary and opinion provided by the resolution professional, such resolution professional is an aggrieved person to have locus to maintain an appeal against such a decision.

3. In Laxmi Trading Corporation v. Hindustan Construction Company Limited (Company Appeal (AT) (Insolvency) No. 1476 of 2023), the NCLAT, while rejecting the contention of the applicant that the operational creditor had a running account with the corporate debtor and would be covered under Article 1 of the Limitation Act, 1963, reiterated that an application under Section 9 of the Code would be governed by Article 137 of the Limitation Act.

Further, the NCLAT observed that acknowledgements sent after the expiry of limitation does not extend the limitation period. 

4. The NCLAT, in Mayur Ratilal Suchak & Anr. v. Birendra Kumar Agarwal (I.A. No. 85 of 2024 in Company Appeal (AT) (Insolvency) No. 25 of 2024) held that when an order is dictated in an open court in the presence of the counsel, the limitation period shall commence from the date of the order and not from the date when the order is uploaded.

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