NCLAT Fortnightly: Important orders on IBC (January 1 – January 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 January 1, 2024 to January 15, 2024.

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

1. In Narendrabhai v. PNB Housing Finance Limited (Company Appeal (AT)(Insolvency) No. 1461 of 2023), the NCLAT held that adjustment of Fixed Deposit receipts (FDRs) against EMIs of a loan taken by corporate debtor would not disentitle financial creditor from initiating a Section 7 application, as such adjustment cannot be treated as automatic regularization of the loan account.

The NCLAT further noted that a one-time settlement (OTS) offer made on a “without prejudice” basis does not dilute the effect of acknowledgement of debt for the purpose of Section 18 of the Limitation Act, 1963.

2. In InStyle Fashion v. Aditya Birla Fashion and Retail Limited (Company Appeal (AT)(Insolvency) No. 1679 of 2023 & I.A. No. 6046 of 2023), the NCLAT held that seeking information for the purposes of asset and account reconciliation cannot be construed as admission of debt and liability on the part of the corporate debtor. 

The NCLAT further noted that on account of its summary jurisdiction, the Adjudicating Authority is not expected to undertake a detailed investigation pertaining to an allegation of forgery of signature.

3. In Kellton Tech Solutions Limited v. Actas Technologies Private Limited (Company Appeal (AT) (Insolvency) No.1569 of 2023 & I.A. No.5606 of 2023), the NCLAT held that a contractual dispute does not cease to be a dispute under Section 9 of the Code merely because the same has not been raised in accordance with the terms of the agreement.  The NCLAT further observed that the Adjudicating Authority is well within its rights to identify any pre-existing disputes, howsoever feeble it may be, based on the evidence available before it.

4. Distinguishing the Supreme Court decision in IFCI Limited v. Sutanu Sinha (Civil Appeal NO.4929/2023), where a compulsorily convertible debenture was held to not constitute financial debt, the NCLAT in Santosh Kumar v. ASK Trusteeship Services Private Limited (Company Appeal (AT) (Insolvency) No.1575 of 2023), relying upon its judgement in MAIF Investments India Pte. Limited vs. Ind Bharath Energy (Utkal) Limited, Company Appeal (AT) (Ins.) No.597 of 2018, reiterated that optionally convertible debentures (OCDs) are in nature of debt.

The NCLAT further held that a Section 7 application cannot be denied merely on the basis of the corporate debtor being a going concern or the applicant or the financial creditor filing the application being a related party of the corporate debtor.

5. The NCLAT, in Rajeev Kumar Jain v. Uno Minda Limited (Comp. App. (AT) (Ins.) No. 947 of 2022) which dealing with the issue of ascertaining the nature of debt, held that the term disbursal of funds in the definition of financial debt under Section 5(8) of the Code does not indicate that the disbursal is required to be made to the corporate debtor only. Any disbursal made on behalf of the corporate debtor or at the instructions of the corporate debtor may also tantamount to disbursal made to the corporate debtor if the beneficiary of such disbursal is the corporate debtor, the NCLAT said.

In furtherance of the aforesaid observation, the NCLAT held that financial assistance provided to the corporate debtor by supplying funds for purchase of raw material by the corporate debtor would amount to supplying funds for the working capital needs of the corporate debtor and, as such, would qualify as financial debt. It further observed that just because the financial assistance was given for the purchase of raw material, being goods, such financial assistance cannot be treated as operational debt and has to be treated as financial debt.

1. In Glamour India Private Limited v. Canara Bank (Comp. App. (AT) (Ins) No. 443 of 2023 & I.A. No. 1464 of 2023), the NCLAT held that where the OTS proposal offered by the corporate debtor was not honored by the corporate debtor, the resolution professional was not permitted to reject the claim of the financial creditor claiming the entire amount due as opposed to the settlement amount agreed under the OTS proposal.

The NCLAT went on to observe that the balance sheet of the corporate debtor reflects the total outstanding to the financial creditor. The resolution professional did not have any power to play the role of the Adjudicating Authority to restrict the claim of a financial creditor to a lower amount, the appellate tribunal added.

2. In Sandeep Gupta v. JM Financial Asset Reconstruction Company Limited (Company Appeal (AT) (Ins.) No. 1192 & 1193 of 2022 & I.A. No. 3897-3898, 3776-3777, 4512, 4520 of 2023), the NCLAT, while noting the difference in objective behind introduction of Section 12A and Section 29A of the Code, observed that the ineligibility criteria mentioned under Section 29A does not apply to the submission of a settlement proposal under Section 12A of the Code by the promoters of a corporate debtor.

The NCLAT further held that a Section 12A application cannot be arbitrarily rejected nor can the proposal be rejected based on the promoters arranging funds from third party resources. It also went on to observe that where the rejection of a Section 12A proposal is with an ulterior motive of requiring control over the assets of the corporate debtor, such rejection can be interfered with by the Adjudicating Authority.

3. In Arpan Maheshjumar Shah v. CoC of Omshri Devprocon Limited (Company Appeal (AT) (Insolvency) No. 08 of 2024), the NCLAT noted that where a resolution plan was approved without obtaining the valuation of the corporate debtor and without the verification of the claims of several creditors, such approval can be interfered with for having not been carried out in accordance with the procedure prescribed under the Code.

4. The NCLAT, in Jindal Power Limited v. Dhiren Shantilal Shah, RP of Tuticorin Coal Terminal Private Limited (Company Appeal (AT) (Insolvency) No. 1166-1167 of 2023), had the opportunity to consider whether a resolution plan submitted by a Prospective Resolution Applicant (PRA) whose name was not in the final list of resolution applicants in terms of Regulation 39(1-B) read with Regulation 36-B(7) of IBBI (CIRP) Regulations, 2016, could be considered for approval for the value maximization of the corporate debtor.

After reviewing the relevant statutory provisions, the NCLAT held that a plea of maximization of value cannot justify non-compliance with statutory provisions to allow entertaining unsolicited plans from someone whose name does not feature in the final list of prospective resolution applicants. It also went on to observe that if unsolicited resolution plans are allowed to be submitted at any stage, the CIRP process would be unending. The value maximization objective should be achieved by conducting CIRP in a time bound manner, the appellate tribunal said.

5. In another matter involving Union Bank of India v. Shailesh Verma (Company Appeal (AT) (Insolvency) No. 24 of 2024), the NCLAT again refused to allow the argument of possibility of maximization of assets of the corporate debtor as a ground to seek the recall of an order approving a resolution plan.

6. The NCLAT in, Sainik Industries Private Limited v. Ritesh Raghunal RP, Indian Sugar Manufacturing Company Limited (Company Appeal (AT) (Insolvency) No. 1614 of 2023), noted that a debt arising out of a supply transaction does not become a financial debt merely on the basis that the agreement provided for financial penalty upon a failure to supply or because the advance payment was secured by a pledge of shares.

7. In Vishram Narayan Panchpor (Resolution Professional of Blue Frog Media Private Limited) v. Committee of Creditors (Blue Frog Media Private Limited), the NCLAT noted that Section 29A of the Code does not per se make promoters and directors ineligible to submit a plan unless they are ineligible under clauses (a) to (g) of the aforesaid Section on the date of such submission. The mere fact that the appellant was a promoter and director would not make him ineligible to submit a resolution plan, the appellate tribunal added.

8. In Punjab National Bank v Sandwoods Infratech Projects (P) Limited (Company Appeal (AT) (Ins.) No. 1527 of 2023 & IA No. 5383 of 2023), the NCLAT held that a plan providing for the release of third party guarantees and collaterals and allowing the transfer of such securities by way of assignment does not breach the provisions of Section 30(2)(e) of the Code. It went on to observe that in terms of the scheme delineated under regulation 37(b) of the CIRP Regulations, if a claim is filed by a financial creditor and the claim of such financial creditor is part of the CIRP process, their security interest can very well be dealt with in the resolution plan and such treatment cannot be questioned on the basis that such assignment of securities would adversely affect the recovery proceedings from the guarantors and collateral securities of third parties.

9. The NCLAT, in Manav Investments and Trading Co. Ltd. v. Pratim Bayal & Ors (Company Appeal (AT) (Insolvency) No. 1501 of 2023), held that related parties are not entitled to any distribution under the resolution plan and cannot claim any discrimination with regard to the payments to unrelated unsecured financial creditors.

10. In Authum Investment and Infrastructure Limited v. Rajneesh Sharma (Company Appeal (AT) (Insolvency) No. 1072 of 2023), the NCLAT held that the CoC is the best judge to interpret the evaluation matrix and process documents to evaluate the NPV allocable to the prospective resolution applicants, while also observing that the highest NPV may not be the sole deciding factor for selecting a prospective resolution application. The NCLAT noted that an unsuccessful PRA cannot challenge the score granted as per the evaluation matrix prepared by the CoC.

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