NCLAT Fortnightly: Important orders on IBC (May 1 – May 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 May 1, 2024 to May 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, Post-CIRP, Liquidation stage and Miscellaneous.

1. In Sanam Fashion & Design Exchange Ltd. v. Ktex Nonwovens Private Limited (Company Appeal (AT) (Ins.) No. 1234 of 2023), the NCLAT noted that to establish a debt as an operational debt in terms of Section 5(21) of the Code, the operation debtor is only required to prove that the claim bears some nexus with a provision of goods or services and the description of supplier or receiver is irrelevant. It was also noted that where there was a clear nexus between the amount paid and the supply, the amount paid as an advance would also qualify as an operational debt.

2. In Optinova AB v. Bio-Med Health Care Products Private Limited (Company Appeal (AT) (Insolvency) No. 1359 of 2022), the NCLAT held that before admitting Section 9 application, what needs to be examined is whether the dispute was existing inter-se the two parties, that is, the corporate debtor and the operational creditor; and not with any third party. Based on this, the NCLAT held that where the cyber-fraud was committed by a third party, without any involvement of the operational creditor, such cyber fraud and the related police complaint could not constitute evidence of a pre-existing dispute inter se between the operational creditor and corporate debtor, for denying admission of a Section 9 application. It was further observed that where a payment which was owed to the operational creditor was made to a third party on account of cyber fraud, the same would not discharge the obligation of the corporate debtor owed to the creditor.

3. In Fedex Express Transportation and Supply Chain Services (India) Private Limited vs. Zipker Online Services (Comp. App. (AT) (Ins) No. 1498 of 2023), the NCLAT overruled its earlier judgements in Hemang Phophalia Vs.The Greater Bombay Co-Operative Bank Ltd. & Anr and Elektrans Shipping Pte. Ltd. Vs. Pierre D’Silva, and observed that although a recovery is allowed against a company whose name has been struck off, as the CIRP proceeding is not a recovery proceeding, the CIRP under the Code cannot be initiated against a corporate debtor whose name has been already struck off by the Registrar of Companies, as upon striking off the name, the entity ceases to be a company and by that logic, a corporate person. 

4. In Virigineni Anjaiah v. Pridhvi Asset Reconstruction and Securitization Company Limited (Company Appeal (AT) (CH) (Ins) No.224/2022), the NCLAT refused to interfere with the orders of the Adjudicating Authority allowing the admission of a Section 7 application by an assignee of a decree holder by observing that the claim arising out of a recovery certificate issued by the DRT would be ‘financial debt’ and would give rise to a fresh period of limitation. It was further observed that a pendency of appeal against such a decree does not bar a Section 7 admission based on the same.

5. The NCLAT in R.B. Singh v. Rashmi Cement Limited (Company Appeal (AT) (Insolvency) No. 1187 of 2023), held that where the dues specified in the Section 8 demand notice as well as in an application filed under Section 9 is entirely paid by the corporate debtor, the operational creditor cannot seek the initiation of CIRP by raising claims of GST refund/ ITC claim, which although admitted by the corporate debtor, were not a part of the demand notice or Form 5 of the Section 9 application.

In this case, the NCLAT also deprecated the action of the Adjudicating Authority for failing to consider the fact of repayment of the entire claimed amount, after the order was reserved but before the admission order was passed, although the fact of such repayment had been brought to the attention of the Adjudicating Authority.

6. In Maneesh Kumar Singh v. State Bank of India (Company Appeal (AT) (Insolvency) No.1484 of 2023), the NCLAT held that a Section 7 application filed on the basis of a breach of a OTS Proposal given during the Section 10A period is not hit by the prohibition contained in the Section 10A period where the original default pertained to a period prior to the commencement of Section 10A.

The NCLAT further held that the OTS proposal submitted by the corporate debtor constitutes an acknowledgement of debt and the benefit of Section 18 of the Limitation Act, 1963 would be available to the financial creditor.

7. In Shrenik Ashokbhai Morakhia v. Reliance Asset Reconstruction Company Limited (Company Appeal (AT) (Insolvency) No.719 of 2024), the NCLAT, while rejecting a challenge to an application filed by a financial creditor for the initiation of insolvency resolution proceedings against a personal guarantor, through a resolution profession observed that Section 95(1) of the Code permits a creditor to file an application for initiating the CIRP through a resolution professional and such application is not defective. It was further observed that a personal guarantor cannot question the assignment of a debt of an original financial creditor if based on the same assignment, the CIRP against the corporate debtor had already been initiated.

8. The NCLAT in Grand Developers Private Limited v. Nitin Batra & Ors. (Company Appeal (AT) (Insolvency) No. 899 of 2024), held that the pendency of a scheme involving the corporate debtor under Section 230 of the Companies Act, 2013 cannot be a ground to deny the admission of a Section 7 application against such corporate debtor.

9. In Metamorphosis Trading LLP v. Sankalp Engineering and Services Private Limited (Company Appeal (AT) (Insolvency) No. 719 of 2024), the NCLAT held that for any debt to qualify as a financial debt, the debt along with interest, if any, should have been disbursed against the consideration for the time value of money and the component of interest is not a sine qua non for the debt to qualify as a financial debt.

The NCLAT further held that for a creditor to qualify as a financial creditor under Section 5(7) of Code, there must be a financial debt which is owed to that person and such a person can either be the principal creditor to whom the financial debt is owed or may be a legal assignee to whom such debt has been transferred.

The NCLAT also held that an assignee steps into the shoes of the assignor and the rights of the assignee are no better than that of the assignor. Hence, if the amount assigned has been termed as trade receivable in the deed of assignment, such amount cannot be viewed as a loan, particularly when there is no contract or agreement recording the advance of any loan. It was also observed that for the admission of a Section 7 application, the financial creditor needs to establish the debt in clear, precise and specific terms.

1. In Anand Sonbhadra v. Gulshan Sehti (Comp. App. (AT) (Ins) No. 810 of 2021), the NCLAT noted that, any amount received from an allotee in a real estate project, whether or not such allottee is a genuine homebuyer or a speculative investor, would constitute a financial debt for the purpose of verification or collation of the claims by the resolution professional. It was further observed that the distinction between a genuine homebuyer and a speculative investor is relevant only at the stage of admission of a Section 7 application to determine the date of default and threshold but has no application in the context of admission of claims as the CIRP against the corporate debtor has already been initiated.

It was further observed a resolution professional cannot deny admission of a claim based on a settlement agreement which was executed by the directors of the corporate debtor, who at the time of such execution of the settlement agreement were disqualified. It was observed that the allottees would be entitled to invoke the doctrine of indoor management for establishing the maintainability of such a claim.

2. In West Coast Paper Mills Ltd. v. Bijay Murmuria (Company Appeal (AT) (Ins.) No. 1272 of 2019), the NCLAT upheld a decision of the Adjudicating Authority and the CoC which differentiated a related party unsecured creditor from secured financial creditors, by observing that the Code does not mandate a related party to be paid on parity with a unrelated party. The NCLAT observed that any prohibition of differential payment to different class of creditors in the resolution plan is ultimately subject to the commercial wisdom of the CoC and that no fault can be attached to the resolution plan merely for not making provisions for a related party, so long as provision of the Code and Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 are met.

3. In Sarda Energy and Minerals Limited v. Ashish Arjunkumar Rathi (Company Appeal (AT) (Insolvency) No. 1395 – 1397 of 2023), the NCLAT held that an order of Adjudicating Authority, which considered materials subsequent to the closing of hearing, without giving an opportunity to the other side to address the issues raised, is not sustainable on account of breach of natural justice.

The NCLAT further held that the Adjudicating Authority may interfere with the approved resolution plan when there is serious error in the decision-making process, which prevents the CoC from exercising the commercial wisdom. In this regard, the NCLAT considered as to when a decision would be deemed to be perverse, and observed that a minor infraction of procedural or any other similar reasons are not sufficient to term a decision as perverse.

4. In Kashi Viswanathan Sivaraman v. New Okhla Industrial Development Authority (Company Appeal (AT) (Insolvency) No. 574 of 2024), the New Okhla Industrial Development Authority (NOIDA) had filed an application for the exclusion of a plot from the resolution plan to be implemented, on the grounds that the lease of such plot held by the corporate debtor was cancelled before the initiation of the CIRP. Allowing such a contention,  the NCLAT observed that the mere inaction on the part of the concerned authority to take back possession of the land and pendency of an application filed by the corporate debtor belatedly for the continuation of lease, would not make the leasehold property an asset of the corporate debtor, where no lease rent was paid nor any permission was taken for the continuation of the lease.

The NCLAT further observed where the corporate debtor had obtained a registration under RERA on the basis of an incorrect declaration on the nature of right it had over the leasehold property, it would not confer any right over the property where the lease had already been terminated.

5. In Sharon Hills Residents Association v. K. Parameswaran Nair (Comp. App (AT) (CH) (INS) No. 192 of 2023) and a group of appeals, the NCLAT held that proviso to Section 12 of the Code, which allowed an extension of a period only once, does not bar the Adjudicating Authority from allowing further extension of time period notwithstanding the expiry of 330 (three hundred and thirty) days as well as a prior instance of extension being granted.

1. In our earlier round up, we had an occasion to discuss the decision of the NCLAT in Vikas Aggarwal v. Asian Colour Coated Ispat Limited (Comp. App. (AT) (Ins) No. 1104 of 2020), where the NCLAT had considered the effect of assignment (as opposed to extinguishment) of a debt under a resolution plan on the continuation of liability of the guarantor, and had observed that NCLAT had failed to take into consideration the decision of the High Court of Australia’s decision in Hutchens v. Deauville Investments Private Limited ([1986] 68 ALR 367) (“Hutchens”) and the decision of the Delhi High Court in Vineet Saraf v. Rural Electrification Corporation Limited (WP(C) 3293/2023, decision dated July 21, 2023) in arriving at the eventual conclusion that, such assignment does not discharge the guarantors.

In the recent decision rendered in the case of Vikram Babulal Sanghvi v. State Bank of India (Company Appeal (AT) (Insolvency) No. 742 of 2024), NCLAT has, however, addressed the criticism by considering both Hutchens and Vineet Saraf and distinguished the decisions by observing that in both the cases, the courts had only made a prima facie observation and had left the issue to be considered at a later period or by a different tribunal. Eventually, it relied upon the decision of the Supreme Court in Lalit Kumar Jain vs. Union of India & Ors., to reiterate its earlier decision that assignment of debt under resolution plan does not ipso facto discharge the liabilities of the personal guarantors and especially when in the instant case, the resolution plan itself contained a provision for retaining the right of invoking personal guarantees.

1. In Raghuram Hume Pipes Private Limited v. Pankaj Dhanuka and Anr. (Company Appeal (AT) (CH) (Ins) No. 240/2023), the NCLAT held that a member of the Stakeholder Consultation Committee (SCC) having a miniscule share and falling in the lower category in terms of distribution waterfall would not qualify as an aggrieved person to challenge an auction process, which is otherwise approved by the majority members of the SCC.

2. In Central Transmission Utility of India Limited v. Ashish Chhwacchria, RP, Essar Power Limited and Ors. (Comp. App. (AT) (Ins) No. 25 of 2022), the NCLAT upheld the resolution plan ascribing NIL value to the operational creditors and unsecured creditors on the basis of liquidation value.

In the same decision, the NCLAT also upheld the decision of the Resolution Professional to admit a contingent claim at a nominal value of Re. 1.

3. In Avil Menzes v. Abdul Qudduskhan and Ors. (Company Appeal (AT) (Insolvency) No. 263 of 2024), the NCLAT noted that for a cost relating to CIRP to qualify as CIRP costs, it is not solely dependent on whether the costs have arisen during the CIRP process but requires to meet the following criteria: (a) maintaining the corporate debtor as a going concern, (b) payment to suppliers of essential goods and services, and (c) direct relation to CIRP with approval from the CoC. Accordingly, in the instant case, expenses incurred for undertaking certain projects of the corporate debtor on the basis of an understanding that the same would be funded by the revenue generated from such projects, were held to be not forming part of the CIRP costs, despite being incurred during the CIRP process, on the basis that (i) the expenses were  not essential for maintain the corporate debtor’s going concern and (ii) the costs were not approved by the CoC. 

1. In Pawan Rajgaria v. Canara Bank (Company Appeal (AT) (Insolvency) No.386 of 2024), the NCLAT held that renewal of financial facilities does not extend the date of default and when such default had occurred outside Section 10A period, a CIRP application on the basis of such default is maintainable, even if the date of renewal falls within the Section 10A period.

2. In Royal India Corporation Limited v. Nandkishor Deshpande and Ors. (Company Appeal (AT) (Insolvency) No. 137/2021), the NCLAT held that a Section 66 application for the avoidance of fraudulent transactions is maintainable even against a third party who had engaged in fraudulent activities by making false entries in its account to reduce its liability towards the corporate debtor.

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