Bar & Bench Weekly IBC Diary #2: Liquidator can sell corporate debtor as a going concern, CoC Code of Conduct and more

The Bar & Bench Weekly IBC Diary aims to report crucial rulings of various courts and tribunals and important updates concerning the Insolvency & Bankruptcy Code (IBC), 2016.

1. SM Milkose Limited & Anr v. Parvinder Kumar Bhatt & Ors. (NCLAT, Delhi)

Issue involved:

Whether any amounts received by the corporate debtor during the currency of the Corporate Insolvency Resolution Process (CIRP) can be adjusted towards the claim of any particular financial creditor during the moratorium period imposed under Section 14 of the IBC?

Provisions:

Section 14, IBC

Decision:

Section 14(1)(b) prohibits transferring, encumbering, alienating or disposing of by the corporate debtor, any of its assets or any legal right or beneficial interest therein. The amounts received by the corporate debtor during the currency of the CIRP are assets of the corporate debtor whose transfer to a chosen creditor on priority without the process of Resolution Plan would be prohibited. The National Company Law Appellate Tribunal (NCLAT) relied on its own ruling in the case of UCO Bank v. G Ramachandran, which held that once CIRP has been initiated, a bank could not have adjusted its own claims from the assets.

Quick Analysis:

The decision re-affirms the intention of moratorium under Section 14 and serves as a rebuke to financial creditors who adjust the accruals of the corporate debtors towards their own claims. Such out of turn adjustments in priority also violates the waterfall mechanism under Section 53 as well as inter-se status with other equally situated creditors. It is interesting to note that on this issue, the Insolvency and Bankruptcy Board of India (IBBI) recently floated a discussion paper envisaging a code of conduct for the Committee of Creditors (CoC).

One of the conducts highlighted in the paper is with respect to financial creditors recovering their debts during the moratorium from the corporate debtor’s account. IBBI has deprecated such practices. It is hoped that with the formalisation of a code of conduct and this decision of NCLAT as a precedent, such practices will be discouraged.

2. Vinod Sehwag v. Siemens Financial Services Pvt. Ltd. & Anr. (NCLAT, Delhi)

Issue involved:

Whether the Adjudicating Authority can give a finding of default while appointing a resolution professional to give a report on acceptance or rejection of the application filed against a personal guarantor under Section 95? Further, whether personal guarantor is required to be heard prior to such a direction?

Provisions:

Section 95, 97, 99, 100, IBC

Decision:

The stage for considering ‘default’ would arrive when the matter is taken up under Section 100 of IBC after submission of report from the resolution professional. If the Adjudicating Authority gives such a finding in advance, the resolution professional’s report under Section 99 would only be a formality. Further, only a limited notice of the application should be given to the personal guarantors of the corporate debtors, only to secure their presence referring to the interim moratorium which has commenced.

Quick Analysis:

This is an important decision that clarifies the role of the Adjudicating Authority at the stage when it is considering the application filed under Section 95 against the personal guarantor. This stage is akin to a ‘first motion’ wherein the issues cannot be pre-judged without calling for a report from the resolution professional. It is only on the basis of the report and after hearing the personal guarantor, that the Adjudicating Authority can decide whether any default has taken place or not. This decision also clarifies that no personal hearing as such is contemplated prior to the appointment of a resolution professional and no disputes on merits by the personal guarantor can be allowed at the preliminary stage.

3. Nitin Chandrakant Naik & Anr v. Sanidhya Industries LLP & Ors (NCLAT, Delhi)

Issue involved:

Whether the assets of a personal guarantor can be transferred or dealt with under a resolution plan for the corporate debtor?

Provisions:

Section 30, 31, IBC

Decision:

No provision can be made under the resolution plan of the corporate debtor to consume property of the personal guarantor without recourse to appropriate proceedings. Personal properties of the personal guarantor cannot be realised by sale/transfer etc in the CIRP of the corporate debtor.

Quick Analysis:

The assets of the corporate debtor and those of the personal guarantor are different. The CIRP provisions in relation to the corporate debtor deal with the assets of the corporate debtor alone. The resolution plan is also premised on the same provisions. The lenders or the resolution applicant cannot be allowed to take a short cut and realise the assets of the personal guarantor without initiating proceedings under the appropriate law.

This decision extends the principle of law enunciated by the Supreme Court in the case of State Bank of India v. V Ramakrishnan & Anr where it was held that moratorium under Section 14 of the IBC during CIRP did not apply to personal guarantors. The properties of the personal guarantor can only be dealt with under appropriate provisions of the IBC relating to personal guarantors and not through a CIRP of the corporate debtor. Observations of the Supreme Court in the recent decision of Lalit Kumar Jain v. Union of India are also useful.

4. Maitreya Doshi v. Anand Rathi Global Finance Ltd & Anr. (NCLAT, Delhi)

Issue involved:

Whether IBC prohibits filing of applications by a creditor against two co-borrowers/corporate debtors for the same debt & default?

Provisions:

Section 7, 60, IBC

Decision:

IBC does not have any aversion to more than one proceeding against different debtors even if they are arising out of one debt and one default. Recovery of debt in one of the proceedings can always be taken note of and set off in the other proceeding so that the co-borrowers are not put to disadvantage.

Quick Analysis:

This is an interesting decision which permits filing of Section 7 applications by a financial creditor against not only the principal borrower, but also its co-borrower in respect of the same debt. A co-borrower is as much a borrower like the other entity and is fully liable to repay the loan taken. The stand of the lender would be fortified more in case of a joint and several liability clause under the contract.

The NCLAT has relied on Sections 60(2) and 60(3), which provide that in case of a personal guarantor, the same Adjudicating Authority before which the corporate debtor’s CIRP is pending, will have the jurisdiction. The same principle has been extended to a co-borrower as well. Practically, there may be difficulties in collation of claims and deciding the voting share of the CoC, as the CIRP of one borrower will have an impact on the CIRP of the co-borrower’s CIRP. This aspect has not been discussed in the decision.

5. Mohan Gems & Jewels Private Limited v. Vijay Verma & Anr. (NCLAT, Delhi)

Issue involved:

Whether the liquidator is authorized to sell the ‘corporate debtor’ as a going concern under the IBC?

Provisions:

Regulation 32, 32A, 39C, 45, IBBI (Liquidation Process) Regulations, 2016

Decision:

As per Regulation 39C of the CIRP Regulations, the CoC may recommend that the liquidator may first explore the sale of the corporate debtor or its business as a going concern. It would be contrary to law to observe that closure of liquidation proceedings cannot be done and only dissolution is provided for under the Code. There is no provision in the Code which prohibits the closure of the liquidation process in the event the corporate debtor is sold as a going concern

Quick Analysis:

This decision furthers the object of the IBC and follows several judicial precedents which have held that liquidation should be the last resort only if the resolution plan submitted is not up to the mark. Even in liquidation, the liquidator can sell the business of the corporate debtor as a ‘going concern’. The decision relies on the subsequent amendment to the regulations which have specifically provided for sale of corporate debtor as a going concern. This ensures maximisation of assets and also ensures that the employees remain in employment, keeping the goodwill intact.

The author is a dually qualified professional. He is a Fellow Chartered Accountant and practices law in the courts of Delhi. He can be reached at mail@deepakjoshi.in