NCLT/NCLAT should not sit in appeal over commercial wisdom of CoC to allow withdrawal of CIRP: Opines Supreme Court

The Supreme Court on June 03, 2022 in the matter of Vallal Rck v. M/s. Siva Industries And Holdings Limited And Ors. held that when 90% or more of the creditors decide that it will be in the interest of all the stake¬holders to permit Settlement Plan filed by promoter of the Corporate Debtor and withdraw Corporate Insolvency Resolution Process (“CIRP”) as per Section 12A of the Insolvency and Bankruptcy Code, 2016, (“IBC”) the adjudicating authority (“NCLT”) or the appellate authority (“NCLAT”) cannot sit in appeal over such commercial wisdom of Committee of Creditors (“CoC”).

In the instant matter, IDBI Bank Limited filed an application under Section 7 of the IBC seeking initiation of CIRP against M/s Siva Industries and Holdings Limited (“Corporate Debtor”). The application was admitted by the NCLT and CIRP was initiated. The Resolution Professional (“RP”) presented a resolution plan before the CoC which was not approved as it did not receive 66% votes, as per the requirement of the statue. The RP filed an application for initiating liquidation. Subsequently, Vallal Rck, the (“promoter of the Corporate Debtor”) filed a settlement application under Section 60(5) IBC to offer a one-time settlement plan. Thereafter, the CoC considered the Settlement plan in its meetings held between October and December, 2020. The final settlement proposal was submitted by the promoter and was considered by the CoC. Ultimately, the settlement plan was approved. Consequently, the RP filed an application seeking withdrawal of CIRP. However, the NCLT rejected the said application stating that the Settlement Plan was only a Business Restructuring Plan. Moreover, it initiated the liquidation process. The appeals filed before the NCLAT were dismissed.

The Supreme Court observed that the recommendation was made as the Committee reckoned that the intent of the IBC is to discourage individual actions for enforcement and settlement. In the light of the same, it had opined that the settlement may be reached amongst all creditors and the debtor, for the purpose of a withdrawal to be granted. Pursuant to the insertion of Section 12A in the IBC, Regulation 30A was added to the Regulations, 2016 which lays down the detailed procedure for withdrawal of application. It was further noted that in Swiss Ribbons Private Limited And Anr. v. Union of India And Ors., validity of Section 12A was upheld. Moreover, considering that a catena of judgments of the Apex Court had already held that commercial wisdom of CoC is not to be interfered with by NCLT and NCLAT, the Court held that the interference would be warranted only when the adjudicating authority or the appellate authority finds the decision of the CoC to be wholly capricious, arbitrary, irrational and de hors the provisions of the statute or the Rules.

Temporary unavailability of a member to sign the order not a ground for fresh hearing, if order was passed with consent of such member: NCLAT Delhi

The National Company Law Appellate Tribunal (“NCLAT”) principal bench on May 31, 2022 while adjudicating an appeal in Ashish Chandravandan Patel v. Axis Bank Ltd. & Anr, has held that an order passed with the consent of both members of an NCLT Bench but signed by only one of them due to temporary unavailability of the other member, does not require the matter to be designated as part-heard and be heard afresh.

In this matter, Axis Bank Ltd. filed a petition under Section 7 of the Insolvency and Bankruptcy Code, 2016 (“IBC”) seeking initiation of Corporate Insolvency Resolution Process (“CIRP”) against Cengres Tiles Ltd. (“Corporate Debtor”). The NCLT admitted the petition and initiated CIRP against the Corporate Debtor while clarifying that:

“The matters were heard almost in the month of March but orders could not be pronounced because Technical Member was not available. Technical Member will not be available for another couple of weeks, hence, matter cannot be kept pending for pronouncement because hearing was concluded almost a month ago. Hence orders are pronounced invoking Rules 151 of NCLT Rules, 2016 with consent of the other Member.”

The Suspended Board of Director of the Corporate Debtor filed an appeal before the NCLAT challenging the order over the ground that the pronouncement of the order is not in accordance with Rule 151 and 152 of the National Company Law Tribunal Rule, 2016 (“NCLT Rules”).

The NCLAT Bench observed that Rule 151(1) empowers any member of the bench to pronounce the order for and on behalf of the Bench. The bench observed that the impugned order clearly mentions that order was pronounced under Rule 151 of the NCLT Rules with ‘consent’ of the other member and hence, there was no error in the order. The bench held that as the reason for not signing the order by the technical member was not death, retirement or resignation; Rule 152(4) cannot be invoked, as the technical member was merely unavailable for a couple of weeks to sign the order and the pronouncement was made with his consent.

SARFAESI proceedings cannot be continued against corporate debtor once CIRP is admitted and moratorium is ordered: Observes Supreme Court

The Supreme Court on May 18, 2022 in the case of Indian Overseas Bank v. RCM Infrastructure Ltd observed that the proceedings under the SARFAESI Act cannot be continued once the Corporate Insolvency Resolution Process (“CIRP”) is initiated and the moratorium is ordered.

In this case, the Indian Overseas Bank (“the Bank”) had extended certain credit facilities to the Corporate Debtor. Eventually, SARFAESI proceedings were initiated against the Corporate Debtor. The Bank took symbolic possession of two secured assets mortgaged exclusively with it in exercise of powers conferred on it under Section 13(4) of the SARFAESI Act read with Rule 8 of the Security Interest (Enforcement) Rules, 2002. An E-¬auction notice came to be issued by the Bank to recover the public money availed by the Corporate Debtor. At this stage, the Corporate Debtor filed a petition under Section 10 of the IBC before NCLT. NCLT admitted the petition and a moratorium was also notified. But even thereafter, the Bank continued the auction proceedings and accepted the balance 75% of the bid amount and completed the sale. NCLT, allowing the application filed by Corporate Debtor, passed an order setting aside the sale. NCLAT dismissed the appeal filed by the Bank and therefore it approached the Apex Court.

The Court referred to Section 14 and 238 of the IBC and court observed-

“In view of the provisions of Section 14(1)(c) of the IBC, which have overriding effect over any other law, any action to foreclose, recover or enforce any security interest created by the Corporate Debtor in respect of its property including any action under the SARFAESI Act is prohibited. We are of the view that the appellant Bank could not have continued the proceedings under the SARFAESI Act once the CIRP was initiated and the moratorium was ordered.”

Section 18 Limitation Act Is Applicable To IBC Proceedings: Reiterates Supreme Court

The Supreme Court on May 18, 2022 in the case of State Bank of India v. Krishidhan Seeds Private Limited observed that the provisions of Section 18 of the Limitation Act are applicable to proceedings under the Insolvency and Bankruptcy Code, 2016 (“IBC”).

In the instant case, the NCLT rejected the application filed by the State Bank of India under Section 7 of the IBC for initiation of the Corporate Insolvency Resolution Process (“CIRP”) on the ground of limitation. It held that a statement contained in the balance sheet cannot be treated as an acknowledgement of liability under Section 18 of the Limitation Act, 1963. While upholding this order, the NCLAT held that recourse to Section 18 of the Limitation Act (effect of acknowledgment in writing) was not available.While considering the appeals filed against these orders, the Apex court bench noted that the judgments relied on by the NCLT and NCLAT has been specifically overruled by the Supreme Court.

Referring to Laxmi Pat Surana v. Union Bank of India (2021) 8 SCC 481, Asset Reconstruction Company (India) Limited v. Bishal Jaiswal (2021) 6 SCC 366, Sesh Nath Singh v. Baidyabati Sheoraphuli Coop. Bank Ltd. (2021) 7 SCC 313 and other judgments , the bench observed-

“(i) The provisions of Section 18 of the Limitation Act are not alien to and are applicable to proceedings under the IBC; and (ii) An acknowledgement in a balance sheet without a qualification can furnish a legitimate basis for determining as to whether the period of limitation would stand extended, so long as the acknowledgement was within a period of three years from the original date of default.”

Therefore, the bench allowed the appeal and restored the proceedings back to the NCLT for fresh adjudication.

Appeal to NCLAT shall be filed within a period of 30 days: Reiterates Supreme Court

The Supreme Court on May 12, 2022 in the case of Safire Technologies Pvt Ltd v. Regional Provident Fund Commissioner reiterates that an appeal against the order of NCLT shall be filed before the NCLAT within a period of 30 days and the appellate tribunal can only condone delay for a period of 15 days.

In the instant matter, the Corporate Insolvency Resolution Process (“CIRP”) of Maruti Koatsu Cylinders Limited was initiated by NCLT Ahmedabad vide its order. The Committee of Creditors approved the resolution plan and the same was approved by NCLT. Regional Provident fund commissioner (“RPFC”) filed its claim with the resolution professional which was not entertained by resolution professional and thereafter an appeal was filed by RPFC against the plan approval order, after a delay of 388 days. The appellant filed a civil appeal before the Supreme Court under Section 62 of Insolvency and Bankruptcy code, 2016 (“IBC”) against the order passed by NCLAT wherein it has issued notice in an appeal even when there was a delay of 388 days in filing the appeal before NCLAT.

The Supreme Court referred to the case of Kalpraj Dharamshi v. Kotak Mahindra Investment bank wherein it was held that an appeal shall be filed before NCLAT within a period of 30 days from the date of order passed by NCLT and held that-

“In view of the aforesaid judgment, we are of the considered view that the Appellate Tribunal committed an error in issuing notice in an appeal that was filed by Respondent No.1 with delay of 388 days”

It was further held that the case relied upon by RPFC pertains to Section 18 of the land acquisition act whereas the case pertains to Limitation prescribed under Section 61 of IBC.

Contract Act does not recognize sale of pledged goods by Pawnee to self: Opines Supreme Court

The Supreme Court on May 12, 2022 in the matter of PTC India Financial Services Ltd v. Venkateswarlu Kari and another held that the Indian Contract Act 1872 does not recognize the sale of the pledged goods by a pawnee to himself in the event of default of payment by the pawnor.

In the instant matter, one company (“MHPL”) pledged its shares with the appellant PTC India Financial Services Ltd (“PIFSL”) company as guarantee for a loan. After the pledge, those shares were registered with the depository with the appellant as the “beneficial owner”. The issue was whether such registration as “beneficial owner” of shares would amount to sale of shares. This question arose in the insolvency proceedings of the debtor company. When PIFSL raised a claim as a financial debtor, MHPL (the guarantor company which pledged the shares) objected. MHPL argued that the PIFSL has sold the pledged shares and has thereby realized its debts and therefore, it is MHPL which will step into the shoes of the financial creditor.

The Court noted that as per Section 176 of the Contract Act, in the event of default by the pawnor, the pawnee may bring a suit or sell the pledged items on giving the pawnor reasonable notice of the sale. As per Section 177, the pawnor has right to redeem the pledged goods before the actual sale of them. The Court further noted that a pawnee has only special rights over the pledged goods – to retain them as security for the debt- and no general rights over them.

Referring to various precedents, and analyzing the differences between “ownership”, “pledge” and “mortgage”, the bench observed-

“Several other High Courts have similarly opined and we agree that the Contract Act does not conceive of sale of the pawn to self and consequently, the pawnor’s right to redemption in terms of Section 177 of the Contract Act survives till ‘actual sale’.”

The Bench overruled the solitary judgment of the single judge of the Punjab and Haryana High Court Dhani Ram and Sons v. The Frontier Bank Ltd. and Another AIR 1962 P&H 321 and said that this decision proceeds on the incorrect understanding of precedents and is to be overruled.

Thus, the Court held that registration of the pawn, that is the dematerialised shares, in favour of PIFSL as the ‘beneficial owner’ does not have the effect of sale of shares by the pawnee. The pledge has not been discharged or satisfied either in full or in part. MHPL is entitled to redeem the pledge before the sale to a third party is made. The Court allowed the appeal of PIFSL and set aside the orders of the NCLT and NCLAT which held MHPL as a secured creditor of the corporate debtor.

Moratorium period can be excluded in computing limitation period in a Suit/Application by Corporate Debtor- Holds Supreme Court

The Supreme Court on May 11, 2022 in the matter of New Delhi Municipal Council v. Minosha India Limited held that the entire period during which the moratorium was in force in respect of corporate debtor can be excluded while computing the period of limitation for a suit or proceeding by the corporate debtor.

In this case, the appellant had approached the Apex Court challenging the Delhi High Court’s order allowing the application filed by respondent corporate debtor under Section 11(6) of the Arbitration and Conciliation Act 1996 (“the 1996 Act”). The issue raised in the appeal was whether Section 60(6) of the Insolvency and Bankruptcy Code (“IBC”) gives rise to a new lease of life to a proceeding at the instance of the corporate debtor on the basis of a moratorium which is put in place by virtue of the order passed under section 14 of the IBC and whether corporate debtor can take advantage of the same to bring the application in this case filed under Section 11(6) of the Arbitration Act? According to appellant, there is no warrant for exclusion of the period for a suit or proceeding by the corporate debtor.

The Court noted that Section 14 of IBC (moratorium) does not include an application under Section 11(6) of the 1996 Act by the corporate debtor or for that matter, any other proceeding by the corporate debtor against another party. Referring to the scheme of insolvency proceedings, the Bench observed:

“The words for which an order of Moratorium has been made under this part is intended to be the point of reference or the premise for the exclusion of the time for the purpose of computing the period of limitation. Besides being the point of reference and being the sine qua non for applying Section 60(6), it also specifies the period of time which will be excluded in computing of the period of limitation. In other words, present an order of Moratorium under Section 14, the entire period of the Moratorium is liable to be excluded in computing the period of limitation even in a suit or an application by a corporate debtor.”

Hence, Courts would not indulge in interpretation of a report of a body and when there is better material in the form of the Act itself available for interpretation. The Court held that if the words of a statute are not ambiguous, the scope of interpretation dwindles.

Committee of Creditors is competent to revise the approved fees of Resolution Professional– Observes NCLAT

National Company Law Appellate Tribunal (“NCLAT”) on May 08, 2022 in the matter of Kushwinder Singhal v. Reena Tiwari held that the Committee of Creditors (“CoC”) is fully competent to revise its earlier approved fees of the Resolution Professional (“RP”).

In the instant case, after the initiation of the Corporate Insolvency Resolution Process (“CIRP”) of Bestways Transport India Pvt Ltd. (“Bestways”), COC decided the fees to be paid to Mr. Kushwinder Singhal to function as the Resolution Professional of Bestways but later on the COC passed a resolution to replace Mr. Kushwinder Singhal and appoint Mr. Vijay Kumar Gupta as the RP of Bestways. Subsequently, an application was filed and NCLT vide its order directed the replacement of RP and also directed the reconstituted COC to decide the fees of erstwhile RP. Mr. Kushwinder Singhal was aggrieved by this order of NCLT, Chandigarh and appealed to the NCLAT.

NCLAT observed that the COC passed the resolution to remove the RP and a major portion of the fees claimed by the RP is for the costs which were incurred subsequent to resolution and therefore, it is appropriate to consider the CIRP cost by COC.

NCLAT observed-

“The entitlement of fee depends on several factors including the change of circumstances, the length of CIRP proceeding hence we are of the view that Regulation 12(3) proviso does not fetter the CoC to consider the fee and expenses.”

Hence, NCLAT held that COC is fully competent to revise the fees of RP even if it is already approved by the earlier COC.

Power of arbitral tribunal to award interest is discretionary & subject to agreement between parties- Opines Supreme Court

The Supreme Court on May 05, 2022 in the matter of Delhi Airport Metro Express Pvt. Ltd. v. Delhi Metro Rail Corporation held that the power of the arbitral tribunal to award interest is subject to an agreement between the parties to the contrary and the tribunal cannot award interest, if the parties have agreed otherwise.

In this case, the parties entered into a Concession Agreement wherein the respondent was to carry out certain civil works. A dispute arose between the parties which were referred to arbitration. The arbitrator partly allowed the claims of the appellant. The appellant filed for the execution of the award and sought future interest on the entire amount of the sum awarded by the arbitrator. The executing court rejected the contention of the appellant on the ground that the arbitrator allowed future interest only on the principal amount. Aggrieved by the order of the executing court rejecting its claim for future interest on the amount of interest awarded, the appellant preferred an appeal before the Supreme Court.

The Court reiterated that the arbitrator is empowered to allow future interest on the pendente lite interest. The Court held that the sum of the award would include both the principal amount and the interest component for the purpose of future interest. However, this power of the arbitrator is subject to an agreement between the parties.

The Court distinguished this case from the judgement in Hyder Consulting v. Governor, State of Orissa, (2015) 2 SCC 189, on the ground that in that case, the parties did not have an agreement, therefore, the court had no occasion to consider the effect of the words ‘unless otherwise agreed by the parties’ on the power of the arbitrator.

The Court further held that the power vested in the arbitrator is discretionary. The arbitrator can allow interest on any part of the claim. It further held that the tribunal can award interest for any period between the date on which the cause of action arose and the date on which the award is made or it may not award any interest at all. It further held that the arbitrator is well within its power to award any rate of interest as it deems reasonable.

The Court finally held that party-autonomy is the cornerstone of the A&C Act and the discretion available with the arbitrator would cease to have effect, if the parties have exercised their autonomy under Section 31(7)(a) of the A &C Act.

Mere suppression of information about criminal complaint filed against the employee before submission of employment application form, does not mean that employer can arbitrarily terminate employee from service- Observes Supreme Court

The Supreme Court on May 02, 2022 in the matter of Pawan Kumar v. Union of India observed that mere suppression of material/false information in a given case does not mean that the employer can arbitrarily discharge/terminate the employee from service.

In this case, the appellant was selected to the post of Constable in the Railway Protection Force (RPF). While he was undergoing training, he was discharged from service on the ground that he did not disclose that an FIR under Sections 148/149/323/506/356 IPC was registered against him and he was prosecuted in the said case. It was found that there was suppression of information/false declaration in the verification form. The High Court dismissed the writ petition filed by the appellant, and therefore he approached the Apex Court.

The Apex Court Bench noted –

“The criminal complaint/FIR in the present case was registered post submission of the application form. We have also taken into account the nature of the allegations made in the criminal case and that the matter was of trivial nature not involving moral turpitude. Further, the proceedings had ended in a clean acquittal.”

The Bench referring to the judgment in Avtar Singh v. Union of India and others, observed-

“The person who has suppressed the material information or has made false declaration indeed has no unfettered right of seeking appointment or continuity in service, but at least has a right not to be dealt with arbitrarily and power has to be judiciously exercised by the competent authority in a reasonable manner with objectivity having due regard to the facts of the case on hand.”

Observing this, the Bench directed to reinstate the appellant in service on the post of Constable.

Employers can’t dispute employees’ date of Birth at fag end of their service- Opines Supreme Court

The Supreme Court on April 21, 2022 in the matter of Shankar Lal v. Hindustan Copper Ltd and others set aside the decision of a Public Sector Undertaking, Hindustan Copper Ltd (“employer”) to reduce the Voluntary Retirement Scheme (“VRS”) benefits to an employee by altering his date of birth and held that the rule that employees cannot raise a dispute relating to date of birth at the fag end of their service is equally applicable to employers as well.

In this case, the employee’s stand was that his date of birth is September 21, 1949. However, the employer reckoned his date of birth as September 21, 1945 for computing the benefits of VRS. If the latter date, i.e. 21st September, 1949 was accepted by the employer to be his date of birth, his financial benefits from the said scheme would have been higher, as he would have had longer service tenure left. He approached the High Court challenging the company’s action. The High Court had held that there were no records to prove that his date of birth was in 1949. After being unsuccessful there, he approached the Supreme Court. The admitted position was that 21st September 1949 was recorded as his date of birth in his service book. This was opened in 1975. The appellant claimed that at the time of his voluntary retirement, he came to learn for the first time that his date of birth was being changed to 21st September 1945. The “Form B” in the records reflected the 1945 date of birth. The employer maintained that the entry in the service book was an error which was corrected later.

The Supreme Court noted-

“This is not a case where a workman is seeking to change his date of birth to his benefit at the end of his career. This is a case where the employer is altering the records at the end of the career of the workman to his detriment on taking unilateral decision that the date of birth specified in the appellant’s service book was erroneous, relying on a date disclosed in a statutory form.”

The Court also observed that the employer changed the date of birth without giving an opportunity of hearing to the employee. The Court added that VRS benefits are covered under the Right to Property under Article 300A of the Constitution of India.

Hence, the Hon’ble Court allowing the appeal, directed the employer to extend the benefits of VRS to the appellant treating his date of birth as 21st September 1949.Such benefits shall be extended to him within a period of four months, upon deducting therefrom the sum already paid to him. The differential amount shall carry simple interest at the rate of seven percent (7%) per annum to be computed from 3rd October 2002, being the date on which he was released from service, till the date of actual payment to him in terms of this judgement.

Corporate Insolvency Resolution Process (“CIRP”) can be initiated based on an unchallenged arbitral award- Observes NCLT Kolkata

The NCLT Kolkata Bench on April 20, 2022 in the matter of Viom Infra Ventures Ltd. v. Bahula Infotech Pvt. Ltd., while deciding a petition under Section 9 of the Insolvency and Bankruptcy Code, 2016 (“IBC”) held that CIRP can be initiated based on an arbitral award, if the said Award has not been challenged.

Bahula Infotech Pvt. Ltd (“Corporate Debtor”) was in process of entering into contracts with the Government Authorities in respect of the scheme of ‘Smart City and Data Centre Projects’, hence was in requirement of various types of equipments. Viom Infra Ventures Ltd. (“Operational Creditor”) agreed to provide equipments lying in its possession and also agreed to acquire certain equipments and provide them on monthly lease/rental basis to the Corporate Debtor. A Master Lease Agreement (‘Agreement‘) was executed between the parties. When disputes had arisen in terms of the Agreement, the matter was referred to arbitration. In 2021 the Operational Creditor issued a Demand Notice under Section 8 of the IBC to the Corporate Debtor for the remaining amount. Thereafter, a petition under Section 9 of the IBC was filed before the Adjudicating Authority by the Operational Creditor, seeking initiation of CIRP against the Corporate Debtor for defaulting payment.

The Adjudicating Authority observed that the Corporate Debtor has neither raised any dispute with respect to the services of the Operational Creditor nor challenged the arbitral award by way of Section 34 petition under the Arbitration and Conciliation Act, 1996. Therefore, the debt is not disputed.

It was further observed that in a petition under Section 9 of IBC, the prime point of defense is the existence of the dispute and/or pendency of a suit or arbitration prior to the receipt of the demand notice under Section 8 of the IBC. However, in the instant case both these defenses are not present.

The Adjudicating Authority placed reliance on the Supreme Court judgment in K. Kishan v. Vijay Nirman Company Private Limited, (2018) 17 SCC 662, wherein it has been held that in order to initiate CIRP in case of arbitral award under Section 9 of IBC, the debt needs to be undisputed.

Hence, Adjudicating Authority admitted the petition filed under Section 9 of IBC and initiated CIRP against the Corporate Debtor.

Wages/Salaries of only those workmen/employees who actually worked during Corporate Insolvency Resolution Process (“CIRP”) are to be included in CIRP Costs- Supreme Court Held

The Supreme Court on April 19, 2022 in the matter of Sunil Kumar Jain v. Sundaresh Bhatt held that the dues towards the wages/salaries of only those workmen/employees who actually worked during the CIRP are to be included in the CIRP costs.

In this case, National Company Law Appellate Tribunal dismissed the appeal preferred by the workmen/employees of M/s ABG Shipyard Limited (“Corporate Debtor”) against National Company Law Tribunal order denying any relief to them with regard to their claim relating to salary, which they claimed for the period involving ‘Corporate Insolvency Resolution Process’ (”CIRP”) and the prior period. The workmen/employees therefore approached the Apex Court in appeal.

The Court observed-

“Even if it is found that the Corporate Debtor was not a going concern during the CIRP despite best efforts by the resolution professional, it cannot be presumed that still the Corporate Debtor was a going concern during the CIRP period. It depends on the facts of each case”

The bench therefore partly allowed the appeal by concluding as follows:

• That the wages/salaries of the workmen/employees of the Corporate Debtor for the period during CIRP can be included in the CIRP costs the same shall be payable in full first as per Section 53(1)(a) of the IBC, provided it is established and proved that the Interim Resolution Professional/Resolution Professional managed the operations of the corporate debtor as a going concern during the CIRP and that the concerned workmen/employees of the corporate debtor actually worked during the CIRP.
• Considering Section 36(4) of the IBC and when the provident fund, gratuity fund and pension fund are kept out of the liquidation estate assets, the share of the workmen dues shall be kept outside the liquidation process and the concerned workmen/employees shall have to be paid the same out of such provident fund, gratuity fund and pension fund, if any, available and the Liquidator shall not have any claim over such funds.

Quantum of debt not to be decided at the stage of admission of a Section 7 petition under Insolvency and Bankruptcy Code, 2016 (“IBC”) – Holds NCLAT, Delhi

The National Company Law Appellate Tribunal (“NCLAT“) Bench on April 16, 2022 in the matter of Rajesh Kedia v. Phoenix ARC Pvt. Ltd. while adjudicating an appeal has held that the quantum of debt is not be considered at the stage of admission of a petition under Section 7 of IBC.

In this matter, UTI advanced financial assistance to Ajanta Paper and General Products Ltd. (“Corporate Debtor“) in the form of subscription of 5 Lakh Secured Redeemable Non-Convertible Debentures of face value of Rs. 100/- each, along with interest and charges payable under the financial facility. In 2002, UTI had issued a recall notice for default of debentures claiming a sum of Rs. 8,35,74,382/- and subsequently, the personal guarantees of the Corporate Debtor were also invoked. In 2003, UTI had filed an original application before the Debt Recovery Tribunal for recovery of its dues. Thereafter, UTI accepted a proposal in 2014 to settle the claims at an amount of Rs. 3,30,00,00,000/-. However, UTI assigned its debt to Phoenix ARC Pvt. Ltd. (“Financial Creditor“). The Financial Creditor issued a Demand Notice in 2016 to the Corporate Debtor. In 2018, the Financial Creditor filed a petition under Section 7 of IBC before the NCLT, Mumbai Bench, seeking initiation of Corporate Insolvency Resolution Process (“CIRP“) against the Corporate Debtor. NCLT, Mumbai Bench initiated CIRP against the Corporate Debtor. One of the suspended directors of the Corporate Debtor filed an appeal against the NCLT order before the NCLAT under Section 61 of the IBC.

The NCLAT Bench observed that the primary issue before them was whether the Adjudicating Authority was justified in admitting the Section 7 Application against the Appellant or not.

The Bench placed reliance on the Supreme Court judgment in M/s. Innoventive Industries Ltd. v. ICICI & Anr., (2018) 1 SCC 407, wherein while observing the definition of ‘Claim’, it was held that even if right of payment is disputed, the IBC gets triggered the moment, the default exceeds the threshold amount.

The NCLAT bench upheld the NCLT order and held that it is not within the domain of the Adjudicating Authority to decide the ‘amount of debt’ at the stage of admission of an application under Section 7 of IBC. The only requirement for admitting a petition under Section 7 of IBC is that the minimum outstanding debt should be more than the threshold amount provided for under the IBC.

Amount disbursed by NBFC upon oral agreement not covered in Financial Debt- NCLT Kolkata

The NCLT Kolkata Bench on April 13, 2022 in the matter of Narendra Promoters & Fincon Pvt. Ltd. v. Vinline Engineering Pvt. Ltd. while deciding a petition under Section 7 of the Insolvency and Bankruptcy Code, 2016 (“IBC“), held that a disbursement made by a Non-Banking Financial Institution (“NBFC“) over an oral agreement cannot be construed as the existence of a financial debt, when there is nothing on record to show that it was disbursed as a loan

In the instant matter, Narendra Promoters & Fincon Pvt. Ltd. (“Financial Creditor“) being a NBFC was approached by Vinline Engineering Pvt. Ltd. (“Corporate Debtor“) for a financial assistance amounting to Rs. 10,00,000/- for business use. An oral agreement was entered into between the parties whereby the Financial Creditor would disburse the amount to the Corporate Debtor over an interest rate of 16% per annum from the date of disbursal. The Corporate Debtor failed to repay the principal amount despite several oral demands by the Financial Creditor. Thereafter, the Financial Creditor had moved a petition before NCLT Kolkata Bench (“Adjudicating Authority“) under Section 7 of IBC, seeking initiation of Corporate Insolvency Resolution Process (“CIRP“) against the Corporate Debtor, for defaulting on the loan amount.

The Adjudicating Authority placed reliance on the Supreme Court judgment in Phoenix Arc Pvt. Ltd. Vs. Spade Financial Services Ltd. &Ors, Civil Appeal No. 2842 of 2020; wherein it has been held that for the implementation of a successful insolvency regime and to impede any person from taking undue benefit, the real nature of the transactions has to be unearthed, as per the IBC.

The Adjudicating Authority was of the opinion that the Financial Creditor has failed to establish the nature of transaction between the parties. It further observed that deduction of TDS is not sufficient to conclude that the transaction in question is a Financial Debt.

Hence, the Bench dismissed the petition under Section 7 of IBC with liberty to the Financial Creditor to pursue other available remedies under law.

Insolvency Resolution Process against legal heirs of personal guarantor by Financial Creditor not permissible- NCLT Kolkata

The NCLT Kolkata bench on April 9, 2022 in the matter of Bank of Baroda v. Ms. Divya Jalan while dismissing the application filed by the Bank of Baroda (“Financial Creditor”) held that the application is not maintainable against legal heirs of the personal guarantor under the Insolvency and Bankruptcy Code, 2016 (“IBC”).

In the instant case, Kilburn Chemicals Limited (“Corporate Debtor”) approached the Petitioner/Financial Creditor to provide credit facilities for setting up of Rutile Grade Titanium Dioxide manufacturing plant. A loan consortium agreement was executed to that effect. The Petitioner had sanctioned credit facilities to a sum of Rupees One Hundred Three Crore Ninety Lakh. Since the Corporate debtor and personal guarantor failed to pay the loan amount, a Petition under Section 7 of the IBC was filed before Adjudicating Authority and the Corporate Debtor was admitted into CIRP. In the meantime, due to the demise of the personal guarantor, the Petitioner issued a demand notice to his legal heirs. A petition was filed under section 95(1) of the IBC for initiating the Insolvency Resolution Process against legal heir of personal guarantor by the financial creditor.

The Bench observed that regulation 3 (1)(a)(e) of Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtor Regulation, 2019, clearly defines that a personal guarantor to a Corporate Debtor is a person against whom guarantee has been invoked and there is outstanding dues left, partly or fully. The definition does not include the ‘legal heirs’.

The NCLT Bench held that when a section 95 application is filed, the assets of the personal guarantor is hit by moratorium and if the legal heirs of the deceased personal guarantor is put into the shoes of the personal guarantor then their personal assets would also get automatically hit by moratorium, which would cause grave prejudice to the rights of the third party. The Bench also held that there is no provision in the code which envisages that the concept of legal heirs stepping into the shoes of the deceased personal guarantor.

Non-Disclosure of material information itself could be a ground for termination of services or employment –  Reiterates Supreme Court

The Supreme Court on April 09, 2022 in the matter of Union of India vs Dillip Kumar Mallick reiterated that non-disclosure of material information itself could be a ground for cancellation of employment or termination of services.

In the instant case, the bench observed that Dillip Kumar Mallick was appointed under the Central Reserve Police Force (‘CRPF’) Group Centre, Bhubaneswar in the year 2003 without disclosing the fact of pendency of criminal case against him, had continued to remain as a pending-trial accused person without the knowledge of the department, until the facts were noticed and he was subjected to departmental proceedings.

The Bench referring to the case of Avtar Singh v. Union of India and Others (2016) 8 SCC 471, made the following observations –

“It remains beyond the pale of doubt that the cases of non-disclosure of material information and of submitting false information have been treated as being of equal gravity by this Court and it is laid down in no uncertain terms that non-disclosure by itself may be a ground for an employer to cancel the candidature or to terminate services. Even in the summation above-quoted, this Court has emphasized that information given to the employer by a candidate as to criminal case including the factors of arrest or pendency of the case, whether before or after entering into service, must be true and there should be no suppression or false mention of the required information.”

Challenge against arbitrator appointment, can’t be under Section 14 of the Arbitration and Conciliation Act, 1996 – Delhi High Court

The Delhi High Court on April 03, 2022 in the matter of Sacheerome Advanced Technologies (SAT) versus NEC Technologies Pvt. Ltd. (NECI) ruled that Section 14 of the Arbitration and Conciliation Act, 1996 does not provide a separate remedy to the parties to challenge the appointment of an arbitrator, notwithstanding the provisions under Section 13 of the Act.

In the instant case, The Petitioner Sacheerome Advanced Technologies, after invoking Arbitration Agreement against the Respondent NEC Technologies Pvt Ltd, filed a petition under Section 11 of the Arbitration and Conciliation Act, 1996 (“the Act”) seeking appointment of an Arbitrator. After the Sole Arbitrator appointed by the Court expired, the Court appointed a new Arbitrator. Thereafter, the Petitioner filed an application before the Arbitrator under Section 15 read with Section 14(1) (a) of the Act, seeking termination of her mandate, which was rejected by the Arbitrator. The Petitioner, thereafter, filed a petition under Section 14 (2) of the Act before the Delhi High Court, requesting the mandate of the Arbitrator be terminated on the ground that the Arbitrator did not make a complete disclosure as required under Section 12(1) of the Act at the time of accepting her appointment.

The Single Bench held that a party can challenge the appointment of an arbitrator only according to the procedure set out in Section 13 of the Act and that a petition under Section 14(1) could not be filed to challenge the appointment of an Arbitral Tribunal on the grounds mentioned under Section 12(3) of the Act, i.e., on the ground of justifiable doubts as to the independence or impartiality of the Arbitrator.

The Court noted that the Petitioner did not make any application challenging the appointment of the Arbitrator under Section 13 of the Act and the challenge made by the Petitioner to the appointment of the Arbitrator was rejected by the Arbitrator. The Court held that the only recourse available to the Petitioner was to proceed with the arbitral proceedings and challenge the arbitral award under Section 34 of the Act.

State has to pay salary for work done by employee, even if appointment was irregular- Supreme Court

The Supreme Court on April 03, 2022 in the matter of Man Singh v. State of Uttar Pradesh has set aside a direction to recover from a person the salary paid to him after his appointment as a teacher was found to be irregular.

In the Instant case, Supreme Court noted that the person had worked for nearly 24 years as a teacher before his services were cancelled for the reason that his appointment was irregular. It was found that he was a relative of a member of the selection committee and hence his appointment was contrary to the rules. While cancelling his appointment, the State also directed the recovery of salary paid to him. Though the person approached the High Court challenging the cancellation order, it did not interfere. Aggrieved, he approached the Supreme Court.

The Bench observed that the High Court ought to have appreciated the fact that he had worked for nearly 24 years. Further, the Court observed-

“We find that the High Court has failed to consider the fact that even if the appointment was irregular, the appellant had discharged the duties and in lieu of duties, he had to be paid. The State cannot take any work from any employee without payment of any salary”

Accordingly, the Supreme Court set aside the High Court order and directed the authorities to treat appellant as retired on the date of the order and to pay pensionary benefits, if any, due to him for the services rendered.

Party’s participation insufficient to infuse life to arbitral proceedings if award is void due to arbitrator’s ineligibility: Delhi HC Opines Prima Facie

The Delhi High Court on March 30, 2022 in the matter of Ruia Exports & Another v. Moneywise Financial Services Private Limited & Others. expressed a prima facie opinion that the participation of any party is not sufficient to infuse life to arbitral proceedings if the award is void ab initio on the ground of ineligibility of an arbitrator.

The Court in the aforesaid decision had held that the arbitral award was void ab initio since it was rendered by an arbitrator unilaterally appointed by the parties, which is impermissible.

In the instant case, the counsel appearing for the respondent did not dispute that unilateral appointment of an arbitrator is impermissible in view of the decision of the Supreme Court in the case of Perkins Eastman Architects DPC & Anr. v. HSCC (India) Ltd. However, it was submitted that since the petitioner had participated in the arbitral proceedings, it was precluded from raising objections on this ground.

The Court was of the view that the question was a substantial one which required consideration, hence posted the matter for further hearing, while staying enforcement of impugned award.

“In view of the above, the enforcement of the impugned award is stayed” the Supreme Court ordered.

Workmen must be heard before their wages are deducted for “Go Slow” Approach- Supreme Court Directs

The Supreme Court on March 29, 2022 in the matter of Bata India Ltd v. Workmen of Bata India Ltd and another affirmed a Karnataka High Court judgment of 2008 which held that an employer must give proper opportunity of hearing to the workmen before deducting their wages for “go slow” approach by which they had failed to produce the agreed output.

The High Court’s judgment was in a case filed by Bata India Limited with respect to the “go slow” approach adopted by its workmen as part of a protest in 2001. The High Court had held that “go slow” is nothing but sort of intentional refusal to work and that in such a situation, the management could be justified in reducing or paying pro-rata wages. The High Court refused to accept the company’s argument that it had put up public notices regarding deduction of wages and that it would thus amount to fair notice. However, such deduction of wages can be done only after giving a fair opportunity to the workmen to defend themselves, the High Court added. Therefore, the High Court directed the company to pay the workmen the deducted wages; however, the company was given liberty to take appropriate steps regarding “go slow” strategy adopted by a large section of the workmen and proceed in accordance with law. The High Court’s verdict was challenged by Bata India before the Supreme Court.

The Supreme Court bench observed-

“We do not think that most of the findings recorded in the impugned judgment require any interference or even clarification”

The company argued before the Supreme Court that the High Court erred in holding that enquiry should have been conducted by it before deducting wages on pro-rata basis. However, the Supreme Court endorsed the High Court’s judgment as expressing a “holistic and pragmatic view”.

The Supreme Court held-

“We perceive and believe that the impugned judgment protects the interest of the appellant and the workmen by prescribing the right procedure which should be followed in case the appellant is of the opinion that the workmen, though present on duty, are not working and are not giving the agreed production on the basis of which wages and incentives have been fixed. This would depend upon the factual matrix and have to be ascertained in case of dispute to render any firm opinion. The procedure prescribed should be followed.”

Notice served to the address shown in ROC records is valid – Observes NCLT, Delhi

The Principal Bench of NCLT, New Delhi on March 26, 2022 in the plea of M/s. Jones Lang Lasalle Building Operations Pvt. Ltd held that demand notice had to be taken to be validly served if delivered at the previous registered address prior to recording of change of address in records of the Registrar of Companies.

In the instant case, the petition was filed by M/s. Jones Lang Lasalle Building Operations Pvt. Ltd/ Operational Creditor under Section 9 of the Insolvency and Bankruptcy Code, 2016 (“IBC”). In 2017, the Corporate Debtor, who is a developer of building name ‘Red Mall’ hired the Operational Creditor, for its property management services such as security, housekeeping, horticulture, facade clearing etc. Since the Corporate Debtor failed to pay the invoice amount, the Operational Creditor approached the Tribunal. The address of the Corporate debtor had been changed at the time of serving the notice, but this change of address was not brought to the notice of ROC. In the ROC record, the previous registered address was showing.

The NCLT bench relied upon the judgment passed by the High Court of Delhi in Hotline Teletubes & Components Ltd V AS Impex Ltd and also relied upon the Judgment passed by NCLT, Chandigarh Bench in the matter of RPG Industrial Product Pvt. Ltd. Vs Sahil International Put. Ltd. The NCLT after appreciating the fact held that demand notice had to be taken to be validly served, if delivered at the previous registered address prior to recording of change of address in records of the Registrar of Companies.

Resolution plan cannot be rejected on a perceived grievance by a suspended director who failed to take appropriate steps – NCLT Kolkata observed

The NCLT, Kolkata Bench on March 25, 2022 in the case of Anand Kariwala v. Mr. Partha Pratim Ghosh, held that initiation of Corporate Insolvency Resolution Process (“CIRP”) against the Corporate Debtor does not bar the suspended Board of Directors (“BOD”) from objecting to the acts of the Resolution Professional (“RP”), if the same are prejudicial to the interests of the Corporate Debtor, or is in violation of any law or procedural requirement.

In the instant case, the applicant, who is the suspended member of the BOD of the Corporate Debtor filed an application u/s 60(5) of the Insolvency and Bankruptcy Code, 2016 (“IBC”) seeking to set aside the resolution plan proposed by the resolution applicant on the ground that the same is undervalued. CIRP against the Corporate Debtor was initiated in 2019. The applicant received a notice for handing over the vehicle of the Corporate Debtor. Only when such a notice was received, did the applicant come to know that the meetings of the Committee of Creditors (“CoC”) were held and that he had not been given notice of the same. The applicant also contended that the Corporate Debtor was being sold at an undervalued price of Rs. 3.4 Crores.

With respect to role of BOD once the CIRP begins, the tribunal was of the view that the role of BOD is limited to assisting and cooperating with the RP for smooth resolution of the Corporate Debtor.

The Bench observed-

“But this limited function does not bar the suspended Board of Directors to object the act of the Resolution Professional if the act of the Resolution Professional is prejudicial to the Corporate Debtor, or is in violation of any law or procedural requirement.”

With respect to the objection of the applicant that the Resolution Plan does not maximize the assets of the Corporate Debtor and thus violated the objective of the IBC, the Bench observed-

“The Applicant has failed to consider that the object of the Code in totality that is not only to maximise the assets of the Corporate Debtor but the primary objective is to give the Corporate Debtor a new lease of life. That is why the stress is given in reviving the Corporate Debtor as a going concern, if possible and the liquidation followed by the dissolution is supposed to be the last resort.”

The NCLT relied on the judgment of the Supreme Court in Ebix Singapore (P) Ltd. v. Committee of Creditors of Educomp Solutions Limited, wherein it was held that inordinate delays cause commercial uncertainty, degradation in the value of the Corporate Debtor and makes the insolvency process inefficient and expensive.

The Tribunal dismissed the application filed by the applicant and stated that the Resolution Plan has been submitted to revive the Corporate Debtor as a going concern and is in compliance with the IBC. A Resolution Plan cannot be rejected based on a perceived grievance by a member of the Suspended Board, who has not taken any steps to participate in the meetings of the CoC.

Can Arbitrators fix their fee without Parties’ consent? Is 4th Schedule the standard fee scale? -Supreme Court Considers

The Hon’ble Supreme Court on March 24, 2022, in the matter of Oil and Natural Gas Corporation ltd. v. Afcons Gunanusa JV, considered arbitration petition filed by the Oil and Natural Gas Corporation (“ONGC”) on the issue related to the mandatory nature of the model fee scale for arbitrators prescribed under the Fourth Schedule of the Arbitration and Conciliation Act, 1996.

The Apex Court discussed on solutions such as (a) parties indicating to the arbitrator the estimated number of sittings before the commencement of proceedings and fixing the fees; accordingly, (b) allowing the arbitrator to increase the fees beyond the agreed scale to a certain percentage (say 10%) of the sittings exceed the estimate; (c) allowing the arbitrator to approach the Court for increasing fee beyond the allowable percentage; (d) stopping the practice of splitting a day into different hearings and applying Fourth Schedule scale day wise.

While discussing the Court suggested:

“Arbitrator can fix the fees for a given number of sittings with consent of parties & in case parties do not agree for revision of the fees, then they could seek judicial intervention for determination of ‘reasonableness in the increase of the fees’”.

Invoking Article 226 for seeking relief in a contractual matter where there is an existing arbitration clause is not an appropriate remedy and neither can the High Court examine the same- Observed Supreme Court

The Hon’ble Supreme Court on March 21, 2022, in the matter of Gujarat Housing Board & Anr. v. Vande Mataram Projects Private Limited while setting aside the High Court’s order and relegating the parties to the remedy under the Arbitration and Conciliation Act, 1996 opined that seeking relief under Article 226 of the Constitution of India in contractual matters, where there is an existing arbitration clause is not an appropriate remedy.

In the impugned order, the High Court had directed Gujarat Housing Board to refund the amount of Rs Rs.1,66,05,000/- and Rs.21,66,470/- which the Board had forfeited while terminating the contract with Vande Mataram Projects Private Limited.

The Apex Court in its order observed:

“We are of the view that the invocation of Article 226 of the Constitution of India for a contractual matter of this nature, where there was an existing arbitration clause was not the appropriate remedy nor could the High Court have examined this and granted the nature of relief which has been done by the impugned order dated 30.09.2021. We are unable to persuade ourselves on the submission of learned counsel for the respondent that the order passed by the High Court was akin to a consent order. It does not say so, we do not find it from the order.”

No conflict between section 17B of the Employees’ Provident Fund and Miscellaneous Provisions Act, 1952 and Insolvency & Bankruptcy Code, 2016 – NCLAT directs full payment of Provident Fund

The NCLAT Principal Bench on March 11, 2022, in the matter of Sikander Singh Jamuwal v. Vinay Talwar observed that there is no conflict between the section 17B of the Employees’ Provident Fund and Miscellaneous Provisions Act, 1952 (“PF Act”) and Insolvency & Bankruptcy Code, 2016 (“IBC”) and directed the Resolution Applicant to pay the Provident Fund dues (“PF”) to the employees.
The Appellant filed an appeal u/s 61 of IBC to set aside the resolution plan as it did not consider the full payment of PF to the employees under the PF Act.
The Tribunal observed:
“After reading Section 17-B of the PF & Miscellaneous Act, 1952 it is amply clear that Resolution Applicant is required to pay contribution and other sums due from the employer as per the provisions of the PF Act.”
The Tribunal relied on the judgment of NCLAT in Tourism Finance Corporation Ltd v. Rainbow Papers Ltd & Ors.
The Tribunal also held that the PF are not considered to be assets of the Corporate Debtor, as has been clarified by the Section 36(4)(a)(iii) of IBC.

Failure to reply to demand notice u/s 8(1) within 10 Days does not preclude the Corporate Debtor from raising the existence of a dispute in a Section 9 application under Insolvency & Bankruptcy Code, 2016 (“IBC”) – Observed NCLAT Delhi

The NCLAT Delhi Principal Bench on March 10, 2022, in the case of M/S Brand Realty Services Ltd. v. M/S Sir John Bakeries India Pvt. Ltd observed:

“The mere fact that Reply to notice under Section 8 (1) having not been given within 10 days or no reply to demand notice having been filed by the Corporate Debtor does not preclude the Corporate Debtor to bring relevant materials before the Adjudicating Authority to establish that there is a pre-existing dispute which may lead to the rejection of Section 9 application.”

The Tribunal further observed that the Section 8(2) of IBC when read with Section 9(1) of IBC, it is clear that Section 9(1) of IBC enables the Operational Creditor to file Section 9 application if no payment has been received by the Operational Creditor from Corporate Debtor or no notice of the dispute under sub-section (2) of section 8 of IBC has been received. The statutory scheme under Section 8 and 9 of IBC does not indicate that in an event reply to notice is not filed within 10 days by Corporate Debtor or no reply to notice under Section 8(1) of IBC have been given, the Corporate Debtor is precluded from raising the question of dispute.

DMRC to pay decretal amount of over 6k crores to DAMPEL by May 31, 2022 for the enforcement of arbitral award- Directs Delhi High Court

The Delhi High Court on March 10, 2022 in the matter of Delhi Airport Metro Express (“DMRC”) Pvt. Ltd. v. Delhi Metro Rail Corporation (“DAMEPL”) directed the DMRC to pay decretal amount to Delhi Airport Metro Express Pvt Ltd in the plea seeking enforcement of arbitral award dated May 11, 2017.

In the instant case, DAMEPL submitted that out of 8009.38 crores (“arbitral award”), a sum of 1678.42 has been paid by DMRC and the remaining decretal amount payable with interest amounted to 6330.96 crores.

In its submission through affidavit, DMRC stated that amount under total project fund and other fund was committed to the salary, retirement, medical of the employees and commuters to which the court observed as follow:

“In the considered opinion of this Court, the said amount i.e. Rs.514+ Rs.114 crores has to be kept aside for the aforesaid purpose, however, from the remaining amount available in different bank accounts of judgment debtor as well as under other heads, the payments towards decretal amount has to be made”.

The court ordered DMRC to pay the outstanding amount in two instalments. The court was of the view that the prior arbitral award need not be limited to the paper award, therefore DMRC was duty bound to divert its fund to be available under different heads as mentioned in the affidavit submitted by it or if necessary, by loans.

Whether claim of licence for use of occupation of immovable premises is an operational debt u/s 5(21) of Insolvency and Bankruptcy Code, 2016 (“IBC”) -NCLAT refers to larger bench

The principal bench of New Delhi on March 09, 2022, in the matter of Jaipur Trade Expo centre Pvt. Ltd. v. Metro Jet Airways Pvt. Ltd. referred the following question for consideration by the larger bench:

“Whether claim of the Licensor for payment of License Fee for use and occupation of Immovable Premises for commercial purposes is a claim of ‘Operational Debt’ within the meaning of Section 5(21) of the Code?”

In the instant case, the counsel for appellant submitted that the judgment dated March 07, 2022, which was delivered in the matter of Mr. M. Ravindranath Reddy v. Mr. G. Kishan & Ors. is distinguishable. It was further submitted that the facts of the appellant’s case is that there was warm shell building and services, which is clearly distinguishable from the facts of the above case and it is ‘operational debt’ within the meaning of Section 5(21) of the.

The counsel for the Respondent submitted that there are other judgments taking the same view which has been taken in Mr. M. Ravindranath Reddy v. Mr. G. Kishan & Ors. case.

In the instant case, the two members Bench of Judgement has expressed doubts about the correctness of the law laid down by three members Bench in Mr. M. Ravindranath Reddy v. Mr. G. Kishan & Ors. case on the ground that it did not notice the judgement of the Supreme Court in the case Mobilox Innovation (P) Ltd. v. Kirusa Software (P) Ltd.

The appellate tribunal referred the case to larger bench and observed:

“We are thus of the view that two aforesaid quoted questions framed in Referring Judgment dated 07th March 2022 be placed for consideration before the ‘Larger Bench’. Let the matter be placed before the Hon’ble Chairperson on the administrative side to constitute a ‘Larger Bench’ for considering the questions as framed in the Judgment dated 07th March 2022.”

Retired partner cannot initiate proceedings under Insolvency and Bankruptcy Code, 2016 (“IBC”) against other partners or firm for retirement dues- observed NCLT, Mumbai

The NCLT, Mumbai bench on March 1, 2022 in the matter of Anil Vora HUF v. Kavya Build-Con Private Limited, rejected the Section 9 application filed by the operational creditor on the ground that a retired partner cannot initiate proceedings u/s 9 of the Insolvency and Bankruptcy Code, 2016 to claim retirement dues against other partners or the firm.

In the instant case, the operational creditor (“Applicant”) filed an application u/s 9 of the IBC, 2016 seeking initiation of Corporate Insolvency Resolution Process (CIRP) against Kavya Build-Con Private Limited (“Corporate Debtor”) on the ground that the Corporate Debtor had failed to make payment of a sum of Rs.75,00,000 to the Applicant, who was a partner in the firm- M/s Kavya KCD Developers (“Firm”).

By virtue of the deed of retirement, the Applicant was granted a lump sum consideration of Rs. 75,00,000 including the amount standing towards the operational creditor’s credit in the books of account.

The NCLT placed reliance on a Supreme Court judgement “Gammon India Ltd V. Neelkanth Mansions and Infrastructure Pvt. Ltd.”, where it was held that since the operational creditor and Corporate Debtor were partners in the Firm, the application filed by the operational creditor is not maintainable and​ was dismissed.

In the present case the NCLT, Mumbai held-

“The Operational Creditor may be liable to the claims against the Corporate Debtor not under the IBC but under the any other law which provides the remedy to the Operational Creditor. The Retired Partner has no right under the IBC to file claim against the Partner or the Firm.”

Initiation of CIRP not mandatory for maintainability of an application against personal guarantors U/S 95, Insolvency and Bankruptcy Code, 2016 (“IBC”) – observed NCLT, Kochi

The NCLT, Kochi bench on February 25, 2022 in the matter of E. Iqbal v. State Bank of India held that when an application for initiation of Corporate Insolvency Resolution Process (CIRP) is pending before the NCLT, initiation of CIRP against the Corporate Debtor is not a prerequisite.

In the instant case, an application for CIRP was filed by the Union Bank of India against M/s. Green Gateway Leisure Limited (“Corporate Debtor”) which was admitted by the NCLT and moratorium was declared. This order of the NCLT was challenged before the NCLAT, seeking to set aside the order of the Adjudicating Authority approving commencement of CIRP against the Corporate Debtor. The NCLAT set aside this order, subsequent to which, the CIRP ended.

In the meantime, the SBI, (one of the financial creditors) of the Corporate Debtor issued a demand notice invoking Rule 7 of the Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process of Personal Guarantors to the Corporate Debtor) Rules 2019 and invoked the personal guarantee of the personal guarantor. The NCLT allowed these applications and appointed a Resolution Professional. An application was filed by the personal guarantor (“Applicant”) of the Corporate Debtor seeking recall of order admitting application against the Applicant/ personal guarantor.

NCLT bench observed, SBI have filed application under Section 7 of IBC before this tribunal against the Corporate Debtor and same is now pending before this tribunal.

The NCLT dismissed the application filed by the Applicant/ personal guarantor and held that since an application for initiation of CIRP against the against the Corporate Debtor was filed and pending before the Adjudicating Authority, in such a case, initiation of CIRP against the Corporate Debtor is not a prerequisite for maintainability of an application u/s 95, IBC filed for initiating IRP against the personal guarantor of the Corporate Debtor.

Acknowledgment of debt in the balance sheet of the corporate debtor comes within the meaning of acknowledgment u/s 18 of the Limitation Act – reiterated NCLT, Kochi

The NCLT, Kochi bench in February, 2022 in the matter of Ms Pheonix ARC Private Ltd vs Kerela Chamber and Industries reiterated that “the acknowledgement of debt in the balance sheet comes within the purview of acknowledgement u/s 18 of Limitation Act, 1963”. Also the period of limitation for filing an application u/s 7 of Insolvency and Bankruptcy Code, 2016 (“IBC”) would be extended, if the debt is acknowledged in the balance sheet of the corporate debtor.

In the instant case, The Kerela Chamber of Commerce and Industries (“Corporate Debtor”) availed various credit facilities from South Indian Bank, Market Road Branch, Ernakulam (“Financial Creditor”) for business purposes. South Indian Bank sanctioned a loan to the tune of Rs 110 Lakhs and executed the necessary documents.

It was observed that the Corporate Debtor did not dispute the liability, thereby confirmed and acknowledged the indebtness of the liability in the favour of South Indian Bank. The Corporate Debtor, vide its various balance sheets, which were acknowledged by the directors, acknowledged the indebtness of its liability. The application was filed by the Financial Creditor to initiate the Corporate Insolvency Resolution Process (CIRP) against Corporate Debtor u/s 7(4) of IBC. The Corporate Debtor filed a counter stating that there is a bar of limitation, since the right to sue accrues when the default occurs.

In this matter, the NCLT analysed the provisions of Section 238A of the IBC, Section 18 of the Limitation Act, 1963 and Article 137 of the Limitation Act, 1968. In the present case the bench held that since the debt was acknowledged in the balance sheet of the Corporate Debtor and the application filed by the Financial Creditor, it is well within the limitation period of 3 years and thereby dismissed the objection regarding limitation as raised by the Corporate Debtor.

Business to Business disputes cannot be construed to as Consumer Dispute – observed Supreme Court

The Supreme Court on February 22, 2022, in the matter of Shrikant G Mantri v Punjab National Bank observed that, if business-to-business disputes were construed as consumer disputes, it would defeat the purpose of providing speedy and simple redressal as envisaged under the Consumer Protection Act, 1986(hereinafter referred to as “the said Act”). The Apex Court also held that the type of a case whether it is commercial or not will entirely depend on the facts and circumstances of the case in hand.

In the instant case, the appellant who is a stock-broker by profession, availed the overdraft facility in connection with his day to day share and stock transactions from the respondent’s bank, with shares as its security. The appellant took the overdraft facility and also sought enhancement of the same from time to time in furtherance of his business as a stock-broker and for the purpose of enhancing the profits therein. Upon the repayment of overdraft, the shares were not returned by the bank to the appellant. Thus, the appellant moved to the National Consumer Disputes Redressal Commission (NCDRC), (hereinafter referred to as “Commission”).

The Commission vide it’s order dated 1st June, 2016, held that the appellant had availed the services of the respondent bank for ‘commercial purpose’ and as such the appellant was not a ‘consumer’ as envisaged under Section 2(1)(d) of the said Act.

Agreeing with the Commission, the Supreme Court observed that if purchase of the goods was for commercial purpose, the purchaser would not be treated as a consumer. Only those transactions for ‘earning of livelihood’ by ‘means of self-employment’ would be included. It was held by the Apex Court that the relationship in this case was purely “business to business and not business to consumer”, which led to the dismissal of the appeal.

ROC imposes a penalty of Rs. 2 Lakh u/s 56(6) of Companies Act,2013 for the delay in issue of Share Certificates as prescribed u/s 56(4) of Companies Act,2013

Registrar of Companies vide Adjudication Order dated January 19, 2022, passed adjudicatory order u/s 454(3) of the Companies Act, 2013 read with Rule 3 of the Companies (Adjudication of Penalties) Rules, 2014 for the delay in issue of share certificates of 30 days from the time period prescribed u/s 56(4) of the Companies Act, 2013- in the matter of RASPBERRY PI EDUCATIONAL SERVICES PRIVATE LIMITED (CIN V80903DL202 1FTC377663).

Limitation under Section 9 of IBC commences only upon the occurrence of default and not when the debt becomes due – observed Supreme Court

The Supreme Court in its order passed on February 04, 2022 in the matter M/s. Consolidated Construction Consortium Limited vs. M/s. Hiltro Energy Solutions Private Limited, relying on the case of B.K. Educational Services (P) Ltd vs. Parag Gupta & Associates, observed that limitation under Section 9 of Insolvency and Bankruptcy Code, 2016 (“IBC”) (i.e., for filing of application for initiation of corporate insolvency resolution process by operational creditor) does not commence when the debt becomes due but only when a default occurs. The Supreme Court further observed that default is defined under Section 3(12) of the IBC as the non-payment of the debt by the corporate debtor when it has become due.

In the instant case, the appellant – Consolidated Construction Consortium Limited placed orders with the Proprietary Concern (which was later taken over by the respondent M/s. Hiltro Energy Solutions Private Limited). The Proprietary Concern was the supplier of Thorn Lighting India Private Limited. The appellant has placed order through three purchase orders dated June 24, 2013. The contention raised in this case was that the date of default mentioned is November 7, 2013, when the cheque was issued to the Proprietary Concern and therefore the limitation of three years under Article 137 of the Limitation Act would expire on November 7, 2016. However, the application under Section 9 was filed only on November 1, 2017.

The Supreme Court noted that both the parties were in negotiation in relation to the re-payment and the minutes of meeting show that the Proprietary Concern was willing to make the re-payment if the appellant issued a letter stating that it would not pursue a claim in the future or if the applicant provided a bank guarantee for the amount.

The court further observed that a final letter was addressed by the appellant to the Proprietary Concern on February 27, 2017, demanding the payment on or before March 4, 2017. The Proprietary Concern replied to this letter on March 2, 2017, finally refusing to make re-payment to the appellant.

Consequently, the application under Section 9 of IBC which was filed on November 1, 2017, approximately eight months after the default was committed, would not be barred by limitation.

Superseded Directors Under RBI Act, not entitled to notice of CoC meetings – NCLAT observed

NCLAT principal bench, New Delhi in its order passed on January 27, 2022 in the matter of Dheeraj Wadhawan vs. The Administrator, Dewan Housing Finance Corporation Limited, observed that there exists a difference between ‘supersession of Directors’ under Section 45-IE of the Reserve Bank of India, Act (“RBI Act”) and the directors of the suspended board of the corporate debtor, as provided under the Insolvency and Bankruptcy Code, 2016 (“IBC”).  The NCLAT observed that Section 24(3)(b) of the IBC provides that the Resolution Professional should give notice/ details of the meeting of the CoC to the ‘suspended’ Directors of the Corporate Debtor. This notice is to be given to the ‘suspended’ Board of Directors, and ‘suspended’ under Section 24(3)(b) of IBC has the same meaning as ‘suspended’ under Section 17(1)(b) of IBC.  This is very different from ‘supersession of Directors’ under Section 45-IE of RBI Act.  The NCLAT observed that upon supersession, the superseded directors ‘vacate’ their office.  This action has finality attached to it.  Hence, superseded directors are not entitled to the notice of CoC meeting and has no right to participate in the meeting.

The Appellant is a promotor, majority shareholder, erstwhile director and guarantor of DHFL/ Corporate Debtor. In November 2019, the RBI exercised its powers under Section 45-IE of the RBI Act and superseded the Board of Directors because the business of DHFL was being carried out in a manner detrimental to the interests of the creditors and depositors. Thus, the Board of Directors of DHFL vacated their offices and the power stood transferred to the Administrator, who then initiated Corporate Insolvency Resolution Process of the Corporate Debtor. Thereafter, a moratorium was imposed.

This Administrator did not give due notice of the meetings of  CoC along with documents and agenda for meetings to the Appellant/ erstwhile Director of DHFL/Corporate Debtor.  The Adjudicating Authority refused the request of the Appellant to be allowed to attend meetings of the CoC as member of the erstwhile Board of Directors of the Corporate Debtor since the erstwhile directors were superseded by the Administrator under the RBI Act. Thus they could not be permitted to participate in the CIRP. Against this, the Appellant preferred an appeal in the NCLAT.

The NCLAT did not interfere with the order of NCLT and observed that since the Board of Directors of DHFL had already vacated their offices, the powers of Board of Directors stood vested in the Administrator as per Section 45-IE of the RBI Act. There was no question of ‘suspension’ of the Board of Directors under Section 17(i)(b) of the IBC.

The NCLAT observed that in the present case, the directors have been superseded by the Administrator under the RBI Act and their vacation is final. If they are to be appointed at a later stage, it would be a fresh/ new appointment and not a continuation of the previous appointment as Directors of the Company.

The author of a tender document is the best person to interpret the same  – Reiterates Supreme Court

The Hon’ble Supreme Court in its judgment delivered on January 31, 2022 in the matter Agmatel India Pvt. Ltd. Vs Resoursys Telecom reiterated that the author of the tender document is the best person to interpret its documents and requirements.  Holding the above, the Supreme Court observed as follows:

“The author of the tender document is taken to be the best person to understand and appreciate its requirements; and if its interpretation is manifestly in consonance with the language of the tender document or subserving the purchase of the tender, the Court would prefer to keep restraint. Further to that, the technical evaluation or comparison by the Court is impermissible; and even if the interpretation given to the tender document by the person inviting offers is not as such acceptable to the Constitutional Court, that, by itself, would not be a reason for interfering with the interpretation given.”

Fire accident cannot be termed as ‘Act of God’ if it did not happen due to external natural force – Supreme Court observed

The Hon’ble Supreme Court of India in the judgment passed on January 05, 2022 in the matter – State of UP Vs Mcdowell and Company Limited observed that a fire accident cannot be said to an ‘act of God’ if it did not happen due to the operation of any forces of nature.

In the instant case , in 2003, a fire incident took place in a godown of the distillery of the Mcdowell & Co. As many as 35,642 cases of Indian Made Foreign Liquor of different brands got destroyed in this fire. After receiving the initial reports that the fire possibly took place due to short circuit of electricity, the Revenue department proposed to recover the amount of excise duty lost, due to such destruction of liquor, from the company. Allowing the writ petition filed by the company, the Allahabad High Court quashed the demand notice issued by the Department.

The High Court had accepted the contention raised by the company that if the fire had taken place despite the company having taken all care, it was nothing but an act of God of which, no human agency had any control.

In appeal filed by the State before the Supreme Court, the Apex Court disagreed with the observation of the Allahabad High Court and allowed the appeal. The Supreme Court observed that the fire incident in question cannot be said to be that of an event beyond human control and the High Court has been in error in holding that no negligence could be imputed on the respondent company.

The Supreme Court observed as follows:

“When nothing of any external natural force had been in operation in violent or sudden manner, the event of the fire in question could be referable to anything but to an act of God in legal parlance”.