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.