India: Recent Orders Under Insolvency And Bankruptcy Code, 2016

  1.                 Adjudicatory Authority cannot go beyond the provisions of the Code in Scrutinizingthe Resolution Plan for approval.

Tomorrow Sales Agency vs Rajiv Khurana [CA (AT) (Ins) No. 164 of 2018]

An appeal was filed against the impugned order of the Hon'ble Adjudicating Authority (National Company Law Tribunal) Chandigarh bench wherein the AA does not approve the original Resolution Plan on the reasons that a) consent of shareholders for transfer of shares have not been taken b) discrimination in payment to the operational creditors and promoter where in the Operational Creditors will be paid 40% up front payment and promoters will be paid in three years and c) retaining to two directors of the Corporate Debtor. Further, as there was objection of the Hon'ble Adjudicating Authority, the Resolution Plan was again amended whereby 100% payment to operational creditor was agreed upon and in addition to it the promoters will be paid as and when the financial position will be better. It was further submitted that the amended Resolution Plan was approved by 100% vote of Committee of Creditors. W.r.t observation regarding retention of two directors of Corporate Debtor it was submitted that there is no bar under the code w.r.t same as Section 29A of the Code only provides for eligibility criteria of the Resolution Applicant.

The NCLAT, while allowing the appeal, observed that the amended Resolution Plan was in consonant with the section 30(2) of the Code, 2016. The rationale given by the Hon'ble NCLAT were that the as per the requirement of the Code, 2016 the Committee of creditor has approved the resolution plan with100%voting shares. Further the Resolution Applicant is eligible and not ineligible under any of the clause of Section 29A or explanation below the same. Merely retention of the Directors of the Corporate Debtor does not violate any of the provision of Section 29A of the Code, 2016.

  1.                Modification by the Adjudicating Authority in the Resolution Plan is not binding on the Resolution Applicant

Tarini Steel Company Pvt. Ltd. vs. Trinity Auto Components Ltd. & Anr. [CA (AT)(Ins ) No. 75 of 2018]

An appeal was filed against the impugned order of the Hon'ble Adjudicating Authority, (NCLT), Mumbai Bench, approving a resolution plan with certain modifications. The appellant contended that the AA has no jurisdiction to make any modification to the resolution plan after it was approved by the Committeeof Creditors (hereinafter referred as "CoC").

Without going into the merit of the case, the NCLAT said that if the resolution applicant is not satisfied with the modifications made by the AA then the resolution applicant is at the liberty to withdraw the plan and AA will allow and proceed for the liquidation.

Meaning thereby, the modification suggested by the AA is not binding on the resolution applicant. The resolution applicant has the liberty to with draw t he resolution plan if he does not concur with the modification made by the AA.

3)             NCLAT declined to intervene in the settlement talks of the parties prior to the admission of the Insolvency application.

Uttam Galva Metallics Ltd. vs State Bank of India CA (AT) (Ins) No. 315 of 2018

Two appeals came before the Hon'ble NCLAT challenging the impugned order wherein the Adjudicatory Authority has order to list the casesfor pronouncement of order(s). The appellant has submitted that the applications have not yet been admitted and Corporate Debtor is negotiating with a third party foreign investor who agreed to invest and pay amount to the Financial Creditor (State Bank of India). The Hon'ble NCLAT observed that the identity of the investor is not known and it cannot refrain the Adjudicating Authority from pronouncement of orders which were required to be pronounced within 14 days from filing of the application as there is no concrete settlement document and merely on the ground that settlement talks are going on it cannot direct the Hon'ble Adjudicating Authority to accept the plea.

The Hon'ble NCLAT also observed further that if any settlement is reached between Corporate Debtor and the Financial Creditor, it will be open to move before the appropriate forum for appropriate relief.

Further, the section 12A of the Insolvency Ordinance, 2018 provides that approval of 90% voting share of Committee of Creditor (hereinafter referred as "CoC") is needed for the withdrawal of admitted application. Once the 90% of voting share of CoC has approved, the Adjudicating Authority can withdraw the application. Consequently, once the application is admitted then the CoC will be appropriate forum to decide whether to withdraw the application or not.

4)             Resolution for extension of Resolution Process should be passed within the period of180 days.

Quantum Limited vs. Indus Finance Corporation Ltd. [CA (AT) (Ins) No. 35 of 2018/

An appeal had been fried against an order of Hon'ble Adjudicating Authority, (NCLT), Mumbai Bench, rejecting the extension of time on the ground that there is no provision to file such application after the expiry of 180 days of CIRP.

TheHon'ble NCLAT has said that from sub-section(2) of section12,it is clear that resolution professional can file an application to the Adjudicating Authority for extension of the period, only if instructed by CoC by a vote of 75% of the voting shares. If within180 days including the last day i.e. 180th day, a resolution is passed by the committee of creditors by a majority vote of 75% of the voting shares for extension of the resolution process then in the interest of justice and to ensure the resolution process is completed following all procedures time should be allowed by the AA, who is empowered to extend such period up to 90 days.

5)            Resolution Professional is the head of the management and whole management requires to function on his directions.

Mis. Subasri Realty Private Limited vs. Mr. N. Subramanian & Anr. [CA (AT) (Ins) No. 290 of 2017/

The Hon'ble NCLAT observed that after apponitment of the Interim Resolution Professional (hereinafter referred as 'IRP') and declaration of moratorium, the Board of Director stands suspended, but that does not amount to suspension of Managing Director or any of the Director or officer or employee of the Corporate Debtor. To ensure that the Corporate Debtor remains on going concern, all the Director/employees are required to function and assist the IRP who manages the affairs of the Corporate Debtor during the period of moratorium. If one or other officer or employee had the power to sign a cheque on behalf of the Corporate Debtor prior to the order of moratorium, such power does not stand suspended on suspension of the Board of Directors nor can be taken away by the Resolution Professional. If, the person empowered to sign cheque refuse to function on the direction of the Resolution Professional or misuse the power, in such case it is always open to the Resolution Professional to take away such power after notice to the person concerned.

6)            Share subscription money does not fall within the definition of expression of "FinancialDebt"

Mi s ACPC Enterprises vs. Affinity Beauty Salon Pvt. Ltd.

{(IB) -352(PB)l2017]

The Hon'ble Adjudicating Authority (Principle Bench, New Delhi) has observed that the amount paid for share subscription money would not fall within the definition of expression of "Financial Debt". Financial Creditor would be any person to whom financial debt

Has been owned and includes a person to whom such debt has been legally assigned or transferred to. The expression "financial debt" has been defined under section 5(8) of the Code which means a debt along with interest which is disbursed against the consideration for time value of money and includes money borrowed against the payment of interest. The subscription amount has not been disbursed against the consideration for time value of money nor this is money borrowed against the payment of interest because it lacks the basic ingredient of consideration for the time value of money and it is not borrowed against the payment of interest.

7) Divergent view of NCLAT on unsecured loan as Financial Debt.

Mack SohTech Pvt. Ltd. vs. Quinn Logistics India Ltd.

{CA( AT)(lns)No. 143 of 2017]

DEBT

The Appellant (Mack Soft Tech Pvt. Ltd.) was developing an office complex by the name of "o-city' in Hyderabad. In the process of developing such a complex, the Respondent acquired majority of shareholding of the Appellant for the consideration of Rs. 162.7 Cr. Subsequently, the Respondent has given interest free unsecured loan for the development of .Q-city'. The Hon'ble NCLAT has observed that grant of loan and to get benefit of development is the object of the Respondent. Thus, there is a 'disbursement' made by the Respondent against the 'consideration for time value of money'. The investment was made to get benefit of the development of 'Q-city', which is the "consideration for the time value of money". Thus, the Respondent comes under the ambit of the Financial Creditor.

However, the Hon'bleNCLAT has given different opinion in case of Shreyans Realtors Pvt. Ltd. vs. Saroj Realtors & Developers Pvt. Ltd. [CA(AT) (lns) No. 311 of 2018], where the appellant has granted the unsecured loan to the Corporate Debtor for repayment along with the interest. The Tribunal has said that the Corporate Debtor never accepted to take loan with interest and never understand to replay the load with interest. Therefore the loan in the present case cannot be considered as a "Financial debt" under section 5(8) of the Code.

1)                  Admission of Insolvency Application against the Corporate Debtor even when loan was not disbursedto Corporate Debtor but to a related party and both are co-borrowers.

Au Small Finance Bank Ltd. vs Prabhu Shanti Real Estate Pvt. Ltd. (18) 477 (PB)/2017

The Hon'ble NCLT (Principle Bench, New Delhi) has observed that an insolvency application is admissible even when the loan was not disbursed to the corporate debtor but to the related party (Education society) and both the parties are co-borrowers. The reasons stated by the Hon'ble bench for admitting the application was that the corporate debtor is a co-borrower and has also created charge on its property with respect to the loan.

Further the Hon'ble bench said that the shareholders of the corporate debtor was also member of the education society and fall under the same management. Further, the Hon'ble bench has observed that the affair of the association being managed by the persons who were holding key managerial position and had majority of shareholdings in Corporate Debtor.

2)            Operational Creditor have nolocus to challenge an application filed under Section 7 by Financial Creditor

ATC Telecom InfrastructurePvt. Ltd. Vi s State Bank of India CA (AT)(Insolvenc)yNo. 381 of 2018

An appeal had been filed by the Appellant before Hon'ble NCLAT in the capacity of Operational Creditor challenging the Corporate Insolvency Resolution Process initiated on basis of the admission of the application by Hon'ble Adjudicating Authority filed by the Respondent against the Corporate Debtor namely 'Videocon Telecommunications Limited"'. The main ground of appeal was that the financial creditor had filed the application under Section 7 by colluding with the Corporate Debtor. The Hon'ble NCLAT while dismissing the application filed by the Appellant held that the Operational creditor has no locus to challenge the application under Section 7. Further the Appellate Tribunal also held that the Operational Creditor cannot be considered as aggrieved person and accordingly cannot file an appeal. Further, the question of collusion can only be raised by the Shareholders of the Corporate Debtor been an aggrieved person.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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