IBC- NCLAT Fortnightly Summary (October 16 – October 31, 2024)

The following is a snapshot of the important orders passed by the National Company Law Appellate Tribunal ("NCLAT"), under the Insolvency and Bankruptcy Code, 2016 ("Code"), during the period between October 16 and October 31, 2024.

For ease of reference, the orders have been categorized and dealt with in the following categories i.e., Pre-admission stage, Corporate Insolvency Resolution Process ("CIRP") stage, Post CIRP stage, Liquidation and Miscellaneous.

A. Pre-admission Stage

1. In Century Aluminium Company Limited v. Religare Finvest Limited(Company Appeal (AT) (Insolvency) No. 1719 of 2024), the NCLAT had an opportunity to examine the interplay between the Code and the Arbitration Act, when it analyzed the impact of pendency of an arbitration proceeding initiated by the financial creditor on the Section 7 application filed by it, as well as the course of action to be taken in the event that an application under Section 8 of Arbitration and Conciliation Act, 1996 is filed.
   
   Insofar as the first issue is concerned, the NCLAT held that even when arbitration proceeding is initiated by the financial creditors, it would not preclude such financial creditor from filing a Section 7 application nor would it preclude the Adjudicating Authority from proceeding to consider the debt and default in a Section 7 application.
   
   In the context of the course to be adopted when a Section 8 application is filed, the NCLAT observed that a right to file under Section 8 of the Arbitration and Conciliation Act, 1996 stands forfeited if such an application is not filed before filing a reply to the Section 7 application. Even otherwise, it was noted that the Adjudicating Authority is duty bound to first ascertain the existence of debt and default under Section 7 of the Code before proceeding with an application under Section 8.
   
   
2. In Canara Bank v. GTL Infrastructure Limited (Comp. App. (AT) (Ins) No. 68 of 2023), the NCLAT considered whether the decision of the Supreme Court in the case of Vidarbha Industries Power Limited v. Axis Bank Limited (Civil Appeal No. 4633 of 2021), can be applied to reject a Section 7 application without ascertaining the viability and feasibility of the corporate debtor.
   After noting that the Adjudicating Authority had rejected that Section 7 application clearly on the basis of Vidarbha industries (supra), the NCLAT went onto observe that there was lack of judicious application of mind by the Adjudicating Authority as it failed to take into account relevant factual aspects indicating that the corporate debtor was not in a position to discharge the debt as and when due. Accordingly, the NCLAT cautioned against applying the principles laid down in Vidarbha Industries (supra) without ascertaining the relevant factors to determine the viability of the corporate debtor.

B. CIRP Stage

1. The entitlement of dissenting financial creditors under a resolution plan, especially in context of the decision of the Supreme Court in the case of India Resurgence Arc Private Limited v. Amit Metaliks Limited (Company Appeal (AT) (Insolvency) No.1061 of 2020) being referred to the larger Bench, was considered by SMFG India Credit Co. Limitedv. (CA) Kshitiz Gupta, Resolution Professional of Aditya Vidyut Appliances Private Limited (Company Appeal (AT) (Insolvency) No. 1886 & 1887 of 2024) and Merina Commotrade Private Limited v.Mr. Anand Sonbhadra Resolution Professional of Shubhkamna Buildtech Private Limited (Comp. App. (AT) (Ins) No. 1347 of 2022).
   
   Upholding the decision of the Adjudicating Authority without considering the priority and value of the security interest of the dissenting financial creditors while deciding their entitlement, the NCLAT observed that even when the decision of Amit Metaliks (supra) has been doubted by the Supreme Court in the case of DBS Bank Limited Singapore v. Ruchi Soya Industries Limited (Civil Appeal No. 9133 of 2019), and the question has been preferred to the larger Bench, the decision in the case of Amit Metaliks (supra) is still subsisting and the order passed while relying on the said decision cannot be treated as erroneous.
   
   
2. The NCLAT, in Nilesh Sharma Resolution Professional, Today Homes and Infrastructure Private Limited v. Mordhwaj Singh (Company Appeal (AT) (Insolvency) No. 1691 of 2023), held that development rights granted in favour of the corporate debtor would constitute its property under Section 3 (27) of the Code, which can be taken possession of and protected in the CIRP process. It was further observed that the Adjudicating Authority has the jurisdiction to decide the issue of possession of the corporate debtor and such issues cannot be left to be adjudicated by a civil court.
   
   
3. In the matter of Jatin Mehta v. Rushabh Civil Contractors Private Limited (Company Appeal (AT) (Insolvency) No. 1515 of 2024), after noting that thepresence of financial debt could be established through the entries regarding 'interest on loan' and 'TDS on interest' in the ledger of both the corporate debtor and the financial creditor, the NCLAT went onto observe that such financial debt cannot be extinguished based on a promise to allot premises being developed by the director of the corporate debtor.
   
   In the context of the issue of whether the financial debt was barred by limitation, the NCLAT relied upon a letter issued by the corporate debtor after the expiry of the initial limitation period of the disbursal of the amount and noted that such communication constituted a promise to pay a time barred debt in terms of Section 25(3) of the Indian Contract Act, 1872, which promise gave rise to a fresh period of limitation.
   
   Finally, the NCLAT observed that when a default has been committed by the corporate debtor prior to commencement of the Section 10A period, the bar under Section 10A of the Code cannot be attracted by the corporate debtor making proposal for payment during the 10A period.
   
   
4. In Krystal Stone Exports Limited v. Stressed Assets Stabilization Fund (Comp. App. (AT) (Ins) No. 1086 of 2024), the NCLAT held that an appeal at the instance of the corporate debtor against the order of admission under Section 7 of the Code is not maintainable when filed by the director authorized by the board resolution.

C. Post-CIRP Stage

1. Whether a lease rent and premium payable during the moratorium would constitute CIRP cost was a matter of discussion by NCLAT in Mr. Sunil Kumar Agarwal and Another v.Anand Sonbhadra Resolution Professional of Shubhkamna Buildtech Pvt. Ltd. & Ors (Comp. App. (AT) (Ins) No. 1351 of 2022) and Mr. A. Guhan and Another v. Sunita Umesh, Liquidator, Deltronix India Limited (Company Appeal (AT) (Insolvency) No. 1095 of 2023).
   
   In Sunil Kumar Agarwal (supra), a two-judge Bench relied upon its earlier decision of another two-judge Bench rendered in the case of Sunil Kumar Agrawal v. New Okhla Industrial Development Authority(CA (AT) (Ins) No. 622 of 2022) (with Justice Rakesh Kumar Jain being part of both the Benches and author of both the decisions) to observe that the lease rent or premium payable during moratorium is not covered within the definition of Insolvency Resolution Process Costs, as covered under Section 5(13) of the Code and Regulation 31 of the CIRP Regulations. It may be noted that both the decisions rendered in Sunil Kumar Agarwal failed to take into account the decision of a three-judge Bench of NCLAT in the case of Prerna Singh v. XALTA Food and Beverages Private Limited (Contempt Case (AT) 03 of 2020, decision (dated December 17, 2021), which had held that rent payable to lessor during the moratorium would constitute CIRP costs.
   
   In the case of A. Guhan (supra) also, the NCLAT went onto observe that lease rent payable during the CIRP period would not constitute CIRP costs. However, the decision can be distinguished from the earlier cases discussed, based on the one critical distinguishing feature - being the non-payment of lease rent even prior to the moratorium and hence rejection of the possibility of the lessor claiming that its rights have been affected prejudicially on account of the moratorium.
   
   
2. In Avil Menezes, Resolution Professional of Topworth Urja & Metals Limited v.Ministry of Coal through its Secretary and Ors. (Company Appeal (AT) (Insolvency) No. 944 of 2024), the issue before the NCLAT was whether the amount kept in escrow by the corporate debtor towards meeting the Annual Mine Closure Cost (AMCC) to which the Coal Controllers Organization was the beneficiary, would be an asset of the corporate debtor. Observing that AMCC is part of the estate of the corporate debtor and cannot be kept outside the CIRP to enable its recovery de hors the Code, the NCLAT justified its decision by observing that the Code overrides both the Coal Mines (Special Provisions) Act, 2015, and the Mines and Minerals (Development and Regulation) Act, 1957, and neither of the statutory provisions created any form of security on the money towards the AMCC.
   
   
3. In Dharmesh Jain v.Jayesh Sanghranjka & Ors (Company Appeal (AT) (Insolvency) No. 825 of 2024), the NCLAT had an opportunity to consider whether a power of attorney (PoA) executed in favour of the directors of the corporate debtor for carrying out development, could be cancelled by a resolution plan. Answering the issue in affirmative, the NCLAT held that when a PoA was given for a particular purpose to the appellant therein, as nominee of the corporate debtor, without conferring right in individual capacity, such power of attorney could be cancelled under the resolution plan.
   
   
4. In Janak Jagjivan Shah, Resolution Professional of Rainbow Infrabuild Private Limited v. Committee of Creditors of Rainbow Infrabuild Private Limited (Company Appeal (AT) (Insolvency) No.1406 of 2024), the NCLAT upheld the decision of the Adjudicating Authority that there cannot be early dissolution of the Corporate Debtor under Section 54 of the Code and Regulations 14 of the Liquidation Regulations, without the prior initiation of liquidation, even when it has no assets and negligible cash and bank balance. However, in such an event, the NCLAT suggested that recourse under Section 240 of the Companies Act, 2013 to get the name of the corporate debtor struck off from the Register of Companies, may be considered.
   
   
5. Where a corporate debtor was registered as an MSME during the CIRP period, in Ashish Singh, Resolution Professional for Vibrant Buildwell Private Limited v. Raj Kumar Sahani (Comp. App. (AT) (Ins) Nos. 253-254, 256-257 & 442-443 of 2024), the issue before the NCLAT was whether a resolution plan filed in relation to an MSME corporate debtor could be challenged under Section 29A(c) of the Code on the basis that the majority shareholding of the SRA was held by the managing directors of the corporate debtor.
   
   By observing that eligibility of a successful resolution applicant under Section 29A(c) of the Code (ineligibility on the ground that resolution applicant is a person under whose management or control the corporate debtor's account has become non-performing) has to be assessed on the date of submission of the resolution plan and noting that, while the corporate debtor was not registered as an MSME on the date of admission, it was registered as such as on the date of submission of the resolution plan, the NCLAT observed that on account of Section 240A of the Code, the SRA cannot be considered to be ineligible under Section 29A(c) of the Code.

D. Liquidation Stage

1. In Sanjay Dave v.Andhra Bank Limited and Ors. (Company Appeal (AT) (Insolvency) No. 1128 of 2024), the NCLAT observed that the SRA cannot object to conditions imposed in the letter of intent issued in the CoC which were not alien to the plan submitted by the SRA and when such conditionalities were deliberated in the CoC meetings, to which the SRA was privy.
   
   In the instant case, the NCLAT also observed that even after approval of plan and as long as the plan has not been approved by the NCLT, the CoC can change its mind and approve liquidation.

E. Miscellaneous

1. In Kommineni Venkata Krishna Rao v. Bhuvan Madan, Erstwhile Resolution Professional of Sathavahana Ispat Limited (Company Appeal (AT) (CH) (Ins) No. 281/2024), by observing that the residuary provision contained under Section 60(5) of the Code cannot be invoked where the Code contains specific statutory provisions, the NCLAT held that an application under Section 60(5) is not maintainable for the execution of a judgment.
2. In Shakir v. Fruitful Buildcon Private Limited (Comp. App. (AT) (Ins) No. 1893 of 2024), the NCLAT observed that an appellant who has not applied for the certified copy of an order cannot claim that he was awaiting the grant of the free copy to overcome the limitation bar.
3. In Regional Provident Fund Commissioner-II v. Vinod Balachandran, Resolution Professional of Albanna Engineering (India) Private Limited (Company Appeal (AT) (CH) (Ins) No. 351/2024), the NCLAT held that even the dues which are falling within the ambit of Sections 7Q and 14B of the Employees' Provident Funds and Miscellaneous Provisions Act, 1952, would be covered under Section 36(4)(a)(iii) of the Code and would be outside the waterfall mechanism prescribed under Section 53.