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10 January 2025

IBC- NCLAT Fortnightly Summary (November 1 – November 15, 2024)

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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.
India Corporate/Commercial Law

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 November 1, 2024 to November 15, 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, Liquidation and Miscellaneous.

A. Pre-admission stage

1. In Rishabh Infra through Hari Mohan Gupta v. Sadbhav Engineering Limited (Company Appeal (AT) (Insolvency) No. 1881 of 2024), the NCLAT upheld the rejection of a Section 9 application by observing that interest terms contained in an invoice cannot be operated against the corporate debtor unless there was a prior agreement for interest or documents showing that the corporate debtor had accepted the obligation of interest.

2. In Punjab National Bank v. Walia Traders Limited (Company Appeal (AT) (Ins.) No. 426 of 2021), the NCLAT it was observed that an application pending under the SARFAESI Act, 2002 would not amount to a continuous cause of action, and hence would not extend the limitation period under the Code.

B. CIRP Stage

1. In Vedic Projects Private Limited v. Sutanu Sinha, Resolution Professional for Simplex Projects Limited (Company Appeal (AT) (Insolvency) No.1927 of 2024), the NCLAT had the opportunity to consider whether an operational creditor could claim interest in terms of Section 16 of the Micro, Small and Medium Enterprises Development Act, 2006 ("MSMED Act") based on its MSE status, in the absence of any agreement between the parties regarding the payment of interest on an outstanding amount?

The two-judge Bench of the NCLAT answered the aforesaid issue in the negative. Whilst doing the same, it upheld the decision of the Adjudicating Authority, which had rejected the challenge against the Resolution Professional's refusal to admit the interest claim filed by the operational creditor (appellant) in terms of the MSMED Act, in the absence of there being any clause in the agreement to include the interest on the delayed payment.

While there is now a definitive decision of the NCLAT on the subject, which would hopefully streamline the divergent approaches being adopted by different Benches of NCLTs (with the ones holding that claim based on such interest is maintainable being in the minority), in our view the decision is not free from criticism for its failure to consider that the statutorily prescribed interest is not dependent upon there being any agreement between the parties regarding the same. It may also be noted that the decision failed to offer any rationale for not considering the statutory interest payable under the MSMED Act as part of the claim, while allowing such interest to be claimed under the Employees' Provident Funds And Miscellaneous Provisions Act, 1952.

2. Chandrakant Khemka v. Santanu Bhattacharjee (Member of Suspended Board of Directors of Nandini Impex Private Limited) v. Santanu Bhattacharjee (Resolution Professional of Nandini Impex Private Limited) and Ors. (Company Appeal (AT) (Ins.) No. 1064 of 2023), dealt with the issue of whether an application filed by the lessor seeking the handover of property given on lease with the corporate debtor can be allowed during the moratorium, if such application is also supported by the CoC.

To address the issue, the NCLAT first examined the locus of an erstwhile promoter director of the corporate debtor (who was also a creditor) to challenge such an application and went on to observe that such a person would qualify as an affected party whose grievances are required to be adjudicated by the Adjudicating Authority.

In relation to the primary issue, the NCLAT went on to observe that Section 14(1) (d) of the Code specifically prohibits the recovery of any property by the owner or lessor where such property is occupied by or in the position of the corporate debtor and hence even where such application is supported by the CoC, the Adjudicating Authority lacks the discretion to allow an application to release the property based on an application by owner/ lessor.

In our humble submission, the aforesaid view of the NCLAT appears to be too restrictive in emphasizing that even when such an application for the release of property is supported by the CoC, such an application cannot be allowed by the Adjudicating Authority. One should be mindful of the fact that maintaining a leasehold property would entail incurring lease rental which would qualify as CIRP cost and may put a burden on the ongoing operation of a corporate debtor.

Where the CoC, in their commercial wisdom, has decided to support an application seeking release of a property deemed non-essential for the corporate debtor, the denial of such a prayer merely based on the fact that the application had been made by the owner/ lessor may require reconsideration.

3. In KH Khan and Another v. Art Constructions Private Limited and Ors. (Company Appeal (AT) (Insolvency) No. 1116 of 2024), the NCLAT considered the question of whether the Adjudicating Authority had the jurisdiction to enter into the issue of whether the subject land is an asset of the corporate debtor, or if the parties were required to be relegated to the competent civil court having jurisdiction, and went onto observe that Adjudicating Authority does not lack such jurisdiction.

4. In Hari Vitthal Mission v. Ravi Sethia (Resolution Professional of Suasth Healthcare Foundation) and Other (Company Appeal (Ins) No. 1206 of 2022), the issue before the NCLAT was the jurisdiction of the resolution professional to decide on the related party status of a creditor as well as whether a not-for-profit entity such as a trust or a Section 8 company can be considered as a related party.

In relation to the first issue, the NCLAT took note of Section 21 of the Code which made the resolution professional responsible for the formation of CoC and consequentially, upheld the role of the Resolution Professional to decide on the related party status of a creditor.

In relation to the second and substantial issue, the NCLAT went onto observe that a not-for profit entity such as a trust would fall under the category of related party if the corporate debtor was controlled by such trust. It was further observed that an entity can be treated as a related party even without directly holding any shares, if such entity exercises substantial influence over the corporate debtor.

5. In Vinay Rai v. Technology Development Board (Company Appeal (AT) (Insolvency) No. 1891 of 2024), the NCLAT had an occasion to consider an application seeking the replacement of the resolution professional, who had initially filed the application under Section 94 of the Code. Allowing such application filed by the financial creditor, the NCLAT went on to observe that just because the initial application was filed by the Resolution Professional, it would not make him immune from being substituted, especially where the resolution professional had represented the personal guarantor earlier in relation to the same debt.

6. In Pratham Expofab Private Limited v. Mr. Anil Matta (Company Appeal (AT) (Insolvency) No. 1803 of 2024), the NCLAT addressed the issue of whether a settlement proposal under Section 12A of the Code (suspension of the CIRP process) could be considered at a stage when a Resolution Plan for the Successful Resolution Applicant was already under consideration by the Adjudicating Authority, especially after several previous settlement proposals made by the suspended management had been rejected due to lack of bona fide intent. The NCLAT observed that the suspended management could not insist on the consideration of the settlement proposal when the CoC had already made a business decision to accept the resolution plan and reject the settlement proposal by exercising its commercial wisdom. The NCLAT emphasized that the CoC's decision, made in exercise of its commercial wisdom, was not subject to judicial review.

C. Liquidation Stage

1. In Sunil Surrendrakumar Kakkad v. Sujyot Infrastructure Private Limited and Ors. (Company Appeal (AT) (Insolvency) No. 1423 of 2024), the NCLAT upheld the decision taken by the CoC for the liquidation of the corporate debtor after holding only two meetings, by observing that it was not incumbent upon the CoC to complete the steps for resolution before approving liquidation.

2. In Narottamka Trade and Vyapaat Private Limited v. SPP Insolvency Professionals LLP and Ors. (Company Appeal (AT) (CH) (Ins) No.305/2024), the NCLAT noted that a scheme of compromise or arrangement under Section 230 of the Companies Act, 2013 cannot be put on a higher pedestal and is required to be accommodated within the tight time frame of the Code, and that the sale of the corporate debtor as a going concern is a much more effective and transparent process. The NCLAT also considered that while taking action under Chapter 6 of Liquidation Process Regulations, dealing with realizations of assets of the corporate debtor, selling the corporate debtor as a going concern, will have to be the first priority for the Liquidator.

3. In State Bank of India v. Arvind Kumar (Comp. App. (AT) (Ins) No. 1109 of 2024), the NCLAT went onto cancel a sale of property by the liquidator, by which property owned by the directors was treated to be a part of the asset of the corporate debtor, by observing that there was no basis for treating the third-party asset to be the asset of the corporate debtor.

D. Miscellaneous

1. The NCLAT, in Corob India Private Limited v. Mr. Birendra Kumar Agrawal and Another (Company Appeal (AT) (Insolvency) No. 749 of 2024), held that an interest-free security deposit collected by the corporate debtor against the leased premises could not be classified as a 'financial debt' within the meaning of Section 5(8) of the Code, merely because interest was payable upon a default in the refund of such deposit. Noting the lack of time value of money involved in such deposit, the NCLAT went onto observe that such deposit would rather be classified as an 'operational debt' but cannot be withdrawn during the moratorium as the said deposit constitutes as an asset of the corporate debtor.

2. In Punjab National Bank v. Walia Traders Limited(Company Appeal (AT) (Ins.) No. 434 of 2021), the NCLAT upheld the observation of the Adjudicating Authority that there is no provision in the Code which bars the filing of a second petition by the same financial creditor against the same corporate debtor, if the debt and default in respect of the second petition occurred in a different factual situation.

The update was first published on Bar & Bench.

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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