This newsletter covers key updates about developments in the Insolvency Law during the month of August 2021.
We have summarized the key judgments passed by the Supreme Court of India (SC), National Company Law Appellate Tribunal (NCLAT), the National Company Law Tribunals (NCLT) and the amendments in the Insolvency and Bankruptcy Code, 2016 (Code) by the Government of India. Please see below the summary of the relevant regulatory developments.
1) THE LOAN AGREEMENT SHOULD BE IN WRITING BETWEEN THE FINANCIAL CREDITOR AND THE CORPORATE DEBTOR IN TERMS OF INSOLVENCY AND BANKRUPTCY (APPLICATION TO ADJUDICATING AUTHORITY) RULES, 2016
Matter: Pawan Kumar v. Utsav Securities Pvt. Ltd. and Anr.
Order dated: 03 August 2021.
In the present case, an application was filed by the financial creditor for initiation of corporate insolvency process against the corporate debtor. It was the case of the financial creditor that it had provided finances to the corporate debtor and the corporate debtor had paid interest and deducted TDS for it. However, the corporate debtor had failed to pay interest thereafter, and also the principal amount. Hence, the financial creditor filed an application before the NCLT seeking initiation of corporate insolvency resolution process (CIRP) against the corporate debtor. The corporate debtor submitted that there was no contractual agreement between the parties specifying the period of the loan nor was any interest rate fixed, and therefore the said amount fell outside the scope of 'financial debt' as defined under the Code. However, NCLT, New Delhi Bench admitted the financial creditor's application for initiation of CIRP against the corporate debtor.
An appeal was filed by the corporate debtor against this order of the NCLT, New Delhi Bench on the ground that there is lack of contractual agreement which can prove the claims of the financial creditor under the Code hence the financial creditor had failed to establish itself as a financial creditor and the transaction as financial debt. The financial creditor submitted that as per the Indian Contracts Act, 1872, oral agreements are valid and enforceable.
The NCLAT allowed the appeal and set aside the order of the NCLT. The NCLAT stated that the NCLT is obliged to investigate the nature of the transaction and should be very cautious in admitting application in order to prevent any person from taking undue benefit of provisions of the Code to detriment the rights of legitimate creditors as well as to protect the corporate debtor from being dragged into CIRP with mala fide intention. The NCLAT held that deduction of TDS cannot be the basis for a transaction to be determined as a financial debt. Further, relying on the RBI guideline and a precedent it was held that there has to be a financial contract as per the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 (Rules) wherein it is a must that the corporate debtor and financial creditor set out the terms of a financial debt including the tenure of the debt, interest payable and the date of repayment. The NCLAT observed that in terms of the Rules there should be a loan agreement in writing between the financial creditor and the corporate debtor.
2) SOCIETIES ARE NOT CORPORATE PERSONS UNDER THE CODE
Matter: Asset Reconstruction Company (India) Ltd. v. Mohammadiya Educational Society.
Order dated: 03 August 2021.
In the present matter, the issue before the NCLAT was whether a society registered under the Societies Registration Act would fall under the definition of a corporate person under the Code. The Code provides that Corporate Insolvency Resolution Process
(CIRP) can be initiated against a 'corporate person' committing default of INR 10,000,000 (Indian Rupees One Million) or more to a financial or operational creditor. Corporate person, as defined in the Code, means:
(i) a company incorporated under Companies Act, 2013 (or previous company law);
(ii) a limited liability partnership established under the Limited Liability Partnership Act, 2008; or
(iii) any other person incorporated with limited liability under any law for the time being in force but shall not include any financial service provider.
The use of the expression "any other person incorporated with limited liability" was interpretated by the NCLAT in light of the provision dealing with applicability of the Code. The NCLAT noted that the provisions of the Code are also applicable to "any other company governed by any special Act for the time being in force, except in so far as the said provisions are inconsistent with the provisions of such special Act." The NCLAT held that the use of the expression "any other person incorporated with limited liability" is wider than "any other company governed by any Special Act" and the definition of 'corporate person' cannot go beyond the application provisions of the Code. The definition must be consistent with such provisions.
NCLAT also interpreted the provisions of the Societies Registration Act to hold that the act of registration of a society shall render it a body corporate by the name under which it was registered, and such a society will have perpetual succession and a common seal, but it will not be considered to be incorporated as a company. Accordingly, NCLAT held that the provisions of the Code would not apply to societies registered under Societies Registration Act as it is not a corporate person.
3) WITHDRAWAL OF THE CIRP AGAINST THE CORPORATE DEBTOR WITHOUT SETTLEMENT OF CLAIMS OF ALL THE CREDITORS CANNOT BE ALLOWED
Matter: Milan Sanyasi v. Rolta BI & Big Data Analysis Pvt. Ltd.
Order dated: 06 August 2021.
In this matter, the question that arose before the NCLT, Mumbai Bench was whether withdrawal of corporate insolvency resolution process (CIRP) can be permitted when the interim resolution professional received claims post admission of the corporate debtor into CIRP. It was held that withdrawal of the CIRP against the corporate debtor without settlement of claims of all the creditors cannot be entertained. The NCLT referred to the judgement of Hon'ble Supreme Court in Indus Biotech v. Kotak India wherein it was held that when a petition is admitted it becomes a proceeding in rem, where the creditor who has triggered the process would lose the control in the proceedings and the CIRP proceedings is required to be considered under the provision of the Code
4) APPLICATION OF OPERATIONAL CREDITOR FOR INITIATING CIRP IS LIABLE TO BE REJECTED IF A GENUINE DISPUTE EXISTS
Matter: Kay Bouvet Engineering Ltd. v. Overseas Infrastructure Alliance (I) Pvt. Ltd..
Order dated: 10 August 2021.
A tripartite agreement was signed between Mashkour Sugar Company Ltd. (employer), Overseas Infrastructure Alliance (I) Pvt. Ltd. (contractor/operational creditor) and the sub-contractor (Kay Bouvet Engineering Ltd./corporate debtor). As per the agreement, the contractor was rendering services to the employer while the sub-contractor was rendering services to both the employer and the contractor, with an objective to fulfil the needs of the employer. The contractor advanced 10% (ten percent) of the contract value to the sub-contractor. However, the tripartite agreement came to be terminated and a fresh agreement was executed between the employer and sub-contractor.
An application seeking CIRP of sub-contractor was filed by the contractor claiming the amount advanced as debt. The sub-contractor disputed the claimed amount stating that the advance payment was made on behalf of the employer and from the funds received by contractor from the employer. Additionally, when a new contract was entered into between employer and the sub-contractor directly, the employer had directed that the advance amount be adjusted against the supplies to be made to the employer for the purpose of completing the project. The NCLT's order rejecting the application of the contractor on the grounds of a pre-existing dispute was set-aside by the NCLAT. The NCLAT's order was then challenged before the SC.
The SC held that if a dispute genuinely exists in reality and is not spurious or hypothetical or misconceived, then the NCLT must reject an application of the operational creditor seeking to initiate CIRP. The SC reiterated that if a pre-existent dispute exists between the parties, the NCLT should reject the application of the operation creditor. It was further stated that at this stage, the NCLT must not be concerned with the merits of the dispute, but merely be satisfied that a dispute exists which is not feeble or a mere contention without any supporting documents. Accordingly, the NCLAT's order was set-aside.
5) APPLICATION FOR INSOLVENCY OF PERSONAL GUARANTOR IS NOT MAINTAINABLE UNLESS INSOLVENCY OR LIQUIDATION IS ONGOING AGAINST THE CORPORATE DEBTOR
Matter: Insta Capital Pvt. Ltd. v. Ketan Vinod Kumar Shah
Order dated: 10 August 2021.
In the present matter, the NCLT Mumbai Bench was dealing with the issue of whether a financial creditor can initiate CIRP against the personal guarantor, without CIRP or liquidation proceedings pending against the Corporate Debtor.
The NCLT noted that in relation to application for CIRP and liquidation for corporate persons including corporate debtors and personal guarantors, the NCLT within whose territory the registered office of the corporate person is located will have jurisdiction to hear and decide the application. Where a CIRP or liquidation proceeding is pending against a corporate debtor before a NCLT, an application relating to CIRP or liquidation or bankruptcy of a corporate guarantor or personal guarantor of such corporate debtor shall also be filed before the same NCLT.
The NCLT, emphasized that only when a CIRP or liquidation proceeding against a corporate debtor is pending before the NCLT, an application against the personal guarantor for the corporate debtor could be filed before such NCLT. NCLT further opined that, filing of an application against the personal guarantor without the corporate debtor undergoing CIRP would vest NCLT with jurisdiction on two courses, one being NCLT and the other one Debt Recovery Tribunal.
6) GOVERNMENT AMENDS THE CODE FOR PRE-PACKS OF MICRO, SMALL AND MEDIUM ENTERPRISES
Notification dated: 12 August 2021.
On 12 August 2021, the Government of India notified the Insolvency and Bankruptcy Code Amendment Act, 2021 (Amendment Act) repealing the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2021 and amending the provisions of Code. The Amendment Act provides for Pre-packaged Insolvency Resolution Process of Micro, Small and Medium Enterprises, and shall be deemed to have come into force from 04 April 2021. For details of the Pre-packaged Insolvency Resolution Process of Micro, Small and Medium Enterprises, please click here for our newsletter for the month of April 2021.
7) NCLT REJECTS APPLICATION FOR WITHDRWAL OF CORPORATE INSOLVENCY RESOLUTION PROCESS OF CORPORATE DEBTOR STATING BANKRUPTCY COURT NEEDS TO BE VIGILANT AND THAT ONLY UNPREJUDICIAL SETTLEMENT PLANS SHOULD BE PERMITTED TO SUCCEED
Matter: M/s. Siva Industries and Holdings Limited
Order dated: 12 August 2021.
In the present matter, the NCLT rejected the application filed by the promoter of the corporate debtor for withdrawing the corporate insolvency resolution process of the corporate debtor and accordingly admitted the resolution professional's application for liquidation of the corporate debtor. The promoter, although ineligible to submit a resolution plan was trying to restructure the loans under the pretext of a settlement proposal.
The NCLT rejected settlement proposal stating that bankruptcy court needs to be vigilant in withdrawal of application cases and only unprejudicial settlement plans should be permitted to succeed. The NCLT rejected the withdrawal application on several grounds inter alia being that the settlement proposal made by the promoter was not a settlement proposal but a 'business restructuring plan' as without even receiving enough credit from the promoter, the committee of creditors (CoC) had approved the withdrawal plan. Secondly, as per the settlement plan, there was no final offer made by the promoter of the corporate debtor and also the acceptance made by the CoC in this regard. There was no finality between the promoter of the corporate debtor and the CoC as per the settlement proposal. Therefore, there was an ambiguity in the terms of settlement. Thirdly, the CoC has not protected itself against default by the promoter once the proposal is approved which transcends beyond the scope of Code.
8) LIQUIDATOR IS AUTHORISED TO SELL THE CORPORATE DEBTOR AS A GOING CONCERN UNDER THE CODE
Matter: M/s. Mohan Gems & Jewels Private Limited v. Vijay Verma and Anr.
Order dated: 24 August 2021.
In this case, the NCLAT set aside an order of the NCLT where the NCLT rejected an application by the liquidator seeking closure of the liquidation process as the corporate debtor was being sold as a going concern under the Insolvency and Bankruptcy Board of India (Liquidation process) Regulations, 2016 (Liquidation Process Regulations). The NCLT stated that if the process of sale as a going concern in liquidation will be in violation of the company concept. It was observed by the NCLT that the Insolvency and Bankruptcy Board of India (IBBI) may bring in subordinate procedure for implementation of the Code but cannot rewrite the procedure.
It was submitted by the liquidator that as per the Liquidation Process Regulations he is authorized and allowed to sell the corporate debtor as a going concern and that the IBBI is empowered under the Code to make regulations to carry out the provisions of the Code.
The NCLAT observed that the power to frame regulations is conditioned by two requirements i) regulations have to be consistent with the provisions of the Code and the rules framed by the Central Government and; ii) the regulations must be to carry out the provisions of the Code. The NCLAT held that IBBI was well within its delegated power to make regulations. Further, the sale of the corporate debtor was carried out by the liquidator in accordance with the Liquidation Process Regulations and accordingly allowed the appeal.
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