This newsletter covers key updates about developments in insolvency law during the month of December 2021.
We have summarized the key judgments passed by the Supreme Court (SC), National Company Law Appellate Tribunal (NCLAT), the National Company Law Tribunals (NCLT) and the proposed amendments in the Insolvency and Bankruptcy Code, 2016 (Code) by the Ministry of Corporate Affairs, Government of India (Government). Please see below the summary of the relevant regulatory developments.
1) NCLT CANNOT STAY TERMINATION OF CONTRACT BASED ON GROUNDS UNRELATED TO CORPORATE DEBTOR'S INSOLVENCY.
Matter: TATA Consultancy Services Ltd. v. Vishal Ghisulal Jain, Resolution Professional, SK Wheels Pvt. Ltd.
Order dated: 23 November 2021
In the present case, a facilities agreement executed between TATA Consultancy Services Ltd. (TCS) and SK Wheels Pvt. Ltd. (SK Wheels) was terminated by TCS for repeated deficient services by SK Wheels. The issue in the present case arose as the termination notice dated 10 June 2019 (Termination Notice) was issued by TCS after the NCLT had initiated insolvency proceedings against SK Wheels in March 2019. The NCLT's order staying the Termination Notice and directing TCS to comply with the terms of the facilities agreement was upheld by NCLAT. This judgment of the NCLAT was challenged before the SC.
The issue under consideration before the SC was whether the NCLT can adjudicate contractual dispute between the corporate debtor and a third party, where termination of contract is based on grounds unrelated to corporate debtor's insolvency. The SC held that a party to a contract with a corporate debtor has a right to terminate the same unless:
- The contractual dispute arises in relation to the insolvency of the corporate debtor; and
- The contract is central to the success of the insolvency proceedings of the corporate debtor and its termination will result in the corporate death of the corporate debtor.
For our detailed analysis of the SC's judgment, click here.
2) SHARE PURCHASE WITH ANNUAL PUT OPTION CANNOT BE CONSIDERED AS A DEBT WHICH IS DISBURSED AGAINST CONSIDERATION OF TIME VALUE FOR MONEY
Matter: Hubtown Limited v. GVFL Trustee Company Pvt. Ltd.
Order dated: 29 November 2021
GVFL Trustee Company Pvt. Ltd (GVFL) filed for initiation of corporate insolvency resolution process (CIRP) against Hubtown Limited for a debt by way of equity investment in shares of Hubtown Bus Terminal (Mehsana) Pvt. GVFL alleged that there was a default as its 'put option' was not entertained when a demand notice was sent to Hubtown Limited demanding exit by way of 'put option'. Hubtown Limited challenged the petition on grounds of maintainability.
Disagreeing with GVFL's stance, the NCLT rejected the petition at the stage of maintainability by stating that the claim of the company as a shareholder with right to exercise the put option will not amount to financial debt under the Code. This is because a shareholder undertakes the risk by investing in shares and gets returns in profits through dividends and appreciation in the share prices and therefore buying shares cannot be termed as investment through a loan and equity is not a debt. The NCLT further noted that an 'annual put option' cannot be considered as a debt which is disbursed against consideration of time value for money and that internal rate of return cannot be equated with interest payments. Internal rate of return for an investor in shares is in relation to expected profit and dividend pay-out and capital appreciation of the shares and is totally different to the interest which is return for any investment by way of loan. Accordingly, GVFL's claim of financial debt to initiate CIRP was dismissed.
3) IF THE CORPORATE DEBTOR IS A MSME, IT IS NOT NECESSARY FOR PROMOTERS TO COMPETE WITH OTHER RESOLUTION APPLICANTS TO REGAIN CONTROL OF THE CORPORATE DEBTOR
Matter: C. Raja John v. R. Raghavendran, Resolution Professional of Springfield Shelters Pvt. Ltd
Order dated: 01 December 2021
In the instant case, C. Raja John, the promoter of the corporate debtor Springfield Shelters Pvt. Ltd (Springfield) submitted a resolution plan for Springfield. It was C. Raja John's stand that as Springfield is a micro, small and medium enterprises (MSME), a promoter is eligible to submit a resolution plan under the Insolvency and Bankruptcy Code, 2016 (Code). The NCLT as well as the resolution professional dismissed C. Raja John's resolution plan on the ground that he suffers a disqualification (i.e., disqualified to act as a director) under the Code and he does not meet the eligibility norm. Moreover, his director identification number (DIN) was under default, and it was observed that he was trying to gain a backdoor entry in Springfield in the guise of presenting it as a MSME.
The NCLAT, keeping in view of the object of the Code i.e., maximization of the value of the assets of corporate debtor, held that if the corporate debtor is a MSME, it is not necessary for the promoters to compete with other resolution applicants to regain the control of the corporate debtor. In fact, the DIN of C. Raja John was reactivated pursuant to the directions of the Madras High Court. Hence, the resolution professional was directed to consider the resolution plan of C. Raja John and the order of the NCLT as well as the order passed by the resolution professional rejecting the resolution plan was quashed and set aside.
4) FOR SALE OF THE CORPORATE DEBTOR, ALL PROSPECTIVE BIDDERS SHOULD GET SUFFICIENT NOTICE AND TIME TO ENABLE THEM TO PARTICIPATE IN THE BIDDING IN AN EFFECTIVE MANNER.
Matter: R.K. Industries (Unit-II) LLP v. HR Commercials Pvt. Ltd.
Order dated: 10 December 2021
CIRP was initiated against ABG Shipyard Limited (ABG Shipyard) under the Code. Since no resolution plan could be obtained the NCLT ordered liquidation of ABG Shipyard. The liquidator held five e-auction process which were unsuccessful. Subsequently, the liquidator, after consultation with the stakeholders' consultation committee (SCC), decided to carry out a sale of certain assets of ABG Shipyard. The sale method was a two stage Swiss challenge process i.e., an initial anchor stage and a subsequent second stage. In the anchor stage, R.K. Industries (Unit-ii) LLP (R.K. Industries) was declared as the highest bidder, and other entities were to bid against R.K. Industries.
Around the same time, Welspun Steel Resources Pvt. Ltd. (Welspun) informed the liquidator of its interest in buying all assets of ABG Shipyard including the ones presently under the Swiss challenge bid process. The SCC decided that it would be beneficial if all assets were sold under a consolidated sale to Welspun and accordingly, the liquidator informed the NCLT which allowed cancellation of the second stage of Swiss challenge process and permitted the consideration of the offer of Welspun, while also allowing the bidders of the Swiss challenge process to bid in this consolidated sale which was to be completed within three weeks. R.K. Industries challenged this order of the NCLT before the NCLAT.
NCLAT noted that the reason the liquidator preferred the consolidated sale and cancelled the second stage of Swiss challenge process was:
- it would have completed asset sale within 9 to 12 months, which would otherwise take 15 to 18 months; and
- It would have permitted completion of the liquidation process in a timely manner.
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