Restructuring & Insolvency Monthly Update | June 2022 - Insolvency/Bankruptcy

RECENT JUDGMENTS

New Okhla Industrial Development Authority v. Anand Sonbhadra

Supreme Court of India | Civil Appeal No. 2222 of 2021 with Civil Appeal No. 2367-2369 of 2021/2022 SCC OnLine SC 631 | Judgment dated May 17, 2022

Background facts

Vide lease deed dated July 30, 2010, New Okhla Industrial Development Authority (NOIDA/Appellant) leased a plot to Shubhkamna Buildtech Pvt Ltd (Corporate Debtor) for a period of 90 years.
Subsequently, the Corporate Insolvency Resolution Process (CIRP) of the Corporate Debtor was initiated and in terms of the provisions of the IBC, the claims of the creditors of the Corporate Debtor were invited. In view of the same, NOIDA also submitted its claim under Form-B as an Operational Creditor and attended meetings of Committee of Creditors (CoC).
Thereafter, contending that the lease deed executed between NOIDA and the Corporate Debtor is a financial lease, NOIDA filed its claim under Form-C as provided under the IBBI (Insolvency Resolution Process) Regulations, 2016 (CIRP Regulations) as a Financial Creditor and requested for a voting share in the CoC.
The claim of NOIDA was rejected as a Financial Creditor, and the issue of whether the Appellant is a Financial Creditor of the Corporate Debtor or not was brought before the NCLT by way of an application filed by NOIDA.
The NCLT held that there was no financial lease in terms of the Indian Accounting Standards and there was no financial debt. Hence, the application filed by the NOIDA was dismissed by holding that NOIDA is not a Financial Creditor of the Corporate Debtor. The NCLAT upheld the order of the NCLT and held that the lease deed in question was not a financial lease as it heavily skewed in favour of the Appellant and there was no substantial transfer of risks and rewards incidental to ownership.
Aggrieved by the order of the NCLAT, NOIDA filed an Appeal before the Supreme Court.

Issue at hand?

Whether the impugned lease is a financial lease to categorize the Appellant as a Financial Creditor within the meaning of the IBC?

Decision of the Court

The Court analyzed the terms of the lease deed and interpreted the definition of Financial Debt, Financial Creditor, Operational Debt and Operational Creditor, as provided under the IBC. Additionally, reference was also made to the word 'transferee' as defined under Section 2(f) of the Uttar Pradesh Industrial Area Development Act, 1976.
Thereafter, the Supreme Court made the following observations in order to decide whether the current lease deed can be said to be a financial debt under Section 5(8)(d) and 5(8)(f) of the IBC and whether NOIDA is a Financial Creditor:
- That for a lease to be a financial lease, there should be a substantial transfer of all the risks and rewards incidental to ownership of an underlying asset. On the contrary, lease payment under an operating lease is on straight line basis or another systematic basis.
- Considering the lease in question, even if it is an admitted fact that there is a debt in this case, 'disbursement of debt' is a primary condition for application of Section 5 (8) of the IBC. While determining the same, it is important to note that it may be true that the word 'transaction' includes transfer of assets, funds or goods and services from or to the corporate debtor; however, to import the definition of 'transaction' in Section 2(33), involving the need to expand the word 'disbursement', to include a promise to pay money by a debtor to the creditor, will be uncalled for straining of the provisions.
- Hence, the Apex Court rejected the contention of NOIDA that the disbursal under Section 5(8) can also be from debtor to creditor and held that as regard to the lease in question, there has been no disbursement of any debt (loan) or any sums by the NOIDA to the lessee.
In view of the above, the Court went on to hold that for a lease that is not a financial lease under Section 5(8)(d) of the IBC but may be established as a financial debt under Section 5(8)(f) of the IBC, provided that the transaction in which any amount is raised holds a 'commercial effect of borrowing'.
The Court concluded that the lease in question does not fall within the ambit of Section 5(8)(f). This is for the reason that the lessee has not raised any amount from the Appellant under the lease, which is a transaction. The mere permission or facility of moratorium, followed by staggered payment in easy instalments, cannot lead to the conclusion that any amount has been raised under the lease from the Appellant, which is the most important consideration
Hence, the Supreme Court held that SC that NOIDA is not a Financial Creditor, and the lease deed does not give rise to a financial debt under Section 5(8) of the IBC. As regards, to the status of the Appellant being an Operational Creditor, the Hon'ble Court upheld the decision of the NCLT and the NCLAT in declaring NOIDA as an Operational Creditor in terms of the IBC.

HAS Viewpoint

The above decision clarifies the position of development authorities like NOIDA as Operational Creditors in cases where NOIDA has provided the land under a lease deed..

Indian Overseas Bank v. RCM Infrastructure Ltd & Anr

Supreme Court of India | Civil Appeal No. 4750 of 2021 | Judgement dated May 18, 2022

Background facts

Indian Overseas Bank (Appellant) had extended credit facilities to RCM Infrastructure Ltd (CD). The CD failed to repay the dues and its loan account was declared as a Non-Performing Asset on June 13, 2016.
The Appellant issued Demand Notice under Section 13(2) of the SARFAESI Act, 2002 (Act). On failure of payment, the Appellant took symbolic possession of two secured assets (Assets) mortgaged with it, by invoking Section 13(4) of the Act r/w Rule 8 of the Security Interest (Enforcement) Rules, 2002 (Rules). An e-auction notice was issued on September 27, 2018.
Subsequently, the CD filed a petition (IP) under Section 10 of the IBC before the NCLT on October 22, 2018 and the same was admitted on January 3, 2019. The Corporate Insolvency Resolution Process (CIRP) commenced, and moratorium was ordered.
In the meantime, the Assets were sold in the second e-auction conducted by the Appellant on December 12, 2018. The sale was confirmed on December 13, 2018 on deposit of 25% of the bid amount and a sale certificate was issued to the bidders. The Appellant accepted to receive the balance 75% till March 8, 2019 by exercising its powers under Rule 9(4)(a) of the Rules.
Pursuant to commencement of the CIRP, the Appellant filed its claim with the IRP as the balance 75% was not yet received and revised its claim when the balance was received during the pendency of the CIRP.
Thereafter, the promoter of the CD filed an application before the NCLT to set aside the sale during the CIRP period or cancel the transaction. The NCLT vide order dated July 15, 2020 (Impugned Order) set aside the sale.
Aggrieved, the Appellant filed an appeal before the NCLAT against the Impugned Order. However, the NCLAT dismissed it vide order dated March 26, 2021 and upheld the Impugned Order of the NCLT.
Consequently, the Appellant filed an Appeal before the Hon'ble Supreme Court against the NCLAT judgment upholding the Impugned Order of NCLT.

Issue at hand?

Whether proceedings under the SARFAESI Act can continue against the Corporate Debtor once CIRP is admitted and moratorium is ordered?

Decision of the Court

The Supreme Court dismissed the Appeal preferred by Appellant and observed that the overriding effect of Section 14(1)(c) of the IBC over any other law prohibits any action to foreclose, recover or enforce any security interest created by the CD in respect of its property, including actions under the Act. In furtherance to this, the Supreme Court also upheld the decision of NCLAT and NCLT to set aside the sale of Assets, which had purportedly concluded only after the moratorium had kicked in.
While arriving at this decision, with regard to overriding power of the IBC under Section 238, the Supreme Court referred to the decisions of Innoventive Industries Ltd v. ICICI Bank & Anr¹, Principal Commissioner of Income Tax v. Monnet Ispat & Energy Ltd² and Ghanashyam Mishra & Sons Pvt Ltd through the Authorized Signatory v. Edelweiss Asset Reconstruction Company Ltd through the Director & Ors³.
Further, the Court deliberated upon the factual matrix of the matter in the light of the sale of the Assets and observed that the sale governed by Rules 8 and 9 of the Rules would be complete only when the auction purchaser makes the entire payment and the authorized officer, exercising the power of sale, issues a certificate of sale of property in favor of the purchaser.
After observing the facts along with the provisions of the IBC, the Court concluded that the sale would be considered to be completed only on March 8, 2019 which falls after the commencement of CIRP and imposition of moratorium. The Court held that since IBC has overriding effect over other laws, the sale of Assets was rightfully set aside.

HAS Viewpoint

This decision highlights the importance of resolution of the Corporate Debtor over securing the interest of individual creditors. It re-emphasizes that the IBC is a complete legislation, and it prevails over other legislations, including the SARFAESI Act.

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Footnotes

1. (2018) 1 SCC 407

2. (2018) 18 SCC 786

3. (2021) 9 SCC 657

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