RECENT JUDGMENTS

Re: Go Airlines (India) Ltd

National Company Law Appellate Tribunal Principal Bench, New Delhi | Judgment dated May 10, 2023 | Company Petition No. (IB)-264(PB)/2023

Background facts

  • The Company Petition bearing CP (IB) No. 264(PB)/2023 was filed by Go Airlines (India) Ltd (Corporate Applicant) under Section 10 of the Insolvency and Bankruptcy Code, 2016 for the voluntary initiation of CIRP.
  • The Corporate Applicant was incorporated in April 29, 2004 and was engaged in running a lowcost Airline under the brand name 'Go Air' since 2005, which was renamed 'GoFirst' in 2021. The Corporate Applicant is the 3rd largest airline operator in India.
  • The Corporate Applicant was a profitable operator from 2009-10 to 2018-19. However, from 2022, it began to default on the payments towards its vendors and aircraft lessors and received various notices from its lenders.
  • The primary reason for its financial distress was the inherently defective engines supplied by Pratt & Whitney, owing to which almost 34% of its aircrafts were grounded and could not take off.
  • On account of the default, the Corporate Applicant was compelled to cancel 4,118 flights with 77,500 passengers in the preceding 30 days. As a result, the DGCA has also issued a Show Cause Notice dated May 02, 2023 to it.
  • A perusal of the Admission Order reveals that the Corporate Applicant has availed a total debt of INR 5,251 crore from its financial creditors, including Central Bank of India, Bank of Baroda, IDBI Bank, Axis Bank, Deutsche Bank and UT Finance Corporation. While the Corporate Applicant has not defaulted on its payment obligations to the Financial Creditors, it submitted before the NCLT, Principal Bench that given its current situation, the default would be imminent.
  • The Corporate Applicant has averred that it has defaulted on its payment obligations to its operational creditors, i.e., vendors and aircraft lessors. Its dues towards its vendors amount to INR 1,202 crore and those towards its aircraft lessors amount to INR 2,660 crore as on the date of filing.
  • The operational creditors of the Corporate Applicant, led by SMBC Aviation Capital Ltd, Narmada Aviation Leasing Ltd and Yamuna Aviation Leasing Ltd opposed the application filed by the Corporate Applicant, contending that it was necessary to hear the creditors prior to admitting the application under Section 10 of the IB
  • The operational creditors further contended that they wish to file an application under Section 65 of the IBC alleging fraudulent initiation of the CIRP, which ought to be heard prior to the admission of this Application.

Issues at hand?

  • Whether there is any mandatory requirement of issuing notice to Creditors before admitting an application under Section 10 of the IBC?
  • Whether an application under Section 65 can be entertained even after the commencement of CIRP?
  • Whether the Corporate Applicant's application under Section 10 of the IBC ought to be admitted, to initiate the CIRP in respect of the Corporate Applicant?

Decision of the Tribunal

  • The NCLT, Principal Bench relied on the decision of the NCLAT in Unigreen Global Pvt Ltd v. Punjab National Bank & Ors1 to hold that a creditor may object to a petition filed under Section 10 of the IBC, however, on limited grounds, such as the non-existence of debt or default in either fact or law.
  • The Principal Bench noted that in the present case, the creditors have not opposed the application on the ground of non-existence of debt or default.
  • Relying on the application to Adjudicating Authority Rules, 2016, the Principal Bench observed that while the said Rules provide that applications under Section 7 and 9 of the IBC must be served to the Corporate Debtor, there is no requirement for the service of an application under Section 10 of the IBC upon creditors.
  • Thus, the NCLT Principal Bench concluded the issue by holding that under Section 10 proceedings, there is no mandatory requirement of issuing notice to the creditors at preadmission stage. Such notice may be issued to the creditors on the discretion of the NCLT on a case-to-case basis.
  • It further held that in cases of clear apprehension of dilution of the assets of the Corporate Applicant and where public interest is involved, issuance of notice cannot be claimed as a matter of right.
  • The NCLT, focusing on the meaning of the term 'initiates' as used in Section 65 of the IBC, concluded that Section 65 does not distinguish between pre- and post-admission and as such, an application challenging the initiation of the insolvency resolution process can be adjudicated upon even after the initiation of the CIR Process.
  • After ascertaining that there is an existing debt; that the Corporate Applicant has defaulted its repayment obligations; that the application under Section 10 is complete and that the Corporate Applicant is not ineligible under Section 11, the NCLT Principal Bench admitted the application under Section 10.

MK Rajagopalan v. Dr. Periasamy Palani Gounder & Anr

Supreme Court of India | Judgment dated May 03, 2023 | Civil Appeal Nos. 1682-1683 of 2022

Background facts

  • The present appeal was preferred against the order dated February 17, 2022 passed by National Company Law Appellate Tribunal (NCLAT), Chennai Bench.
  • Appu Hotels Ltd, the Corporate Debtor, availed project loans from a consortium of bankers led by Indian Bank to build Le Meridian, Coimbatore. Over time, the Corporate Debtor failed to meet its repayment obligations, leading to the initiation of CIRP under Section 7 IBC.
  • In the CIRP of the Corporate Debtor, the Resolution Plan submitted by MK Rajagopalan was approved by the Committee of Creditors (CoC) with 87.39% majority voting share. Challenging the same, the suspended promoter director of the Corporate Debtor Dr. Periasamy Palani Gounder alleged procedural irregularities in the conduct of the CIRP.
  • The NCLT, Chennai while dismissing the application filed by Dr. Gounder approved the Resolution Plan submitted by MK Rajagopalan, as approved by the CoC.
  • The NCLAT reversed the order of the NCLT and remanded the matter to the CoC with directions to the resolution professional, to inter alia resume the CIRP from the stage of publication of Form 'G', and to invite the EOI afresh as per the CIRP Regulations.
  • Aggrieved by this order of the NCLAT, the Appellant preferred the present Appeal before the Supreme Court.

Issues at hand?

  • Whether the approval of the Resolution Plan had been in contravention of Sections 30(2) and 61(3) of the IBC?
  • Whether the resolution applicant was ineligible to submit a Resolution Plan in terms of Section 29-A(e) of the IBC for being disqualified to act as a director under Section 164(2)(b) of the Companies Act?
  • Whether the Resolution Plan in question leads to violation of Section 166(4) of the Companies Act and hence, cannot be approved in terms of Section 30(2)(e) of the Code?
  • Whether the Appellate Tribunal erred in applying the principles of non-discrimination in relation to related party of corporate debtor and thereby holding against the Resolution Plan in question for want of provision for related party?
  • Whether the Appellate Tribunal erred in holding that settlement offer of the promoter in terms of Section 12-A of the IBC was not placed for consideration of CoC; and whether nonconsideration of such a proposal has any bearing on the question of approval of the Resolution Plan in question?

Decision of the Court

  • Dismissing the present Appeal, the Supreme Court upheld the NCLAT's order which set aside MK Rajagopalan's Resolution Plan on the grounds of ineligibility to submit a plan as an alter ego of the trust 'Sri Balaji Vidyapeeth,' which had already been declared ineligible.
  • Further, the Supreme Court held that the resolution applicant was barred from submitting a Resolution Plan by Section 88 of the Trusts Act, 1882.
  • The Supreme Court also made categorical observations regarding the conduct of the CIRP of the Corporate Debtor. The revised Resolution Plan in the present case was filed directly before the NCLT, without being put to a vote before the CoC, which was deemed improper.
  • Reiterating the law laid down by the Supreme Court in Court in Committee of Creditors of Essar Steels v. Satish Kumar Gupta & Ors2 and K Sashidhar v. Indian Overseas Bank3 , the Supreme Court emphasised that the commercial wisdom of the CoC entails a deliberation by the CoC taking into account the interests of various stakeholders as well as the Corporate Debtor.
  • Underlining the need for the proper consideration of the plan by the CoC, held that any modification to a plan, however small the same may be, must necessarily be placed before the CoC, approved by the CoC after due deliberation and only thereafter can the same be placed before the NCLT for its approval.
  • The Apex Court further found Resolution Plan to be in violation of Section 166(4) of the Companies Act, 2013, which prohibits a director of a company from involving himself in a situation in which s/he may have a direct interest which may conflict with the interest of another company
  • Moreover, the Supreme Court observed that the ineligibility to submit the Resolution Plan as a director under Section 164(2)(b) of the Companies Act, the settlement offer by the promoter under Section 12-A of the Code, and the non-discrimination of related parties were not adequately considered by the NCLAT.

Footnotes

1. Company Appeal (AT)(Insolvency) No. 81 of 2017

2. Civil Appeal No. 8766-67 of 2019

3. (2019) 12 SCC 150

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