1. Concept of Reverse Corporate Insolvency Process.

The Hon'ble National Company Law Appellate Tribunal (NCLAT) in Flat Buyers Association Winter Hills-77, Gurgaon vs Umang Realtech Private Limited through IRP & Ors [CA(AT)(Insolvency) No. 926 of 2019] introduced the concept of Reverse Corporate Insolvency Resolution Process which means that during the Corporate Insolvency Resolution Process, the resolution (end result) is reached without approval of the third-party resolution plan.

This was done with the intention that the interest of all the stakeholders including allottees, financial institutions, etc are protected and the Real Estate Company keeps functioning as going concern with the help of promoter working along with the Resolution Professional. The Hon'ble NCLAT also issued various directions w.r.t CIRP against a real estate infrastructure and same are enumerated as follows:

  1. In CIRP against a real estate, if allottees (financial creditors) or financial institutions/Banks (Other Financial Creditors) or Operational Creditors of one project initiated CIRP against the Company then the allottees or financial institutions/Banks or operational creditors of the other project cannot file its claim before the Resolution Professional. Further, the CIRP will be confined to such a project of the Company.
  2. A secured creditor such as financial institutions/banks cannot be provided with the asset (flat/apartment) by preference over the allottees (Unsecured Financial Creditors) to whom the project has been approved. Their claims are to be satisfied by providing the flat/apartment.
  3. As an alternative to achieve the object of maximization of the asset, an allottee may agree to opt for another flat/apartment or one tower or another tower if not allotted to any other.
  4. Prayer for refund cannot be allowed by the Adjudicating Authority or by the NCLAT.

2. Directorate of Enforcement is not having Jurisdiction to attach the property of the Corporate Debtor however, it may file a claim as Operational Creditor.

JSW Steel Limited Vs Mahender Kumar Khandelwal & Anr

[Company Appeal (AT) (Insolvency) No. 957 of 2019]

In the present appeal the Hon'ble NCLAT has considered the following issues:

  1. The jurisdiction of 'Directorate of Enforcement' to attach the property of the 'Corporate Debtor' or part thereof which is undergoing the Corporate Insolvency Resolution Process ("CIRP");
  2. Whether the 'Directorate of Enforcement' comes within the meaning of 'Operational Creditor' in terms of Section 5 (20) and (21) of the 'Insolvency and Bankruptcy Code, 2016' for the purpose of money claim (civil matter), which may be generated out of the attached property/ part thereof of the 'Corporate Debtor'.
  3. Whether 'JSW Steel Limited' (Successful Resolution Applicant) is a related party of the 'Bhushan Power and Steel Limited' (Corporate Debtor) pursuant to their shareholding in joint venture company i.e. Rohne Coal Company Private Limited.

In this appeal the Union of India through the Ministry of Corporate Affairs in consultation with the Department of Financial Services and the Banks has made the following submissions:

  1. The Ministry post-meeting with the officials of the Department of Financial Services and the Banks (Committee of Creditors) it was unanimously recognized that the Secured creditors' rights have to be protected in the resolution by maximizing the value of assets of the corporate debtor under the supervision of the NCLT
  2. It was added that the resolution plan approved by the Adjudicating Authority is binding such an approved Resolution Plan is binding on all stakeholders, including all government agencies. Section 31(1) of the amended Insolvency and Bankruptcy Code (Amendment) Act, 2019 makes it clear that the resolution plan is binding on all statutory authorities.
  3. Also further if any investigation is undergoing against the corporate Debtor by the Central Bureau of Investigation ("CBI"), Serious Fraud Investigation Office ("SFIO") and/ or the Directorate of Enforcement ("ED") such investigations must be treated or considered separately that of Corporate Insolvency Resolution Process. The management of the company will be responsible for the crimes committed under any of these rules and regulations
  4. Regarding the assets of the corporate debtor, once the Corporate Insolvency Resolution Process (CIRP) under IBC has completed, the enforcement agencies cannot take any actions against the assets of the corporate debtor such as attachment or confiscation of the assets
  5. Once the resolution plan is approved and the new management takes over the control it is not possible to attach asset in the hands of new promoters or resolution applicant would defeat the purpose of the IBC
  6. Directorate of Enforcement has the power to deal with or attach the personal assets of the old promoters and the other accused but not the assets of the Corporate Debtor which has been acquired in good faith, which is financed by the secured lenders. So accordingly the assets of the corporate debtor are not obtained through proceeds of crime under the Prevention of Money Laundering Act, 2002 ("PMLA) and need not be subject to attachment by the Directorate of Enforcement after approval of Resolution Plan by the Adjudicating Authorities.

The Hon'ble NCLAT, after considering the above submissions of the Union of India through Ministry of Corporate Affairs and the steps were taken by the 'Directorate of Enforcement', held that 'Directorate of Enforcement' is prohibited from the attachment of any property of the 'Corporate Debtor' without prior approval of the NCLAT. Further, the property which has been already attached shall be released in favor of the 'Resolution Professional' immediately.

Furthermore, the Hon'ble NCLAT has also held that in case assets are seized by the Enforcement Directorate and finally if it is proven that the assets were purchased out of the 'proceeds of crime', such an amount generated out of the assets will come within the meaning of 'Operational Debt' payable to the Enforcement Directorate and thus the Enforcement Directorate may file claim in terms of the provisions of the Code.

Furthermore, regarding the Related party issue, Directorate of Enforcement alleged that since 'Bhushan Power and Steel Limited' (Corporate Debtor) and 'JSW Steel Limited' (Successful Resolution Applicant) is holding 24.09% and 49% equity respectively in joint venture company i.e. 'Rohne Coal Company Private Limited' they should be treated as Related party thus making them ineligible.

The Hon'ble NCLAT while considering the issue held that pursuant to Section 32A (1) (a) of the 'I&B Code' and the definition is given under Section 5(24) of the 'I&B Code' it is clear that 'JSW Steel Limited' cannot be considered as an associate company/ related party of the 'Corporate Debtor' by virtue of their investment in downstream joint venture company i.e. 'Rohne Coal Company Private Limited'. Instead 'Rohne Coal Company Private Limited' will be considered as an 'associate company' of both the 'Corporate Debtor' as well as of the 'Successful Resolution Applicant',

Further, it stated that as per the directions of the Central Government if they are made to form a consortium or joint venture to carry out the business such person cannot be made ineligible in terms of Section 32A (1) (a) by stating that they are related parties

3. The Sole Proprietary Concern, not falling into the definition of person Section 3(23), cannot initiate IBC proceedings

R.G. Steels vs. Berrys Auto Ancillaries (P) Ltd.


RG Steels, a proprietorship concern, filed a Petition before the National Company Law Tribunal, New Delhi Bench ("NCLT") as Operational Creditor under the provisions of Section 9 of the Insolvency and Bankruptcy Code, 2016 ("IBC" or "Code") seeking for the initiation of Corporate Insolvency Resolution Process ("CIRP") in relation to the amount allegedly unpaid and default against M/s. Berrys Auto Ancillaries Private Limited ("Corporate Debtor").

The NCLT dismissed the application filed by the Operational Creditor, stating that the Operational Creditor is a sole proprietorship concern and by virtue of definition as contained in Section 3(23) of IBC, a person even though includes an individual it does not include within its ambit a Sole Proprietary Concern. Accordingly, the petition was dismissed by the NCLT.

4. Pre-existence of a dispute to be proved to dismiss the application under Section 9

M/s Mohit Minerals Limited v. M/s Shree Rama Newsprint Limited

[Company Appeal (AT)(Insolvency) No. 620 of 2019]

The Hon'ble National Company Law Appellate Tribunal ("NCLAT") in its recent judgment M/s Mohit Minerals Limited v. M/s Shree Rama Newsprint Limited upheld the observations made by the National Company Law Tribunal, Ahmedabad Bench, Ahmedabad ("NCLT/Adjudicating Authority") and accordingly dismissed the appeal in view of the existing dispute prior to the receipt of Demand Notice.

In the present case, the Respondent-Corporate Debtor was forced to purchase the goods from another supplier since the Appellant failed to supply the goods as required by the Respondent. Pursuant to a clause in the Agreement between the two parties in this respect, the Respondent asked the Appellant to pay the price difference that the Respondent had to pay to purchase the goods that the Appellant had failed to supply. However, the Appellant requested the payment from the Respondent for the unpaid amount and on failure of Respondent to pay the sum, the Appellant issued a Demand Notice to the Respondent under Section 8 of Insolvency and Bankruptcy Code, 2016 ("IBC") and then proceeded to initiate Corporate Insolvency Resolution Process ("CIRP") in NCLT against the Respondent. However, NCLT rejected the said application on grounds of an existing dispute. The Appellant challenged the impugned order on the grounds that the dispute which was raised by the Respondent is not a bonafide dispute and it is a mere sham dispute raised by the Respondent to escape liability of the operational debt. The Appellant contended that the dispute raised by the Respondent-Corporate Debtor is not a bona fide dispute, whereas the Respondent argued that dispute clearly existed prior to the issuance of Demand Notice dated 01.02.2018.

The Hon'ble Bench opined that it is important to be sure whether there is a pre-existence of the dispute prior to the receipt of Demand Notice or there is a record of dispute in the Information Utility. Basis this, the Hon'ble Bench held that in the present case the dispute between the parties truly existed prior to the issue of Demand Notice and was of the view that it is a bonafide dispute and not hypothetical or spurious as contended by the Appellant.

Therefore, in view of the above, NCLAT held that the Adjudicating Authority rightly rejected the application and accordingly, the appeal was dismissed.

5. Resolution Plan before amended Regulation 38 may allow differential treatment amongst financial creditors

Rahul Jain Vs. Rave Scans Pvt. Ltd. & Ors.

[Civil Appeal No. 7940 OF 2019]

The Hon'ble Supreme Court vide its recent judgment set aside the observations made by the National Company Law Appellate Tribunal ("NCLAT") and restored the order passed by the National Company Law Tribunal ("NCLT/Adjudicating Authority") whereby the NCLT held the differential treatment and pay-out to different financial creditors as justified and legal.

In the present case, the Corporate Insolvency Resolution Process ("CIRP") was initiated against the Corporate Debtor under Section 10 of the Insolvency and Bankruptcy Code, 2016 ("IBC"). The Adjudicating Authority approved the Resolution Plan which was challenged by Hero Fin Corp ("Financial Creditor/ Second Respondent"/"Hero") alleging discrimination on the grounds that the secured financial creditors were provided with a higher percentage of their claim amounts.

NCLAT while setting aside the NCLT's order for approving the Resolution Plan, relied upon Central Bank of India v. Resolution Professional of the Sirpur Paper Mills Ltd. & Ors., and Binani Industries Ltd. v. Bank of Baroda & Anr. and noted that Regulation 38 had been held to be discriminatory in these cases due to which an amendment was made on 5th October 2018, and the provision in Regulation 38(1)(c) on liquidation value payable to financial creditors was deleted. Since the Regulation was held to be discriminatory, the same was amended to read as follows:

38. Mandatory contents of the resolution plan.--

(1) The amount due to the operational creditors under a resolution plan shall be given priority in payment over financial creditors.

(1-A) A resolution plan shall include a statement as to how it has dealt with the interests of all stakeholders, including financial creditors and operational creditors, of the corporate debtor.

Hon'ble NCLAT was of the opinion that Ld' NCLT had wrongfully allowed the Resolution Plan and discriminated against the dissenting financial creditor, in terms of the amended Regulation 38.

The Hon'ble Apex Court held that given that since the resolution process began well before the amended regulation (Regulation 38(1-A)) came into force and the resolution plan was prepared and approved before that amendment was enforced, hence the observations of NCLAT, holding the differential treatment of the secured financial creditors and dissenting financial creditor (which was an NBFC and had charge over only specific plant and machinery and personal guarantee of Promoters) was not justified. The Hon'ble Supreme Court hence noted that the plan was approved and except the objections of the dissenting creditor (i.e. Hero), the plan had attained finality. Having regard to these factors and circumstances, it was held that the NCLAT's order was not in accordance with the law and was thus set aside, upholding the order of the NCLT, holding that the financial creditor was not discriminated against which lead the NCLAT to modify the Adjudicating Authority's directions.

6. Assets of Corporate Debtor cannot be sold back to the Promoters of the Corporate Debtor

State Bank of India v. Anuj Bajpai (Liquidator)

[Company Appeal (AT) (Insolvency) No. 509 of 2019]

The Hon'ble National Company Law Appellate Tribunal ("NCLAT/Appellate Authority") vide its judgment passed on 18.01.2019 dismissed an appeal filed by the State Bank of India ("SBI/Financial Creditor/Appellant"), in this matter wherein SBI wanted to sell its secured interest to the Promoter of the Corporate Debtor.

In this case, Ld' NCLT, Mumbai allowed SBI to opt-out of the liquidation process under Section 52(1)(b) of the Insolvency and Bankruptcy Coe, 2016 ("I&B Code"), however simultaneously imposed a restriction on SBI to not sell the assets to any person who is disqualified under Section 29A of the I&B Code.

SBI thus filed this appeal contending that there did not exist any such bar as per the provisions of the Code. It was the argument of SBI that once the financial creditor had opted out of the liquidation process, then the creditor was entitled to realize the security interest in terms of Section 52(4) of the I&B Code and was not restricted to sell the same to either the Promoters of the Corporate Debtor or any other person who falls within the ambit of Section 29A of the I&B Code.

The Liquidator, on the other hand, contended that allowing the Financial Creditor to sell off their assets to the promoters of the Corporate Debtor would unequivocally defeat the purpose of the Code. The Liquidator argued that allowing SBI to sell off the assets to the Promoters would:

  1. mean that the assets shall go back to the same management or defaulting parties, who have committed the default and;
  2. lead to cartels being formed by the defaulting parties with the 'Financial Creditors'.

Hon'ble NCLAT in this regard, noted the proviso to Section 35(1)(f) of the I&B Code, 2016 that read as follows:

"Provided that the liquidator shall not sell the immovable and movable property or actionable claims of the corporate debtor in liquidation to any person who is not eligible to be a resolution applicant;"

The Appellate Authority further referred to the celebrated judgment of NCLAT, Jindal Steel & Power Limited v. Arun Kumar Jagatramka & Anr. [Company Appeal (AT)(Insolvency) No.221 of 2018], wherein it was held that:

"...the Promoter, if ineligible under Section 29A cannot make an application for Compromise and Arrangement for taking back the immovable and movable property or actionable claims of the 'Corporate Debtor'.

Hon'ble NCLAT quoted Section 52(4) of the I&B Code, which reads as follows:

"A secured creditor is entitled to enforce, realize, settle, compromise or deal with the secured assets in accordance with such law as applicable to the security interest being realized and to the secured creditor and apply the proceeds to recover the debts due to it."

Thus, the Appellate Authority dismissed the appeal filed by SBI stating that the Appellant could not after seeking permission from the Liquidator to realize the security interest and then deny to abide by the restriction imposed by the Liquidator and confirmed by NCLT.

7. The liquidator must consider a Scheme under Section 230 of the Companies Act, 2013 to revive the Corporate Debtor.

Sunil Kakkad Vs Parag Sheth, The Liquidator/ Resolution Professional & Ors.

[Company Appeal (AT) (Insolvency) Nos. 1260-1261 of 2019]

In this case, the Hon'ble National Company Law Appellate Tribunal ("NCLAT/Appellate Authority"), vide its order dated 19th November 2019, once again revisited the objectives of the Insolvency and Bankruptcy Code, 2016 ("I&B") to emphasize that it was important that a Corporate Debtor remains or is even sold off as a 'going concern' and if a successful Scheme under Section 230 of the Companies Act, 2013 could be presented, then the Liquidator needed to consider the same.

In the present case, the National Company Law Tribunal, Ahmedabad Bench ("NCLT") had vide its order dated 22.08.2019 ordered liquidation of the Corporate Debtor. The Appellant, the Promoter of the Corporate Debtor filed an appeal against the said liquidation order on the ground that even though the Corporate Insolvency Resolution Process ('CIRP') against the Corporate Debtor had started on 30th November 2017, however, the 'Interim Resolution Professional' and 'Resolution Professional' did not take any steps in accordance with the provisions of the I&B Code. As a result, neither any valuation was made nor any Information Memorandum was published within the time of 180 days or even thereafter within 270 days.

Thereafter, the impugned order of Liquidation was passed in view of various observations which are as follows:

The Appellant contended that there were a number of 'Resolution Applicants' (including M/s. Tejmalbhai & Co, who also filed an interlocutory application before the Hon'ble NCLAT) who could submit a successful 'Resolution Plan'.

The Hon'ble NCLAT in view of various judgments and the objectives and statement of the I&B Code, which is to maximize the assets of the Corporate Debtor and balance the stakeholders such as the financial creditors, operational creditors, secured creditors, and unsecured creditors without any discrimination, observed that if there was the slightest possibility to provide a viable 'Scheme' under Section 230 of the Companies Act, 2013 in order to take over the Corporate Debtor, then the Liquidator was bound to follow the due procedure as laid down in the Companies Act, 2013 and as discussed by various courts in the above-mentioned cases. The Appellate Tribunal further observed that it was important that such a Scheme was not only brought to the notice of the Liquidator but was also considered to ensure that attempts were first made to revive the Corporate Debtor by protecting it from its management under Section 230 of the Companies Act, 2013. Only if such a Scheme failed would the Liquidator take steps to first sell the Corporate Debtor as a going concern and only as a last resort liquidate the Corporate Debtor.

It is pertinent to note that the Hon'ble NCLAT allowed the Appellant (M/s Tejmal Bhai & Co.) to present a Scheme even though it was observed by the Ld' NCLT that the Corporate Debtor was not a going concern and had not conducted any business in the last 5 years.

8. It is not necessary to match the Amount of Resolution Plan with the Liquidation Value under the CIRP. Further, the approved Resolution Plan cannot be withdrawn under the provisions of Section 12A of the Code.

Maharashtra Seamless Limited Vs Padmanabhan Venkatesh & Ors.

[Civil Appeal Nos. 4242 and 4967-4968 of 2019]

In this case, the appeal was initiated by M/s. Seamless Tubulaar Private Limited, the successful Resolution Applicant ("Resolution Applicant") in the Corporate Insolvency Resolution Process ("CIRP") of United Seamless Tubulaar Private Limited ("Corporate Debtor") initiated under the provisions of the Insolvency and Bankruptcy Code, 2016 ("IBC"/ "Code"). The Adjudicating Authority, the National Company Law Tribunal, Hyderabad Bench ("NCLT") by an order dated 21st January 2019 approved the resolution plan submitted by the Resolution Applicant which offered an upfront payment of Rs. 477 Crores. The resolution plan submitted by the Resolution Applicant was approved by 87.10% vote of the Committee of Creditors ("COC"). However, the order of the NCLT was carried up in appeal before the National Company Law Appellate Tribunal ("NCLAT") by two parties namely Padmanabhan Venkatesh (Promoter of the corporate debtor) and the Indian Bank (one of the financial creditors). The complaint of Padmanabhan Venkatesh and the Bank before the NCLAT was primarily on the ground that the approval of the resolution plan amounting to Rs. 477 crores were giving the Resolution Applicant windfall as they would get assets valued at Rs. 597.54 crores at a much lower amount.

Hon'ble NCLAT in the appeal filed before it observed that the 'Resolution Plan' is against the statement and object of the IBC and therefore the Resolution Plan has to be modified. Accordingly, the NCLAT vide common order dated 8th April 2019 in the aforesaid appeals, inter-alia, held that the Resolution Applicant should increase upfront payment of Rs. 477 Crores as proposed to the 'Financial Creditors', 'Operational Creditors' and other Creditors to Rs. 597.54 Crores by paying additional Rs. 120.54 Crores approximately to make it at par with the average liquidation value of Rs. 597.54 Crores. It was further held that until the resolution plan is modified, the Resolution Applicant cannot take over the Corporate Debtor. The NCLT will allow the Resolution Applicant to take over the possession of the 'Corporate Debtor' including its moveable and immoveable assets and the plant only if the 'Resolution Applicant' modifies the 'Resolution Plan', as ordered above and deposits another sum of Rs. 120.54 Crores within 30 days. On failure, the resolution plan approved in favor of the Resolution Applicant shall be set aside and the NCLT will pass appropriate order in accordance with the law.

Thereafter, the Resolution Applicant filed an application before the Supreme Court for withdrawal of the resolution plan u/s 12 A of the IBC and also seeking refund of the sum deposited in terms of the Resolution Plan along with interest. In this appeal, the Apex had to deal with two issues as under:

  1. Whether the scheme of the Code contemplates that the sum forming part of the resolution plan should match the liquidation value or not and;
  2. Whether the resolution applicant can withdraw the resolution plan under section 12A of the Code

The Hon'ble Supreme Court, after hearing all the parties, have observed and held that there is no provision in the IBC or Regulations which states that the bid of any Resolution Applicant has to match liquidation value arrived in the manner provided in Clause 35 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016. It was also observed by the Apex Court that the object behind the prescribing valuation process is to assist the COC to decide on a resolution plan properly. Once, a resolution plan is approved by the COC, the statutory mandate on the NCLT under the Code is to ascertain that a resolution plan meets the requirement of sub-section (2) and (4) of Section 30 of the IBC. Further, it stated that the NCLAT has proceeded on equitable perception rather than commercial wisdom by stating that the value arrived is 20% below its liquidation value.

While dealing with the issues, regarding the withdrawal of the resolution plan under section 12A of IBC, the Apex court has opined that the Resolution Applicant cannot withdraw from the proceeding in the manner prescribed in Section 12A of the IBC. The exit route prescribed in Section 12A of the Code is not applicable to a Resolution Applicant. The procedure provided under the said provisions only applies to applicants invoking Sections 7, 9 and 10 of the Code. Accordingly, the appeal of the Resolution Applicant was allowed and the order of the Hon'ble NCLAT has been set aside.

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