Restructuring & Insolvency Monthly Update | October 2024

STATUTORY UPDATES

Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) (Second Amendment) Regulations, 2024 dated September 24, 2024¹

• By way of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) (Second Amendment) Regulations, 2024, the Insolvency and Bankruptcy Board of India (IBBI) proposes to amend Regulation 16A of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (CIRP Regulations) to streamline the provision for appointment of Authorised Representative (AR) for the Financial Creditors in a Class, as under:
  • The choice of an AR mentioned in Form CA by a Financial Creditor in a Class shall not be considered, if the Form CA is received after the time stipulated in the public announcement.
  • During the pendency of the application for appointment of AR before the Adjudicating Authority (AA), the chosen AR shall act as an interim representative for the Class of Creditors, and shall have all such rights and duties as that of an AR.

RECENT JUDGMENTS

SBS Holdings, Inc. v Mohan Lal Jain, Liquidator of SBS Transpole Logistics Pvt Ltd – NCLAT, New Delhi

Judgment dated September 18, 2024 [Company Appeal (AT) (INS) No. 624 of 2024]

Background facts

• This Appeal has been preferred by the Appellant before the NCLAT, New Delhi challenging the rejection of its claim by the Liquidator and subsequently by the AA. Notably, the claim of the Appellant arose post commencement of Liquidation proceedings in respect of the Corporate Debtor and therefore, could not have been filed being calculated as on the Liquidation Commencement Date, within the period stipulated in the Public Announcement.
• Prior to initiation of CIRP in respect of the Corporate Debtor, the Corporate Debtor had initiated arbitration against the Appellant, which was continued by the Resolution Professional after commencement of CIRP in respect of the Corporate Debtor.
• In the meanwhile, on December 16, 2020, Liquidation proceedings came to be initiated in respect of the Corporate Debtor and the Liquidator invited claims from the stakeholders on or before January 15, 2021.
• After compilation of claims and filing of the Preliminary Report before the AA in accordance with Regulation 13 of the IBBI (Liquidation Process) Regulations, 2016 (Liquidation Regulations), the Arbitral Tribunal on December 22, 2022 (read with Memorandum of Correction dated March 06, 2023), dismissed the claim of the Corporate Debtor and awarded cost of INR 9.52 Crores in favour of the Appellant.
• In view of the award of the Arbitral Tribunal, on March 27, 2023, the Appellant filed its claim before the Liquidator of the Corporate Debtor, which was rejected by him on the ground that no claim against the Corporate Debtor existed as on the Liquidation Commencement Date. The decision of the Liquidator was also upheld by the AA.
• The Appellant argued that any claim which arises post Liquidation Commencement Date can also be admitted by the Liquidator, provided, it shall not affect the distribution already made. The appellant also argued that the Resolution Professional/ Liquidator having continued the Arbitration Proceedings, cannot not deny acceptance of the claim against the Corporate Debtor.
• This Respondent on the other hand submitted that the statutory scheme under the IBC does not provide for admission of any claim arising subsequent to the Liquidation Commencement Date.

Issues at hand?

• Whether the Liquidation Regulations prohibit acceptance of any claim arising after the Liquidation Commencement Date?

Decision of the Court

• The NCLAT dismissed this Appeal and upheld the order passed by the Ld. AA and the Liquidator.
• The NCLAT noted the statutory scheme under the IBC and Liquidation Regulations. As per Regulation 12 of the Liquidation Regulations, the Liquidator calls upon the stakeholders to submit claims as on the Liquidation Commencement Date. Further, Regulation 13 of the Liquidation Regulations requires the Liquidator to file a Preliminary Report containing the estimates of the assets and liabilities of the Corporate Debtor, as on the Liquidation Commencement Date within a period of 75 days from the Liquidation Commencement Date.
• Regulation 16 of the Liquidation Regulations provides for submission of claim by a stakeholder on or before the last date mentioned in the public announcement. Regulations 16 also contemplates that a stakeholder shall prove its claim for debt due to him, as on the Liquidation Commencement Date.
• The NCLAT observed that the above Regulations delineate the statutory scheme and makes it clear that the claims are to be filed by the claimants as on the Liquidation Commencement Date.
• The NCLAT further noted Regulation 28 of the Liquidation Regulations and observed that it is the only Regulation which deals with claim of payment not due as on the Liquidation Commencement Date and provides for filing of claim in the manner prescribed.
• In view of the aforementioned scheme of the IBC and Liquidation Regulations, the NCLAT dismissed the Appeal filed by the Appellant and held that no claim arising post Liquidation Commencement Date can be entertained by the Liquidator.

Rohit J Vora v Insolvency and Bankruptcy Board of India, New Delhi – High Court of Bombay

Judgement dated September 04, 2024 [Writ Petition (Lodging) No. 20352 of 2023]

Background facts

• This Writ Petition has been filed by the Petitioner challenging an order passed by the Disciplinary Committee consisting of a whole-time member of IBBI. As per the Petitioner, the order having been passed by a single whole time member is contrary to Section 220 of the IBC and therefore, was defective.
• It was argued by the Petitioner that Clause 2 (1)(c) of the Insolvency and Bankruptcy Board of India (Inspection and Investigation) Regulations, 2017 (Inspection Regulations) defines Disciplinary Committee as a 'Committee of whole-time member(s)' constituted by the Board under Section 220(1) of the IBC. However, it is the case of the Petitioner that this Regulation cannot be construed to mean that the Disciplinary Committee could consist of a single member. The Petitioner relied on Kunj Behari Lal Butail and Ors. Vs. State of H.P. and Ors. 2000 INSC 88 to urge that the Regulations have been framed in the exercise of powers conferred by Section 196 of the IBC for carrying out the purposes under IBC and therefore, cannot overreach what has been provided for under the IBC.
• On the contrary, the counsel appearing for IBBI submitted that in terms of proviso to Section 220(1) of the IBC, it was permissible for IBBI to constitute a Disciplinary Committee constituting even a single whole time member. It was argued by the Respondent that the expression 'members' and 'whole-time members' in proviso to Section 220 (1) of the IBC impliedly includes a singular member. The Respondent IBBI relied on Section 13 of the General Clauses Act, 1897 to submit that use of an expression which may be singular in a particular provision would include the plural and vice versa.

Issue at hand?

• Whether the Disciplinary Committee constituted under Section 220 of the IBC can comprise of a single whole time member?

Decision of the Tribunal

• The High Court of Bombay did not agree with the contention of the Petitioner that a Disciplinary Committee cannot comprise of a single whole-time member of the IBBI and rejected the challenge raised by the Petition to the Order of the Disciplinary Committee.
• The High Court noted the language of Section 220 of the IBC as well as Clause 2(1)(c) of the Inspection Regulations. The High Court observed that the proviso to Section 220 does not intend to convey the number of members in a Disciplinary Committee but only intends to specify that the Committee shall comprise whole time members of IBBI and therefore, cannot be considered to decide the intent of the legislature regarding the number of members in a Disciplinary Committee.
• The High Court further observed that it is rather Clause 2 (1)(c) which indicates the number of members. Clause 2(1)(c) of the Inspection Regulations indicates that the Disciplinary Committee constituted by the IBBI ought to consist of whole-time member(s). This would indicate that the Disciplinary Committee could consist of either a single whole-time member or more than one whole-time member.
• The High Court noted Clause 13 of the General Clause Act, 1897 and observed that unless there is anything repugnant in the subject or context, words in the singular shall include the plural, and vice versa. After noting the above contentions of the parties and provisions of law placed, the High Court held that the context in which the word 'members' is used in the proviso to Section 220(1) of the IBC does not limit its operation only to its plural meaning, rather, 'Members' of the Disciplinary Committee would include a singular whole-time member too, in view of Section 13(2) of the General Clauses Act, 1897.
• In view thereof, the High Court rejected the challenge to the constitution of Disciplinary Committee, as raised by the Petitioner.

Ramesh Kumar Chugh v Assets Care & Construction Enterprise Ltd – NCLAT, New Delhi

Judgment dated October 15, 2024 [Company Appeal (AT)(INS) No. 1726 of 2024]

Background facts

• This Appeal has been preferred by the Appellant seeking restraint on auction pursuant to the sale notices issued by the Respondent under SARFAESI Act, 2002 (SARFAESI).
• Briefly, the Appellant stood as personal guarantor to an operational debt, in respect of which, Section 95 proceedings were initiated against the Appellant on December 22, 2023. The Appellant was also a partner/ guarantor to certain other financial facilities availed inter-alia by Sheena Exports Ltd. (a Partnership Firm), where the Appellant has 25% partnership. Due to nonrepayment of debt, the Respondent put up certain properties provided as security for the loan facilities availed by Sheena Exports Ltd, for auction.
• On February 06, 2024, the Appellant issued notice of dissolution to the other partners of Sheena Exports. The Appellant argued that pursuant to dissolution of the partnership firm, the liabilities of the firm have passed on to its partners and in view of interim moratorium operating in terms of Section 96 of the IBC, the auction notices issued by the Respondent are defective and could not have been issued.
• The Appellant submitted that though Section 48 of the Partnership Act, 1932 gives priority to repayment of the debts of the partnership firm post its dissolution, however, since interim moratorium under Section 96 had come into operation qua the Appellant, Section 178 of IBC would prevail as per Section 238 of IBC and priority to the payment of debts of the partnership firm will be given over personal debts. Since IBC is a special legislation, by virtue of Section 238 of IBC it would prevail over the Partnership Act. It was the case of the Appellant that if the sale of the assets is permitted under Security Interest (Enforcement Rules), 2002 (Enforcement Rules), would amount to violation of the provisions of moratorium under Sections 96 and 178 of IBC.
• On the contrary, the Respondent argued that since the property in question were not owned by the Appellant but stood in the name of Sheena Exports, the Respondent as a Secured Creditor is entitled to proceed in accordance with the SARFAESI Act for realisation of its dues by sale of the property in question. The Respondent contended that this action is not violative of interim moratorium under Section 96 of the IBC as it is not taking action against the Appellant or his personal property but against the partnership firm. The Respondent relied on the judgment of the Supreme Court in the matter of Rajendra Bajoria Vs Hemant Kumar Jalan 2021 SCC OnLine SC 764 wherein it has been held that the partners do not have any right, title or interest in respect of the assets and properties of a firm so long as the firm is carrying on business. It is also the case of the Respondent that the assets and properties of a partnership firm are distinguishable from the personal/individual assets of the partners.
• The Respondent also argued that even if the Partnership Firm is dissolved, the Appellant as one of the partners therein will be entitled to the surplus of sale proceedings of the assets and properties of the firm, if any, only after meeting the liabilities of the firm to third parties, in the share ratio as agreed upon in the partnership deed.

Issue at hand?

• Whether auction of a property of a Partnership Firm (where the Appellant is a partner) is barred by virtue of operation of interim moratorium under Section 96 of the IBC in respect of the personal guarantee of the Appellant?

Decision of the Tribunal

• The NCLAT noted the provisions of personal insolvency under Sections 95 and 96 of the IBC. The NCLAT further noted the implications of interim moratorium under Section 96 of IBC, as elucidated by the Supreme Court in Dilip B. Jiwrajka Versus Union of India MANU/SC/1274/2023.
• The NCLAT observed that moratorium imposed under Section 96 of IBC, 2016, would strictly apply to the security interest created by the Appellant in his personal capacity wherein personal guarantee is given in respect of the operational debt and will not extend to the cover the subject property being the property of the partnership firm against which Section 95 had not been invoked.
• The NCLAT relying on Bajoria (Supra) further observed that the partners of a firm are entitled only to the profits of the firm and upon dissolution of the firm they are entitled to the surplus of the sale proceeds of the assets and properties of the firm after meeting the liabilities of the firm in the share agreed upon in the Partnership Deed. The partners do not have any right, title or interest in respect of the assets and properties of a firm.
• The NCLAT further noted that the High Court of Allahabad in Onkar Rice Mill vs State of U.P. & Ors 2019 SCC OnLine All 5623 has held that no part of the assets of the partnership could be regarded as belonging to any individual partner and no individual partner can predicate his share in a particular property belonging to the Firm. Therefore, the NCLAT held that the assets of the partnership firm are not the personal property of the Appellant and cannot be subjected to the provisions of interim moratorium merely because a Section 95 application has been filed against a partner of the firm in respect of a personal guarantee given for a party other than the partnership firm.
• The NCLAT categorically observed that the moratorium imposed under Section 96 of IBC would apply only to the security interest created by the Appellant under the personal guarantee in his capacity as a personal guarantor with respect to default of operational debt.

State Bank of India v India Power Corporation Ltd – Supreme Court

Judgment dated September 27, 2024 [Civil Appeal No. 10424 of 2024]

Background facts

• This Appeal has been preferred by State Bank of India (SBI) against an order passed by the NCLAT, Chennai, dismissing its Appeal on the ground of delay, holding that a free of cost copy provided under Rule 50 of the National Company Law Tribunal Rules, 2016 (NCLT Rules) cannot be treated as certified copy referred to in Rule 22 (2) of the National Company Law Appellate Tribunal Rules, 2016 (NCLAT Rules).
• Briefly, SBI filed an appeal before the NCLAT against rejection of its Section 7 Petition. This appeal was filed with a delay of 3 days beyond the 30 day period. The Appellant filed the Appeal along with a free of cost copy and therefore, did not file an application seeking exemption of certified copy. The Judicial Member was of the view that since no application seeking exemption of certified copy has been filed, the 3 days delay cannot be condoned. The matter was referred to a third member, who later agreed with the view taken by the Judicial Member and dismissed the Appeal.
• It is the submission of the Appellant that Rule 50 of the NCLT Rules places both the certified copy which is provided free of cost as well as the certified copy which is made available against the payment of costs, on the same footing.
• On the other hand, the Respondents, relying on V Nagarajan Vs SKS Ispat and Power Limited & Ors., (2022) 2 SCC 244 argued that Appellant cannot be dispensed with their obligation to apply for and obtain a certified copy for filing an appeal.

Issue at hand?

• Whether a free of cost copy provided under Rules 50 of the NCLT Rules be treated as a certified copy under Rule 22 (2) of the NCLAT Rules?

Decision of the Tribunal

• The Supreme Court took note of Rule 22(2) of the NCLAT Rules and observed that it requires every appeal to be accompanies by a certified copy of the Impugned Order.
• The Supreme Court further observed that Rule 50 governs the furnishing of certified copies to the parties and reads that "The Registry shall send a certified copy of final order passed to the parties concerned free of cost and the certified copies may be made available with cost as per Schedule of fees, in all other cases."
• The Supreme Court noted that clearly, both, the certified copy (free of cost and certified copy on payment of costs) are treated as certified copy for the purposes of Rule 50 of the NCLT Rules. Therefore the Supreme Court observed that in this case, the Appeal was filed within the condonable period of 15 days and should have been condoned by the NCLAT.
• Accordingly, the Supreme Court set aside the Impugned Order and restored the Appeal before the NCLAT.

Samrat Restaurant v Brewcrafts Microbrewing Pvt Ltd

Judgment dated September 25, 2024 [Company Appeal (AT) (INS) No. 1409 of 2024]

Background facts

• This Appeal has been preferred by an Operational Creditor challenging the Order of NCLT, rejecting its Section 9 Petition under the IBC inter-alia for the reason that a part of the debt amount claims falls within the Section 10A period and therefore, the debt fails to meet the threshold limit of 1 Crore.
• Briefly, the Appellant and the Respondent entered into a Leave & License Agreement for lease of certain premises in the year 2017. After some time, the Respondent defaulted on its payment obligations under this Agreement and the Appellant issued notice dated February 06, 2019 calling upon the Respondent to clear the outstanding dues.
• Later in March, 2020, on account of COVID-19, the Corporate Debtor made certain representations to the Appellant and requested to reduce the license fee. The Operational Creditor modified the license fee from time to time. The Corporate Debtor on August 29, 2021 agreed to clear the outstanding dues to the Operational Creditor.
• However, the Corporate Debtor i.e. the Respondent, yet again failed to clear the outstanding dues and the Appellant issued notice dated 10.03.2023 to the Respondent to clear the outstanding dues.
• Since the Corporate Debtor failed to repay the debt, the Appellant issued demand notice in terms of Section 8 of the IBC and subsequently filed a Petition under Section 9 of the IBC.
• However, on May 22, 2024, the NCLT rejected the Petition filed by the Appellant observing that part of the debt amount falls within the prohibited period under Section 10A of the IBC and therefore , the same ought to be excluded.
• The Appellant therefore filed the present Appeal challenging the order passed by the NCLT.
• The Appellant argued that the Appellant and the Respondent entered into an OTS which extended the payment obligations until after the Section 10A period and therefore, the subsequent default occurred outside the scope of Section 10 A period. The Appellant also argued that an OTS is a clear admission of debt and constituted an acknowledgement of debt as well as an understanding to pay the same.
• On the other hand, the Respondent contended that a significant portion of the alleged debt falls within the ambit of Section 10 A of the IBC and therefore, the Section 9 Petition has been rightly rejected by the Ld. Adjudicating Authority. The Respondent further argued that the OTS agreement did not alter the date of default, and the default during the Section 10A period remained protected under law. The Respondent relied on the judgement passed by the NCLAT in Bhavit Sheth vs Madan Bajrang Lal Vaishnawa and Anr (CA AT Ins No 328 of 2024) wherein it was held that the claim of operational debt falling within the Section 10 A period, could not be the basis for default in a Section 9 Petition. The Respondent also relied on the judgement passed by the NCLAT in SLB Welfare Assn. v PSA IMPEX (P) Ltd (2022 SCC OnLine NCLAT 1584), to argue that the date of default does not change basis an acknowledgement.

Issue at hand?

• Whether the debt alleged by the operational creditor falls, continuing before, during and after the Section 10A period, nullify the effect of Section 10A of the IBC?

Decision of the Tribunal

• The NCLAT noted that Section 10A of the IBC prohibits filing of any application for initiation of CIRP of a Corporate Debtor for a default falling within the period mentioned therein.
• The NCLAT also noted the findings of the NCLAT in Bhavit Seth (Supra) wherein the NCLAT held that since the claim of operation debt fell within 10A period, no Application ever could have been filed for the default of the lease rental during the 10A period.
• The NCLAT observed a part of the debt, falling within the period mentioned in Section 10A ought to be excluded from the debt amount claimed by the Appellant.
• As regards the shifting of date of default on account of the OTS Agreement, the NCLAT observed the acknowledgement of debts in the year 2021 and 2023 cannot be treated as an OTS. The NCLAT noted its findings in SLB Welfare Assn. (Supra) and observed that the date of default is not dependent on the date of acknowledgement.
• The NCLAT observed that the purported OTS agreement and the rent reductions due to COVID-19 only reflect a temporary modification of payment terms but they do not extinguish the original default that occurred during the Section 10A period. The NCLAT further observed that an interpretation to the effect that subsequent agreements should nullify the protection offered by Section 10A would undermine the legislative intent and open the door for Creditors to circumvent the protections offered by law.
• In view of the above findings, the NCLAT rejected the Appeal filed by the Appellant to hold that the date of default cannot be shifted on the basis of acknowledgement of debt and the benefit of Section 10A of the IBC will accrue to the Corporate Debtor.

Footnotes

1 IBBI (Insolvency Resolution Process for Corporate Persons) (Second Amendment) Regulations, 2024

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