India: Important Judgments Under SC & HC Under IBC - Volume I

SUPREME COURT JUDGMENTs

Sabarmati Gas Ltd. vs. Shah Alloys Ltd. [Civil Appeal No. 1669 Of 2020]

Amendment to Definitions Extension of Limitation Period and Condonation of Delay in an application under the Code.

When the limitation period for initiating CIRP under Section 9, IBC is to be reckoned from the date of default, as opposed to the date of commencement of IBC and the period prescribed therefor, is three years as provided by Section 137 of the Limitation Act, 1963 and the same would commence from the date of default and is extendable only by application of Section 5 of the Limitation Act, 1963 it is incumbent on the Adjudicating Authority to consider the claim for condonation of the delay when once the proceeding concerned is found filed beyond the period of limitation.

M/s Godrej Sara Lee Ltd. Vs. The Excise and Taxation Officer-Cum-Assessing Authority & Ors- Civil Appeal No. 5393 of 2010, dated 1-2-2023

Mere availability of an alternative remedy of appeal or revision would not oust the jurisdiction of the high court and render a writ petition not maintainable.

Availability of an alternative remedy does not operate as an absolute bar to the "maintainability" of a writ petition and that the rule, which requires a party to pursue the alternative remedy provided by a statute, is a rule of policy, convenience and discretion rather than a rule of law. Though elementary, it needs to be restated that "entertainability" and "maintainability" of a writ petition are distinct concepts. The fine but real distinction between the two ought not to be lost sight of.

Punj Lloyd Aviation Ltd Vs Chipsan Aviation Pvt Ltd - Civil Appeal No. 306 of 2023

Status under IBC of an advance payment paid by the Operational Creditor and not refunded by the Corporate Debtor.

The Supreme Court noted that NCLAT has reversed the decision while relying upon the decision of this Court in Consolidated Construction Consortium Limited vs Hitro Energy Solutions Private Limited, where it has been held that Section 5(21) has to be interpreted in a broad and purposive manner in order to include all those who provide or receive operational services from the Corporate Debtor which ultimately leads to an operational debt. The NCLT in its original order had not considered the other defences that were raised by the applicant to the application under Section 9 of the IBC. Hence, on remand, all the rights and contentions of the parties on the merits of the case are kept open to be urged before and decided by the NCLT.

Victory Iron Works Ltd Vs Jitendra Lohia & Anr - Civil Appeal No. 1743 of 2021

Development rights created in favour of the Corporate Debtor constitute "property" within the meaning of the expression under Section 3(27) of the Code.

It may be noted from Sections 18 and 25 that the word "asset" and not the word "property" is what is used in these provisions, though the word "property" is defined in Section 3(27). But the said word "asset" used in Sections 18 and 25 is not defined in the IBC. The word "asset" is not defined, either in IBC. As per Section 3 (37) of the Code, words and expression used but not defined in this Code but defined in the Indian Contract Act, 1872, the Indian Partnership Act, 1932, The Security and Exchange Board of India Act, 1992, the Recovery of Debts due to Banks and Financial Institution Act, 1993, the Limited Liability Partnership Act, 2008 and the Companies Act, 2013 shall have the meanings respectively assigned to them in those acts. But asset has not been defined even in aforesaid Acts or in any of the seven enactments referred to in Section 3(37) of the Code. Since the expression "asset" in common parlance denotes "property of any kind", the bundle of rights that the Corporate Debtor has over the property in question would constitute "asset" within the meaning of Section 18(f) and Section 25(2)(a) of IBC. The Supreme Court held that a bundle of rights and interest in form of development rights have been created in favour of the Corporate Debtor. These bundles of rights have been created for a valid consideration. Development rights created in favour of the Corporate Debtor constitute "property" within the meaning of the expression under Section 3(27) of the Code. Since the expression "asset" in common parlance denotes "property of any kind", the bundle of rights that the Corporate Debtor has over the property in question would constitute "asset" within the meaning of Section 18 (f) and Section 25 (2)(a) of IBC.

Srei Multiple Asset Investment Trust Vision India Fund Vs Deccan Chronicle Marketeers & Others – Civil Appeal No(s). 1706 of 2023 with Civil Appeal No(s). 8323 of 2022 and Civil Appeal No(s). 8132 of 2022

Declaration of ownership over Trademarks after approval of Resolution Plan by CoC, which is not a part of Resolution Plan amount to modification or alteration of approved Resolution Plan.

CoC approved the resolution plan with the provisions that the Corporate Debtor has a perpetual exclusive right to use the brands, namely, "Deccan Chronicle" and "Andhra Bhoomi" and it nowhere indicates regarding the right of ownership over the trademarks/brands. But the Adjudicating Authority while adjudicating application I.A. No.155 of 2018, apart from upholding the exclusive right to use the trademarks, "Deccan Chronicle" and "Andhra Bhoomi", made a further declaration that trademarks belong to Corporate Debtor/DCHL under its order dated 14th August, 2019, which, in our view, was a modification/alteration in the approved Resolution Plan which indisputably is impermissible in law and this what the NCLAT in para 32 of its impugned order has observed.

Ajay Kumar Radheyshyam Goenka Vs Trourism Finance Corporation of India Ltd - Criminal Appeal No. 172 of 2023

If Resolution Plan for Corporate Debtor is approved or the company gets dissolved, directors and the other accused cannot escape from their liability under Section 138 of Negotiable Instruments Act, 1881 already commenced and during the pendency.

Nature of proceedings under IBC and Negotiable Instruments Act, 1881 (NI Act) are different and would not intercede each other. The moratorium under Section 14 of the IBC does not apply to the proceedings initiated against signatories/directors under the NI Act. Extinguishment of debt under Section 31 or Sections 38 to 41 of the IBC would not ipso facto apply to the extinguishment of the criminal proceedings. The proceeding under the NI Act are not in the nature of debt recovery proceedings and rather are penal in character.

Relying upon the judgement in the case of P. Mohanraj and Ors vs Shah Brothers Ispat Private Limited and Narinder Garg and Ors vs Kotak Mahindra Bank Limited and Ors the Proceeding under NI Act had already commenced and cognizance upon the complaint was already taken and during the pendency of CIRP, the directors/signatories thus cannot escape from their penal liability by citing its dissolution. Passing of the resolution plan under Section 31 of the IBC and in light of Section 32A of the IBC, the criminal proceedings under Section 138 of the NI Act will stand terminated only in relation to the corporate debtor if the same is taken over by a new management.

High Court of Gujarat - Ajay Vasant Tikekar Vs. Geelon Industries Pvt. Ltd.- Decided on 27th September 2023

There is no bar contained in any of the provisions of the IBC restraining the complainant to approach the criminal court to seek penal action under Section 138 of the NI Act.The signatory/director cannot take the benefit of discharge obtained by the corporate debtor by operation of law under the IBC.

In view of Sections 138, 139 and 141 of the NI Act, it is also clear position of law that under provisions of Section 14 of IBC, the proceedings cannot continue against corporate debtor but can be initiated or continued against natural persons including persons mentioned under Sections 141(1) and 141(2) of the NI Act.

Abhishek Singh Vs Huhtamaki PPL Ltd & Anr.- Decided on 28th March, 2023

Application for withdrawal of the corporate insolvency resolution process under Section 12A of the Insolvency and Bankruptcy Code, 2016 can be allowed by the adjudicating authority even before the constitution of the committee of creditors.

Section 12A of the IBC permits withdrawal of applications admitted under Sections 7, 9 and 10 of the IBC with the approval of 90% voting share of CoC, only after the CoC has been constituted, it does not expressly bar entertaining the applications for withdrawal prior to the constitution of the CoC.

The IBBI Regulations are binding on the NCLT despite being sub-ordinate in nature to the IBC. Consequently, the NCLT erred in holding that Regulation 30A of the IBBI Regulations does not have a binding effect.

Following the decision in Swiss Ribbons (P) Ltd. v. Union of India, Regulation 30A of the IBBI Regulations was substituted to allow applications for withdrawal of CIRP to be entertained even before the constitution to CoC. Regulation 30 of the IBBI Regulations is not in conflict with Section 12A of the IBC and the same only furthers the cause introduced in Section12A of the IBC.

The NCLT had inherent powers under Rule 11 of the NCLT Rules, 2016 to either allow or disallow an application for withdrawal of the CIRP even prior to the constitution of the CoC. Regulation 30A of IBBI Regulations provides a complete mechanism even for the purposes of dealing with the claim for expenses of the IRP. The other creditors of the Corporate Debtor have their independent rights against the Corporate Debtor which would not be adversely affected if the settlement between the Corporate Debtor and Operation Creditor is accepted in the present case and the proceedings are allowed to be withdrawn.

M/s Next Education India Pvt Ltd Vs M/s K12 Techno Services Pvt Ltd-Civil Appeal No. 1775 of 2021

Invoices for the period preceding three years from the date of the application under Section 9 of IBC ought to be considered rather than considering the starting point of limitation from the date of first invoice.

There were 187 different invoices for the period between 12.03.2011 and 30.06.2017. The amount under different invoices were unpaid, which gave rise to the appellant to initiate the proceedings under Section 9 of the IBC before the NCLT. The NCLT considering the starting point of limitation as 12.03.2011 held that the claim is barred by limitation. The Supreme Court held that NCLT did not take into consideration the subsequent invoices at least preceding three years from the date of filing of Section 9 application, which ought to have been considered.

M/s. South Indian Bank Ltd & Ors. Vs Naveen Mathew Philip & Anr. Etc.

High Court invoking Article 226 of the Constitution of India in Commercial Matters

Supreme Court observed that certain High Courts continue to interfere in such matters, leading to a regular supply of cases before this Court. One such High Court is that of Punjab & Haryana.

A writ of certiorari is to be issued over a decision when the Court finds that the process does not conform to the law or statute. In other words, courts are not expected to substitute themselves with the decision-making authority while finding fault with the process along with the reasons assigned. Such a writ is not expected to be issued to remedy all violations. When a Tribunal is constituted, it is expected to go into the issues of fact and law, including a statutory violation. A question as to whether such a violation would be over a mandatory prescription as against a discretionary one is primarily within the domain of the Tribunal.

A writ of mandamus is a prerogative writ. In the absence of any legal right, the Court cannot exercise the said power. More circumspection is required in a financial transaction, particularly when one of the parties would not come within the purview of Article 12 of the Constitution of India. The powers conferred under Article 226 of the Constitution of India are rather wide but are required to be exercised only in extraordinary circumstances in matters pertaining to proceedings and adjudicatory scheme qua a statute, more so in commercial matters involving a lender and a borrower, when the legislature has provided for a specific mechanism for appropriate redressal.

G. Vikram Kumar Vs State Bank of Hyderabad & Ors – Civil Appeal No. 31523153 of 2023 (@SLP (Civil) Nos. 59735974 of 2018)

In view of the availability of the alternative statutory remedy available by way of proceedings/appeal under Section 17 of the SARFAESI Act, the High Court ought not to have entertained the writ petition under Article 226 in which the e-auction notice was under challenge.

Hon'ble Supreme Court held that in view of the availability of the alternative statutory remedy available by way of proceedings/appeal under Section 17 of the SARFAESI Act, the High Court ought not to have entertained the writ petition under Article 226 of the Constitution of India in which the e-¬auction notice was under challenge. Therefore, the High Court has committed a very serious error in entertaining the writ petition under Article 226 of the Constitution of India challenging thee-¬auction notice issued by the Bank in exercise of power under Section 13(4) of the SARFAESI Act.

The aforesaid facts were pointed out before the High Court and despite the same the High Court has allowed the writ petition which is not sustainable at all. The Hon'ble Apex Court also held that even otherwise it is very debatable whether Section 13(8) of the SARFAESI Act shall be applicable in favour of a person who is only an agreement to sale holder or Section 13(8) of the SARFAESI Act shall be applicable only in case of the borrower who is ready and willing to pay the entire debt. In the present case the borrower failed to get any relief from the DRT. The borrower did not apply and/or invoke Section 13(8) and did not agree to clear the entire dues. Therefore, also the High Court has materially erred in allowing the writ petition.

M/s. Vistra ITCL (India) Ltd & Ors Vs Mr Dinkar Venkatsubramanian & Anr- Civil Appeal No. 3606 of 2020

Rights of a Secured Creditor who would not fall under the category of Financial Creditors or Operational Creditors as per the IBC

The Corporate Debtor had created a first ranking exclusive pledge in favour of Vistra ITCL (India) Ltd. over the equity shares held by it in the capital of JMT Auto Limited. Claim filed by Vistra ITCL (India) Ltd. on the basis of the pledged shares was rejected by RP.

The Supreme Court that the person is whose favour the security interest is created need not be the creditor who avails the credit facility, and can be a third person. Security interest can be created for credit facilities/loan advanced to another person. It is accepted and admitted that the Vistra has security interest in the pledged shares.

Intent of the amended Section 30(2) read with Section 31 of the Code recognises and protects the interests of other creditors who are outside the purview of the CoC. First is to treat the secured creditor as a financial creditor of the Corporate Debtor to the extent of the estimated value of the pledged share on the date of commencement of the CIRP. This would make it a member of the CoC and give it voting rights, equivalent to the estimated value of the pledged shares. However, this may require re-consideration of the dictum and ratio of Anuj Jain (supra) and Phoenix ARC (supra), which would entail reference to a larger bench. The second recourse available, would be almost equivalent in monetary terms for the Vistra, who is treated it as a secured creditor and is held entitled to all rights and obligations as applicable to a secured creditor under Section 52 and 53 of the Code. This to our mind would be a fair and just solution to the legal conundrum and issue highlighted before us.

Moser Baer Karamchari Union Through President Mahesh Chand Sharma Vs Union of India & Ors. Writ Petition (C) No.421 of 2019 and other writ petitions

Waterfall Mechanism in Insolvency & Bankruptcy Code, 2016 (IBC) vs. in Companies Act, 2013

In principle, it cannot be doubted that the cases of revival or winding up of the company on the ground of insolvency and inability to pay debts are different from cases where companies are wound up under Section 271 of the Companies Act 2013. The two situations are not identical. The reasons and grounds for winding up under Section 271 of the Companies Act, 2013 are vastly different from the reasons and grounds for the revival and rehabilitation scheme as envisaged under the Code. In view of the enactment of IBC and Section 53 of the IBC, it necessitated to amend the Act, 2013. As per Sub-Section (7) of Section 327, Sections 326 and 327 shall not be applicable in theevent of liquidation under the IBC.

The waterfall mechanism is based on a structured mathematical formula, and the hierarchy is created in terms of payment of debts in order of priority with several qualifications, striking down any one of the provisions or rearranging the hierarchy in the waterfall mechanism may lead to several trips and disrupt the working of the equilibrium as a whole and stasis, resulting in instability. Every change in the waterfall mechanism is bound to lead to cascading effects on the balance of rights and interests of the secured creditors, operational creditors and even the Central and State Governments. Sub-section (7) of Section 327 of the Act, 2013 provides that Sections 326 and 327 of the Act, 2013 shall not be applicable in the event of liquidation under the IBC, which has been necessitated in view of the enactment of IBC and it applies with respect to the liquidation of a company under the IBC, Section 327(7) of the Act, 2013 cannot be said to be arbitrary and/or violative of Article 21 of the Constitution of India. In case of the liquidation of a company under the IBC, the distribution of the assets shall have to be made as per Section 53 of the IBC subject to Section 36(4) of the IBC, in case of liquidation of company under IBC.

Paschimahal Vidhyut Vitran Nigam Ltd. Vs Raman Ispat Pvt Litd. & Ors – Civil Appeal No. 7976 of 2019

Treatment of the Government Dues under Section 53 of IBC/ Priority of Government Dues

The expression "government dues" is not defined in the IBC - it finds place only in the preamble. The repeated reference of lowering of priority of debts to the government, on account of statutory tax, or other dues payable to the Central Government or State Government, or amounts payable into the Consolidated Fund on account of either government, in the various reports which preceded the enactment of the IBC, as well as its Preamble, means that these dues are distinct and have to be treated as separate from those owed to secured creditors.

The specific mention of other class of creditors whose dues are statutory, such as dues payable to workmen or employees, "the provident fund, the pension fund, the gratuity fund" under Section 36(4), which excludes these enumerated amounts from the liquidation, especially clarifies that not all dues owed under statute are treated as 'government' dues. In other words, dues payable to statutory corporations which do not fall within the description "amounts due to the central or state government" such as for instance amounts payable to corporations created by statutes which have distinct juristic entity but whose dues do not constitute government dues payable or those payable into the respective Consolidated Funds stand on a different footing.

On the other hand, dues payable or requiring to be credited to the Treasury, such as tax, tariffs, etc. which broadly fall within the ambit of Article 265 of the Constitution are 'government dues' and therefore covered by Section 53(1)(f) of the IBC.

Rainbow Papers judgment did not notice the 'waterfall mechanism' under Section 53 – the provision had not been adverted to or extracted in the judgment. The dues payable to the government are placed much below those of secured creditors and even unsecured and operational creditors. This design was either not brought to the notice of the court in Rainbow Papers (supra) or was missed altogether. In any event, the judgment has not taken note of the provisions of the IBC which treat the dues payable to secured creditors at a higher footing than dues payable to Central or State Government.

Review Petition against Rainbow Papers judgment dismissed - Supreme Court of India- Review Petition (Civil) No. 1620 Of 2023 - Sanjay Kumar Agarwal Vs. State Tax Officer (1) & Anr.

Even a third party to the proceedings, if he considers himself to be an "aggrieved person, may take recourse to the remedy of review petition.

Any passing reference of the judgment, which is challenged under review petition, made by the Bench of the equal strength could not be a ground for review.

Subsequent decision or a judgment of a co-ordinate Bench or larger Bench by itself cannot be regarded as a ground for review.

The well-considered judgment sought to be reviewed does not fall within the scope and ambit of Review.

A co-ordinate Bench cannot comment upon the discretion exercised or judgment rendered by another co-ordinate Bench of the same strength.

A well-considered judgment sought to be reviewed does not fall within the scope and ambit of Review.

Supreme Court of India- Civil Appeal No 2568 – Decided on 18th August 2023 - Industrial Development Bank of India Vs. Superintendent of Central Excise and Customs and Others

Whether the claim of a secured creditor has precedence over the right of the customs authorities to recover the customs duty

We must hold that the decision of the division bench of the Calcutta High Court in Dytron (India) Ltd. (supra) does not lay down the correct law and is, accordingly, overruled. The decision in Dytron (India) Ltd. (supra) was referred to in Sundaresh Bhatt, Liquidator of ABG Shipyard (supra), wherein this Court observed that reliance of the National Company Law Appellate Tribunal on Dytron (India) Ltd. (supra) was not appropriate as such interpretation has been legislatively overruled by the inclusion of Section 142A in the Customs Act. We wish to clarify, as held above, that the decision in Dytron (India) Ltd. (supra) does not lay down the correct law, as even earlier, the position in law was that the debt 'due and payable', when it falls within the four corners of clause (a) to Section 530(1) of the Companies Act, would be treated as preferential payment, but it would not override and be given preference over the payments of overriding preferential creditors covered under Section 529A of the Companies Act..

Concept Of Clean Slate - KRBL Ltd. Vs State of Gujarat- Civil Appeal No. 7976 Of 2019

Claim of GST was rejected for want of sufficient proof and during the liquidation, no claim was lodged by GST Department, Purchaser in liquidation process is entitled to a clean slate.

In light of the judicial pronouncement in Ghanashyam Mishra and Sons (2021) the debt therefore did not form a part of the resolution plan and therefore stood extinguished.

State tax dues and the State would be a claimant as an operational creditor.

In the facts of the present case having failed to assert its claim the State as an operational creditor/stakeholder/secured creditor would have to fall in line as per the "waterfall mechanism" under Section 53 of the IBC.

The decision of the Supreme Court in the case of Paschimanchal Vidhyut Vitran Nigam Limited would indicate that once having relinquished its interest under Section 52, the State cannot continue the insistence of maintaining the charge in the revenue records and its claim will have to stand in priority.

Even otherwise as per Section 100 of the Transfer of Property Act, a charge cannot be enforced against any property in the hands of a person to whom such property has been transferred for consideration and without notice of such charge. The Purchaser was entitled to a clean slate.

Delhi High Court- Indian Oil Corporation Ltd. Vs. Arcelor Mittal Nippon Steel India Ltd- ARB.P. 102/2022-Judgement Delivered on 10th October 2023

Approval of Resolution Plan results in an extinguishment of a claim which was admitted on notional value.

Whether the approval of the Resolution Plan would render the disputes which are sought to be referred for the consideration of an AT non-arbitrable?

The legislative intent and command of Sections 30 and 31 of the IBC is an issue which is no longer res integra. In Ghanashyam Mishra as well as the host of judgments rendered in that context and which were duly noticed by the Supreme Court in that decision, the underlying theme has been the recognition of the right of the successful Resolution Applicant to take over the corporate debtor on a "clean" or "fresh" slate. Those decisions lay primordial importance of the successful Resolution Applicant being enabled to take over the corporate debtor without being burdened by any uncertainties or a specter of irresolution. The approval of the Resolution Plan is statutorily recognised as conferring a closure upon all claims that persons or entities may have had against the corporate debtor. The claims or liabilities which could have been enforced against the corporate debtor are duly considered in the course of the CIRP with the Adjudicating Authority undertaking a detailed exercise with respect to identification of the various creditors of the corporate debtor, including the classes thereof, the scrutiny of claims received and the ultimate apportionment of the amounts deposited by the successful Resolution Applicant amongst the creditors inter se.

The Supreme Court while alluding to the intent of the resolution process underlying the IBC had described this aspect as the "hydra headed monster". In fact, Ghanashyam Mishra significantly observes that all claims which are not part of the Resolution Plan shall stand extinguished and no person would be entitled to "initiate or continue" any proceedings in respect of the claim.

Once it is accepted that the approval of the Resolution Plan results in the extinguishment of all claims that the petitioner may have had, the dispute which is now sought to be canvassed cannot be permitted to be urged again before the AT. That would clearly amount to rewriting upon the clean slate based upon which the respondent took over the corporate debtor. A reference of the disputes as sought by the petitioner would clearly amount to a reopening of the Resolution Plan and which is clearly impermissible in light of the finality which was accorded by the decision of the Supreme Court in Committee of Creditors. Empowering the AT to adjudicate or rule upon these disputes would also be contrary to the principles which were enunciated by the Supreme Court in Ghanashyam Mishra. The Court thus comes to conclude that on due application of the "eye of the needle" test, it is manifest that the disputes which are spoken of in the Section 11 petition are non-arbitrable and thus no reference to the AT is warranted.

Supreme Court of India- Civil Appeal No. 5590 of 2021 RPS Infrastructure Ltd. Vs. Mukul Kumar & Anr.

Can a claim after the resolution plan by the CoC be admitted by the Resolution Professional.

The mere fact that the Adjudicating Authority has yet not approved the plan does not imply that the plan can go back and forth, thereby making the CIRP an endless process. This would result in the reopening of the whole issue, particularly as there may be other similar persons who may jump onto the bandwagon. As described above, in Essar Steel,8 the Court cautioned against allowing claims after the resolution plan has been accepted by the COC.

The IBC is a time bound process. There are, of course, certain circumstances in which the time can be increased.

Section 15 of the IBC and Regulation 6 of the IBBI Regulations mandate a public announcement of the CIRP through newspapers. This would constitute deemed knowledge on the appellant. In any case, their plea of not being aware of newspaper pronouncements is not one which should be available to a commercial party.

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