IBC – NCLAT Fortnightly Summary (September 1 – September 15, 2023) – Trials & Appeals & Compensation

The following is a snapshot of the important orders passed by
the National Company Law Appellate Tribunal
(“NCLAT“), under the Insolvency and
Bankruptcy Code, 2016 (“Code“), during
the period between September 1, 2023 – September 15, 2023.
For ease of reference, the orders have been categorized and dealt
with in the following categories i.e.,Pre-admission stage,
Corporate Insolvency Resolution Process
(“CIRP“) stage and Miscellaneous.

PRE-ADMISSION STAGE

1. In IDBI Trusteeship Services Limited v. Direct Media
   Distribution Ventures Private Limited (Company Appeal (AT)
   Insolvency No. 850 of 2023), the NCLAT held that where the
   date of default fell within the period covered under Section 10A,
   any subsequent payment made after the Section 10A period does not
   shift the date of default to take the same outside the Section 10A
   period for a Section 7 application to be maintainable.




2. In Beetel Teletech Limited v. Arcelia IT Services
   Private Limited (Company Appeal (AT)(Insolvency) No. 1459 of
   2022), the NCLAT held that where the default was committed
   prior to the Section 10A period and such default continues during
   such 10A period, any liability accrued during the aforesaid period
   could be aggregated with the principal for meeting the threshold.
   Notably, the same view was taken by NCLAT in Narayan Mangal v. Vatsalya Builders &
   Developers Private Limited (Company Appeal (AT) (Ins.) No. 294 of
   2023.

   The NCLAT, in the present case, further held that in light of
   Section 60 of the Indian Contract Act, 1872, which gives the
   creditor the discretion to appropriate the payment received against
   the interest, the Adjudicating Authority cannot question the manner
   of appropriation by the creditor where the debtor had not clearly
   stated anything otherwise.




3. The NCLAT, in Vikram Kumar v. Aranca (Mumbai) Private Limited
   (Company Appeal (At) (Insolvency) No. 836 of 2023), held
   that a Section 7 application is not maintainable against a
   corporate guarantor where the corporate guarantee was invoked
   during the period specified under Section 10A of the Code.




4. In Venkat Rao Marpina v. Vemuri Ravi Kumar (Company
   Appeal (At) (Ch) (Ins.) No. 134/2022 ), the NCLAT upheld the decision of the
   Adjudicating Authority to admit the Section 7 petition, by
   observing that the advances given by a real estate buyer to the
   developer would be considered as a borrowing and such amounts
   raised from real estate buyers would amount to financial debt
   within the meaning of Section 5(8)(f) of the Code.

   Interestingly, it appears that the financial creditor here was a
   sole homebuyer, and could not have maintained a Section 7 petition
   without meeting the threshold prescribed under the second proviso
   to sub-section (1) of Section 7 of the Code. However, it appears
   that both the Adjudicating Authority and the NCLAT had failed to
   give due attention to the said aspect.




5. In Avinash Totade & Ors. v. Sinew Developers
   Private Limited (Company Appeal (AT) (Insolvency) No.1131 of 2023
   & I.A. No. 3941, 3899 of 2023), the NCLAT held that a
   Section 7 application is not maintainable solely for the recovery
   of interest.




6. Whether a CIRP application lies on account of a breach of a
   settlement agreement elicited two diametrically opposite views from
   the Principal Bench and Chennai Bench of NCLAT.

   The Principal Bench, in Ahluwalia Contracts (India) v. Jasmine Buildmart
   Private Limited (Company Appeal (AT) (Insolvency) No. 345 of
   2023), held that breach of a memorandum of settlement
   arising out of an underlying operational debt which only specifies
   the mode and manner of payment is capable of sustaining a Section 9
   petition.

   However, the Chennai Bench of NCLAT, in Maulik Kirtibhai Shah v. United Telecoms Limited
   (Company Appeal (AT) (CH) (Ins) No. 268/2023 IA No.834/2023 –
   For Exemption) took a different view. The Chennai Bench of
   NCLAT held that a settlement agreement does not come within the
   definition of operational debt and the claims arising under a
   memorandum of understanding loses the character of operational debt
   and becomes a debt simpliciter. It was further held that the
   definition of ‘operational debt’ cannot be given a wide
   interpretation to include any agreement between the parties which
   does not specifically pertain to supply of goods or services.




7. In Anuratan Textiles Private Limited v. Amaira
   International Pvt Limited (Company Appeal (At)(Ins)
   No.856/2021), the NCLAT relied upon the decision of the
   Supreme Court in Indus Biotech Private Ltd Vs Kotak India Venture
   (Offshore) Fund (earlier known as Kotak India Venture Limited) and
   others (Arbitration Petition (Civil) No. 48/2019), to
   reject a decision of the Adjudicating Authority to direct the
   parties to refer the matter to arbitration based on an application
   filed under Section 8 of the Arbitration and Conciliation Act,
   1996. The NCLAT observed that when a petition is filed to initiate
   CIRP, before entertaining any application filed under Section 8 of
   the Arbitration Act, it needs to first adjudicate on the
   application filed under the Code by recording a satisfaction with
   regard to debt and default.




8. In the matter of Agarwal Polysacks Limited v. K. K. Agro Foods and
   Storage Limited (Company Appeal (AT) (Insolvency) No.1126 of
   2022, while examining the issue of whether a written
   contract is a pre-condition for proving a financial debt, the NCLAT
   noted that the usage of the word ‘or’ in Regulation 8 of
   Insolvency and Bankruptcy Board of India (Insolvency Resolution
   Process for Corporate Persons) Regulations, 2016,
   (“CIRP Regulations“) would indicate that
   the said regulation does not contemplate execution of all the
   documents mentioned in such regulation and that the existence of
   debt can be proved by any of the documents referred to in
   sub-regulation (2).

   Further, while noting that a financial debt could be proved from
   other relevant documents, and not necessarily a written contract,
   the NCLAT observed that Form 26AS entries could be used to prove
   financial debt if it corroborates to the claim of the financial
   debt.

CIRP STAGE

1. The NCLAT, in Engineering Mazdoor Parishad Devas Through Its
   General Secretary v. Teena Saraswat Pandey, Resolution Professional
   of S & H Gears Private Limited (Comp. App. (AT) (Ins.) No. 1200
   of 2023) held that the resolution professional was
   justified in admitting the claim of workmen on the basis of the
   amount specified in the balance sheet of the corporate debtor,
   where the workmen failed to provide relevant records to
   substantiate their claim.




2. In Mayuras Industrial Services v. S R Shriraam
   Shekher (Company Appeal (AT) (CH) (Ins) No. 07/2023 (IA No.
   45/2023), the NCLAT held that where the Committee of
   Creditors (CoC) has approved withdrawal of CIRP with more than 90%
   of voting share, such decision cannot be rejected by the
   Adjudicating Authority.




3. In Dauphin Cables Private Limited v. Praveen Bansal
   (Company Appeal (AT) Insolvency No. 971, 972 & 973 of
   2023), the NCLAT relying upon Regulation 36 of CIRP
   Regulations, held that shareholder is not entitled to ask for
   documents and calculations on basis of which claim of the financial
   creditor has been admitted.




4. In Deputy Commissioner, UTGST, Daman v. Rajeev
   Dhingra (Company Appeal (AT) (Insolvency) No.1340 of
   2022), the NCLAT held that the decision of resolution
   professional or CoC to reject a belated plan which contained
   various infirmities like non-submission of duly signed net worth
   certificate, audited financial statements, etc. could not be
   successfully challenged, even where such a plan was more viable
   than the accepted resolution plan. The NCLAT further held that
   where a plan is rejected by CoC, the Adjudicating Authority cannot
   question the commercial wisdom of the CoC nor deal with the merits
   of resolution plan unless it is found to be contrary to the express
   provisions of law and against the public interest.

   Further, the NCLAT held that the decision of resolution
   professional to not accept a delayed statutory claim filed after
   the approval of the resolution plan by the CoC could not be
   challenged as the CIRP Regulations do not enable the resolution
   professional to admit a claim beyond the prescribed time
   period.




5. While analysing the definition of a corporate person, the
   NCLAT, in Nitin Pannalal Shah v. Vijay Raja (Company Appeal
   (AT) (Insolvency) No. 379 of 2021), noted that an entity
   which is registered as stock brokers under the SEBI Act, 1992 read
   with the SEBI (Stock-Brokers and Sub-Brokers) Regulations, 1992
   would qualify as a financial service provider and would be outside
   the ambit of a corporate person defined under Section 3(7) of the
   Code and a corporate debtor defined under Section 3(8) of the Code
   for a Section 7 application to be maintainable against such
   entity.

   Further, on the point of maintainability of appeals filed by the
   NSE against an order of admission filed against a stockbroker, the
   NCLAT noted that NSE being the market regulator had the locus to
   maintain such an appeal.




6. In SAJ housing Private Limited v. Priyanka Chouhan
   (Company Appeal (AT)(Insolvency) No. 1093 of 2022), the
   NCLAT, relying upon the decision of the Supreme Court in Orator Marketing (P) Ltd. v. Samtex Desinz (P)
   Ltd ( Civil Appeal No. 2231 of 2021), noted
   that that the concept oftime value of moneywould also include a
   transaction that does not necessarily culminate into money being
   returned to the lender or interest being paid in respect of money
   that has been borrowed and can include anything which is equivalent
   to the money that has been loaned as long as commercial effect of
   borrowing or profit as the aim is discernible. It, therefore, held
   that a financial debt does not exclude an interest free
   loan and merely because there was no interest associated, the
   nature of financial debt would not change. However, eventually the
   NCLAT noted that no financial debt existed as the amount was
   invested as return of profit share.

   Further the NCLAT held that the decision of the CoC to approve
   liquidation within 38 (thirty-eight) days of CIRP cannot be faulted
   where the corporate debtor was not in a running condition, nor had
   any employee or business activity.




7. The NCLAT, in Mr. Vijay Kumar Garg v. Power Grid Corporation of
   India Limited (Company Appeal (AT) (CH) (INS.) No. 260 of
   2023), reiterated the well settled principle that bank
   guarantees are not assets or liabilities of the corporate debtor,
   and held that invocation of a bank guarantee cannot be limited by
   the moratorium, while refusing to interfere with a reasoned order
   of the Adjudicating Authority.

LIQUIDATION STAGE

1. In Pooja Deora v. Rajeev Sharma (Company Appeal (AT)
   (Insolvency) No. 1288 of 2022), the NCLAT held that where
   the CIRP period was coming to an end and there was no resolution
   plan, the decision of the CoC to liquidate the corporate debtor
   cannot be challenged.

The update was first published on
Bar & Bench.

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