Between The Lines | Supreme Court: Proceedings under SARFAESI cannot be continued against corporate debtor once CIRP is admitted and moratorium is ordered.

The Supreme Court (“SC”) has in the judgement dated May 18, 2022 (“Judgement”), in the matter of Indian Overseas Bank v M/S RCM Infrastructure Limited and Another [Civil Appeal No. 4750 of 2021] held that once corporate insolvency resolution process (“CIRP”) is initiated, all actions under Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (“SARFAESI”) to foreclose, recover or enforce any security interest are prohibited.

Facts

In the instant case, an appeal was preferred before the SC challenging the judgment dated March 26, 2021 (“Impugned Order”) passed by the National Company Law Appellate Tribunal, Principal Bench, New Delhi (“NCLAT”), thereby dismissing the appeal filed by the Indian Overseas Bank (“Appellant”). The appeal to the NCLAT was in turn filed challenging the order dated July 15, 2020 passed by the National Company Law Tribunal, Hyderabad Bench-1, Hyderabad (“NCLT”), by which the NCLT had allowed the application filed by the former managing director (“Respondent No. 2”) of M/s. RCM Infrastructure Limited (“Corporate Debtor”/ “Respondent No. 1”) and set aside the sale of the assets of the Corporate Debtor. Respondent No. 1 and Respondent No. 2 are collectively referred to as “Respondents”.

The Appellant had extended certain credit facilities to the Corporate Debtor. However, the Corporate Debtor failed to repay the dues and the loan account of the Corporate Debtor became irregular. On June 13, 2016, the loan account of the Corporate Debtor came to be classified as “Non-Performing Asset” (“NPA”). The Appellant issued a demand notice under Section 13(2) of the SARFAESI, calling upon the Corporate Debtor and its guarantors to repay the outstanding amount due to the Appellant. Since the Corporate Debtor failed to comply with the demand notice and repay the outstanding dues, the Appellant took symbolic possession of two secured assets mortgaged exclusively with it, in exercise of powers conferred on it under Section 13(4) of the SARFAESI, read with Rule 8 (Sale of immovable secured assets) of the Security Interest (Enforcement) Rules, 2002 (“Rules”). One of the said properties stood in the name of the Corporate Debtor and the other in the name of corporate guarantor. An e-auction notice came to be issued on September 27, 2018 by the Appellant to recover the public money availed by the Corporate Debtor.

On October 22, 2018, the Corporate Debtor filed a petition under Section 10 (Initiation of corporate insolvency resolution process by corporate applicant) of the Insolvency and Bankruptcy Code, 2016 (“IBC”) before the NCLT. In the first e-auction held on November 6, 2018, no bids were received. In the second e-auction held on December 12, 2018, three persons became successful bidders by offering jointly a price of Rs.32.92 crores for both the secured assets. On December 13, 2018, the sale was confirmed in favour of the successful bidders in the public auction. The successful bidders deposited 25% of the bid amount, that is, Rs.8.23 crore including the earnest money deposit of the said amount and the Appellant issued a sale certificate to them. The auction purchasers were directed to pay the balance 75% of the bid amount within 15 days, that is, prior to December 28, 2018. The auction purchasers addressed a letter to the Appellant seeking handing over of peaceful and vacant possession of the secured assets and also prayed for extension of time to pay the balance 75% of the bid amount till March 8, 2019, which was accepted by the Appellant.

NCLT, by order dated January 3, 2019, admitted the petition filed by the ex-promoter of the Corporate Debtor, and consequently the CIRP of the Corporate Debtor commenced, and moratorium under Section 14 (Moratorium) of the IBC was notified and an Interim Resolution Professional (“IRP”) was also appointed.

The Appellant on January 21, 2019, filed its claim in Claim Form-C with the IRP, upon it coming to know about the admission of the insolvency petition filed by the Corporate Debtor. According to the Appellant, since the balance 75% of the bid amount was not yet received on the said date, it was not excluded from the claim filed before the IRP. During the pendency of the CIRP, the Appellant accepted the balance 75% of the bid amount, that is, Rs.24.69 crores on March 8, 2019. Upon receipt of the payment, the Appellant submitted its revised claim in Claim Form-C to the IRP on March 11, 2019. The Appellant also intimated the IRP about the successful sale of the said secured assets. The Respondent No. 2 thereafter filed an application praying before the learned NCLT to set aside the security realization during the CIRP period carried out by the Appellant or in the alternative to cancel the impugned transaction. By way of the order dated July 15, 2020, the learned NCLT passed an order thereby allowing the said application filed by the Respondent No. 2 and setting aside the sale of the property owned by the Corporate Debtor. Being aggrieved thereby, the Appellant filed an appeal before the NCLAT and the same was rejected by the Impugned Order. Being aggrieved by such order thereby, the present appeal was preferred by the Appellant to the Supreme Court.

Issue

Whether proceedings under the SARFAESI can be continued against the Corporate Debtor once CIRP is admitted and moratorium is ordered.

Arguments

Contentions raised by the Appellant:

It was argued that the very initiation of the voluntary insolvency proceedings under Section 10 of the IBC was with mala fide intent and as such, hit by Section 65 (Fraudulent or malicious initiation of proceedings) of the IBC. It was submitted that the demand notice was challenged by the Corporate Debtor by filing an application before the learned Debt Recovery Tribunal-II, Hyderabad (“DRT”). However, no stay was granted by the DRT in the said application. On the contrary, an order was passed on October 29, 2018 by the learned DRT, whereby confirmation of sale was stayed, subject to deposit of Rs.12 crores by the Corporate Debtor. The Corporate Debtor failed to do so. After that, with mala fide intent, instead of making payment, a petition came to be filed under Section 10 of the IBC by the Corporate Debtor for the sole purpose of stalling the sale. Though the issue with regard to Section 65 of the IBC was subsequently raised by the Appellant, neither the learned NCLT nor the learned NCLAT had considered the same.

It was argued that since the moratorium under Section 14 of the IBC had ceased to subsist after the order directing liquidation was passed under Section 52 (Secured creditor in liquidation proceedings) of the IBC, the secured creditors were allowed to realise their security interest. It was therefore submitted that there was no bar on the Appellant to realise its money. In view of the provision of Section 54 (Dissolution of corporate debtor) of the IBC, the sale was complete after the Appellant had received 25% of the bid amount and the said was confirmed. Relying on Vidhyadhar v. Manikrao and Another [(1999) 3 SCC 573], and B. Arvind Kumar v. Govt. of India and Others [(2007) 5 SCC 745] it was argued that merely because a part of the sale consideration was received subsequently, it could not affect the sale. Section 14(1)(c) of the IBC interdicts any action to foreclose, recover or enforce any security interest including any action under SARFAESI. However, it does not undo actions which have already stood completed.

Contentions raised by the Respondents:

The Respondents argued that the title of the secured assets cannot be conveyed to the auction purchasers merely upon confirmation of sale even before receiving full sale consideration. It was submitted that the title would be passed over only after receipt of the full consideration and issuance of sale certificate. Further, it was submitted that the contentions are totally contrary in view of various provisions of the SARFAESI, the Rules as well as Sections 14(1)(c), 31(1) and 238 of the IBC. Section 13(8) of the SARFAESI itself provides a right of redemption of secured assets to the owner/debtor. Upon approval of the Resolution Plan (“RP”), in view of Section 31(1) of the IBC, all the debts stand legally resolved and the same is binding on all parties including the Corporate Debtor, its employees, members, creditors, and all governmental dues and the successful resolution applicant would be entitled to start on a clean slate. Further, the jural relationship of creditor-debtor would get altered/severed under a new contract upon approval of a new RP. It was submitted that as a consequence, the security created under the old contract would stand released by operation of law and the relationship would be governed by the terms of the approved plan and the mortgage created under the old contract would get extinguished/novated.

It was submitted that in any case, in view of Section 238 (Provisions of the IBC to override other laws) of the IBC, the provisions contained therein will override all other laws for the time being in force and the provisions of the IBC would also prevail over any other instrument having effect by virtue of any other law. The continuation of any proceeding including the proceeding under the SARFAESI is totally illegal in view of Section 14(1)(c) of the IBC. It was, therefore, submitted that the continuation of any action under the SARFAESI by the Appellant and the receipt of the balance sale consideration was violative of Section 14(1)(c) of the IBC. The amount payable by the Corporate Debtor to the other financial creditors is much more than the amount received by the Appellant during the pendency of the CIRP.

Under the provisions of the IBC, all the financial creditors would be entitled to a share in the amount received upon realization of the assets of the Corporate Debtor and the Appellant cannot keep it in entirety. Section 65 of the IBC expressly provides for the mechanism and the remedy for addressing frivolous or malicious proceedings initiated under the SARFAESI. However, the Appellant chose not to take recourse to such proceedings. It was contended that as such, the allegations of mala fide were incorrect.

Observations of the Supreme Court

The SC observed that after the CIRP is initiated, there is moratorium for any action to foreclose, recover or enforce any security interest created by the Corporate Debtor in respect of its property including any action under the SARFAESI. The words “including any action under the SARFAESI Act” are significant. The legislative intent is clear that after the CIRP is initiated, all actions including any action under the SARFAESI to foreclose, recover or enforce any security interest are prohibited. The SC observed that the provisions of the IBC shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law. It has been consistently held by the SC that the IBC is a complete code in itself and in view of the provisions of Section 238 of the IBC, the provisions of the IBC would prevail notwithstanding anything inconsistent therewith contained in any other law for the time being in force.

Insofar as the judgment of the SC in the case of Vidhyadhar (supra) was concerned, the SC observed that it was held that even if the full price of the property has not been paid, the transaction of the sale will take effect and the title would pass on that transaction, the SC had further held that the real test is the intention of the parties. It was held that the parties must intend to transfer ownership of the property and that they must also intend that the price would be paid either in praesenti or in future. The SC however noted that in the said case, the defendant had not only executed the sale deed in favour of the plaintiff but had presented it for registration, admitted its execution before the Sub-Registrar before whom the remaining part of the sale consideration was paid and thereafter, the document was registered.

In the case of B. Arvind Kumar (supra), the property in question was a suit property and was sold in a public auction. The sale was confirmed by the District Judge, Civil and Military Station, Bangalore. What was held by the SC is that when a property is sold by public auction in pursuance of the order of the court and the bid is accepted and the sale is confirmed by the court in favour of the purchaser, the sale becomes absolute and the title vests in the purchaser. It was held that a sale certificate is issued to the purchaser only when the sale becomes absolute. It was held that when the auction purchaser derives title on confirmation of sale in his favour and a sale certificate is issued evidencing such sale and title, no further deed of transfer from the court is contemplated or required. Additionally, in the said case, the SC found that the sale certificate itself was registered.

The SC clarified that the instant case arises out of a statutory sale. The sale would be governed by Rules 8 and 9 (Time of sale, issues of sale certificate and delivery of possession, etc.) of the Rules. The sale would be complete only when the auction purchaser makes the entire payment and the authorised officer, exercising the power of sale, issues a certificate of sale of the property in favour of the purchaser in the form given in Appendix V to the Rules. The SC noted that in the present case, the balance amount was accepted by the Appellant on March 8, 2019. The sale under the statutory scheme as contemplated under Rules 8 and 9 of the Rules would stand completed only on March 8, 2019.

The SC noted that this date fell much after January 3, 2019, on which date the CIRP commenced and moratorium was ordered. The SC was unable to accept the argument on behalf of the Appellant that the sale was complete upon receipt of the part payment. The SC concluded that in view of the provisions of Section 14(1)(c) of the IBC, which have overriding effect over any other law, any action to foreclose, recover or enforce any security interest created by the Corporate Debtor in respect of its property including any action under the SARFAESI Act is prohibited.

Decision of the Supreme Court

The SC held that the Appellant could not have continued the proceedings under the SARFAESI once the CIRP was initiated and the moratorium was ordered. Further it rejected the contention of the Appellant that the petition filed by the Corporate Debtor was mala fide.

VA View:

Through this Judgement, the SC determined on the issue of applicability of provisions under Section 14 of the IBC to a proceeding initiated in terms of the SARFAESI, in particular, auction sale. It confirmed that bar under Section 14 of the IBC extends to any action of enforcement of any security interest created by the corporate debtor, including any action under the SARFAESI.

Through this Judgment the SC has clarified the rationale behind the IBC as a legislation, which favours the resolution process of corporate debtors, over securing interest of individual claimants. The SC reiterated the legislative intent of the IBC that after the CIRP is initiated, all actions including any action under the SARFAESI to foreclose, recover or enforce any security interest are prohibited.

For any query, please write to Mr. Bomi Daruwala at [email protected]

Between The Lines | Supreme Court: A liability in respect of a claim arising out of a recovery certificate under the Recovery of Debts and Bankruptcy Act, 1993 would be a “financial debt” under the IBC and a holder of such recovery certificate would be a “financial creditor” under the IBC.

The Supreme Court (“SC”) has in its judgment dated May 30, 2022, in the matter of Kotak Mahindra Bank Limited v. A. Balakrishna and Another [Civil Appeal No. 689 of 2021] held that a liability in respect of a claim arising out of a recovery certificate under the Recovery of Debts and Bankruptcy Act, 1993, would be a “financial debt” within the meaning of Section 5(8) of the Insolvency and Bankruptcy Code, 2016 (“IBC”) and a holder of such recovery certificate would be a “financial creditor” under Section 5(7) of the IBC.

Facts
The appeal challenged the judgment and order dated November 24, 2020 passed by the National Company Law Appellate Tribunal, New Delhi (“NCLAT”), thereby allowing the appeal filed by the respondent no. 1, director of the corporate debtor, and reversing the order dated September 20, 2019 passed by the National Company Law Tribunal, Chennai (“NCLT”), whereby the application filed by the appellant, Kotak Mahindra Bank Limited (“KMBL”), under Section 7 of the IBC was admitted. The NCLAT while allowing the appeal held that the application filed by KMBL, was time barred and that issuance of recovery certificate would not trigger the right to sue.

During the years 1993 and 1994, Ind Bank Housing Limited (“IBHL”) sanctioned separate credit facilities to three companies (“Borrower Entities”). The respondent no. 2, M/s. Prasad Properties and Investments Private Limited (“Corporate Debtor”), stood as the corporate guarantor/ mortgagor and mortgaged its immovable property to secure the aforesaid credit facilities sanctioned to the Borrower Entities.

The Borrower Entities defaulted in repayment of the dues and subsequently IBHL classified all the facilities availed by them as non-performing asset (“NPA”) in November, 1997. Pursuant thereto, IBHL filed three civil suits before the High Court of Madras, against the Borrower Entities and the Corporate Debtor, for recovery of the amounts due. During the pendency of the suits, KMBL and IBHL entered into a deed of assignment dated October 13, 2006, wherein IBHL assigned all its rights, title, interest, estate, claim and demand to the debts due from Borrower Entities, to KMBL. Pursuant to the said deed, KMBL and the Borrower Entities entered into a compromise on August 7, 2006 (“Compromise”).

It was claimed by KMBL that the Borrower Entities failed to make payments as per the Compromise and thus, KMBL issued a demand notice dated September 26, 2007 to them and the Corporate Debtor under Section 13(2) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (“SARFAESI”). The said notice was followed by a possession notice dated January 10, 2008 issued under Section 13(4) of the SARFAESI, by KMBL due to default in payment by the Corporate Debtor of the amount demanded. KMBL further issued a winding up notice dated May 6, 2008 under the Companies Act, 1956 to the Corporate Debtor.

Aggrieved by the continuous default of payment by the Corporate Debtor and the Borrower Entities, KMBL filed three applications under Section 31(A) of the erstwhile Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (now known as the Recovery of Debts and Bankruptcy Act, 1993) (“Debt Recovery Act”) before the Debt Recovery Tribunal (“DRT”) for issuance of debt recovery certificates in terms of the Compromise entered into between the parties. The applications came to be allowed by the DRT and separate recovery certificates came to be issued against each of the Borrower Entities and the Corporate Debtor.

On the basis of the aforementioned recovery certificates, on October 5, 2018, KMBL, claiming to be a financial creditor, filed an application under Section 7 of the IBC before the NCLT and sought initiation of corporate insolvency resolution process (“CIRP”) against the Corporate Debtor, which was admitted. Respondent no.1, director of the Corporate Debtor filed an appeal which was allowed by the NCLAT. Aggrieved with the judgment of the NCLAT, KMBL filed the present appeal with the SC.

Issue
Whether the issuance of a recovery certificate in favour of the financial creditor would give rise to a fresh cause of action to initiate proceedings under Section 7 of the IBC.

Arguments

Contentions raised by KMBL:

KMBL submitted that the issue involved in the present proceedings is no more res integra. It was submitted that the SC has, in the case of Dena Bank (Now Bank of Baroda) v. C. Shivakumar Reddy and another [(2021) 10 SCC 330] (“Dena Bank Judgment”), held that once a claim fructifies into a final judgment and order/ decree, upon adjudication, and a certificate of recovery is also issued authorizing the creditor to realize its decretal dues, a fresh right accrues to the creditor to recover the amount specified in the recovery certificate. It is submitted that in view of the law laid down by the SC in the Dena Bank Judgment, the present appeal deserves to be allowed inasmuch as, the application under Section 7 of the IBC filed by KMBL was within the period of three years from the dates of issuance of the recovery certificates.

It was further submitted that the conduct of the respondents is that of a dishonest borrower. Having entered into the consent terms, which were decreed by the High Court of Madras and having not complied with the terms contained in the compromise decree, it is now not open to the respondents to oppose the admission of the application under Section 7 of the IBC.

In rejoinder, KMBL submitted that the Dena Bank Judgment correctly lays down the position of law. If the relevant provisions of the IBC are construed in correct perspective, the only conclusion that would be arrived at is that KMBL is a “financial creditor”. It was submitted that the correct approach would be to consider the underlying transaction forming the basis of the proceedings initiated by the creditor culminating in a recovery certificate. If the underlying transactions are such that they constitute a financial debt and the creditor is a financial creditor, then that would be the determining factor for deciding the maintainability of the CIRP application. KMBL further submitted that the judgment debt does not lose its legal essence or character solely because it has fructified into a recovery certificate.

Lastly, KMBL submitted that the purpose of the IBC is to preserve the corporate debtor as an ongoing concern, while ensuring maximum recovery for all the creditors and that the provisions of the IBC have to be interpreted in such a manner as to advance the purpose of the IBC and not in a manner in which they defeat the object of the IBC.

Contentions raised by the respondents:

The respondents submitted that the cause of action has merged into the order of issuance of the recovery certificate by the DRT and, therefore, by application of the doctrine of merger, the debt no more survives. It was also submitted that the initiation of CIRP by KMBL would amount to filing of second proceedings for the very same cause of action and thus would be hit by the doctrine of res judicata.

It was further submitted that recovery certificates cannot be treated as “decree” for all purposes. It was submitted that a decree holder may initiate CIRP as a financial creditor, but the holder of a recovery certificate granted under Section 19(22) of the Debt Recovery Act is not entitled to initiate CIRP under the IBC as a financial creditor or a decree holder. Sub-sections (22) and (22A) of Section 19 of the Debt Recovery Act were brought on the statute book by ‘The Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016 (Act No. 44 of 2016)’, which was enacted on August 16, 2016 and brought into force from November 4, 2016. The respondents submitted that the deeming fiction contained therein applies only for the purposes of initiation of winding up proceedings. The deeming fiction cannot be extended for any other purpose.

Further, after November 15, 2016, that is, the date on which Section 255 of the IBC (which omitted the application of the insolvency procedure under the Companies Act, 2013) was brought into force, the recovery certificate holders lost their right to use their certificate as a “decree” for initiating winding-up proceedings under the Companies Act, 2013.

It was also submitted that the Dena Bank Judgment is per incuriam, and that it is rendered without considering the provisions of sub-sections (22) and (22A) of Section 19 of the Debt Recovery Act as well as certain provisions of the IBC. If the aforesaid provisions of the IBC and the Debt Recovery Act are considered in correct perspective, the conclusion that would be inevitable is that a decree holder is not a “financial creditor” and as such, is disentitled to invoke the provisions of Section 7 of the IBC. Further, the provisions of Section 14 of the IBC (which deals with the imposition of moratorium on the corporate debtor) would also amplify this position as the institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority is specifically prohibited.

Therefore, the NCLAT has correctly held that the application filed by KMBL under Section 7 of the IBC was beyond the period of limitation since issuance of recovery certificate does not give rise to a fresh cause of action and the timeline for the purpose of limitation would start in the year 1997 when the accounts of the Borrower Entities were declared NPA, and that no interference is warranted with the same.

Observations of the Supreme Court

The SC observed that in the Dena Bank Judgment, the court held in unequivocal terms that once a claim fructifies into a final judgment and order/ decree, upon adjudication, and a certificate of recovery is also issued authorizing the creditor to realize its decretal dues, a fresh right accrues to the creditor to recover the amount of the final judgment and/ or order/ decree and/ or the amount specified in the recovery certificate. Furthermore, the Dena Bank Judgment held that issuance of a certificate of recovery in favour of the financial creditor would give rise to a fresh cause of action to the financial creditor, to initiate proceedings under Section 7 of the IBC for initiation of the CIRP, within three years from the date of the judgment and/ or decree or within three years from the date of issuance of the certificate of recovery.

Applying principles of various judgments to the definition of “financial debt” under the IBC, it could clearly be seen that the words “means a debt along with interest, if any, which is disbursed against the consideration for the time value of money” are followed by the words “and includes”. Thereafter various categories (a) to (i) have been mentioned in the definition of financial debt. It is clear that by employing the words “and includes”, the Legislature has only given instances, which could be included in the term “financial debt”. However, the list is not exhaustive but inclusive. The legislative intent could not have been to exclude a liability in respect of a “claim” arising out of a recovery certificate from the definition of the term “financial debt”, when such a liability in respect of a “claim” simpliciter would be included in the definition of the term “financial debt”.

Having held that a liability in respect of a claim arising out of a recovery certificate would be a “financial debt” within the ambit of its definition under clause (8) of Section 5 of the IBC, as a natural corollary thereof, the holder of such recovery certificate would be a financial creditor within the meaning of clause (7) of Section 5 of the IBC. As such, such a person would be a “person” as provided under Section 6 of the IBC who would be entitled to initiate the CIRP.

Insofar as the contention of the respondents with regard to Section 14(1)(a) of the IBC is concerned, the SC did not find that the words used therein could be read to mean that the decree holder is not entitled to invoke the provisions of the IBC for initiation of CIRP. The prohibition to institution of suit or continuation of pending suits or proceedings including execution of decree would not mean that a decree holder is also prohibited from initiating CIRP, if he is otherwise entitled to in law. The effect would be that the applicant, who is a decree holder, would himself be prohibited from executing the decree in his favour.

A perusal of the Dena Bank Judgment would reveal that the SC considered all the relevant provisions of the IBC and the earlier judgments of the court. The SC did not find any inconsistency in the Dena Bank Judgment with the earlier judgments of the SC on which reliance is placed by the respondents. The SC found that the contention that the Dena Bank Judgment being per incuriam to the statutory provisions and earlier judgments of the court, is wholly unsustainable.

It was sought to be argued by the respondents that the recovery certificate is for the limited purpose of initiation of winding up proceedings. If the contention is accepted, the word “limited” would be required to be inserted in Section 19(22A) of the Debt Recovery Act, between the words “shall be deemed to be decree or order of the Court” and “for the purposes of initiation of winding up proceedings”. It is more than well settled that when the language of a statutory provision is plain and unambiguous, it is not permissible for the court to add or subtract words to a statute or read something into it which is not there.

Further, when the Legislature itself has provided that any recovery certificate issued under sub-section (22) of Section 19 of the Debt Recovery Act will be deemed to be a decree or order of the court for initiation of winding-up proceedings, which proceedings are much severe in nature, it will be difficult to accept that the Legislature intended that such a recovery certificate could not be used for initiation of CIRP, which would enable the Corporate Debtor to continue as an ongoing concern and, at the same time, pay the dues of the creditors to the maximum.

Decision of the Supreme Court

With the aforesaid findings, the SC held that a liability in respect of a claim arising out of a recovery certificate would be a “financial debt” within the meaning of clause (8) of Section 5 of the IBC. Consequently, the holder of the recovery certificate would be a financial creditor within the meaning of clause (7) of Section 5 of the IBC. As such, the holder of such certificate would be entitled to initiate CIRP, if initiated within a period of three years from the date of issuance of the recovery certificate.

Therefore, the SC allowed the present appeal and set aside the judgment and order of the NCLAT. Undisputedly, the application for initiation of CIRP under Section 7 of the IBC had been filed by KMBL within a period of three years from the date of issuance of the recovery certificate.

VA View:

In this judgment, the SC has rightly analysed the intention of the Legislature, by stating that the list provided in in the definition of “financial debt” of the IBC is not exhaustive but inclusive and thus, the legislative intent could not have been to exclude a liability in respect of a “claim” arising out of a recovery certificate from the definition of the term “financial debt”. In doing so, the court interpreted the IBC in such a manner so as to advance the purpose of the IBC and not in a manner in which they defeat the object of the IBC.

The SC also relied and rightly upheld the decision in the Dena Bank Judgment and observed that issuance of a certificate of recovery in favour of the financial creditor would give rise to a fresh cause of action to the financial creditor, to initiate proceedings under Section 7 of the IBC for initiation of the CIRP. This judgment brings further clarity towards understanding the provisions of the IBC and would significantly contribute to interpretation of the definition of the term “financial debt”.

For any query, please write to Mr. Bomi Daruwala at [email protected]

Between The Lines | Supreme Court: Application under Section 11(6) of the Arbitration and Conciliation Act, 1996 for the appointment of arbitrator can be filed only before high courts possessing jurisdiction

The Hon’ble Supreme Court (“SC”) has in the judgement dated March 24, 2022 (“Judgement”), in the matter of M/s. Ravi Ranjan Developers Private Limited v. Aditya Kumar Chatterjee [Civil Appeal Nos. 2394-2395 of 2022 (Arising out of SLP (C) Nos. 17397-17398 of 2021)] held that an application under Section 11(6) of the Arbitration and Conciliation Act, 1996 (“Act”) for appointment of an arbitrator cannot be moved in any High Court in India, irrespective of its territorial jurisdiction.

Facts

The above case throws light on Section 11(6) of the Arbitration and Conciliation Act, 1996 (“Act”). The said case is an appeal by M/s. Ravi Ranjan Developers Private Limited (“Appellant”) against the order dated August 13, 2021 (“Impugned Order”) passed by the Calcutta High Court (“CHC”) for the appointment of an arbitrator and an order passed on October 4, 2021 by the CHC rejecting a review application made by the Appellant in favour of Aditya Kumar Chatterjee (“Respondent”). Section 11(6) of the Act confers jurisdiction upon the court in case of non-compliance of the procedure for appointment of the arbitrator, as agreed upon by the parties.

The Appellant and the Respondent entered into a development agreement dated June 15, 2015 (“Development Agreement”) for the development of a property based in Muzaffarpur in Bihar outside the jurisdiction of the CHC. The Development Agreement contained an arbitration clause which stated clearly that in case of any dispute or difference between the Appellant and the Respondent arising out of the Development Agreement, the reference of such dispute would be made to an arbitrator appointed by both the Appellant and the Respondent and such arbitration would be conducted under the provisions of the Act and the sitting of the arbitral tribunal would be at Kolkata.

Due to differences between the Appellant and the Respondent, the Respondent terminated the Development Agreement on April 24, 2019, which was not accepted by the Appellant. The Respondent filed a petition under Section 9 (Interim measures, etc., by Court) of the Act in the Court of the District Judge, Muzaffarpur seeking interim protection in respect of the property.

The Respondent sent a notice to the Appellant invoking the arbitration clause under the Development Agreement. Further, the Respondent moved an arbitration petition in the CHC under Section 11(6) of the Act for the appointment of an arbitrator. In response to the same, the Appellant filed an Affidavit in Opposition questioning the territorial jurisdiction of the CHC to decide the application under Section 11(6) of the Act. By the Impugned Order, the CHC allowed the arbitration petition and appointed a sole arbitrator in the case. Subsequently, the Appellant filed an application for review of the Impugned Order, which was dismissed by the CHC. Aggrieved, the Appellant has brought the instant appeal before the SC.

Issue

Whether the CHC had jurisdiction to entertain the application filed by the Respondent and to appoint an arbitrator.

Arguments

Contentions raised by the Appellant:

The Appellant submitted that the counsel for the Appellant in the CHC gave consent without instructions from the Appellant. However, the CHC did not adjudicate the issue of territorial jurisdiction raised by the Appellant in its Affidavit in Opposition filed in the CHC.

The contentions that the Appellant raised in its application for review of the Impugned Order were as follows:

• In the Impugned Order the objections of the Appellant pertaining to the CHC not having jurisdiction in the matter and the objections regarding non-arbitrability of the disputes involved, have not been considered by the CHC;
• The CHC lacked jurisdiction to entertain the Respondent since the Hon’ble High Court at Patna had to be approached under Section 11 (Appointment of arbitrators) of the Act;
• The CHC proceeded on the concession of counsel which was contrary to the instructions of the Appellant. The Appellant had not instructed counsel to concede and had, to the contrary, instructed counsel to oppose the petition and, therefore, consent of the counsel was without jurisdiction and void.

It was argued before the SC that an order without jurisdiction can be questioned at any time at any stage irrespective of any consent given by the counsel, without instructions of the Appellant. The Appellant submitted that the word ‘Court’ has been defined, in case of an arbitration other than international commercial arbitration, to mean the principal Civil Court of original jurisdiction in a district and would include the High Court in exercise of its ordinary original jurisdiction, having jurisdiction to decide the questions forming the subject matter of the arbitration, if the same had been the subject matter of the suit, but it does not include any Civil Court of a grade inferior to such principal Civil Court or any Court of small causes.

The Appellant emphasized on the mandatory nature of Section 42 (Jurisdiction) of the Act to argue that an earlier application for interim protection having been moved at the District Court at Muzaffarpur, the Respondent could not have invoked the jurisdiction of the CHC. It was submitted that the parties cannot by consent confer jurisdiction on a court which inherently lacked jurisdiction.

Contentions raised by the Respondent:

The Respondent contended that the CHC had the territorial jurisdiction to entertain the application under Section 11(6) of the Act as the seat of arbitration was Kolkata. The Respondent admitted to the fact that the above application was in relation to a property in Muzaffarpur and that the Development Agreement was executed outside the territorial jurisdiction of the CHC and, thus, the CHC had no jurisdiction in this regard. However, it was further submitted that though the Development Agreement was executed outside the jurisdiction of the CHC, the Development Agreement contained the fact that if any dispute arises then the seat of arbitration would be at Kolkata and thus the CHC could exercise territorial jurisdiction.

The Respondent submitted that the word ‘Court’ has been defined in case of an arbitration other than international commercial arbitration to mean the principal Civil Court of original jurisdiction, having jurisdiction to decide the questions forming subject matter of the arbitration.

The Respondent argued that the initial order of appointment of arbitrator was passed by the CHC with consent of the Appellant, since the Appellant appeared in the arbitration proceedings. Therefore, the Appellant acquiesced to the reference of the disputes to the arbitrator appointed by the CHC.

Observations of the Supreme Court

The SC observed that the minutes of the proceedings before the arbitrator appointed by the CHC does not indicate that the Appellant willingly submitted to arbitration by the learned arbitrator. The Appellant only agreed to the fees of the arbitrator appointed by the CHC. The SC concurred with the argument made by the Appellant that an order without jurisdiction can be questioned at any time at any stage irrespective of any consent that may have been given by the counsel, without instructions of the Appellant.

Answering the issue about whether the CHC had territorial jurisdiction to pass the Impugned Order, in negative, the SC observed that the Development Agreement was admittedly executed and registered outside the jurisdiction of the CHC and the Development Agreement pertains to development of property located in Muzaffarpur, outside jurisdiction of the CHC. The Appellant has its registered office in Patna, outside the jurisdiction of CHC. The Appellant has no establishment and does not carry on any business within the jurisdiction of the CHC. Further, as admitted by the Respondent, no part of the cause of action had arisen within the jurisdiction of the CHC.

In case of an arbitration other than international commercial arbitration, ‘Court’ would mean the principal Civil Court of original jurisdiction in a district and would include the CHC in exercise of its ordinary original jurisdiction, having jurisdiction to decide the questions forming the subject matter of the arbitration, if the same had been the subject matter of the suit, but it does not include any Civil Court of a grade inferior to such principal Civil Court or any court of small causes. Subject to the pecuniary or other limitations prescribed by any law, suits for recovery of immovable property or determination of any other right to or interest in an immovable property or compensation for wrong to immovable property, is to be instituted in the court, within the local limits of whose jurisdiction, the property is situated. Certain specific suits relating to immovable property can be instituted either in the court within the limits of whose jurisdiction the property is situated, or in the court within the local limits of whose jurisdiction, the defendant actually or voluntarily resides or carries on business. All other suits are to be instituted in a court, within the local limits of whose jurisdiction, the defendant voluntarily resides or carries on business. Where there is more than one defendant, a suit may be instituted in the court within whose jurisdiction any of the defendants voluntarily resides or carries on business. A suit may also be instituted in a court within whose jurisdiction the cause of action arises either wholly or in part.

The SC observed that no suit could have been filed in any court over which the CHC exercises jurisdiction, since the suit pertains to immovable property situated at Muzaffarpur in Bihar, outside the territorial jurisdiction of the CHC. The Appellant neither resides not carries on any business within the jurisdiction of the CHC. It was observed that Section 11(6) of the Act has to be harmoniously read with Section 2(1)(e) of the Act and construed to mean, a High Court which exercises superintendence/supervisory jurisdiction over a court within the meaning of Section 2(1)(e) of the Act.

Section 42 of the Act is mandatory and has been enacted to prevent the parties to an agreement from being dragged into proceedings in different courts, when more than one court has jurisdiction. However, Section 42 of the Act cannot possibly have any impact on an application under Section 11(6) of the Act, which necessarily has to be made before a High Court, unless the earlier application was also made in a High Court. In the instant case, the earlier application under Section 9 of the Act was made in the District Court at Muzaffarpur and not in the High Court of Judicature at Patna. An application under Section 11(6) of the Act for appointment of Arbitrator, could not have been made in the District Court of Muzaffarpur. Therefore, Section 42 of the Act is not attracted.

The SC observed that the Appellant and the Respondent had not agreed to submit to the jurisdiction of the CHC, but had only agreed that the sittings of the arbitral tribunal would be in Kolkata. The SC relied on Union of India v. Hardy Exploration and Production (India) Inc. [13 SCC 472] wherein the SC had held that the sittings at various places are relatable to venue. It cannot be equated with the seat of arbitration or place of arbitration, which has a different connotation.

In the instant case, Kolkata was only the venue for sittings of the arbitral tribunal. It is well settled that, when two or more courts have jurisdiction to adjudicate disputes arising out of an arbitration agreement, the parties to such agreement might, decide to refer all disputes to any one court to the exclusion of all other courts, which might otherwise have had jurisdiction to decide the disputes. The SC agreed with the argument of the Appellant that parties to an agreement cannot, by consent, confer jurisdiction on a court which inherently lacked jurisdiction.

In the instant case, the Appellant and the Respondent did not agree to refer their disputes to the jurisdiction of the courts in Kolkata. Kolkata was only intended to be the venue for arbitration sittings. Accordingly, the Respondent approached the District Court at Muzaffarpur, and not a court in Kolkata for interim protection under Section 9 of the Act. The Respondent having invoked the jurisdiction of the District Court at Muzaffarpur, is estopped from contending that the parties had agreed to confer exclusive jurisdiction to the CHC to the exclusion of other courts. Neither of the parties to the Development Agreement construed the arbitration clause to designate Kolkata as the seat of arbitration.

Decision of the Supreme Court

The SC held that the CHC inherently lacks jurisdiction to entertain the application of the Respondent under Section 11(6) of the Act. The CHC should have decided the objection raised by the Appellant, to the jurisdiction of the CHC, to entertain the application under Section 11(6) of the Act, before appointing an arbitrator. Thus, the SC allowed the appeal and set aside the Impugned Order and dismissal of the review application. The SC held that the appointment of the arbitrator was without jurisdiction and was therefore set aside.

Appointing a sole arbitrator to decide the disputes between the Appellant and the Respondent, the SC called for the status quo with regards to the property in question to be maintained for a period of 15 days from the date of the order so as to enable the respective parties to approach the arbitrator under Section 17 (Interim measures ordered by arbitral tribunal) of the Act, for interim relief in accordance with law.

VA View:

The SC through this Judgement threw light on the legislative intent of Section 11(6) of the Act. It has rightly held that an application under Section 11(6) of the Act for the appointment of an arbitrator or arbitral tribunal cannot be moved in any High Court in India, if such High Court lacks territorial jurisdiction. It could never have been the intention of Section 11(6) of the Act that arbitration proceedings should be initiated in any High Court in India, irrespective of whether the respondent resided or carried on business within the jurisdiction of that High Court, and irrespective of whether any part of the cause of action arose within the jurisdiction of that court, to put an opponent at a disadvantage and steal a march over the opponent.

Moreover, the SC has reiterated the well settled law that sittings at various places are relatable to venue, and cannot be equated with the seat of arbitration or place of arbitration, which has an entirely different connotation.

For any query, please write to Mr. Bomi Daruwala at [email protected]

Between The Lines | NCLAT: A fresh resolution plan cannot be considered by committee of creditors

The National Company Law Appellate Tribunal (“NCLAT”) has in the judgement dated April 18, 2022 (“Judgement”), in the matter of Steel Strips Wheels Limited. v. Shri Avil Menezes, Resolution Professional of AMW Autocomponent Limited and Others [Company Appeal (AT) (Insolvency) No. 89 of 2022] held that a fresh resolution plan cannot be considered by committee of creditors of AMW Autocomponent Limited (“CoC”).

Facts

The present appeal had been filed by the successful resolution applicant, that is, Steel Strips Wheels Limited (“Appellant”) under Section 61 of the Insolvency and Bankruptcy Code, 2016 (“Code”) challenging the order dated January 18, 2022 (“Impugned Order”) wherein the National Company Law Tribunal, Ahmedabad, (“NCLT”) had allowed an application filed by Triton Electric Vehicle, LLC (“Respondent No. 3”) for consideration of its resolution plan.

Previously, by an order dated September 01, 2020, the corporate insolvency resolution process (“CIRP”) was initiated against AMW Autocomponent Limited (“Corporate Debtor”). Consequent to negotiations undertaken with the CoC, the Appellant submitted its resolution plan on April 24, 2021 (“Resolution Plan”) and an addendum dated August 27, 2021. The Resolution Plan was approved by the CoC with 98.55% voting share. The ‘Letter of Intent’ was issued by the respondent no.1, Mr. Avil Menezes (“Resolution Professional”) to the Appellant on September 21, 2021. Pursuant to this, the Appellant submitted a bank guarantee of INR 20 Crores on September 23, 2021. On September 24, 2021, the Resolution Professional filed an application before the NCLT seeking approval of the Resolution Plan.

On December 13, 2021, the Resolution Professional received the request from Respondent No.3 for submitting a resolution plan. The Resolution Professional placed the request of the Respondent No.3 before the CoC. In the meeting of the CoC held on December 18, 2021 it was opined that the Resolution Plan had already been approved by the CoC and application for approval of the Resolution Plan had already been filed by the Resolution Professional before the NCLT, therefore, a fresh plan cannot be considered. The Resolution Professional by his e-mail dated December 22, 2021 conveyed CoC’s decision to the Respondent No.3.

The Respondent No.3 filed an application before the NCLT wherein it was prayed that the Respondent No.3 be permitted to submit the Resolution Plan and that the Resolution Professional and the CoC be directed not to consider the Resolution Plan of the Appellant. The above application was allowed by the NCLT by Impugned Order. The Appellant, aggrieved by the Impugned Order, filed the present appeal.

Issue

If a resolution plan has already been approved, whether a fresh resolution plan can be considered by the CoC.

Arguments

Contentions raised by the Appellant:

The Appellant submitted that the Resolution Plan having been approved by the CoC and the application for approval of the Resolution Plan pending before the NCLT, there was no occasion for the NCLT to pass the Impugned Order. The period for submitting a resolution plan had long expired. Even otherwise, the name of the Respondent No.3 was not included in the final prospective list of the resolution applicants and it had no authority to submit any plan. The NCLT had no jurisdiction to permit the CoC to consider the resolution plan of the Respondent No.3 when the Resolution Plan of the Appellant has already been approved by the CoC and it fully complied with the provisions of the Code. Further, finality had been attached to the Resolution Plan of the Appellant as it was approved by the CoC, and the said finality could not have been taken away by the Impugned Order passed by the NCLT.

The Appellant submitted that the Impugned Order indicates that it was passed without even hearing the Resolution Professional and the CoC, since the order itself mentions “Issue notice to RP and CoC”. The NCLT ought not to have passed the Impugned Order without hearing the affected parties. The Impugned Order deserved to be set aside on this ground alone.

The Appellant submitted that the NCLT was not made aware that the Resolution Plan had already been approved by the CoC and that previously, on December 18, 2021, the CoC had already declined the request of the Respondent No.3. The NCLT not being posted with the facts, has erroneously passed the Impugned Order directing the CoC to consider the Resolution Plan. The timeline under the Code cannot be breached. Further, the Respondent No.3 who was not part of the CIRP could not have been permitted to join at such a late stage.

Submissions by the Resolution Professional and the Respondent no.3:

The Resolution Professional submitted that, the Resolution Plan of the Appellant stood approved by the CoC and an application for approval of the Resolution Plan was pending before NCLT. As per CoC’s instructions, it was communicated to the Respondent No.3 that the CIRP of the Corporate Debtor was at very advanced stage, hence, the CoC could not be able to consider the proposal at that stage. However, referring to reply filed by the CoC in the proceedings, it was noted that during the proceedings the CoC had shown its willingness to consider the plan of the Respondent No.3. It was further submitted that, keeping in mind the objects and reasons of the Code, the CoC subsequently, in its meeting dated March 05, 2022, deliberated and decided that the Respondent No.3 may be given an opportunity to present their resolution plan. The commercial wisdom of the CoC is to be given due credence. The Resolution Plan of the Appellant is neither binding nor irrevocable. The NCLT has all powers and jurisdiction to permit the CoC to consider the resolution plan of Respondent No.3.

The Respondent No.3 submitted a joint resolution plan with regard to Corporate Debtor as well as another sister concern. The Appellant itself had failed to submit the Resolution Plan before the final date of submission fixed by the CoC, that is, April 19, 2021. It was submitted that, the Respondent No.3 is a leading company in the auto component sector and the resolution plan of the Respondent No.3 will not only maximise the value of the assets of the Corporate Debtor, but also provide value maximisation and a timely exit to all stakeholders of the CIRP, including all the employees/ ex-employees of the Corporate Debtor. Keeping in mind the object and purpose of the Code and in the interest of the Corporate Debtor, the Respondent No.3 be permitted to submit the resolution plan.

Observations of the NCLAT

The NCLAT noted relevant facts and presentations made by the parties. The approval of the Resolution Plan was well within the CIRP period as extended by the NCLT. During the CIRP, two plans were placed for approval before the CoC and the Resolution Plan of the Appellant received 98.55% voting shares. Further, for the first time, the expression of interest was shown by Respondent No.3 by its e-mail dated December 13, 2021, by which time, entire CIRP of the Corporate Debtor was at an advanced stage including approval of the Resolution Plan of the Appellant which was pending consideration before the NCLT.

The NCLAT noted that the Hon’ble Supreme Court (“SC”) in Ebix Singapore Private Limited v. Committee of Creditors of Educomp Solutions Limited and Another [2021 SCC OnLine SC 707] held that the resolution plan even prior to the approval of the NCLT, is binding inter se the CoC and the successful resolution applicant by virtue of the Code’s framework. In the said case, it was noted that the report of the Bankruptcy Law Reforms Committee mentioned that, the resolution professional submits a binding agreement to the adjudicator before the default maximum date. Further, the SC had emphasised on the timeline.

Therefore, the NCLAT observed that the CoC, having approved the Resolution Plan of the Appellant, had rightly taken a decision that the resolution plan of the Respondent No.3 cannot be considered. The NCLAT noted that, the SC, in Ebix (supra) mentioned that the delays were attributable to:

• the NCLT taking considerable time in admitting CIRPs;
• late and unsolicited bids by resolution applicants after the original bidder becomes public upon passage of the deadline for submission of the plan; and
• multiplicity of litigation and the appellate process to the NCLAT and the SC.

The NCLAT noted that such inordinate delays cause commercial uncertainty, degradation in the value of the corporate debtor and makes the insolvency process inefficient and expensive.

The NCLAT observed that, in view of the law laid down by the SC in Ebix (supra), there was no valid reason given by the NCLT for permitting the consideration of the resolution plan of the Respondent No.3 and that such consideration shall be breaching both timeline as well as the finality of the Resolution Plan of the Appellant.

Further, the NCLAT noted that in Chhatisgarh Distilleries Limited v. Dushyant Dave (Resolution Professional of Anand Distilleries Private Limited) [2020 SCC OnLine NCLAT 1078], it was observed that, the adjudicating authority suo moto cannot direct the CoC to consider the new resolution plan and re-consider the already approved resolution plan. The decision of the COC accepting or rejecting the resolution plan is limited to the grounds mentioned in Section 30(2) of the Code, and purely commercial decision of the COC cannot be adjudicated by the adjudicating authority. The NCLAT noted that the SC in Committee of Creditors of Essar Steel India Limited v. Satish Gupta [2019 SCC OnLine SC 1478] observed that, the adjudicating authority cannot direct the CoC to consider the second resolution plan submitted before the authority although the second resolution applicant is ready to invest more amount in comparison to first resolution applicant. The NCLAT noted that, the SC in the said judgment held that under Section 30(2) of the Code, decision of the committee of creditors is purely commercial and cannot be adjudicated by the adjudicating authority.

The NCLAT observed that, present case was not a case where issue of commercial wisdom of the CoC regarding approval or disapproval of the plan is under consideration. In exercise of commercial wisdom, the CoC has already approved the plan of the Appellant with voting share of 98.55%. Further, after approval of the Resolution Plan by the CoC by requisite vote and after expiry of CIRP, it is not open for the CoC to contend that it is ready to consider the plan of the Respondent No.3, which according to it may be a better plan having much higher value.

In the case of Kalinga Allied Industries India Private Limited v. Hindustan Coils Limited [2021 SCC OnLine NCLAT 51] the issue whether the adjudicating authority can direct the committee of creditors to consider the resolution plan of a person who was not part of the insolvency resolution process was dealt with as under:

“…, the Respondent No. 1 is not part of CIRP.. … There is no provision in the code or regulation which provides that while exercising the power under Section 31 of the I&B Code the Adjudicating Authority can direct the COC to consider the Resolution Plan of such person who has not been part of CIRP. Otherwise also if such procedure is adopted then the CIRP will be frustrated. Once the Resolution Plan has been opened and fundamentals and financials of the Plan and offer made therein were disclosed to all the participants including RP… Therefore, no further fresh bid or offer could have been accepted or considered…”

It was noted by the NCLAT that, the CoC had extended the last date for submission of the resolution plan from time to time, and further, the CoC had granted one-time opportunity to all resolution applicants in the final list to submit a resolution plan or a revised plan till May 09, 2021. In view of the above, there was no substance in the submission of the Respondent No.3 that the Resolution Plan of the Appellant was also not submitted within the time fixed.

Decision of the NCLAT

The NCLAT held that the CoC could not as per existing law, consider the resolution plan of the Respondent No.3 after approval of the Resolution Plan of the Appellant. Further, there was no valid reason indicated in the Impugned Order for permitting the CoC to consider the resolution plan of the Respondent no.3, which was submitted after approval of the Resolution Plan. The Impugned Order was declared as unsustainable and was set aside. Consequently, the appeal was allowed. The NCLAT held that the NCLT had erroneously entertained the application and the resolution plan of the Respondent No. 3.

VA View:

The NCLAT in this Judgement has rightly observed that, the fact that the CoC was willing to consider the plan of the Respondent No.3 does not in any manner take away the finality of the Resolution Plan of the Appellant approved by the CoC. The NCLAT has reiterated that the CIRP is a time bound process with a specific aim of maximizing the value of assets of the Corporate Debtor. The Code and the regulations made thereunder lay down strict timelines which need to be adhered to by all the parties, at all stages of the CIRP.

It was observed that, delays are also a cause of concern because the liquidation value depletes rapidly, irrespective of the imposition of a moratorium. A delayed liquidation is harmful to the value of the Corporate Debtor, the recovery rate of the CoC and consequentially, the economy at large. Therefore, the NCLT cannot direct the CoC to consider a new resolution plan.

For any query, please write to Mr. Bomi Daruwala at [email protected]

NCLAT: Nil payment to operational creditors is permissible under the resolution plan

The National Company Law Appellate Tribunal (“NCLAT”) has in the judgement dated April 7, 2022 (“Judgement”), in the matter of M/s. Genius Security and Allied Services v. Shivadutt Bannanje and Another [Company Appeal (AT) (Insolvency) No. 110 of 2021] held that nil payment to operational creditors is permissible under the resolution plan if the liquidation value is less than the admitted claims of the corporate debtor.

Facts

In the instant case, two appellants had approached the NCLAT under Section 61 (Appeals and Appellate Authority) of the Insolvency and Bankruptcy Code, 2016 (“IBC”) against the impugned order dated January 29, 2021 (“Impugned Order”) passed by the National Company Law Tribunal, Bengaluru (“NCLT”). Since two appellants had challenged the Impugned Order, the NCLAT disposed off both appeals by passing a common Judgement.

The appellants, namely M/s. Genius Security and Allied Services (“Appellant No. 1”) and M/s. RCC Mix (“Appellant No. 2”) provided security and housekeeping services for the projects undertaken by M/s. Fortuna Urbanscape Private Limited (“Corporate Debtor”). Appellant Nos. 1 and 2 are collectively referred to as “Appellants”.

Upon initiation of corporate insolvency resolution process (“CIRP”) against the Corporate Debtor, the Appellant Nos. 1 and 2, who formed part of the operational creditors, submitted their proof of claims in Form B specifying amounts of INR 8,77,317/- and INR 1,08,55,500/-, respectively, to Mr. Shivadutt Bannanje (“Resolution Professional”) along with details of sales invoices and account statements.

The Resolution Professional duly approved the claim amount of Appellant No. 1 at INR 8,47,147/- by e-mail dated December 9, 2019, and the claim amount of Appellant No. 2 at INR 1,08,55,500/- by e-mail dated February 11, 2020.

M/s. Koncept Shelters, the successful resolution applicant of the Corporate Debtor (“Resolution Applicant”) submitted a resoluton plan dated August 3, 2020 (“Resolution Plan”), which provided for a payment of INR 8,00,00,000/- to financial creditors as against a claim of INR 123,05,76,095/- and a provision was also made for homebuyers who formed part of the financial creditors. However, the Resolution Plan proposed nil payments to the operational creditors as against their admitted claims amounting to INR 99,50,075/-.

The committee of creditors (“CoC”) of the Corporate Debtor by a majority of 95.07% approved the Resolution Plan of the Corporate Debtor and the said Resolution Plan also received approval of the NCLT on January 29, 2021.

Consequently, the Appellants (being operational creditors of the Corporate Debtor) challenged the Impugned Order of the NCLT approving the Resolution Plan of the Corporate Debtor on the ground that the Resolution Plan provided nil payment to the operational creditors.

Issue

Whether nil payment to operational creditors is permissible under the resolution plan.

Arguments

Contentions raised by the Appellants:

Firstly, the Appellants submitted that the security and housekeeping services provided by it to the Corporate Debtor were of due importance and aided timely completion of the Corporate Debtor’s projects. Therefore, the dues payable to the Appellants were to be treated as an operational debt under the provisions of the IBC.

Appellant No. 1 contended that the Resolution Professional by e-mail dated December 9, 2019, had duly admitted its claim amount at INR 8,47,147/-, refusing a sum of INR 30,170/- being with respect to tax deducted at source (TDS). Appellant No. 2 submitted that its entire claim of INR 1,08,55,500/- was admitted by the Resolution Professional by e-mail dated February 11, 2020.

The Appellants submitted that the Resolution Applicant had deliberately kept the claims of the Appellants out of the purview of the Resolution Plan despite the Appellants claims being duly admitted by the Resolution Professional, thereby giving a clear indication on the part of the Resolution Applicant that the claims of the Appellants found no merit in the Resoluton Plan. The failure of the Resolution Applicant to verify and acknowledge the claims of the Appellants was in clear violation and contrary to the provisions of the IBC.

The Appellants submitted that, one Mr. Prakash, a real–estate allottee had also raised concerns with respect to the allocation of funds towards unsecured creditors (which included the Appellants), while considering the Resolution Plan during the 8th CoC meeting held on July 30, 2020.

Lastly, the Appellants contended that the Resolution Plan provided by the Resolution Applicant was not in conformity with Section 30(1) of the IBC and that the NCLT ought not to have approved the Resolution Plan provided by the Resolution Applicant despite the fact that it did not provide for any payments to the operational creditors. Further, the NCLT ought to have liquidated the Corporate Debtor on the ground that the Resolution Plan was not in conformity with Section 30(1) of the IBC. In view of the above, the Appellants prayed for setting aside the Impugned Order passed by the NCLT.

Contentions raised by the Resolution Professional:

The Resolution Professional (being the Resolution Professional in both appeals) submitted that the understanding of the Appellants that every creditor is required to be paid the entire amount due to it regardless of the nature of debt, the quantum of debt, the assets of the Corporate Debtor, and the total amount of investment being brought in by the Resolution Applicant, is fundamentally flawed and squarely contrary to the provisions of the IBC.

The Resolution Professional submitted that Section 30(2)(b) of the IBC mandates that the payment to operational creditors shall not be less than (a) the amount to be paid to them in the event of a liquidation under Section 53 of the IBC; or (b) the amount that would have been paid to them if the amount to be distributed under the resolution plan had been distributed in accordance with the order of priority under Section 53(1) of the IBC, whichever is higher. Therefore, in either of these two circumstances, if no sum would have been payable to the operational creditors, no sum needs to be earmarked in the Resolution Plan towards payment to operational creditors.

In the present case, it was evident that the liquidation value of the Corporate Debtor was far lower than the total admitted claims made against the Corporate Debtor and that in light of the waterfall mechanism set out in Section 53 of the IBC, no payment would be made to operational creditors in the event of liquidation of the Corporate Debtor.

Moreover, the Resolution Plan clearly stated that payment to operational creditors as a class was not contemplated at all due to the insufficiency of the liquidation value of the Corporate Debtor and that such non-payment to the operational creditors is permissible in accordance with Section 30(2)(b) read with Section 53(1) of the IBC.

The Resolution Professional further contended that the CoC had approved the Resolution Plan by majority vote of 95.07% after considering the feasibility and viability of the Resolution Plan. The said plan had also received approval of the NCLT by its Impugned Order. On account of the foregoing, the Resolution Professional prayed for dismissal of the appeals.

Contentions raised by the Resolution Applicant:

The Resolution Applicant (being the successful Resolution Applicant in both appeals) has contended for dismissal of the appeals on the ground that they were time barred debts. The Resolution Applicant making similar submissions as those of the Resolution Professional, stressed on the fact that the liquidation value of the assets of the Corporate Debtor were evidently lower than the total admitted claims made against the Corporate Debtor and in light of the waterfall mechanism set out in Section 53 of the IBC, no payment would be made to operational creditors in the event of liquidation of the Corporate Debtor.

The Resolution Applicant submitted that it had in its Resolution Plan, contemplated to invest a sum of INR 8,80,00,000/- inclusive of CIRP cost. Therefore, if these sums were to be distributed in accordance with the waterfall mechanism set out in Section 53 of the IBC, no amount would be payable to the operational creditors.

Further, the Resolution Applicant submitted that the Resolution Plan was approved by the CoC in their commercial wisdom.

Observations of the NCLAT

The CoC in its 8th meeting approved the Resolution Plan and declared that the Resolution Plan would be binding on the Corporate Debtor and its employees, members, creditors including the Central Government and any State Government.

The NCLT observed that out of the total claims filed by the operational creditors, claims aggregating to INR 99,50,075/- were verified and admitted for the purposes of CIRP by the Resolution Professional.

Further, with regard to payments to operational creditors, the following proposal was made in Schedule-4(xii) of the Resolution Plan:

“ii. The Liquidation Value is insufficient for payment to the Operational Creditors of the Company as the Liquidation Value is insufficient to satisfy the claims of even the Secured Financial Creditors in full and nil payment has been proposed under the Resolution Plan towards claims of Operational Creditors whether filed or not, whether admitted or not, whether asserted or not and whether or not set out in the balance sheets of the company or the profit and loss account statements of the Company or the List of Creditors and no source has been identified for such payment under this Resolution Plan.”

Moreover, no claims in relation to workmens’ dues were admitted by the Resolution Professional. Similarly, nil payments were proposed towards payment of any outstanding Government dues, taxes, etc. which were admitted as operational creditor debt.

Schedule-4(iv) of the Resolution Plan earmarked a sum of INR 8,00,00,000/- for payment to financial creditors against a claim of INR 123,05,76,095/-. Further, a sum of INR 30,00,000/- was earmarked for payments to employees against a claim of INR 13,99,74,125/-, whereas a sum of INR 50,00,000/- was earmarked for payment towards CIRP cost.

The NCLAT observed that the Resolution Plan made only three categories of payments, that is, (i) CIRP cost, (ii) Employees dues, (iii) Financial creditor dues. No payments were earmarked to any other category including the operational creditors and were shown as nil.

The NCLAT observed that due procedure as contemplated under the IBC is to be followed to submit a resolution plan and that once the plan has received approval of the CoC followed by the approval of the adjudicating authority, the same becomes binding on a corporate debtor, its employees, members, creditors and other stakeholders.

Decision of the NCLAT

The NCLAT came to a resultant conclusion that the approval of the Resolution Plan was legal and valid and that there was no infirmity or illegality in the Resolution Plan approved by the CoC (by majority vote of 95.07%) and the NCLT. With respect to the allegation of the Appellants that a discriminatory treatment was made between the Appellants and similarly situated operational creditors, the NCLAT held that the question of discrimination would arise only when part of the operational creditors are paid their dues in exclusion of other operational creditors. In the present case, there is no discrimination amongst the operational creditors for the reason that no amounts were earmarked for any of the operational creditors of the Corporate Debtor.

Therefore, there being no grounds to interfere with the Impugned Order of the NCLT approving the Resolution Plan, the NCLAT dismissed the appeals filed by the Appellants.

VA View:

The NCLAT in this judgement has correctly observed that the Resolution Plan was neither in violation of any provision of the law nor made any discriminatory treatment towards the Appellants and similarly situated operational creditors. Pertinently, when no payments were made to any operational creditors including government dues, the question of dismininatory treatment towards the Appellants did not arise. Owing to the fact that the liquidation value of the assets were far lower than the total admitted claims made against the Corporate Debtor, no payments would have been made to the operational creditors even in the event of liquidation of the Corporate Debtor.

Affirming NCLT’s decision, the NCLAT reiterated the well settled law that the commercial wisdom of the CoC cannot be interfered with by the NCLT/NCLAT. Therefore, it can be stated that, a resolution plan which takes into consideration the interest of ‘all’ the creditors and is not discriminatory against one or other operational creditor, is said to be in accordance with the provisions of the IBC.

The principle emerging from this NCLAT ruling is that resolution plan once approved by the NCLT becomes binding on operational creditors. Further, nil payment to operational creditors is permissible under the resolution plan.

For more information please write to Mr. Bomi Daruwala at [email protected]