Between the Lines | Bombay High Court: A secured debt shall take priority over the ‘Government’ dues/tax dues under the SARFAESI Act

The Bombay High Court (“BHC”) has in its judgement dated July 28, 2021, in the matter of M/s Edelweiss Asset Reconstruction v. M/s Tax Recovery Officer, Income-Tax Department and Others [Writ Petition (L) No. 7964 OF 2021], held that, the secured debt shall take priority over the ‘Government’ dues/tax dues.

Facts

M/s Classic Diamonds (India) Limited (“Borrower”), a company under liquidation, was sanctioned facility/debt (“Credit Facility”) by the State Bank of India (“SBI”) and IndusInd Bank (collectively referred to as “Lenders”) in 2003 and 2011 respectively. The Credit Facility was secured by way of an equitable mortgage created by way of deposit of title deeds in respect of various immovable properties including one office in Opera House, Mumbai (“Premises”). The Borrower defaulted in repayment of the Credit Facility. Consequently, the Lenders filed separate proceedings before the Debts Recovery Tribunals-II, Mumbai.

In the meanwhile, due to the non-payment of income tax dues by the Borrower, the Tax Recovery Officer, Income Tax Department (“ITD”), by its order dated January 17, 2013, levied attachment over the Premises prohibiting and restraining the Borrower from transferring or creating a charge on the Premises (“Attachment Order”).

M/s Edelweiss Asset Reconstruction Company (“EARC”) is a company registered as a securitization and asset reconstruction company pursuant to Section 3 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (“SARFAESI Act”). EARC, by two deeds of assignment dated March 19, 2014 and March 29, 2017, acquired all the rights, title and interest with respect to the Credit Facility (“Assignments”) granted by the Lenders to the Borrower. The Assignments were along with the benefits of security of equitable mortgages created by way of deposits of title deeds over the immovable properties of the Borrower including the Premises in favour of the banks. Thereafter, EARC, being the assignee, was substituted as the original applicant in two original applications filed by the Lenders because of the defaults committed by the Borrower in repayment of debts before the Debts Recovery Tribunals-II, Mumbai by orders dated November 17, 2014 and December 07, 2017, respectively.

On May 25, 2017, EARC called upon the Borrower to pay the balance of outstanding Credit Facility by initiation of proceedings under Section 13(enforcement of security interest) of the SARFAESI Act. However, on account of failure of repayment of debt, on November 08, 2017, EARC took possession of the Premises under Section 13(4) of the SARFAESI Act with an intention to sell the Premises. In December 2019, the EARC discovered that the ITD had prohibited the selling/transferring the Premises by virtue of the Attachment Order. Consequently, EARC repeatedly requested the ITD to vacate/lift the attachment on the Premises or grant a no objection certificate (“NOC”) for the sale of the Premises. On account of no response by the ITD and aggrieved by the Attachment Order, EARC filed this writ petition under Article 226 of the Constitution of India before the BHC seeking order and direction for ITD to raise the said attachment levied on the Premises and to issue an NOC permitting EARC to sell the Premises.

Issue

Whether the secured debt assigned in favour of EARC has a priority over Government dues/tax dues.

Arguments

Contentions raised by EARC:

EARC, inter alia, contended that it is a secured creditor and as per the provisions of Section 26-E (priority to secured creditors) of the SARFAESI Act, it has prior and superior charge over the Premises which cannot be disturbed because of the dues of ITD. EARC argued that Section 26-E of the SARFAESI Act provides a statutory recognition of the priority of claim of secured creditor over all other debts and all taxes, cess and other rates payable to ‘Central Government’ or ‘State Government’ or any local authority. Therefore, under the provisions of the SARFAESI Act, EARC was empowered to sell the assets of the Borrower and recover its dues over and above the attachment levied by ITD by virtue of the Attachment Order.

It was further contended that, the priority of the charge of EARC over the dues of the ITD also stood clarified by virtue of the Enforcement of Security Interest and Recovery of Debt Laws and Miscellaneous Provisions (Amendment) Act, 2016 (“SIRDLMP Amendment”). Section 41 (insertion of new section 31-B) of the SIRDLMP Amendment introduced Section 31-B (priority to secured creditors) under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (“RDDB Act”). Section 31-B of the RDDB Act, similar to Section 26-E of the SARFAESI Act, provides a statutory recognition of the priority of claim of secured creditor over all other debts and all taxes, cess and other rates payable to Central Government or State Government or local authority.

EARC also relied upon the decision of the Hon’ble Supreme Court (“SC”) in the case of Bombay Stock Exchange v. V. S. Kandalgaokar [(2015) 2 SCC 1] (“BSE Case”) and the decision of the BHC in the case of State Bank of India v. State of Maharashtra [(2020) SCC online Bom 4190] (“SBI Case”). It was submitted that in both the abovementioned judicial pronouncements, it was held that the Income Tax Act, 1961 (“IT Act”) does not provide for paramountcy of income tax dues. It was further submitted that in the SBI Case (supra), it was held that secured debt has priority over income tax dues and, therefore, EARC as secured creditor has a prior superior charge over the income tax dues.

Contentions raised by the ITD:

The ITD in an affidavit in reply dated July 09, 2021 submitted that, as the total ‘Income Tax’ demand against the Borrower was INR 58,64,54,659/-plus interest for different assessment years from 2006-2007 to 2013-2014, in the absence of any other means of recovery of the outstanding demand, the Premises of the Borrower was attached by virtue of the Attachment Order under the provisions of the IT Act.

The ITD submitted that during the recovery survey under Section 133A (power of survey) of the IT Act, the Borrower was summoned to produce various details including details of loans and advances, however, Borrower had nowhere mentioned about the mortgage over the Premises and, therefore, the Premises was attached. ITD also relied on the decision of the SC in the case of Central Bank of India v. State of Kerala [(2009) 4 SCC 94] (“CBI Case”) wherein it was held that, in case the statutory first charge is created in favour of State under Section 26B (tax payable to be first charge on the property) of the Kerala General Sales Tax Act, 1963 then, the said charge shall have primacy over the right of the bank to recover its dues.

Lastly, it was submitted that the Premises of the Borrower has been attached by the ITD in the interest of the ITD as per Sections 220 (when tax payable and when assessee deemed in default) to 232 (recovery by suit or under other law not affected) of the IT Act and Second Schedule (procedure for recovery of tax) thereof, and there is no provision in the IT Act to vacate/lift the attachment till the finalisation/recovery of the demand. Therefore, in the absence any such provision, the ITD itself cannot vacate/lift the attachment on the Premises pursuant to the Attachment Order and it would be for the BHC to pass appropriate orders.

Observations of the Bombay High Court

The BHC analysed the judicial pronouncement relied on by both the parties and observed that the SC in the BSE Case (supra), while considering the question whether the lien exercised by the stock exchange can be said to be a superior right to the income tax dues, held that the IT Act does not provide for any paramountcy of dues by way of income tax. The BHC further observed that the SC while giving the decision in the BSE Case (supra) also referred to its own decision in the case of Dena Bank v. Bhikhabhai Prabhudas Parekh & Co. [(2000) 5 SCC 694], where it was held that Government dues have priority only over unsecured debts. The BHC further assessed that in the SBI Case, the BHC also considered the question of priority between the charge of a secured creditor and tax/VAT dues under the Maharashtra Value Added Tax Act, 2002 and, after considering the provisions of SARFAESI Act as well as RDDB Act, it was observed that the mortgage of a secured creditor gets prior charge over the charge of the state for tax/VAT dues.

The BHC, with reference to the CBI Case (supra) relied on by the ITD, observed that the said decision was distinguished in the SBI Case (supra) wherein, the SC stated that, since Section 26E of the SARFAESI Act and Section 31- B of the RDDB Act were not in the statue book at the time of deciding the CBI Case (supra), the impact of the said sections did not come into consideration. In light of the abovementioned case laws and provisions, the BHC was of the view that EARC’s charge/mortgage over the Premises has priority over the dues of the ITD.

Decision of the Bombay High Court

The BHC allowed the petition and arrived at the conclusion that the EARC’s charge/mortgage on the Premises has priority over the dues of the ITD and directed the ITD to release the attachment levied pursuant to the Attachment Order on the Premises and issue a NOC permitting the EARC to sell the said premises.

VA View:

The BHC’s order deals with the doctrine of priority of crown debt. The common law doctrine of priority of crown debt pertains to a common law principle that the debt due to the state or the king claims priority before all other creditors. The basic justification for the said principle rests on the well-recognized principle that the State is entitled to raise money by taxation because unless adequate revenue is received by the State, it would not be able to function as a sovereign government at all.

Over the years, the SC, through various judgements mentioned above, and others, has created an exception to this doctrine by stating that a debt which is secured takes priority over the Government dues/tax. The BHC’s order rightly upholds what the SC has upheld in similar matters where the question of priority of secured debt over crown debt was raised.

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

Between the Lines | Supreme Court: Interest free term loans advanced to a corporate person are not excluded from the purview of a financial debt under Section 5(8) of the Insolvency and Bankruptcy Code, 2016

The Hon’ble Supreme Court (“SC”) has in its judgment dated July 26, 2021, in the matter of Orator Marketing Private Limited v. Samtex Desinz Private Limited [Civil Appeal No. 2231 of 2021] (“Judgement”) held that the definition of financial debt under Section 5(8) of the Insolvency and Bankruptcy Code, 2016 (“IBC”) does not exclude an interest free loan and that it would have to be construed to include interest free loans advanced to finance the business operations of a corporate body.

Facts

M/s Sameer Sales Private Limited (“Original Lender”), advanced a term loan of INR 1.60 crores to M/s Samtex Desinz Private Limited (“Corporate Debtor”) for a period of two years in order to enable the Corporate Debtor to meet its working capital requirements. Thereafter, the Original Lender assigned the outstanding loan to M/s Orator Marketing Private Limited (“Appellant”). As per the loan agreement, the loan was due and payable on February 1, 2020. According to the Appellant, the Corporate Debtor made some payments, however, INR 1.56 crores remained outstanding.

The Appellant filed an application under Section 7 of the IBC before the National Company Law Tribunal, New Delhi (“NCLT”) seeking the initiation of the Corporate Insolvency Resolution Process (“CIRP”) against the Corporate Debtor. The NCLT rejected the application of the Appellant on the ground that the Appellant had extended an interest free loan and had failed to prove that the loan was disbursed against consideration of time value of money. Thereafter, the National Company Law Appellate Tribunal, New Delhi (“NCLAT”), upheld the order of the NCLT on the aforementioned ground that since the money borrowed is not against payment of interest, it could not be termed as a financial debt under Section 5(8) of the IBC.

Being aggrieved by the order of the NCLAT, the Appellant filed the present appeal before the SC under Section 62 of the IBC.

Issue

Whether a person who extends a term loan to a corporate person free of interest, for its working capital requirements is not a financial creditor and therefore, incompetent to initiate CIRP under Section 7 of the IBC.

Arguments

Contentions raised by Appellant:

It was the submission of the Appellant that since even after a period of two years, the loan still remained due, it must be thereafter treated as a financial debt. The Appellant relied on the judgment of the NCLAT in the matter of Mack Soft Tech Private Limited v. Quinn Logistics India Limited [ Company Appeal (AT) (Ins) No.143 of 2017], to submit that when there is disbursement and default, it should be construed as a financial debt. It was further contended that after the execution of the assignment agreement in its favour, the Appellant, not being a related party and having taken the assignment for consideration, the loan extended would be a financial debt.

Observations of the Supreme Court

The SC observed that the definition of financial debt under Section 5(8) of the IBC was misconstrued by both the NCLAT and the NCLT by reading the same in isolation and out of context and hence the judgment and order of the NCLAT affirming the order of the NCLT was patently flawed.

It was further noted that, in a plethora of judgments, it has been observed that while construing and/or interpreting any statutory provision, the legislative intent of the statute must be looked at and that each word, phrase or sentence has to be construed in light of the general purpose of the act itself. Therefore, when the meaning of a certain provision in a statute is to be construed, the statue has to be read as a whole; the previous state of the law, the general scope and ambit of the statute and the mischief that it was intended to remedy, would all be relevant factors.

The SC relied on its judgment in Pioneer Urban Land and Infrastructure Limited v. Union of India [4 (2019) 8 SCC 416], where numerous previous judgments including Innoventive Industries Limited v. ICICI Bank Limited [2 (2018) 1 SCC 407] and Swiss Ribbons Private Limited and Another v. Union of India and Others [3 (2019) 4 SCC 17] were referred to and held that even individuals who were debenture holders could be financial creditors who could initiate CIRP.

The SC further observed that the definition of financial debt under Section 5(8) of the IBC cannot be read in isolation, without considering other relevant definitions, particularly, the definition of ‘claim’ in Section 3(6), ‘corporate debtor’ in Section 3(8), ‘creditor’ in Section 3(10), ‘debt’ in Section 3(11), ‘default’ in Section 3(12) and ‘financial creditor’ in Section 5(7) along with Sections 6 and 7 of the IBC. In order to arrive at its decision, the SC relied on the definition of financial debt in Section 5(8) of the IBC which provides that “a debt along with interest if any which is disbursed against the consideration of the time value of money and includes money borrowed against the payment of interest, as per Section 5 (8) (a) of the IBC” and observed that the NCLT and the NCLAT have overlooked the words “if any” which could not have been intended to be otiose. ‘Financial debt’ would mean outstanding principal due in respect of a loan and would also include interest thereon, if any . In the event that there is no interest payable on the loan, only the outstanding principal would qualify as a financial debt. Therefore, both the NCLAT and the NCLT failed to notice Clause (f) of Section 5(8) of the IBC, in terms whereof a financial debt includes any amount raised under any other transaction, having the commercial effect of borrowing.

Additionally, it was observed that sub-clauses (a) to (i) of Section 5(8) of the IBC are illustrative and not exhaustive. It was noted that the legislature has the power to define a word in a statute and that such definition may be restrictive or extensive but when the word is defined to include something, then such definition is prima facie extensive. While making the aforesaid observation, the SC referred to its judgment in State of Bombay v. Hospital Mazdoor Sabha and Others [6 AIR 1960 SC 610], wherein it was held that “It is obvious that the words used in an inclusive definition denote extension and cannot be treated as restricted. Where we are dealing with an inclusive interpretation, it would be inappropriate to put a restrictive interpretation upon words of wider denotation.”

Lastly, the SC noted that, taking into account the aims, objectives and scheme of the IBC, there is no discernible reason as to why a term loan to meet the financial requirements of the Corporate Debtor for its operation, which obviously has the commercial effect of borrowing, should be excluded from the purview of financial debt. It was further observed that the trigger for initiation of CIRP by a financial creditor under Section 7 of the IBC is the occurrence of default by the corporate debtor and default includes financial debt and operational debt. Further, the definition of debt is also expansive and it includes, inter alia, financial debt. Therefore, since, the definition of financial debt under Section 5(8) of the IBC does not exclude an interest free loan, it would have to be construed to include interest free loans advanced to finance the business operations of a corporate body.

Decision of the Supreme Court

In view of the above, the SC allowed the appeal and set aside the orders of the NCLT and the NCLAT which dismissed the petition of the Appellant under Section 7 of the IBC. It was also directed that the petition filed by the Appellant under Section 7 of the IBC before the NCLT would stand revived and is to be considered afresh in accordance with the law and findings in the present Judgement.

VA View:

Since the commencement of the IBC, it has been observed consistently that a debt would require the elements of ‘debt along with interest’ or ‘time value of money’ to qualify as a financial debt under Section 5(8) of the IBC. The SC observed that the orders of the NCLT and the NCLAT were patently flawed having misconstrued the definition of ‘financial debt’ by reading the definition in isolation and out of context. The SC further clarified that a term loan meeting the financial requirements of a Corporate Debtor for its operation has the commercial effect of borrowing, and hence should not be excluded from the purview of a financial debt.

The SC in this Judgement, giving regard to the aim, objective and scheme of the IBC has rightly clarified that clauses (a) to (i) of the said Section are not exhaustive and it is to be construed to include an interest free loan. The SC held that the definition of ‘financial debt’ cannot be read in isolation, without taking into consideration other relevant definitions of the IBC as the statute has to be read as a whole.

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

Between the Lines | NCLAT: Withdrawal of corporate insolvency resolution process proceedings filed against the corporate debtor allowed, prior to the constitution of the committee of creditors.

The National Company Law Appellate Tribunal, New Delhi (“NCLAT”) has in its judgment dated July 07, 2021 (“Judgement”), in the matter of Anuj Tejpal v. Rakesh Yadav and Another [I.A. No. 815 of 2021 in Company Appeal (AT) (Insolvency) No. 298 of 2021], allowed withdrawal of corporate insolvency resolution process (“CIRP”) proceedings filed against the Corporate Debtor (defined below) prior to the constitution of the committee of creditors (“CoC”). The NCLAT further held that, in the interest of justice, the inherent powers can be exercised by both National Company Law Tribunal (“NCLT”) and NCLAT, who may allow or disallow the application of withdrawal keeping in view the interest of the concerned parties and the facts of each case.

Facts

Mr. Anuj Tejpal (“Appellant”), an erstwhile ‘Director’ of ‘OYO Hotels and Homes Private Limited’ (“Corporate Debtor”) preferred the instant appeal (“Appeal”), under Rule 11 (Inherent Powers) of the National Company Law Appellate Tribunal Rules, 2016 (“NCLAT Rules”). The Appeal was filed against the order of NCLT dated March 30, 2021 (“Impugned Order”) in view of an amicable settlement arrived at between the concerned parties. The NCLT by virtue of the Impugned Order had admitted the application, filed under Section 9 of the IBC, for initiation of CIRP against the Corporate Debtor and not ‘Mypreferred Transformation and Hospitality Private Limited’ (“MTH”), the sister concern of the Corporate Debtor being a distinct legal entity.

The Corporate Debtor (erstwhile Alcott Town Planners Private Limited) had executed a ‘Management Services Agreement’ dated November 16, 2018 (“MSA”) with Mr. Rakesh Yadav, the respondent no. 1 herein (“Operational Creditor”), to manage and operate ‘Hotel Yellow White Residency’ for which the Operational Creditor had received as security deposit INR 13,50,000 in addition, to an investment of INR 14,25,098/- as capital expenditure, made by the Corporate Debtor. During the subsistence of MSA, all rights and liabilities were transferred to MTH, with effect from June 01, 2019. MTH revised the MSA on July 17, 2019 wherein the benchmark revenue payable to the Operational Creditor was modified. MTH had made the payments as per modified commercial terms. Thereafter, the Operational Creditor issued demand notices under Section 8 of the IBC, for default in payment, dated September 13, 2019, pertaining to the period of July 2019 to September 2019 amounting to INR 7,02,000/- and another demand notice dated November 11, 2019 for the period pertaining to July 2019 to November 2019 amounting to INR 16,02,000/-(“Demand Notices”). It was stated that, the Demand Notices were incorrectly addressed to the Corporate Debtor, when all the rights and obligations under MSA were vested with MTH.

The NCLAT by an order dated April 08, 2021, issued a notice and suspended the constitution of the CoC of the Corporate Debtor, based on the submission that, the Operational Creditor had wrongly proceeded against the Corporate Debtor instead of MTH, and that, MTH had already paid all the amounts claimed by the Operational Creditor. It had also been submitted that, all efforts would be made to reach an amicable settlement with the Operational Creditor under Section 12-A (Withdrawal of application admitted under Sections 7, 9 or 10) of the Insolvency and Bankruptcy Code, 2016 (“IBC”). Subsequently, the Operational Creditor had issued a letter dated April 23, 2021 to the effect that, all disputes, claims and counter claims of the Operational Creditor qua both the Corporate Debtor as well as MTH stood settled to the full satisfaction of the parties. It was also submitted that, the interim resolution professional (“IRP”) had received the payment towards the total expenses incurred by him and there was no further amount outstanding in this regard.

During the pendency of the Appeal, certain intervention applications were filed by a few intervenors including ‘Federation of Hotel and Restaurant Associations of India’ among others with regard to their respective claims.

Issue

• Whether NCLAT can exercise its inherent powers under Rule 11 of NCLAT Rules to allow withdrawal of CIRP proceedings, prior to constitution of CoC of the Corporate Debtor.

Arguments

Contentions raised by the Appellant:

The Appellant submitted that, since the settlement was arrived at prior to the constitution of the CoC, the question of applicability of Section 12-A of the IBC did not arise in this case. This was not an application under Section 12-A of the IBC and therefore Regulation 30-A of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (“CIRP Regulations”) and the procedure thereunder was not applicable to the facts of this case. Further that, NCLAT had exercised its inherent power under Rule 11 of NCLAT Rules in several precedents and therefore it could not be said that only NCLT had the inherent powers under Rule 11 of NCLT Rules, 2016 (“NCLT Rules”).

The Appellant further contended that the intervention applications were not maintainable at this stage of Appeal due to the settlement arrived at between the parties. Further that the intervention applications were contrary to the settled principles of law laid down in Swiss Ribbons Private Limited and Others. v. Union of India and Others [(2019) 4 SCC 17], among others that the scope of the IBC is meant for ‘revival’ of the Corporate Debtor. Further that, the proposed intervenors were not allowed to contest the merit of the Appeal or contest the settlement of the subject dispute as proceedings under the IBC were not debt recovery proceedings. The proposed intervenors could come into existence only on the constitution of CoC as per the provisions of the IBC and till then they had no locus standi to object a settlement. Further that, Section 14 of the IBC bars the filing of any application against the Corporate Debtor under Sections 7 and 9 of the IBC during the moratorium period and that the proposed intervenors had not placed any documents on record to substantiate any ‘debt’ or ‘default’. Therefore, in view of the settlement between the Operational Creditor and MTH, no other purported claimant could object to the setting aside of the CIRP against the Corporate Debtor.

The Appellant submitted that, great prejudice would be caused to the Corporate Debtor in view of the subsistence of the CIRP proceedings despite having settled the matter with Operational Creditor. Further that the CIRP proceedings would lead to loss of goodwill and reputation, loss of perspective investments and serious administrative difficulties in collection of revenue from the existing partners, disbursement of payments to dependent hotel owners, vendors and employees.

Observations of the NCLAT
The NCLAT noted that, Section 12-A of the IBC refers to a situation which is post constitution of CoC, whereas Regulation 30-A(1)(a) of CIRP Regulations deals with procedure to be followed before the constitution of CoC. The NCLAT noted that Regulation 30-A of the CIRP Regulations was amended with effective from July 25, 2019, and reads as mentioned below:

“1. An application for withdrawal under section 12A may be made to the Adjudicating Authority –

• before the constitution of the committee, by the applicant through the interim resolution professional”.

Further that, Section 12-A of IBC read together with amended Regulation 30-A of the CIRP Regulations provided that stage of pre-constitution of CoC would be covered under the Regulation 30-A(1)(a) of the CIRP Regulations.

The NCLAT further also referred to Rule 11 of NCLAT Rules, which provides that, “Nothing in these rules shall be deemed to limit or otherwise affect the inherent powers of the Appellate Tribunal to make such orders as may be necessary for meeting the ends of justice or to prevent abuse of the process of the Appellate Tribunal.”

The NCLAT observed that in the judgment in Jogender Kumar Arora v. Dharmendar Sharma and Others [Company Appeal (AT) (Insolvency) No. 94, 95 of 2019] it was held that, the NCLAT had inherent powers under NCLAT Rules to decide on an application for withdrawal of CIRP, taking into consideration that, before the constitution of CoC, the Corporate Debtor and Operational Creditor had settled their dues amicably. The NCLAT noted that in a catena of judgements it was observed that, the NCLAT and the NCLT had consistently exercised inherent powers conferred upon them to allow withdrawal, on a case-to-case basis in view of the settlement reached prior to formation of a NCLAT relied extensively on the observations made in Swiss Ribbons (supra) wherein it was noted that, once IBC gets triggered on admission of a petition filed by a creditor(s), by the NCLT, the proceeding before the NCLT, being a collective proceeding, would be a proceeding in rem. Therefore, at any stage where the CoC would not have been constituted, a party could approach and consult NCLT directly, which may, in exercise of its inherent powers under Rule 11 of NCLT Rules, allow or disallow an application for withdrawal or settlement which will be decided after hearing all the parties concerned and considering all relevant factors on the facts of each case. NCLAT noted that, in the case of Brilliant Alloys Private Limited v. Mr. S. Rajagopal and Others [SLP (Civil) No. 31557/2018], it was clarified that Regulation 30-A is not mandatory but is directory for the simple reason that on the facts of a given case, an application for withdrawal may be allowed in exceptional cases even after issuing the invitation for expression of interest under Regulation 36-A. Further the NCLAT rejected the contention that the application for withdrawal, filed, prior to constitution of CoC ought to be mandatorily dealt with the provisions under the Regulation 30-A(1)(a) of CIRP Regulations.

The NCLAT further observed that it is a well-settled proposition of law that, substantive law takes precedence over a regulation and Section 12-A of the IBC clearly refers to the withdrawal of an application under Sections 7, 9 or 10 of the IBC after the constitution of the CoC. The NCLAT noted that, the main thrust against the provision of Section 12-A is the fact that 90% of a CoC would have to allow withdrawal. The withdrawal shall be a consequence of all financial creditors contemplating and deciding together to allow such withdrawal as, ordinarily, an omnibus settlement involving all creditors ought, ideally, to be entered into with a corporate debtor.

The NCLAT noted with regard to the intervenors applications that it was not the case of the intervenors that demand notices under Section 8 of the IBC were pending. Rather their contention was that, the Corporate Debtor owed them certain monies/dues. The NCLAT observed that, before constitution of CoC, mere filing of a ‘Claim’ did not constitute default per se. It was only on the basis of the ‘Claims’ that the CoC was constituted. The NCLAT observed that the prime objective of the IBC is not recovery, but revival of the Corporate Debtor. Further that, after admission of petition under IBC, the NCLT, on a case to case basis can exercise its inherent power under Rule 11 of the NCLT Rules for withdrawal of CIRP, if parties are interested to amicably settle the matter prior to constitution of CoC.

The NCLAT noted that, the communication filed by the Operational Creditor evidenced that all amounts due and payable by the Corporate Debtor, had been paid in full and final satisfaction. The NCLAT proceeded to reiterate that, in the interest of justice, the inherent powers could be exercised by both NCLT and NCLAT and consequentially, they may allow or disallow the application of withdrawal keeping in view the interest of the concerned parties and the facts of each case.

Decision of the NCLAT

The NCLAT proceeded to hold that, in the interest of justice it would exercise the inherent powers and allow withdrawal of CIRP application against the Corporate Debtor in view the interest of the concerned parties. The NCLAT noted that, Regulation 30-A(1)(a) was not applicable to the present case.

The NCLAT allowed the Appeal and set aside the Impugned Order, thereby consequentially also set aside appointment of IRP, moratorium against Corporate Debtor, etc. The NCLAT further directed that, the Corporate Debtor was released from all the rigours of law and is allowed to function independently through its board of directors with immediate effect.

The intervenor applications filed during the pendency of the Appeal, were dismissed. The NCLAT further held that, the intervenors were free to seek legal remedies available under IBC by filing separate application for admission of CIRP at any stage and that NCLT shall hear the matter, uninfluenced by this Judgement, if any, on merits and proceed in accordance with law.

VA View:

The NCLAT in this Judgement held that Regulation 30A of the CIRP Regulations was not applicable to the instant Appeal. The NCLAT rightly observed that an appeal before NCLAT is essentially a continuation of the original proceeding. Hence a change in law can always be applied in an original or appellate proceeding. The NCLAT noted that IBC envisages the said principle more particularly on account of Section 32 of the IBC which provides that any appeal from an order approving the resolution plan shall be in the manner and on the grounds specified in Section 61(3) of the IBC. The NCLAT held that its inherent powers were sufficient for allowing the withdrawal of CIRP proceedings.

The NCLAT also considered the effect of the pandemic on the ‘Hospitality and Tourism Industry’ and noted that creditors were free to move an application before the NCLT or they could alternatively approach the Corporate Debtor and reach an amicable settlement for the same.

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