Supreme Court: Provident Fund benefits payable to contractual employees from date of filing writ petition and not retrospectively

The Supreme Court of India (“SC”) has, in the case of Pawan Hans Limited and Others v. Aviation Karmachari Sanghatana and Others (decided on January 17, 2020), held that the contractual employees in an establishment (not hired through a contractor) are also entitled to provident fund (“PF”) benefits.

Facts
Pawan Hans Limited (“Appellant”) is a company where Government of India holds 51% stake and the balance 49% is with Oil and Natural Gas Company Limited. The Appellant notified ‘Pawan Hans Employees Provident Fund Trust Regulations’ (“Regulations”) in 1986 and constituted ‘Pawan Hans Employees Provident Fund Trust’ (“Trust”) in 1987 for giving PF benefits to the employees.

Relevant clauses in Regulations are reproduced hereunder:

“1.3 – These Regulations shall apply to all the employees of the Corporation.
…
2.5. –“Employee” means any person who is employed for wages/salary in any kind of work, monthly or otherwise, in or in connection with the work of the Corporation and who gets his wages/salary directly or indirectly from the Corporation, and excludes any person employed by or through a contractor or in connection with the work of the Corporation but does not include any person employed as an apprentice or trainee. ”

Although the Regulations defined the term ‘employee’ to include any person employed directly or indirectly, the Appellant provided PF benefits only to its regular employees. Consequently, Aviation Karmachari Sanghatana (“Respondent”) made representations to the Appellant to extend the benefit under Regulations even to contractual employees.

However, the Appellant did not give response to the representations. Accordingly, the Respondent approached Honourable Bombay High Court (“BHC”) by filing a writ petition. By its order dated September 12, 2018, BHC concluded that the contractual employees are entitled to benefits under Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 (“Act”) and Employees’ Provident Funds Scheme, 1952 (“Scheme”). Hence BHC directed the Appellant to enrol contractual employees under the Scheme. Further, it directed the Appellant to deposit PF contribution for the period commencing from the date when such employees became eligible under Scheme till the time they worked for the Appellant. Being aggrieved by the said order, the Appellant preferred an appeal before the SC.

Issues
(i) Whether the Appellant is under a statutory obligation to provide the PF benefit.
(ii) If contractual employees are entitled to PF benefit, whether such benefit is payable under the Regulations or the Act?
(iii) If contractual employees are entitled to PF benefit, from what date the aforesaid benefit be extended to them?

Arguments
The Appellant, inter alia, argued that: neither the Act nor notification dated March 22, 2001 (the said notification made provisions of the Act applicable to certain specified establishments including the airlines industry, other than airlines owned or controlled by the Central or State Government) thereunder is applicable to it. As under Section 1(b) of the Act, an establishment belonging to or under the control of the Centre and whose employees are entitled to the benefit of contributory PF in accordance with any scheme or rules framed by the Central or State Government in respect of such benefits, is exempted under the Act. The SC in Regional Provident Fund Commissioner v. Sanatan Dharam Girls Secondary School [(2007) 1 SCC 268] laid down a twin-test for an establishment seeking exemption from the Act, namely, (I) the establishment must be either “belonging to” or “under the control of” the Central or State Government and (ii) employees of such an establishment should be entitled to the benefit of contributory provident fund or old age pension in accordance with any scheme or rule framed by the Central Government or State Government governing such benefits. As far as the question of scheme was concerned, the Company already had its own Regulations in force.

It was also contended that since several contractual employees had superannuated, passed away, resigned or ceased to be in the employment of the Appellant, the BHC had committed an error by applying provisions of the Act retrospectively from the date the contractual employees joined the Appellant. Finally, it was contended that the BHC order had doubled the Appellant’s liability as the contractual employees had already been paid their full monthly financial benefits/emoluments.

Respondent No. 3, that is, Regional Provident Fund Commissioner (“RPFC”) submitted that Appellant was not covered under the Act and thus BHC’s direction to deposit contribution from the date of eligibility of the contractual employees till the date of remittance was not workable and could not be sustained.

The Respondents, inter alia, argued that: (i) Regulations defined the term ‘employee’ to include all employees, including employees engaged on contractual basis, who are in the direct or indirect employment of the Appellant; (ii) the contractual employees were employed directly by the Appellant and not through any contractor; (iii) the Appellant directly remunerated the contractual employees; and (iv) the Appellant is not a government owned/ controlled company since its affairs were managed and controlled by a board of directors.

Observations of the Supreme Court
In order to be exempted from the Act, the Appellant had to meet the ‘twin test’ to seek exemption under the Act as laid down in Regional Provident Fund Commissioner v. Sanatan Dharam Girls Secondary School [(2007) 1 SCC 268]– (i) being a government company; and (ii) providing PF benefits to all employees. While the Appellant did in fact have its own scheme in force, it restricted the applicability of such scheme only to the ‘regular employees.’ Moreover, the Appellant’s scheme was not framed by the Central or State government, nor applicable to all of its employees. Therefore, the SC observed that the Appellant did not fulfil the second test and, held that the Appellant was liable to provide PF benefits to contractual employees.

The SC observed that the contractual employees would be entitled to PF benefits either under the Act or Regulations as: (i) they were not engaged through any contractor; (ii) they received wages/salary directly without involvement of any contractor since the date of their engagement; (iii) they have been in continuous employment of the Appellant for long periods of time; and (iv) their work was of perennial and continuous nature owing to which they cannot be termed ‘contractual’ in nature. However, SC preferred to cover the contractual employees under the Regulations over the Act so as to ensure uniformity in the service conditions of all the employees of the Appellant.

The SC elaborated on the predicament faced by the Appellant in complying with BHC’s order by holding that the BHC order would create imbalance if it were to be applied retrospectively. The SC observed as under:

“Provident Fund is normally managed on actuarial basis; the contributions received from employer and the employee are invested and the income by way of interest forms the substantial fund through which any pay-out is made. For all these years the Fund in question was subsisting on contributions made by the other employees and, if at this stage, the benefit in terms of the judgment of the High Court is extended with retrospective effect, it may create imbalance. Those who had never contributed at any stage would now be members of the fund. The fund never had any advantage of their contributions and yet the fund would be required to bear the burden in case any pay-out is to be made. Even if concerned employees are directed to make good contributions with respect to previous years with equivalent matching contribution from the employer, the fund would still be deprived of the interest income for past several years in respect of such contributions.” (emphasis supplied).

Decision of the Supreme Court

1. The Appellant to provide PF benefit to the contractual employees from January 2017 when writ petition was filed before the BHC. However, PF benefit would not be extended to contractual employees who have superannuated, expired, resigned or ceased to be in employment of the Appellant on the date of SC judgement;

2. RPFC to compute the PF amount for the period of January 2017 to December 2019 (“Contribution Period”) to be deposited in to the Trust by Appellant and the contractual employees;

3. The Appellant was directed to pay simple interest at the rate of 12% per annum for the Contribution Period under Section 7Q (interest payable by the employer) of the Act on the amount so computed by RPFC;

4. Contractual employees to deposit matching PF contribution for the Contribution Period along with interest at the rate of 6% per annum; and

5. From January 2020 onwards, the Appellant and the contractual employees to make their respective contributions as per the Regulations.

Vaish Associates Advocates View:

The SC has established a progressive stance by bringing ‘contractual employees’ on the same footing as that of the regular employees in terms of PF contribution. Further, SC’s direction to the employer as well the contractual employees to pay PF contribution from the date of writ petition (January 2017), instead of a retrospective date (from the date when the contractual employee became eligible) is carefully thought out. SC has also undertaken a positive approach by directing employees to make the same PF contribution as the employer. As such, the Act or the Scheme nowhere provides that the employee needs to make PF contribution for the past period or that the employee needs to pay interest on such contribution in respect of the said period.

Further, in light of the peculiarity of the facts and circumstances of this case, the SC exercised pragmatism in holding that contractual employees who have superannuated, expired, resigned or ceased to be in employment of the Appellant are ineligible to receive PF benefit.

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

NCLAT: No default by real estate developer if possession delayed due to reasons beyond control

An application had been filed by home buyers, Shilpa Jain and Akash Jain (collectively, “Respondents”) under Section 7 of the Insolvency and Bankruptcy Code, 2016, to initiate Corporate Insolvency Resolution Process (“CIRP”) against Raheja Developers (“Corporate Debtor”). The National Company Law Tribunal, Special Bench at New Delhi (“NCLT”) by order dated August 20, 2020 (“Impugned Order”), initiated CIRP against the Corporate Debtor. The promoter/shareholder Navin Raheja (“Appellant”) thereafter filed an appeal before the National Company Law Appellate Tribunal (“NCLAT”) in order to challenge the Impugned Order on two primary grounds: (i) that there was fraudulent and malicious initiation of the CIRP; and (ii) that the application filed by the Respondents was barred by limitation and not maintainable on several other grounds. The NCLAT by its judgement dated January 22, 2020 held that if the delay was not due to the Corporate Debtor, it could not be alleged that the Corporate Debtor had defaulted.

FACTS
The Respondents had booked an apartment in the residential project of the Corporate Debtor, in respect of which the Corporate Debtor had: (i) issued a joint allotment letter dated August 3, 2012; and (ii) executed a Flat Buyer’s Agreement dated August 3, 2012 (“Buyer’s Agreement”). In pursuance of the same, the Corporate Debtor received a total amount of INR 86,62,691 from the Respondents. As per Clause 4.2 of the Buyer’s Agreement, possession of the apartment was to be provided within thirty-six months, that is, by August 3, 2015. As per the said clause, in the event the construction could not be completed by the Corporate Debtor within the allotted time frame, the Corporate Debtor was under an obligation to pay the Respondents compensation at the rate of INR 7 per square feet of the super area per month for the entire period of the delay commencing from the time the apartment was to be conveyed. Thereafter, the Respondents filed an application under Section 7 of the IBC (initiation of corporate insolvency resolution process by financial creditor) before the NCLT. They were seeking a refund of the entire principal amount of INR 86,62,691 along with interest at the rate of 18% per annum.

ISSUES
(i) Whether the Corporate Debtor had committed a default if the offer of possession had been delayed due to reasons beyond the control of the Corporate Debtor.

(ii) Whether the Respondents had filed the application before the NCLT with a fraudulent and malicious intent for reasons other than for resolution of insolvency or liquidation.

ARGUMENTS
Contentions raised by the Appellant:

(I) The Corporate Debtor had taken the plea before the NCLT that it had issued a notice of possession for the apartment on November 15, 2016, and even after repeated requests, the Respondents had refused to take possession of the apartment.

The Corporate Debtor had also informed the NCLT that it had already filed a writ petition before the Supreme Court (“SC”) against the application filed by the Respondents. Under the said writ petition, the Corporate Debtor had challenged the constitutional validity of explanation to Sections 5(8)(f), 7, 21(6A)(b) and 25A of the IBC which respectively deal with any amount raised from an allottee under a real estate project shall be deemed to be an amount having the commercial effect of a borrowing, initiation of corporate insolvency resolution process by financial creditor, application for appointment of insolvency professional other than interim resolution professional for certain class of creditors and rights and duties of authorized representative of financial creditors. Herein, the SC had also issued a notice staying all proceedings before the NCLT. Despite the same, and not considering the decision of the SC in Pioneer Urban Land and Infrastructure Limited and Another v. Union of India and Others [2019 SCC Online SC 1005], the Impugned Order was passed.

(ii) The Corporate Debtor had also informed the NCLT that as per the Buyer’s Agreement, the possession of the apartment was to be handed over to the allottees subject to certain force majeure conditions. In this instance, any delay could be attributed to these force majeure conditions and not to the Corporate Debtor.

The Corporate Debtor had completed the construction in advance and further, an occupation certificate was also applied for by the Corporate Debtor in the year 2013. As such, the Corporate Debtor had complied with all obligations under the Buyer’s Agreement. It was also contended that any delay in processing of the application for the occupation certificate could be attributed to the delay of the relevant authority. Therefore, such delay was clearly beyond the control of the Corporate Debtor or the promoter. Despite such delays, the Corporate Debtor had managed to secure the occupation certificate in 2016. In pursuance of the receipt of the said certificate, the possession of the apartment was offered to the Respondents by way of the notice of possession on November 15, 2016. However, the Respondents conveniently chose to file a petition under Section 7 of the IBC after the expiry of a period of two years from the notice of possession. The Respondents had also failed to comply with the various formalities provided for by the Corporate Debtor in the notice of possession. Such conduct of the Respondents only reflects their mala fide intention.

(iii) In addition, the Corporate Debtor had also annexed a demand letter seeking payment of an outstanding amount of INR 86,62,851. The Respondents had also defaulted to make the aforesaid payment and had deliberately suppressed such fact. The Respondents were now seeking a refund of the entire amount along with interest, totaling to INR 87,32,108, which was higher than the principal amount paid by the Respondents. It was notable that the Respondents were also given the discretion to accept the money deposited by them if they did not intend to accept possession.

Observations of the NCLAT

As per Clause 4.4 of the Buyer’s Agreement, the construction was subject to force majeure conditions which, inter alia, included the condition for delay in grant of completion/ occupation certificate by the Government and/ or any other authority or if non-delivery of possession is beyond the control of the company. In such a case, the Corporate Debtor was entitled to a reasonable extension of time for delivery of the possession depending on the prevailing circumstances.

The Corporate Debtor also reserved the right to alter the terms and conditions of allotment or even suspend the scheme in case the circumstances warrant the same. As per Clause 5.1 of the Buyer’s Agreement, the Appellant had a right to cancel the allotment upon refunding payment along with interest at the rate of 5% per annum. In essence, it could not be stated that the Respondents were remedy less. The NCLAT observed that in the case of Pioneer, the SC had held that the Real Estate (Regulation and Development) Act, 2016 (“RERA”) was in addition to and not in derogation of the provisions of any other law for the time being in force. Therefore, the remedies under RERA were additional and not exclusive to the remedies under IBC. Thus, the provisions of IBC would also apply in addition to RERA.

The SC had also noted in the aforesaid judgement that under Section 19 (rights and duties of allottees) of RERA, an allottee was entitled to claim possession of the apartment, plot or building, as the case may be, or refund of amount paid along with interest in accordance with the terms of the agreement for sale. In addition, all allottees were responsible for making necessary payments in instalments within the time specified in the agreement for sale and were also liable to pay interest at such rate as may be prescribed for any delay in such payment. Further, an allottee was duty bound to take physical possession of the apartment, plot or building, as the case maybe, within a period of two months of issuance of the occupancy certificate.

The SC had also taken note of the Andaman and Nicobar Islands Real Estate (Regulation and Development) (General) Rules, 2016, that made provisions for ‘interest payable by promoter and allottee’ and the ‘timelines for refund’, wherein it had observed that once a default relating to amounts due and payable to the allottee was made out in an application under Section 7 of the IBC, the burden shifted on the promoter/ real estate developer to point out that allottee himself was a defaulter. Further, it was also important for the promoter/real estate developer to point out under Section 65 of the IBC that CIRP has been invoked fraudulently. This could be done by showing that: (i) the allottee was only a speculative investor and not genuinely interested in purchasing the apartment; and (ii) the allottee did not want to fulfil his obligation to take possession of the apartment under RERA in light of a failing real estate market. The NCLAT noted that as per the judgement of the SC in Pioneer, the Corporate Debtor could now refer to Section 65 of the IBC to show that the proceedings had been invoked fraudulently or maliciously.

The NCLAT observed that in a large number of cases, the allottees happened to be speculative investors. They simply wanted to forsake possession and seek monies already paid. The NCLAT noted that the NCLT had refused to accept the notice of possession, wherein a further period of four months and a further period of three months were sought for handing over possession and registration, respectively.

As such, the NCLAT also noted that the Appellant had taken a stand before the NCLT in respect of non-availability of necessary infrastructure facilities by the government for carrying out developmental activities.

Further, the Appellant had also agreed to pay the amount with interest but the Respondents wanted a higher percentage of money at the rate of 18% per annum.

While the Respondents haven’t denied that they were offered possession, the fact remains that after two years, they did not seek possession and only wanted their money back. As per Clause 4.4 of the Buyer’s Agreement, the Corporate Debtor could not be made responsible if there was a delay on account of non-availability of necessary infrastructure facilities being provided by the government for carrying out developmental activities. The delay in providing the occupation certificate therefore, fell squarely within the said clause.

Decision of the NCLAT

The NCLAT held that the Respondents had filed the application under Section 7 of the IBC fraudulently with malicious intent, and only wanted to jump ship and retrieve the amount paid by employing coercive measures. Delay in grant of approval by the relevant competent authority could not be taken into consideration in holding that the Corporate Debtor had delayed in delivering possession. Further, the NCLT had also ignored the decision of the SC, which though delivered prior to the admission of the application was binding on all courts.

The NCLAT held that the case fell within the ambit of Section 65 of the IBC. It also imposed penalty on the Respondents in addition to setting aside the Impugned Order and dismissing the application under Section 7 of the IBC. The NCLAT also observed that before admitting any case, it would be desirable for the NCLT to enquire if the intention of the allottees was to seek refund and not the possession of the apartment.

Moreover, if the delay was attributable to force majeure and not to the fault of the Corporate Debtor, it could not be alleged that the Corporate Debtor had defaulted in delivering the possession.

Vaish Associates Advocates View:

This is a welcome move by the NCLAT in reaffirming the judgement of the SC in Pioneer and acknowledging that allottees cannot simply jump ship by attuning their decision to seek possession of the apartment/ refund of amounts paid as per the prevailing real estate market.

The decision imposes a duty upon the NCLT to place an application filed by the allottee under strict scrutiny to determine the true intent of the allottee. As such, once a prima facie case is made out by the applicant, the real estate developer is given an opportunity to prove that the allottee was himself a defaulter and point out, as under Section 65 of the IBC, that the allottee had in fact filed an application only with a fraudulent intent.

Further, the decision also reinforces a protection to the real estate developer if the possession was delayed due to reasons beyond control.

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

SC: No provision under the IBC requiring the resolution plan to match liquidation value; and an approved resolution plan cannot be withdrawn under Section 12A of the IBC

The Supreme Court (“SC”) has by its judgement (decided on January 22, 2020) held that there is no provision in the Insolvency and Bankruptcy Code, 2016 (“IBC”) that requires a resolution plan to match the liquidation value of the assets of the corporate debtor and that an approved resolution plan cannot be withdrawn by a successful resolution applicant under Section 12A of the IBC.

FACTS
M/s. Maharashtra Seamless Limited (“Appellant”) was a successful resolution applicant in the corporate insolvency resolution process involving United Seamless Tubulaar Private Limited (“Corporate Debtor”) and its creditors. The total debt of the Corporate Debtor was INR 1,897 crores, comprising of term loans aggregating to INR 1,652 crores availed from two entities of Deutsche Bank, and a working capital loan of INR 245 crores taken from an Indian Bank, which was also the initiator of the corporate insolvency resolution process before the National Company Law Tribunal, Hyderabad (“Adjudicating Authority”). Under an order dated January 21, 2019, the Adjudicating Authority approved the resolution plan submitted by the Appellant (“Resolution Plan”).

The Resolution Plan included upfront payment of INR 477 crores by the resolution applicant, that is, to the financial creditors, operational creditors and other creditors of the Corporate Debtor, as per the ratio suggested therein. Ancillary directions were issued by the Adjudicating Authority while giving its approval to the said Resolution Plan and observing that the said plan met all the requirements of Section 30(2) of the IBC. The aforesaid order passed by the Adjudicating Authority was however, taken up in appeal before the National Company Law Appellate Tribunal (“NCLAT”) by one of the promoters of the Corporate Debtor, by the name Padmanabhan Venkatesh, and the Indian Bank (“Respondents”). The Appellant herein had also preferred an appeal before the NCLAT challenging the order of the Adjudicating Authority dated February 28, 2019, on the ground that it was not given access to the assets of the Corporate Debtor.

Under a common order dated April 8, 2019, dealing with all the three aforementioned appeals, the NCLAT held that the Appellant should increase the upfront payment from INR 477 crores, as proposed under the Resolution Plan, to INR 597.48 crores, to make it at par with the average liquidation value of INR 597.54 crores and that such increased amount should be paid in the same ratio as suggested in the Resolution Plan. The NCLAT further held that if the Appellant failed to undertake the payment of the additional amount and deposit it in an escrow account within thirty days, the impugned order of approval of the Resolution Plan was to be treated as having been set aside.

The said order of the NCLAT was appealed against by the Appellant in the instant case before the SC on April 23, 2019. Similarly, the financial creditor, DB International (Asia Limited) also filed an appeal against the aforesaid order of the NCLAT on May 1, 2019 before the SC. In addition to the appeal, an Interlocutory Application (“IA”) was filed by the Appellant before the SC on August 2, 2019, seeking refund of the sum deposited by it in terms of the Resolution Plan along with interest, and withdrawal of the Resolution Plan. The Appellant’s grievance was that in order to take over the Corporate Debtor it had availed of a substantial term loan facility and deposited the sum of INR 477 crores for resolution of the Corporate Debtor in a designated escrow account on February 19, 2019, but due to delay in implementation of the Resolution Plan, it was compelled to bear the interest burden. Also, the export orders it had accepted in anticipation of successful implementation of the Resolution Plan were cancelled, as a result of which the takeover of the Corporate Debtor had become untenable.

ISSUES
(i) Whether the scheme of the IBC contemplates that the sum forming part of the Resolution Plan should match the liquidation value or not.
(ii) Whether Section 12A of the IBC is the applicable route through which a successful resolution applicant can retreat.

ARGUMENTS

Contentions raised by the Appellant:

The Appellant, inter alia, contended that the NCLAT had exceeded its jurisdiction in directing matching of the liquidation value in the Resolution Plan. The Appellant further contended that the final decision on the Resolution Plan should be left to the commercial wisdom of the committee of creditors and there is no requirement that the Resolution Plan should match the maximized asset value of the Corporate Debtor. Additionally, the counsel for DB International (Asia Limited), while supporting the main appeal of the Appellant, resisted the plea of the Appellant for withdrawal of the Resolution Plan and refund of the sum already remitted. On the aspect of withdrawal of the Resolution Plan, the counsel for the financial creditors submitted that the only route through which a resolution applicant can travel back after admission of the Resolution Plan was as per Section 12A of the IBC.

Contentions raised by the Respondents:

The Respondents’ primary contention was that approval of the Resolution Plan, under which the assets of the Corporate Debtor were valued at INR 477 crores, would ultimately entitle the Appellant to excessive gains as it would get assets valued at INR 597.54 crores at a much lower amount. They emphasized that there could be no reason to release the property valued at INR 597.54 crores to the Appellant at INR 477 crores. One of the Respondents further contended that another resolution applicant, namely, Area Projects Consultants Private Limited, had made a revised offer of INR 490 crores, which was more than the amount offered by the Appellant.

Observations of the Supreme Court:

The SC noted that, in the course of appeal before the NCLAT, substantial argument was also advanced over failure on part of the Adjudicating Authority to maintain parity between the financial creditors and the operational creditors on the aspect of clearing dues. Thereafter, the SC referred to Section 30(2)(b) of the IBC which specifies the manner in which a resolution plan shall provide for payment to the operational creditors. The SC also referred to the decision dated November 15, 2019, of a co-ordinate bench of the SC in the case of Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta [Civil Appeal Nos. 8766-8767], which dealt with the manner of handling claims of operational creditors in a corporate insolvency resolution process. The co-ordinate bench of the SC had observed that there is no doubt that a key objective of the IBC is to ensure that the corporate debtor keeps operating as a going concern during the insolvency resolution process and must therefore make past and present payments to its operational creditors, without which such operation as a going concern would become impossible. On the point of dealing with claims of the operational creditors, the SC, referring to the aforementioned judgment, held that the UNCITRAL Legislative Guide makes it clear beyond any doubt that equitable treatment is only of similarly situated creditors and that there is a difference in payment of the debts of financial creditors and operational creditors, with operational creditors having to receive a minimum payment, being not less than the liquidation value, which does not apply to financial creditors. However, since none of the operational creditors in the instant case had questioned the legality of the Resolution Plan, the SC observed that the said issue had become academic.

On the question of whether the scheme of the IBC contemplates that the sum forming part of the Resolution Plan should match the liquidation value or not, the SC delved into the text of Section 31 of the IBC which specifies the manner of approval of a resolution plan. The SC then placed reliance on Clause 35 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (“Regulations”) which deals with the determination of liquidation value of the assets of the corporate debtor. The SC held that no provision in the IBC or Regulations has been brought to its notice under which the bid of any resolution applicant has to match the liquidation value arrived at in the manner provided in Clause 35 of the Regulations. The SC stated that the object behind prescribing such valuation process is to assist the committee of creditors to take a decision on a resolution plan properly. Once a resolution plan is approved by the committee of creditors, the statutory mandate of the Adjudicating Authority under Section31(1) of the IBC is to ascertain whether the resolution plan meets the requirement of sub-sections (2) and (4) of Section 30 of the IBC.

The SC held that it did not, per se, find any breach of the said provisions in the order of the Adjudicating Authority in approving the Resolution Plan. The SC further held that the NCLAT had proceeded on equitable perception rather than commercial wisdom in holding that the liquidation value was inequitable. The SC categorically stated that the NCLAT ought to cede ground to the commercial wisdom of the creditors rather than assess the Resolution Plan on the basis of quantitative analysis. The scope of interference by the Adjudicating Authority is limited to judicial review only. The SC thus, held that the NCLAT ought not to have interfered with the order of the Adjudicating Authority in directing the resolution applicant to enhance its fund inflow upfront.

With respect to the IA filed by the Appellant seeking refund of the amount remitted, coupled with the plea of withdrawal of the Resolution Plan, the SC held that the exit route prescribed in Section 12A of the IBC is not applicable to a resolution applicant. The procedure envisaged in the said provision applies only to applicants invoking Sections 7, 9 and 10 of the IBC for initiation of corporate insolvency resolution process by the financial creditor, operational creditor and corporate applicant respectively. The SC further held that the Appellant having appealed against the NCLAT order with the object of implementing the Resolution Plan could not be permitted to take a contrary stand in the IA filed in connection with the very same appeal for refund of the amount remitted. The SC further observed that considering the Appellant had raised funds for implementing the Resolution Plan by mortgaging the assets of the Corporate Debtor, it would, in the said circumstance, not engage in the judicial exercise of determining the question as to whether after having been successful in a corporate insolvency resolution process, a resolution applicant altogether forfeits its right to withdraw from such process or not.

Decision of the Supreme Court
In view of the above, the SC allowed the present appeal and set aside the order of the NCLAT dated April 8, 2019. The SC affirmed the order of the Adjudicating Authority passed on January 21, 2019 which approved the Resolution Plan, and directed the Appellant to remit an additional sum to the resolution professional for further remittance to the operational creditors as per their dues. Further, the IA filed by the Appellant seeking refund of the amount remitted, coupled with the plea of withdrawal of the Resolution Plan was dismissed. The SC accordingly directed the resolution professional to take physical possession of the assets of the Corporate Debtor and hand it over to the Appellant within a period of four weeks. The police and administrative authorities were directed to render assistance to the resolution professional to enable him to carry out the directions of the SC. The SC further ordered that all interim orders stand dissolved and connected applications disposed of.

Vaish Associates Advocates View:

The SC has, by this judgment, categorically held that there is no provision under the IBC requiring that the bid of any resolution applicant has to match the liquidation value arrived at. By endorsing the commercial wisdom of the committee of creditors in assessing the resolution scheme for the benefit of all stakeholders, the SC has clearly demarcated the scope and ambit of the adjudicating authority limiting it to only judicial review and barring interference by it in the commercial decision arrived at by the committee of creditors.

This judgment also clears the air on the aspect of withdrawal of the resolution plan upon admission by explicitly elucidating that such an exit option is not available to a resolution applicant. A plethora of judgments of the SC have held that any insolvency resolution process is a case of a mutual contract between the creditors and the debtor. Upon getting the seal of approval of the adjudicating authority the resolution plan becomes a statutory contract. A resolution is, therefore, a consensus in substance. However, withdrawal of an approved resolution plan under the garb of Section 12A would render lock down of economic resources, and unsuccessful/unscrupulous promoters continuing to manage the businesses, which is against the purpose and intent of the IBC.

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

NCLT: RP can take possession of a corporate debtor’s assets which are subject matter of litigation to facilitate the corporate insolvency resolution process

The National Company Law Tribunal, Mumbai Bench (“NCLT”) in the case of Pravin Blaggan, in the matter of Goa Auto Accessories v. Suresh Saluja (decided on December 12, 2019) held that a resolution professional (“RP”) could take possession of a corporate debtor’s assets which were subject matter of litigation, to facilitate the Corporate Insolvency Resolution Process (“CIRP”) under the Insolvency and Bankruptcy Code, 2016 (“IBC”).

FACTS
The case relates to the possession of a property at the Honda Industrial Estate (“Property”) by one Mr. Pravin Blaggan (“Applicant”), which was in actuality, under the ownership of Goa Auto Accessories (“Goa Auto”). The NCLT had, pursuant to an application filed by Goa Auto in the capacity of a corporate applicant under section 10 of the IBC, passed an order dated December 11, 2018 (“Order 1”). Order 1 commenced the CIRP for Goa Auto. Consequently, the NCLT appointed Mr. Suresh Saluja as the IRP for the same.

Thereafter, a miscellaneous application was filed by the Applicant before the NCLT, challenging the direction of the Interim Resolution Professional (“IRP”) by letter dated December 21, 2018 (“Letter”), wherein the IRP had called upon the Applicant to hand over the possession of the property owned by Goa Auto in view of the commencement of CIRP. The Applicant was called upon to comply with the aforesaid direction with twenty-four hours of the receipt of the said Letter. By way of the Letter, the IRP had also alleged that the Applicant was in illegal occupation of the property. The division bench of the NCLT heard the miscellaneous application and passed an order directing the RP to take possession of the property from the Applicant. However, a dissenting order dismissing the miscellaneous application was passed on August 20, 2019. The matter was then referred to Honourable Suchitra Kanuparthi as the third member to resolve the difference of opinion due to the previous two orders.

ISSUE
Whether the NCLT could order possession of the property of Goa Auto to facilitate the CIRP and allow the RP to take possession of the same, pending adjudication of suits filed by the Goa Auto and the Applicant.

ARGUMENTS

Contentions of the Applicant:

The Applicant submitted that he had not been occupying the Property illegally, and in fact had been occupying the same as per an agreement dated January 28, 1997, which was entered into between Goa Auto and the Applicant (“Agreement”). Further, the Applicant submitted that he was an erstwhile employee of Goa Auto and had worked from 1982 to January 1983. Following this period, the Corporate Applicant started his own proprietary entity and carried on business from the shed, of the job work assigned by Goa Auto in respect of components of spare parts of automobiles. It was also submitted by the Applicant that he had filed a special suit for the recovery of monies from Goa Auto. It was further contended that in view of section 18(1)(f)(vi) (assets subject to the determination of ownership by a court or authority) of the IBC the assets which were subject to determination of court/authority, possession of the same could not be sought for by a resolution professional pending adjudication of a suit. Resultantly, in the instant case, pending finalization of the suit in respect of the Property, the RP could not seek possession of the same. Further, the RP only had to fulfill an administrative function as he did not possess any adjudicatory powers to claim possession of the Property.

Contentions of Goa Auto:
It was argued by Goa Auto that while a resolution professional was duty bound to take control and custody of an asset of a corporate applicant, the same was subject to determination of ownership by a court/authority.Given the fact that suits were pending for finalization before the courts in Goa, the possession of the Property could not be sought for by the RP. Goa Auto also relied upon the judgment of the Bombay High Court in Tata Steel BSL Limited v. Varsha [2019 3 AIRBOMR 351], wherein it was held that merely because a CIRP had been undertaken, a dispute which was recognized as sub judice for which accommodation was made in the resolution plan could not be extinguished.

Contentions by the Resolution Professional:
The RP submitted that he had filed a reply to the miscellaneous application, wherein he had submitted that by way of the Agreement, Goa Auto had conferred upon the Applicant the right to use the Property for the purpose of setting up a welding, fabrication, milling, drilling and deburring unit in order to carry out the job work for Goa Auto. It was also submitted that certain disputes had arisen between Goa Auto and the Applicant, as the latter had breached certain conditions of the Agreement. In view of the breach, Goa Auto had called upon the Applicant to vacate the Property by notice dated August 22, 2008. In any case, as per clause 7 of the said Agreement, Goa Auto was entitled to ask the Applicant to vacate the Property within one month of such notice. Notably, Goa Auto had also filed a special suit before the Honourble Civil Court at Bicholim, Goa, seeking possession of the Property from the Applicant.

The RP also argued that since the time he was appointed as an IRP, it was his duty to take control and custody of any asset over which Goa Auto had an ownership right, including those which may or may not be in its possession. It was contended that merely because the Applicant was claiming a lien on the Property under the guise of a pending suit before a civil court, the same could not prejudice the right of the RP under the provisions of IBC. Further, no interim order had been passed in respect of such suit.

The RP further submitted that he had a right to claim possession of the Property under section 18(1)(f)(ii) (assets that may or may not be in possession of the corporate debtor) of the IBC and that his right to claim possession was not affected under section 18(1)(f)(vi) of IBC. Pertinently, it was pointed out that there was no dispute of ownership in respect of the Property. The bone of contention was with regard to the possession of the Property and right to use the same.

OBSERVATIONS OF THE NCLT
It was held that the NCLT alone had jurisdiction when it came to applications and proceedings by or against a corporate applicant covered by the IBC. Thus, no other forum has jurisdiction to entertain or dispose of any such applications or proceedings. If it were to be held that a civil court also had jurisdiction, the same would introduce manipulations to frustrate the resolution process.

Through a plain reading of section 60(5)(b) (NCLT shall have jurisdiction to entertain/ dispose of any claim made by or against the corporate debtor) of the IBC and section 60(5)(c) (NCLT shall have jurisdiction to entertain or dispose of any question of priorities, law or facts, arising out of the insolvency resolution or liquidation proceedings) of the IBC, it was concluded that the IBC empowered the NCLT to entertain the dispute raised in the suit. Further, section 63 (civil court not to have jurisdiction) of the IBC, barred the jurisdiction of the civil court in matters pertaining to the National Company Law Appellate Tribunal (“NCLAT”). Section 231 (bar of jurisdiction) of the IBC also barred the civil court from granting any injunction in respect of any action taken or in pursuance of any order passed by the adjudicating authority under the IBC. Therefore, upon a conjoint reading of the above mentioned provisions of IBC, the jurisdiction of the civil court was excluded when matters fell under the purview of the IBC. It was also noted that the IBC was a self-contained code that conferred supervisory powers on the NCLT with respect to the entire CIRP. The principles of comity would be affected if conflicting orders were passed by a civil court and the NCLT. Ultimately, such a course of action would be detrimental to the conduction of the CIRP.

It was stated that the office of the RP had become functus officio upon completion of his tenure, and thereafter, the RP had been appointed as a liquidator. Subsequent to the same, the RP had not taken any steps to amend his status. Subject to the directions of the adjudicating authority under section 35(1)(b)of the IBC a liquidator had the power to take into custody or control all the assets, property effects, and actionable claims of Goa Auto. The NCLT observed that similar provisions also existed under the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002. Importantly, the non-obstante clause under section 238 of the IBC, enabled the IBC to have an overriding effect over anything inconsistent in any other law or instrument.

It was observed that there were two pending suits in question: (i) one filed by Goa Auto seeking, inter alia, the possession of the Property and, (ii) the other, filed by the Applicant, claiming for the recovery of monies from Goa Auto. In respect of both aforesaid suits, it was observed that no restraint orders had been passed. Hence, it was held that the RP’s claim for possession of the Property before the adjudicating authority in view of CIRP order could be entertained under the provisions of IBC.

In view of the moratorium, even though the suit filed by the Applicant though temporarily stayed, the suit filed for recovery of possession filed by Goa Auto was deemed to continue. Further, the NCLT noted that the RP had filed an application to liquidate Goa Auto under section 31 of the IBC as no resolution plan had been received by him.

DECISION OF THE NCLT
Thus, in view of the overriding power under section 238 of the IBC, the NCLT directed that the RP/ liquidator be allowed to take possession of the Property from the Applicant.

Vaish Associates Advocates View:

The NCLT concluded by reiterating that no civil court would have the jurisdiction to entertain any suit or proceeding in a matter over which the NCLT has jurisdiction in accordance with the IBC. Further, the civil suit filed by the Applicant was only for the recovery of monies and would therefore, have a limited bearing on the suit for possession by the RP. Hence, the pendency of civil proceedings did not bar the RP from exercising his duty of taking control and custody of the assets of Goa Auto.

This judgment will go a long way in establishing the rights of an insolvency professional under the IBC, and in clarifying that possession of property that is not under the possession of a corporate debtor but which is owned by the corporate debtor could be taken back by the insolvency professional on behalf of the corporate debtor.

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