Page 83 – Vaish Associates Advocates

Delhi High Court: Creditors cannot be given preferential treatment towards satisfaction of a compromise decree during moratorium

The Delhi High Court (“DHC”) has, in the case of Ved Prakash Abbot v. Kishore K. Avarsekar and Others (decided on August 09, 2019) held while dismissing a contempt petition that pending moratorium under the Insolvency and Bankruptcy Code, 2016 (“IBC”), creditors cannot be given preferential treatment towards satisfaction of a compromise decree.

FACTS
Ved Prakash Abbot (“Petitioner”) had filed a suit for recovery of dues against a Company (“Company”) owned by Kishore K. Avarsekar (“Respondent”). However, the parties reached a compromise and a compromise decree was passed that recorded the terms of the same, where the Company was directed to pay a sum of INR 10,19,763 in monthly instalments. However, on June 20, 2017 an interim resolution professional was appointed, as an application under Section 10 of the IBC for initiation of the corporate insolvency resolution process (“CIRP”) was made. Thus, moratorium was imposed as per Section 14 of the IBC. Subsequently, the cheque for the second instalment was dishonoured. On March 20, 2018 an application for liquidation was passed and a liquidator was appointed. Further, a contempt petition was filed by the Petitioner where it was alleged that the Company and the Respondent have committed a contempt of the compromise decree by not repaying the sum in the manner provided.

ISSUE
Whether the compromise decree could be honoured in view of the initiation of the CIRP as per the IBC?

ARGUMENTS
The Petitioner argued that there was a wilful disobedience of the compromise decree previously passed. The Petitioner further submitted that even prior to the appointment of the interim resolution professional and initiation of moratorium as per Section 14 of the IBC, the Respondents defaulted on two of the payments due and therefore it could be inferred that the Respondents reflected no intention to abide by the terms of the compromise decree. It was further contended that Section 14 of the IBC does not have any impact on the contempt proceedings before a High Court under Article 215 of the Constitution of India and the Contempt of Courts Act, 1971. The Delhi High Court’s judgement in the case of E.D. v. Axis Bank (decided on April 02, 2019) was interpreted and analysed where it was held that provisions of Section 14 of the IBC are not applicable to a statutory authority under the Prevention of Money Laundering Act, which would apply to the instant case. Other judgements such as Delhi Development Authority v. Skipper Construction Company (Private) Limited and Others [(1996) 4 SCC 622] and Jyoti Limited v. Kanwaljit Kaur Bhasin [32 (1987) DLT 198] were referred to in order to state that as per the principle of ‘lifting the corporate veil’ the directors and other officers in-charge have been previously held responsible for the acts and/or omissions of companies.

The Respondent’s main argument was centred on the definition of ‘civil contempt’ as per Section 2(b) of the Contempt of Courts Act, 1971. Section 2(b) of the Contempt of Courts Act, 1971 is reproduced below:

“(b) “civil contempt” means wilful disobedience to any judgement, decree, direction, order, writ or other process of a court or wilful breach of an undertaking given to a court;”

The Respondent thereby argued that in order to qualify as a contempt of court, there shall have to be a ‘wilful’ disobedience or breach. The Respondent further stated that prior to the initiation of the CIRP, it was not in a financial position to repay the amounts. After initiation of the CIRP, an interim resolution professional was appointed who took over the management of the Company and was vested with the power of the board of directors of the Company.

The Respondent contended that he had certainly not benefited from the Company going under the CIRP as he actually lost control of the Company with the appointment of the interim resolution professional. The Respondent further submitted that the Petitioner is entitled to the satisfaction of the decree only through the route of proceedings under the aegis of the IBC. Further, paying the Petitioner’s dues before paying the dues owed to the 328 other operational creditors would amount to preferential treatment of a particular creditor. The Respondent cited the Supreme Court’s judgement in the case of Ashok Paper Kamgar Union v. Dharam Dhoda and Others [(2003) 11 SCC 1] wherein it was held that ‘wilful’ in Section 2 of the Contempt of Courts Act, 1971 means an act or omission done voluntarily and intentionally with the specific intent to do something the law forbids or with an intent to omit to do something that the law requires to be done. The Respondent stated that in view of the CIRP being initiated, the lack of payment is not wilful, voluntary or intentional.

OBSERVATIONS OF THE DHC
The DHC, while weighing the arguments made by the parties referred to the judgement of the Supreme Court in the case of B.K. Kar v. High Court of Orissa [AIR 1961 SC 1367] wherein it was held that mere unintentional disobedience is not enough to hold anyone guilty of contempt. Although disobedience might have been established, absence of wilful disobedience on the part of the contemnor will not hold him guilty unless the contempt involves a degree of fault or misconduct. It was further held that the Respondent was justified in not giving preferential treatment to the Petitioner towards satisfaction of the compromise decree, and that the principal of lifting of corporate veil is not applicable. The DHC also held that the criminal proceedings can continue despite of moratorium granted under the IBC.

DECISION OF THE DHC
The DHC stated that the Respondent is not guilty of contempt of court as the Company had not wilfully disobeyed the compromise decree. However, it was further clarified that if in the future the Company is revived or any fresh cause of action arises in favour of the Petitioner, the judgment rendered by the DHC will not come in the way of the Petitioner seeking a remedy available to him in law.

Vaish Associates Advocates View
This judgement clarifies a pertinent question of law that the imposition of moratorium and commencement of CIRP shall override previous payment obligations including compromise decrees, and that on institution of the CIRP under the IBC, a corporate debtor is justified in not giving preferential treatment to a party towards satisfaction of a previous payment obligation, such as a compromise decree.

This judgement follows other judgements that have been passed recently where the primacy of the IBC over other legislations have been upheld. More importantly, this judgement recognizes the provisions and functioning of the IBC in holding that once a company is under the provisions of the CIRP, the promoter and the board of directors do not have any control over the operations of the company.

NCLAT: A financial creditor cannot intervene or oppose admission of a corporate insolvency resolution process by another financial creditor

In the recent judgement of L&T Infrastructure Finance Company Private Limited v. Gwalior Bypass Project Limited and Others (decided on August 19, 2019), the National Company Law Appellate Tribunal (“NCLAT”) has reaffirmed the two orders passed by the National Company Law Tribunal (“NCLT”) dated May 29, 2019 and has held that a financial creditor cannot intervene or oppose an admission of application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (“IBC”).

FACTS
Gwalior Bypass Project Limited (“Corporate Debtor”), a special purpose vehicle was to construct, develop, finance and operate the Gwalior Bypass on NH-75 in Madhya Pradesh. As per the regulations of the National Highway Authority of India (“NHAI”), a project for the interest of the public is to receive a ring-fenced financing in order to protect the special purpose vehicles assets from being encumbered. Therefore, in the concession agreement executed between NHAI and the Corporate Debtor (“Agreement”), the Corporate Debtor was barred from creating any encumbrance, lien, rights or benefits on any of its assets, unless the NHAI had consented to the same. The Corporate Debtor issued to L&T Infrastructure Finance Company Limited (“Appellant”) pursuant to its sanction letter, secured, rated, redeemable, non-convertible debentures aggregating to INR 260 crores. Thereafter, a modified sanction letter was executed wherein the Appellant subscribed to non-convertible debentures aggregating to INR 241.55 crores. It is pertinent to note that the NHAI had issued no objection letters for both the sanction letters. Further, a debenture trust deed (“Deed”) was executed between the Corporate Debtor and IL&FS (“Trustees”).

During such period, ICICI Bank had also sanctioned a loan of INR 91.5 crore to the Corporate Debtor. On the default of the Corporate Debtor to repay the principal amount along with the interest to ICICI Bank, an application was filed by ICICI Bank to NCLT for the admission of the corporate insolvency resolution process (“CIRP”). The NCLT admitted the same on May 29, 2019.

The Appellant therefore filed an application for intervention/impleadment before the NCLT. However, the NCLT dismissed the case. Thereafter, the matter was referred to the NCLAT.

ISSUE
Whether a financial creditor has the right to intervene and oppose admission of an application under Section 7 of the IBC?

ARGUMENTS
The Appellant argued that as per the Deed, the Corporate Debtor was barred from performing any acts which would either hinder or delay the payment of the debt of the Appellant. The Appellant further argued that in accordance with the Agreement, no prior approval of NHAI had been obtained by the Corporate Debtor. Moreover, the Appellant submitted that the impugned order had the effect of relegating the rights and interest of the Appellant to that of a minority financial creditor wherein its voting share has been reduced to 38.76% and that of ICICI Bank is 61.24%. The Appellant thus believes that its sole, senior and secured lender status has been disregarded. Further, the Appellant argued that by applying the provisions of the IBC, ICICI Bank had indirectly manipulated the voting share in collusion with the Corporate Debtor.

FINDINGS OF THE NCLAT
NCLAT has relied on the judgement of the Hon’ble apex Court in the case of Innoventive Industries Limited v. ICICI Bank [(2018) 1 SCC 407] which held that when the default takes place, in the sense that a debt becomes due and is not paid, IBC is triggered the moment default is of INR 1 lakh or more. The Court further went on to state that within a period of 14 days, the adjudicating authority is to be satisfied that a default in the repayment of the debt has occurred. Within these 14 days, the corporate debtor shall have a right to point out that no default has occurred.

Once the adjudicating authority is satisfied of the fact that a default in debt has occurred, it is to admit the application, unless the same is incomplete. The NCLAT therefore observed that an adjudicating authority is required to verify if the application is complete; if the corporate debtor is in fault for non-payment of a debt; and the amount of such a debt is INR 1 lakh or more.

Further, in accordance with the decision of NCLAT in the case of Innoventive Industries Limited v. ICICI Bank (decided on May 15, 2017), the Corporate Debtor may raise an application stating that there is no debt payable in law or that no default has been committed. The Corporate Debtor may also take a plea that the applicant is not a financial creditor or an operational creditor. It is therefore inferred that only a corporate debtor has the right to object to an application with regards to the CIRP and no financial creditor shall have such right to object on the application of another financial creditor.

DECISION OF THE NCLAT
Since the Appellant is a financial creditor of the Corporate Debtor and is neither a member nor a shareholder of the Corporate Debtor, it has no right to intervene or oppose the admission of the application by ICICI Bank against the Corporate Debtor. The appeal was accordingly dismissed.

Vaish Associates Advocates View
Section 7(1) of the IBC states that “a financial creditor either by itself or jointly with other financial creditors, or any other person on behalf of the financial creditor, as may be notified by the Central Government may file an application for initiating CIRP against a corporate debtor before the Adjudicating Authority when a default has occurred.” Therefore, it is provided that any financial creditor shall be allowed to file an application for CIRP when a default in the repayment of a debt has occurred.

Further, in accordance with the principles of equity and natural justice and as stated in Sree Metalinks Limited and Another v. Union of India [(2017) 203 CompCas 442], NCLT may provide the corporate debtor with a reasonable opportunity to defend itself. However, no such right has been provided to a financial creditor. This judgement therefore accentuates that other than a corporate debtor, no other person, including a financial creditor shall be allowed to intervene or oppose an application for the admission of a CIRP of another financial creditor.

Delhi High Court: Remedies available to allottees of flats under the Consumer Protection Act, 1986 and the Real Estate (Development and Regulation) Act, 2016, are concurrent

The Delhi High Court has, in M/s. M3M India Private Limited and Another v. Dr. Dinesh Sharma and Another (decided on September 4, 2019), that was clubbed together with a batch of petitions filed under Article 227 of the Constitution of India and dealing with the same question of law, held that the proceedings instituted by the buyers against the developers under the Consumer Protection Act, 1986 (“CPA”) can run concurrently with proceedings instituted under the Real Estate (Development and Regulation) Act, 2016 (“RERA”).

FACTS
The common question for consideration of the Delhi High Court in this matter (and the petitions clubbed with it) was whether proceedings under the CPA can run concurrent with proceedings under the RERA.

This issue was dealt with earlier by the National Consumer Disputes Redressal Commission (“National Commission”) in Ajay Nagpal v. Today Homes and Infrastructure Private Limited (decided on April 15, 2019) where the issue involved was whether, despite the provision under Section 3 of the CPA which states that –“the provisions thereunder shall be in addition to and not in derogation of the provisions of any other law for the time being in force”, the jurisdiction of the consumer fora stands precluded in light of RERA being enacted. In the said matter, the National Commission had held that the reliefs provided under the CPA and RERA are concurrent, and the jurisdiction of courts under the CPA is not negated by RERA. Subsequently, in several other petitions filed before the National Commission on the same issue, the forum had passed interim orders staying further proceedings on all such matters but while the same were part-heard, the Supreme Court by its order dated August 09, 2019, in Pioneer Urban Land and Infrastructure Limited and Another v. Union of India and Others [2019 SCC Online SC 1005] (“Pioneer Judgement”), held that reliefs given to allottees of flats/ apartments are concurrent, and such allottees are in a position to avail of reliefs under CPA, RERA, as well as under the Insolvency and Bankruptcy Code, 2016 (“IBC”).

Pursuant to passing of the Pioneer Judgment, the National Commission’s order in Ajay Nagpal v. Today Homes and Infrastructure Private Limited has been challenged under the petitions clubbed under the above stated matter of M/s. M3M India Private Limited and Another v. Dr. Dinesh Sharma and Another before the Delhi High Court.

ARGUMENTS
The petitioners in the Pioneer judgment contended that the primary issue for consideration was the concurrent existence of the reliefs provided under IBC and RERA and not as much concurrence of the reliefs under RERA and the CPA. Hence, any observation by the Supreme Court regarding the reliefs under RERA and CPA being concurrent are to be considered as obiter dicta and not to be regarded as the ratio decidendi of the judgment, which alone has precedential value. It was further argued that the Pioneer Judgement would be applicable only to proceedings under the CPA filed prior to the enactment of RERA and not to the proceedings filed after RERA came into effect. The petitioners also argued that, even if the Pioneer Judgement is considered to hold that the CPA and RERA provide concurrent remedies, the conclusion overlooks Section 79 of RERA which states that no civil court is to have jurisdiction over matters empowered to be heard by RERA. The petitioners also contended that the conclusion recorded in the Pioneer judgment, regarding the concurrent nature of reliefs under CPA and RERA forms neither the ratio decidendi nor the obiter dicta and is, therefore, non-binding on the High Courts.

The respondents on the other hand argued that the inter-connection between proceedings under the CPA and RERA had been considered by the Supreme Court in the Pioneer Judgement and that the Supreme Court’s conclusions were binding on the High Courts, even if the same was to be considered as being obiter dicta.

OBSERVATIONS OF THE DELHI HIGH COURT
The Delhi High Court referred to the judgment of the National Commission in the case of Ajay Nagpal v. Today Homes and Infrastructure Private Limited where it was held that the remedies provided by the CPA and RERA are concurrent and the jurisdictions of the forums/commissions constituted under the CPA is not ousted by RERA.

The Delhi High Court also referred to the decision of the Supreme Court in the Pioneer Judgement, wherein the Supreme Court, in examining the operation of remedies under RERA and IBC, had emphasised that the remedies under RERA were not intended to be exclusive, but were to run parallel with other remedies. As regards the concurrence of the remedies under CPA and RERA, the apex Court had observed that, “Remedies that are given to allottees of flats/apartments are concurrent remedies, such allottees of flats/apartments being in a position to avail of remedies under the Consumer Protection Act, 1986, RERA as well as the triggering of the IBC” (emphasis supplied).

The Delhi High Court further observed that even in the event the afore stated observation of the Supreme Court may be characterised as obiter dicta, various judgments of the Supreme Court have held that an obiter dictum of

the Supreme Court is not only binding on the High Courts, but also has clear persuasive value before the Supreme Court itself. The Delhi High Court also observed that the reference to Section 71(1) of the RERA as an example of a parallel remedy by the Supreme Court does not, in the present context, lead to the conclusion that the Court intended to reach a decision only with regard to the pending CPA complaints, and not the ones to be instituted in the future.

DECISION OF THE DELHI HIGH COURT
In view of the aforementioned precedents, the Delhi High Court concluded that the remedies available to the allottees of flats/apartments under CPA and RERA are concurrent and thus, there was no ground for interference with the view taken by the National Commission in the case of Ajay Nagpal v. Today Homes and Infrastructure Private Limited. The writ petitions before the Delhi High Court were thereby dismissed, and the interim orders passed by the National Commission consequently, vacated.

Vaish Associates Advocates View:
The Delhi High Court’s order in the instant case has clarified the position on the concurrency of remedies available under the CPA and RERA, thereby opening up multiple avenues for such allottees to seek redressal of their claims and grievances against builders under the CPA, RERA and the IBC.

This is in the interest of home buyers’ as implementation of RERA is still fairly at a nascent stage in many States and curtailing remedies available to allottees of flats/apartments under CPA under such circumstances would be grossly unjust. As such, this judgement is a positive development for home buyers and will go a long way in curbing deficiency in rendering of promised products/services as well as checking malpractices by builders.

GST Cafe – Take a look at the Highlights of the 37th GST Council Meeting

The following are the highlights of the 37th GST Council meeting held on September 20, 2019 along with notifications implementing decisions taken during the meeting.

Law and Procedure related changes

Requirement for filing of Annual Return for F.Y. 2017-18 & 2018-19 waived for composition taxpayers
Requirement for filing of Annual Return for F.Y. 2017-18 & 2018-19 made optional for taxpayers with annual turnover of up to Rs. 2 crore
Restrictions to be imposed on recipients w.r.t. availment of ITC, in case details of outward supplies not provided under Form GSTR-1. This proposal, in our view, is in violation of Sec. 16 of CGST Act, which entitles assessee to claim ITC if vendor has deposited tax with Govt. The law does not entail furnishing of GSTR-1 by vendor for claim of ITC by recipient. With new return system being implemented from April 2020, such amendment will pose operational challenge for taxpayers in the transitional phase
New returns system proposed to be introduced from April, 2020 (earlier proposed from 01.10.2019)
Integrated refund system with disbursal by single authority proposed to be introduced from 24.09.2019
End date for filing appeal against orders of Appellate Authority before GST Appellate Tribunal extended
Circular to be issued clarifying procedure for claiming refund subsequent to favorable order in appeal or any other forum
Circular clarifying taxability w.r.t. supply of ITES services being made on own account or as intermediary to be issued, in supersession of earlier circular dt. 18.07.2019
Circular dt. 28.06.2019, issued with respect of post-sales discount withdrawn ab-initio
Exemption from payment of GST on export freight by air or sea extended up to 30.09.2020

In Principle Approval

Aadhar number to be linked with GST registration of taxpayers and such linking proposed to be made mandatory for claiming refund
In order to tackle menace of fake invoices and fraudulent refunds, in principle decision to prescribe reasonable restrictions on passing of credit by risky taxpayers including risky new taxpayers

Rate Changes on services (w.e.f. 01.10.2019) [Notif. No. 20/2019-CT (R)]

Tax on hotel accommodation services reduced as under:

Tax on outdoor catering services (other than in premises with accommodation of daily tariff of Rs. 7501 or above per unit) reduced to 5% without ITC from present 18% with ITC
Special Procedure for payment of tax rescinded w.r.t. development rights supplied on or after 01.04.2019 [Notif. No. 23/2019-CT(R)]
Grant of alcoholic liquor license neither a supply of goods nor a supply of service. [Notif. No. 25/2019-CT(R)]
Manufactures of aerated water excluded from purview of the composition scheme w.e.f. 01.10.2019 [Notif. No. 43.2019-CT]
Refund of compensation cess disallowed for tobacco and manufactured tobacco substitutes in case of inverted duty structure [Notif. No.3/2019-CC(R)]
Changes in rates of compensation cess [Notif. No. 2/2019-CC(R)]

NCLAT: The Insolvency and Bankruptcy Code, 2016 is not applicable to NBFCs

The National Company Appellate Law Tribunal (“NCLAT”) has, in the case of Housing Development and Finance Corporation Limited v. RHC Holding Private Limited (decided on July 10, 2019) held that the provisions of the Insolvency and Bankruptcy Code, 2016 (“Code”) are not applicable to ‘non- banking financial institutions’ (“NBFCs”).

FACTS
Housing Development and Finance Corporation Limited (“Appellant”) challenged the December 6, 2018 order of the Principal Bench of National Company Law Tribunal (“NCLT”), which had dismissed its insolvency plea against RHC Holding Private Limited (“Respondent”), observing that it was an NBFC and hence, does not come under the purview of the Code. The Appellant had moved the NCLT to recover an amount of INR 41 crores due from the Respondent.

ISSUE

The central issue of this case was whether the Respondent being an NBFC is out of the purview of the Code?

ARGUMENTS
The Respondent argued that the NCLT had rightly rejected the application of the Appellant since the Respondent is a ‘financial service provider’ and is excluded from the definition of Corporate Person as per Section 3(7) of the Code. The Respondent also relied on the NCLAT’s decision in the case of Randhiraj Thakur v. M/s Jindal Saxena Financial Services (decided on September 18, 2018) wherein it was held that an insolvency petition filed against an NBFC is not maintainable.

Section 3(7) of the Code is reproduced below:

“’corporate person’ means a company as defined in clause (20) of section 2 of the Companies Act, 2013 (18 of 2013), a limited liability partnership, as defined in clause (n) of sub-section (1) of section 2 of the Limited Liability Partnership Act, 2008 (6 of 2009), or any other person incorporated with limited liability under any law for the time being in force but shall not include any financial service provider;” (emphasis supplied)

The term ‘financial service provider’ has been defined in Section 3(17) of the Code as:

“’financial service provider’ means a person engaged in the business of providing financial services in terms of authorisation issued or registration granted by a financial sector regulator;”(emphasis supplied)

The term ‘financial service’ has been defined in Section 3(16) of the Code as:

“’Financial service’ includes any of the following services, namely-
(a) Accepting of deposits;
(b) Safeguarding and administering assets consisting of financial products, belonging to another person, or agreeing to do so;
(c) Effecting contracts of insurance;
(d) Offering, managing or agreeing to manage assets consisting of financial products belonging to another person;
(e) Rendering or agreeing, for consideration, to render advice on or soliciting for the purposes of-
(i) Buying, selling or subscribing to, a financial product;
(ii) Availing a financial service; or
(iii) Exercising any right associated with a financial product or financial service;
(f) Establishing or operating an investment scheme;
(g) Maintaining or transferring records of ownership of a financial product;
(h) Underwriting the issuance or subscription of a financial product; or
(i) Selling, providing, or issuing stored value or payment instruments or providing payment services;”

The Appellant argued that the Respondent is not a ‘financial service provider’. According to the Appellant the intent and the purpose of the legislature is to specifically carve out a set of institutions that provide set of identified financial services. The exclusion cannot be beyond what has been contemplated by the Code. The Code is applicable to all entities other than those which are specifically engaged in business of providing ‘financial services’ under the Code.

It was further argued by the Appellant that the Respondent is a holding company, which invests in shares, bonds, debentures, debts or loans in group companies and gives guarantees on behalf of group companies. Being a holding company, the Respondent is a separate entity altogether. Thus, the services being provided by the Respondent constitute offering and managing assets consisting of financial products belonging to another person, which cannot be equated to financial services as defined above.

OBSERVATIONS OF THE NCLAT
The NCLAT observed that the definition of ‘financial service’ if read with definition of ‘financial service provider’, clarifies that it is not necessary that the ‘financial service providers’ must accept deposits. It was further held that the definition of ‘financial services’ as defined in Section 3(16) of the Code is not limited to the nine activities as shown in sub-clause (a) to (i) of Section 3(16) of the Code. The sub-clauses are inclusive which mean that there can be other services which come within the meaning of ‘financial services’. Further, reliance was placed on the registration certificate issued by the Reserve Bank of India (“RBI”) to commence business of ‘non-banking financial services’, except the acceptance of public deposits. The NCLAT additionally relied on Section 45-I of the Reserve Bank of India Act, 1934 which defines the meaning of an NBFC.

DECISION OF THE NCLAT
The two-member bench headed by Chairman Justice S J Mukhopadhaya upheld the order of the NCLT which had rejected the Appellant’s plea. The NCLAT held that it found no merits in the Appellant’s petition and further stated that the Respondent comes under the purview of the RBI and remedies should be sought from the RBI and not the bankruptcy court.

Vaish Associates Advocates View
The NCLAT in this case laid down the cardinal principle that NBFCs, irrespective of their functions, shall not come under the purview of the Code. It has liberally interpreted the definition of ‘financial services’ provided in the Code and has stated that even if an entity that does not undertake the activities enumerated in Section 3(16) of the Code, it can be considered a financial service provider, as the definition provided is not exhaustive in nature.

In this context, it is pertinent to take note of Section 227 (Power of Central Government to notify financial sector providers, etc.) of the Code, which states that the Central Government has the power to notify certain categories of the financial service providers who may be subject to the provisions of the Code. Till date, no such notification has been issued by the Central Government. However, this can be used as a tool to bring such companies into the ambit of the Code as and when the Central Government deems fit.

It is also imperative to note that financial service providers constitute a significant segment of our economy, wherein public funds are involved. In an event where insolvency proceedings are initiated against these entities, this may result in a cascading effect on the economy, hence these entities have been excluded from the ambit of the Code.

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

NCLT Cuttack: Failure to implement the resolution plan cannot reset the clock back to day one to restart the insolvency process

The National Company Law Tribunal (“NCLT”), Cuttack in the case of State Bank of India v. Adhunik Metaliks Limited and Others (decided on July 8, 2019) rejected the resolution plan submitted by the resolution applicant on the ground of delay and ordered for liquidation of the corporate debtor.

FACTS
State Bank of India (“State Bank”) filed an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (“Code”) for initiation of the corporate insolvency resolution process (“CIRP”) against Adhunik Metaliks Limited and its subsidiary M/s. Zion Steel Limited (“Corporate Debtor”) before the NCLT, Kolkata. In pursuance thereto, Liberty House Group (“Liberty House”) submitted a resolution plan, which was accepted by the committee of creditors (“CoC”) and then was approved by the NCLT, Kolkata.

Liberty House did not take steps to implement the resolution plan. Hence, the CoC filed an application in the NCLT, Kolkata asking for directions to Liberty House for implementation of the resolution plan by making upfront payment or else to pass an order for liquidation of the Corporate Debtor. The NCLT, Kolkata issued notice to Liberty House asking them as to why order of liquidation should not be passed. On an appeal, the National Company Law Appellate Tribunal (“NCLAT”) directed Liberty House to make upfront payment within 30 days. Meanwhile, the NCLT Cuttack was functional and upon failure of Liberty House in making payment, the CoC approached the NCLT, Cuttack for cancellation of the resolution plan and requested to allow them to forfeit the money deposited by Liberty House as part of upfront payment claiming it to be performance security for implementation of the resolution plan.

ISSUE
Whether the resolution plan approved by the NCLT, Kolkata can be rejected for its non-implementation? If so, whether the resolution plan submitted by any other resolution applicant can be considered? If not, whether liquidation can be initiated against the Corporate Debtor?

ARGUMENTS
State Bank and the CoC contended that, since Liberty House failed to make the upfront cash payment of INR 410 crores for more than a year,t here is breach of terms of the resolution plan under Section 74(3) (Punishment for contravention of moratorium or the resolution plan) of the Code, and therefore, the said resolution plan should be rejected. The CoC also requested to forfeit INR 50 Crores deposited by Liberty House as performance security under Regulation 36B(4A) (forfeiture of performance security upon failure in implementation of the resolution plan) of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Person) Regulation, 2016 (“Regulations”).

The CoC argued that an order of liquidation can be passed under Section 33(1) (Initiation of liquidation) of the Code, only if: (i) contingencies are that the adjudicating authority does not receive any resolution plan during 180 or 270 days; or (ii) the adjudicating authority rejects the resolution plan under Section 31 of the Code. Since this case did not fall under any of the aforesaid contingencies, an order of liquidation cannot be passed. Hence, it requested the NCLT, Cuttack to revive the CIRP and allow consideration of the resolution plan submitted by the second highest bidder by excluding the days vested by Liberty House in non-implementation of their plan from the CIRP period.

Liberty House contended that the CoC did not co-operate with them in implementation of the resolution plan as they failed to issue offer letter of equity shares of the Corporate Debtor and thus it was difficult for them to invest funds as per the resolution plan. Liberty House argued that INR 50 crores were deposited as a part of upfront cash payment to show its readiness and willingness in implementation of the resolution plan and thus cannot be forfeited by treating it as performance security.

OBSERVATIONS OF THE NCLT, CUTTACK
The NCLT, Cuttack observed that non-compliance with the order of the NCLAT to make the upfront payment within 30 days amounts to breach of the terms of the resolution plan. Further, the NCLT, Cuttack rejected the arguments of Liberty House by stating that the word “upfront payment” used in the resolution plan cannot be qualified by any condition as sought to be attached subsequently by them.

The NCLT, Cuttack further observed that while approving the resolution plan, the CoC did not ask Liberty House for any performance security for successful implementation of the resolution plan. It also observed that Regulation 36B(4A) of the Regulations was added by an amendment dated April 24, 2019 and thus cannot be applied retrospectively. Hence, the upfront payment of INR 50 crores cannot be forfeited by the CoC.

With regard to reviving the CIRP and considering the resolution plan of the second highest bidder, the NCLT refused to accept the contentions of the CoC. It observed that the resolution plan submitted by second highest bidder was considered earlier and rejected because their investment in the Corporate Debtor was below its liquidation value. The NCLT, Cuttack held that it cannot re-set the clock back to day one. Further, if the second highest bidder was really interested in the affairs of the Corporate Debtor, they still have an opportunity to do so by filing an application under Section 230-232 of the Companies Act, 2013 for merger and amalgamation during liquidation.

DECISION OF THE NCLT, CUTTACK
The NCLT, Cuttack rejected the resolution plan submitted by Liberty House on account of its failure to implement the same and ordered for liquidation of the Corporate Debtor as a going concern under Section 33 of the Code. The NCLT, Cuttack held that the money deposited by Liberty House cannot be said to be performance security and hence, cannot be forfeited by the CoC. However, since Liberty House did not demand the same, the NCLT, Cuttack did not pass any order thereto at this stage.

Vaish Associates Advocates View
The NCLT, Cuttack draws a line between the underlined objective of the Code, that is, to ensure more resolutions than liquidations and basic tenets of the Code wherein a resolution plan once rejected cannot be later considered. An opportunity was given to the CoC to consider all bids received and it had at that point rejected the same by approving the resolution plan submitted by Liberty House.

Thus, in such a scenario, re-setting the clock would go against the spirit of the Code. The NCLT should adopt a stringent approach towards successful bidders who back track on their commitment to implement the plan, and thereby, frustrating the object of the Code to ensure resolution of the corporate debtor within the statutory time limit.

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