Page 87 – Vaish Associates Advocates

Jurisdiction determined as per Section 42 and the doctrine of Forum Conveniens

Aasma Mohammed Farooq and Ors. v. Union of India and Ors.
Link to Judgement / MANU/DE/4514/2018

In this case a writ petition had been filed before the Delhi High Court (Court) challenging the provisions of Section 5(1), 5(5), 8(3), 8(5) and 8(6) of the Prevention of Money Laundering Act, 2002 (‘Act’). The Petitioners sought quashing of provisional attachment, impugned original complaint and the show cause notice.

The notice to show cause under Section 8 of the Act had been issued by the Adjudicating Authority, based in Delhi.

On behalf of the respondent, the maintainability of the petition was objected on the ground that it would go against the principles of ‘forum conveniens’ and so the Court should not entertain this petition.

As per Section 42 of Act, i.e., Appeal to High Court – Any person aggrieved by any decision or order of the Appellate Tribunal may file an appeal to the High Court within sixty days from the date of communication of the decision or order of the Appellate Tribunal to him on any question of law or fact arising out of such order:

Provided that the High Court may, if it is satisfied that the appellant was prevented by sufficient cause from filing the appeal within the said period, allow it to be filed within a further period not exceeding sixty days.

Explanation.-For the purposes of this section, “High Court” means-

(i) The High Court within the jurisdiction of which the aggrieved party ordinarily resides or carries on business or personally works for gain;

and

(ii) Where the Central Government is the aggrieved party, the High Court within the jurisdiction of which the respondent, or in a case where there are more than one respondent, any of the respondents, ordinarily resides or carries on business or personally works for gain.

In this case, reference had also been placed on the judgment of Five Judges of this Court in the case of M/s. Sterling Agro Industries Ltd. v. Union of India & Ors. (AIR 2011 Delhi 174)[http://lobis.nic.in/ddir/dhc/DMA/judgement/01-08-2011/DMA01082011CW65702010.pdf] to contend that even if the impugned order has been issued by an Authority and the same constitutes a part of cause of action to make the writ petition maintainable in this Court, yet the same may not be a singular factor for this Court to decide the matter on merits and this Court can refuse to exercise its discretionary jurisdiction by invoking the doctrine of forum conveniens.

The Court held that because the notice under Section 8 of the Act has been issued by the Authority in Delhi it can entertain the writ petition because a part of cause of action has arisen under the jurisdiction of this Court but decided against it as it is not the forum conveniens.

Since the petitioner was based in Mumbai and the properties were located in Mumbai. Moreover, the provisional attachment order had been passed in Mumbai. The complaint though, filed before the Adjudicating Authority in Delhi, it encompassed all the facts that had arisen in Mumbai. It is only after filing of the original complaint as contemplated under Section 5(5) of the Act before the Adjudicating Authority, which is located in Delhi that the impugned notice had been issued from Delhi but the fact remains that nothing had happened in Delhi. Only notice to show cause had been issued by Adjudicating Authority based in Delhi.

Therefore, the Court decided that in this case the Bombay High Court shall be the forum conveniens and it is where the party aggrieved against the orders passed by the Appellate Authority shall approach, in terms of Section 42 of the Act and thus, this Court shall not entertain the present writ petition.

The writ petition was dismissed as infructuous, with liberty to the Petitioner to approach the Bombay High Court.

For more information please write to Mr. Vijay Pal Dalmia at [email protected]

Independence of proceedings of Special Courts and Enforcement Authorities under PMLA

Case: Navdeep Singh vs. Assistant Director, Directorate of Enforcement
Judgement Copy / MANU/PH/1764/2018

In this case before the High Court of Punjab and Haryana (Court), the petitioner, Navdeep Singh, had filed a petition for quashing of complaint under the Prevention of Money Laundering Act, 2002 (PMLA).

Prior to this, there was specific information with the police to the effect that the petitioner had indulged in sale of narcotics and it was pursuant to the said secret information that the petitioner and his co-accused, Srabjit Singh, were arrested and the petitioner was found in possession of 95 grams of heroin and an amount of Rupees 9 lacs was also recovered from him. Consequently, FIR was lodged for offence under Sections 21 and 25 of Narcotic Drugs and Psychotropic Substances Act, 1985 (NDPS Act). Since offence under Section 21 of NDPS Act is listed amongst the scheduled offences in the ‘Schedule’ to the PMLA, therefore, an offence under Section 3 punishable under Section 4 of the PMLA was attracted.

When the proceedings under Section 5 of the PMLA Act for attachment of amount of Rupees 9 lacs were initiated and provisional attachment order was passed which was confirmed by the Adjudicating Authority, the trial in respect of the NDPS case was still pending. Even when the complaint was filed, the trial was still pending and it was afterwards that the trial concluded and the petitioner and his co-accused were convicted.

The material question before the Court was whether prosecution for offence under Section 3 of PMLA could be initiated during the pendency of attachment proceedings or before the attachment confirmation attains finality or before the conviction of the petitioner under the NDPS Act attains finality.

The counsel for respondents contended that there is no statutory bar for prosecuting the accused under PMLA either during pendency of proceedings under any other Act or even during pendency of the attachment proceedings under PMLA and placed reliance upon judgment of Delhi High Court in J. Sekar v. Union of India (2018 III AD ( Delhi ) 638) [http://lobis.nic.in/ddir/dhc/SMD/judgement/11-01-2018/SMD11012018CW53202017.pdf] in which the Division Bench, after examining the scheme of PMLA observed as follows:

“36. There are, therefore, two parallel streams-

(i) criminal proceedings before the Special Court for trial of the offences under Section 3 read with Section 4 PMLA and;

(ii) the departmental proceedings before the authorities instituted under the PMLA, i.e. the Director, the AA, and the AT, the orders of which are subject to appeal before the High Court.”

The Court held that the proceedings for attachment are separate and in the nature of interim measures required to be taken to avoid a situation where proceedings are rendered redundant on account of the property being squandered away. If the designated officer has reason to believe, based on the material in his possession, that a person is in possession of proceeds of crime and, such proceeds, are likely to be concealed, transferred or dealt with in any manner which may result in frustrating proceedings relating to confiscation of ‘proceeds of crime’, he may proceed to attach the property in question. In fact it is in anticipation of prosecution that attachment proceedings are initiated.

Additionally, the second proviso to Section 5(1), when read with the first proviso, would itself make it clear that attachment or pendency of attachment proceedings would not affect filing of a complaint under PMLA. While the first proviso to Section 5(1) envisages the provisional attachment being made simultaneously with the filing of the challan in the criminal Court for offences under Sections 3 and 4 of PMLA, the second proviso carves out an exception by providing that in case the Director or any other authorised officer has reason to believe that if such property involved in money laundering is not attached immediately the non-attachment of the property is likely to frustrate any proceeding under this Act, the attachment may be made prior to initiation of criminal proceedings.

While proceedings under Sections 5 and 8 of PMLA are conducted by Enforcement Authorities, a complaint for offence under section 3 of PMLA is dealt with by a Special Court presided over by a judicial officer. Needless to mention that the Special Court is neither bound not governed not influenced by any order passed by the Enforcement Authorities and has to act independently on the basis of evidence led before it.

IT was also held that it was not the order of attachment which is foundation for lodging a complaint under section 3 of PMLA but it is the factum of recovery of the amount of Rupees 9 lakhs, prima facie believed to be ‘proceeds of crime’ which forms the foundation for prosecuting the accused for offence under section 3 of PMLA.

Thus it was found that there is no ground for quashing the complaint and the petition was dismissed.

For more information please write to Mr. Vijay Pal Dalmia at [email protected]

Taxbuzz | Taxation Laws (Amendment) Ordinance, 2019 clarified by Circular No. 29 of 2019

Taxation Laws (Amendment) Ordinance, 2019 clarified by Circular No. 29 of 2019

The Taxation Laws (Amendment) Ordinance, 2019 (“the Ordinance”), promulgated by the President on 20.09.2019, had interalia introduced a new provision, viz., section 115BAA in the Income Tax Act, 1961 (“the Act”) providing for a lower rate of tax at 22% (plus applicable surcharge and cess) for domestic companies, subject to fulfilment of certain conditions. Simultaneously, section 115JB relating to payment of Minimum Alternate Tax (‘MAT’) on book profit was also amended to provide that companies opting for preferential rate of tax under section 115BAA of the Act will be exempt from MAT on book profit under the former section.
In our last TaxBuzz dated 25th September, 2019, where we had analyzed the aforesaid amendments introduced by the Ordinance, we had opined that since the provisions of section 115JB have been made inapplicable to companies opting preferential rate of tax under section 115BAA, the set-off of brought forward MAT credit available under section 115JAA against tax liability under the new provision would be highly contentious.
Further, the issue whether brought forward loss needs to be segregated to determine amount of loss attributable to claim of additional depreciation under section 32(1)(iia), for the purposes of determining tax liability under the new provision of section 115BAA, was ambiguous.
The CBDT vide Circular No.29 of 2019 dated 02.10.2019 (“the Circular”) has clarified that once a company has opted for preferential rate of tax of 25.17% under section 115BAA, such company shall not, in the year of exercise of option or in any succeeding assessment year be:
- allowed to claim set-off of any brought forward loss attributable to additional depreciation under section 32(1)(iia) of the Act;
- eligible to set-off brought forward MAT credit.

Observations/ Comments

Considering that the CBDT vide aforesaid Circular has clarified the legislative intent of not allowing set-off of MAT credit once the company opts for preferential of tax under the new provisions of section 115BAA of the Act, it may not, in our view, be possible to contend otherwise.
It is advisable that for companies having unutilized MAT credit to first exhaust the same by remaining under the existing scheme of taxation and thereafter opt for the new scheme of preferential tax under section 115BAA. It may further be noted that since MAT payable under section 115JB has been reduced from 18.5% to 15% vide the Ordinance, there would be scope for increased set-off of brought forward MAT credit by 3.5%, if the companies opt to remain under the existing scheme of taxation.

For more information please write to:
Mr. Gaurav Jain at [email protected]
Mr. Deepesh Jain at [email protected]

Taxbuzz | The Taxation Laws (Amendment) Ordinance, 2019

With aim to provide fillip to the sluggish economy and promote growth and investment, the Government has by Ordinance made amendments in the Income Tax Act, 1961 (“the Act”) vide the Taxation Laws (Amendment) Act, 2019 which was promulgated by the President on 20.09.2019.

Key features of the aforesaid amendments are as under:

Section 115BAA – Lower tax rates introduced for domestic companies

A new section 115BAA has been inserted w.e.f. assessment year 2020-21 which provides option to a domestic company to pay tax at lower rate of 22% (plus applicable surcharge and cess) as opposed to normal tax rate of 30%/ 25% (plus applicable surcharge and cess), provided the income is computed-
- without claiming exemption/ deduction
  - u/s 10AA [SEZ units],
  - u/s 32(1)(iia) [additional depreciation qua new plant and machinery @ 20%/ 30%],
  - u/s 32AD [15% on new assets in undertaking set up in specified backward areas in Andhra Pradesh, Bihar, Telangana, and West Bengal]
  - u/s 33AB [specified percentage of amounts deposited with Tea/ Coffee/ Rubber Board]
  - u/s 33ABA [specified percentage of amounts deposited in Site Restoration Account]
  - u/s 35(1)(ii)/(iia), 35(2AA) [specified deduction for scientific research]
  - u/s 35AD [expenditure on specified business]
  - u/s 35CCC [expenditure on agricultural extension project]
  - u/s 35CCD [expenditure on skill development project]
  - under Part C of Chapter VIA except section 80JJAA of the Act (such as 80IA/ IB/ IC/ ID/ IE etc.)
- without set-off of any brought forward losses to the extent such loss relates to deductions mentioned above. Such losses would also not be allowed to be carried forward to subsequent years.
- after claiming depreciation other than additional depreciation u/s 32(1)(iia).
Benefit of lower rate under the aforesaid section can be exercised by the company from any year commencing from AY 2020-21 or onwards. Such option is to be exercised in prescribed manner, before due date of return u/s 139(1) for the year in which option is exercised. Option once exercised would be binding for subsequent years and cannot be withdrawn.

Observations/ Comments:

Effective tax rate u/s 115BAA would be 25.168% (including 10% surcharge and 4% cess). Surcharge in respect of income chargeable to tax under section 115BAA is prescribed @ 10%.
Benefit is available only to domestic companies and not to other categories of assessee like partnership firm, LLP, foreign company etc.
Domestic company will have to weigh the benefit of lower rate under this provision with effective tax rate under existing scheme arrived after taking specified deduction(s)/ exemption(s). If the benefit on accounts of deduction u/s 10AA or additional depreciation or under Chapter VIA (Part C) etc. are expected to be substantial over the years, the domestic company may choose not to exercise such option. Option u/s 115BAA in such cases may be exercised later when benefit of such deductions/ exemption recedes.
Only brought forward losses attributable to specified deductions/ exemptions are not allowable. Other brought forward losses and unabsorbed depreciation u/s 32(2) are allowed to be set off.

Section 115BAB – Lower tax rates introduced for domestic manufacturing companies

New section 115BAB has been inserted w.e.f. assessment year 2020-21 which provides option to a domestic manufacturing company to pay tax at a lower rate of 15% (plus applicable surcharge and cess) if such company is set-up and registered on or after 1st October, 2019 and commences manufacturing activity upto 31st March, 2023.
Surcharge in respect of income chargeable to tax under section 115BAA is prescribed @ 10%.
Akin to the provisions of section 115BAA, income for the purposes of the aforesaid preferential rate has to be computed without claiming exemptions / deductions, set-off of brought forward losses, as prescribed in that section and discussed above.
Additionally, following conditions must be fulfilled by the company to avail benefit of lower tax rate:
- company must not be formed by splitting up, or the reconstruction of a business already in existence;
- company must not use machinery or plant previously used for any purpose. Used plant and machinery to the extent of 20% of total value of plant and machinery is permissible;
- company must not use building previously used as a hotel or a convention centre.
Similar to provisions of section 80IA(10), sub-section (4) of section 115BAB empowers the assessing officer to determine/ deem reasonable profits of such domestic company, if such company has business arrangements or enters transaction with connected parties in a manner that it produces more than ordinary profits. Domestic transfer pricing provisions contained in section 92BA have been made applicable to transactions of eligible companies with connected parties.
Akin to provisions of section 115BAA, if company opts for lower rate of tax given under this section, it shall not be able to subsequently withdraw the option.
Comparative tax rates for assessment year 2020-21 pre and post the Ordinance for domestic companies are as under:

Section 115JB – Reduced tax on book profit of companies not claiming benefit u/s 115BAA/ 115BAB

Provisions of section 115JB have been amended to reduce the Minimum Alternate Tax (MAT) on book profit from 18.5% to 15%, w.e.f. assessment year 2020-21.
Companies availing benefit of lower tax rate under new provisions of sections 115BAA/ 115BAB have been exempted from MAT on book profit under section 115JB.

Observations/ Comments:

Considering that section 115JB shall not be applicable to companies opting for tax under the new provisions of sections 115BAA/ 115BAB, the issue whether brought forward MAT credit u/s 115JAA shall be available for set off against the tax liability under the new provisions would be contentious.

Section 115QA – Tax on buyback of shares

Section 115QA was inserted vide Finance Act, 2013 providing for 20% tax in the hands of domestic company on ‘distributed income’ to the shareholders on buyback of unlisted shares.
The aforesaid section was amended by the Finance (No.2) Act, 2019 to also include buy back of shares listed on a recognised stock exchange.
Since the aforesaid amendment was brought in the middle of the year through the interim budget (Finance No.2) Act, 2019 on 05.07.2019, the same was considered to be harsh for listed companies which had on the basis of the existing provisions of no buy back tax, announced buy back of its shares prior to promulgation of the aforesaid new provision.
As a measure of relief to such companies, section 115QA has been further amended to exclude transaction of buy-back of listed shares announced before 5th July, 2019.

Rationalization of surcharge

Vide Finance Act (No.2), 2019, surcharge on income tax was increased for individuals, HUF, BOI, AOP and artificial judicial person falling in higher income bracket in the following manner:

The aforesaid higher surcharge of 25% and 37% introduced vide Finance Act (No.2), 2019 has been removed for-
- Foreign Institutional Investors (FIIs) deriving income by way of capital gains from transfer of securities covered under section 115AD (1)(b);
- individuals, HUF, BOI, AOP and artificial judicial person deriving income by way of capital gains on transfer of equity shares or units of equity-oriented funds (covered u/s 111A and 112A) .
Unlike individuals / HUF, BOI, AOP the benefit of lower surcharge to FIIs covered under section 115AD(1)(b) is available on capital gains from transfer of all securities like debt oriented funds and not just equity/ equity oriented funds.
Withdrawal of higher surcharge would encourage/ boost investments in capital investments.

CBDT Circular- High Depreciation on Motor Vehicles

With intent to provide boost to ailing automobile sector, new higher rates of depreciation have been notified by CBDT for motor cars/ vehicles acquired on or after 23rd August, 2019 and before 1st April, 2020 and put to use by that date:
- For motor-cars other than those used in a business of running them on hire, rate of depreciation is enhanced to 30% as against existing rate of 15%;
- For motor buses, motor lorries and motor taxis used in a business of running them on hire, rate of depreciation is enhanced to 45% as against existing rate of 30%.

For more information please write to:
Mr. Gaurav Jain at [email protected]
Mr. Deepesh Jain at [email protected]

Supreme Court: Application for corporate insolvency resolution process can be withdrawn even after issuance of invitation for expression of interest

The Supreme Court in the case of Brilliant Alloys Private Limited v. Mr. S. Rajagopal and Others (decided on December 14, 2018) held that the application for corporate insolvency resolution process can be withdrawn even after issuance of invitation for expression of interest.

FACTS
The National Company Law Tribunal, Chennai (“NCLT”) on September 28, 2017 allowed the petition filed by Brilliant Alloys Private Limited (“Corporate Debtor”) under Section 10 (Initiation of corporate insolvency resolution process by corporate applicant) of the Insolvency and Bankruptcy Code, 2016 (“Code”) and ordered commencement of the corporate insolvency resolution process (“CIRP”) and imposed moratorium as per the provisions of Section 14 (Moratorium) of the Code.

Since the settlement happened after the issue of invitation for expression of interest, an application under Section 12A of the Code (Withdrawal of application under Section 7, 8 and 10) would not have been allowed. Therefore, the resolution professional filed an application under Section 60(5)(a) of the Code (Adjudicating authority for corporate persons) which states that the NCLT shall have the jurisdiction to entertain or dispose of any application or proceeding by or against the corporate debtor or corporate person. The aforesaid application was to allow for the withdrawal of the CIRP and remove the corporate debtor from the clutches of the Code. The Division Bench of the NCLT passed an order dated November 11, 2018 dismissing the application stating that since Regulation 30A of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (“CIRP Regulations”) imposes conditions for withdrawal of application that it has to be filed before invitation for expression of interest, NCLT cannot pass an order allowing the withdrawal ignoring the conditional clause. Aggrieved by the order of the NCLT, the Corporate Debtor approached the Supreme Court under Article 136 (Special leave to appeal by the Supreme Court) of the Constitution of India and the following issue came up for determination:

ISSUE
Whether the application for CIRP can be withdrawn even after the issuance of invitation for expression of interest under the Code.

OBSERVATIONS OF THE SUPREME COURT
The Supreme Court observed that despite the Corporate Debtor, financial creditor and operational creditor agreeing to the same, the only reason the application to withdraw the CIRP failed was because Regulation 30A of the CIRP Regulations states that withdrawal cannot be permitted after issuance of invitation for expression of interest. Regulation 30A of the CIRP Regulations has been reproduced hereinbelow:

“30A. Withdrawal of application.

An application for withdrawal under section 12A shall be submitted to the interim resolution professional or the resolution professional, as the case may be, in Form FA of the Schedule before issue of invitation for expression of interest under regulation 36A.

The application in sub-regulation (1) shall be accompanied by a bank guarantee towards estimated cost incurred for purposes of clauses (c) and (d) of regulation 31 till the date of application.

The committee shall consider the application made under sub-regulation (1) within seven days of its constitution or seven days of receipt of the application, whichever is later.

Where the application is approved by the committee with ninety percent voting share, the resolution professional shall submit the application under sub-regulation (1) to the Adjudicating Authority on behalf of the applicant, within three days of such approval.

The Adjudicating Authority may, by order, approve the application submitted under sub-regulation (4).”

The Supreme Court, however went on to state that Regulation 30A of the CIRP Regulations must be read with the main provisions of Section 12A of the Code, which contains no such stipulations. Section 12A of the Code is reproduced below.

“12A. Withdrawal of application admitted under section 7, 9 or 10
The Adjudicating Authority may allow the withdrawal of application admitted under section 7 or section 9 or section 10, on an application made by the applicant with the approval of ninety per cent voting share of the committee of creditors, in such manner as may be specified.”

The Supreme Court observed that the stipulation under Regulation 30A of the CIRP Regulations can only be considered to be directory and would depend on the facts of each case.

DECISION OF THE SUPREME COURT
The Supreme Court set aside the NCLT’s order and allowed the settlement. Subsequently, the CIRP was annulled.

Vaish Associates Advocates View
This judgement keeps in mind the central theme of the Code, which is insolvency resolution of corporate persons and maximization of value of assets of all the stakeholders. In this instance, since the Corporate Debtor, operational creditors and financial creditors agreed to the withdrawal of the application for CIRP, the Supreme Court decided that it would be more beneficial to forgo the procedural aspects that had bound the NCLT from allowing the application for the withdrawal of the CIRP.

However, questions might be raised about the applicability of other procedural requirements of Regulation 30A of the CIRP Regulations on other cases of withdrawal, since the Supreme Court has clearly stated that the stipulations contained therein would depend upon facts of each case.

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

NCLAT: Liability of the corporate debtor towards the promoter-personal guarantor can be waived by the resolution plan

The National Company Law Appellate Tribunal (“NCLAT”) in Lalit Mishra and Others v. Sharon Bio Medicine Limited and Others (decided on December 19, 2018) held that a resolution plan that discharged the liability of the corporate debtor to pay off its personal guarantors who were also the promoters was not discriminatory in nature.

FACTS
By way of order dated February 28, 2018, the National Company Law Tribunal, Mumbai (“NCLT, Mumbai”) approved the resolution plan approved by the committee of creditors of Sharon Bio Medicine Limited (“Corporate Debtor”). The dispute arose when the promoters of the Corporate Debtor (“Appellants”) felt short changed as the resolution plan did not provide for their dues, as personal guarantors, to be paid off.

The resolution plan stated that the personal guarantee provided by the existing promoters of the Corporate Debtor shall result in no liability towards the Corporate Debtor or the successful resolution applicants and all the securities of the Corporate Debtor would be released. Further, the resolution plan also envisaged a selective reduction of the share capital of the Corporate Debtor more particularly (i) the entire shareholding of the promoter group and secured lenders; and (ii) up to 90% of the equity shares held by the public shareholders. This resulted in the Appellants challenging the order of the NCLT, Mumbai approving the resolution plan on two counts:

The resolution plan did not envisage paying off the Appellants who were the promoters of the Corporate Debtor.

The resolution plan was discriminatory towards the Appellants who were also the personal guarantors of the Corporate Debtor.

ISSUE
Whether NCLT, Mumbai should have approved the resolution plan in light of the personal guarantors excluded from being paid off?

ARGUMENTS
The Appellants submitted that the payment terms provided in the resolution plan were in contravention to the applicable provisions of law. They also submitted that the successful resolution applicant had arbitrarily reduced or written off substantial liabilities of the Appellants without any legal basis. It was further pleaded that the lenders had not been treated similarly and restructuring for its entire claims of the Corporate Debtor was against the provisions of the Insolvency and Bankruptcy Code, 2016 (“Code”).

The Appellants argued that the security interest which includes the personal guarantees of the Appellants had been reduced to ‘nil’ under the resolution plan. Therefore, the resolution plan was contrary to Section 133 and 140 of the Indian Contract Act, 1872 (“Contract Act“). Section 133 of the Contract Act provides that if any change is made in the terms of the contract between the principal debtor and the creditor without the surety’s consent, it will discharge the surety from transactions subsequent to the change.

Further, Section 140 of the Contract Act deals with the right of subrogation to the surety, which provides that when the surety has paid the guaranteed debt or performed a guaranteed duty, it steps into the shoes of the creditor and all rights of the creditor start to vest with the surety.

The submissions of the Respondent were not recorded in the judgement.

OBSERVATIONS OF THE NCLAT
The NCLAT observed that one of the primary objects of the Code is maximization of the value of the assets of the Corporate Debtor and then to balance the interest of all the creditors. Further the Code prohibits the promoters from gaining, directly or indirectly, control of the Corporate Debtor, or benefiting from the corporate insolvency resolution process or its outcome. The Code seeks to protect creditors of the Corporate Debtor by preventing promoters from rewarding themselves at the expense of creditors and undermining the insolvency processes. This is evident from the fact that powers of the promoters as the members of the board of directors of the Corporate Debtor are suspended once the resolution process begins and the promoters and shareholders have no right of representation, participation or voting in the meeting of the committee of creditors.

The NCLAT also observed that the personal guarantors who had filed the appeal in the present matter were the promoters, who contributed to the insolvency of the Corporate Debtor. Therefore, a resolution plan that does not envisage a payment of dues to the Appellants in their capacity as promoters /personal guarantors or discharges the liability of the Corporate Debtor as well as successful resolution applicant would not be discriminatory in nature.

The NCLAT also held that the liability of guarantors is co-extensive with the borrower. Also, it was not the intention of the Code to benefit the personal guarantors by excluding exercise of legal remedies available in law to the creditors, to recover legitimate dues by enforcing the personal guarantees, which are independent contracts.

DECISION OF THE NCLAT
The NCLAT held that resolution plan does not discriminate against the promoters/shareholders/personal guarantors and therefore dismissed the appeal filed by the Appellants.

Vaish Associates Advocates View
The NCLAT held that the resolution plan can effectively deny a personal guarantor the right of subrogation enshrined in the Contract Act. It is trite to mention that promoters or related parties are usually the ones who provide personal guarantees to the corporate debtors. It has been observed in some cases, that the promoters are the ones driving a company to insolvency and in such cases, providing a less favourable payment arrangement or, no payment at all under a resolution plan for such promoters compared to other creditors or even shareholders would be far from discriminatory.

This is in line with the spirit of the judgement in case of J.R. Agro Industries Private Limited v. Swadisht Oils Private Limited (decided on July 24, 2018) where the National Company Law Tribunal, Allahabad (“NCLT Allahabad”) ordered a modification of a resolution plan that gave priority to the related party financial creditors over the operational creditors. The NCLT Allahabad applied the principle enshrined in paragraph 55 of the UNCITRAL Legislative Guide which specifies that when an organisation owes debts to more than one creditor, the priority scheme established under the applicable law may provide for subordination of certain types of claim: for example, the determination of the priority of related party claims.

Further, the doctrine of equitable subordination also provides that a court can permit the subordination of a controlling shareholder’s claims upon debt to those of other bona fide creditors in bankruptcy, if the controlling shareholder has behaved unfairly or wrongly towards the company and its outside creditors. In line with the aforementioned decision of the NCLT Allahabad and the doctrine of equitable subordination, this judgement acts equitably by differentiating the promoters from other creditors and shareholders.