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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.

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

Supreme Court: Former employee can be appointed as an arbitrator

The Supreme Court in the case of Government of Haryana PWD Haryana (B and R) Branch v. M/s G. F. Toll Road Private Limited and Others (dated January 3, 2019) held that the Arbitration and Conciliation Act, 1996 (“Arbitration Act”) does not disqualify a former employee from acting as an arbitrator, provided there are no reasonably justifiable apprehensions as to his independence and neutrality.

FACTS
M/s G. F. Toll Road Private Limited (“Respondent 1”) entered into a contract with the Government of Haryana, PWD Haryana (B and R) Branch (“Appellant”) for construction, operation and maintenance of Gurgaon-Faridabad Road and Ballabhgarh-Sohna Road on December 12, 2008. The parties further entered into a Concession Agreement dated January 31, 2009 (“Agreement”) for the same. Clause 39.2.2 of the Agreement (Dispute resolution) is reproduced hereinbelow:

“There shall be a Board of three arbitrators of whom each party shall select one and the third arbitrator shall be appointed in accordance with the Rules of Arbitration of the Indian Council of Arbitration”.

Subsequently, disputes arose between the parties and the Indian Council of Arbitration (“Respondent 2”) was requested to commence arbitration proceedings by a letter dated March 30, 2015.

The Appellant appointed a retired Engineer-in-Chief, Mr. R. K. Aggarwal, who was a retired employee of the State of Haryana as its nominee arbitrator. Respondent 2, which was conducting the arbitration proceedings, advised the Appellant to reconsider its choice on the grounds that there might be justifiable doubts with respect to his integrity and impartiality. Respondent 1 raised an objection alleging the same.

Consequently, the Appellant requested for a period of 30 days to appoint an alternative arbitrator. However, before the 30 day period was complete, the Respondent 2 informed the Appellant that it had already appointed a nominee arbitrator as well as the presiding officer. The Appellant sought to challenge the above and filed a application under Section 15 (Termination of mandate and substitution of arbitrator) of the Arbitration Act before the Chandigarh District Court and an objection under Section 16 (Competence of arbitral tribunal to rule on its jurisdiction) of the Arbitration Act before the arbitral tribunal itself. Both these contentions were dismissed. A civil revision petition was also filed by the Appellant before the Punjab and Haryana High Court, which was dismissed. Aggrieved by the judgement of the Punjab and Haryana High Court, the Appellant filed a special leave petition before the Supreme Court.

ISSUE
Whether a former employee can be appointed as an arbitrator under the provisions of the amended Arbitration Act.

ARGUMENTS
The Appellant argued that the appointment of the nominee arbitrator was illegal and contrary to the rules laid down by the Respondent 2. Further, it was argued that since it has been more than ten years since Mr. Aggarwal’s retirement, there cannot exist any proclivity or bias. The Appellant cited the judgement of the House of Lords in Locabail Limited v. Bayfield Properties [(2002 (1) All ER 465)] which stated:

“The greater the passage of time between the event relied on as showing a danger of bias and the case in which the objection is, raised, the weaker (other things being equal) the objection will be.”

The Respondent 1 and the Respondent 2 (collectively referred to as the “Respondents”) argued that the appointment of Mr. Aggarwal as the arbitrator was inappropriate as he is a retired employee of the Appellant and that his ability to be fair, just and impartial is dubious. The Respondents also argued that the Arbitration and Conciliation (Amendment) Act, 2015 (“2015 Amendment”), which added the Fifth Schedule to the Arbitration Act, enumerates grounds which give rise to justifiable doubts as to the independence or impartiality of arbitrators. Part 1 of the Fifth Schedule of the Arbitration Act states that the impartiality of an arbitrator can be questioned, if:

“The arbitrator is an employee, consultant, advisor or has any other past or present business relationship with a party.”

OBSERVATIONS OF THE SUPREME COURT
The Supreme Court in its judgement clarified that even though the 2015 Amendment would not apply in this case as the appointment in question was made before the amendment was passed, the amendment itself does not preclude any person who was an ex-employee from being appointed as an arbitrator. The Supreme Court ruled that the words “is an” indicates that the person so nominated is only disqualified if he/she is a present/current employee, consultant, or advisor of one of the parties. It further observed that the words “other” indicates a relationship other than an employee, consultant or an advisor and therefore held that the word “other” cannot be used to widen the scope of the section to include former employees.

The Supreme Court further stated that the contention raised by the Respondents that there would be bias was not substantiated by any evidence and it could not be objectively determined. It held that mere allegations of bias without a factual matrix supporting the same could not end up disqualifying an arbitrator.

DECISION OF THE SUPREME COURT
The Supreme Court set aside the earlier judgement of the Punjab and Haryana High Court and stated that the appointment of Mr. Aggarwal was valid. However, during the pendency of the proceedings, both parties mutually agreed to arbitration being conducted by a single arbitrator in supersession of the arbitration clause in the Agreement, and therefore the Supreme Court directed that the sole arbitrator shall proceed in continuation of the previously-constituted arbitral tribunal.

Vaish Associates Advocates View
This judgement of the Supreme Court clarifies an important proposition of law regarding the appointment of a former employee as an arbitrator post the 2015 Amendment. It clarifies that even though the person is a former employee of a party, that in itself cannot disqualify him from being appointed as an arbitrator. Further, the burden to show that the appointed arbitrator cannot exercise his/her mandate without bias or favoritism is firmly placed on the alleging party. It is also clarified that mere allegations are not enough to give rise to justifiable doubts as to the independence or impartiality of an arbitrator under the Fifth Schedule of the Arbitration Act added in the 2015 Amendment and therefore the same should be substantiated by sufficient evidence.

Therefore, this judgement can be construed as a pro-arbitration judgement. However, the courts must be vigilant as bias must be judged on a case-to-case basis, and in cases where there can be an obvious indication of bias, the judiciary must step in to ensure that there is no impropriety.

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

Supreme Court: ‘Administrative difficulties’ cannot be a valid reason for condoning the delay in challenging a domestic award beyond the statutory period prescribed

The Supreme Court in the case of M/s Simplex Infrastructure Limited v. Union of India (decided on December 5, 2018) held that administrative difficulties cannot be a valid reason to condone a delay above and beyond the statutory period prescribed under the Arbitration and Conciliation Act, 1996 (“Arbitration Act”).

FACTS
M/s Simplex Infrastructure Limited (“Appellant”), a contractor, entered into an agreement dated January 5, 2006, for the construction of permanent shelters in the tsunami-hit Andaman and Nicobar Islands with the Union of India (“Respondent”). Due to differences with regard to the performance of the construction work, the parties were referred to arbitration.

On October 27, 2014, the arbitrator made an award in favour of the Appellant. The Respondent received the copy of the award on October 31, 2014. Aggrieved by the award, the Respondent filed an application under Section 34 (Application for setting aside arbitral award) of the Arbitration Act on January 30, 2015 before the District Judge, Port Blair. On February 12, 2016, the District Judge dismissed the Respondent’s application for want of jurisdiction. On March 28, 2016, the Respondent filed an application under Section 34 of the Arbitration Act before the Calcutta High Court for challenging the arbitral award along with an application for condonation of a delay of 514 days on ground that there was a bona fide mistake in filing the application before the wrong forum and the Respondent’s counsel caused delay due to which necessary formalities were not complied with within the prescribed time. The Calcutta High Court allowed the Respondent’s application and condoned the delay. Aggrieved by the decision of the Calcutta High Court, the Appellant filed an appeal in the Supreme Court and the following issue came up for determination:

ISSUE
Whether the Calcutta High Court was justified in condoning a delay of 514 days by the Respondent in filing the application under Section 34 of the Arbitration Act?

Relevant Provision
Section 34(3) of the Arbitration Act states as follows:
“34.Application for setting aside arbitral award.

(3) An application for setting aside may not be made after three months have elapsed from the date on which the party making that application had received the arbitral award or, if a request had been made under section 33, from the date on which that request had been disposed of by the arbitral tribunal:

Provided that if the Court is satisfied that the applicant was prevented by sufficient cause from making the application within the said period of three months it may entertain the application within a further period of thirty days, but not thereafter.”

ARGUMENTS
The Appellant argued that even if the benefit of Section 14 of the Limitation Act, 1963 (“Limitation Act”), which deals with the “exclusion of time of proceeding bona fide” in a court without jurisdiction subject to satisfaction of certain conditions, was extended to the Respondent in filing the application under Section 34 of the Arbitration Act, there would still be a delay of 131 days which could not be condoned in view of the specific statutory limitation prescribed under Section 34(3) of the Arbitration Act.

The Respondent argued that delay in filing an application under Section 34 of the Arbitration Act was due to the fact that departmental office was located at Port Blair, Andaman and it was a time-consuming process for obtaining permission from the circle office at Chennai. Hence, there were no willful latches on its part and the delay was caused due to inevitable administrative difficulties of obtaining directions from higher officials. The Respondent in this context relied on the case of Union of India v. Tecco Trichy Engineers & Contractors [(2005) 4 SCC 239], wherein the Supreme Court condoned the delay of 3 months and 27 days and observed that the service of the arbitral award on the general manager could not be taken to be sufficient notice to constitute the starting point of limitation for the purpose of Section 34(3) of the Arbitration Act.

OBSERVATIONS OF THE SUPREME COURT
The Supreme Court examined Section 34(3) of the Arbitration Act which provides that the application for setting aside the award could be made within 3 months from the date of receipt of the arbitral award and the period can only be extended for a further period of 30 days on showing sufficient cause and not thereafter. The Supreme Court observed that the use of the words “but not thereafter” in the proviso makes it clear that the extension cannot be given beyond 30 days. Relying on the case of Union of India v. Popular Construction Company [(2001) 8 SCC 470], the Supreme Court observed that Section 5 of the Limitation Act (Extension of prescribed period on sufficient cause) has no application to the application filed under Section 34 of the Arbitration Act.

The Supreme Court further observed that even if the benefit of Section 14 of the Limitation Act (Exclusion of time of proceeding bona fide in court without jurisdiction) in respect of the period spent in pursuing the proceedings before the District Judge is given to the Respondent, there will still be a delay of 131 days in filing the application under Section 34 of the Arbitration Act before the Calcutta High Court which was beyond the strict timelines prescribed under Section 34(3) of the Arbitration Act. The Supreme Court differentiated facts of the present case with the facts of the case relied upon by the Respondent by holding that there is no dispute with respect to the party who received the arbitral award in the instant matter. With regard to obtaining permission from the circle office at Chennai, the Supreme Court observed that administrative difficulties would not be a valid reason to condone a delay above and beyond the statutory prescribed period under Section 34 of the Arbitration Act.

DECISION OF THE SUPREME COURT
The Supreme Court set aside the judgement rendered by the Calcutta High Court and dismissed the application for condonation of delay filed under Section 34(3)of the Arbitration Act on the ground that it was barred by limitation.

Vaish Associates Advocates View
Strictly interpreting the provisions of law, the Supreme Court in this case, has set aside the application filed by the Respondent beyond the statutory period prescribed under Section 34(3) of the Arbitration Act. While arriving at the conclusion, the Supreme Court laid emphasis on use of words “but not thereafter” in the proviso to Section 34(3) of the Arbitration Act. The said judgment clearly lays down the view that courts should not exercise their powers beyond what has been prescribed in the Arbitration Act as that will only defeat the legislative intent behind the enactment of the said proviso.

Reaffirming its earlier judgement in case of Consolidated Engineering Enterprises v. Principal Secretary, Irrigation Department [(2008) 7 SCC 169] on applicability of Section 14 of the Limitation Act on the application filed under Section 34(3) of the Arbitration Act, the Supreme Court brought more clarity in computing the period of limitation in challenging an arbitral award. Though this judgment will serve as a precedent in the importance of filing the application within the limitation period prescribed under the law, the Supreme Court has failed to lay down any criteria for determining as to what would constitute an ‘administrative difficulty’ by the party filing the application for condonation of delay and therefore the same will have to be examined on a case to case basis.

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

Challenge to resolution plan by SEBI dismissed by National Company Law Appellate Tribunal

National Company Law Appellate Tribunal (“NCLAT”) in Securities and Exchange Board of India v. Assam Company India Limited and Others (decided on August 29, 2019) held that a resolution plan requiring delisting of shares of the corporate debtor against which Securities Appellate Tribunal (“SAT”) had passed an interim order would be valid.

FACTS
After a Corporate Insolvency Resolution Process (“CIRP”) was initiated against Assam Company India Limited (“Corporate Debtor”), by an order dated September 20, 2018, National Company Law Tribunal, Guwahati Bench (“NCLT Guwahati”) approved the resolution plan submitted by BRS Ventures Investment Limited (“Successful Resolution Applicant”). Securities and Exchange Board of India (“SEBI”) challenged the order of approval of the said resolution plan as the said resolution plan provided for delisting the shares of the Corporate Debtor.

Before the initiation of the CIRP, SEBI had received a letter from the Ministry of Corporate Affairs (“MCA”) dated June 09, 2017 (“MCA Letter”) along with a copy of letter dated May 23, 2017 from Serious Fraud Investigation Office (“SFIO”) annexing a list of 331 shell companies, the Corporate Debtor being one of them. Accordingly, SEBI issued interim directions to the concerned stock exchanges to take certain actions against the Corporate Debtor. This prompted the Corporate Debtor to approach SAT which resulted in an adverse interim order by the SAT requiring a forensic audit to be conducted on the Corporate Debtor. Various opportunities were given thereafter to the Corporate Debtor to file its reply or objections to the said interim order, however it failed to do so. Instead, the Corporate Debtor filed a writ petition before the Guwahati High Court challenging the MCA Letter wherein the Guwahati High Court set aside the MCA Letter. SEBI challenged the said order before a larger bench of the Guwahati High Court. Thereafter, SEBI received an intimation from the stock exchanges that NCLT Guwahati had approved a resolution plan which provided for delisting of the equity shares of the Corporate Debtor. Aggrieved by the approval of the resolution plan, SEBI approached the NCLAT.

ISSUE
Whether the order of NCLT Guwahati approving the resolution plan of the Corporate Debtor should be reversed?

ARGUMENTS
The counsel for SEBI submitted that the approved resolution plan had the effect of denuding the jurisdiction of SEBI under the provisions of the Securities and Exchange Board of India Act, 1992 (“SEBI Act”) in an indirect manner. Further, the Corporate Debtor had not taken any steps to file a reply or objections to the interim order of the SAT. All of this contravenes SEBI Act and would accordingly be hit by Section 30(2)(e) of the Insolvency and Bankruptcy Code, 2016 (“IBC”). It was also argued that the effect of the impugned clause in the resolution plan was that the equity shares of the Corporate Debtor shall stand delisted from the concerned stock exchanges which will not only render the action initiated by SEBI in conjunction with the said stock exchanges against the Corporate Debtor, nugatory and ineffective, but also compel public shareholders to exit for a very meagre amount, which would not be in the interest of investors and the securities market.

The investigations of SEBI under the provisions of the SEBI Act and the regulations made thereunder, other laws specified in the secretarial audit report and prima facie observations regarding misuse of books of funds by the Corporate Debtor ought not be permitted to be scuttled by adopting the method of delisting of the equity shares of the Corporate Debtor, by way of approval of the resolution plan in an attempt to wriggle out of the jurisdiction of and proceedings instituted by SEBI. Additionally, the resolution plan should not have been proceeded without a right to be heard being given to SEBI. Further, it was also submitted that the Single Judge of the Guwahati High Court had only quashed the MCA Letter and not the letter of the SFIO.

It was argued for the Corporate Debtor and the Successful Resolution Applicant that the sole ground taken by SEBI was that there are pending investigations initiated against the Corporate Debtor as a shell company and therefore the delisting of equity shares should not be allowed in terms of the resolution plan. However, the Guwahati High Court had already set aside the investigation. In the appeal filed by SEBI against the order of the Guwahati High Court, no order of stay had been passed. Further, the Corporate Debtor cannot be treated as a shell company after it has been taken over by Successful Resolution Applicant pursuant to the resolution plan. It was submitted that apart from protecting rights of all the stakeholders including financial creditors and operational creditors, the rights of public shareholders had also been protected.

The liquidation value of the Corporate Debtor would be much lower than the amount payable to financial creditors and therefore the liquidation value of the Corporate Debtor had been assessed to be NIL. Further, the Successful Resolution Applicant in its plan has provided a sum of INR 1.82 crores for the public shareholders which is in consonance with the Gazette Notification dated May 31, 2018 issued by SEBI for delisting of shares pursuant to the resolution plan approved under Section 31 of the IBC. The resolution plan provided for exit route to the public shareholders by earmarking INR 1.82 crores for cancellation of their shares and no individual and/or entity having any dues had been deprived of any amount under the approved resolution plan.

Since the approved resolution plan had taken care of interest of the public shareholders and all the stakeholders, the apprehension of SEBI was completely misplaced.

FINDINGS OF THE NCLAT
NCLAT referred to the relevant portions of the resolution plan submitted by the Successful Resolution Applicant concerning the delisting of the shares of the Corporate Debtor. It also referred to Section 30(2)(e) and Section 32 read with Section 61 of the IBC which deal with approvals of resolution plans and appeals from order approving the resolution plan. One of the grounds for examining a resolution plan and where an appeal can be filed against an order approving a resolution plan is if the said resolution plan is in contravention of the provisions of any law for the time being in force. The argument of SEBI was that the resolution plan was against the interim order of SAT. NCLAT held that such alleged violation of the interim order passed by SEBI cannot be held to be as against ‘any existing provision of law’. Accordingly, the appeal against the order of NCLT, Guwahati is not maintainable.

However, NCLAT stated that its order shall not come in the way of SEBI or any competent authority taking any steps against erstwhile promoters, directors or officers of the Corporate Debtor, if any or all of them had violated any of the provisions under the SEBI Act or rules framed thereunder or under any other law.

DECISION OF THE NCLAT
NCLAT upheld the order of NCLT, Guwahati approving the resolution plan submitted by the Successful Resolution Applicant and dismissed the appeal filed by SEBI.

Vaish Associates Advocates View
This judgement comes at a time where an IBC v. SEBI dispute is sub judice in an appeal before the Supreme Court resulting from the judgement of NCLT, Principal Bench in Bhanu Ram v. HBN Dairies and Allied Limited (decided on April 30, 2019). In the said case, the properties of the corporate debtor had been attached by SEBI. CIRP was initiated against the corporate debtor and due to the coming in force of a moratorium on the assets of the corporate debtor, after the initiation of CIRP, SEBI was directed to detach the properties of the corporate debtor. NCLT in the said case held that due to the non-obstante clause in the IBC, provisions of IBC would prevail over the provisions of SEBI and hence the properties of the corporate debtor should be detached. Aggrieved by this order, an appeal has been filed before the Supreme Court by SEBI in the case of SEBI v. Rohit Sehgal and Others.

In the instant case, NCLAT has interpreted Section 61(3)(i) of the IBC which provides that if a resolution plan is in contravention of any of the provisions of any law for the time being in force, an appeal can be preferred against an order approving such a resolution plan. As per this judgement, an alleged violation of the SAT interim order does not qualify as a violation of the law in force. It is curious to note that NCLAT has not made any observations regarding the appeal filed against the order of the Single Judge Bench of the Guwahati High Court by SEBI.

The apex Court’s decision in the appeal preferred in the case of SEBI v. Rohit Sehgal and Others may ultimately resolve the conflict between the contradictory provisions of the SEBI Act and the IBC.

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.