Significant Judgments on Insolvency and Bankruptcy Code

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Experts at Sumedha pieced together a significant judgment on insolvency and bankruptcy code. Read through to know what our experts have to say about this.

SIGNIFICANT JUDGMENTS ON
INSOLVENCY AND BANKRUPTCY CODE
(JANUARY, 2022)
Page 1 of 22
DISCLAIMERS:
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Reasonable care has been taken to ensure that the information contained herein is not
misleading or untrue at the time of publication.
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4. Facts and views expressed in the document are subject to change without any notice to the
recipient.
Page 2 of 22
CONTENTS
DISCLAIMERS:....................................................................................................................1
1. APPLICABILITY OF SECTION 29A OR SUPREMACY OF REVIVAL UNDER
THE INSOLVENCY AND BANKRUPTCY CODE? ................................................3
2. BANKS CANNOT EXERCISE LIEN ON FIXED DEPOSIT AFTER INITIATION
OF MORATORIUM UNDER IBC..............................................................................6
3. CAN ADJUDICATING AUTHORITY RECALL ITS ORDER OF INITIATION OF
CIRP/ LIQUIDATION? ...............................................................................................8
4. IMPLEMENTATIONAL DELAYS IN RESOLUTION PLAN ...............................10
5. POWER OF COC TO RECALL ITS APPROVAL?.................................................12
6. SUCCESSFUL BIDDER IN LIQUIDATION ENTITLED TO WITHDRAW ITS
BID? ...........................................................................................................................16
7. TREATMENT AS SECURED CREDITOR- WITHOUT CHARGE
REGISTRATION? .....................................................................................................19
ABOUT SUMEDHA MANAGEMENT SOLUTIONS PVT. LTD....................................21
Page 3 of 22
1. APPLICABILITY OF SECTION 29A OR SUPREMACY OF REVIVAL UNDER
THE INSOLVENCY AND BANKRUPTCY CODE?
Introduction:
In the case of Bank of Baroda vs. MBL Infrastructures Limited1, the Apex Court has provided
the judicial interpretation of Section 29A(h) of the Insolvency and Bankruptcy Code, 2016.
Facts of the case:
(i) On initiation of corporate insolvency resolution process of the Corporate Debtor, two
resolution plans were received by the Resolution Professional. Post which Section 29A
was introduced in the Code, whereby certain disqualifications were laid down for the
resolution applicants.
(ii) The resolution plan was approved by the committee of creditors as well as the
adjudicating authority.
(iii) During the implementation of the plan, one of the financial creditor challenged the
eligibility of the resolution applicant, contending that Section 29A has to be given a
holistic interpretation as the objective is to weed out undesirable persons.
Statutory Interpretation of the Code:
The Supreme Court has in numerous cases discussed the report of the bankruptcy law reforms
committee/ draft bill to understand the object behind a particular provision. At several instances
(recently in Arun Kumar Jagatramka v. Jindal Steel & Power Limited2
), the Apex Court have
emphasised that the ultimate object of the Code is to put the corporate debtor back on the rails.
In Arun Kumar (supra), the Court further considered the need for adopting a purposive
interpretation to Section 29A with the primary aim to revive and restart the corporate debtor,
with liquidation of the corporate debtor being the last resort.
1
https://ibbi.gov.in/uploads/order/a439cd71e7b1f7dcb9644c371e597424.pdf
2
(2021) 7 SCC 474
Page 4 of 22
Further, in Ramesh Kymal v. Siemens Gamesa Renewable Power (P) Ltd.3
, the court
emphasised on timely resolution of a corporate debtor by an effective legal framework for
development of credit markets.
Judgment:
The Apex Court deliberated on the scope of Section 29A, and observed as follows:
(i) If at the time of submission of plan, the resolution applicant was eligible, and thereafter,
by operation of the law, the person becomes ineligible, then the subsequent amended
provision would govern the question of eligibility of resolution applicant. If there is
ineligibility which prohibits a resolution applicant to proceed further and the amendment
being in the nature of providing a better process in the interest of the creditors and the
debtor, the same is required to be followed as against the provision that stood at an earlier
point of time. Thus, date of submission of resolution plan has got no relevance, as it does
not create any right in favour of a resolution applicant, i.e. one cannot say, what is good
today cannot be applied merely because an applicant was eligible to submit a resolution
plan at an earlier point of time.
(ii) Further, highlighting the object of Section 29A, it was determined that Section 29A has
a laudable object of protecting and balancing the interest of the committee of creditors
and the corporate debtor, while shutting the doors to canvas the interests of others.
Accordingly, a resolution applicant can never have an independent right to insist for the
protection of its own interest in the resolution process.
Considering the aforementioned, in the instant case, the Apex Court held that the plan
submitted by the Resolution Applicant ought not to have been entertained since the Resolution
Applicant had executed personal guarantees which were invoked by three of the financial
creditors even prior to the filing of application, therefore, the rigor of Section 29A(h) of the
Code was attracted. However, due to the following reasons, the Apex Court decided to not
interfere with the ongoing implementation of the resolution plan:
3
(2021) 3 SCC 224
Page 5 of 22
(a) The ultimate object of the Code is to put the corporate debtor back on the rails, and the
plan is currently being implemented, whereby the Corporate Debtor is an on-going
concern having thousands of employees.
(b) Majority of creditors had given their approval to the resolution plan after taking into
consideration the techno-economic report pertaining to the viability and feasibility of the
plan.
(c) No prejudice would be caused to the dissenting creditors as their interests would
otherwise be secured by the resolution plan itself, which permits them to get back the
liquidation value of their respective credit limits.
(d) There are many on-going projects of public importance undertaken by the Corporate
Debtor (operated by the Resolution Applicant) in the nature of construction activities
which are at different stages (some completed and some nearing completion).
Concluding Remarks:
In the instant case, the ineligibility of the resolution applicant was ignored and the corporate
debtor was not sent to liquidation, considering the broader object of the Code. However, this
decision should not be regarded as a precedent or a general rule, and should only be considered
as an exceptional instance.
Page 6 of 22
2. BANKS CANNOT EXERCISE LIEN ON FIXED DEPOSIT AFTER INITIATION
OF MORATORIUM UNDER IBC
Introduction:
In Kotak Mahindra Bank Limited vs. Ravindra Loonkar, Resolution Professional of ACIL
Ltd.4
, the Hon’ble NCLAT held that banks cannot unilaterally withhold the possession of fixed
deposits after the commencement of CIRP. Below we discuss the ruling:
Facts of the case:
(i) On initiation of corporate insolvency resolution process of Corporate Debtor, Appellant
Bank submitted its claim with the Interim Resolution Professional, wherein it declared
the details of mutual credit, mutual debts, and other mutual dealings with Corporate
Debtor which may be set off against its claim. Appellant Bank also claimed that it has
exercised general lien over FDRs.
(ii) Resolution Professional (RP) directed the Appellant Bank to close the fixed deposits
placed by Corporate Debtor with Appellant and transfer the amount (including interest
accrued thereon) in another bank to be used for meeting the expenses being borne to run
the affairs of the Corporate Debtor as a going concern.
(iii) Appellant Bank submitted that fixed deposits are forming part of security of Appellant
Bank and that it has priority over redemption of such fixed deposits for adjustment of
debt of Corporate Debtor, and therefore, Appellant Bank rejected RP’s request.
(iv) Accordingly, an application was filed by the resolution professional under Section 60(5)
of IBC, wherein the Adjudicating Authority directed the Appellant Bank to close the
fixed deposits and act as per the instructions of RP. Thereafter, the said matter came up
for consideration before the NCLAT.
4
https://efiling.nclat.gov.in/nclat/order_view.php?path=L05DTEFUX0RvY3VtZW50cy9DSVNfRG9jdW1lbnR
zL2Nhc2Vkb2Mvb3JkZXJzL0RFTEhJLzIwMjItMDEtMDcvY291cnRzLzMvZGFpbHkvMTY0MTU0MDI5N
zIwNzUyNTEyMDk2MWQ3ZWFjOTE1ODU0LnBkZg==
Page 7 of 22
Precedents relied upon:
In Union Bank of India Vs. K.V. Venugopalan5
, the Kerala High Court had held that right of
lien cannot be exercised over fixed deposits, since money placed in fixed deposit is a debt in
the hands of the bank, and therefore, a debt cannot be subjected to lien nor a debtor can exercise
such a right.
In Indian Overseas Bank vs. Mr. Dinkar T. Venkatsubramaniam, RP of Amtek Auto Ltd.6,
NCLAT held that once order of moratorium in terms of provisions of Section 14(1)(c) is
declared, it creates a bar on enforcement of any security interest in respect of Corporate Debtor,
and no recovery action in form of lien or set-off can be exercised by banks in
discharge/settlement of their pre-CIRP dues.
Judgment:
The Hon’ble NCLAT upheld the decision of the Adjudicating Authority and dismissed the
appeal, reiterating the principle laid down in the case of Indian Overseas Bank (supra).
5
1990 SCC OnLine Ker 12
6
https://ibbi.gov.in/webadmin/pdf/order/2017/Nov/15th%20Nov%202017%20in%20the%20matter%20of%20In
dian%20Overseas%20Bank%20Vs.%20Mr.%20Dinkar%20T.%20Venkatsubramaniam%20IRP%20for%20Amt
ek%20Auto%20CA%20(AT)%20267-2017_2017-11-23%2016:46:44.pdf
Page 8 of 22
3. CAN ADJUDICATING AUTHORITY RECALL ITS ORDER OF INITIATION OF
CIRP/ LIQUIDATION?
Introduction:
In Vineet Khosla vs. Edelweiss Asset Reconstruction Company Ltd.7, the Hon’ble NCLAT
has held that every Court/Tribunal has power to recall the order obtained by practicing fraud.
Accordingly, the order of liquidation can be set aside when there is any material irregularity.
Facts of the case:
(i) Adjudicating Authority, vide order dated 15.03.2019, admitted the application filed by
Edelweiss Asset Reconstruction Company Ltd. (“Respondent”) for initiation of
corporate insolvency resolution process against Margra Industries Ltd. (“Corporate
Debtor”).
(ii) The said order was challenged by the suspended-director of the Corporate Debtor before
NCLAT, however, the appeal was dismissed.
(iii) Since there were no resolution plans compliant to the requirements of the request for
resolution plan and provisions of IBC, CoC in its 9th
meeting held on 21.12.2019 resolved
to liquidate the Corporate Debtor.
(iv) Thereafter, RP filed an application under Section 33(1) of IBC for liquidation of
Corporate Debtor.
(v) The suspended director of Corporate Debtor (“Appellant”) filed an application seeking
recall of admission order dated 15.03.2019 on the ground that the claim is barred by
limitation.
(vi) Adjudicating Authority held that limitation issue is a question of fact and law. This issue
should have been raised at the time of admission or at least in the appeal. Moreover, since
the matter was now pending for completion of liquidation, the admission order cannot be
recalled.
(vii) Being aggrieved with the order of liquidation and dismissal of application for recall of
admission order, the Appellant filed an appeal before NCLAT.
7
https://efiling.nclat.gov.in/nclat/order_view.php?path=L05DTEFUX0RvY3VtZW50cy9DSVNfRG9jdW1lbnR
zL2Nhc2Vkb2Mvb3JkZXJzL0RFTEhJLzIwMjItMDEtMDcvY291cnRzLzQvZGFpbHkvMTY0MTU1MDcwN
zQ1MzQ5NTU3OTYxZDgxMzczYzM4YTAucGRm
Page 9 of 22
Precedents relied upon:
In AV Papayya Sastry vs. Government of A.P.8
, the Hon’ble Supreme Court observed as
follows:
“It is thus settled proposition of law that a judgment, decree or order obtained by playing
fraud on the Court, Tribunal or Authority is a nullity and non est in the eye of law. Such
a judgment, decree or order - by the first Court or by the final Court has to be treated as
nullity by every Court, superior or inferior. It can be challenged in any Court, at any
time, in appeal, revision, writ or even in collateral proceedings”.
In United India Insurance Co. Ltd. vs. Rajendra Singh9 also, it was held that every
court/tribunal has power to recall its order which is obtained by practicing fraud.
Judgment:
In the instant case, the Hon’ble NCLAT, vide its judgment dated 07.01.2022, observed that the
respondent did not file any false document in support of the petition. Further, the respondent
did not commit any act of deliberate deception with the design of securing some unfair/
undeserved benefit. Accordingly, it was held that the respondent has not obtained order dated
15.03.2019 by practicing fraud, and therefore, the Adjudicating Authority has no jurisdiction
to recall the admission order.
8
AIR 2007 SC 1546
9
AIR 2000 SC 1165
Page 10 of 22
4. IMPLEMENTATIONAL DELAYS IN RESOLUTION PLAN
Introduction:
In the case of Edelweiss Asset Reconstruction Company Ltd. vs. Peter Beck and Peter
Vermoegensverwaltung Ltd.10
, the main issue that arose before the Hon’ble NCLAT was with
respect to non- submission of an enforceable bank guarantee by the successful resolution
applicant, and other delays in compliance of provisions of the resolution plan. Below we
analyse the case:
Facts of the case:
The resolution plan submitted by Peter Beck and Peter Vermoegensverwaltung Ltd. in the
corporate insolvency resolution process (CIRP) of Sharon Bio Medicine Ltd. was approved by
National Company Law Tribunal, Mumbai Bench, vide order dated 28.02.2018. There were
delays in implementation of the resolution plan, and by order dated 02.02.2021, the NCLT gave
additional time to the successful resolution applicant to infuse funds.
The said order was then challenged before the National Company Law Appellate Tribunal,
wherein the appellant prayed that the CIRP should be re-initiated along with reinstating the
previous resolution professional and 90 days of extra period should be provided in CIRP to
invite expressions of interest for submission of resolution plan.
Relevant Provisions of Law:
The Code provides that if the resolution plan approved by the Adjudicating Authority is
contravened by the corporate debtor, any person other than the corporate debtor, whose
interests are prejudicially affected by such contravention, may make an application to the
Adjudicating Authority for liquidation order [Section 33(3)].
The Code further provides for punishment if the corporate debtor, any of its officers or creditors
or any person on whom the approved resolution plan is binding under Section 31, knowingly
and wilfully contravenes any of the terms of such resolution plan or abets such contravention
10
https://ibbi.gov.in//uploads/order/3b0eace9e891464272cf44a491c08e2a.pdf
Page 11 of 22
[Section 74(3]. As per Section 31(1), an approved resolution plan shall be binding on the
corporate debtor and its employees, members, creditors, including the Central Government,
any State Government or any local authority to whom a debt in respect of the payment of dues
arising under any law for the time being in force, such as authorities to whom statutory dues
are owed, guarantors and other stakeholders involved in the resolution plan.
The Code, however, does not stipulate for any consequences on the resolution applicant, if the
approved plan is contravened by such resolution applicant. The committee of creditors can, at
max, as per the terms of the request for resolution plan, forfeit the earnest money deposit and
the performance security submitted by the successful resolution applicant.
Judgment:
In the present case, the Hon’ble NCLAT, in its judgement dated 05.01.2022, observed that
there is no express provision regarding re-initiation of CIRP, and no application has been made
for initiation of liquidation. In fact, the corporate debtor is a going concern and all the
stakeholders are interested in keeping the Corporate Debtor as a going concern, therefore, the
case is not a fit case for liquidation, and accordingly, the Hon’ble NCLAT granted additional
time to the resolution applicant to comply with its obligations under the resolution plan.
Concluding Remarks:
One may argue that even upon liquidation, the corporate debtor could be sold as a going
concern, however, if such an event does not happen, the corporate debtor would most certainly
face corporate death. Therefore, in author’s opinion, NCLAT should have relied on its
precedent in the case of Ingen Capital Group LLC. vs. Ramkumar S. V.11
, wherein a show
cause notice was issued on the directors of the resolution applicant as to why cost not be
imposed on them, and the NCLAT had further directed that if there is any another resolution
plan compliant with Section 30(2), the resolution professional may place it before the CoC,
and thereafter before the Adjudicating Authority for approval.
11
https://ibbi.gov.in/webadmin/pdf/order/2019/May/In%20the%20matter%20of%20Ingen%20Capital%20Group
%20LLC%20Vs%20Ramkumar%20S.V.%20CA%20(AT)%20No.795-2018_2019-05-01%2019:14:51.pdf
Page 12 of 22
5. POWER OF COC TO RECALL ITS APPROVAL?
Introduction:
In Jaypee Kensingon Boulevard Apartments Welfare Association vs. NBCC (India)
Limited12
, the Hon’ble Supreme Court had held that in case a resolution plan requires
modification, the Adjudicating Authority must send back the resolution plan to committee of
creditors (CoC) to consider the modifications, so as to afford an opportunity to resolution
applicant to modify the plan, and CoC may then re-consider the plan and vote upon same.
Similar understanding reflects even from the Hon’ble Supreme Court decision in Committee
of Creditors of Essar Steel India Ltd vs. Satish Kumar Gupta13
, wherein it had affirmed this
power to remand back. Now, recently, in Bank of Maharashtra vs. Videocon Industries Ltd.14
,
the primary issue that arose for consideration before NCLAT was whether CoC can review its
decision of approving the resolution plan. Below we analyse the judgment:
Facts of the case:
(a) The dissenting financial creditor filed an appeal before NCLAT, praying that the NCLT
order approving the resolution plan should be dismissed, and the plan should be
remanded back to CoC. Primary contentions were as follows:
(i) Discrepancies existed between Form-H and distribution excel sheet shared with the
CoC members, and therefore, the appellant stated that non- disclosure of respective
share of the liquidation value to the CoC members may have resulted in them not
being able to take a proper and prudent decision on the resolution plan. Had the
CoC known the correct share of the liquidation value, they would not have
approved the resolution plan with a huge haircut of 95%, resulting in loss to the
banks/financial institutions handling public money.
(ii) The resolution plan proposes that non-convertible debentures will be issued to the
dissenting financial creditor, which shall be redeemable after five years. Therefore,
the resolution plan did not provide for “upfront” payment in priority to the
dissenting financial creditor, as provided in Section 30(2) of the Insolvency and
12
2021 SCC OnLine SC 253
13
(2020) 8 SCC 53
14
https://ibbi.gov.in//uploads/order/2022-01-06-092523-j5xav-8511af095c7bdb9a5f281970582528db.pdf
Page 13 of 22
Bankruptcy Code, 2016 (“Code”), and Regulations 38 of the Insolvency and
Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons),
2016.
(iii) The amount to be received under the resolution plan by the dissenting financial
creditor is less than the liquidation value which the dissenting financial creditor
would have otherwise received, and hence, contrary to Section 30(2) of the Code.
(iv) While the resolution plan was approved by CoC, prior approval of Competition
Commission of India was not obtained as per proviso to Section 31(4) of the Code.
(b) There were significant observations regarding low value of resolution plan and haircut
of high magnitude being suffered by various classes of stakeholders, including
operational creditors, under the resolution plan.
(c) Public sector banks and financial institutions etc., constituting approx. 95% of the CoC
(out of 95.09% voted in favour) resolved to remand the matter back to CoC for its
reconsideration, through affidavit, considering that CoC, majority of which were public
sector banks and financial institutions, dealing with public money, were acting as
custodian of public trust and discharging statutory role.
Precedents relied upon:
The Hon’ble Supreme Court, in Sakri Vasu vs. State of UP15, held as follows:
“It is well-settled that when a power is given to an authority to do something it includes
such incidental or implied powers which would ensure the proper doing of that thing. In
other words, when any power is expressly granted by the statute, there is impliedly
included in the grant, even without special mention, every power and every control the
denial of which would render the grant itself ineffective. Thus where an Act confers
jurisdiction it impliedly also grants the power of doing all such acts or employ such
means as are essentially necessary to its execution.
15
(2008) 2 SCC 409
Page 14 of 22
21. An express grant of statutory powers carries with it by necessary implication the
authority to use all reasonable means to make such grant effective.”
The Hon’ble Allahabad High Court in Duli Chand vs. State of Uttar Pradesh16
held- “It is a
trite law that power to do also includes the power to undo”.
Similarly, the Hon’ble Bombay High Court, in Rajesh Hansraj Chopra vs. the Competent
Authority & Ors.17, held:
“Section 21 of the General Clauses Act is a general provision how to interpret provisions
of an enactment regulation or rules where certain powers are conferred on certain
authority to issue an order and the extent to which such power could be exercised. In
doing so, such authority is conferred with power to modify, amend or to alter it”.
Relying on the same principle, Hon’ble Bombay High Court had again, in Sunil Gayaprasad
Mishra vs. Rashtra Sant18, held that the approval once granted to the recommendations of the
selection committee to appoint a teacher was considered to be capable of being reviewed and
even withdrawn [See Also: Dhikpathy vs. Chairman Chennai Port Trust19].
Judgment:
Since the provisions of the Code were not complied with, the approval of the resolution plan
was not in accordance with Section 31. Accordingly, the approval of resolution plan by the
CoC as well as Adjudicating Authority was set aside and the plan was remitted back to CoC.
In this regard, the following were the key observations of NCLAT:
(i) Simply stating everywhere that it shall not be less than the amount to be paid to such
creditors in accordance with Section 53 of the Code in the event of liquidation is just
washing off his hands.
(ii) What is being perceived repeatedly by the Apex Court is that commercial wisdom are
totally in the domain of CoC and these business decisions taken by CoCs are non-
justiciable by the Adjudicating Authority. The Adjudicating Authority does not have
16
Writ C- No. 45851 of 2011
17
2001 SCC Online Bom 1145,
18
2012 (5) AllMR 581
19
2001 SCC OnLine Mad 154
Page 15 of 22
power to modify the plan, as held by Hon’ble Apex Court in K.Sashidhar Vs. Indian
Overseas Bank20 and CoC of Essar Steel (supra). The Code under Section 31(1) read
with Section 30(2) has clearly and specifically provided that the Adjudicating Authority
is to see that the resolution plan as approved by the CoC meets the requirements as
referred to in Section 30(2) of the Code, and if the Adjudicating Authority is satisfied
that the laid down criteria are complied with in the resolution plan then they can approve
the plan. If they are not, then the Adjudicating Authority can, at best, send back the
resolution plan for re-consideration of the CoC.
(iii) If the CoC has power to approve the plan, it also has the power to reconsider and review
its own decisions. Just like the board of directors of a company who approves a proposal
may, also at a later date, review, and even annul, the approval, in case there are
implementational difficulties or otherwise. Also, akin to shareholders who sometimes
review their own approvals, based on board of directors’ recommendations, and if
required, the approval is revoked.
Concluding Remarks:
There are several instances were a plan is approved by the CoC, however, the implementation
is delayed, whether due to ongoing litigations or other reasons. In the meantime, if it is found
that there has been material change in the financial position of the resolution applicant, or that
it will not be able to comply with its commitments under the resolution plan, the best possible
recourse for the CoC may be to withdraw its approval. While it was already well settled that
that an authority who has the power to take a decision has equally the power to review the said
decision, now, the CoC can also, in light of the aforementioned case, exercise the power to
review its decision considering the change in circumstances.
20
(2019) 12 SCC 150
Page 16 of 22
6. SUCCESSFUL BIDDER IN LIQUIDATION ENTITLED TO WITHDRAW ITS
BID?
Introduction:
In Visisth Services Limited vs. S. V. Ramani21, the key issue that was considered by the
Hon’ble NCLAT was whether the successful bidder can withdraw its bid after payment of the
EMD and seek for refund of the amount paid on the ground that the offer was a ‘conditional
offer’. Below we discuss the ruling:
Facts of the case:
(i) Appellant purchased e-auction process information document from liquidator upon
payment of Rs. 5 Lakhs.
(ii) On 04.09.2019, Appellant sent an email to liquidator seeking clarifications on several
issues with respect to e-auction process and proposed different payment terms and
specified in the email that their offer of acceptance was conditional to extinguish claims
of financial creditors, tax department, operational creditors, provident fund employees
and other contingent liabilities.
(iii) On 05.09.2019, liquidator issued two emails to the Appellant informing that the terms
and conditions of the bid document could not be changed or revised after public
notification.
(iv) Appellant submitted EMD of Rs. 37,10,000/- to liquidator.
(v) On 08.09.2019, Appellant sent an email to liquidator stating that if any litigation arises
from any source, EMD amount and the bidding document purchase amount was to be
refunded within three days.
(vi) On 26.09.2019, liquidator issued provisional sale letter in favour of Appellant.
(vii) On 29.10.2019, Appellant addressed a letter to liquidator stating the provisional letter of
sale was inconsistent with the terms of payment specified by the Appellant and sought
for refund of the money paid with the interest.
21
https://efiling.nclat.gov.in/nclat/order_view.php?path=L05DTEFUX0RvY3VtZW50cy9DSVNfRG9jdW1lbnR
zL2Nhc2Vkb2Mvb3JkZXJzL0RFTEhJLzIwMjItMDEtMTEvY291cnRzLzMvZGFpbHkvMTY0MTg5ODM3N
DE5MTA4MDEzNjE2MWRkNjE4NjFiMDYwLnBkZg==
Page 17 of 22
(viii) The main case of the Appellant was that since liquidator did not assist the Appellant in
clarifying the liabilities of Corporate Debtor, the Appellant informed the liquidator that
if their bid is not accepted with its terms they would seek to withdraw from the Bid.
Accordingly, Appellant filed an affidavit before the Adjudicating Authority seeking
approval of sale without transfer of any liabilities, and if there exists any impediment, for
withdrawal of Bid and refund of amount paid.
Precedents relied upon:
The Hon’ble Apex Court in Punjab Urban Planning and Development Authority and Ors.
vs. Raghu Nath Gupta and Ors.22 observed as follows:
“After having accepted the offer of the commercial plots in a public auction with a
superimposed condition i.e. on “as-is-where-is” basis and after having accepted the
terms and conditions of the allotment letter, including instalment facility for payment,
the respondents cannot say that they are not bound by the terms and conditions of the
auction notice, as well as that of the allotment letter.”
Again, in UT Chandigarh Admn. vs. Amarjeet Singh23, the Hon’ble Supreme Court observed
as follows:
“19. ….In a public auction of sites, the position is completely different. A person
interested can inspect the sites offered and choose the site which he wants to acquire and
participate in the auction only in regard to such site. Before bidding in the auction, he
knows or is in a position to ascertain, the condition and situation of the site. He knows
about the existence or lack of amenities. The auction is on `as-is-where-is-basis'. With
such knowledge, he participates in the auction and offers a particular bid. There is no
compulsion that he should offer a particular price…..
20. Where there is a public auction without assuring any specific or particular amenities,
and the prospective purchaser/lessee participates in the auction after having an
opportunity of examining the site, the bid in the auction is made keeping in view the
existing situation, position and condition of the site. If all amenities are available, he
22
(2012) 8 SCC 197
23
(2012) 8 SCC 202
Page 18 of 22
would offer a higher amount. If there are no amenities, or if the site suffers from any
disadvantages, he would offer a lesser amount, or may not participate in the auction.
Once with open eyes, a person participates in an auction, he cannot thereafter be heard
to say that he would not pay the balance of the price/premium or the stipulated interest
on the delayed payment, or the ground rent, on the ground that the site suffers from
certain disadvantages or on the ground that amenities are not provided.”
Judgment:
(i) In the declaration signed, bidder unconditionally agreed to abide by the terms of e-
auction, which is inclusive of forfeiture of EMD, in the event bidder did not perform their
obligation after acceptance of their bid. Therefore, now, bidder cannot wriggle out of its
contractual obligations arising out of acceptance of his bid, and cannot be entitled to
EMD amount and amount paid towards bid purchase document, if he does not comply
with the terms of contract.
(ii) If the bidder is allowed to withdraw the bid and seek refund on the ground that their
conditional offer has not been accepted, then liquidation process would be a never ending
one, defeating the scope and objective of IBC.
(iii) Bidder is bound by the terms and conditions of bid document and no communication to
liquidator stating that it is a conditional offer is sustainable. If bidder had any
apprehensions and conditions about liabilities, bidder could have exercised their choice
of not participating in bid, and bidder cannot propose conditions subsequent to their
participation in bid.
Page 19 of 22
7. TREATMENT AS SECURED CREDITOR- WITHOUT CHARGE
REGISTRATION?
Introduction:
In SICOM Limited vs. Mr. Sundaresh Bhat, Liquidator of ABG Shipyard Limited24, the
Hon’ble NCLAT held that Section 77(3) of Companies Act, 2013 (provision of mandatory
registration of a charge) is applicable only to charge created by a ‘company’ and not on
encumbrance created over an asset of a company pursuant to the judgment of Debt Recovery
Tribunal. Below we discuss the ruling:
Facts of the case:
(i) ABG Shipyard Limited (“Corporate Debtor”) had obtained financial assistance from
the Appellant in 2013, and the security was provided by mortgage and hypothecation.
(ii) The account of Corporate Debtor was classified as non-performing asset, and the
Appellant issued notices and reminders to pay outstanding money, and ultimately, filed
an O.A. before Debt Recovery Tribunal, seeking recovery of money.
(iii) DRT, vide its judgment dated 26.04.2017, allowed the O.A. and directed the Appellants
to jointly and severally deposit Rs.144,46,95,879/- within 30 days, failing which due was
to recover from their mortgaged and hypothecated properties.
(iv) Later, on initiation of liquidation of the Corporate Debtor, the Appellant filed its claim
with the liquidator, wherein its claim was categorised as “unsecured” since the Appellant
failed to furnish any document pertaining to ROC charge in support of its security interest
as required under Section 77 of Companies Act, 2013.
Precedents relied upon:
Section 109 of the Companies Act, 1913 came for consideration before Oudh High Court in
Hukmichand vs. Pioneer Mills Ltd.25
, wherein the High Court held that Section 109 was not
applicable when charge is created by operation of law and not by a contract.
24
https://efiling.nclat.gov.in/nclat/order_view.php?path=L05DTEFUX0RvY3VtZW50cy9DSVNfRG9jdW1lbnR
zL2Nhc2Vkb2Mvb3JkZXJzL0RFTEhJLzIwMjItMDEtMDYvY291cnRzLzEvZGFpbHkvMTY0MTQ2MjEyNz
E0ODQzNTIxOTY2MWQ2Yjk2ZjlhNTVmLnBkZg==
25
AIR 1927 Oudh 55
Page 20 of 22
The Hon’ble Calcutta High Court, in Praga Tools Ltd. vs. Official Liquidator of Bengal
Engineering Co. (P) Ltd.26
, held that when security was furnished in pursuant of order of High
Court, which cannot be said to be a charge created by the company, Section 125 of Companies
Act was not applicable.
In Indian Bank vs. Official Liquidator, Chemmeens Exports (P) Ltd. & Ors.27
, the provision
of Section 125 of Companies Act, 1956 came for consideration. Indian Bank had advanced
certain amount to M/s Chemmeens Exports Pvt. Ltd., which was secured by equitable mortgage
by deposit of title deeds of debtor. Winding up proceedings were initiated by the bank. The
bank sought leave of the Company Court to file a suit for recovery, which was granted. In the
suit, Official Liquidator filed written statement taking the plea that the properties of the
Company not having been registered under Section 125, therefore, the charge was void. A
preliminary decree was passed against the Official Liquidator.
The Hon’ble Supreme Court also approved the judgment of Bombay High Court in Suryakant
Natvarlal Surati vs. Kamani Bros. Ltd.28
The Hon’ble Supreme Court, in Kerala State Financial Enterprises Ltd. vs. Official
Liquidator29
, referring to the judgment of Indian Bank (supra), also held that Section 125 of
Companies Act may not be applicable in a case where decree has already been passed.
Judgment:
There being an adjudicatory order in favour of the Appellant, mortgage and hypothecation was
created in favour of Appellant, hence, non-registration of mortgage and hypothecation under
Section 77 of Companies Act cannot be a ground to hold that Appellant was a ‘unsecured
creditor’. Accordingly, the NCLAT held that security interest was created by virtue of
judgment of DRT.
26
1982 SCC OnLine Cal 290
27
(1998) 5 SCC 401
28
(1985) 58 Comp Cas 121
29
(2006) 10 SCC 709
Page 21 of 22
ABOUT SUMEDHA MANAGEMENT SOLUTIONS PVT. LTD.
 Sumedha Management Solutions Pvt. Ltd.
(SMSPL) is sponsored by Sumedha Fiscal
Services Limited (SFSL)- a listed investment
banking company providing various
professional services under IBC;
 SMSPL is an IBBI recognized IPE vide IPE
Recognition no: IBBI/ IPE/0020 & CIN:
U93000WB2017PTC219387;
 Board of Directors of SMSPL consists of
eminent Chartered Accountants and IPs;
 In-house team of lawyers, company
secretaries, MBAs, assisting in legal and
compliance matters;
 Wide bouquet of services- Sumedha group
provides investment banking, insolvency
advisory, business turnaround & growth,
voluntary liquidation, management buy-outs,
resolution application, insolvency
professional, resolution plan preparation and
related advisory;
 Pan India presence - Kolkata, Mumbai, Bengaluru,
New Delhi and Ahmedabad.
Major Services:
 Advise both lenders & borrowers on IBC;
 Assist lenders (both financial & operational)
towards recovery strategy on defaulting ;
 Identification of stressed assets, formulating
strategies, pre-pack plan & execution for making
recoveries;
 Assisting corporates in working out turnaround
strategies & restructuring packages;
 Strategizing for mergers/acquisitions & business
reorganizations;
 Resolution/recovery under IBC with experienced
professionals;
 Proactive and specialized services to help
companies transform themselves.
Page 22 of 22
Registered Office
8B Middleton Street, 6A, Geetanjali Apartment, Kolkata- 700071
T: +91 33 22298936
E: kolkata@sumedhamanagement.com, W: www.sumedhamanagement.com
Ahmedabad
T: +91 79 48905388, M: +91 9328163153
E: ahmedabad@sumedhamanagement.com
Bengaluru
T: +91 80 41242545, M: +91 9901902545
E: bangalore@sumedhamanagement.com
Mumbai
T: +91 22 41718000, M: +91 9820355344
E: mumbai@sumedhamanagement.com
New Delhi
T: +91 11 41654481, M: +91 7042773564
E: delhi@sumedhamanagement.com
BRANCHES
CONTACT US

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Significant Judgments on Insolvency and Bankruptcy Code

  • 1. SIGNIFICANT JUDGMENTS ON INSOLVENCY AND BANKRUPTCY CODE (JANUARY, 2022)
  • 2. Page 1 of 22 DISCLAIMERS: 1. The information contained in this document is extracted from different public sources. Reasonable care has been taken to ensure that the information contained herein is not misleading or untrue at the time of publication. 2. The document is for general information only and we are not soliciting any action based on this material. 3. The document is confidential and prepared for private circulation only. This is not an advertisement material. 4. Facts and views expressed in the document are subject to change without any notice to the recipient.
  • 3. Page 2 of 22 CONTENTS DISCLAIMERS:....................................................................................................................1 1. APPLICABILITY OF SECTION 29A OR SUPREMACY OF REVIVAL UNDER THE INSOLVENCY AND BANKRUPTCY CODE? ................................................3 2. BANKS CANNOT EXERCISE LIEN ON FIXED DEPOSIT AFTER INITIATION OF MORATORIUM UNDER IBC..............................................................................6 3. CAN ADJUDICATING AUTHORITY RECALL ITS ORDER OF INITIATION OF CIRP/ LIQUIDATION? ...............................................................................................8 4. IMPLEMENTATIONAL DELAYS IN RESOLUTION PLAN ...............................10 5. POWER OF COC TO RECALL ITS APPROVAL?.................................................12 6. SUCCESSFUL BIDDER IN LIQUIDATION ENTITLED TO WITHDRAW ITS BID? ...........................................................................................................................16 7. TREATMENT AS SECURED CREDITOR- WITHOUT CHARGE REGISTRATION? .....................................................................................................19 ABOUT SUMEDHA MANAGEMENT SOLUTIONS PVT. LTD....................................21
  • 4. Page 3 of 22 1. APPLICABILITY OF SECTION 29A OR SUPREMACY OF REVIVAL UNDER THE INSOLVENCY AND BANKRUPTCY CODE? Introduction: In the case of Bank of Baroda vs. MBL Infrastructures Limited1, the Apex Court has provided the judicial interpretation of Section 29A(h) of the Insolvency and Bankruptcy Code, 2016. Facts of the case: (i) On initiation of corporate insolvency resolution process of the Corporate Debtor, two resolution plans were received by the Resolution Professional. Post which Section 29A was introduced in the Code, whereby certain disqualifications were laid down for the resolution applicants. (ii) The resolution plan was approved by the committee of creditors as well as the adjudicating authority. (iii) During the implementation of the plan, one of the financial creditor challenged the eligibility of the resolution applicant, contending that Section 29A has to be given a holistic interpretation as the objective is to weed out undesirable persons. Statutory Interpretation of the Code: The Supreme Court has in numerous cases discussed the report of the bankruptcy law reforms committee/ draft bill to understand the object behind a particular provision. At several instances (recently in Arun Kumar Jagatramka v. Jindal Steel & Power Limited2 ), the Apex Court have emphasised that the ultimate object of the Code is to put the corporate debtor back on the rails. In Arun Kumar (supra), the Court further considered the need for adopting a purposive interpretation to Section 29A with the primary aim to revive and restart the corporate debtor, with liquidation of the corporate debtor being the last resort. 1 https://ibbi.gov.in/uploads/order/a439cd71e7b1f7dcb9644c371e597424.pdf 2 (2021) 7 SCC 474
  • 5. Page 4 of 22 Further, in Ramesh Kymal v. Siemens Gamesa Renewable Power (P) Ltd.3 , the court emphasised on timely resolution of a corporate debtor by an effective legal framework for development of credit markets. Judgment: The Apex Court deliberated on the scope of Section 29A, and observed as follows: (i) If at the time of submission of plan, the resolution applicant was eligible, and thereafter, by operation of the law, the person becomes ineligible, then the subsequent amended provision would govern the question of eligibility of resolution applicant. If there is ineligibility which prohibits a resolution applicant to proceed further and the amendment being in the nature of providing a better process in the interest of the creditors and the debtor, the same is required to be followed as against the provision that stood at an earlier point of time. Thus, date of submission of resolution plan has got no relevance, as it does not create any right in favour of a resolution applicant, i.e. one cannot say, what is good today cannot be applied merely because an applicant was eligible to submit a resolution plan at an earlier point of time. (ii) Further, highlighting the object of Section 29A, it was determined that Section 29A has a laudable object of protecting and balancing the interest of the committee of creditors and the corporate debtor, while shutting the doors to canvas the interests of others. Accordingly, a resolution applicant can never have an independent right to insist for the protection of its own interest in the resolution process. Considering the aforementioned, in the instant case, the Apex Court held that the plan submitted by the Resolution Applicant ought not to have been entertained since the Resolution Applicant had executed personal guarantees which were invoked by three of the financial creditors even prior to the filing of application, therefore, the rigor of Section 29A(h) of the Code was attracted. However, due to the following reasons, the Apex Court decided to not interfere with the ongoing implementation of the resolution plan: 3 (2021) 3 SCC 224
  • 6. Page 5 of 22 (a) The ultimate object of the Code is to put the corporate debtor back on the rails, and the plan is currently being implemented, whereby the Corporate Debtor is an on-going concern having thousands of employees. (b) Majority of creditors had given their approval to the resolution plan after taking into consideration the techno-economic report pertaining to the viability and feasibility of the plan. (c) No prejudice would be caused to the dissenting creditors as their interests would otherwise be secured by the resolution plan itself, which permits them to get back the liquidation value of their respective credit limits. (d) There are many on-going projects of public importance undertaken by the Corporate Debtor (operated by the Resolution Applicant) in the nature of construction activities which are at different stages (some completed and some nearing completion). Concluding Remarks: In the instant case, the ineligibility of the resolution applicant was ignored and the corporate debtor was not sent to liquidation, considering the broader object of the Code. However, this decision should not be regarded as a precedent or a general rule, and should only be considered as an exceptional instance.
  • 7. Page 6 of 22 2. BANKS CANNOT EXERCISE LIEN ON FIXED DEPOSIT AFTER INITIATION OF MORATORIUM UNDER IBC Introduction: In Kotak Mahindra Bank Limited vs. Ravindra Loonkar, Resolution Professional of ACIL Ltd.4 , the Hon’ble NCLAT held that banks cannot unilaterally withhold the possession of fixed deposits after the commencement of CIRP. Below we discuss the ruling: Facts of the case: (i) On initiation of corporate insolvency resolution process of Corporate Debtor, Appellant Bank submitted its claim with the Interim Resolution Professional, wherein it declared the details of mutual credit, mutual debts, and other mutual dealings with Corporate Debtor which may be set off against its claim. Appellant Bank also claimed that it has exercised general lien over FDRs. (ii) Resolution Professional (RP) directed the Appellant Bank to close the fixed deposits placed by Corporate Debtor with Appellant and transfer the amount (including interest accrued thereon) in another bank to be used for meeting the expenses being borne to run the affairs of the Corporate Debtor as a going concern. (iii) Appellant Bank submitted that fixed deposits are forming part of security of Appellant Bank and that it has priority over redemption of such fixed deposits for adjustment of debt of Corporate Debtor, and therefore, Appellant Bank rejected RP’s request. (iv) Accordingly, an application was filed by the resolution professional under Section 60(5) of IBC, wherein the Adjudicating Authority directed the Appellant Bank to close the fixed deposits and act as per the instructions of RP. Thereafter, the said matter came up for consideration before the NCLAT. 4 https://efiling.nclat.gov.in/nclat/order_view.php?path=L05DTEFUX0RvY3VtZW50cy9DSVNfRG9jdW1lbnR zL2Nhc2Vkb2Mvb3JkZXJzL0RFTEhJLzIwMjItMDEtMDcvY291cnRzLzMvZGFpbHkvMTY0MTU0MDI5N zIwNzUyNTEyMDk2MWQ3ZWFjOTE1ODU0LnBkZg==
  • 8. Page 7 of 22 Precedents relied upon: In Union Bank of India Vs. K.V. Venugopalan5 , the Kerala High Court had held that right of lien cannot be exercised over fixed deposits, since money placed in fixed deposit is a debt in the hands of the bank, and therefore, a debt cannot be subjected to lien nor a debtor can exercise such a right. In Indian Overseas Bank vs. Mr. Dinkar T. Venkatsubramaniam, RP of Amtek Auto Ltd.6, NCLAT held that once order of moratorium in terms of provisions of Section 14(1)(c) is declared, it creates a bar on enforcement of any security interest in respect of Corporate Debtor, and no recovery action in form of lien or set-off can be exercised by banks in discharge/settlement of their pre-CIRP dues. Judgment: The Hon’ble NCLAT upheld the decision of the Adjudicating Authority and dismissed the appeal, reiterating the principle laid down in the case of Indian Overseas Bank (supra). 5 1990 SCC OnLine Ker 12 6 https://ibbi.gov.in/webadmin/pdf/order/2017/Nov/15th%20Nov%202017%20in%20the%20matter%20of%20In dian%20Overseas%20Bank%20Vs.%20Mr.%20Dinkar%20T.%20Venkatsubramaniam%20IRP%20for%20Amt ek%20Auto%20CA%20(AT)%20267-2017_2017-11-23%2016:46:44.pdf
  • 9. Page 8 of 22 3. CAN ADJUDICATING AUTHORITY RECALL ITS ORDER OF INITIATION OF CIRP/ LIQUIDATION? Introduction: In Vineet Khosla vs. Edelweiss Asset Reconstruction Company Ltd.7, the Hon’ble NCLAT has held that every Court/Tribunal has power to recall the order obtained by practicing fraud. Accordingly, the order of liquidation can be set aside when there is any material irregularity. Facts of the case: (i) Adjudicating Authority, vide order dated 15.03.2019, admitted the application filed by Edelweiss Asset Reconstruction Company Ltd. (“Respondent”) for initiation of corporate insolvency resolution process against Margra Industries Ltd. (“Corporate Debtor”). (ii) The said order was challenged by the suspended-director of the Corporate Debtor before NCLAT, however, the appeal was dismissed. (iii) Since there were no resolution plans compliant to the requirements of the request for resolution plan and provisions of IBC, CoC in its 9th meeting held on 21.12.2019 resolved to liquidate the Corporate Debtor. (iv) Thereafter, RP filed an application under Section 33(1) of IBC for liquidation of Corporate Debtor. (v) The suspended director of Corporate Debtor (“Appellant”) filed an application seeking recall of admission order dated 15.03.2019 on the ground that the claim is barred by limitation. (vi) Adjudicating Authority held that limitation issue is a question of fact and law. This issue should have been raised at the time of admission or at least in the appeal. Moreover, since the matter was now pending for completion of liquidation, the admission order cannot be recalled. (vii) Being aggrieved with the order of liquidation and dismissal of application for recall of admission order, the Appellant filed an appeal before NCLAT. 7 https://efiling.nclat.gov.in/nclat/order_view.php?path=L05DTEFUX0RvY3VtZW50cy9DSVNfRG9jdW1lbnR zL2Nhc2Vkb2Mvb3JkZXJzL0RFTEhJLzIwMjItMDEtMDcvY291cnRzLzQvZGFpbHkvMTY0MTU1MDcwN zQ1MzQ5NTU3OTYxZDgxMzczYzM4YTAucGRm
  • 10. Page 9 of 22 Precedents relied upon: In AV Papayya Sastry vs. Government of A.P.8 , the Hon’ble Supreme Court observed as follows: “It is thus settled proposition of law that a judgment, decree or order obtained by playing fraud on the Court, Tribunal or Authority is a nullity and non est in the eye of law. Such a judgment, decree or order - by the first Court or by the final Court has to be treated as nullity by every Court, superior or inferior. It can be challenged in any Court, at any time, in appeal, revision, writ or even in collateral proceedings”. In United India Insurance Co. Ltd. vs. Rajendra Singh9 also, it was held that every court/tribunal has power to recall its order which is obtained by practicing fraud. Judgment: In the instant case, the Hon’ble NCLAT, vide its judgment dated 07.01.2022, observed that the respondent did not file any false document in support of the petition. Further, the respondent did not commit any act of deliberate deception with the design of securing some unfair/ undeserved benefit. Accordingly, it was held that the respondent has not obtained order dated 15.03.2019 by practicing fraud, and therefore, the Adjudicating Authority has no jurisdiction to recall the admission order. 8 AIR 2007 SC 1546 9 AIR 2000 SC 1165
  • 11. Page 10 of 22 4. IMPLEMENTATIONAL DELAYS IN RESOLUTION PLAN Introduction: In the case of Edelweiss Asset Reconstruction Company Ltd. vs. Peter Beck and Peter Vermoegensverwaltung Ltd.10 , the main issue that arose before the Hon’ble NCLAT was with respect to non- submission of an enforceable bank guarantee by the successful resolution applicant, and other delays in compliance of provisions of the resolution plan. Below we analyse the case: Facts of the case: The resolution plan submitted by Peter Beck and Peter Vermoegensverwaltung Ltd. in the corporate insolvency resolution process (CIRP) of Sharon Bio Medicine Ltd. was approved by National Company Law Tribunal, Mumbai Bench, vide order dated 28.02.2018. There were delays in implementation of the resolution plan, and by order dated 02.02.2021, the NCLT gave additional time to the successful resolution applicant to infuse funds. The said order was then challenged before the National Company Law Appellate Tribunal, wherein the appellant prayed that the CIRP should be re-initiated along with reinstating the previous resolution professional and 90 days of extra period should be provided in CIRP to invite expressions of interest for submission of resolution plan. Relevant Provisions of Law: The Code provides that if the resolution plan approved by the Adjudicating Authority is contravened by the corporate debtor, any person other than the corporate debtor, whose interests are prejudicially affected by such contravention, may make an application to the Adjudicating Authority for liquidation order [Section 33(3)]. The Code further provides for punishment if the corporate debtor, any of its officers or creditors or any person on whom the approved resolution plan is binding under Section 31, knowingly and wilfully contravenes any of the terms of such resolution plan or abets such contravention 10 https://ibbi.gov.in//uploads/order/3b0eace9e891464272cf44a491c08e2a.pdf
  • 12. Page 11 of 22 [Section 74(3]. As per Section 31(1), an approved resolution plan shall be binding on the corporate debtor and its employees, members, creditors, including the Central Government, any State Government or any local authority to whom a debt in respect of the payment of dues arising under any law for the time being in force, such as authorities to whom statutory dues are owed, guarantors and other stakeholders involved in the resolution plan. The Code, however, does not stipulate for any consequences on the resolution applicant, if the approved plan is contravened by such resolution applicant. The committee of creditors can, at max, as per the terms of the request for resolution plan, forfeit the earnest money deposit and the performance security submitted by the successful resolution applicant. Judgment: In the present case, the Hon’ble NCLAT, in its judgement dated 05.01.2022, observed that there is no express provision regarding re-initiation of CIRP, and no application has been made for initiation of liquidation. In fact, the corporate debtor is a going concern and all the stakeholders are interested in keeping the Corporate Debtor as a going concern, therefore, the case is not a fit case for liquidation, and accordingly, the Hon’ble NCLAT granted additional time to the resolution applicant to comply with its obligations under the resolution plan. Concluding Remarks: One may argue that even upon liquidation, the corporate debtor could be sold as a going concern, however, if such an event does not happen, the corporate debtor would most certainly face corporate death. Therefore, in author’s opinion, NCLAT should have relied on its precedent in the case of Ingen Capital Group LLC. vs. Ramkumar S. V.11 , wherein a show cause notice was issued on the directors of the resolution applicant as to why cost not be imposed on them, and the NCLAT had further directed that if there is any another resolution plan compliant with Section 30(2), the resolution professional may place it before the CoC, and thereafter before the Adjudicating Authority for approval. 11 https://ibbi.gov.in/webadmin/pdf/order/2019/May/In%20the%20matter%20of%20Ingen%20Capital%20Group %20LLC%20Vs%20Ramkumar%20S.V.%20CA%20(AT)%20No.795-2018_2019-05-01%2019:14:51.pdf
  • 13. Page 12 of 22 5. POWER OF COC TO RECALL ITS APPROVAL? Introduction: In Jaypee Kensingon Boulevard Apartments Welfare Association vs. NBCC (India) Limited12 , the Hon’ble Supreme Court had held that in case a resolution plan requires modification, the Adjudicating Authority must send back the resolution plan to committee of creditors (CoC) to consider the modifications, so as to afford an opportunity to resolution applicant to modify the plan, and CoC may then re-consider the plan and vote upon same. Similar understanding reflects even from the Hon’ble Supreme Court decision in Committee of Creditors of Essar Steel India Ltd vs. Satish Kumar Gupta13 , wherein it had affirmed this power to remand back. Now, recently, in Bank of Maharashtra vs. Videocon Industries Ltd.14 , the primary issue that arose for consideration before NCLAT was whether CoC can review its decision of approving the resolution plan. Below we analyse the judgment: Facts of the case: (a) The dissenting financial creditor filed an appeal before NCLAT, praying that the NCLT order approving the resolution plan should be dismissed, and the plan should be remanded back to CoC. Primary contentions were as follows: (i) Discrepancies existed between Form-H and distribution excel sheet shared with the CoC members, and therefore, the appellant stated that non- disclosure of respective share of the liquidation value to the CoC members may have resulted in them not being able to take a proper and prudent decision on the resolution plan. Had the CoC known the correct share of the liquidation value, they would not have approved the resolution plan with a huge haircut of 95%, resulting in loss to the banks/financial institutions handling public money. (ii) The resolution plan proposes that non-convertible debentures will be issued to the dissenting financial creditor, which shall be redeemable after five years. Therefore, the resolution plan did not provide for “upfront” payment in priority to the dissenting financial creditor, as provided in Section 30(2) of the Insolvency and 12 2021 SCC OnLine SC 253 13 (2020) 8 SCC 53 14 https://ibbi.gov.in//uploads/order/2022-01-06-092523-j5xav-8511af095c7bdb9a5f281970582528db.pdf
  • 14. Page 13 of 22 Bankruptcy Code, 2016 (“Code”), and Regulations 38 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons), 2016. (iii) The amount to be received under the resolution plan by the dissenting financial creditor is less than the liquidation value which the dissenting financial creditor would have otherwise received, and hence, contrary to Section 30(2) of the Code. (iv) While the resolution plan was approved by CoC, prior approval of Competition Commission of India was not obtained as per proviso to Section 31(4) of the Code. (b) There were significant observations regarding low value of resolution plan and haircut of high magnitude being suffered by various classes of stakeholders, including operational creditors, under the resolution plan. (c) Public sector banks and financial institutions etc., constituting approx. 95% of the CoC (out of 95.09% voted in favour) resolved to remand the matter back to CoC for its reconsideration, through affidavit, considering that CoC, majority of which were public sector banks and financial institutions, dealing with public money, were acting as custodian of public trust and discharging statutory role. Precedents relied upon: The Hon’ble Supreme Court, in Sakri Vasu vs. State of UP15, held as follows: “It is well-settled that when a power is given to an authority to do something it includes such incidental or implied powers which would ensure the proper doing of that thing. In other words, when any power is expressly granted by the statute, there is impliedly included in the grant, even without special mention, every power and every control the denial of which would render the grant itself ineffective. Thus where an Act confers jurisdiction it impliedly also grants the power of doing all such acts or employ such means as are essentially necessary to its execution. 15 (2008) 2 SCC 409
  • 15. Page 14 of 22 21. An express grant of statutory powers carries with it by necessary implication the authority to use all reasonable means to make such grant effective.” The Hon’ble Allahabad High Court in Duli Chand vs. State of Uttar Pradesh16 held- “It is a trite law that power to do also includes the power to undo”. Similarly, the Hon’ble Bombay High Court, in Rajesh Hansraj Chopra vs. the Competent Authority & Ors.17, held: “Section 21 of the General Clauses Act is a general provision how to interpret provisions of an enactment regulation or rules where certain powers are conferred on certain authority to issue an order and the extent to which such power could be exercised. In doing so, such authority is conferred with power to modify, amend or to alter it”. Relying on the same principle, Hon’ble Bombay High Court had again, in Sunil Gayaprasad Mishra vs. Rashtra Sant18, held that the approval once granted to the recommendations of the selection committee to appoint a teacher was considered to be capable of being reviewed and even withdrawn [See Also: Dhikpathy vs. Chairman Chennai Port Trust19]. Judgment: Since the provisions of the Code were not complied with, the approval of the resolution plan was not in accordance with Section 31. Accordingly, the approval of resolution plan by the CoC as well as Adjudicating Authority was set aside and the plan was remitted back to CoC. In this regard, the following were the key observations of NCLAT: (i) Simply stating everywhere that it shall not be less than the amount to be paid to such creditors in accordance with Section 53 of the Code in the event of liquidation is just washing off his hands. (ii) What is being perceived repeatedly by the Apex Court is that commercial wisdom are totally in the domain of CoC and these business decisions taken by CoCs are non- justiciable by the Adjudicating Authority. The Adjudicating Authority does not have 16 Writ C- No. 45851 of 2011 17 2001 SCC Online Bom 1145, 18 2012 (5) AllMR 581 19 2001 SCC OnLine Mad 154
  • 16. Page 15 of 22 power to modify the plan, as held by Hon’ble Apex Court in K.Sashidhar Vs. Indian Overseas Bank20 and CoC of Essar Steel (supra). The Code under Section 31(1) read with Section 30(2) has clearly and specifically provided that the Adjudicating Authority is to see that the resolution plan as approved by the CoC meets the requirements as referred to in Section 30(2) of the Code, and if the Adjudicating Authority is satisfied that the laid down criteria are complied with in the resolution plan then they can approve the plan. If they are not, then the Adjudicating Authority can, at best, send back the resolution plan for re-consideration of the CoC. (iii) If the CoC has power to approve the plan, it also has the power to reconsider and review its own decisions. Just like the board of directors of a company who approves a proposal may, also at a later date, review, and even annul, the approval, in case there are implementational difficulties or otherwise. Also, akin to shareholders who sometimes review their own approvals, based on board of directors’ recommendations, and if required, the approval is revoked. Concluding Remarks: There are several instances were a plan is approved by the CoC, however, the implementation is delayed, whether due to ongoing litigations or other reasons. In the meantime, if it is found that there has been material change in the financial position of the resolution applicant, or that it will not be able to comply with its commitments under the resolution plan, the best possible recourse for the CoC may be to withdraw its approval. While it was already well settled that that an authority who has the power to take a decision has equally the power to review the said decision, now, the CoC can also, in light of the aforementioned case, exercise the power to review its decision considering the change in circumstances. 20 (2019) 12 SCC 150
  • 17. Page 16 of 22 6. SUCCESSFUL BIDDER IN LIQUIDATION ENTITLED TO WITHDRAW ITS BID? Introduction: In Visisth Services Limited vs. S. V. Ramani21, the key issue that was considered by the Hon’ble NCLAT was whether the successful bidder can withdraw its bid after payment of the EMD and seek for refund of the amount paid on the ground that the offer was a ‘conditional offer’. Below we discuss the ruling: Facts of the case: (i) Appellant purchased e-auction process information document from liquidator upon payment of Rs. 5 Lakhs. (ii) On 04.09.2019, Appellant sent an email to liquidator seeking clarifications on several issues with respect to e-auction process and proposed different payment terms and specified in the email that their offer of acceptance was conditional to extinguish claims of financial creditors, tax department, operational creditors, provident fund employees and other contingent liabilities. (iii) On 05.09.2019, liquidator issued two emails to the Appellant informing that the terms and conditions of the bid document could not be changed or revised after public notification. (iv) Appellant submitted EMD of Rs. 37,10,000/- to liquidator. (v) On 08.09.2019, Appellant sent an email to liquidator stating that if any litigation arises from any source, EMD amount and the bidding document purchase amount was to be refunded within three days. (vi) On 26.09.2019, liquidator issued provisional sale letter in favour of Appellant. (vii) On 29.10.2019, Appellant addressed a letter to liquidator stating the provisional letter of sale was inconsistent with the terms of payment specified by the Appellant and sought for refund of the money paid with the interest. 21 https://efiling.nclat.gov.in/nclat/order_view.php?path=L05DTEFUX0RvY3VtZW50cy9DSVNfRG9jdW1lbnR zL2Nhc2Vkb2Mvb3JkZXJzL0RFTEhJLzIwMjItMDEtMTEvY291cnRzLzMvZGFpbHkvMTY0MTg5ODM3N DE5MTA4MDEzNjE2MWRkNjE4NjFiMDYwLnBkZg==
  • 18. Page 17 of 22 (viii) The main case of the Appellant was that since liquidator did not assist the Appellant in clarifying the liabilities of Corporate Debtor, the Appellant informed the liquidator that if their bid is not accepted with its terms they would seek to withdraw from the Bid. Accordingly, Appellant filed an affidavit before the Adjudicating Authority seeking approval of sale without transfer of any liabilities, and if there exists any impediment, for withdrawal of Bid and refund of amount paid. Precedents relied upon: The Hon’ble Apex Court in Punjab Urban Planning and Development Authority and Ors. vs. Raghu Nath Gupta and Ors.22 observed as follows: “After having accepted the offer of the commercial plots in a public auction with a superimposed condition i.e. on “as-is-where-is” basis and after having accepted the terms and conditions of the allotment letter, including instalment facility for payment, the respondents cannot say that they are not bound by the terms and conditions of the auction notice, as well as that of the allotment letter.” Again, in UT Chandigarh Admn. vs. Amarjeet Singh23, the Hon’ble Supreme Court observed as follows: “19. ….In a public auction of sites, the position is completely different. A person interested can inspect the sites offered and choose the site which he wants to acquire and participate in the auction only in regard to such site. Before bidding in the auction, he knows or is in a position to ascertain, the condition and situation of the site. He knows about the existence or lack of amenities. The auction is on `as-is-where-is-basis'. With such knowledge, he participates in the auction and offers a particular bid. There is no compulsion that he should offer a particular price….. 20. Where there is a public auction without assuring any specific or particular amenities, and the prospective purchaser/lessee participates in the auction after having an opportunity of examining the site, the bid in the auction is made keeping in view the existing situation, position and condition of the site. If all amenities are available, he 22 (2012) 8 SCC 197 23 (2012) 8 SCC 202
  • 19. Page 18 of 22 would offer a higher amount. If there are no amenities, or if the site suffers from any disadvantages, he would offer a lesser amount, or may not participate in the auction. Once with open eyes, a person participates in an auction, he cannot thereafter be heard to say that he would not pay the balance of the price/premium or the stipulated interest on the delayed payment, or the ground rent, on the ground that the site suffers from certain disadvantages or on the ground that amenities are not provided.” Judgment: (i) In the declaration signed, bidder unconditionally agreed to abide by the terms of e- auction, which is inclusive of forfeiture of EMD, in the event bidder did not perform their obligation after acceptance of their bid. Therefore, now, bidder cannot wriggle out of its contractual obligations arising out of acceptance of his bid, and cannot be entitled to EMD amount and amount paid towards bid purchase document, if he does not comply with the terms of contract. (ii) If the bidder is allowed to withdraw the bid and seek refund on the ground that their conditional offer has not been accepted, then liquidation process would be a never ending one, defeating the scope and objective of IBC. (iii) Bidder is bound by the terms and conditions of bid document and no communication to liquidator stating that it is a conditional offer is sustainable. If bidder had any apprehensions and conditions about liabilities, bidder could have exercised their choice of not participating in bid, and bidder cannot propose conditions subsequent to their participation in bid.
  • 20. Page 19 of 22 7. TREATMENT AS SECURED CREDITOR- WITHOUT CHARGE REGISTRATION? Introduction: In SICOM Limited vs. Mr. Sundaresh Bhat, Liquidator of ABG Shipyard Limited24, the Hon’ble NCLAT held that Section 77(3) of Companies Act, 2013 (provision of mandatory registration of a charge) is applicable only to charge created by a ‘company’ and not on encumbrance created over an asset of a company pursuant to the judgment of Debt Recovery Tribunal. Below we discuss the ruling: Facts of the case: (i) ABG Shipyard Limited (“Corporate Debtor”) had obtained financial assistance from the Appellant in 2013, and the security was provided by mortgage and hypothecation. (ii) The account of Corporate Debtor was classified as non-performing asset, and the Appellant issued notices and reminders to pay outstanding money, and ultimately, filed an O.A. before Debt Recovery Tribunal, seeking recovery of money. (iii) DRT, vide its judgment dated 26.04.2017, allowed the O.A. and directed the Appellants to jointly and severally deposit Rs.144,46,95,879/- within 30 days, failing which due was to recover from their mortgaged and hypothecated properties. (iv) Later, on initiation of liquidation of the Corporate Debtor, the Appellant filed its claim with the liquidator, wherein its claim was categorised as “unsecured” since the Appellant failed to furnish any document pertaining to ROC charge in support of its security interest as required under Section 77 of Companies Act, 2013. Precedents relied upon: Section 109 of the Companies Act, 1913 came for consideration before Oudh High Court in Hukmichand vs. Pioneer Mills Ltd.25 , wherein the High Court held that Section 109 was not applicable when charge is created by operation of law and not by a contract. 24 https://efiling.nclat.gov.in/nclat/order_view.php?path=L05DTEFUX0RvY3VtZW50cy9DSVNfRG9jdW1lbnR zL2Nhc2Vkb2Mvb3JkZXJzL0RFTEhJLzIwMjItMDEtMDYvY291cnRzLzEvZGFpbHkvMTY0MTQ2MjEyNz E0ODQzNTIxOTY2MWQ2Yjk2ZjlhNTVmLnBkZg== 25 AIR 1927 Oudh 55
  • 21. Page 20 of 22 The Hon’ble Calcutta High Court, in Praga Tools Ltd. vs. Official Liquidator of Bengal Engineering Co. (P) Ltd.26 , held that when security was furnished in pursuant of order of High Court, which cannot be said to be a charge created by the company, Section 125 of Companies Act was not applicable. In Indian Bank vs. Official Liquidator, Chemmeens Exports (P) Ltd. & Ors.27 , the provision of Section 125 of Companies Act, 1956 came for consideration. Indian Bank had advanced certain amount to M/s Chemmeens Exports Pvt. Ltd., which was secured by equitable mortgage by deposit of title deeds of debtor. Winding up proceedings were initiated by the bank. The bank sought leave of the Company Court to file a suit for recovery, which was granted. In the suit, Official Liquidator filed written statement taking the plea that the properties of the Company not having been registered under Section 125, therefore, the charge was void. A preliminary decree was passed against the Official Liquidator. The Hon’ble Supreme Court also approved the judgment of Bombay High Court in Suryakant Natvarlal Surati vs. Kamani Bros. Ltd.28 The Hon’ble Supreme Court, in Kerala State Financial Enterprises Ltd. vs. Official Liquidator29 , referring to the judgment of Indian Bank (supra), also held that Section 125 of Companies Act may not be applicable in a case where decree has already been passed. Judgment: There being an adjudicatory order in favour of the Appellant, mortgage and hypothecation was created in favour of Appellant, hence, non-registration of mortgage and hypothecation under Section 77 of Companies Act cannot be a ground to hold that Appellant was a ‘unsecured creditor’. Accordingly, the NCLAT held that security interest was created by virtue of judgment of DRT. 26 1982 SCC OnLine Cal 290 27 (1998) 5 SCC 401 28 (1985) 58 Comp Cas 121 29 (2006) 10 SCC 709
  • 22. Page 21 of 22 ABOUT SUMEDHA MANAGEMENT SOLUTIONS PVT. LTD.  Sumedha Management Solutions Pvt. Ltd. (SMSPL) is sponsored by Sumedha Fiscal Services Limited (SFSL)- a listed investment banking company providing various professional services under IBC;  SMSPL is an IBBI recognized IPE vide IPE Recognition no: IBBI/ IPE/0020 & CIN: U93000WB2017PTC219387;  Board of Directors of SMSPL consists of eminent Chartered Accountants and IPs;  In-house team of lawyers, company secretaries, MBAs, assisting in legal and compliance matters;  Wide bouquet of services- Sumedha group provides investment banking, insolvency advisory, business turnaround & growth, voluntary liquidation, management buy-outs, resolution application, insolvency professional, resolution plan preparation and related advisory;  Pan India presence - Kolkata, Mumbai, Bengaluru, New Delhi and Ahmedabad. Major Services:  Advise both lenders & borrowers on IBC;  Assist lenders (both financial & operational) towards recovery strategy on defaulting ;  Identification of stressed assets, formulating strategies, pre-pack plan & execution for making recoveries;  Assisting corporates in working out turnaround strategies & restructuring packages;  Strategizing for mergers/acquisitions & business reorganizations;  Resolution/recovery under IBC with experienced professionals;  Proactive and specialized services to help companies transform themselves.
  • 23. Page 22 of 22 Registered Office 8B Middleton Street, 6A, Geetanjali Apartment, Kolkata- 700071 T: +91 33 22298936 E: kolkata@sumedhamanagement.com, W: www.sumedhamanagement.com Ahmedabad T: +91 79 48905388, M: +91 9328163153 E: ahmedabad@sumedhamanagement.com Bengaluru T: +91 80 41242545, M: +91 9901902545 E: bangalore@sumedhamanagement.com Mumbai T: +91 22 41718000, M: +91 9820355344 E: mumbai@sumedhamanagement.com New Delhi T: +91 11 41654481, M: +91 7042773564 E: delhi@sumedhamanagement.com BRANCHES CONTACT US