LatestLaws.com's Yearly Digest of the Insolvency and Bankruptcy Code Cases of 2023
LatestLaws.com's Yearly Digest of the Insolvency and Bankruptcy Code Cases of 2023, compiled exclusively for you, contains landmark decisions on Insolvency and Bankruptcy before NCLT and NCLAT and other ancillary issues related thereto, and much more in one place. Stay updated, Good People, with LatestLaws.com!
A. Supreme Court of India
The Hon’ble Supreme Court noted that Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as “IBC”) is a time bound procedure. It was observed that the Appellant had delay of 287 days. It should have been on the Appellant to find out whether the Corporate Debtor was undergoing CIRP.
It was opined that Section 15 of the IBC and Regulation 6 of the IBBI Regulations mandate a public announcement of the CIRP through newspapers. This would constitute deemed knowledge on the Appellant. In any case, their plea of not being aware of newspaper pronouncements is not one which should be available to a commercial party.
The Supreme Court made a significant observation regarding the responsibility of an auction purchaser towards the property purchased. The Court pointed out that an Official Liquidator could not guarantee or warrant the condition of the sold property. Therefore, it was the purchaser's responsibility to conduct a thorough investigation of the title and encumbrances of the property.
B. NCLT
1. NCLT, New Delhi rules: Amendment in pleadings under Sec 7 can be done at any stage
The NCLT, New Delhi Bench held that the amendment of pleadings in an Application filed under Section 7 of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as “IBC”), can be done at any stage of the matter.
2. NCLT, Mumbai Bench rules: No debt due if the assignment deed is insufficiently stamped
The NCLT, Mumbai Bench expounded that an instrument which is not stamped or insufficiently stamped in accordance with the Stamps Act is not an enforceable instrument and, hence, is a void contract in terms of provisions of the Contract Act. Accordingly, such instrument cannot be taken in evidence by the Court.
In the present case, since the liability of the Corporate Debtor arose from the assignment deed, there was no debt due on account of the deed being insufficiently stamped.
The NCLT, Mumbai Bench held that the amounts due (rentals for the period) to an owner or lessor where such property is occupied by or in the possession of the corporate debtor, who was barred to recover his property on account of Moratorium under Section 14 of the IBC is included in the definition of Insolvency Resolution Process Costs.
Accordingly, the dues of Applicant was admitted in the liquidation proceedings. However, it was clarified that the dues would be settled only as per Section 53 of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as “IBC”).
4. NCLAT, New Delhi rules that fraudulent transactions ought to be proved beyond reasonable doubt
The NCLAT, New Delhi Bench has opined that to prove any transaction to be collusive and fraudulent in nature, the degree of proof and evidence required should be of unimpeachable nature and beyond reasonable doubt. The Bench also noted that the scope and jurisdiction of the NCLT is summary in nature.
The NCLT, New Delhi Bench noted that the definition of financial products covers securities and different types of contracts which are not defined under the Insolvency and Bankruptcy Code, 2016 ( hereinafter referred to as “IBC”). Therefore, the Securities Contracts (Regulation) Act, 1956 was looked at.
It was opined that the Shares, Scrips, Stocks, Bonds, Debentures, Debenture Stocks etc., are included under the term “Securities” and hence, can be treated as financial products as per Section 3(15) of the IBC.
Noting that the Corporate Applicant deals in securities, it was expounded that the Corporate Applicant would be a financial service provider and was registered with SEBI.
Therefore, Corporate Applicant was outside the purview of the Corporate Person as defined under Section 3(17) of the IBC and hence, could not file a Section 10 Application.
6. NCLT, Mumbai Bench rules: Any subsequent agreement will not change the nature of transaction
The NCLT, Mumbai Bench expounded that any agreement cannot alter the nature of the transaction and hence, the financial creditor will remain to be an allottee.
In the present case, the Corporate Debtor could not start the construction for flat and subsequently the amount received for purchase of flat was converted to a loan that had to be repaid. The Tribunal noted that the actual nature of transaction was between the parties as builder and allottee. However, in lieu of Section 5(7) read with 5(8)(f) of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as “IBC”), it was propounded that the CIRP was to be filed by minimum of 100 of allottees under the same real estate project. In the present case, a single allottee had commenced the CIRP.
7. NCLT, Mumbai Bench expounds: Homebuyers can only vote on resolution plan as a class
The NCLT, Mumbai Bench propounded that homebuyers can vote in favour or against the plan only as a class. Therefore, there is no locus standi for some of the home buyers who are otherwise in the minority also to oppose the plan as dissatisfied home buyers.
The NCLT, Mumbai Bench ruled that if there is a work contract between the parties and there exists a dispute regarding the quantum of work done and amount paid, the same would amount to pre-existing dispute and hence, Section 9 of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as “IBC”) application will be liable to be dismissed.
The NCLT, Mumbai Bench opined that a petition under Section 9 of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as “IBC”) is not maintainable if there exists a pre-existing dispute between the parties.
In the present case, the parties entered into a yearly clearance and forwarding Agent Agreement against which even the Corporate Debtor had counterclaims. Therefore, the Bench ruled that this was evidence of the fact that there existed pre-existing dispute between the parties.
The NCLT, Kochi Bench expounded that for a Section 7 of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as “IBC”) application to be disposed of, impleadment of an Independent Chartered Accountant is not necessary. Regarding, the impleadment of the shareholder of the Corporate Debtor, it was ruled that neither he is a necessary party nor a proper party. Therefore, even the shareholder is not required to be impleaded as a party.
The NCLT, Kolkata Bench has opined that arbitral proceedings cannot continue after Section 7 of the Insolvency and Bankruptcy Code,2016 (hereinafter referred to as “IBC”) application was admitted. The Section 14 moratorium comes into effect when the application under Section 7 is admitted and therefore, the continuation of arbitral proceedings would be in violation of Section 14 of IBC.
The NCLT, New Delhi opined that one of the criteria for related parties is set out in Section 5(24) of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as “IBC”).
This includes controlling the composition which includes appointment and removal of directors. To ascertain whether the Committee of Creditors (CoC) Members had any control over the composition or not, the scheme of the Companies Ac, 2013 was examined regarding the appointment and removal of directors.
In the present case, the Tribunal observed that the members of the CoC were capable of controlling the composition of the Board and therefore, were related parties. The constitution of Coc was ruled to be erroneous. It was expounded that the Resolution plan approved by a CoC consisting of related parties is void ab initio.
The NCLT, Indore Bench expounded that a conditional plan without the consent of all the secured financial creditors is in contravention of the IBC.
It was opined that the Committee of Creditors (“CoC”) can only take decisions concerning the insolvency of the Corporate Debtor. Under the pretext of commercial wisdom, the right of a secured financial creditor to proceed against the personal guarantor of the Corporate Debtor cannot be extinguished.
It was enunciated that the CoC by majority votes cannot enforce its decision for extinguishment of the right of the dissenting creditor to proceed against the personal guarantor.
The NCLT, Amravati Bench observed that as per Section 135 of the Indian Contract Act of 1872, a surety is discharged if the creditor and principal debtor enters a contract by which a composition or promise is arrived at unless surety assents to such contract.
It was noted that the Personal Guarantor was not a party to the said OTS proposal and it was not even signed by the Personal Guarantor. Therefore, the OTS cannot be construed as an acknowledgement on part of the Personal Guarantor.
C. NCLAT
The Hon’ble NCLAT, New Delhi Bench expounded that the Resolution Plan providing for extinguishment of personal guarantee as approved by the CoC, did not contravene any provisions of Section 30(2)(e) of the IBC.
It was further noted that as per IBC, in the event of liquidation of the Corporate Debtor, the payment to which a Financial Creditor, who does not vote in favour of the Resolution Plan is entitled for payment in accordance with Section 53(1).
It was ruled that no provision in IBC mandated the Successful Resolution Applicant to make upfront payment to the dissenting Financial Creditors. The payment to dissenting Financial Creditors was given priority and whether payment was upfront or in instalment did not make any difference.
2. NCLAT, New Delhi Bench opines: Raising of amount by an agreement is a commercial borrowing
The Hon’ble NCLAT, New Delhi Bench expounded that that list under Section 5(8) of the IBC was not exhaustive but inclusive. Further, the raising of amount by the Company through Share Subscription-cum-Shareholders Company Agreement was a commercial borrowing, since the said transaction has direct effect with the business, which was carried out by the Corporate Debtor, i.e. construction of building and township.
It was opined that the raising of the amount through the Agreement had the commercial effect of borrowing. Moreover, the expression 'time value of money' encompassed in itself the concept of time value of the disbursement.
The Bench noted that Section 7 application was not filed solely on the basis of consent award, but underlying agreements as well.
It was opined that legislature could never have intended to keep a debt, which is crystallized in the form of a Decree, outside the ambit of Section 5(8).
The NCLAT, New Delhi Bench opined that Appellant who never submitted any claim before the Resolution Professional claiming to be workmen could not be allowed to contend at this stage that they are workmen and they should be paid at par with the workmen of the Corporate Debtor for amount which was admitted in the CIRP by the Resolution Professional.
Further, it was noted that Section 53 of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as “IBC”) itself provides different treatment in the distribution of assets where workmen dues are dealt with in Section 53(1)(b) and operational debt at the much lower ladder.
The Bench held that when Resolution Plan differentiates between payment to the workmen as well as to the Operational Creditors, such distinction is in accordance with law and cannot be faulted.
The National Company Law Appellate Tribunal (NCLAT), Principal Bench, New Delhi held that when a matter is reserved for orders, there is no scope for entertaining application from parties to re-hear the matter. The Tribunal stated that "it is a well-settled proposition of law that the two stages of reserving of judgment and pronouncement of judgment are in a continuum with no hiatus or gap as such in the two stages."
The NCLAT, New Delhi Bench opined that Section 42 of the Companies Act 2013 is an enabling provision which empowers the company to make a private placement of securities. Under Section 42(3), Companies making private placement shall issue private placement offer and application in such form and manner as may be prescribed to identified persons.
In the present case, there was no evidence to prove that the amount was in pursuance of the offer of private placement. However, it was observed that any e- mail that amount shall be adjusted subsequently can in no manner effect the debt so long as it remains due. It does not mean that the debt was paid and liquidated.
The NCLAT, New Delhi Bench opined that reason that Corporate Debtor or its Bankers were unable to obtain permission for remittance of amount overseas, could not be made a reason to hold that no default is committed.
In the present case, Corporate Debtor has time and again acknowledged the debt.
It was noted that the the default has been committed by the Corporate Debtor, which was an admitted fact and repeated acknowledgment by the Corporate Debtor and promises to make the payments were in vain.
The NCLAT, New Delhi Bench opined that a related cannot be allowed to participate in CoC’s voting share.
In the present case, it was noted that the resolution plan was approved by homebuyer as a class. Appellant therefore becomes a minority of that class and hence, could not be allowed to challenge the Resolution Plan which has received approval of class of homebuyers on the basis of majority of votes of homebuyers.
The Bench further ruled that commercial wisdom of the Committee of Creditors, which has approved the Resolution Plan under which different treatment has been given to ‘Affected Homebuyers’ and ‘Unaffected Homebuyers’, cannot be faulted.
8. NCLAT, New Delhi: Successful Auction Purchaser can pursue avoidance application
The NCLAT, New Delhi Bench opined that Resolution Applicant can pursue the avoidance application. It was unequivocally held that the Successful Resolution Applicant can be allowed to prosecute the avoidance application, the same analogy shall be applicable with regard to prosecution by the Successful Auction Purchaser in liquidation estate when the asset of the corporate debtor has been sold as a going concern and acquisition plan submitted by Successful Auction Purchaser has been approved by the Tribunal.
9. NCLAT, New Delhi : CIRP in the Real Estate Project has different contours and ramification
The NCLAT, New Delhi Bench opined that in event the default of Rs. 1 Crore is made out against the Corporate Debtor it is not necessary that the default of Rs. 1 Crore should be qua of the applicants individually or separately if default of Rs. 1 Crore is made out qua any of the applicants or any other financial creditor who is not even part of the Application, application under Section 7 is maintainable. Further what is required to be proved under Section 7 is that the default of Rs. 1 Crore which is due on the Corporate Debtor is not barred by limitation if default of Rs. 1 Crore due of corporate debtor is within limitation the fact that claim of certain other allottees who were joint in the application is barred by limitation is insignificant.
The NCLAT, New Delhi Bench observed that Appellant was granted various opportunities to comply with the terms and conditions laid down in LOI and process memorandum, but the Appellant failed to comply with the same and could not even gave the performance guarantee of Rs. 100 Crores as against the resolution plan of Rs. 2505 Crore.
It was opined that the observations which are sought to be expunged or deleted are relevant and germane to the process for taking decision for allowing the application filed by SBI for withdrawal of the application filed by the RP for approval of the resolution plan submitted by the Appellant in which it did not show any interest as it could not even deposit a sum of Rs. 100 Crores as the performance guarantee and requested to treat the BBG of Rs. 40 Crores as part of the performance guarantee of Rs. 100 Crores and asked for rest of the amount of Rs. 60 Crores to deposit in the overseas escrow account which was not the spirit of LOI and process memorandum.
11. NCLAT, New Delhi : Acknowledgments contained in the balance sheet extends the limitation period
The NCLAT, New Delhi Bench ruled that as per Section 18 of the Limitation Act, 1963 any acknowledgement marks the commencement of a fresh period of limitation for the creditor for making an enforceable claim seeking repayment of the debts due from the debtor. Thus, the three-year period for recovering debts under Limitation Act can be extended if the debtor acknowledges the debt within that period.
In the present case, the acknowledgments contained in the balance sheet extends the limitation period and hence it was opined that Section 7 application is well within the extended limitation period.
The Bench opined that merely because the notes to the account and the director’s report narrate the different stages of subsequent litigation with respect to the said unsecured loan, it cannot be said that these notes in any manner diminish the relevance and import of the debt which finds mention in the balance sheets for the purposes of Section 18 of the Limitation Act.
The NCLAT, New Delhi Bench that the avoidance application has to be decided by the NCLT which shall not affect the proceedings of the CIRP. Further, the PUFE Applications are different proceedings. It was ruled that the NCLT is well within jurisdiction to consider both the Resolution Plan Approval Application as well as PUFE Application but it erred in observing that the consideration of Plan Approval Application has to be deferred and can be taken only after PUFE Applications are decided.
The NCLAT, Chennai Bench opined that Performance of Bank Guarantee, is excluded from the definition Section of 3 (31) of the IBC. Therefore, it was ruled that the Performance Bank Guarantee does not fall under Moratorium, in terms of Section 14 of the IBC.
It was expounded that the Bank Guarantee is neither an Asset nor a Liability of a Company and hence, the invocation of the Bank guarantees by the Respondent No.1 were held to be valid as the same were pursuant to the Transmission Agreement.
The NCLAT, New Delhi Bench opined that the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as “IBC) bars initiation of CIRP proceedings when the Corporate Debtor commits any default during the Section 10A period. However, if the default is committed prior to the Section 10A period and continues in the Section 10A period, this statutory provision does not put any bar on the initiation of CIRP proceedings.
It was opined that it was never the intention to cover any default occurring before the period of Section 10A and continuing thereafter.
15. NCLAT, New Delhi Bench expounds: TDS deduction does not extent limitation period
The NCLAT, New Delhi Bench opined that the TDS deduction cannot give any extension to the limitation period.
It was further ruled that even if no defence of limitation was raised, application barred due to time has to be rejected.
The NCLAT, New Delhi Bench held that for a pre-existing dispute to be ground to nullify an application under Section 9, the dispute raised must be truly existing at the time of filing a reply to notice of demand as contemplated by Section 8(2) of IBC or at the time of filing the Section 9 application.
The NCLAT, New Delhi Bench has in this case held that in order to prove the ingredient of Section 65 of the Insolvency and Bankruptcy Code, 2016 there has to be adequate pleadings and findings.
The NCLAT, New Delhi Bench held that the proceeding which undertook in the liquidation proceedings cannot be ignored nor can be washed out only on the ground that in the balance sheet of the Corporate Debtor the name of the Appellant was reflected.
19. NCLAT, New Delhi rules that Ex-Director of corporate debtor does not have stake in CIRP process
The NCLAT, New Delhi Bench has opined that the Appellant who was an ex-director of the Corporate Debtor, was not part of the CIRP process and hence, the Appellant was not a stakeholder in the CIRP process.
20. NCLAT, New Delhi expounds Personal Guarantee can be discharged in a Resolution Plan
The NCLAT, New Delhi Bench, opined that by approval of the plan, the personal guarantors are not per se and ipso facto discharged from the obligations that may arise from the guarantee given to the Financial Creditor. However, it is not to say that the personal guarantee can never be discharged in a resolution plan. It was further noted that the moratorium does not apply to personal guarantors.
In the present case, there was a specific clause in the plan about the release of the personal guarantee. It was observed that when the CoC itself approved the plan after deliberations on the said clause, the NCLT could not have interfered with that commercial wisdom.
21. NCLAT, Chennai Bench expounds: Decision on contractual interest liability outside the scope of IBC
The NCLAT, Chennai Bench opined that the penal interest provision has to be dealt with as per the Settlement Agreement which the parties signed. The Bench propounded that the contractual interest liability is outside the purview of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as “IBC”). It was held that the interest continues to accumulate till the amount is repaid and therefore, there was no illegality in the decision of the Committee of the Creditors.
Further, it was expounded that Section 14 IBC does not specify any interest waiver during the period of moratorium. Hence, the contention that no interest could be charged after the claims have been admitted was bad in law.
On the issue of Promoter being MSME and still not being given preference, it was held that the IBC does not envisage any preference to be given to an MSME while accepting a resolution plan.
22. NCLAT, New Delhi expounds: Sec 9 application cannot be entertained when dispute is pre-existing
The NCLAT, New Delhi analysed Section 5(21) of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as “IBC”) which defines operational debt and opined that the claim must bear some nexus with a provision of goods or services irrespective of who is to be the supplier or receiver.
In the present case, it was noted that the dispute was pre-existing; therefore, the Section 9 application was rightly dismissed.
23. NCLAT, Chennai Bench rules: Sec 7 is maintainable against co-borrower
The NCLAT, Chennai Bench expounded that when the Appellant itself chose to join hands with the co-borrower and owned all rights and liabilities as a co-borrower,then the Section 7 application of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as “IBC”) was rightly admitted against the Appellant.
Subsequently, even a board resolution along with an addendum agreement was executed.
Therefore, the Appellant was a co-borrower against whom Section 7 Application was maintainable.
The NCLAT, New Delhi Bench has opined that the default date for the principal borrower cannot be put to be the default date for the corporate guarantor.
It was further ruled that the liability of corporate guarantor and the principal borrower is coextensive, but when the guarantee requires invocation of the deed, the default date of the guarantor should be when the corporate guarantee has been invoked.
25. NCLAT, New Delhi rules: No debt if no direct disbursement of money to the corporate debtor
The NCLAT, New Delhi expounded that the trigger for Section 7 of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as “IBC”) is the occurrence of default by the Corporate Debtor. The Bench expounded that it is a basic requirement of the Section that there must be a financial debt owed by the Corporate Debtor to the financial creditor.
In the present case, the Appellant failed to prove any direct disbursement of money to the Corporate Debtor. Further, the Corporate Debtor did not admit the debt even once. There was no proof of the existence of a debt.
Further, it was noted that no case was made for piercing the corporate veil as the Appellant could not even prove any direct transactions with the Corporate Debtor.
The NCLAT, New Delhi Bench opined that after a charge was created in favour of the Bank, it was mandatory for the Corporate Debtor to get the consent of the Bank to execute the lease rent agreement.
It was expounded that the suspended board of directors do not have locus standi to file an appeal against the plan’s approval by the committee of creditors.
Regarding the change of business plan due to the resolution plan, it was ruled that the same is permitted under the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as “IBC”). Further, in the present case, the Corporate Debtor was not doing business for many years.
27. NCLAT, New Delhi rules: Tribunal has inherent power to recall but cannot review
The NCLAT, Principal Bench New Delhi opined that the Tribunal does not have the power to review but it does have the power to recall its judgement as this is inherent in the Tribunal under Rule 11 of the NCLAT Rules, 20116.
It was also held that the power to recall a judgement can be exercised by the Tribunal when any procedural error is committed. Some examples of grounds for recalling a judgement are the necessary party not being served, or not before the Tribunal when the judgement was delivered.
The NCLAT, Chennai has opined that Section 238 of the of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as “IBC”) is superior to the provisions of the SARFAESI Act, 2002. It was further noticed that the resolution plan was approved with a majority of 98.70%.
It was ruled that the commercial wisdom of the committee of creditors is non-justifiable. Noting that the RBI has also asserted that prior permission is not required, the Bench held that the resolution plan should not have been rejected.
The NCLAT, Principal Bench New Delhi ruled that on the basis of documents executed between the parties, the Debenture holders have the right to receive payments after the issue of a Demand Certificate by the debenture Trustee and the Guarantors are jointly and severally liable to make such payment to the Debenture Holder.
The Bench opined that the Debenture holders are the financial creditors who are owed a debt by the Corporate Debtor (“CD”) as CD as the Co-Obliger has guaranteed repayment of due amounts to the Debenture holders.
It was also ruled that the NCLT had examined the existence of debt and default before admitting Section 7 of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as “IBC”) application and hence, the order did not require any interference.
The NCLAT, New Delhi opined that the application of Section 65 of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as “IBC”) is maintainable after the application is filed under any of Sections 7, 9, or 10 of IBC. It is not necessary for the application to be admitted and for the Corporate Insolvency Resolution Process (CIRP) to commence to ensure the maintainability of the Application under Section 65.
31. NCLAT, New Delhi expounds: Timelines in Regulation 35A are only directory
The NCLAT, New Delhi ruled that the timeline in Regulations 35A of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (hereinafter referred to as “2016 Regulations”) was not mandatory and that the requirement to approach NCLT on or before the 135th day of the insolvency commencement day (“ICD”) is only directory in nature. Further, the fact that there was a delay in the determination of opinion cannot by itself be a ground for the non-maintainability of the petition.
In the present case, there was a gap of nearly 8 months.
Further, the formation of opinion has to be completed on or before the 75th day of the ICD, and the determination of the opinion on or before the 115th day of the ICD. In the present case, these timelines were not adhered to by the Resolution Professional (“RP”).
It was noted that the RP was not provided with any documents from the suspended management. Moreover, the work in preparing the report was hindered due to the Covid-19 pandemic. Hence, it was held that the delay in submitting applications under Sections 43 and 66 was with sufficient cause and not due to laxity or leniency.
Further, the purpose of Section 43 was enunciated which is to determine and nullify the preferential transactions undertaken by the parties at the relevant time to withdraw money from a distressed corporate debtor when it is on the verge of the commencement of the corporate insolvency resolution process (“CIRP”).
The NCLAT, New Delhi Bench opined that Article 137 of the Limitation Act of 1963 talks about the limitation period for applications, and the same is applied to the limitation period in the case of Sections 7, 9, and 10 of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as “IBC”).
The Bench opined that an application under Section 9 IBC cannot be said to be a suit and the same is strengthened by the fact that Section 5 of the Limitation Act is inapplicable to suits and it does apply to Sections 7 and 9 of the IBC. Based on this, it was ruled that NCLT committed an error in dismissing the Section 9 application on the ground that it was barred by Section 69(2) of the Partnership Act, 1932.
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