India: Insolvency And Bankruptcy Code: Quarterly Review Of Significant Judgments (October 2020 – December 2020)

1. Ramesh Kymal v. Siemens Gamesa Renewable Power Private Limited

National Company Law Appellate Tribunal, New Delhi

Company Appeal (AT) (Insolvency) No. 701 of 2020

Decided On: 19.10.2020

The bar imposed by the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020 on the filing of applications under Sections 7, 9 and 10 of IBC, for default arising on or after 25.03.2020 would not be applicable on defaults committed before that date.

Brief Facts: The present matter deals with an appeal concerning an application filed under Section 9 of the Insolvency and Bankruptcy Code, 2016 ("IBC") by the operational creditor against the corporate debtor. The adjudicating authority had refused to interfere on the Section 9 application taking note of the newly inserted Section 10A in the IBC vide the promulgation of Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020 ("Ordinance") published in the Gazette of India on 05.06.2020. The adjudicating authority held that the law created a bar on the initiation of the Corporate Insolvency Resolution Process ("CIRP") in terms of the newly inserted Section 10A coming into force through the Ordinance. In the present matter, the moot question is whether the amending provision of Section 10A introduced via the Ordinance would be applicable, for any default arising on or after 25.03.2020. If so, what would happen to an application filed by on or after 25.03.2020 and before the promulgation of the Ordinance.

The Appellant contended that the word initiation date defined under Section 5(11) of the IBC means the date on which the financial creditor, operational creditor or the corporate debtor, made an application to the adjudicating authority for initiating CIRP. The Appellant further submitted that Section 5(12) of the IBC dealt with insolvency commencement date, which is the date of admission of an application for initiating CIRP by the adjudicating authority. According to the Appellant, Section 10A of the IBC dealt with the aspect of initiation and not commencement. It was further submitted that Section 10A only prohibits the filing of an application on or after 05.06.2020 for defaults occurring during the relevant period specified in the Ordinance and not initiation of CIRP after the said date. The Appellant stated that once an application had been filed, Section 10A did not stand as an impediment in its admission or non-admission based on merit.

On the other hand, the Respondent contended that initiation of insolvency proceedings against businesses, when the economy and markets have been critically impacted on account of COVID-19, would be not only counterproductive to the legislative scheme of the IBC, but also detrimental to the revival of the economy. This is said to be the intention of the legislature as gathered from the preamble of the Ordinance.

Held: The National Company Law Appellate Tribunal, New Delhi ("NCLAT") looked into the language in Section 10A of the IBC to observe that the bar on the filing of applications under Sections 7, 9 and 10 of IBC, for default arising on or after 25.03.2020 would not be applicable on defaults committed before that date. The NCLAT further noted that the bar on the initiation of CIRP could not operate in respect of applications which had been filed for initiation of CIRP in respect of default committed before 25.03.2020 even if such application may have been filed after 25.03.2020 but before the promulgation of the Ordinance. Therefore, the instant appeal was dismissed since the date of default in the present case was 30.04.2020.

2. Madhusudan Tantia v. Amit Choraria and Ors.

National Company Law Appellate Tribunal, New Delhi

Company Appeal (AT) (Insolvency) No. 557 of 2020

Decided On: 12.10.2020

The notification issued by the Ministry of Corporate Affairs on 24.03.2020 raising the minimum threshold to one crore rupees under the powers conferred by the proviso to Section 4 of Insolvency and Bankruptcy Code, 2016 has a prospective effect. If the said notification were to have a retrospective effect, it would lead to absurd results leaving wider implications.

Brief Facts: The present appeal arises out of the impugned order of National Company Law Tribunal, Kolkata Bench ("NCLT") whereby an application filed by the operational creditor Foseco India Limited, under Section 9 of the Insolvency and Bankruptcy Code, 2016 ("IBC") was admitted against Om Boseco Rail Products Limited, the corporate debtor. The sole moot point in the instant matter was whether the notification ("Notification"), issued by the Ministry of Corporate Affairs on 24.03.2020 under the powers conferred by the proviso to Section 4 of IBC, had a retrospective or prospective effect.

Held: The National Company Law Appellate Tribunal ("NCLAT") on a more in-depth inspection of the language of the Notification noted that there was no display of an express intent for the Notification to be retrospective in nature. Consequently, the NCLAT held that the Notification was prospective and would not apply to applications, filed under Sections 7, 9 and 10 of IBC, which were pending across the country at various NCLT benches for admission, before the issuance of the Notification. It was observed that had the Notification been made applicable to applications pending before 24.03.2020, absurd results would have led to broader implications. The NCLAT concluded that the NCLT had rightly admitted the application filed under Section 9 of IBC by the operational creditor. Thus, the appeal was dismissed.

3. Kiran Gupta v. State Bank of India and Ors.

High Court of Delhi

W.P. (C) 7230/2020 and C.M. Appl. 24414/2020

Decided On: 02.11.2020

The liability of a guarantor is co-extensive with that of the principal debtor and not in the alternative. It cannot be said that proceedings in the National Company Law Tribunal against the principal debtor can be a bar to institution or continuation of proceedings against the guarantor under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.

Brief Facts: The moot question which arose for consideration in the instant writ petition is whether a bank/financial institution can institute or continue with proceedings against a guarantor under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 ("SARFAESI Act"), when proceedings under the Insolvency and Bankruptcy Code, 2016 ("IBC") have been initiated against the principal borrower and the same are pending adjudication. The Petitioner contended that proceedings against the principal borrower under the IBC and against the guarantor under the SARFAESI Act cannot be instituted and continued simultaneously; unless the proceedings under the IBC do not come to an end and it is decided that the company cannot be revived. Further, the Petitioner argued that if the resolution plan was accepted in the instant case, then by virtue of Section 31 of the IBC, all the guarantees become ineffective as the resolution plan is binding on the guarantors.

Held: The High Court of Delhi ("High Court") observed that the liability of a guarantor is co-extensive with that of the principal debtor and not in the alternative, it cannot be said that proceedings in the National Company Law Tribunal ("NCLT") against the principal debtor can be a bar to institution or continuation of proceedings against the guarantor under the SARFAESI Act.

The High Court noted that the question of whether the Respondent can proceed against a guarantor even after initiation of proceedings under the IBC stood settled in the decision of the Hon'ble Supreme Court in State Bank of India v. Ramakrishan and Another.¹ It was held that neither Section 14 nor Section 31 of the IBC placed any fetters on banks/financial institutions from initiation and continuation of the proceedings against the guarantor for recovering their dues. Therefore, the Petitioner's argument that all proceedings against the Petitioner, who is only a guarantor, should be stayed under the SARFESI Act during the continuation of the insolvency resolution process qua the principal borrower, was rejected as meritless. The High Court concluded that the Petitioner could not escape the liability qua the respondent/bank. Hence, the writ petition was dismissed.

4. State Bank of India v. Athena Energy Ventures Private Limited

National Company Law Appellate Tribunal, New Delhi

Company Appeal (AT) (Ins) No. 633 of 2020

Decided On: 24.11.2020

When an application of a financial creditor under Section 7 of the Insolvency and Bankruptcy Code, 2016 is admitted against the principal borrower, another application by the same financial creditor can be admitted against the corporate guarantor on the same set of claims and default.

Brief Facts: The Appellant filed the instant application against Respondent corporate debtor who was also the corporate guarantor for Athena Chattisgarh Power Ltd., i.e., the principal borrower. The application was filed as the principal borrower defaulted on financial assistance extended to it. The Appellant claimed that it filed an application under Section 7 of the Insolvency and Bankruptcy Act, 2016 ("IBC") to seek initiation of Corporate Insolvency Resolution Process ("CIRP") against Respondent-corporate guarantor. The application was presented before the National Company Law Tribunal, Hyderabad Bench ("NCLT") under Section 60(2) of IBC even though the registered office of Respondent is at New Delhi. The NCLT noted that the instant matter was factually similar to the case in Dr. Vishnu Kumar Agarwal v. M/s. Piramal Enterprises Ltd. ² The NCLT, relying upon the decision in Piramal, declined to admit the application as it was on same set of facts, claim and default for which CIRP was already initiated and was in progress and where according to the NCLT, the claim of Applicant had already been admitted. Thus, the Application of the Appellant against the Respondent came to be rejected. The moot questions that emerged in the instant matter was when application under Section 7 of the IBC had been admitted against the principal borrower, whether the present application by the same financial creditor could be admitted against corporate guarantor on same set of claims and default?

Held: The National Company Law Appellate Tribunal ("NCLAT") relied upon the decision of the Hon'ble Supreme Court in State Bank of India v. V. Ramakrishnan & Anr.³ and Edelweiss Asset Reconstruction Company Ltd. Sachet Infrastructure Ltd. and Ors.⁴ to hold that if two Applications can be filed, for the same amount against Principal Borrower and Guarantor keeping in view the Sec. 60(2) & (3) of IBC, then such Applications can also be maintained. The NCLAT concluded that simultaneous remedy is central to a contract of guarantee and where principal borrower and surety are undergoing CIRP, the creditor should be able to file claims in CIRP of both of them. The IBC does not prevent this. Hence, the appeal was allowed.

5. Kaledonia Jute and Fibres Pvt. Ltd. v. Axis Nirman and Industries Ltd. and Ors.

Civil Appeal No. 3735 of 2020 (Arising out of Special Leave Petition (Civil) No. 5452 of 2020)

Decided On: 19.11.2020

The entire object of IBC would be thrown to the winds if the Company Court was allowed to proceed with the winding up while in a separate proceeding the NCLT entertained the application filed under Section 7 of Insolvency and Bankruptcy Code, 2016.

Brief Facts: The Second Respondent in the instant matter filed a company petition before the High Court of Allahabad ("Company Court") under Section 433 of the Companies Act, 1956, ("Companies Act") for the winding up of the First Respondent company, on the ground that it was unable to pay its debts. The Company Court ordered notice to the First Respondent herein, but the First Respondent failed to appear before the Company Court. Therefore, the Company Court ordered the admission of the company petition and also directed the publication of the advertisement of the petition under Rule 24 of the Companies (Court) Rules, 1959.

Pursuant to the said order, the Second Respondent (the petitioning creditor) effected a publication of the advertisement in the Official Gazette. Further, newspaper publications were also made. Thereafter, the Company Court passed an order directing the winding up of the First Respondent company on the ground that the company has been unable to pay its debts and that it was just and equitable to wind it up.

Thereafter, the First Respondent filed an application for recalling the order of winding up. To prove its bonafides, the First Respondent paid the entire amount due to the Second Respondent along with costs. Therefore, the Second Respondent had no objection to the recall of the order of winding up. However, the official liquidator opposed the application for recall on the ground that the First Respondent owed money to various creditors to the tune of Rs. 27 Crores and that unless the said amount was paid, the order of winding up could not be recalled. The Official Liquidator also submitted that he had already taken over the charge of the Company's assets.

Meanwhile, the Appellant herein, claiming to be a creditor of the First Respondent herein, moved an application before the National Company Law Tribunal, Allahabad Bench ("NCLT") under Section 7 of the Insolvency and Bankruptcy Code, 2016 ("IBC"). Thereafter, the Appellant moved a civil miscellaneous application before the Company Court seeking a transfer of the winding-up petition to the NCLT. This application was rejected by the Company Court by a cryptic order, on the sole ground that the requirement of Rule 24 had already been complied with and that a winding-up order had already been passed. It is against the Company Court's order, refusing to transfer the winding-up proceedings from the Company Court to the NCLT that the financial creditor has come up with the instant civil appeal.

Held: The Hon'ble Supreme Court noted that the issues for consideration in the present matter were as follows:

a) what are the circumstances under which a winding-up proceeding pending before the High court could be transferred to the NCLT; and

b) at whose instance, such transfer could be ordered.

The Hon'ble Supreme Court opined that the Appellant was entitled to seek a transfer of the winding-up proceedings instituted before the Company Court to the NCLT. The Apex Court further observed that the restriction under Rules 5 and 6 of the Companies (Transfer of Pending Proceedings) Rules, 2016, which deal with the appropriate stage of transferring proceedings had no application to the case of a transfer covered by the 5th proviso to Section 434(1)(c) of the IBC. Therefore, the Supreme Court allowed the present appeal.

Consequently, the winding-up proceedings before the Company Court were transferred to the NCLT to be heard along with the Appellant's application under Section 7 of IBC. The Hon'ble Supreme Court relied upon the decision in Forech India Ltd. v. Edelweiss Assets Reconstruction Co. Ltd.⁵ to hold that the entire object of IBC will be thrown to the winds if the Company Court was allowed to proceed with the winding up while in a separate proceeding the NCLT entertained the application filed under Section 7 of IBC.

6. M/s Tharakan Web Innovations Pvt. Ltd. v. NCLT and Anr.

WP (C) No. 27936/ 2020

High Court of Kerala

Decided On: 11.12.2020

Kerala High Court stayed the order of the NCLT which held that Notification raising the threshold limit for insolvency proceedings as rupees one crore will apply only prospectively.

Brief Facts: In the present case, the Petitioner vide a writ petition challenged the validity of the decision of the National Company Law Tribunal, Kochi Bench ("NCLT") whereby it was held that the notification ("Notification"), issued by the Ministry of Corporate Affairs on 24.03.2020 had a retrospective effect. Before the NCLT, insolvency proceedings were initiated by Cyriac Njavally (the Second Respondent) concerning an alleged default of Rs 31 lakhs. The corporate debtor filed an application before the NCLT objecting to the maintainability of the proceedings in view of the Notification. It was contended that the application stated filed on 07.03.2020 was incomplete and that it was filed only on 25.09.2020. The corporate debtor further contended that the date of proper filing should have been regarded as the 'initiation date' for the insolvency proceedings. However, the NCLT rejected the objection by holding that the Notification will not affect proceedings if the cause of action has arisen before 24.03.2020. The NCLT observed that the Notification did not pose a retrospective effect. An interpretation otherwise would fall contrary to the executive's intention to exercise its power of delegated legislation. Further, the NCLT opined that if the intention were to provide blanket protection to corporate debtors from being dragged to the NCLT irrespective of when or what extent a default has taken place, it would require a legislative amendment and that a mere issuance of the notification would not suffice. The Tribunal had relied on the order passed in the case Madhusudhan Tantia v. Amit Choraria and Anr.⁶ which held that the Notification has no retrospective effect.

Held: The Kerala High Court on 11.12.2020 stayed the impugned order of the NCLT which held that Notification raising the threshold limit for insolvency proceedings as Rupees One Crore will apply only prospectively. Notices were issued to both the respondents and the proceedings before the NCLT were stayed.