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NCLAT HELD THAT APPLICABILITY OF SECTION 29A OF IBC WHILE CONSIDERING SECTION 12A OF IBC

NCLAT section12A

INTRODUCTION

In a very recent judgment, the Hon’ble NCLAT in the matter of Shweta Vishwanath Shirke & Ors. vs. Committee of Creditors, while dismissing the Order for liquidation of M/s Sterling Biotech, passed by the Adjudicating Authority, Mumbai Bench, has held that Section 29A of IBC is not applicable for entertaining/considering an application under Section 12A of IBC. The NCLAT while deciding the Appeals observed that the application moved under Section 12A having been approved by the 'Committee of Creditors' by more than 90% of the voting share as required under the Code, it was not open to the Adjudicating Authority to reject the same and that too on the ground that the promoter, who has moved the Application under Section 12A is ineligible under Section 29A to file a Resolution Plan.

FACTS:

Pursuant to an Order dated 11.06.2018 passed by the Adjudicating Authority, Mumbai, in an Application filed under Section 7 of the I & B Code by Andhra Bank, M/s Sterling Biotech underwent Corporate Insolvency Resolution Process (hereinafter referred as CIRP).

Sequence of Events

8.8.2018 – The members of CoC received a revised offer from the promoter of the Corporate Debtor for a one-time settlement.

27.2.2019 – 13th CoC meeting: Andhra Bank submitted an Application under Form FA as prescribed under Regulation 30A(1) of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations for the withdrawal of the CIRP of the Corporate Debtor.

The Resolution i.e., OTS was rejected as it received 89.5% of the affirmative vote of the CoC as against the requisite 90% as prescribed under Section 12A of the Code.

As there was no resolution plan and the withdrawal of the CIRP had failed, the Resolution authorizing the RP to file a liquidation value was put on vote, however, the same was rejected.

5.3.2019 – 14th CoC meeting: Andhra Bank submitted a fresh Form FA with all the details of the OTS offer.

The fresh resolution for withdrawal of the CIRP U/s 12A was put to vote and the same received 90.32% of affirmative votes

Application U/s 12A filed before the Adjudicating Authority.

 

 

ISSUE

Whether Section 29A of the ‘I&B Code’ is applicable to the Applicant, if he intends to withdraw the Petition under Section 7 or 9, if the Committee of Creditor, approves a proposal with 90% voting share, in terms of Section 12A?

ARGUMENTS OF UNION OF INDIA THROUGH MCA

The Union of India through MCA has opposed the Application U/s 12A of the Code for withdrawal of the CIRP on the ground that if the withdrawal of the CIRP process is permitted by the Adjudicating Authority, then the promoters of the Corporate Debtor, i.e., SBL will again get control over the Corporate Debtor at a discount. Further, the MCA has opposed the Application on the ground that promoters of the Corporate Debtor are a willful defaulters and absconders and therefore they are ineligible under Section 29A of the I & B Code. 

 

OBSERVATION OF THE ADJUDICATING AUTHORITY

The Adjudicating Authority, Mumbai Bench while considering the arguments of the Union of India through MCA has held that case in hand is an attempt by the promoters to defeat the legislative provisions of Section 29A under the guise of OTS with approval of 90.32% vote share if CoC and further raised a question of doubt in the functioning of the CoC.

 

JUDGMENT AND ANALYSIS

The while considering the facts and the legal provisions involved in the matter, the Hon’ble NCLAT took note of the Insolvency Law Committee Report, 2018 vide which Section 12A of the I&B Code was inserted and the Judgment passed by the Hon’ble Supreme Court of India in the matter of Swiss Ribbons Pvt. Ltd. & Anr. vs. Union of India & Ors.-, whereby the Hon’ble Supreme Court had considered the stages in which an application can be withdrawn including Section 12A. The NCLAT while taking note of the same held that that the Promoters/Shareholders are entitled to settle the matter in terms of Section 12A and in such case, it is always open to an applicant to withdraw the application under Section 9 or 7 of the I & B Code on the basis of which the Corporate Insolvency Resolution Process was initiated. The NCLAT while allowing the Appeal held that Section 29A is not applicable for entertaining/considering an application under Section 12A as the Applicants are not entitled to file application under Section 29A as ‘resolution applicant’.

The Corporate Insolvency Resolution Process’ was initiated pursuant to an application under Section 7 filed by the ‘Andhra Bank’ (Appellant herein). The application under Section 12A having been approved by the ‘Committee of Creditors’ more than 90% of the voting share, it was not open to the Adjudicating Authority to reject the same and that too on a ground of ineligibility under Section 29A, is not applicable.

Disclaimer: - This article is for the general information and awareness of its readers, In-case of any legal matter in relation with readers, they are expected to have legal opinion before placing reliance on it. Further it contains completely author's views on the subject and completely unbiased based on authors own experience, study and understanding. 

Author:- EasyLegalTax Team

PENDENCY OF SUIT OR ANY PROCEEDINGS NOT A BAR TO ADMIT AN APPLICATION BY A FINANCIAL CREDITOR OF IBC

Financial Creditors

The National Company Law Appellate Tribunal (NCLAT) has held that the pendency of a suit with respect to a dispute associated with a default cannot be a ground to reject an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (I&B Code) by a Financial Creditor. A pre-existing dispute cannot be a subject matter of Section 7 of the I&B Code, though it may be relevant under Section 9 of IBC, the NCLAT has held.

 

FACTS

An appeal was preferred by a Promoter of the Corporate Debtor, Marigold Overseas Limited (appellant) against an Order 20.09.2019 passed by the Adjudicating Authority i.e. National Company Law Tribunal, Special Bench, New Delhi (NCLT).

A loan amount of Rs. 2,60,00,000 was given by M/s Pashupati Jewellers, Financial Creditor, to one Bal Karan Singh Bhullar from Sumedha Kanodia on the basis of an agreement executed in April 2017.

The ‘Corporate Guarantee and Undertaking’ for the loan was given by the Corporate Debtor, Marigold Overseas Limited.

Subsequently, on default, an Application under Section 7 of the I&B Code was preferred by the Financial Creditor against the Corporate Debtor. The same was admitted by NCLT and the appeal was preferred before the NCLAT.

 

ARGUMENTS

Before the NCLAT, the Appellant argued that the Agreement of 'Corporate Guarantee and Undertaking' was executed in violation of Section 185 of the Companies Act, 2013.

It was alleged that the Agreement was a result of a fraud played by one of the erstwhile Directors and the Agreement was not even reflected in the records of the ‘Corporate Debtor’ available with the Registrar of Companies. Therefore, according to the Appellant, in the eyes of law, no ‘Corporate Guarantee’ was given by the Corporate Debtor and the application under Section 7 of the I&B Code was not maintainable.

 

OBSERVATIONS OF NCLAT

After hearing the counsel, the NCLAT recorded that the ‘Corporate Guarantee and Undertaking’ Agreement was on record and it was on Indian Non-Judicial “e-Stamp” issued by the Government of National Capital Territory of Delhi. In the said e-Stamp, it was clearly mentioned that the e-Stamp was purchased by Marigold Overseas Ltd. for the purpose of the Loan Agreement.

Therefore, the Appellate Tribunal remarked that merely because the Appellant entered the company as Director in May 2017, a plea of fraud cannot be taken now as it was the Management of the ‘Corporate Debtor’, i.e., Marigold Overseas Limited which had entered into the Agreement at the relevant time.

If for one or the other reason, they have not referred the ‘Corporate Guarantee and Undertaking’ Agreement to Registrar of Companies and suppressed the fact, the Appellant or the subsequent Director, cannot take a plea that the ‘Corporate Guarantee and Undertaking’ Agreement was obtained by fraud on 7th April 2017 and is not reflected in the records of the Registrar of Companies.”, the Appellate Tribunal stated.

CONCLUSION

Referring to the Supreme Court’s decision in Innoventive Industries Ltd. Vs. ICICI Bank and Anr., the NCLAT stated that once the Adjudicating Authority is satisfied on the basis of records that debt is payable and there is a default, the Adjudicating Authority is required to admit the application. In view of the ‘Corporate Guarantee and Undertaking’ Agreement instituted on e-Stamp, issued by the Government of National Capital Territory of Delhi, it was not open to the Adjudicating Authority to deliberate on the issue of whether e-Stamp was a forged document or not, the NCLAT said. The NCLAT added that merely because a suit has been filed by the Appellant and is pending, it cannot be a ground to reject the application under Section 7 of the I&B Code.

The NCLAT held that

Pre-existing dispute cannot be a subject matter of Section 7, though it may be relevant under Section 9 of the I&B Code.”, it said.

 

In view of the above, the appeal was dismissed with the observation that the orders passed by the NCLT and the NCLAT would not be relied upon for deciding the merit of any pending suit in relation to the issue if any.

 

Disclaimer: - This article is for the general information and awareness of its readers, In-case of any legal matter in relation with readers, they are expected to have legal opinion before placing reliance on it. Further it contains completely author's views on the subject and completely unbiased based on authors own experience, study and understanding. 

Author:- EasyLegalTax Team

The procedure of filing an application by an operational creditor under Insolvency and Bankruptcy Code (IBC)

operational creditor

Section 6 of the Insolvency and Bankruptcy Code,2016 (“IBC”) provides that only three categories of persons can initiate Corporate Insolvency Resolution Process(“CIRP”) namely financial creditors, operational creditors and the corporate debtor itself. Procedure for initiating the corporate insolvency process in all the three cases are different.

Who is an operational creditor?

Any person from whom goods and services are availed in the normal course of business. Such debts can include an outstanding salary of an employee or tax dues or raw material suppliers.

Procedure for filing an application or initiating the CIRP by an operational creditor is covered by section 8 and 9 of IBC. Section 8 deals with the procedure an operational creditor has to follow before approaching the adjudicating authority and section 9 deals with the procedure which has to be followed while approaching the adjudicating authority.

When and against whom when can an operational creditor file an application for CIRP?

Currently, a CIRP can be initiated only against a corporate debtor. Corporate debtor means either a company registered under the Companies Act, 2013 or a Limited Liability Partnership ("LLP") registered under the LLP Act, 2008)

An application can be filed only when a corporate debtor fails to pay back its debt which has arisen out of goods being sold or services being supplied and there is no dispute related to such transaction.

When and how can a corporate debtor avoid payment of the alleged debt?

In practice, the only situation in which a corporate debtor can escape or delay the strict provisions of the IBC in case of a demand from the operational creditor is when there exists a dispute between the parties. As per section 5(6) of the IBC dispute can be a suit or arbitration proceeding relating to:

  1. A dispute related to the amount of debt: - A dispute related to the existence of such debt or a dispute related to the exact amount of debt.
  2. Quality of goods or service: - A dispute regarding the quality of the goods and services which was delivered.
  3. Breach of representation or warranty: - A dispute related to any representation or warranty made in the agreement. This can also include violation of any terms or conditions made in the agreement.

Procedure to be followed by an operation creditor before approaching the adjudicating authority

Step 1: Send a demand notice:

Send a demand notice and an invoice of the outstanding payment to the corporate debtor in Form 3 or Form 4 prescribed in the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016.

This demand notice can be sent in hard copy to its registered office through registered post, speed post or by hand. In such cases acknowledgement of the receipt of the notice is mandatory. It can also be sent via e-mail to its whole-time director, designated partner or a key managerial person (includes CEO and CFO).

Step 2: File a copy of demand notice or invoice with an information utility. Details of information utilities can be found here: https://www.ibbi.gov.in/service-provider/information-utilities.

Step 3: Wait for 10 (ten) days after the notice is received by the corporate debtor.

            Within these 10 days three things can happen:

  1. The corporate debtor pays back the dues amount within these 10 days: In such a case, the corporate debtor has to send a proof of payment as a reply to the notice. This proof of payment can be a record of online/electronic transfer or record of encashment of cheque by the operational creditor.
  2. The corporate debtor sends a reply to the notice within these 10 days under section 8(1) of the IBC saying that there exists a dispute.
  3. The corporate debtor sends no reply or a proper reply within these 10 days.

An operational creditor can approach the adjudicating authority only in the third case where it has not received a reply or a proper reply.

Step 4: Make an application to the adjudicating authority in Form 5 prescribed in the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 along with:

  1. Copy of demand notice which was served to the corporate debtor.
  2. Copied all the documents supporting the claim of the operational creditor.
  3. Copy of account statement of the operational creditor to confirm that there was no payment of the said debt.
  4. Affidavit as prescribed in the form.
  5. Application fee and proof that the application fees have been paid.

After the application is made and the application and it is admitted the CIRP will commence.

Disclaimer: - This article is for the general information and awareness of its readers, In-case of any legal matter in relation with readers, they are expected to have legal opinion before placing reliance on it. Further it contains completely author's views on the subject and completely unbiased based on authors own experience, study and understanding. 

Author:- EasyLegalTax Team

Whether the Resolution Professional has jurisdiction to determine” the claim Filed by Financial Creditor

resolution professional

The National Company Law Appellate Tribunal (NCLAT) in a recent judgment while upholding the Judgment passed by the NCLT, Chennai has held that the ‘Resolution Professional’ have no jurisdiction to “determine” the claim. The Resolution Professional could have only “collated” the claim, based on evidence and the record of the ‘Corporate Debtor’ or as filed by the Financial Creditor.

FACTS

An appeal was preferred by the Resolution Professional of the Corporate Debtor, PRC International Hotels Private Limited (appellant) against an Order 31.07.2019 passed by the Adjudicating Authority i.e. National Company Law Tribunal, Chennai Bench (NCLT).

Mr. S. Rajendran, the Resolution Professional of the Corporate Debtor collated the claim of Jonathan Mouralidarane, one of the Financial Creditor of the Corporate Debtor and held the claimed amount to be Nil. That against the determination of the Claim by the Resolution Professional, Jonathan Mouralidarane, the Financial Creditor preferred an application under Section 60(5) before the Adjudicating Authority (National Company Law Tribunal), Single Bench, Chennai. That the NCLT after considering various facts and records at hand, accepted the total claim.

 

OBSERVATIONS OF NCLAT

After hearing the counsels, the Hon’ble NCLAT was of the opinion that the ‘Resolution Professional’ had no jurisdiction to “determine” the claim as pleaded in the Appeal. He could have only “collated” the claim, based on evidence and the record of the ‘Corporate Debtor’ or as filed by Jonathan Mouralidarane, the Financial Creditor, herein in. The Hon’ble NCLAT observed that if an aggrieved person thereof moves before the Adjudicating Authority and the Adjudicating Authority after going through all the records, comes to a definite conclusion that certain claimed amount is payable. The Hon’ble NCLAT was further of the opinion that the Resolution Professional should not have moved in Appeal, as in any manner, he was not an affected party and accordingly the Appeal filed by the Resolution Professional was dismissed.

 

Disclaimer: - This article is for the general information and awareness of its readers, In-case of any legal matter in relation with readers, they are expected to have legal opinion before placing reliance on it. Further it contains completely author's views on the subject and completely unbiased based on authors own experience, study and understanding. 

Author:- EasyLegalTax Team

WHETHER A SOLE PROPRIETOR FIRM ENTITLED TO INITIATE IBC PROCEEDINGS, NCLT ANSWERS IN NEGATIVE

NCLT

The Adjudicating Authority i.e., National Company Law Tribunal, New Delhi while deciding an Application under Section 9 of the I & B Code has held that a ‘Sole Proprietary Concern’ is not a person within the meaning of Section 3(23) of the Insolvency and Bankruptcy Code, 2016 (I&B Code). Hence, the Adjudicating Authority held that the Proprietary Concern is not entitled to initiate insolvency proceedings before the Adjudicating Authority under the I&B Code.

 

FACTS

An Operational Creditor, M/S RG Steels had moved an application under Section 9 of the I&B Code for initiation of corporate insolvency resolution process against the Corporate Debtor i.e., M/S Berrys Auto Ancillaries Pvt Ltd.

The application was preferred for an unpaid amount and default of Rs 15,16,753/-. The alleged default arose out of two invoices dated February 21, 2017, and February 24, 2017. In addition to this, the interest of Rs 4,02,411/- @ 18% per annum was also being claimed from the date of the default.

A Demand Notice was sent by the Operational Creditor to the Corporate Debtor on September 9, 2018. In its reply to the Demand Notice, the Corporate Debtor disputed the liability as claimed by the Operational creditor.

 

OBSERVATION OF THE ADJUDICATING AUTHORITY

After hearing the parties and perusing the record, the Adjudicating Authority i.e., NCLT observed that prima facie, RG Steels was a Sole Proprietary Concern.

However, by virtue of definition, as contained in Section 3(23) of IBC, 2016, a person even though includes an individual it does not include within its ambit a Sole Proprietary Concern.”

 

The Adjudicating Authority further noted that the documents filed along with the petition represented that the rate as charged by Operational Creditor to the Corporate Debtor was a matter of dispute even prior to the issue of Demand Notice.

The Adjudicating Authority while deciding the Application also recorded that “the communication dated 15.9.2017 wherein it has been clearly stated in the absence of terms and conditions of Purchase orders containing terms of payment, Discounts rate etc. rate difference etc. reconciliation of the accounts is required for clarity and this has also been followed by at the time of sending reply by way computational chart as given in page 60 of the petition itself. Thus we find that there seems to be a pre-existence of dispute..”

 

CONCLUSION

In view of the above, the Adjudicating Authority concluded that the since Sole Proprietary Firm was not a person within Section 3(23) of the I&B Code and since there exist a dispute, the Adjudicating Authority dismissed the Application filed by RG Steel under Section 9 of the I&B Code.

 

Disclaimer: - This article is for the general information and awareness of its readers, In-case of any legal matter in relation with readers, they are expected to have legal opinion before placing reliance on it. Further it contains completely author's views on the subject and completely unbiased based on authors own experience, study and understanding. 

Author:- EasyLegalTax Team

Whether the suspended board of directors entitled to managerial remuneration while the Company is undergoing CIRP

CIRP

While the powers of the Board are suspended and the Directors continue to perform their duties, are they entitled to managerial remuneration while the CIRP is under progress?

The relevant provision dealing with the directors of the Corporate Debtor which is undergoing CIRP is explained under Section 17 (1)(b) of the Insolvency and Bankruptcy Code (in short I & B, Code”. As per Section 17 (1) (b) of the I & B Code, the power of the board of directors or partners of the Corporate Debtor shall stand suspended and shall be exercised by the Interim Resolution Professional.

Further, it would be relevant to note the provision of Section 19 of the I & B Code wherein it has been mandated that the personnel of the Corporate Debtor including its promoters or any other persons associated with the management of the Corporate Debtor shall extend all assistance and cooperation to the Interim Resolution Professional as may be required by him in managing the affairs of the Corporate Debtor.

The Definition of personnel as given under Section 5 (23) of the I & B Code includes the directors as well as partners. In my opinion although the powers of the board of directors are suspended, however, the same does not affect the functioning of the directors in their individual capacity and the directors are bound to discharge their day to day functions and must ensure that the Corporate Debtor remains an on-going concern. As per the mandate of Section 17(1)(c) of the I & B Code, the only difference would be that the directors must report to the Interim Resolution Professional or the Resolution Professional as the case may be. Therefore, in my opinion, the directors/partners, who continue to discharge their day to day functions would continue to draw the remuneration irrespective of the commencement of the insolvency resolution process.

Disclaimer: - This article is for the general information and awareness of its readers, In-case of any legal matter in relation with readers, they are expected to have legal opinion before placing reliance on it. Further it contains completely author's views on the subject and completely unbiased based on authors own experience, study and understanding. 

Author:- EasyLegalTax Team

Whether an IRP can dispossess any person from Corporate Debtor's property which is under litigation

Corporate debtors

Question of Law referred to NCLT, Principal Bench:

INTRODUCTION

The above question of law has been referred by the Bench of NCLT, Mumbai. Ld. Member Judicial, Shri Bhaskara Pantula Mohan while deciding the Application filed by one Pravin Blaggan (who was in occupancy of the Shed) held that the IRP is allowed to take possession of the shed, whereas, Ld. Member Technical, Shri Nallesenapathy held that the IRP was not empowered to dispossess any person in the case in hand, especially when the same is sub judice before a civil court.

FACTS:

Pursuant to an Order dated 11.12.2018 passed by the Adjudicating Authority, Mumbai, in an Application filed under Section 10 of the I & B Code by the Corporate Debtor, Goa Auto Accessories Ltd., the Corporate Debtor underwent Corporate Insolvency Resolution Process (hereinafter referred as CIRP). The Application under Section 10 of the I&B Code was admitted by the Adjudicating Authority and Mr. Suresh Taluja was appointed as an Interim Resolution Professional and a moratorium was imposed under Section 14 of the I&B Code.

That during the Corporate Insolvency Resolution Process, the IRP found that one Pravin Blaggan, (the Applicant before the Adjudicating Authority, Mumbai) was illegally occupying a shed owned by the Corporate Debtor.

The Insolvency Resolution Professional vide its letter dated 21.12.2018 informed Pravin Blaggan about the Company undergoing CIRP and called upon the Applicant to handover the possession of the shed to the IRP within 24 hours.

The Applicant vide its letter dated 29.12.2018 informed the IRP about various other on-going litigations between the Corporate Debtor and himself related to the property in question. However, the applicant, in the interest of justice and equity sought the intervention of the Tribunal with a prayer to restrict the IRP from acting any furtherance of its letter dated 21.12.2018.

 

ISSUE

Whether an Insolvency Resolution professional can dispossess any person from the property owned by the Corporate Debtor which is under litigation?

ARGUMENTS OF THE APPLICANT I.E., PRAVIN BLAGGAN

The Applicant argued that he was not in illegal occupation of the shed and had been occupying it pursuant to an agreement executed in the year 1997 between him and the Corporate Debtor. The Applicant further informed the Adjudicating Authority that he was an employee of the Corporate Debtor and a dispute between them arose with respect to the payment of rent which resulted into the filing of a civil suit before Civil Judge, Senior Division, Goa, in March 2009. The Applicant also brought to the notice of the NCLT that the issue of possession/occupation of the shed was sub judice before the Civil Court and therefore, the IRP should be directed to refrain from acting in furtherance of his direction.

 

ARGUMENTS OF THE IRP

The IRP argued that as per Section 18 (1) (f) of the I & B Code, it was his duty to take control and custody of any asset owned by the Corporate Debtor including the assets which are not in its possession. It was further submitted that the right of the applicant claiming a lien on the shed was pending before Civil Court but there was no interim order. Therefore, as per the Resolution Professional the same cannot prejudice the right of the Resolution Professional under the provisions of the Code.

 

OBSERVATION OF THE ADJUDICATING AUTHORITY

After hearing both the parties, the Members of the Bench had a contrary view to the issue that was putforth to the Adjudicating Authority. That the Ld. Member (Judicial), Shri Bhaskara Pantula Mohan agreed with the arguments advanced by the Resolution Professional, Ld. Member (Technical) V Nallesenapathy had a contrary view.

Ld. Member Judicial, Shri Bhaskara Pantula Mohan observed that I & B Code authorizes and empowers the Resolution Professional to take control and custody of any property which the Corporate Debtor has the complete ownership of. The Ld. Member further observed that IBC authorized and empowered the IRP to take possession of the shed as the suit filed by the applicant merely pertained to the issues of possession and mesne profits and not the question of ownership. He held that the power of the IRP even extended to properties which are the subject matter of court proceedings.

Ld. Member Technical, Shri Nallesenapathy observed that as per Section 18 (1)(f)(vi) the IRP was duty-bound to take control and custody of assets, subject to the determination of a court of authority. That he further added taking control of the assets by the IRP only meant taking symbolic possession and not physical possession specially when the same is sub judice before a Civil Court. That the Ld. Member while taking into consideration the object of Section 18(1)(f)(vi), he observed that property under dispute is included in the Information Memorandum to enable a prospective resolution applicant to "take a call" after considering the litigation and accordingly, submit a resolution plan. He further added that the object of this provision is never to dispossess anyone who is in the occupation of the property belonging to the Corporate Debtor.

In view of the contrary observation on the legal issue, the question as to whether an interim resolution professional (IRP) can dispossess any person in possession of a property owned by the Corporate Debtor when the said property is a subject to litigation before the Civil Court was thus referred to the Principal Bench.

Disclaimer: - This article is for the general information and awareness of its readers, In-case of any legal matter in relation with readers, they are expected to have legal opinion before placing reliance on it. Further it contains completely author's views on the subject and completely unbiased based on authors own experience, study and understanding. 

Author:- EasyLegalTax Team

Treatment of Expression of Interest Received Outside The Timeline As Mentioned In FORM G -EasyLegalTax

FORM G

Whether fresh expression of interest can be accepted beyond the last date of receipt of expression of interest as per the Invitation for Expression of Interest (Form G) under Regulation 36A(1) of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016.

The Insolvency and Bankruptcy Code, 2016 (‘I&B Code’), as also detailed in the Preamble of the Code, is formed with the objective of reorganisation and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximisation of value of assets of such persons to promote entrepreneurship, availability of credit and balance of interest of all stakeholders.

The prime objective of the Corporate Insolvency Resolution Process is maximisation of value of assets of the ‘Corporate Debtor’ and thereby for all creditors. In order of priority, the first order objective is “resolution”. The second order objective is “maximisation of value of assets of the ‘Corporate Debtor’’ and the third order objective is “promoting entrepreneurship, availability of credit and balancing the interests”. This order of objective is sacrosanct.

In order to extend the objectives of the Code, the Resolution Professional and the Committee of Creditors are duty bound to ensure maximisation of value of the Corporate Debtor within the time frame prescribed under the I&B Code i.e. 330 days which can be further extended by period of 90 days, subject to the approval of the Hon’ble Adjudicating. The endeavour is to find out a Resolution Applicant who can offer maximum value for resolution of the insolvency of the Corporate Debtor so as to safeguard the interest of all stakeholders of the Corporate Debtor

Though Regulation 36A (6) of Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) envisages a bar on submission of Expression of Interest (EoI) after the time specified in the invitation for expression of interest but the law is well settled in this regard that the Regulations have to be read in consonance with the main provisions of the I&B Code (Brilliant Alloys Private Limited v. Mr. S. Rajagopal and Ors.- SLP No. 31557/2018 ). The I&B Code contains no such stipulation with respect to the bar on acceptance of expression of interest beyond the last date mentioned in the Invitation for Expression of Interest Form. Further, the Regulations to the I&B Code can only be considered to be directory in nature and are not mandatory where no clear stipulation to the effect is defined under the provisions of the I&B Code, the furtherance of objectives of the I&B Code should be treated as the guiding principles for the conduct of CIRP.

Therefore, in case any Resolution Plan is not yet approved by the Committee of Creditors and is still under consideration, then the expression of interest to submit a resolution plan by a Resolution Applicant can be permitted/considered by the Resolution professional and the Committee of Creditors.

 

Disclaimer:This article is for the general information and awareness of its readers, In-case of any legal matter in relation with readers, they are expected to have legal opinion before placing reliance on it. Further it contains completely author's views on the subject and completely unbiased based on authors own experience, study and understanding. 

Author:- EasyLegalTax Team

Moratorium Under Insolvency and Bankruptcy Code -EasyLegalTax

moratorium under ibc

Insolvency and Bankruptcy Code, 2016 (“IBC”) has given new hope to the financial market in India. Before IBC the debt recovery system in India was in a complete clutter, which was affecting the Indian Economy. The IBC has introduced the concept of moratorium under Section of the I & B Code in a Company which undergoes the corporate insolvency resolution process (in short CIRP) as soon as a Petition/Application either filed by a Financial Creditor or an Operational Creditor or a Corporate Applicant is admitted.

What does the 'Moratorium’ mean?

Moratorium defined under Section 14 of the IBC means a period in which:

  1.       All the ongoing cases/suits against the company undergoing CIRP get stayed.
  2.       No new cases/recovery suits can be filed against the company undergoing CIRP during this period.
  3.       All the actions for recovery of any debt under any other law except the IBC get stayed.
  4.       Any transfer or disposing off of any property of the company undergoing CIRP is prohibited.

When and how is the moratorium imposed?

Moratorium is imposed by the National Company Law Tribunal i.e., the Adjudicating Authority herein on an Application filed by:

1. Financial creditor- All the creditor who gives financial loans and includes institutions like banks and non-banking financial companies. It also includes any person from whom a company has:

  1. Borrowed money against the payment of interest.
  2. Receivables sold or discounted other than any receivables sold on a non-recourse basis
  3. Raised money from any kind of transaction which has a commercial effect of borrowing. Eg: A builder company raising money by booking of any real estate project.
  4. An obligation to pay because of any indemnity bond, guarantee bond or letter of credits issued by a bank.

It also includes loan taken by a corporate debtor in transactions such as derivative transaction entered into in connection with protection against or benefit from fluctuation in any rate or price and may include liability in respect of any lease or hire purchase contract which is deemed as a finance or capital lease.

2. Operational creditor- Any person from whom goods and services are availed in the normal course of business. Such debts can include an outstanding salary of an employee or tax dues or raw material suppliers. 

3. The Corporate Applicant i.e., the Company itself – Where a corporate debtor has committed a default, a corporate applicant thereof may file an application for initiating corporate insolvency resolution process with the Adjudicating Authority.

So, when an application is filed by any of the above before the Adjudicating Authority seeking initiation of the CIRP of a Company, the Adjudicating Authority while admitting such Application declares moratorium prohibiting actions taken against the Company undergoing CIRP or any action taken by the Company which has an effect on the creditors of the company.

 

What is the importance of moratorium or why is it needed?

The object of the IBC in a nutshell is:

  1. To consolidate and amend the laws relating to the reorganization and the insolvency resolution of the Corporate persons in a time bound manner for maximization of the value of assets. The main aim is to improve ease of doing business, and facilitate more investments
  2. to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders including alteration in the order of priority of payment of Government dues.

The mandate of the Insolvency and Bankruptcy Code is that the moment an Application under the I&B Code is admitted, the moratorium that comes into effect under Section 14(1)(a) expressly interdicts institution or continuation of pending suits or proceedings against corporate debtors.

To achieve the smooth functioning of the Company as an on-going concern it becomes important that some time is given to the company and the Resolution Professional, working on the resolution so that they can carry out their work without any pressure or distress. So, all the cases and debt recovery process are halted during the CIRP so that they can focus solely on the resolution of the company. In case, the Corporate Debtor under-going CIRP fails, the Corporate Debtor is referred to liquidation under the I & B Code and the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016. 

When does the moratorium period ends?

That as and when the Adjudicating Authority approves a Resolution Plan under Section 31(1) of the I&B Code or passes an Order for liquidation of the Corporate Debtor under Section 33 of the I&B Code, the moratorium shall cease to have effect from the date of such approval of resolution plan or liquidation order, as the case may be. In either of the case, all the assets of the Corporate Debtor would be released from the rigour of the moratorium under Section 14 of the I&B Code.

Disclaimer: - This article is for the general information and awareness of its readers, In-case of any legal matter in relation with readers, they are expected to have legal opinion before placing reliance on it. Further it contains completely author's views on the subject and completely unbiased based on authors own experience, study and understanding. 

Author:- EasyLegalTax Team

Prima Facie View of NCLAT: Enforcement Directorate To Be treated As Operational Creditor

NCLAT

The Hon’ble NCLAT while hearing the appeal filed by the successful Resolution Applicant expressed its prima facie that if the assets seized by the Enforcement Directorate are finally held that the assets were purchased out of the ‘proceeds of crime’ as per the Prevention of Money Laundering Act, in such case, the amount which is generated out of the assets will come under the definition of the ‘Operational Debt’ for which the Enforcement Directorate may file claim in terms of the I&B Code.

APPEAL BEFORE THE HON’BLE NCLAT

The Appeal has been preferred by the successful Resolution Applicant for Bhushan Power and Steel i.e., JSW Steel Limited. The main plea of JSW Steel Ltd. before Hon’ble NCLAT is for immunity for the assets of the Bhushan Power and Steel from the ongoing criminal proceedings against it by various authorities like Enforcement Directorate, SFIO and CBI.

The Hon’ble NCLAT on the previous date of hearing framed two issues for consideration of the Appeal filed by the Successful Resolution Applicant:

  1. Whether the ‘Directorate of Enforcement’ has jurisdiction to attach the property of the ‘Corporate Debtor’ or part thereof which is undergoing ‘corporate insolvency resolution process’; and
  2. Whether the ‘Directorate of Enforcement’ comes within the meaning of ‘Operational Creditor’ in terms of Section 5 (20) and (21) of the 2 ‘Insolvency and Bankruptcy Code, 2016’ for the purpose of money claim (civil matter), which may be generated out of the attached property/ part thereof of the ‘Corporate Debtor’?

VIEW OF THE DEPARTMENTS OF THE CENTRAL GOVERNMENT BEFORE THE NCLAT

Ministry of Corporate Affairs:

Mr. Sanjay Shorey, Director (Legal and Prosecution), appeared for Ministry of Corporate Affairs, Government of India. The argument putforth by the Ministry of Corporate Affairs was that the ‘Directorate of Enforcement’ has no jurisdiction to attach the property of the ‘Corporate Debtor’, which is undergoing ‘corporate insolvency resolution process’ and particularly when the appeal is pending consideration of issue of attachment of property of the ‘Corporate Debtor’.

Union of India through Ministry of Corporate Affairs in consultation with Department of Financial Services and the Banks averred that the purpose and scheme of the CIR process is to hand over the company of the corporate debtor to a bona fide new resolution applicant. Any threat of attachment of the assets of the corporate debtor or subjecting the corporate debtor to proceedings by investigating agencies for wrong doing of the previous management will defeat the very purpose and scheme of CIR process, which inter-alia includes resolution of insolvency and revival of the company, and the efforts of the bank to realise dues from their NPAs would get derailed.

Directorate of Enforcement:

The Enforcement Directorate on the other hand had a divergent view on the same. The Enforcement Directorate, submitted that NCLAT has no jurisdiction with respect to the attachment of assets in the course of proceedings under the Prevention of Money Laundering Act. It further submitted that in the present case as the ‘proceeds of crime’ is involved, part/property of the ‘Corporate Debtor’ (Bhushan Power & Steel Limited) has been attached by the Deputy Director of the Directorate of Enforcement, New Delhi by order dated 10th October, 2019.

ORDER OF NCLAT

Taking into consideration the fact that the stand taken by the ‘Directorate of Enforcement’, is contrary to the stand taken by the Government of India, therefore before deciding the case on merit, the Hon’ble NCLAT granted an opportunity to the two wings/ Departments of the Central Government to sit together and settle the issue. Further, the Hon’ble NCLAT stayed the order of attachment dated 10th October, 2019 passed by the Deputy Director, ‘Directorate of Enforcement’ with regard to part property of the ‘Corporate Debtor’ (Bhushan Power & Steel Limited). The Hon’ble NCLAT further prohibited the Director, Deputy Director and other officers of ‘Directorate of Enforcement’ from attachment of any property of the ‘Corporate Debtor’ (Bhushan Power and Steel Limited) without prior approval of this Appellate Tribunal. The property already attached by them was ordered to be released in favour of the ‘Resolution Professional’.

Disclaimer: - This article is for the general information and awareness of its readers, In-case of any legal matter in relation with readers, they are expected to have legal opinion before placing reliance on it. Further it contains completely author's views on the subject and completely unbiased based on authors own experience, study and understanding. 

Author:- EasyLegalTax Team