IBC Digest by AVM Resolution Professionals LLP.

NCLAT (part I )
IBC Digest by AVM Resolution Professionals LLP.

1.AA has to provide opportunity to the creditor to rectify the defects before rejecting the application.

NCLAT in the case of Mr Hardik Fakirchand Shah v. Male Square Retail Pvt. Ltd. (Company Appeal (AT) Insolvency No. 210 of 2021) has held that the petition under Section 9 of the Code cannot be rejected outrightly without giving the opportunity to the Operational Creditor (OC) to amend the same.

In the present appeal, the OC has challenged the rejection of his application by the Adjudicating Authority (AA). The OC claims that he has supplied goods to the Corporate Debtor (CD) and has raised 10 invoices out of which the OC has received only payments for the three invoices, latest on 26.11.2018. Against such default, the OC filed an application under Section 9. The AA rejected the application stating it to be barred by limitation observing that the last invoice was of the year 2015 and the application was filed in the year 2019 which is more than 3 years from the date of default. The NCLT also stated that the invoice dated 08.07.2017 was having a different format than the rest of the invoices and hence the creditability of the same was doubted.

The OC in his appeal argued that the AA failed to take notice of the invoice dated 26.11.2018 which was also the date of default upon which no observations were made by the AA. Further, the Appellant contended that the mere fact of the invoice having a different format cannot be a ground for not considering the validity and authenticity of the invoice.

The Appellate Tribunal observed that even if there were more requirements of documents to support the claim of the OC, the AA was under obligation to allow rectifying the defect by giving notice. Further, it was held that the AA failed to justify the finding of not admitting the 2017 invoice having a different format than the rest. Lastly, the NCLAT also observed that the last invoice dated 26.11.2018 was mistakenly left by the AA which ought to be considered for the calculation of the limitation and hence, the petition was well within the limitation period. Thus, the appeal was admitted and the impugned order was set aside.

2. Application against the PG can be filed independently without even filing for the application against the CD.

NCLAT in the matter of State Bank of India v. Mahendra Kumar Jajodia (Company Appeal (AT) Insolvency No. 60 of 2022) has held that it is not imperative for an application against a Personal Guarantor to the Corporate Debtor (PG) to have an admitted petition of insolvency against such Corporate Debtor (CD). The appeal has been filed challenging the impugned order of the NCLT rejecting the application filed under Section 95(1) of the Code on the ground of it being premature.

The Respondent claimed that Section 60(2) of the Code provides that the insolvency or the liquidation proceedings against the CD be pending before the NCLT for admission of petition against the PG.

The NCLAT observed that the use of words "a" and "such" under Section 60(2) of the Code are for the matters wherein the application against the CD has been filed or admitted in a particular NCLT which will have the jurisdiction to deal with this matter also. It nowhere bars fresh insolvency proceedings to be admitted against the PG wherein no case has been admitted or pending against the CD. Further, it was observed that the use of the above-mentioned words are only to ensure that the insolvency proceedings against the CD and the PG run in the same NCLT. Also, it was held that the provisions under Section 60(2) are supplemental to Section 60(1) of the Code and an application can be made under sub-section 1 if the matter is outside the purview of sub-section 2. Hence, the Appellate Tribunal held that the decision of the NCLT in rejecting the application terming it premature was erred in law and was accordingly set aside.

3.Distribution of extra funds available as working capital can be made even before the liquidation of the assets during the liquidation.

NCLAT in the matter of Varsana Ispat Ltd. (Through Liquidator) v. Varsana Employee Welfare Association (Company Appeal (AT) (Ins.) No. 885 of 2020) has observed that act of the liquidator in distributing the recoveries from the debtors during the liquidation process to the stakeholders is valid as per the provisions of the Code.

The present appeal was filed by the liquidator to challenge the impugned order of the NCLT which held that the disbursement made by the liquidator from the working capital of the CD before liquidating the assets was not in accordance with the provisions of the Code and to declare the distribution so made to be in consonance with the IBC.

Contentions of the Appellant

  • Distribution made by him was after the discussion with the SCC and as per Section 53 of the Code.

  • Distribution from the surplus working capital available made was with the undertaking taken from the creditors under Regulation 43 which provides for the return of the distribution if the creditors are not entitled to receive the same.

  • It was also argued that the liquidator after the discussion with the KMPs of the CD distributed the extra funds available.

  • The distribution so made was in consonance with Regulation 42 which provides for distribution to be made to the stakeholders within a period of 90 days from the receipt of the amount.

  • Respondent no. 1 does not have the locus to challenge the distribution as their claims have already been duly met with.

Contentions of the Respondent No. 1

  • The liquidator has made the illegal distribution from the working capital before the sale of assets of the CD.

  • He has also violated Section 53 of the Code which provides for the sale of assets first and then the distribution of the proceeds arising from such sale.

Observations by the NCLAT

The Appellate Tribunal set aside the judgment of the NCLT and held the distribution made to the stakeholders to be valid.

4.Whether the lenders to the allottees can be considered as Financial Creditors?

The Hon'ble NCLAT in the case of Axis Bank Limited v. Value Infracon India Private Limited (I.A. No. 1502/1503 of 2020 in Company Appeal (AT) (Insolvency) No. 582) has answered this question in negative.

Brief facts of the case:

The Appellant/ Bank had given loans to the allottees of a real estate project which later has gone into insolvency. The Appellant had filed its claim with the Insolvency Resolution Professional (IRP) which was refused by the same. Against this action of the IRP, an application was filed in the NCLT under Section 60(5) of the Code which was rejected by the Adjudicating Authority (AA) by observing that the Bank cannot be called as the creditor to the Corporate Debtor (CD) as the loans were given to the homebuyers of the CD and not directly to the CD. By way of this appeal, it has challenged the impugned order passed by the NCLT which rejected the application for inducting the Bank as the secured financial creditor.

Contentions of the Appellant:

  1. That the recovery certificate issued by the DRT was in favour of both the allottee and the bank which makes the bank a creditor as per Section 3(10) of the Code.

  2. That there arises a possibility that the allottees won't deposit the amounts which they will receive under the resolution plan, despite the charge of the Appellant over the said flat.

Contentions of the Respondent:

  1. That the liability to repay the loan was on the homebuyers and not the CD.

  2. That the security interest to be created on the property has to be registered as per Section 77 of the Companies Act, 2013 and since, no charge was created, the Appellant cannot be categorised as a secured financial creditor.

  3. That the definition of financial debt under the Code provides for allottees to be the Financial Creditors (FC) and not the banks advancing loans to the homebuyers. Reference can be made to the case of Pioneer Urban Land & Infrastructure Ltd. & Anr. v. Union of India & Ors. ((2019) 8 SCC 416).

  4. That the recovery certificate obtained was by way of misrepresentation to the DRT and thus, none of the flats was mortgaged with the Appellant Bank.

Observations of the NCLAT:

The Appellate Tribunal after hearing to the parties referred to the case of Pioneer Urban in which it was observed that if the lenders are to be included in the Committee of Creditors (COC) on behalf of the homebuyers and they are to act on behalf of the allottees, then there arises no need for such inclusion and thus, the allottees themselves are best to be the part of the COC. Also, it was observed that the homebuyer should be considered as FC irrespective of the fact that he has selffinance the flat or has taken the loan from the lender for purchasing the flat.

Lastly, it was also stated by the Appellate Tribunal that the objective and scope of the IBC will get defeated if such banks/financial institutions who have given loans to the allottees are considered as FCs and further went on to say that the presence of the tripartite agreement between the bank, borrower and the CD will not affect the nature of the money borrowed by the homebuyer.

Hence, the appeal was dismissed and the impugned order was upheld.

5.Operational Debt does not have classification such as statutory dues and non-statutory dues.

NCLAT in the case of Government of India v. Ashish Chhawchharia (Company Appeal (AT) (Ins.) No. 02 0f 2021) has held that the Code does not differentiate between the statutory dues and other claims under the Operational Debt (OD).

The Appellant in the present appeal has challenged the impugned order by which the resolution plan of the successful resolution applicant (SRA) was passed. The Appellant contends that the plan has reduced the claim amount which was submitted by it and has failed to safeguard the interest of the statutory dues of the Appellant and other Operational Creditors (OC). It also contended that the claims under the statutory dues and of the OCs are different from each other as the former does not arise from the mutual agreement or contract but charges and obligations of the payer. Hence, the extinguishment of dues was not in conformity with the provisions of the Code.

Respondent/RP contended that the plan has been approved by the COC over which the AA has no judicial power and thus, has become binding on all the stakeholders including the Government.

Also, the payment as decided in the resolution plan has been given to the OC which is more than 36% of the liquidation value which came out to be nil. The RP further stated that the statutory dues come within the definition of OD and the Code does not provide for any difference between the statutory and non-statutory dues.

The NCLAT after hearing to the parties observed that the statutory dues of the Appellant shall come within the definition of OD under Section 5(21) of the Code.

Further, the Appellate Tribunal observed that the Code does not provide for special treatment for statutory dues and such debt shall be the part of OD as per the IBC. Lastly, it was held that the argument of the Appellant that its claim cannot be extinguished is against the ruling given in the case of Essar Steels and thus, it was observed that the claims of the creditors get settled and extinguish by operation of the IBC.

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