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IBC Brief – May, 2023

Welcome back to our updates on the Insolvency and Bankruptcy Code featuring developments during February 2023

Welcome back to our updates on the Insolvency and Bankruptcy Code, featuring developments in the month of May 2023. 

The Supreme Court permitted the course of action of allowing project-wise insolvency for Supertech, by way of an interim order. The court recognized that initiating insolvency proceedings for each project of Supertech would create uncertainty and cause significant hardship for the homebuyers. The Supreme Court upheld the order of the National Company Law Appellate Tribunal (“NCLAT”) in this regard. 

In a setback to the efforts of its lessors to reclaim their aircraft, the NCLAT upheld the insolvency proceedings against financially struggling airline Go First. The airline voluntarily filed for insolvency resolution proceedings on May 10, and the National Company Law Tribunal (“NCLT”) admitted the plea. Engine manufacturer Pratt & Whitney, based in Los Angeles, contested the airline’s bankruptcy filing in a Delaware court. Pratt & Whitney argued that Go First is not a victim but an “insolvent airline” that failed to fulfill its obligations. Go First stated that despite significant support, the extensive damage caused by the faulty engines from Pratt & Whitney, which led to grounding almost 50% of its fleet while incurring full operational costs, resulted in a loss of Rs 10,800 crores in revenue and additional expenses. 

From the Docket 

Sanket Kumar Agarwal v. APG Logistics  was filed before the Supreme Court of India seeking setting aside of the order passed by the National Company Law Appellate Tribunal (“NCLAT”) as the appeal before the NCLAT was filed on the forty-sixth day of the date of the order. The NCLAT had held that the date of filing of appeal cannot be beyond the period of thirty days except when another fifteen days or less could only be condoned in cases where the Appellant demonstrates the sufficient cause of delay in filing the Appeal. The Supreme Court held that the date on which the order was pronounced must be excluded while computing the limitation for filing an appeal against such orders under section 61(2) of the Insolvency and Bankruptcy Code, 2016 (“Code”) 

The Supreme Court in Mars Remedies Pvt. Ltd. v. BDH Industries Limited where an application for the intervention filed by a financial creditor in the main appeal filed by the corporate debtor against the order of admission passed in another Corporate Insolvency Resolution Process (“CIRP”) initiated by another financial creditor held that there cannot be two CIRPs simultaneously going against the same debtor. The Corporate Debtor cannot be allowed to have the benefit of the best of both worlds. The NCLT earlier had dismissed the application but NCLAT allowed the application, forcing the corporate debtor to come up before the Supreme Court.  

The Supreme Court dismissed the writ petition Moser Baer Karamchari Union v. Union of India and Ors., to declare Section 327(7) of the Companies Act, 2013 as arbitrary and violative of Article 21 of the Constitution and thus unconstitutional. Supreme Court declined to interfere with the waterfall mechanism established under the Code. The Supreme Court stated that the waterfall mechanism is based on a structured mathematical formula and establishes a hierarchy for the payment of debts in a specific order of priority, subject to certain qualifications. Altering or striking down any provision or rearranging the hierarchy in the waterfall mechanism could lead to disruptions and instability in the functioning of the overall equilibrium and stasis. Such changes would have cascading effects on the rights and interests of secured creditors, operational creditors, as well as the Central and State Governments. 

The Supreme Court in Ezeego One Travel and Tours v. Yatra Online allowed Ezeego to withdraw the appeal against Yatra Online. Earlier Ezeego moved the Apex Court against the NCLAT order that had dismissed an insolvency application against Yatra. Setting aside the NCLT order, the NCLAT had said in the 31 March order that there was an error in allowing Ezeego to bring a new date of default, without considering that there was another date of default existing in the pleadings which were filed at the inception of the litigation. Ezeego Tours and Travels later settled its insolvency dispute with Yatra Online. 

The Supreme Court in M.K. Rajagopalan v. Dr. Periasamy Palani Gounder  has pronounced that even while respecting the commercial wisdom of the Committee of Creditors (“CoC”), in the present case the resolution plan in question could not have been approved by the adjudicating authority. Earlier NCLAT disapproved the resolution plan which was approved by the CoC and the NCLT. The Apex court upheld the order given by NCLAT where the Successful Resolution Applicant was declared ineligible in terms of Section 88 of the Indian Trust Act,1882.   

The Supreme Court in Vistra ITCL (INDIA) v. Mr. Dinkar Venkatasubramanian dealt with the issue of treatment of a secured creditor does not fall under the category of a financial creditor or operational creditor. The Supreme Court relying upon its own judgement in the case of a person Anuj Jain and Phoenix ARC held that, a creditor who only holds a security interest in the assets of the corporate debtor, even if considered a secured creditor due to collateral security provided by the corporate debtor, would not be classified as a financial creditor under Section 5(8) of the IBC. However, in view of the intent of the amended Section 30(2) along with Section 31 of the IBC is to acknowledge and protect the interests of other creditors who are not part of the COC, the Supreme Court treated the appellant as a secured creditor in accordance with Section 52 read with Section 53 of the IBC. The successful resolution applicant was given the option to treat the appellant as a secured creditor, allowing them to retain the security interest in the pledged shares. Consequently, the appellant would be entitled to the proceeds from the sale of the pledged shares under Section 52 of the IBC, as read with the relevant regulations. 

The Supreme Court in M. Suresh Kumar Reddy v. Canara Bank & Ors. has held that once NCLT is satisfied that the default has occurred, there is hardly any discretion left with NCLT to refuse admission of application under Section 7.  

The Supreme Court in Gluckrich Capital v. The State of West Bengal.  held that under section 66 of Code, the remedy is not available against third parties. The court opined that in given circumstances it is for the Resolution Professional or the successful resolution applicant, as required to take civil recourse against a third party, for recovery of dues payable to the corporate debtor which may be available in law.  

The NCLAT in Netafirm Agricultural Financing Agency v. Baliraja Sakhar Karkhana Ltd. held that Adjudicating Authority has committed error in rejecting the Application under section 7 of IBC for not fulfilling threshold. Computation of Principal as well as interest has to be done for ascertaining threshold limit under IBC.  

The NCLAT in Manas Sarkar v. Indian Overseas Bank & Ors. has held that pending adjudication does not come in the way of deciding applications filed under section 7 of IBC. It subsequently held that debiting the cash credit account of the corporate debtor for adjustment towards a term loan cannot be a ground to deny admission of the section 7 application.  

In the case of Kapil Wadhawan v. Piramal Capital & Housing Finance  the NCLAT upheld the decision to allow the successful resolution applicant, Piramal, to pursue avoidance applications. The court emphasized the importance of discovering fraudulent transactions and preventing their benefits to creditors. It rejected the appeals filed by the former promoters, including the appellant, stating that there were no grounds for interference. The decision affirmed the intent of the statutory scheme and the objective of bringing back public money into the system. The appeals were dismissed placing reliance on the division bench judgment of the Hon’ble High Court of Delhi in Venus Recruiters. 

Thank you for reading.

– Sarthak Advocates & Solicitors