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IBC Brief – September, 2022

Welcome back to our updates on the Insolvency and Bankruptcy Code, featuring developments in the month of September 2022.

Welcome back to our updates on the Insolvency and Bankruptcy Code, featuring developments in the month of September 2022.

Errata: The title of the previous email “IBC Brief – September, 2022” was incorrect and should be read as “Arbitration Brief – September, 2022”. Inconvenience to readers is deeply regretted.

The Insolvency and Bankruptcy Board of India (“IBBI“) notified amendments to the IBBI (Voluntary Liquidation Process) Regulations, 2016, and IBBI (Liquidation Process) Regulations, 2016 for a second time. The amended regulations, which came into force on 16.09.2022, introduce the following changes:

  1. During the first 60 days of liquidation commencement, the Committee of Creditors (“CoC”) constituted during Corporate Insolvency Resolution Process (“CIRP”) shall function as the Stakeholders Consultation Committee (“SCC”). The SCC shall be reconstituted after adjudication of claims based upon admitted claims.
  2. The SCC has been empowered to propose replacement of the liquidator to the Adjudicating Authority and fix the fees of the liquidator, if the CoC did not fix the same during CIRP.
  3. If a claim is not filed during the liquidation process, then the amount of claim collated during CIRP shall be verified by the liquidator.
  4. Specific event-based timelines have been stipulated for the auction process.
  5. Before the filing of an application for dissolution or closure of the process, SCC shall advise the liquidator, on the way proceedings in respect of avoidance transactions or fraudulent or wrongful trading, shall be pursued after the closure of liquidation proceedings.

The IBBI has amended the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (“CIRP Regulations“) for the fourth time and has notified the amendment on 16.09.2022. The recent amendment enables the Resolution Professional (“RP”) and the CoC to issue a request for a resolution plan a second time for the sale of one or more of the assets of the Corporate Debtor (“CD”) in cases where no resolution plan has been received for the corporate debtor as a whole. It enables a resolution plan to include the sale of one or more assets of CD to one or more successful resolution applicants submitting resolution plans for such assets and providing for appropriate treatment of the remaining assets. However, the working of the provisions needs to be considered, especially in cases where there may be one of more financial creditors having a first change.

From the Docket

A five-judge bench of the Appellate Authority in VR Ashok Rao v. TDT Copper held that refiling an appeal after curing the defects beyond the period of seven days will amount to a fresh filing and any delay beyond the period prescribed under Section 61 of the Insolvency and Bankruptcy Code, 2016 (“Code”) or Section 421 of the Companies Act, 2013 in refiling the appeal can be condoned only on sufficient justification.

The Appellate Authority in Ram Bhaj Jain v. Tarun Batra has held that an order passed by the Adjudicating Authority for liquidation of the Corporate Debtor would not be invalid solely because a One Time Settlement was under consideration.

The NCLAT upheld the ruling of the NCLT in Trident Fabricators  v. Hiranmayee Energy that the NCLT under Rule 43 of NCLT Rules, 2016 has ample powers to call for any information or evidence, it may consider necessary at its discretion. NCLT, however, also held that when there is no privity of contract between the Appellant and the Corporate Debtor, it does not have powers to call the documents and in such cases ,the alternate remedy could be seeking those documents by virtue of an application in the civil court.

The Supreme Court in K. Paramasivam v. Karur Vysya Bank has held that insolvency proceedings against a guarantor can be initiated even if the insolvency proceedings of the Principal Borrower have not been initiated. The Court placed reliance on its earlier decision of Laxmi Pat Surana v. Union of India wherein a ‘corporate person was included in the definition of a ‘corporate debtor’ in order to allow the proceedings in the aforementioned circumstance.

In State Tax Officer (1) v. Rainbow Papers Limited the Supreme Court held that the Resolution Plan which ignores the statutory demands payable to any State Government or legal authority, altogether, is liable to be rejected. The court further added that Section 48 of the Gujarat Value Added Tax Act is not contrary to or inconsistent with Section 53 or any other provisions of the Code. Under Section 53(1)(b)(ii), the debts owed to a secured creditor, would include the State under the GVAT Act.
Relevant excerpt is reproduced hereinbelow:

“If the Resolution Plan ignores the statutory demands payable to any State Government or a legal authority, altogether, the Adjudicating Authority is bound to reject the Resolution Plan.. In other words, if a company is unable to pay its debts, which should include its statutory dues to the Government and/or other authorities and there is no plan which contemplates dissipation of those debts in a phased manner, uniform proportional reduction, the company would necessarily have to be liquidated and its assets sold and distributed in the manner stipulated in Section 53 of the IBC.. In our considered view, the Committee of Creditors, which might include financial institutions and other financial creditors, cannot secure their own dues at the cost of statutory dues owed to any Government or Governmental Authority or for that matter, any other dues.”

In Bharat Hotels Ltd. v. Tapan Chakraborty the NCLAT held that the issue of item wise CIRP cost, and its approval falls in the ambit of the wisdom of the CoC. It essentially has the power to ratify, modify or set aside the cost so claimed. The subject matter of cost is to be decided in the meeting of the CoC and not to be examined by the NCLT even before the CoC takes a decision.

The NCLAT, Principal Bench has set aside an order for liquidation of Corporate Debtor and has given one more opportunity to the Committee of Creditors and Resolution Professional for finding out as to whether there can be any Resolution Plan to revive the Corporate Debtor.

“In the facts of the present case, decision to liquidate the Corporate Debtor was taken in the 5th CoC meeting held on 24.02.2020 by that time neither any Valuers were appointed nor there was any liquidation value. The Resolution Professional has not even prepared an Information Memorandum. As noted above, the entire object and purpose of the I&B Code is to revive the Corporate Debtor and put it back on track. The CoC had not taken any effort to issue any Form G to find out whether there can be a resolution of the Corporate Debtor by any Resolution Applicant. Without even making one effort, CoC jumped to the conclusion to liquidate. It is true that under the statute CoC is empowered to take a decision to liquidate the Corporate Debtor. Material irregularity has been committed in the process as already noticed above.

In Maitreya Doshi v. Anand Rathi Global Finance the Supreme Court has held that approval of a resolution in respect of one borrower cannot discharge a co-borrower. The Bench observed that if there are two borrowers or if two corporate bodies fall within the ambit of corporate debtors, there is no reason why proceedings under Section 7 of the IBC cannot be initiated against both the Corporate Debtors. However, the approval of a resolution concerning one borrower cannot discharge the other borrower for certain. If dues are partly realised from one Corporate Debtor, the balance may be realised from the other one by the virtue of them being a co-borrower. Moreover, once the claim of the Financial Creditor is substantiated, the question of recovery cannot be raised twice over.

In Ashok G. Rajani v. Beacon Trusteeship  the Supreme Court observed that there is no bar to withdrawal of an admitted CIRP application before constitution of Committee of Creditors. The Bench observed that settlement cannot be stifled before the constitution of the Committee of Creditors in anticipation of claims against the Corporate Debtor from third persons. The Supreme Court noted that Section 12A of the IBC enables the Adjudicating Authority to allow the withdrawal of an application admitted under Section 7 or Section 9 or Section 10, on an application made by the applicant with the approval of 90% voting shares of the Committee of Creditors in such a manner as may be specified. 

The NCLAT in P.M. Cold Store v. Goouksheer Farm Fresh  has held that payment of TDS towards interest payable does not amount to acknowledgement in writing of the liability of the Corporate Debtor. The Bench directed the IBBI to investigate into the conduct of the Resolution Professional for violation of Regulation 13 of the CIRP Regulations, 2016.

In Reliance Commercial Finance v. Darode Jog Builder the NCLAT has upheld the NCLT’s decision to not admit a petition under Section 7 of IBC, despite there being a debt and default. The Bench accorded the Corporate Debtor an opportunity to pay/settle the full amount of default despite the Financial Creditor’s unwillingness to enter settlement.

Thank you for reading.

– Sarthak Advocates & Solicitors