IBC – NCLAT Fortnightly Summary (August 16, 2023 – August 31, 2023) – Insolvency/Bankruptcy

The following is a snapshot of the important orders passed by
the National Company Law Appellate Tribunal
(“NCLAT“), under the Insolvency and
Bankruptcy Code, 2016 (“Code“), during
the period between August 16, 2023 – August 31, 2023. For
ease of reference, the orders have been categorized and dealt with
in the following categories i.e.,Pre-admission stage, Corporate
Insolvency Resolution Process (“CIRP“)
stage and Miscellaneous.

PRE-ADMISSION STAGE

1. In Anand Gupta and Anr. v. Vardhman Realtech Private
   Limited (Company Appeal (AT) (Insolvency) No. 1065 of
   2023), the NCLAT did not interfere with the order of the
   Adjudicating Authority, which held that the money advanced by a
   joint venture partner would not amount to a financial debt for
   maintainability of Section 7 application.

2. In Naresh Choudhary v. Sterling Enamelled Wires
   Private Limited and Another (Company Appeal (AT)(Insolvency) No. 39
   of 2023 & I.A. No.137 of 2023), the NCLAT upheld the
   decision of the Adjudicating Authority holding that defense of
   pre-existence of dispute cannot be taken into account where after
   raising of such disputes, the corporate debtor had acknowledged its
   liability. The NCLAT further noted that any pre-existing dispute
   should have been brought to the pointed notice of the Operational
   Creditor and mere usage of words ‘subject to theclaimslodged
   with you’ would not be sufficient to substantiate
   ‘pre-existing disputes.’

3. In Supreme Transport Organization Pvt. Ltd. v.
   Maharashtra Airport Development Company (Comp. App. (AT) (Ins)
   No.1056 of 2023), the NCLAT held that a Section 9
   application is not maintainable for the recovery of earnest money
   deposit in connection with a tender as such earnest money did not
   fall under the ambit of ‘operational debt’, since had no
   nexus with provision of goods or services.

4. The NCLAT, in Narayan Mangal v. Vatsalya Builders &
   Developers Private Limited (Company Appeal (AT) (Ins.) No. 294 of
   2023), held that where a default is committed prior to the
   period specified in Section 10A and where such default continues,
   there is no bar under Section 10A of the Code from recognizing the
   accrual of interest during such period and such interest accrued
   can be taken into account for computing the threshold under Section
   4 of the Code.

5. Diametrically opposite views arose from the Principal and
   Chennai Bench of NCLAT on the question of whether an application
   for initiation of CIRP is maintainable based on a default in
   payment under a settlement agreement which occurred during the
   Section 10A period, where such settlement agreement was entered in
   relation to a default prior to Section 10A period.

   In Raghavendra Joshi v. Axis Bank Limited (Company
   Appeal (AT) Insolvency No. 914 of 2023), the corporate
   debtor had defaulted in discharging its commitment under an
   accepted One Time Settlement (OTS) during the period covered under
   Section 10A of the Code. While upholding the maintainability of a
   Section 7 application against such a default of an accepted OTS,
   the Principal bench of NCLAT held that the bar on initiation of
   CIRP under Section 10A is not applicable where the default had
   categorically occurred prior to the period specified in Section 10A
   of the Code and where default of OTS continues during the suspended
   period.

   On the other hand, in Zhejiang Industrial Group Company Limited v. Al
   Badr Seafoods Private Limited (Company Appeal (AT) (CH) (INS.) No.
   272 of 2023,the Chennai bench of NCLAT held that the bar
   on initiation of CIRP under Section 10A was applicable where the
   default in payment of instalment under a settlement agreement
   executed in relation to a default relating to pre-section 10A
   period, occurred during the Section 10A period.




6. In Zhejiang Industrial Group Company Limited v. Al
   Badr Seafoods Private Limited (Company Appeal (AT) (CH) (INS.) No.
   272 of 2023), the Chennai Bench of NCLAT held that a
   Section 9 application filed on the basis of a default in payment of
   an instalment under a settlement agreement was not maintainable as
   such default in payment does not come within the definition of
   ‘operational debt’ under Section 5(21) of the Code.
   However, it may be noted that principal bench of NCLAT noted
   diametrically opposite view, and in our opinion the correct view,
   in Ahluwalia Contracts (India) Limited v. Jasmine
   Buildmart Private Limited (Company Appeal (AT) (Insolvency) No. 345
   of 2023 & I.A. No.1164 of 2023.




7. In Madras Chemical and Polymers v. Vijay Aqua Pipes
   Private Limited (Company Appeal (AT) (CH) (INS.) No. 298 /
   2021), the NCLAT held that where the corporate debtor
   failed to pay the principal amount for certain goods, a CIRP
   application filed by a del credere agent claiming to be a financial
   creditor would not be maintainable as such debt, while could
   qualify as operational debt, cannot be termed as financial debt.
   The NCLAT further held that a legal notice demanding payment was
   not equivalent to a Section 8 demand notice.

CIRP STAGE

1. In Ashok Gosavi & Ors. v. Manoj Kumar Agarwal
   & Ors. (Company Appeal (AT) (Insolvency)
   No.1094/2023), the NCLAT held that, where the authorized
   representative of the home buyers had voted in favour of approval
   of a resolution plan based on the approval of the majority of the
   home buyers, such a resolution plan cannot be challenged by
   minority home buyers.

2. The NCLAT, in Ganesh Ores Private Limited v. Vijaykumar V. Iyer
   & Anr (Company Appeal (AT) (Insolvency) No.830 of
   2023) held that a plan may make distinction between
   secured creditors and unsecured creditors in so far as their
   entitlement is considered. It further went on to hold that where a
   member of committee of creditors has approved the resolution plan
   itself, it cannot separately challenge the distribution mechanism
   specified in such a resolution plan.

3. In Indian Overseas Bank v. Rathi TMT Saria Private
   Limited & Ors (Comp. App. (AT) (Ins) No.1134 of 2023 & I.A.
   No. 3949 of 2023), the NCLAT held that committee of
   creditors cannot consider other resolution plans during the
   pendency of approval of a resolution plan before the Adjudicating
   Authority, when the plan has already been approved by the committee
   of creditors.

4. In Kotak Mahindra Bank v. RP of Universal Buildwell
   Pvt Ltd. (Company Appeal (AT) (Ins.) No. 1000 of 2021),the
   corporate insolvency resolution process was initiated on behest of
   a financial creditor (homebuyers). The appellant (being another
   financial creditor) filed an application after filing its claims
   for limiting the corporate insolvency resolution process only to a
   particular project of the corporate debtor. By this application,
   the appellant sought for the release the other projects from the
   rigours of the insolvency process.

   The NCLAT noted that while the insolvency process could have been
   limited to one project, the Adjudicating Authority could not have
   modified and reviewed its order of admission against the corporate
   debtor and restricted the insolvency process to only one project
   based on the application of the appellant.

5. In Giriraj Enterprises v. Regen Powertech Private
   Limited and Anr. (Company Appeal (AT) (CH) (Ins) No.
   323/2021), in a bunch of appeals, the NCLAT considered
   whether Regen Powertech Private Limited (“Holding
   Company”) and Regen Infrastructure and Services Private
   Limited (“Subsidiary Company”),were intertwined and
   whether the consolidation of the CIRP process of both the Holding
   Company and the Subsidiary Company could be done.

   The NCLAT following the principles laid down in Oase Asia Pacific Pte Limited Vs. Axis Bank and
   other Financial Creditors & Ors. in Company Appeal (AT) (Ins)
   No. 783/2020 and Radico Khaitan Ltd. vs. BT & FC Pvt. Ltd.
   & 6 Ors.’ in Company Appeal (AT) (Ins) No.
   919/2020, which interalia included parameters such as
   common control, common directors, common assets, inter-dependence,
   etc. and examined the connection between the Holding Company and
   the Subsidiary Company to hold that both companies had
   interconnected business relationships. The NCLAT found that the
   Subsidiary Company, which was in the business of providing service
   to the customers of the Holding Company, was incorporated for the
   benefit of the Holding Company, and was dependent upon the Holding
   Company for funds.

   The NCLAT, therefore, allowed consolidation of the two separate
   insolvency resolution process and held that the consolidation of CIRPs cannot be
   construed as an equity jurisdiction. The scope and intent of
   the Code is value maximization, which would be served by treating
   the Holding Company and the Subsidiary Company to be a single
   entity. However, the NCLAT clarified that this order has been
   passed keeping in mind the peculiar facts of the present case, and
   solely in regards to the scope and objective of the Code.

   In this matter, the NCLAT also held that decree holder fallswithin
   the scope of creditor under Section 3(10) of the Code.

6. Whether a resolution plan can validly contain a provision for
   extinguishment of personal guarantees was the question which was
   dealt by NCLAT in SVA Family Welfare Trust v. Ujaas Energy Limited
   (Company Appeal (AT) (Insolvency) No. 266 of 2023). While examining the issue, the NCLAT
   took note of the decision of Supreme Court in Lalit Kumar v. UOI (Transferred Case (Civil) No.
   245/2020), which had held that sanction of a resolution
   plan does not per se operate as a discharge of guarantors’
   liability. The NCLAT opined that such a decision was not a
   precedent for laying down the law that personal guarantee can never
   be discharged in a resolution plan. Treating the decision of CoC to
   accept the value for relinquishment of personal guarantee as
   commercial decision of the CoC, the NCLAT further held that the
   Adjudicating Authority committed an error in rejecting the plan
   which provided for extinguishment of personal guarantee by
   allocating a value.