Supreme Court Cases -Limited Insolvency Examination w.e.f. 1st January, 2021

Supreme Court Cases – Limited Insolvency Examination w.e.f. 1st January, 2021

 

1. Innoventive Industries Ltd. v ICICI Bank and Anr. (Civil Appeal Nos. 8337-8338 of 2017)

Case Citation: [2017] ibclaw.in 02 SC

FACTS:

In 2012, Innoventive Industries (Corporate Debtor/Appellant) began to suffer losses and it could not further support its business activities. In order to ensure that it pays back the financial assistance received, it proposed for Corporate Debt Restructuring (CDR), which, led to all 19 banks, who provided finances, to form a consortium. The consortium approved the CDR scheme in 2014. Further, a Master Restructuring Agreement (MRA) was entered upon in 2014, by which funds were to be infused by the creditors and a few obligations were to be met by the Corporate Debtor.

In 2016, ICICI Bank (Respondent No. 1) filed an application before the NCLT for the initiation of the CIRP. However, Corporate Debtor claimed that there was no debt owed as a result of 2 years of temporary suspension of all liabilities of the Appellant as stated in two notifications under the Maharashtra Relief Undertakings (Special Provisions) Act, 1958 (hereinafter referred to as Maharashtra Act). Moreover, another application was filed by the Corporate Debtor where it was pleaded that due to non-release of funds under the MRA, it was incapable of replaying its debts.

The NCLT held that the IBC prevailed over the Maharashtra Act by applying the non-obstante clause under Section 238 of the IBC. Moreover, it held that a Parliamentary Statute would apply over a State Statute. Hence, the application was admitted and moratorium was declared. The second application was dismissed on two grounds, the first being no audience to the Corporate Debtors by the NCLT under the procedure of the IBC and the second being that such an assertion was to be made in the earlier application to decide the existence of default within 14 days as prescribed by the IBC.

An appeal was filed before the NCLAT against the NCLT order. However, NCLAT affirmed the order passed by the NCLT, but it held that IBC and Maharashtra Act are two different legislations which operate differently and are thus, not repugnant to each other. It also said that the Appellant cannot take advantage of the Maharashtra Act and the MRA to delay the CIRP under Section 7 of the IBC. An appeal to this effect was filed in the Supreme Court.

ISSUES:

1. Whether the appeal is maintainable before the Court as it was filed by the management of the company after it was suspended and an IRP/RP was appointed?
2. Whether there is any repugnancy between the IBC and the Maharashtra Act under Article 254 of the Constitution?
3. Whether Section 238 of the IBC shall enable the IBC to prevail over the Maharashtra Act?

DECISION:

Considering the first issue, the Court held that once an application for the CIRP is admitted before the NCLT, the management of the company is suspended and an IRP is appointed to manage the affairs of the company. Thus, the erstwhile directors, who are suspended cannot file an appeal on behalf of the company. It is only the company which can be the sole appellant against the order passed by the NCLAT or the NCLT. On the basis of the above reasoning, the Court held that such application filed by the suspended management of the company is not maintainable before the court. It is imperative to know that the Court did not dismiss the appeal solely based on the above reason as it was the first application moved under the IBC and the judges felt it was important for them to deliver a detailed judgement providing clarity to the shift in the law.

Considering the second issue, the Court held that the Maharashtra Act was repugnant to the IBC for three reasons, firstly, there was a direct inconsistency between the two Acts when the same facts would be applied. Secondly, the State law hindered the application of the Parliamentary Statute such that if the provision of Maharashtra Act would be applied, then it will not be possible to continue with the CIRP. Thirdly, both the Code and the Act have similar provisions w.r.t. application of moratorium, such that they cannot be applied together. 

Considering the third issue, the Court held that the non-obstante clause (Section 238) of the IBC will prevail over the limited non-obstante clause contained in Section 4 of the Maharashtra Act. It also stated that the Parliamentary Statute shall prevail over State Statute under the implication of Article 254(1) of the Constitution and that the application of the Maharashtra Act over the IBC is void under the doctrine of repugnancy.  

Thus, the Supreme Court affirmed the order passed by the NCLT and set aside the order of the NCLAT. It therefore held that both the NCLT and the NCLAT were right in admitting the application filed by the Respondent under Section 7 of the IBC.

JUDICIAL EXCERPTS:

“According to us, once an insolvency professional is appointed to manage the company, the erstwhile directors who are no longer in management, obviously cannot maintain an appeal on behalf of the company. In the present case, the company is the sole appellant. This being the case, the present appeal is obviously not maintainable.”

“It is clear, therefore, that the earlier State law is repugnant to the later Parliamentary enactment as under the said State law, the State Government may take over the management of the relief undertaking, after which a temporary moratorium in much the same manner as that contained in Sections 13 and 14 of the Code takes place under Section 4 of the Maharashtra Act.”

“The adjudicating authority correctly referred to the non-obstante clause in Section 238 and arrived at a conclusion that a notification under the Maharashtra Act would not stand in the way of the corporate insolvency resolution process under the Code.”

 

2. Mobilox Innovations Private Limited v Kirusa Software Private Limited (Civil Appeal No. 9405 of 2017)

Case Citation: [2017] ibclaw.in 01 SC

FACTS:

Mobilox Innovations Private Limited (Corporate Debtor/ Appellant) engaged Kirusa Software Private Limited (Operational Creditor/ Respondent) for providing services. A Non-Disclosure Agreement (NDA) was executed between the two with retrospective effect. The Respondent breached the NDA in furtherance of which the Appellant withheld the invoices of payment. On 23/12/2016, the Respondent issued a demand notice under Section 8(1) of the Code against the Appellant which was duly responded by the latter stating the existence of serious and bona fide disputes between them. Subsequently, an application under Section 9 of the Code was filed by the Respondent in the NCLT, Mumbai, which was rejected on the ground that the Appellant has issued the notice of dispute, and the application is hit by Section 9(5)(ii)(d). The Respondent filed an appeal in the NCLAT against the orders of the NCLT where the appeal was allowed stating that disputes were not only vague but Appellant intended to evade the liability. Aggrieved by the orders of the NCLAT the appeal was filed in the Supreme Court.

ISSUE:

What is the scope and ambit of the terms “disputes” and “the existence of a dispute” under Section 8(2)(a) to determine the sustainability of an Operational Creditor’s application under the Code?

DECISION:

The Supreme Court concluded that an Operational Creditor can only trigger the application of insolvency under Section 9 of the Code if the Corporate Debtor has neither done the payment nor issued a reply to demand notice within 10 days of issuance of demand notice. The Court further observed that the word “and” used in Section 8(2)(a) of the Code must be read as “or”

stating that the dispute will exist between the parties if a suit or an arbitration proceeding is pending before the receipt of demand notice.

Furthermore, the Court went on to explain the meaning of the expression ‘existence of dispute’ and concluded that the AA has to use the test of ‘plausible contention’ to determine the ‘existence of dispute’ and need not to examine the merits of the dispute. The Court concluded by stating that the definition of ‘dispute’ under Section 5(6) of the Code is inclusive and not an exclusive one.

 JUDICIAL EXCERPTS:

“It is clear, therefore, that once the operational creditor has filed an application, which is otherwise complete, the adjudicating authority must reject the application under Section 9(5)(2)(d) if notice of dispute has been received by the operational creditor or there is a record of dispute in the information utility. It is clear that such notice must bring to the notice of the operational creditor the “existence” of a dispute or the fact that a suit or arbitration proceeding relating to a dispute is pending between the parties. Therefore, all that the adjudicating authority is to see at this stage is whether there is a plausible contention which requires further investigation and that the “dispute” is not a patently feeble legal argument or an assertion of fact unsupported by evidence.”

 

3. Dharani Sugars and Chemicals Ltd. v. Union of India and Ors. Transferred Case (Civil) No.66 of 2018 in TP (Civil) No. 1399 of 2018

Case Citation: [2019] ibclaw.in 11 SC

FACTS:

Reserve Bank of India published a circular namely, “Resolution of Stressed Assets-Revised Framework” on February 12, 2018. The circular insisted that a bank has to be vigilant enough and make sure that default accounts which are exceeding to Rupees 2000 crores and are not cleared within 180 days of such default or when the first date of default is after 01/03/18, within 15 days from the expiry of this 180 days, then they must be operated under the IBC. Additionally, the circular also mandated that the banks would have to show the defaults in case there is a default in the repayment of the interest by a day. They will also have to make sure that the resolution plan is ready before 180 days of default gets complete. Moreover, the all precedent guidelines of the RBI were over taken by the circular of 2018.

Apart from that, the Circular also discusses that the restructuring can only take place if it is approved by 100% of the creditors. This was in contravention to Section 35AA and 35AB of the Banking Regulation Act.

ISSUES:

1. Whether the circular issued by the RBI provides the regulatory power to RBI?
2. Whether the RBI and the Government of India are authoritative to initiate the CIRP under the IBC by the virtue of Section 35AA and 35AB of the Banking Regulation Act, 1949?

DECISION:

Supreme Court has declared that the RBI circular containing the allowance of the IBC proceedings would not be applicable and invalidated the circular in its totality. Moreover, for the cases where in the banks have already started the proceedings against the Corporate Debtor only by the virtue of RBI circular would remain unconsidered. But, for the cases wherein an application is accepted on the basis of exercise of the legal right provided by the virtue of the IBC that shall remain unaffected.

The judgement mentioned that the inclusion of Section 35AA and AB to the Banking Regulation Amendment Act of 2017 was considered to be constitutionally valid in nature.

The Supreme Court also mentioned that taking into consideration Section 35AA and 35AB of the Banking Regulation Act, 1949, the RBI can direct the banks to work within the principles mentioned by the Central Government. Thus, the RBI is not completely autonomous but is under the surveillance of the Central Government. Hence, the Court laid that there should be specific authorisation by the Central government which is a sine qua non for the application under Section 7 of the IBC and the matter should pertain to specific default committed by the Corporate Debtor.

JUDICIAL EXCERPTS:

“The role assigned, therefore, by Section 35AA, when it comes to initiating the insolvency

resolution process under the Insolvency Code, is thus, important. Without authorization of the Central Government, obviously, no such directions can be issued.”

“It is clear that the RBI can only direct banking institutions to move under the Insolvency Code if two conditions precedent are specified, namely, (i) that there is a Central Government authorization to do so; and (ii) that it should be in respect of specific defaults.”

 

4. Pioneer Urban Land and Infrastructure Limited & Anr v. Union of India & Ors. WP(Civil) No. 43 of 2019 and other petitions

Case Citation: [2019] ibclaw.in 13 SC

FACTS:

The amendments made to Sections 5, 21 and 25 of the IBC, 2016 through a report prepared by the Insolvency Law Committee dated 26.03,2018 was constitutionally challenged through various writ petitions filed by the Petitioner. The report considered allottees or homebuyers of real estate projects to be the “Financial Creditors” so that Section 7 of the Code can be triggered against the real estate developer. Further, they are entitled to be represented in the COC by authorised representatives in addition to being Financial Creditors.

The NCLAT on 21st July, 2017 in Nikhil Mehta and Sons (HUF) v. AMR Infrastructure Ltd. held that the amounts which the developers have raised from the homebuyers under assured return schemes had a “commercial effect of borrowing”. Such amounts raised were treated as “commitment charges” under the account “Financial Cost” in the annual returns of the developers. This allowed the NCLAT to consider the homebuyers as Financial Creditors within the meaning of Section 5(7) of the IBC.

The Insolvency Committee Report suggested that amendments must be made in the Code seeking to clarify, as a matter of law, the position of a homebuyer under the IBC. The Insolvency and Bankruptcy Code Amendment Ordinance, 2018 was thereafter promulgated by the President which allowed a homebuyer to be considered as a Financial Creditor and to be a part of the COC by Authorized Representative.

 ISSUES:

1. Whether Home Buyers can be considered as the Financial Creditors under the IBC?
2. Whether the explanation added to Section 5(8)(f) of the IBC is clarificatory or not?
3. Whether IBC has an overriding effect over the RERA?
4. Whether certain provisions of the IBC are constitutionally valid?

DECISION:

Considering the first issue, the Court held that a homebuyer would be considered as a Financial Creditor by the application of Section 5(7) of IBC. Section 5(7) defines ‘financial debt’ which is a debt against consideration for time value of money. The Court observed that the amount paid by the allottees to the developers has the element of time value of money to such homebuyer. Thus, the Court considered that such debt would be a financial debt and homebuyers would be treated as a financial creditors.

Considering the second issue, the Court observed that Section 5(8)(f) is a residuary provision which considers a debt to be a financial debt as it has the effect of commercial borrowing. The Court decided that the amount lent by a homebuyer would fall under Section 5(8)(f) without applying the explanation clause as a homebuyer has an interest in the flat as he/she would get it at a lower cost compared to a readymade flat which shall accord for the time value of money lend to the developer. Thus, the explanation is provided to clarify that a homebuyer would be considered as a Financial Creditor and it does not enlarge the scope of the original meaning.

W.r.t. the third issue, the Court held that the IBC shall have an overriding effect over the RERA as Section 88 of the latter law particularly establishes that the provision of the same is additional to other provisions such as that of the IBC and it shall not act as a relaxation for other such provisions. Further, the intent of clarifying a homebuyer as a Financial Creditor despite the existence of the RERA indicates that the Parliament amended the IBC to give it preference over the RERA.  As per the doctrine of harmonious construction, RERA and the IBC are to be read together and they must co-exist together. However, in the event of conflict, the Code will prevail over the RERA.

Considering the fourth issue, the Court held that there lies certain intelligible differentia which makes a homebuyer unique from an Operational Creditor. The Court gave several reasons to explain its decision. For example, in operational debt, the person supplying goods or services is termed as a creditor and the person paying amounts is known as A debtor. However, in the situation of real estate, it is the opposite which makes homebuyers different from an Operational Creditor. A homebuyer is a Financial Creditor as the debt provided is against time value of money. In regards of Article 19(1)(g) and 300A of the Constitution, the Court held that the objective of the IBC is to ensure that the Corporate Debtor is a going concern and does not face liquidation so that it can repay the amount back to the creditors. It held that the Amendment was brought in the light of public interest and it does not violate Article 19(1)(g).

Thus, the Supreme Court held that Article 14, 19(1)(g) read with Article 19(6), or 300-A of the Constitution of India is not infringed by the Amendment Act to the Code. 

JUDICIAL EXCERPTS:

“Amounts raised by developers under assured return schemes had the “commercial effect of a borrowing”, which became clear from the developer’s annual returns in which the amount raised was shown as “commitment charges” under the head “financial costs”. As a result, such allottees were held to be “financial creditors” within the meaning of Section 5(7) of the Code.”

“The explanation was added by the Amendment Act only to clarify doubts that had arisen as to whether home buyers/allottees were subsumed within Section 5(8)(f). The explanation added to Section 5(8)(f) of the Code by the Amendment Act does not in fact enlarge the scope of the original Section as home buyers/allottees would be subsumed within Section 5(8)(f) as it originally stood.”

 

5. Arcelormittal India Private Limited v Satish Kumar Gupta & Ors. (Civil Appeal Nos.9402-9405 of 2018)

Case Citation: [2018] ibclaw.in 31 SC

FACTS:

On 2nd August, 2017, the CIRP for Essar Steels was commenced and Shri. Satish Kumar Gupta was initially appointed as the IRP and later confirmed as the RP. During the same period, Section 29A of the IBC was inculcated into the Code through an amendment in 2017. The RP circulated an advertisement seeking expression of interest for the resolution applicants who wish to submit their resolution plan which shall suggest the method to ensure ESIL continues as a going concern. ArcelorMittal India Private Limited (AMIPL) and Numetal were one of the applicants to the process. They submitted their resolution plans for the debt-stricken Essar Steel. Initially, both applicants were held to be ineligible by the RP. As per the RP, both resolution applicants were persons connected to NPAs and hence, under Section 29A, they were disqualified. The origins of Numetal, which was nothing more than a Special Purpose Vehicle (SPV) created for the sole purposes of bidding for Essar Steel, were traced back to the promoters of Essar. Thereafter the members of Numetal gave control of Numetal to Mr. Rewant Ruia who was the son of the promoter of Essar Steel – Mr. Ravi Ruia.

In the case of AMIPL, the RP emphasized upon the fact that Mr. Laxmi Mittal, who is the promoter of AMIPL indirectly held control over two companies namely Uttam Galva Steels and KSS Petron. Both Uttam Galva steels and KSS Petron were declared as NPAs. Hence, the RP disqualified Numetal and AMIPL.

This decision of the RP was challenged before the NCLT. The NCLT based on facts pertaining to the two applicants, upheld the view of the RP and held both AMIPL and Numetal to be ineligible parties to a resolution process under Section 29A of the Code. However, the NCLT also mentioned that the problems or the reasons which are making these applicants ineligible as resolution applicants could be cured. The Tribunal granted some time to both Numetal and AMIPL to pay off their debts, settle the NPAs and cure the ineligibility.

Aggrieved by this, both AMIPL and Numetal appealed before the NCLAT against the NCLT order. NCLAT affirmed the order passed by the NCLT and held that although eligible as an applicant in terms of application filed during the prescribed period but not eligible as an applicant under Section 29A of the IBC.

NCLAT held AMIPL and Numetal as still an ineligible resolution applicant. Thus, AMIPL appealed before the Supreme Court.

ISSUES:

1. Whether Numetal and AMIPL are eligible resolution applicants under Section 29A of the IBC?
2. Whether the right to appeal is available to a rejected resolution applicant?

DECISION:

Considering the first issue, the Court interpreted Section 29A of the IBC, and it held that it is very important to lift the corporate veil especially in such cases where corporate vehicle is set up for the purpose of submission of a resolution plan which in this case was Numetal. Since Numetal was incorporated for the sole purpose of bidding for Essar, with no financial or experience credentials of its own. During this investigation, it was discovered that about Rs. 500 crores that has been deposited towards submission of earnest money was yet again traceable back to Mr. Rewant Ruia even after submission of the second resolution plan. The Court further continued and assessed the eligibility of AMIPL. With respect to the case of AMIPL, the Court looked into the manner in which the shareholdings in Uttam Galva and KSS Petron were divested. KSS Petron is directly connected to LN Mittal and AMIPL. Moreover, it has been declared as an NPA and CIRP has already been established against it which leads to AMIPL not being eligible under Section 29A of the IBC as KSS Petron is a connected person to AMIPL. The Supreme Court held both Numetal and AMIPL ineligible as resolution applicants.

Considering the second issue, the Supreme Court held that a resolution applicant has no right to appeal to a rejection of its resolution plan by the RP as anyway the applicant has no vested right that his resolution plan be must be considered. The appropriate stage for a resolution applicant to raise a concern is after the COC has reviewed the resolution plans submitted to it by the RP and passed a resolution thereafter. The Court further held that even a writ petition under Article 226 filed before a High Court is also liable to be turned down on the ground that no right, much less a fundamental right, is affected at this stage. The main intention behind this is to prevent the CIRP from getting hampered due to multiple litigations.

JUDICIAL EXCERPTS:

“AMIPL would be hit by Section 29A(c), as a group company of Shri L.N. Mittal exercised positive control, by its shareholding, right to appoint directors and affirmative voting rights, over KSS Global, which in turn held 100% shareholding in KSS Petron. It is clear therefore that the Uttam Galva transaction clearly renders AMIPL ineligible under Section 29A(c) of the Code.”

“This shows that Numetal itself revealed in its resolution plan that its corporate veil should be lifted, for without lifting this veil, none of the parameters of the request for proposal could have been met by Numetal itself. It is thus clear that the four shareholders of Numetal were persons “acting jointly” within the meaning of Section 29A.”

“ Generally and broadly speaking, we may say that the corporate veil may be lifted where a statute itself contemplates lifting the veil, or fraud or improper conduct is intended to be prevented, or a taxing statute or a beneficent statute is sought to be evaded or where associated companies are inextricably connected as to be, in reality, part of one concern.”

 

6. Committee of Creditors of Essar Steel India Limited through Authorised Signatory v Satish Kumar Gupta & Ors. [Civil Appeal No. 8766-67 of 2019 and Ors.]

Case Citation: [2019] ibclaw.in 07 SC

FACTS:

In 2017, the RBI issued a press release that identified 12 stressed accounts which needed an immediate reference under the IBC amongst which Essar Steel India Ltd. (ESIL) was present. Several other banks such as Standard Chartered Bank and State Bank of India separately filed applications under Section 7 of the IBC to initiate the CIRP against ESIL. Mr. Satish Kumar Gupta (Respondent/RP) was appointed as the IRP and later, the RP. Arcelor Mittal India Pvt. Ltd. submitted their resolution plan which was accepted with a majority by the COC.

After that, the NCLT passed an order where it stated that the dues of the Operational Creditors will have a priority over the dues of the Financial Creditors as per Regulation 38 of IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016. It further stated that the Financial Creditors should sacrifice their interest by providing 15% of profits from the CIRP to the Operational Creditors and other stakeholders.

An appeal was filed in the NCLAT and it also approved the resolution plan but passed an order for redistribution of the proceeds from the CIRP between the class of creditors based on equality such that the Financial Creditors would get 60.7% and the Operational Creditors with a claim of or more than Rupees 1 crore would get 60.28% of their claims. It stated that the waterfall mechanism envisaged under Section 53 of the IBC could not be applied in the CIRP and that the profits generated during the CIRP shall be equally distributed amongst the creditors. Further, it denied the creation of a sub-committee and that the COC needs to take all decisions. Lastly, it held that the COC has not been given the power to decide the manner of distribution as it would lead to a conflict of interest between the Operational Creditors and the Financial Creditors.

ISSUES:

1. What is the role of RP and the COC during the CIRP?
2. Whether there is a scope of judicial review by the NCLT and the NCLAT over the resolution plan?
3. Whether the principle of equality is maintained between different classes of creditors?
4. Whether the COC can appoint a sub-committee?
5. Whether Section 4 and 6 of the IBC Amendment Act, 2019 are constitutionally valid?

DECISION:

The Court held that a RP is an important person during the CIRP who takes up the affairs of the Corporate Debtor after its management is suspended. The RP also collects all claims by the creditors, prepared for the meetings of the COC, and prepares all resolution plans that are to be submitted before the COC for voting. The Court held that the role of the RP is not adjudicatory but administrative. The role of the COC is to apply commercial wisdom as to whether or not a Corporate Debtor shall remain a going concern by applying a resolution plan. It has to consider the feasibility and viability of the plan.

The Court further held that the NCLT has a limited scope of judicial review under Section 31 of the Code whereby it merely has to examine a resolution plan to confirm whether it covers matters enlisted under Section 30(2). For the NCLAT, the scope is within the application of Section 32 whereby it can review a resolution plan if such resolution plan is in contravention of the law or does not protect certain creditors. It also observed that both the NCLT and the NCLAT cannot interfere with the commercial wisdom of the COC and order as to what to pay and how much to pay to each class of creditors.

The Court on the subject of differential treatment held that un-equals cannot be treated equally and thus, a reasonable classification amongst classes of creditors does not violate Article 14 of the Constitution of India. It further held that under Regulation 38 of IBBI (Insolvency Resolution Process for Corporate Person) Regulations, 2016, there lies no indication that all classes of creditors must be paid the same amount. A resolution plan involving different terms of payment may be adopted by the COC on the basis of its commercial wisdom.

On the fourth issue, the Court held that a sub-committee shall be appointed by the COC as the COC may not be able to take all decisions by themselves and they may need a sub-committee for the purpose of carrying administrative tasks such as providing analysis, compiling documents and negotiating with resolution applicants.

Furthermore, w.r.t. Section 4 of the Amendment Act, 2019 the Court held that the Code requires a CIRP to be mandatorily completed within 330 days from the date of commencement. This includes any extension granted by the IBC and time taken by litigant for litigation related to the CIRP. The Court holds it to be valid as the word ‘mandatorily’ does not violate the provisions of the Constitution and stated its effect to be directive in nature. Section 6 of the Amendment Act, 2019 brings about a change in Section 30(2)(b) w.r.t. the payment received by the Operational Creditors and the dissenting Financial Creditors. The Court stated that this section does not prohibit the COC from classifying creditors, rather, it only provides a guideline as to the minimum payment received by an Operational Creditor.

JUDICIAL EXCERPTS:

 “Thus, it is clear that the limited judicial review available, which can in no circumstance trespass upon a business decision of the majority of the Committee of Creditors, has to be within the four corners of Section 30(2) of the Code, insofar as the Adjudicating Authority is concerned, and Section 32 read with Section 61(3) of the Code, insofar as the Appellate Tribunal is concerned.”

“Regulation 38 again does not lead to the conclusion that financial and operational creditors, or secured and unsecured creditors, must be paid the same amounts, percentage wise, under the resolution plan before it can pass muster.”

 

7. Shivam Water Treaters Pvt. Ltd. v Union of India Secretary to Govt. Ministry of Corporate Affairs & Ors. (SLP (C) No. 1740/2018)

Case Citation: (2018) ibclaw.in 66 SC

Hon’ble Supreme Court held that having heard learned counsel for the parties, we are only inclined to request the High Court to address the relief limited to any action taken by the respondents or any order passed by the National Company Law Tribunal. Barring this, the High Court should not address any other relief sought in the prayer clause. The High Court is requested not to enter into the debate pertaining to the validity of the Insolvency and Bankruptcy Code, 2016 or the constitutional validity of the National Company Law Tribunal.

Our present order does not debar the petitioner to challenge the validity of composition of the National Company Law Tribunal and the validity or the constitutionality of the Insolvency and Bankruptcy Code, 2016 before this Court under Article 32 of the Constitution. The special leave petition stands disposed of accordingly. No order as to costs.

 

8. B K Educational Services Pvt. Ltd. v Parag Gupta and Associates (Civil Appeal No.23988/2017 and other appeals)

Case Citation: [2018] ibclaw.in 32 SC

FACTS:

A dispute arose regarding liability between B.K Educational Services Pvt. Ltd. (Corporate Debtor) and Parag Gupta & Associates (Financial Creditor). The debtor contended all financial claims as false except the debt of an immovable property allotted by Greater Noida Industrial Development Authority (GNIDA). It was also alleged that financial records were tampered and manipulated by the relatives of the Financial Creditors. Further, it was claimed that such debts were time barred. Also, there was nothing to extend the limitation to recover the same.

The NCLT disposed the application by passing that the limitation period could not be extended as the documents produced were not justifiable but the sum given by the Petitioner on 25 February 2015 was entitled to be recovered. The Financial Creditor then filed an application under Section 7 of the IBC before the NCLAT against the NCLT order. The NCLAT held that the provisions of the Limitation Act were not applicable for initiation of the CIRP under the code and hence, accepted the application. 

ISSUE:

Whether Article 137 of the Limitation Act, 1963 is applicable under the IBC prior to the date on which the IBC (Second Amendment), 2018 came into effect?

DECISION:

The Supreme Court held that Section 433 of Companies Act provides for the application of provisions of the Limitation Act to the NCLT. Limitation Act should be applied retrospectively to the NCLT proceedings as per Section 238A of the IBC which was inserted by the First Amendment. It states that Article 137 of the Limitation Act specifically comes into picture as the Limitation Act is applicable to the applications/proceedings filed under Sections 7 and 9 of the IBC from the inception of the Code. Article 137 provides that the period of limitation for the applications under IBC is three years from the date of default or when the “right to sue” accrues. The application would be barred by limitation if the default has occurred over three years prior to the date of filing of the application unless the delay is condoned as per Section 5 of the Limitation Act.

JUDICIAL EXCERPTS:

“Section 238A, being clarificatory of the law and being procedural in nature, must be held to be retrospective.”

“The Limitation Act is applicable to applications filed under Sections 7 and 9 of the Code from the inception of the Code, Article 137 of the Limitation Act gets attracted. “The right to sue”, therefore, accrues when a default occurs. If the default has occurred over three years prior to the date of filing of the application, the application would be barred under Article 137 of the Limitation Act, save and except in those cases where, in the facts of the case, Section 5 of the Limitation Act may be applied to condone the delay in filing such application.”

 

9. Chitra Sharma v Union of India (WP No.744 of 2017 and other petitions)

Case Citation: [2018] ibclaw.in 37 SC

FACTS:

IDBI Bank Ltd. (Financial Creditor) initiated an application under Section 7 of the IBC for CIRP against Jaypee Infratech Ltd. (JIL/Corporate Debtor) at the NCLT as there was a default of Rs. 526.11 crores. The NCLT admitted the application and initiated CIRP on 09.08.2017 and subsequently passed an order of moratorium under Section 14 of the IBC. Several home-buyers invested in residential projects which were proposed by the Corporate Debtor and Jayprakash Associates Ltd. (JAL/Holding Company). In 2017, IBC did not recognize home-buyers as creditors and under recent amendment to the IBBI Regulations, the claims of other creditors have to be filled in Form-F under Regulation 9(a).

Thus, because of the imposition of moratorium, other rights of such home-buyers under other acts such as Contract Act (specific performance), RERA Act, etc. could not be enforced. Aggrieved by the same, the home-buyers filed various petitions before the Supreme Court to satisfy their claims which were not covered by the IBC.

ISSUE:

Whether CIRP should be extended to introduce new resolution plans to avoid liquidation and thus, safeguard the interests of home-buyers?

DECISION:

The Court held that initially when the petition was filed, home-buyers had no locus standi in CIRP and were considered as other creditors. By the passing of the Insolvency and Bankruptcy (Amendment) Ordinance, 2018, home-buyers were considered as Financial Creditors under Section 5(7) of the IBC, thus, allowing them to initiate CIRP and be a part of the COC.

It further stated that with all resolution plans having been rejected by the COC and the plan suggested by JAL rejected because of the statutory bar under Section 29A of IBC, JIL would have moved into liquidation which would affect the rights of the creditors. Thus, an order was passed by the Court to extend the initial 180 days period by a further 90 days period wherein a new COC would be constituted with home-buyers as Financial Creditors.

Further, the RP would invite fresh bids so that plethora of choices are available, excluding the suggestions put forth by JIL or JAL along with its related parties because of the bar under Section 29A of the IBC.

JUDICIAL EXCERPTS:

“As a result of the Ordinance, home-buyers are brought within the purview of financial creditors under the IBC.”

“JIL/JAL and their promoters shall be ineligible to participate in the CIRP by virtue of the provisions of Section 29A.”

 

10. Anuj Jain Interim Resolution Professional for Jaypee Infratech Limited v Axis Bank Limited etc. [Civil Appeal Nos. 8512-8527 of 2019 and other petitions]

Case Citation: [2020] ibclaw.in 06 SC

FACTS:

In the present case Jaiprakash Infratech Limited (hereinafter as JIL) is a subordinate of the Jaiprakash Associate Limited (hereinafter as JAL). JAL was a public listed company and it had taken credit from several associated bank including State Bank of India, ICICI Bank and Standard Chartered Bank. In return of this credit the JAL had given certain securities, land security was one of them which were later mortgaged by JIL. Consequently, the IDBI bank (being one of the creditors of the JIL), filed a petition under Section 7 of the IBC. The petition consisted of the appeal to carry out a CIRP against JIL. The petition alleged JIL to be a defaulter of payment of 526.11 crores which was later accepted and the CIRP was initiated.

Alternatively, an IRP filed an application alleging the mortgage transactions as fraudulent, undervalued and privileged under Section 43, 45, 49 and 66 of the IBC. NCLT accepted the contentions of IRP and rejected the creditors of JAL to be the creditors of JIL. Thus, the mortgages claimed by the JIL as their security of the debt from the its main company JAL were rejected.

In an appeal the NCLAT set aside the NCLT’s decision and affirmed that the lenders of JAL can also be considered as the creditors of JIL. The Appellate Tribunal mentioned that the mortgages were not made on the new liabilities and hence the application of Section 43(2)(a) of the IBC won’t be possible. Moreover, the mortgages were done in ordinary course of business and not fraudulently. However, the NCLAT judgement didn’t mention any satisfactory reason for altering the NCLT judgement.

Ultimately, the appeal was taken to Supreme Court by the RP, Financial Creditors and home buyer of JIL.

ISSUES:

1. Whether the mortgages initiated by JIL were falling within the ambit of Section 43, 45, 49 and 66 of the IBC?
2. Whether the JAL is the Financial Creditor of the JIL on the basis of the mortgages claimed by JIL as a security of debt of JAL?

DECISION:

Primarily, the Supreme Court analyzed the three requirements of Section 43, i.e., firstly, if there is any beneficial transaction to the creditor or guarantor for any liability, then the transaction would be a preferential transaction, secondly, the transaction must put that particular guarantor or the creditor in an upper position than what he could be in case there would have been distribution of the assets as per Section 53(1)(b) of the IBC and thirdly, such a transaction must have been conducted before 2 years (look back period) of the initiation of the CIRP (in case of beneficiary being a related party) and the transaction must be conducted within one year (in case of beneficiary being an unrelated party).

The Court held that JAL was in a beneficial condition in comparison to other creditors which have given it an upper position as compared to a situation under Section 53 of the Code. The Court had also emphasized that the confirmation of a fraudulent transaction is not decisive factor for understanding the preferential transaction.

While, pondering upon the look back period, the Court held that look back period doesn’t imply that the Sections 43 and 44 of the IBC have a retrospective operation. It further stated that if the transaction has been entered in ordinary course of business by the debtor and if it is providing new value to debtor then the same would be exempted.

Thus, in present case, the Court emphasized that the indirect act of mortgaging by JIL for securing the liabilities of its parent company is not acceptable and there is no scope of JIL and JAL falling under the protection of Section 43(3). It also considered the mortgage transactions as fraudulent and undervalued and considered them to be a part of preferential transaction.

On the second issue, the Court has mentioned that the Financial Creditors and the Secured Creditors are different, though both are creditors it is not necessary that the Secured Creditor is a Financial Creditor. A company which is more interested in securing debt of the third party (for the purpose of this case mortgage transactions) would not be considered as a Financial Creditor. So, the creditors to JAL are secured creditors to JAL and cannot be considered Financial Creditors of JIL.

JUDICIAL EXCERPTS:

“We hold that such lenders of JAL, on the strength of the mortgages in question, may fall in the category of secured creditors, but such mortgages being neither towards any loan, facility or advance to the corporate debtor nor towards protecting any facility or security of the corporate debtor, it cannot be said that the corporate debtor owes them any ‘financial debt’ within the meaning of Section 5(8) of the Code; and hence, such lenders of JAL do not fall in the category of the ‘financial creditors’ of the corporate debtor JIL.”

 

11. Swiss Ribbons Pvt. Ltd. & Anr. V Union of India & Ors. [Writ Petition (Civil) No.99 of 2018 and other petitions]

Case Citation: [2019] ibclaw.in 03 SC

FACTS:

The present petition attacked the constitutional validity of various provisions of the IBC. The specific facts of the case were not dealt by the Court as the main issue was related to the constitutional validity of the Code.

ISSUES:

1. Whether the appointment of members of the NCLT and the NCLAT is contrary to the Court’s judgment in Madras Bar Association case?
2. Whether the classification between the Financial Creditor and the Operational Creditor is discriminatory, arbitrary and violative of Article 14 of the Constitution of India?
3. Whether Section 12A of the IBC is violative of Article 14 of the Constitution of India?
4. Whether the IRP/RP has the judicial powers?
5. Whether Section 29A of the IBC constitutionally valid?

DECISION:

1. The Apex Court referred to Section 412 of the Companies Amendment Act, 2017 and the affidavit filed by the Ministry of Corporate Affairs in compliance with the judgment of the Court to hold that the members of the NCLT and the NCLAT are selected by the committee constituted as per the guidance of the Court.
2. The distinction between the Financial Creditor and the Operational Creditor was held to be non-violative of Article 14 and was based on intelligible differentia having relation to the objective sought to be achieved by the IBC. The Court referred to various provisions of the IBC, cases and reports to strike the difference between the two and held that Financial Creditors are involved in the assessing of the viability & feasibility of the business of the Corporate Debtor from the very beginning which the Operational Creditors are not and thus, they are in a better position to undertake the business of the Corporate Debtor for the purpose of making the resolution plan. Further, the Court held that the Financial Creditors are generally at a higher risk as compared to Operational Creditors as they are the provider of capital to the Corporate Debtor and they don’t have an option to quit in between as compared to Operational Creditors, thereby making the differential treatment to be fair.
3. The withdrawal of application under Section 12A which was admitted under Section 7 and 9 was held to be non-violative of Article 14 of the Constitution of India. The Court referred to the ILC report and held that once the CIRP is triggered and the COC is constituted, it becomes proceedings in rem and therefore cannot be terminated by a single creditor. The Court applied Rule 11 of NCLT Rules to conclude that the withdrawal can be done after the admission of application but before the constitution of the COC and this should be with the consent of the creditors who hold 90% of the credit value. The Court further referred to Section 60 of the Code to hold that the decision of the COC is not final and can be reviewed by the AA, if it violates any provision of the law.
4. On the fourth issue, the Court observed that the RP’s have no judicial powers resided with them. The Court distinguished between the powers of the liquidator and the RP as to how the former has quasi-judicial powers whereas the latter has the administrative powers and the final decision is in the hands of the COC.
5. The Court further upheld the constitutionality of Section 29A which deals with the ineligibility of the person to become a resolution applicant. The Court also stated that the section does not have a retrospective effect considering that the resolution applicants do not have any vested interests.

JUDICIAL EXCERPTS:

“Apart from the above, the nature of loan agreements with financial creditors is different from contracts with operational creditors for supplying goods and services. Financial creditors generally lend finance on a term loan or for working capital that enables the corporate debtor to either set up and/or operate its business. On the other hand, contracts with operational creditors are relatable to supply of goods and services in the operation of business. Financial contracts generally involve large sums of money. By way of contrast, operational contracts have dues whose quantum is generally less. In the running of a business, operational creditors can be many as opposed to financial creditors, who lend finance for the set up or working of business. Also, financial creditors have specified repayment of schedules, and defaults entitle financial creditors to recall a loan in totality. Contracts with operational creditors do not have any such stipulations.

 

12. Sagar Sharma & Anr. v Phoenix ARC Pvt. Ltd. &Anr, [Civil Appeal No. 7673 of 2019]

Case Citation: [2019] ibclaw.in 17 SC

FACTS:

An appeal was filed against the impugned order of the NCLT where it was held that limitation period for the Respondent 1 would start from the date of enforcement of the IBC, i.e. 1st December, 2016, for an application filed under Section 7 of the Code.

ISSUE:

Whether the right to apply for the limitation would accrue from the date of enforcement of the IBC?

DECISION:

The Apex Court under Article 141 of the Constitution of India held that the judgments of this Court are followed in letter and spirit. The Supreme Court relied on the judgment of B.K. Educational Services Private Limited v. Parag Gupta and Associates, Civil Appeal No. 23988 of 2017, and held that the date of enforcement of the IBC cannot be the trigger point of the limitation for filing of application under the Code and further held that Article 137 of the Limitation Act is to be applied for the applications filed under the Code. This means that the period of limitation shall start from the date of default and will continue for a period of three years unless extended as per the law. Thus, the order of the NCLT was set aside and the appeal was allowed.

JUDICIAL EXCERPTS:

“Article 141 of the Constitution of India mandates that our judgments are followed in letter and spirit. The date of coming into force of the IBC Code does not and cannot form a trigger point of limitation for applications filed under the Code. Equally, since “applications” are petitions which are filed under the Code, it is Article 137 of the Limitation Act which will apply to such applications.”

 

13. Babulal Vardharji Gurjar v Veer Gurjar Aluminium Industries Pvt. Ltd. & Anr. [Civil Appeal No. 6347 of 2019]

Case Citation: [2020] ibclaw.in 16 SC

FACTS:

The Appellant was director of the Respondent (Corporate Debtor). The company defaulted in repayment of secured debts extended to it by various banks and consequently, was classified as NPA in 2011. A demand notice was issued under Section 13(2) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act (SARFAESI Act), 2002, followed by recovery proceedings under Section 19 of Recovery of Debts Due to the Banks and Financial Institution (RDDBFI Act), 1993 against the Corporate Debtor. In March 2018, during the pendency of these proceedings before the DRT, an application for initiating the CIRP under Section 7 of the IBC was filed by JM Financial ARC Pvt. Ltd., in the capacity of being the Financial Creditor. The application was admitted by the AA. The Appellant appealed against the maintainability of the application before the NCLAT which got dismissed. Thus, a further appeal was made to the Supreme Court under Section 62 of the IBC. The Supreme Court remanded the matter to the NCLAT for determining as to whether the application was barred by limitation. The NCLAT ruled that the application was within the limitation period. Aggrieved by this order, the present appeal was filed before the Supreme Court by the Corporate Debtor.

ISSUES:

1. When does the right to sue under the Code accrue?
2. Whether the claim in the present case was time-barred or a continuing one?
3. Whether the Application filed by the Financial Creditor under Section 7 of the IBC is barred by limitation?
4. Whether the argument made by the Respondent that the rules of limitation are not meant to destroy its rights holds good in the present case?
5. Whether insolvency proceedings under the IBC can be initiated in cases involving the pendency of proceedings before the DRT under the SARFAESI Act, 2002?

JUDGMENT:

Concerning the first issue, the Supreme Court held that the right to sue under the Code accrues on the date on which the default occurs or when the account becomes an NPA and not on the date of the commencement of the Code. Thus, enforcement of the IBC in 2016 will not give a new life to time-barred debts. Default here means ‘non-payment of debt when it is due and payable and is not paid by the Corporate debtor. Therefore, in the present case, the right to sue accrued in 2011 when the account of the Corporate Debtor was classified as NPA, and not on 1^st December, 2016, when the Code was enforced.

W.r.t. the second issue, the Court concluded that Article 18 of the Limitation Act provides for the extension of limitation period upon the acknowledgement of a debt by the debtor. Thus, the provision can revive only the period of limitation and not the date of default. In the present case, the date of default mentioned was 08/07/2011 and there has been no fresh acknowledgement made by the debtor. Even if there would have been a case of acknowledgment, the same was not pleaded by the Financial Creditor. The Court further held that a mere mention of the debt by the Corporate Debtor in its balance sheet does not give any fresh date of default, until that has been supported by way of evidence.

For the third issue, the Court observed that the present application is barred by limitation. As per Article 137 of the Limitation Act, 1963, the limitation period is of 3 years from the date of default. Since the default occurred in 2011, an application filed in 2018 is beyond the limitation period. The intent of the IBC could not have been to give a new life to time-barred debts and to provide a fresh opportunity to creditors who didn’t exercise their remedy within the limitation period under laws existing before the IBC. Further, an application under Section 7 of the IBC is not for enforcement of a mortgage liability and hence, Article 62 of the Limitation Act does not apply to such an application.

Considering the fourth issue, the Court held that the submission that the rules of limitation are not meant to destroy the rights of the parties is misplaced in the present case. Application of rules of limitation as under Section 238A of the Code does not deal with the rights of the Respondent. Rather, it only bars recourse to the particular remedy of initiation of the CIRP under the Code. Thus, the argument was rejected.

W.r.t. the fifth issue, the Court laid down that the proceedings under the IBC can be initiated during the pendency of other proceedings. In the present case, due to the admission of the application under Section 7 by the AA, the proceedings pending before the DRT under Section 19 of RDDBFI Act, 1993 could not have been continued during the period of moratorium. Now, since the application is rejected for being time-barred, the moratorium shall be lifted and the stalled proceedings shall continue.

The primary focus of the Code is to ensure the revival and continuation of the corporate debtor by protecting it from its own management. It is not merely a recovery legislation for creditors.

JUDICIAL EXCERPTS:

“The following basics undoubtedly come to the fore: (a) that the Code is a beneficial legislation intended to put the corporate debtor back on its feet and is not a mere money recovery legislation; (b) that CIRP is not intended to be adversarial to the corporate debtor but is aimed at protecting the interests of the corporate debtor; (c) that intention of the Code is not to give a new lease of life to debts which are time-barred; (d) that the period of limitation for an application seeking initiation of CIRP under Section 7 of the Code is governed by Article 137 of the Limitation Act and is, therefore, three years from the date when right to apply accrues; (e) that the trigger for initiation of CIRP by a financial creditor is default on the part of the corporate debtor, that is to say, that the right to apply under the Code accrues on the date when default occurs; (f) that default referred to in the Code is that of actual non-payment by the corporate debtor when a debt has become due and payable; and (g) that if default had occurred over three years prior to the date of filing of the application, the application would be time-barred save and except in those cases where, on facts, the delay in filing may be condoned; and (h) an application under Section 7 of the Code is not for enforcement of mortgage liability and Article 62 of the Limitation Act does not apply to this application.”

 

14. K. Sashidhar v Indian Overseas Bank & Ors. [Civil Appeal 10673-2018]

Case Citation: [2019] ibclaw.in 08 SC

FACTS:

In the present case two appeals arising out of the orders of the NCLAT in the case of Kamineni Steel & Power India Pvt. Limited (Corporate Debtor 1) and Innoventive Industries Limited (Corporate Debtor 2) were clubbed together.

In 2008, Corporate Debtor was incorporated as a private limited company but could not continue its operation beyond 2013 due to financial crisis and subsequently filed for insolvency under Section 10 of the IBC. The CIRP was initiated wherein resolution plans concerning both the Corporate Debtors were considered by the COC and was approved by less than 75% of voting shares of the Financial Creditors. In case of Corporate Debtor 2, the resolution plan was approved by 66.57% of the COC and the NCLT ordered liquidation under Section 33(1) of the IBC whereas in the case of Corporate Debtor 1, the resolution plan was approved by 78.63% of the COC excluding the votes of COC who abstained from voting and the NCLT approved the resolution plan. Both the orders were dismissed by the NCLAT on appeal and it directed liquidation as the resolution plan was not approved by the requisite majority of 75% of the COC. The same was challenged in the Supreme Court.

ISSUES:

1. Whether the COC be questioned in rejecting the resolution plan under Section 30(2)?
2. Whether the amendment reducing the threshold limit to 66% has a retrospective effect?

DECISION:                    

The Supreme Court observed that the jurisdiction of AA is limited to make an enquiry into the ‘approved’ resolution plan regarding the conditions being satisfied as mentioned under Section 30(2) of the IBC. The Court emphasized that questioning the ‘commercial wisdom’ of the COC is outside the scope of the AA.

The Court further held that amendment to the Code reducing the voting percentage for approval of resolution plan from 75% to 66% is prospective in nature and that it cannot be applied to the decisions which were taken prior to the amendment by the COC and hence would not be applicable in the present case.

JUDICIAL EXCERPTS:

“At best, the Adjudicating Authority (NCLT) may cause an enquiry into the “approved” resolution plan on limited grounds referred to in Section 30(2) read with Section 31(1) of the I&B Code. It cannot make any other inquiry nor is competent to issue any direction in relation to the exercise of commercial wisdom of the financial creditors be it for approving, rejecting or abstaining, as the case may be. Even the inquiry before the Appellate Authority (NCLAT) is limited to the grounds under Section 61(3) of the I&B Code. It does not postulate jurisdiction to undertake scrutiny of the justness of the opinion expressed by financial creditors at the time of voting.”

 

15. Union of India v Association of Unified Telecom Service Providers of India, etc. [MA(D)No. 9887 of 2020 in Civil Appeal Nos. 6328-6399 of 2015]

Case Citation: [2020] ibclaw.in 20 SC

Facts of the case [para 1-4]

• The Supreme Court passed judgment and order in Union of India v. Association of Unified Telecom Service Providers of India and other [2019] ibclaw.in 27 SC in which the Court decided regarding the definition of the ‘AGR’ and dues to be paid thereunder.
• The concept of AGR arose in the light of the provisions contained in the policy framed by the Government of India and the provisions of the Indian Telegraph Act. Under section 4(1) of the Telegraph Act, the Central Government has the exclusive privilege of establishing, maintaining, and working telegraphs. Section 4 of the Telegraph Act enables the Central Government to part with the exclusive privilege in favour of any other person by granting a licence on such conditions and considering such terms as it thinks fit. The licence issued under section 4(1) becomes a contract between a licensor and a licensee.
• This Court wanted to examine the bona fides of the telecom service providers who have resorted to the process of insolvency, hence, invited them to file their response. Before the initiation of insolvency proceedings, most of the telecom service providers who are under the insolvency proceedings had applied to the Department of Telecommunications to grant permission for trading of licence. The Central Government objected on the ground that it would not be possible for it to grant permission. It declined the permission. There were huge arrears concerning the spectrum licence, which were required to be paid, as a pre­condition to such permission. Various sharing arrangements made inter se telecom service providers with respect to the spectrum also came to the fore.
• The Union of India, Department of Telecommunications’ stand is that the spectrum cannot be the subject­matter of the IBC proceedings in view of the provisions in sections 14 and 18. The dues under the licence towards the spectrum’s use cannot be put in the category of operational dues. In contrast, the Department of Commerce holds the opinion that the dues under the licence are operational dues, and the provisions of the IBC are applicable.

Question before the Supreme Court

The following three questions arise for consideration:
(1) Whether spectrum can be subjected to proceedings under the Code?

(2) In the case of sharing, how the payment is to be made by the Telecom Service Provider (for short, ‘TSP’)? and

(3) In the case of trading, how the liability of the seller and buyer is to be determined?

The telecom service providers’ stand is that the proceedings of insolvency under the Code have been triggered bona fide. This Court can examine the limited question in these proceedings whether the proceedings are resorted to as a subterfuge to avoid payment of AGR dues, and it is for the NCLT to decide whether the licence/spectrum can be transferred and be a part of the resolution process initiated under the provisions of the Code. Whether spectrum/licence can be subjected to resolution process as an asset belonging to the telecom service providers, and whether the AGR dues are operational dues and have to be dealt with under the provisions of the IBC by NCLT. With respect to the trading and sharing arrangement to the extent of spectrum traded or shared by different service providers under the sharing arrangement, the liability as per the guidelines, has to be borne by the respective telecom service providers. [para 5]

1. Whether spectrum can be subjected to proceedings under the Code?

A. Arguments on behalf of Government of India [Shri Tushar Mehta, learned Solicitor General of India] [para 11]

• The licensee does not own the spectrum and has merely been granted a right to use, which is based on fulfilment of the conditions of the contract in the form of a Licence Agreement. Thus, the spectrum cannot be subjected to transfer in proceedings under the Code as the licensee is not the owner. Section 18(f), along with its Explanation (a), mandates that only the corporate debtor’s assets can be taken into control and custody by the resolution professionals, which is in the ownership of the corporate debtor. Explanation to Section 18 provides that assets owned by a third party in possession of the corporate debtor or held under contractual arrangements are not included in the term ‘assets’ for the purpose of Section 18. It is not an asset for Section 18. The spectrum held under a contractual arrangement is not an asset of the corporate debtor. The spectrum cannot be a subject matter of proceedings under the Code. The resolution professional has no jurisdiction to prepare a resolution plan as per Guidelines for Trading of Access Spectrum by Access Services Providers (for short, ‘the Guidelines of 2015’) issued on 12.10.2015. 
• The permission was sought to trade the licence; however, the Government of India, DoT, declined it because arrears have to be paid, and other conditions were not fulfilled. After that, insolvency proceedings were initiated, which were not permissible concerning the spectrum given provisions contained in Section 18 of the Code.
• NCLT Mumbai vide order dated 27.11.2019, held that licence is an asset of State over which the corporate debtor has no right of ownership. The above argument of the State Government was accepted; however, in view of the provisions contained in Section 14 on moratorium being created, the licence could not be revoked. An appeal was filed before the NCLAT against the order mentioned above, which was dismissed on the ground of limitation. An appeal has been filed in relation to the revocation of licence, which is pending in this Court registered as Diary No.15564 of 2020.
• The licence under Section 4 of the Indian Telegraph Act, 1885, was granted on certain terms and conditions. The spectrum did not construe property as defined in Section 3(27) of the Code.
• Concerning public trust doctrine, reliance has been placed on Centre for Public Interest Litigation and Ors. v. Union of India and Ors. (2012) 3 SCC 1, in which it was held that natural resources must always be used in the country’s interests, not private interests. The corporate debtor can never be said to be in occupation of either the licence or spectrum as per Section 14(1)(d) of the Code. Any dispute is to be settled under the provisions of Telecom Regulatory Authority of India Act, 1997 by the Telecom Disputes Settlement and Appellant Tribunal.
• Reliance has been placed on M/s. Embassy Property Development Pvt. Ltd. v. State of Karnataka [2020] ibclaw.in 12 SC [C.A.No.9170 of 2019], in which this Court held that the Code would not apply to right to mine as exclusive possession had not been granted to the corporate debtor and grant was limited to right to mine, excavate and recover iron ore and red oxide for a specified period. It was further held that the right not to be dispossessed found in Section 14(1)(d) of the Code would have nothing to do with the rights conferred by a mining lease, especially on a Government land.
• As per Regulation 32 of the CIRP Regulations, 2016, the spectrum agreement cannot be held to be essential goods or services under Section 14(2) of the Code. Similarly, it cannot be subjected to proceedings under Section 18 of the Code. In the resolution plan, selling the right to use the spectrum to some other company could not have been made. A corporate debtor cannot create any third party right in any manner whatsoever. Against the order dated 9.6.2020 passed by the NCLT approving the resolution plan of UVARC, DoT has filed a petition before the NCLAT relating to Aircel Group. Guidelines are statutory and binding. Aircel Licensee has defaulted in making payment of Deferred Spectrum Auction.
• In the case of RCOM, W.P. (C) No.845 of 2018 was filed under Article 32 of the Constitution of India for closure/quashing of the CIRP initiated against it. After that, payment was made to M/s. Ericsson India Pvt. Ltd, who initiated the proceedings under the Code. RCOM has sought NOC to trade Reliance Jio Infocomm Limited (RJIL). DoT informed it on 14.12.2018 that the Government couldn’t give the NOC for trading. This Court decided the proceedings on 24.4.2019. Thereafter, the Board of Directors of RCOM decided to continue with the proceeding under the Code and, decided to withdraw the appeal from NCLAT. RCL/RTL defaulted in payment of various deferred spectrum auction instalments.

B. Shri Harish Salve, learned senior counsel argued as under: [ para 12]

Under Section 18, the spectrum can be subjected to insolvency proceedings. This Court examined the question of recoverability of AGR dues in preference to the dues of secured creditors on the basis that the use of spectrum would rank in priority higher than that of secured creditors. Leasing of the spectrum is not permissible as per the Guidelines. The RJIL is also not proposing to buy any spectrum from the resolution applicant of RCOM or any other company. Only sharing and trading is permissible subject to the conditions specified in the Guidelines. The assets of RCOM are comprised primarily of the spectrum, real estate, and active assets. Even if this Court permitted the sale of such a spectrum, RJIL is not intending to acquire the same. 

C. Shri Shyam Divan and Shri Ravi Kadam, learned senior counsel on behalf of CoC of RCOM, Aircel Limited, and Dishnet Wireless Limited, argued: [ para 13]

• The spectrum and telecom licences are assets of the telecom company. Section 18(f) of the Code mandates that resolution professional would take control and custody of any asset over which the corporate debtor has ownership rights as recorded in the balance sheet of the corporate debtor. Section 18(f)(iv) includes intangible assets. The telecom licence and right to use the spectrum form a part of the intangible assets. The right to use is a valuable right. In the financial statement, telecom licence and the right to use the spectrum had been shown as an intangible asset. Without telecom licences and spectrum, there would be no hope of reviving Aircel entities.
• The NCLT asked to take the approval of the DoT for the transacting spectrum. Thus, it is for the DoT to give permission. Dot has to approve the implementation of the resolution plan.
• Claims of DoT for unpaid dues are operational debts, and DoT is an operational creditor.
• The proceedings under the Code cannot be nullified to realise AGR and other dues of DoT.

D. Shri Ranjit Kumar, learned senior counsel, on behalf of CoC of Aircel Limited, Aircel Cellular Limited and Dishnet Wireless Limited argued that: [para 14]

• Under the Code, UV Asset Reconstruction Company Limited has submitted a resolution plan, which has been approved by the NCLT on 9.6.2020. Aircel Entities are holders of telecom licences. The licences issued by DoT contain the format for the execution of the Tripartite Agreement between the licensor, licensee, and the lenders.
• Aircel Entities have offered lenders spectrum as a security against the loans advanced by the lenders to Aircel Entities. Thus, the DoT claim over the spectrum will be subservient to the claims of the lenders as per the Code, and DoT has to be treated as an operational creditor.
• The Banks are in the business of lending money for the betterment of the national economy, in the same manner, the Government is in the business of spectrum. As per Clause 6.3 of the Licence Agreement, licence can be transferred subject to fulfilment of the conditions agreed between the licensor, licensee, and the lenders.
• The provisions of the Code have to prevail. The Government has entered into a pure business transaction by granting a licence and taking fees against the grant. The spectrum is a raw material for telecom companies. If the spectrum’s licence is terminated, the resolution professional will find it difficult to run the company as a going concern. DoT is an operational creditor. AGR dues are contractual dues and cannot have precedence over the dues of secured creditors. He has referred to Section 53 to contend that the operational creditor is protected in a manner provided in the Code.
• Section 238 of the Code contains a non­obstante clause to the effect that anything inconsistent therewith contained in any other law for the time being in force, the Code shall prevail. As such, the Code overrides the provisions of the Indian Telegraph Act, 1885, Indian Wireless Telegraphy Act, 1933, and Telecom Regulatory Authority of India Act, 1997.

E. Decisions of the Supreme Court

• A question has been raised concerning ownership. Whether TSPs can be said to be the owner based on the right to use the spectrum under licence granted to them? Whether a licence is a contractual arrangement? Whether ownership belongs to the Government of India? Whether spectrum being under contract can be subjected to proceedings under Section 18 of the Code? The question also arises whether the spectrum can be said to be in possession, which arises from ownership. What is the distinction between possession and occupation? Whether possession correlates with the ownership right? A question also arises concerning the difference between trading and insolvency proceedings. Whether a licence can be transferred under the insolvency proceedings, particularly when the trading is subjected to clearance of dues by seller or buyer, as the case may be, as provided in Guideline Nos.10 and 11; whereas in insolvency proceedings dues are wiped off. Guideline No.12 is also assumed to be of significance in case spectrum is subjected to insolvency proceedings, which must be considered. [para 18]
• It is also required to be examined that when Government has declined the permission to trade and has not issued NOC for trading on the ground of non­fulfilment of the conditions as stipulated in the Licence Agreement, the spectrum can be subjected to resolution proceedings which will have the effect of wiping off the dues of the Government, which are more than Rs.40,000 crores. Whereas the dues of the Banks are much less. Whether obtaining the DoT’s permission and its approval to the resolution plan would be a substitute for Trading Guideline Nos.10, 11, and 12 ? [para 19]
• A question also arises of bona fide nature of the proceedings under the Code. In the backdrop facts of the cases, question also arises whether spectrum licence subjected to proceedings under the Code, and it overrides the provisions contained in the Indian Telegraph Act, 1885, Indian Wireless Telegraphy Act, 1933, and Telecom Regulatory Authority of India Act, 1997. [para 20]
• In view of the fact that the licence contained an agreement between the licensor, licensee, and the lenders, whether on the basis of that, spectrum can be treated as a security interest and what is the mode of its enforcement. Whether the Banks can enforce it in the proceedings under the Code or by the procedure as per the law of enforcement of security interest under the SARFAESI Act, 2002 or under any other law. [para 21]
• A question of seminal significance also arises whether the spectrum is a natural resource, the Government is holding the same as cestui que trust. In view of the nature of the resource, it can be subjected to insolvency/liquidation proceedings. Earlier licence was obtained on the payment of fees in advance that was not beneficial to the TSPs, as such a new revenue sharing regime was devised in 1999, and the Central Government has an exclusive right under section 4 of the Telegraph Act, 1885 in use of spectrum, it can part with on certain statutory guidelines, its use is not permissible without the payment of requisite fee. [para 22]
• Whether dues under the licence can be said to be operational dues? It is also to be examined whether deferred/default payment instalment/s of spectrum acquisition cost can be termed to be operational dues besides AGR dues. Whether as per the revenue sharing regime and the provisions of the Indian Telegraph Act, 1885, the dues can be said to be operational dues? Whether natural resource would be available to use without payment of requisite dues, whether such dues can be wiped off by resorting to the proceedings under the Code and comparative dues of Government, and secured creditors and bona fides of proceedings are also the questions to be considered. [para 22]
• We consider it appropriate that the aforesaid various questions should first be considered by the NCLT. Let the NCLT consider the aforesaid aspects and pass a reasoned order after hearing all the parties. We make it clear that it being a jurisdictional question, it requires to be gone into at this stage itself. Let the question be decided within the outer limits of two months. We also make it clear that we have not observed on the merits of the case, and we have kept all the questions open to be examined by the NCLT. [para 23]

Spectrum Trading vs. Spectrum Sharing [para 8 & 9]

The “spectrum trading” allows parties to transfer their rights and obligations to another party. In the case of “spectrum sharing”, the right to use spectrum remains with the respective telecom service providers, whereas in the case of spectrum trading, the right to use gets transferred from the buyer to the seller. Under spectrum trading guidelines, details of transactions which have taken place, are given. 

2. In the case of sharing, how the payment is to be made by the Telecom Service Provider (for short, ‘TSP’)? [para 24]

• Coming to the question as to the liability of sharing operator, who is sharing the spectrum of the original licensee of the past AGR dues of the original licensee is concerned, that spectrum sharing is permitted and approved by the Sharing Guidelines dated 24.09.2015. The Parliament has approved spectrum sharing as part of “National Telecom Policy, 2012”. However, DOT issued and approved the final guidelines in the year 2015. Spectrum sharing is a policy that permits the sharing of radio access network equipment of operators. Single radio network equipment is used to provide services by two operators using both the entities’ spectrum. 
• On going through the entire Sharing Guidelines, it does not stipulate anything about the past dues of the sharing operators. In the case of sharing spectrum usage charges, the rate of each of the licensees post sharing shall increase by 0.5% of adjusted gross revenue. 
• That in the present case, only part of the spectrum of the licensee has been shared with the case of some of TSPs., which has been approved by the DoT under the Sharing Guidelines, 2015, and there is no provision for the liability of the past dues on the shared operator. Even otherwise, the past dues of sharing operator/licensee covers AGR for the spectrum used by holder of licence, certain TSPs. such as Reliance came into existence later on, and as observed hereinabove, the liability of such operator of the AGR, would only be to the extent it has used the said spectrum. Shared operator TSPs. cannot be saddled with the liability to pay the past dues of AGR of licensee, that have shared the spectrum with the original licensees.

3. In the case of trading, how the liability of the seller and buyer is to be determined?

• Coming to the question of liability of the telecom companies which are using spectrum under the Trading Guidelines with respect to the AGR dues of the telecom company, Spectrum trading is governed by the Spectrum Trading Guidelines dated 12.10.2015 and under the said Trading Guidelines, part of the spectrum of the telecom company facing insolvency – the other telecom company is using original licensee. [para 27]
• Para 11 of the Spectrum Trading Guidelines was further clarified vide O.M. dated 12.05.2016. Certain telecom operators raised specific questions on the Trading Guidelines dated 12.10.2015. Question No.2 in respect of para 11, seeks a clarification as to whether the transfer of spectrum is for a specific area and reference to the dues relate to only the spectrum being traded in the concerned area, and seeks clarification whether the buyer will be jointly or severally liable for only those dues if found recoverable after the effective date of trading, which were not known to the seller at the time of the effective trade date. [para 27]
• In a case where the entire spectrum is under sale, in that case, the past dues of the seller shall be the liability of the buyer except the amount/dues, if any, found recoverable after the effective date of the trade, which was not known to the parties at the time of the effective date of trade and in such a situation the liability of such dues of the buyer and seller would be jointly or severally and the government at its discretion is entitled to recover such amount. In the present case, it is not in dispute that in some cases only part spectrum was traded, and the remaining spectrum continued with the seller. At the time of agreement for spectrum trading, the AGR dues of the seller were also known. Therefore, on a joint reading of para 11 of the Spectrum Trading Guidelines dated 12.10.2015 read with O.M. dated 12.05.2016, the seller’s dues prior to the concluding of the agreement/spectrum trading shall not be upon the buyer. [para 28]
• It is clear that in the case, which was decided by this Court relating to AGR dues, respondents were the parties, and they were litigating with respect to the definition of AGR in the second round of appeal filed in 215 before this Court. Each of them was aware that the dispute as to the definition of AGR was pending in this Court. Thus, it is apparent that it was known to the parties that AGR dues to be finalised as per the decision of this Court in a pending matter, and lis was pending for the last 20 years. The liability cannot be escaped as specified in the Trading Guidelines to the extent that the seller or buyer is liable. They have to pay the AGR as per the judgment rendered by this Court. The purchasers who are not seller or buyer, shall have to pay the dues to the extent they are liable under the Guidelines, as discussed above. It was stated that they have paid dues as per the self­assessment or, in some cases, demands have not been raised. We direct DoT to complete the assessment in such cases of trade and raise demand if it has not been raised and to examine the correctness of self­assessment and raise demand, if necessary, after due verification. In case demand notice has not been issued, let DoT raise the demand within six weeks from today.  [para 29]

4. Payment of dues of AGR

• The Union of India has filed an application through the Department of Telecommunications (DoT) to modify the order dated 24.10.2019 passed in C.A. Nos.6328­6399/2015 and a separate order of even date passed in the abovesaid civil appeals. M.A. No.266/2020 was filed by the TSPs./licensees in which order dated 14.2.2020 was passed, and the contempt proceedings against the Desk Officer were drawn. In view of the communication dated 23.1.2020, it was withdrawn on 14.2.2020. [para 30]
• The Union of India, after envisaging the larger interest, economic consequences on the nation and to ensure that the order of this Court is complied with in its letter and spirit, has taken a conscious decision and sought approval of this Court to a formula for recovery of past dues from the telecom service providers. The formula is placed for approval of this Court, which is arrived at after detailed and long drawn deliberations at various levels in the administrative hierarchy, including the Cabinet, and keeping in view the vital issues related to financial health and viability of the telecom sector, need for ensuring competition and a level­playing field in the interest of consumers. [para 33]
• A prayer has also been made to pay the remaining dues through annual installments spanning over 20 years. For any lapse, a provision has been made to protect the net present value as per the order passed by this Court up to the date of judgment and the dues thereafter, to be realised using the discounted rate of 8%, which is based on one marginal MCLR rate of SBI which is currently at 7.75%. The interest, penalty, and interest on penalty on the arrears as per agreement not to be levied beyond the date of judgment, and the NPV will be protected. However, for prospective arrears, if any, the TSPs. shall be liable to interest, penalty, and interest on penalty for unpaid dues as per agreement after the date of judgment of this Court. [para 34]
• 36. However, we consider that the period of 20 years fixed for payment is excessive. We feel that it is a revenue sharing regime, and it is grant of sovereign right to the TSPs. under the Telecom Policy. We feel that some reasonable time is to be granted, considering the financial stress and the banking sector’s involvement. We deem it appropriate to grant facility of time to make payment of dues in equal yearly instalments. Rest of the decision quoted above, taken by the Cabinet, shall stand except the modifications concerning the time schedule for making payment of arrears. But, at the same time, it is to be ensured that the dues are paid in toto. The concession is granted only on the condition that the dues shall be paid punctually within the time stipulated by this Court. Even a single default will attract the dues along with interest, penalty and interest on penalty at the rate specified in the agreement. [para 36]
• We also place on record that the demand of AGR was raised as against non­telecom PSUs. on the strength of the judgment passed by this Court. Pursuant to the Court’s directions, the matter has been reexamined and considering the representations filed by PSUs. It is stated in the affidavit dated 18.6.2020 that non­ telecom public sector undertakings are non­telecom entities involved in providing services such as power transmission, oil and gas exploration, and refining, Metrorail service, etc., and that they are not into the business of providing mobile services to the general public. They are not holding Access Service Licence (ASL). The revenue received by non­telecom public sector undertakings under the head of ‘telecom services’ forms a very negligible and a small portion and does not form part of the total revenue, e.g., 0.0002% for GAIL, 0.00028% for DMRC and 0.001% for Oil India, etc. DoT has decided to withdraw the demands raised for licence fee based on non­telecom revenue from the nontelecom public sector undertakings, which are M/s. Powergrid, GAIL, Oil India Ltd., DMRC, which constitutes about 96% of the demand regarding non­telecom PSUs. In this regard orders have been issued on 13.7.2020 and 14.7.2020. [para 37]

5. Directions:

(i) That for the demand raised by the Department of Telecom in respect of the AGR dues based on the judgment of this Court, there shall not be any dispute raised by any of the Telecom Operators and that there shall not be any re­assessment.
(ii) That, at the first instance, the respective Telecom Operators shall make the payment of 10% of the total dues as demanded by DoT by 31.3.2021.
(iii) TSPs. have to make payment in yearly instalments commencing from 1.4.2021 up to 31.3.2031 payable by 31st March of every succeeding financial year.
(iv) Various companies through Managing Director/Chairman or other authorised officer, to furnish an undertaking within four weeks, to make payment of arrears as per the order.
(v) The existing bank guarantees that have been submitted regarding the spectrum shall be kept alive by TSPs. until the payment is made.
(vi) In the event of any default in making payment of annual instalments, interest would become payable as per the agreement along with penalty and interest on penalty automatically without reference to Court. Besides, it would be punishable for contempt of Court.
(vii) Let compliance of order be reported by all TSPs. and DoT every year by 7th April of each succeeding year. 

In the Suo Motu Contempt Petition, in view of the reply filed and compliance reported, and an unconditional apology tendered, which we accept, we discharge notice issued to Shri Mandar Deshpande and drop the proceedings. Before parting with the proceedings, we place on record our appreciation for the fair and able assistance provided by Shri Tushar Mehta, Solicitor General, and the respective senior counsel appearing on behalf of respective parties. Accordingly, the pending interlocutory applications are disposed of in terms of the aforesaid order/directions. All the previous orders stand modified accordingly.

 

16. K. Kishan v Vijay Nirman Company Pvt. Ltd. (Civil Appeal Nos. 21824 & 21825-2017)

Case Citation: [2018] ibclaw.in 01 SC

FACTS:

A Memorandum of Understanding was entered into between Vijay Nirman Company (Respondent), SDM Projects Pvt. Ltd. (SDM) and Ksheerabad Construction Pvt. Ltd. (KCPL) because of the two separate agreements, the first between the Respondent and KCPL and the second between SDM Projects and KCPL. In 2017, disputes arose out of the tripartite agreement after which arbitration was invoked as the mode to solve the dispute. Two claims were awarded in favor of the Respondent and three counter-claims that were filed before the Tribunal were rejected. Further, the Respondent sent across a demand notice under Section 8 of the IBC to KCPL to pay an outstanding amount of Rs. 1,79,00,166. KCPL disputed by stating that the amount mentioned in the notice was the subject-matter of an arbitration proceeding, rather, the Respondent owed larger amounts to KCPL.

Aggrieved by the award, KCPL filed a petition before the NCLT under Section 34 of the Arbitration & Conciliation Act, 1996 challenging the award. At the same time, an application was filed under Section 9 of the IBC before the NCLT by the Respondent. The NCLT admitted the application for CIRP under Section 9. It stated that it is irrelevant whether the petition under Section 34 of the Arbitration Act was pending or not as long as there was no stay of the award.

An appeal was filed before the NCLAT which was eventually dismissed. The NCLAT stated that Section 238 of the IBC would apply over the Arbitration Act and affirmed the NCLT order.

ISSUE:

Whether the proceedings under the IBC can be invoked in respect of a debt against which an arbitration proceeding is pending?

DECISION:

The Supreme Court referred to its earlier ruling in the case of Mobilox Innovations Pvt. Ltd. v. Kirusa Software Pvt. Ltd., Civil Appeal No. 9405 of 2017, and upheld the same in which it was held that IBC cannot be used against Operational Creditors to bypass the adjudicatory and enforcement process of a debt contained in other statutes. Further, the Court held that an arbitral award under Section 34 of the Arbitration Act already establishes the fact that a pre-existing issue between the parties is the dispute of such debt. The same shall continue to exist till a final award is not passed under Sections 34 and 37 respectively. It held that as there is no record of debt owed and that it is a subject-matter of dispute under an arbitral award, an application under Section 9 of IBC shall not be maintainable. It further held that the Arbitral Award makes it clear that the amount of debt owed is disputed which would not cause for any inconsistency between the two laws.

The Court set aside the order passed by the NCLAT and the NCLT. 

JUDICIAL EXCERPTS:

“This is for the reason that our judgment in Mobilox Innovations (supra) has made it clear that the insolvency process, particularly in relation to operational creditors, cannot be used to bypass the adjudicatory and enforcement process of a debt contained in other statutes.”

“We have no doubt in stating that the filing of a Section 34 petition against an Arbitral Award shows that a pre-existing dispute which culminates at the first stage of the proceedings in an Award, continues even after the Award, at least till the final adjudicatory process under Sections 34 & 37 has taken place.”

“Even if it be clear that there be a record of an operational debt, it is important that the said debt be not disputed. If disputed, an insolvency petition cannot be proceeded with further.”

 

17. State Bank of India v Ms. Metenere Limited [Civil Appeal 2570 of 2020]

Case Citation: [2020] ibclaw.in 17 SC

Decision of the Appellate Tribunal  in the matter of State Bank of India Vs. M/s. Metenere Ltd. [2020] ibclaw.in 114 NCLAT

Facts of the case

Appellant (State Bank of India) is the Financial Creditor who sought initiation of CIRP by filing an application under Section 7 of the Code before the Adjudicating  Authority (NCLT), New Delhi, Principal Bench which, on taking note of the objection raised by the ‘Corporate Debtor’-‘M/s. Metenere Limited’ regarding the name of proposed ‘Interim Resolution Professional’- Mr. Shailesh Verma passed impugned order dated 4th January, 2020 directing the Appellant- ‘Financial Creditor’ to perform its statutorily mandatory obligation by substituting the name of the ‘Resolution Professional’ to act as an IRP in place of Mr. Shailesh Verma as it was of the view that Mr. Shailesh Verma having worked with the State Bank of India for 39 years before his retirement in 2016, there was an apprehension of bias and Mr. Shailesh Verma was unlikely to act fairly and could not be expected to act as an Independent Umpire.

Aggrieved thereof, Appellant-‘Financial Creditor’ has preferred instant appeal assailing the impugned order on the ground that the proposed ‘Interim Resolution Professional’ Mr. Shailesh Verma fulfils the requirement for appointment as ‘Interim Resolution Professional’/ ‘Resolution Professional’ under the ‘I&B Code’ and admittedly bears no disqualification.

Question before the Appellate Tribunal

Whether an ex-employee of the Financial Creditor having rendered services in the past, should not be permitted to act as Interim Resolution Professional at the instance of such Financial Creditor, regard being had to the nature of duties to be performed by the Interim Resolution Professional and the Resolution Professional.

Contentions of the parties

It is contended on behalf of the Appellant that:

• the ‘I&B Code’ and the Regulations framed thereunder do not attach any disqualification to an ex-employee of a ‘Financial Creditor’ from being appointed as an ‘Interim Resolution Professional’.
• the ‘Interim Resolution Professional’ is not required to act as an ‘Independent Umpire’ between the ‘Financial Creditor’ and the ex- management of the ‘Corporate Debtor’ or decide any conflicting issues between them.
• the ‘Resolution Professional’ has no adjudicatory powers and only acts as a facilitator in theCIRP as all major decisions are taken only with the approval of the ‘Committee of Creditors’.
• the ‘Financial Creditor’ also plays part only to the extent of its voting share as a member of ‘Committee of Creditors’ and not beyond that.
• Therefore, merely because the proposed ‘Interim Resolution Professional’ happens to be an ex-employee of the ‘Financial Creditor’ cannot be a ground to allege bias against him. Lastly, it is contended that the proposed ‘Interim Resolution Professional’ is not on any panel of the Appellant Bank or handling any portfolios and has no role in decision making committee of the Appellant Bank.

It is contended on behalf of the Respondent(Corporate Debtor) that:

• that Mr. Shailesh Verma was in employment with the Appellant for over 39 years and retired as the Chief General Manager in 2016.
• He is drawing pension from the Appellant- ‘Financial Creditor’ which falls within the definition of ‘salary’ under the Income Tax Act, 1961.
• in view of the same, Mr. Shailesh Verma is an ‘interested person’ being an ex-employee and on the payroll of ‘Financial Creditor’, thus rendered ineligible under the ‘I&B Code’ to act as an ‘Interim Resolution Professional’.
• mere apprehension of bias is sufficient ground of apprehension of biasness of the proposed ‘Interim Resolution Professional’ towards the Appellant.

Decision of the Appellate Tribunal

• Pension issue: Merely, because Mr. Shailesh Verma continues to draw pension for services rendered in past does not clothe him with the status of an ‘interested person’. The fact that Mr. Shailesh Verma is drawing pension from ‘Financial Creditor’s organisation does not clothe him with the status of an employee on the payroll of ‘Financial Creditor’. Pension is paid for the services rendered to the employer in the past and it is a benefit earned for such past services under the relevant Service Rules. The pensioner is entitled to such benefit as a privilege under the Service Rules and not as a boon from the ex-employer. Provision engrafted in Section 17(1) of the Income Tax Act, 1961 bringing pension within the ambit of ‘salary’ cannot be interpreted to render a pensioner of a ‘Financial Creditor’ under the statutory framework ineligible as an ‘interested person’ being in employment of the ‘Financial Creditor’ as the definition of ‘salary’ under the Income Tax Act, 1961 is designed only for the purposes of computing of income to determine tax liability. The argument advanced on behalf of the  ‘Corporate Debtor’ in this Court to portray Mr. Shailesh Verma as an ‘interested person’ drawing salary within the meaning of Income Tax Act, 1961 defies logic and same has to be repelled.
• Ineligibility under CIRP Regulation: The Regulation 3 (1) of the CIRP Regulations, 2016 clearly provides that an Insolvency Professional shall be eligible for appointment as a ‘Resolution Professional’ for the CIRP of a ‘Corporate Debtor’ if he or his partners and directors of the Insolvency Professional Entity are independent of the ‘Corporate Debtor’. Admittedly, Mr. Shailesh Verma is a qualified Insolvency Professional and neither he nor any of his associates is alleged to be connected with the ‘Corporate Debtor’ in a manner rendering him ineligible to act as a ‘Resolution Professional’.
• No disciplinary proceedings: Admittedly, no disciplinary proceedings are pending against Mr. Shailesh Verma and he is not on aforestated panel or engaged as a retainer by the ‘Financial Creditor’.
• Relationship with Financial Creditor: He had a long relationship with the ‘Financial Creditor’, spanning around four decades, before demitting office as the Chief General Manger in 2016 but currently he is merely a pensioner drawing pension as a benefit earned for the past services in terms of the relevant Service Rules which he is getting independent of the benevolence of the ex-employer i.e. the Appellant- ‘Financial Creditor’.
• Past loyalty and the long services: But it cannot be denied that the Appellant restricted its choice to propose Mr. Shailesh Verma as ‘Interim Resolution Professional’ obviously having regard to past loyalty and the long services rendered by the later. This conclusion is further reinforced by filing of instant appeal by the ‘Financial Creditor’ who is upset with the impugned order directing the Appellant-‘Financial Creditor’ to substitute the name of ‘Interim Resolution Professional’ in place of Mr. Shailesh Verma. This has to be viewed in the context of apprehension of bias raised by the Respondent-‘Corporate Debtor’ for the apprehension of bias necessarily rests on the perception of Respondent- ‘Corporate Debtor’.

NCLAT held that the fact that the proposed ‘Resolution Professional’ Mr. Shailesh Verma had a long association of around four decades with the ‘Financial Creditor’ serving under it and currently drawing pension coupled with the fact that the ‘Interim Resolution Professional’ is supposed to collate all the claims submitted by Creditors, though not empowered to determine the claims besides other duties as embedded in Section 18 of the ‘I&B Code’ raised an apprehension in the mind of Respondent- ‘Corporate Debtor’ that Mr. Shailesh Verma as the proposed ‘Interim Resolution Professional’ was unlikely to act fairly justifying the action of the Adjudicating Authority in passing the impugned order to substitute him by another Insolvency Professional. Observations of the Adjudicating Authority in the impugned order with regard to ‘Interim Resolution Professional’ to act as an Independent Umpire must be understood in the context of the ‘Interim Resolution Professional’ acting fairly qua the discharge of his statutory duties irrespective of the fact that he is not competent to admit or reject a claim.

In the  given  set  of  circumstances,  we  are  of  the  considered opinion that the apprehension of bias expressed by the ‘Corporate Debtor’ qua the appointment of Mr. Shailesh Verma as proposed ‘Interim Resolution Professional’ at the instance of the Appellant-‘Financial Creditor’ cannot be dismissed offhand and the Adjudicating Authority was perfectly justified in seeking substitution of Mr. Shailesh Verma to ensure that the ‘Corporate Insolvency Resolution Process’ was conducted in a fair and unbiased manner. This is notwithstanding the fact that Mr. Shailesh Verma was not disqualified or ineligible to act as an ‘Interim Resolution Professional’. Viewed thus, we find no legal flaw in the impugned order which is free from any legal infirmity and has to be upheld. It goes without saying that the Appellant- ‘Financial Creditor’ should not have been aggrieved of the impugned order as the same did not cause any prejudice to it.

Hon’ble Supreme Court vide order dated 22.05.2020 reported at [2020] ibclaw.in 17 SC held that this order does not reflect the correct approach, the same shall not be treated as a precedent.

 

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