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Important IBC Judgments by NCLTs (12 – 16 July 2021)

  July 22, 2021

~ By Ankur Mishra & Aaryan Mohan

Abbreviations Used

Code – Insolvency and Bankruptcy Code, 2016

CIRP – Corporate Insolvency Resolution Process

AA – Adjudicating Authority (NCLT)

CD – Corporate Debtor

FC – Financial Creditor

OC – Operational Creditor

CoC – Committee of Creditors

IRP – Interim Resolution Professional

RP – Resolution Professional

RA – Resolution Applicant

 

Allahabad Bench

Retrospective application of amendments made in IBBI (Liquidation Process) Regulations – M/s LML Ltd. (In Liquidation) Through Liquidator, Arun Gupta (14/07/2021)

The present application was filed by the Liquidator of CD under Section 60(5)(c) of the Code r/w Regulation 33(1) and Schedule I of the IBBI (Liquidation Process) Regulations, 2016 (“LP Regulations”) seeking permission to conduct an auction of CD’s assets by reducing the reserve price by 10% for a subsequent auction, when the auction fails at the earlier reduced price.

In this case, the AA had ordered the liquidation of the CD vide order dated 23.03.2018 and subsequently appointed Mr. Arun Gupta as a liquidator on 09.04.2018. The liquidator constituted a monitoring committee and issued a sale notice along with a public announcement on 27.09.2018 for the first auction to be held on 31.10.2018. However, one major immovable property remained unsold despite putting it up for auction 11 times.

Sub-paragraphs 4, 4A and 4B of para 1 Schedule 1 of the LP Regulations were amended on 25.07.2019. According to the amended provisions, the reserve price shall be the value of the asset in accordance with Regulation 35 (sub-para 4). Where an auction fails at the reserve price, the Liquidator may reduce the reserve price by upto 25% of such value and conduct subsequent auctions (sub-para 4A). If an auction fails even at a reduced price under clause 4A, the reserve price may be further reduced by not more than 10% at a time (sub-para 4B).  These amendments were made applicable to liquidation processes which commenced on or after 25.07.2019. The present application had been filed since the liquidation process in this case had begun before 25.07.2019.

The AA allowed the retrospective application of the amended LP Regulations in the present case and opined that, allowing the said application would expedite the liquidation process as otherwise, the liquidator may not be able to sell the property. Accordingly, the liquidator was permitted to reduce the reserve price by 10% in the next auction.

 

Resolution Round-Up

Approval of Resolution Plan by AA under Section 31 of the Code for resolution of M/s Piyush Shelters India Pvt. Ltd. (14/07/2021)

• AA ordered for initiation of CIRP against CD on 04.12.2018.
• Even after inviting EOIs four times, only one EOI fulfilling the eligibility criteria was received from Naveen Kumar Gupta, as the lead member of the Consortium of Maya Buildcon Pvt. Ltd., Geotech Homz Pvt. Ltd. and Naveen Kumar Gupta.
• In the 9th CoC meeting held on 01.11.2019, the CoC approved of the resolution plan with 80.16%.
• The resolution plan was found to be in compliance with Section 30(2) of the Code and hence, the resolution plan was approved by AA.

Liquidation of Hipad Technology India Pvt. Ltd. under Section 33 of the Code (15/07/2021)

• AA initiated CIRP proceedings against CD vide order dated 09.12.2020.
• CoC opined that since machinery has been deteriorated in the process of dismantling the assets and since it is not possible to revive the CD, thus liquidation of CD is the only viable option.
• It was argued that since CD is not a going concern anymore and in view of the rapid changes in mobile technology, the machineries of CD were turning obsolete and the value of the assets were declining, hence the present application for liquidation under Section 33.
• CoC passed a resolution with 100% votes on 25.03.2021 to liquidate the CD as there is no hope for resolution or revival of the company.
• Hence, the application was allowed by the AA and liquidator appointed under Section 34(1) of the Code.

Dissolution of Shashi Oils and Fats Pvt. Ltd. under Section 54 of Code (15/07/2021)

• Sole Secured Creditor: ASREC (India) Pvt. Ltd. filed a claim to the tune of ~ Rs. 49 Crores.
• ASREC relinquished their security interest on the assets of CD to themselves and accordingly, added CD’s assets to the liquidation estate.
• Sale proceeds distributed among the stakeholders of CD in terms of waterfall mechanism under Section 53 and bank account of CD closed on 19.03.2021
• CD completely wound up and assets liquidated. Hence, AA orders for dissolution.

 

Ahmedabad Bench

The ambiguous contours of the look back period — Invesco Asset Management (India) Pvt. Ltd. v. Sintex Industries Ltd. (13/07/2021)

The application, filed by the suspended management, was for the NCLT to enforce the look back period in the context of avoidance transactions, as given under Section 46(1) of the Code. The management contended that the CoC and their auditor need to adhere to the mandate of the Code, which prescribes a look back period beyond which avoidance transactions cannot be looked into. The NCLT while concurring with the view of the suspended management, cautioned the CoC, and the auditor to pay heed to the look back period; however, the NCLT was of the view that the suspended management could bolster their defence in the Section 66 proceedings, by highlighting that the look back period was exceeded, thereby, denying any preemptive relief to the suspended board of management.

It is a settled position of law, that if a Court has the power to remedy a wrong, it should be within its jurisdiction to prevent the wrong from happening. However, the same is to be construed with the objective of the provision, therefore, the contention that going beyond the look back period would be prejudicial to the suspended management does not hold water. The overarching objective of the code is to maximize the debtor’s assets in favour of all the stakeholders involved, therefore, the wrong brought about after exceeding the look back period will need to be balanced against the increase in the debtor’s estate. Further, section 45, which does not account for intention is limited by the look back period, however, section 49 deals with avoidance transactions which involve malafide intent, therefore, the same should not be limited by the look back period, as “it is axiomatic that fraud vitiates everything”(Village of Willowbrook, 37 Ill.App.2d 393 (1962)). However, the malafide intent behind such transactions would only surface when they are actually discovered, therefore, the NCLT’s stance on not intervening preemptively, and allowing the contravention to be used as a post facto defence in section 66 proceedings, is correct.

Can the CoC be compelled to reconsider a rejected Resolution Plan? Alpha Alternate Holdings v. Union of India

The CoC rejected the RA’s plan on the basis of two technicalities. First, that it had been submitted by an entity other than the RA, and second, the RP had not valued all of the debtor’s assets. However, the RP highlighted a third contention against the RA’s plan – that it did not comply with the issued Expression of Interest and with the Requirement for Resolution Plan. This was not considered by the NCLT, for the reason that the RP had not disclosed reasons for the plan’s rejection.

Against that backdrop, the NCLT by relying on the narrow scope for intervention with the wisdom of the CoC carved out in CoC of Essar Steel India ltd. v. Satish Kumar Gupta, considered it appropriate to direct the CoC to reconsider the plan, as the wisdom of the CoC in this factual matrix was not aligned with the mandate of the Code. Further, the NCLT felt that liquidation would be a drastic consequence to reach, without exhaustion of all available remedies.

 

See also: The appropriate forum for entertaining allegations against an outgoing RP is the Insolvency and Bankruptcy Board of India, and not the Adjudicating Authority. Nuvoco Vistas Corporation Ltd. v. Shilpraj Pvt. Developers Pvt. Ltd.