August 15, 2021
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
GST – Goods and Services Tax
TDS – Tax Deducted at Source
The Appellant/OC had filed an application u/s. 9 of the Code against the CD, claiming outstanding dues for the supply of soya beans made in July 2015. The application was dismissed by the AA for the reason that the debt was time-barred. The AA did not accept the receipt of Rs. 2 lacs from the CD dated 24th November 2017 because the name shown in the bank statement was M/s. Premier Nutritions and not the name of the CD. However, the Appellant/OC argued that the legal name of the CD was ‘Girdharilal Sugar and Allied Industries Limited’ and the trade name of the CD for GST was ‘Premier Nutritions Prop Girdharilal Sugar and Allied Industries’. The Appellate Tribunal, based on the GST registration certificate, held that the payment dated 24th November 2017 was made by the CD and the limitation got extended as per Section 19 of the Limitation Act, 1963. Thus, the appeal was allowed, and the matter was remitted back to the AA.
The CIRP for the CD had started in the year 2019 and by January 2021, the CoC had decided to move for the liquidation of the CD. While the approval for liquidation was pending before the AA, Respondent No. 2 proposed a resolution plan. The AA condoned the delay in submitting the resolution plan and directed the CoC to decide on it by 22 March 2021. However, the CoC granted more time to the RA for modification of the plan, despite the objection by the Appellant/FC.
The Appellant/FC moved the AA against the decision of the CoC granting an extension of time and argued that u/s. 33 of the Code, if the CIRP was not completed within the stipulated time limit, then the only recourse would be to liquidate the CD. The AA considered the fact that the voting on the resolution plan had already taken place, and declined to pass orders for liquidation.
The Appellate Tribunal held that the orders of liquidation cannot be passed without considering the resolution plan, which had been approved by the CoC. The AA had exercised its discretion to not liquidate the CD, and the Appellate Tribunal declined to interfere with the discretion of the AA.
The brief facts were that the FC had provided alleged financial assistance to the tune of Rs. 6.10 crores and the CD had paid interest and deducted TDS for it. However, it was alleged that the CD had failed to pay interest thereafter, and also the principal amount. The Respondent/FC approached the AA u/s. 7 of the Code seeking initiation of CIRP against the CD. The CD contended that there was no contractual agreement between the parties specifying the period of the loan nor any interest rate fixed, and therefore the said amount fell outside the scope of ‘financial debt’ u/s. 5(8). The AA overruled the submissions of the CD and initiated CIRP.
In appeal, the appellant argued that in the absence of a written loan agreement, the Respondent/FC had failed to establish itself as a financial creditor and the aforementioned transaction as a financial debt. They also relied on the decision of the Appellate Tribunal in Sanjay Kewalramani Vs. Sunil Parman and Kewalramani & Ors. in which it was held that mere payment of interest and TDS cannot be sufficient to impose liability on the CD. On the other hand, the Respondent/FC argued that as per Section 10 of the Indian Contracts Act, 1872, oral agreements are valid and enforceable as written agreements.
The Appellate Tribunal differed from the opinion of the AA and held that deduction of TDS cannot be the basis for a transaction to be determined as a financial debt. The Appellate Tribunal observed that in terms of Rule 3(1)(d) of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016, there should be a loan agreement in writing between the Financial Creditor and the CD.
The AA had directed the RP to invite EoIs afresh owing to a CIRP being initiated against the successful RA. The Appellant argued that the CIRP process had already consumed 1091 days and that the Appellant would submit a resolution plan. There had been no extension of time for CIRP by the AA, without which the impugned order was not valid in law. The Appellate Tribunal remitted the matter back to the AA to consider if the extension of CIRP was required and if the Appellant was eligible to submit a resolution plan.
The Respondent had disconnected the electricity supply to the CD while CIRP was pending. The AA ordered that the electricity connection be restored upon payment of Rs. 1,50,000/- out of the total outstanding dues by the CD. The Appellant/RP argued that the supply of electricity was an essential service that could not be disconnected in the moratorium period in view of Section 14 of the Code r/w 32 of the Insolvency Resolution Process for Corporate Persons Regulations, 2016. The Appellate Tribunal noted that as per Regulation 32, electricity would be an essential supply to the extent it would not be a direct input to the output produced by the CD. The Appellate Tribunal declined to interfere with the order of the AA because the electricity for the running of the printing business of the CD would not be protected as an essential supply.
~ By Manikanda Prabhu J
We talk to Dr. M. S. Sahoo, the IBBI Chairperson and the flag-bearer of the Indian insolvency and restructuring industry, on a variety of issues.July 12, 2021
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