Important IBC Judgments by the NCLTs (2-6 August 2021)

  August 11, 2021

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

Extension of Liquidation Period Permitted for Realising Unsold Asset through an Auction: M/s LML Limited (Under Liquidation) Through Mr. Arun Gupta (03.08.2021)

This application was filed under Section 60(5) of the Code by the liquidator, praying for an extension of the liquidation period by one year. It was stated that only one major immovable asset remained unsold even after several attempts at auctioning it, which held up the CIRP’s completion. It is significant to note that two extensions for the same matter had been previously granted to the liquidator for six months each – dated 27 May to 26 November 2020 and 27 November 2020 to 26 May 2021, respectively.

The liquidator had already commenced and distributed funds worth Rs. 1,05,20,96,441/- which were paid towards CIRP expenses, and the remaining amount went to the stakeholders in accordance with the provisions of the Code (Section 53). The liquidator applied to the AA for guidance to sell the asset, which was not attracting adequate interest. Accordingly, the AA granted permission for the reserve price of the asset to be reduced by 10% after each subsequent failed auction. Subsequent auctions were executed in compliance with these directions.

The Tribunal took into account the seriousness of the COVID-19 pandemic and the overall purpose of the Code, which was to aid the liquidator in the process of the fulfilment of his duties. Therefore, the application was allowed, but the extension granted was only for six months rather than the requested twelve. Additionally, the period consumed by the lockdowns imposed in the concerned area was allowed to be excluded from the liquidation process in light of the guidelines previously issued by the Supreme Court. 

Usage of Premises Without a Rent Agreement in Place while CIRP was Initiated: Standard Chartered Bank v. JVL Agro Industries Limited (06.08.2021)

The  application was filed  by Jhunjhun Oil Mills Limited (“JOML”) against the RP of the  CD, for the payment of overdue rent, along with the stipulated  interest. The CD had possessed the premises since 2007, and it shifted its registered office to the address in February 2018. JOML was a group company and an inter se arrangement was entered into by the two entities. There was no existing rent agreement included in this arrangement. The CD also contended that there were no rent receipts produced or submitted by the respondents, backing the presence of a rent agreement in favour of the Applicant. The CD argued that despite all the information regularly furnished to establish clarity, a demand  for rent payment was raised. Subsequently, JOML was informed of the repeated attempts made by the Respondent to restrain the CD’s entry into the premises, which caused direct harm to the ongoing CIRP and the liquidation process. On the other hand, it was submitted by the Respondent that at the beginning, a deal was negotiated and agreed upon which provided for a rent amount of Rs. 5,00,000/- along with Rs. 1,00,000/- excluding GST being payable by the CD. 

The Bench observed it was an undisputed fact that the premises in question was put to a continued usage by CD as its registered office, since February 2018 with no payment of rent being made on time. The emails submitted by JOML clearly addressed the need for the CD to enter into a rent agreement with the agreed terms and conditions, which were ignored on a regular basis. The AA took note of the fact that CD was in possession of the concerned premises and made no effort to enter into a rent agreement even after the initiation of CIRP; and further observed that this gave the CD no leeway to take advantage of the premises for commercial use and not be liable to pay the accrued rent even if there was no rent agreement in effect. It was held that the stance of a rent agreement not being entered into would not be taken into legal consideration since the premises were continuously used for commercial purposes for two years, and it was not reasonable for the CD to not pay any rent for it. 

Ahmedabad Bench

Liability of the Corporate Debtor vis à vis a Tripartite Borrower Agreement: Magma Housing Finance Limited v. Aagam Infrabuild Pvt. Limited (02.08.2021)

A Section 7 application was filed by the FC (Magma Finance Housing Limited) against the CD (Aagam Infrabuild Private Limited). A tripartite agreement dictated the disbursement of money by the FC to the CD on behalf of two individuals in furtherance of securing a flat in the project developed by the CD. Therefore, the two individuals were the borrowers in this transaction, and the amount they borrowed from the FC was directly disbursed to the CD to secure a flat.

The agreement included a clause according to which, on cancellation of allotment of the flat, the CD would be liable to repay the disbursed amount to the FC. On non-repayment of dues by the borrowers, the FC vide a letter urged the CD to cancel the allotment of the flat, and refund the amount disbursed by the FC. However, during adjudication of the FC’s Section 7 application under the Code, the AA heavily relied upon supporting documents, and even the letter which requested cancellation of the flat, to establish that the CD has no liability to pay the FC, since the two individuals were the borrowers, and not the CD. In contrast to this assertion, the AA did not logically link the letter which urged cancellation to the clause in the tripartite agreement, which makes the CD liable to repay the loan amount in case of cancellation of the allotment. The AA dismissed the application on the ground that the CD was not liable to repay the FC as cancellation had not yet occurred. 

Kochi Bench

Typographical errors in final orders can be corrected within two years of pronouncement of the orders, either on the Tribunal’s own accord, or on being moved by any party under Rule 154 of the NCLT Rules: Merchem Ltd. v. The Department of Factory and Boilers (02.08.2021)

Chennai Bench

Powers of the Liquidator vis à vis Employee Provident Funds: The Regional Provident Fund Commissioner Employees Provident Fund Organization v. S. Kannan (03.08.2021)

After being intimated of the liquidation of the CD’s operation, the applicant (The Regional Provident Fund Commissioner) informed the respondent (Liquidator) that the dues for the Employee Provident Fund would not form a part of the debtor’s estate as under Section 36 (4)(a)(iii) of the Code. The applicant further submitted Form F (Insolvency Resolution Process Regulations, 2016) substantiating its entire claim of Rs. 15,31,222 /-, which also included penalties as under Sections 14B and 7Q of the Employee Provident Fund & Miscellaneous Provisions Act, 1952 (“EPF Act”). The liquidator rejected the applicant’s claim citing enormous delays in its filing, and further recommended the treatment of penalties separately from the “amount due from employer” (EPF Act, Section 11 (2)); that is, the treatment of fines as per the waterfall mechanism prescribed under Section 53 of the Code. 

The AA was quick to note that the applicant could not be denied its dues on the basis of “enormous” delay in filing of claims, as the Employee Provident Fund dues do not form a part of the liquidation estate. Additionally, the AA refused to exclude the penalties from the Employee Provident Fund amount by referring to the observations of the Supreme Court in Maharashtra Bank Co-op Bank Ltd. v. Provident Fund Commissioner, where the apex court held that exclusion of damages or interest leviable from the ambit of “amount due from employer” incentivizes the employer to not cooperate with concerned authorities. Therefore, the fines too form a part of the “amount due from employer”, and should not be treated separately as under the waterfall mechanism. Consequently, the entirety of the Employee Provident Fund amount was excluded from the liquidation estate. An auxiliary correction was made by the AA, where it noted that the current application was to be filed under Section 42 of the Code, as it was against the decision of the liquidator, as opposed to Section 60(5) of the Code.

A Liquidator’s Unsuccessful Attempt to Circumvent a Public E-Auction Sale: In the matter of Auro Mira Energy Company Pvt Ltd  (02.08.2021)

The liquidator applied to the AA preferring private sale of a parcel of 931.53 acre land, citing difficulties in conducting e-auctions, which included the non-continuous nature of the land; that is, the land did not share any common boundaries, and the enormous cost that came with every failed e-auction (Rs 2,90,000/-). Additionally, the liquidator highlighted the negligible interest shown in the e-auctions, as opposed to the ready availability of decent private buyers. The AA noted that the liquidator had not issued any public notices for any of the three previous e-auction sales, going against the IBBI (Liquidation Process) Regulations, 2016, and directed the liquidator to conduct a proper e-auction sale, thereby, shutting down the liquidator’s attempt at circumventing the public e-auction sale.

~ By Aaryan Mohan and Sandali Sharma

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