Important IBC Judgments by the NCLTs (9-13 August 2021)

  August 15, 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

New Delhi Bench VI

Doubts regarding the applicability of IBBI Regulations in relation to the payment of liquidation costs:  M/s SPM Auto Pvt. Ltd. through Vijendra Sharma v. SIDBI, Canara Bank, Corporation Bank and Mahindra & Mahindra  (10.08.2021)

The application was filed by the Liquidator seeking guidance on a number of issues, most important among which was to decide the percentage of distribution of CIRP and liquidation cost between the secured creditors according to Section 53 of IBC, 2016 read with Regulation 42 of IBBI Regulations, 2016. 

The bench, from the bare perusal of Section 53 of the Code, reached the conclusion that the proceeds from the liquidation process shall be distributed in a way that the CIRP and liquidation cost is paid in full as the first priority. Additionally, Regulation 42’s specifications were addressed to explain that the liquidation cost is supposed to be deducted before the distribution is made. Since the respondents in this instance had not paid the contribution according to the share of the fee, the bench prescribed the proportional deduction of the liquidator’s fee from the proceeds payable to the recipients; the ratio was held to  be decided proportionately on the basis of realization. 

There was also the question about the applicability of Regulation 2A of IBBI Regulations, amended on 25.07.19, to a creditor who was a CoC member previously. The bench explained that the company went under liquidation in 2018 which was before the enactment of the Regulations; hence they would not be applicable in the given matter. 

Mumbai Bench

Individual CIRP proceedings against a personal guarantor not maintainable: Insta Capital Private Limited v. Ketan Vinod Kumar Shah  (10.08.2021)

The application was filed by a financial creditor, Insta Capital Private Limited, under Section 95 of the Code read with Rule 7(2) of  the IB Rules, 2019. It was against the personal guarantor of the CD, S.K. Products LLP, for  initiating CIRP. 

Rule 7(2) concerns applications made to the AA for CIRP for personal guarantors to CDs. The CD had applied for sanction of loan from the FC. The debt was due on 12.04.2019 and a default occurred. The FC submitted appropriate evidence to prove the existence of debt and the amount in default. The NCLAT, in SBI v. Athena Energy Ventures Pvt. Ltd., had already held that CIRP could be initiated against both the CD and the personal guarantor simultaneously for the same debt and default. 

The personal guarantor (Respondent) raised preliminary objections against the maintainability of the application on the grounds of Section 60(2) of the Code and the limited scope of NCLT jurisdiction. The bench  referred to Section 60 of the Code and Section 128 of the Contract Act to emphasise that CIRP could always be initiated against a guarantor, but in this instance, Section 60(2)’s non-obstante clause came into play to specify that only when the CIRP of a CD was pending before the NCLT, an application against the guarantor could be filed. Under Section 95, an application could only be filed against the guarantor if the CD was already under CIRP; therefore, the petition was dismissed on the grounds of non-maintainability of the suit against the guarantor individually. 

Decisions regarding pre-existing conflicts during CIRP: Pradeep Thakore v. MFC Transport Pvt. Ltd.  (10.08.2021)

Applicant Operational Creditor sought to initiate CIRP against the CD, alleging that it had committed default in making payments to the FC and the OC (Rs. 23,00,000/-). The OC, a former employee of the CD, was employed in 2010 at a monthly salary of 2,00,000/-.  In August 2017, the salary was reduced to Rs. 1,00,000/- till his superannuation in March 2019, without any prior communication. Reasons given orally were based on a financial crisis, and the OC was assured that the outstanding salary would be settled in “due course of time”. 

In March 2018, the OC expressed his concerns regarding his consistently reducing salary, which got no response from the CD. Another email in October 2018 yielded no response. When the date of his superannuation came close, the OC requested the CD to settle the required amount and was put on hold by the management of the CD to no avail. The OC issued a demand notice under Section 8 of the Code for an amount of Rs. 23,00,000/-. The CD called the entire demand a sham and that the salary reduction stemmed from poor performance. 

Facts suggested that the CD had communicated with the OC regarding his degrading performance in 2017, which cleared the dispute’s nature as pre-existing. The bench did not consider the claim made as qualifiable under the definition of operational debt; this deemed both issues against the OC and hence, the petitions were rejected. The order, in no way, however, precluded the OC from recovering his amount from the CD by approaching an appropriate legal forum. 

Kochi Bench

Non-compliance with appropriate time frame keeps employees from accrued remuneration:  In the matter of Excel Glasses Ltd. through Ravindra Chaturvedi (11.08.2021)

Appeals were filed by workmen/employees of Excel Glasses Ltd under Section 42 of the Code, aggrieved by the liquidator’s decision of intimating them the claims of Workmen/Employees in the matter. Applicants were jobless since 2012 after putting in long years of service in the company. 

The bench addressed its previous order dated 10.08.2020 permitting the liquidator to modify the entries in the List of Stakeholders Report in the subject matter; the liquidator complied and modified the entries in the list of claims of the workmen/employees based on the books of the CD. 

The liquidator (Respondent) filed a counter to each application inter alia stating the following:

  • Deficiencies were found in the claim application during the processing of said claims. 
  • Fifteen applications were filed on 28.07.2020, seven on 13.08.2020 and only one on 21.08.2020, much earlier than the liquidator’s email inviting any potential individual claims.

The tribunal referred to Section 42 of the Code which requires the applications to be filed within 14 days of the decision of the liquidator, i.e. 21.08.2020. The final order of the liquidator had to be waited for, and premature application was not acceptable. The Liquidator summarised the points in the List of Stakeholders for Workmen/Employees dated 20.12.2020, and submitted that most claims were received after the last date affixed for receipt of claims. In absence of an appropriate response, the liquidator followed Regulation 19 and verified the total liability towards the applicants till the date of liquidation order. Hence, claims were processed under legal guidance and then mentioned on the website as a part of the list, with the implication of scrutiny on information. The applicants could not provide any substantial proof of appointment.

This order was deemed to be  of no interference to the proceedings against the Respondent under Section 42 of the Code. It was emphasized by the bench, again, that the applicants had without waiting for the final order of the liquidator rushed to the tribunal and filled the applications prematurely. 

~ By Sandali Sharma

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