NCLAT's August 2023 Orders: A Comprehensive Analysis of Key Decisions

NCLAT's August 2023 Orders: A Comprehensive Analysis of Key Decisions

**Author :- Ayushi Mishra, a student of Jitendra Chauhan College of Law

Introduction

The National Company Law Appellate Tribunal (NCLAT) is a vital institution in the realm of insolvency and bankruptcy law in India. Between August 1 and August 15, 2023, the NCLAT issued a series of significant orders under the Insolvency and Bankruptcy Code, 2016 (IBC). These orders have far-reaching implications for various stakeholders, including operational creditors, financial creditors, resolution applicants, liquidators, and more. In this article, we will delve into some of the most noteworthy decisions categorized by the stage of the insolvency process.

Pre-admission Stage

1. Inclusion of Interest in Principal Debt (Kasha E. Sai v. M/s Yarn Udyog): The NCLAT clarified that interest stipulated in an invoice can be added to the principal debt amount for meeting the threshold specified under Section 4 of the IBC. Moreover, the NCLAT emphasized that an arbitration proceeding initiated before the MSME council, even if rejected for lack of jurisdiction, does not constitute a pre-existing dispute.

2. Effect of Section 10A on CIRP Application (Carissa Investment LLC v. Indu Techzone Private Limited): The NCLAT held that if the last installment of a settlement understanding falls due during the Section 10A moratorium period, an application for Corporate Insolvency Resolution Process (CIRP) is not maintainable if the dues are not paid.

3. Treatment of Unsecured Loans (Mahmod Alam Khan v. Ahmed Alam Khan): The NCLAT clarified that unsecured loans extended by directors or shareholders to a corporate debtor, even without interest or repayment agreements, qualify as financial debts. Such loans become due and payable on demand.

4. Default and Section 10A (Nitin Chandrakant Desai v. Edelweiss Asset Reconstruction Limited): The NCLAT clarified that a default occurring before the Section 10A moratorium period does not bar the filing of a CIRP application based on that default, even if filed after the Section 10A period.

5. Admission of CIRP Against Solvent Company (Winled (HK) Cables & Wire Products Co. Ltd. v. Velankani Electronics Private Limited): The NCLAT affirmed that the admission of corporate insolvency resolution process is not barred against a solvent company, provided the borrower acknowledges the amounts due.

6. Section 9 Application for Compensation (Chandrashekhar Exports Private Limited v. Babanraoji Shinde Sugar & Allied Industries Limited): The NCLAT ruled that an application under Section 9 of the IBC cannot be maintained based on a claim of compensation and penalty unless it has become a crystallized debt through adjudication by a competent authority.

7. Threshold for Section 8 Demand Notice (Rajesh Sabharwal v. Desein Private Limited): The NCLAT clarified that even if a demand notice under Section 8 was issued before the amendment of Section 4, the increased threshold for CIRP application must be met when filing a Section 9 application.

8. SARFAESI Act and Section 7 Application (Dhirajlal Parbatbhai Lakkad v. Ramesh Kumar Totla): The NCLAT emphasized that resorting to proceedings under the SARFAESI Act does not preclude a bank from filing a Section 7 application under the IBC.

Corporate Insolvency Resolution Process (CIRP) Stage

1. Resolution Applicant's Rights (Ramneek Goel v. Sunil Bajaj): The NCLAT clarified that a sole resolution applicant does not have an inherent right to insist that only their plan should be voted and approved. Additionally, the Adjudicating Authority has the power to examine all issues arising from the CIRP, including breaches of confidentiality.

2. Powers of Committee of Creditors (CoC) (Amit Goel v. Piyush Colonizers Limited): The NCLAT affirmed that the CoC has the power to change the management of a subsidiary of a corporate debtor under Section 28(1)(j) of the IBC, even if Section 66 proceedings challenge the sale of subsidiary shares.

3. Amendment of Resolution Plan (Ocean Capital Market Limited v. Uday Narayan Mitra): The NCLAT ruled that when a portion of a resolution plan is non-compliant with the law, and the successful resolution applicant voluntarily suggests modifications to rectify the issue, the Adjudicating Authority can remit the plan to the CoC for consideration and voting.

4. Resolution Professional's Fees (India Resurgence ARC Private Limited v. Rohit J. Vora): The NCLAT held that if the CoC approves payment of fees to the resolution professional until they demit the post, it is not time-bound approval. The resolution professional is entitled to claim fees until replacement or substitution, and fees may be scaled down if minimal work is undertaken.

5. Action Against Forged Documents (Sanjay Jain v. Nilesh Sharma): The NCLAT emphasized that claims based on forged documents are not maintainable, and the Adjudicating Authority can initiate action under Section 340 of the Code of Criminal Procedure.

6. CoC's Resolution Plan Decision (Anil Kumar v. Jayesh Sanghrajaka): The NCLAT upheld the CoC's decision to entertain a resolution plan without re-issuing Form G, highlighting that minor procedural deviations should not undermine the integrity of the resolution process, especially when the plan offers significantly more than the liquidation value.

7. Resolution Professional's Fees and CIRP Closure (Laxman Singh v. Kerry Indev Logistics Private Limited): The NCLAT cautioned against resolution professionals claiming disproportionate fees. In a unique scenario, the NCLAT used its inherent power to close the CIRP after 270 days when the sole CoC member sought withdrawal.

8. Personal Guarantor and Jurisdiction (Mahendra K. Agarwal v. PTC India Financial Services Limited): The NCLAT clarified that insolvency proceedings against a personal guarantor can be initiated in the jurisdiction where the corporate debtor's registered office is located. Such proceedings are unaffected by settlements or withdrawals against the corporate debtor.

9. Provident Fund Department Claims (Employees Provident Fund Organization v. CA. S. Prabhu): The NCLAT ruled that the Liquidator cannot demand an assessment order to admit claims filed by a provident fund department, even when there is a shortfall compared to returns filed by the establishment.

10. Central Excise Dues (Assistant Commissioner of Central Tax v. Sreenivasa Rao Ravinuthala): The NCLAT clarified that central excise dues, while considered a first charge on the property of the assessee under the Central Excise Act, are not secured debts under the IBC.

11. Specific Project Resolution Plan (Arun Kumar v. Sripriya Kumar): The NCLAT held that objections to a resolution plan for a specific project mentioned in the public announcement, if not raised during CoC meetings, cannot be entertained later. It also clarified that the active status of a DIN is crucial for Section  29A disqualification, and penal interest is governed by contractual arrangements.

12. Differential Payments to Unsecured Creditors (Peter Beck and Partner Vermoegensverwaltung v. Sharon Bio-Medicine): The NCLAT permitted differential payments to assenting and dissenting unsecured financial creditors, as long as dissenting creditors receive the liquidation value mandated under the IBC.

Liquidation Stage

1. Forfeiture of Earnest Money Deposit (S. Hari Karthik v. Jayaram Chowdhary): The NCLAT ruled that the liquidator cannot forfeit the earnest money deposit of a resolution applicant solely on grounds of delay in completing the CIRP if the request for a resolution plan specifies forfeiture only in case of false and misleading representation.

Miscellaneous

1. Date of Default vs. NPA Declaration Date (Shilpi Asthana v. Indusind Bank Limited): The NCLAT clarified that the date on which an asset is declared a Non-Performing Asset (NPA) cannot be considered as the date of default. Therefore, CIRP can be admitted if the actual date of default precedes the Section 10A moratorium period.

Conclusion

The NCLAT's August 2023 orders demonstrate the tribunal's commitment to clarifying and interpreting the IBC in a manner that balances the interests of all stakeholders involved in the insolvency process. These decisions address crucial issues related to pre-admission disputes, the CIRP stage, liquidation, and other miscellaneous matters. They provide valuable guidance to practitioners, creditors, resolution applicants, and insolvency professionals navigating the complex landscape of Indian insolvency law. The NCLAT's role in shaping the evolving insolvency jurisprudence of India cannot be understated, and its decisions continue to play a pivotal role in the IBC's implementation and effectiveness.