India – Development In Insolvency Law – August 2019.

This newsletter covers key updates about developments in the Insolvency Law during the month of August 2019. We have summarized the key judgments passed by the Hon’ble Supreme Court (SC), the National Company Law Appellate Tribunal (NCLAT) and various benches of the National Company Law Tribunals (NCLT). Please see below the summary of the relevant regulatory developments.

 

Matter: Pioneer Urban Land and Infrastructure Limited and another vs. Union of India and others

 

Order dated: 09 August 2019

 

Summary:

 

A large number of writ petitions were filed before the Supreme Court (SC) challenging the constitutional validity of the amendments made to the Insolvency and Bankruptcy Code, 2016 (Code) that deem allottees of real estate projects to be “financial creditors”. The amendments also entitle allottees as financial creditors to be represented in the Committee of Creditors by authorised representatives. The amendments were made pursuant to a report prepared by the Insolvency Law Committee.

 

The real estate companies inter alia raised the following contentions:

 

i. Treating allottees to be financial creditors is discriminatory inasmuch as unequals are treated equally, equals are treated unequally, and both are without any intelligible differentia having any nexus with the objects of the Code.

 

ii. There is a specific legislation, namely, the Real Estate (Regulation and Development) Act, 2016 (RERA), which deals in detail with the real estate sector, and provides for adjudication of disputes between allottees and the developer.

 

iii.     Advances received from home buyers by developers cannot, from an accounting perspective, be treated as financial liabilities.

The SC held as follows before dismissing the writ petitions:

i.       The amendment to the Code does not infringe Articles 14, 19(1)(g) read with Article 19(6), or 300-A of the Constitution of India.

ii. The RERA is to be read harmoniously with the Code, as amended by the Amendment Act. It is only in the event of conflict that the Code will prevail over the RERA. Remedies given to allottees of flats / apartments are therefore concurrent remedies such allottees of flats/apartments being in a position to avail of remedies under the Consumer Protection Act, 1986, RERA as well as the triggering of the Code.

 

iii. Section 5(8)(f) as it originally appeared in the Code being a residuary provision, always subsumed within it allottees of flats/apartments. The explanation together with the deeming fiction added by way of amendment is only clarificatory of this position in law.

 

Matter: Mr. Shobhnath and others vs Prism Industrial Complex Limited

 

Order dated: 06 August 2019 

 

Summary:

 

Appeal was preferred by Mr. Shobhnath (Appellant) before the National Company Law Appellate Tribunal (NCLAT) against the order of National Company Law Tribunal (NCLT), whereby the NCLT rejected the application filed by the Appellant for initiating corporate insolvency resolution process (CIRP) against Prism Industrial Complex Limited (Respondent) on the ground that there existed a financial fraud, where the directors / promoters have deliberately engaged in a scheme having striking similarity with the infamous "chit funds" or “Ponzi schemes” and the scheme of the Insolvency and Bankruptcy Code, 2016 (Code) is not meant for a case of a financial fraud or irregularity.

 

The NCLT had observed that this was a case where interests of a large number of retail investors, from whom money had been raised in the guise of debentures or deposits, was involved. The NCLT had further observed from the balance sheet of the Respondent that money had been raised from numerous investors and the promoters / directors have siphoned the funds out into various affiliated companies. As the retail investors, who have been deprived of their life’s savings, would not want revival of the company, NCLT did not admit the application filed by the Appellant for initiating CIRP against the Respondent.

 

The NCLAT referring to the order passed in Innoventive Industries Limited vs. ICICI Bank and another, observed that ‘debt’ means a liability of obligation in respect of a ‘claim’ and a ‘claim’ means a right to payment even if it is disputed. The Code gets triggered the moment default is of INR 100,000 or more. The NCLAT referred to Section 65 of the Code which states that any person who initiates CIRP or liquidation proceedings fraudulently or with malicious intent for any purpose other than for the resolution of insolvency, or liquidation, the Adjudicating Authority has power to impose upon such person penalty which shall not be less than INR 100,000 and may extend to INR 10 million. The NCLAT observed that no case was made out by the NCLT for passing any observation under Section 65 of the Code and it was merely on the ground that the directors and promoters of the Respondent  had engaged in scheme having striking similarity with the infamous chit funds or Ponzi Schemes.

 

The NCLAT held that in such a case the Promoters / Directors may face serious criminal implication for breach of the orders of SEBI, but that cannot be ground to reject an application for initiating CIRP against the Respondent, or to initiate any proceeding under Section 65 against the Appellants, who have no connection with the Directors or Promoters of the Respondent. Accordingly, the NCLAT set aside the order of the NCLT and admitted the application for initiation of CIRP filed by the Appellant.

 

Matter: State Bank Of India Vs. Moser Baer Karamchari Union And Another.

 

Order dated: 19 August 2019

 

Summary:

 

Appeal was preferred by State Bank of India (Appellant) before the National Company Law Appellate Tribunal (NCLAT) against the order of National Company Law Tribunal, Principal Bench (NCLT), whereby the NCLT held that the ‘Provident Fund Dues’, ‘Pension Fund Dues’ and ‘Gratuity Fund Dues’ cannot be part of Section 53 of the Insolvency and Bankruptcy Code, 2016 (Code).

 

The question before the NCLAT was whether the provident fund, pension fund and gratuity fund fall within the meaning of assets of the ‘Corporate Debtor’ for distribution under Section 53 of the Code.

 

The NCLAT referred to Section 36 of the Code and observed that all sums due to any workman or employee from the provident fund, the pension fund and the gratuity fund, shall not be included in the liquidation estate assets and cannot be used for recovery in the liquidation. The NCLAT also referred to Section 53 of the Code which deals with distribution of the assets and observed that it is clear from the section that so far the proceeds from the sale of the liquidation assets of the Corporate Debtor is concerned, the distribution is to be made in order of priority and within such period and in such manner as provided. On review of Sections 36 and 53 of the Code the NCLAT observed that as all sums due to any workman or employees from the provident fund, the pension fund and the gratuity fund, do not form part of the liquidation estate/ liquidation assets of the ‘Corporate Debtor’, the question of distribution of the provident fund or the pension fund or the gratuity fund in order of priority and within such period as prescribed does not arise.

 

Further, the NCLAT rejected the Appellants submission that ‘workmen’s dues’ shall have the same meaning as assigned under Section 326 of the Companies Act, 2013 (CA Act) stating that while applying Section 53 of the Code, Section 326 of the CA Act is relevant for limited purpose of understanding “workmen’s dues” which can be more than provident, pension and gratuity funds kept aside and protected under Section 36 of the Code. 

 

Accordingly, the NCLAT upheld the decision of the NCLT and held that in case of inconsistency in any other law for the time being in force the provisions of the Code will have an overriding effect.

 

 

Matter: State Bank of India vs. Uttam Galva Metallics Limited

 

Order dated: 01 August 2019 

 

Summary:

 

In this matter the question before the National Company Law Tribunal, Mumbai Bench (NCLT) was whether copy of minutes of the meetings of the committee of creditors (CoC) could be shared with the unsuccessful resolution applicants, pursuant to an order passed by the NCLT wherein the parties were directed to complete the pleadings.

 

Carval Group was declared as the successful resolution applicant in the corporate insolvency resolution process (CIRP) of the Uttam Galva Metallics Limited (Corporate Debtor). The question arose by way of a miscellaneous application filed by SSG Group, an unsuccessful resolution applicant stating that its resolution plan had wrongly not been shortlisted to be put up before the CoC and the CoC’s decision to approve the resolution plan of Carval Group is wrong in law and therefore in order to establish its case SSG Group should be provided with the copy of minutes of CoC meetings in which Carval Group’s plan was approved. The NCLT observed that SSG Group had already filed an application before it objecting to Carval Group’s resolution plan, alleging flaws in the CIRP and in rejection of its resolution plan.

 

The NCLT was of the view that it is crystal clear from the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 that confidentiality is to be maintained with respect to liquidation value and fair market value of the Corporate Debtor. Accordingly, the NCLT was of the view that demanding the minutes of CoC meetings in the garb of completion of pleadings is nothing but an attempt to polish its case for objecting the resolution plan submitted by the successful resolution applicant. The NCLT further held that all resolution applicants had been provided with all relevant information for filing their resolution plans.



Matter: Mr. Amit Gupta, Promoter Shareholder Of Varanasi Auto Sales Limited Vs. Yogesh Gupta, Resolution Professional Of

Varanasi Auto Sales Limited

 

Order dated: 09 August 2019

 

Summary:

 

In this matter an application was filed by the Promoter (Applicant) of Varanasi Auto Sales (Corporate Debtor) before the National Company Law Tribunal, Allahabad Bench (NCLT) seeking certain directions to be passed to the resolution professional (RP) of the Corporate Debtor. The  Applicant inter alia contented that (i) the eligibility criteria floated by the RP under the invitation for expression of interest was discriminatory as it did not include Promoter of Corporate Debtor and (ii) that the RP wrongly rejected the Applicant’s application for resolution plan under Section 29A of Insolvency and Bankruptcy Code, 2016 as the same will not be applicable in corporate insolvency resolution process of the Corporate Debtor by virtue of Section 240A as it is an the Micro, Small and Medium Enterprise (MSME).

 

The NCLT observed that the Applicant did not submit any document to prove that it is registered under the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act) except the acknowledgement whereby the Corporate Debtor had applied for registration as MSME and had failed to file the memorandum required under the MSMED Act.

 

The NCLT was thus of the view when a person who established the enterprise did not exercise the option of filing the memorandum with authority as specified under the MSMED Act, he won’t be entitled to claim benefits of being an MSME. Accordingly, the NCLT held that the Applicant cannot ask the RP to treat the Applicant as a prospective resolution applicant until and unless the Applicant being a Promoter and Director of the Corporate Debtor establishes that the Corporate Debtor is an MSME. The NCLT further held that by virtue of Section 29A of the Insolvency and Bankruptcy Code, 2106 the Applicant is not qualified to present a resolution plan.

 

 

 

For further information, please contact:  

Souvik Ganguly, Partner, Acuity Law

al@acuitylaw.co.in