India – Development In Insolvency Law – September 2018

18 October, 2018

 

Introduction 

 

This newsletter covers developments with respect to the Insolvency and Bankruptcy Code, 2016 during the month of September 2018. We have covered orders passed by the National Company Law Appellate Tribunal and various benches of the National Company Law Tribunal. We have also covered two circulars issued by the Insolvency and Bankruptcy Board of India on 31 August 2018 and 14 September 2018, with respect to intimation of change of directors / partners in an insolvency professional entity and voting in the committee of creditors, respectively. Please see below the summary of the relevant orders and the circulars. 

 

ABBREVIATIONS 

 

 

1. MORATORIUM CANNOT BE EXTENDED FOR ENCASHING BANK GUARANTEES 

 

Matter: M/s. Levcon Valves (P) Limited vs. Energo Engineering Projects Limited

Order dated: 24 August 2018

 

Summary:

 

The NCLT, Principal Bench admitted Energo Engineering Projects Limited, being the corporate debtor, for CIRP vide order dated 05 September 2017. During the CIRP, the RP of the corporate debtor received communications from State Bank of India for encashing certain bank guarantees made by the corporate debtor. However, the RP instructed the said bank to withhold the said encashment and subsequently filed an application before the NCLT, for restraining State Bank of India and Bank of Maharashtra (collectively referred to as “Banks”) from encashing the respective bank guarantees.

 

The question before the NCLT, was whether the moratorium period could be extended to performance guarantees furnished by banks, thereby restraining them from encashing the said bank guarantees. Accordingly, the NCLT inter alia held that, moratorium would not apply to a surety in a contract of guarantee of a corporate debtor, in view of the recent amendment made to the provisions of ‘moratorium’ under the Code. Therefore, it is clear that, moratorium would not come in the way of a party from encashing the bank guarantees and thus the bank guarantees were rightly invoked by the Banks. 

 

2. INTEREST-FREE ‘INVESTMENTS’ AND ABSENCE OF LENDING AGREEMENT CANNOT BE TERMED AS FINANCIAL DEBT 

 

Matter: Dr. Ramakant Suryanath Pande in the matter of M/s. Milestone Real Estate Fund vs. M/s. Choubey Realities Private Limited

Order dated: 24 August 2018

 

Summary:

 

Dr. Ramakant Suryanath Pande, being the Applicant, had submitted a claim amounting to INR 112,723,771 (Indian Rupees One Hundred Twelve Million Seven Hundred Twenty Three thousand Seven Hundred Seventy One) against the corporate debtor i.e. M/s. Choubey Realities Private Limited . The said claim was rejected by the RP, primarily for the following reasons a) the amount submitted by the Applicant was ‘interest- free’ and b) the corporate debtor had no supporting evidence, recording the alleged ‘loan’ of the Applicant.

 

Being aggrieved by the said rejection, the Applicant filed an application before the NCLT, Mumbai Bench. It is pertinent to note that the Applicant is not only a shareholder of the corporate debtor (holding 46% of equity shares) but also a non-executive director. Further, the alleged ‘loan’ forwarded by the Applicant to the corporate debtor was made through an oral agreement on 08 May 2012. 

 

The NCLT observed that not only did the Applicant fail to prove that the corporate debtor paid interest in the past (towards repayment of a portion of the alleged loan by the Applicant), including failure to deduct TDS (tax deducted at source) thereupon, but also failed to establish the interest rate that was agreed between the Applicant and the corporate debtor. Hence, the NCLT keeping in view the facts of the case, inter alia held that, the Applicant’s claim came under the nature of an ‘investment’ and the same cannot be treated as a financial debt. 

 

3. ACTSOFSUSPENDED DIRECTORS OF THE CORPORATE DEBTOR DURING MORATORIUM 
 

Matter: Olympia Credits and Mercantile Private Limited vs. Prithvi Finvest Company Private Limited

Order dated: 24 August 2018

 

Summary:

 

In the present matter, the NCLT, Kolkata Bench by way of two interlocutory applications dealt with the following issues:

 

a) Whether diversion of funds of the corporate debtor by the suspended directors of the corporate debtor during moratorium amounted to violation of the provisions of the Code; and

b) Whether the IRP can permit the directors to continue the operation of the corporate debtor during CIRP.

 

The NCLT inter alia held that, the diversion of funds by the suspended directors of the corporate debtor during moratorium is not only illegal but also amounts to violation of the provisions of the Code. The Code does not authorize the IRP to permit the suspended directors of the corporate debtor to run the operations of the corporate debtor by itself. Further, the corporate debtor can only function with the guidance and instruction of the IRP and therefore the IRP has no power to permit the suspended directors of the corporate debtor to operate the corporate debtor independently.

 

Accordingly, the NCLT directed that the money diverted during moratorium be refunded to the account of the corporate debtor within 15 days of the order. 

 

4. ONLY MODE FOR AN INELIGIBLE PERSON TO MAKE ITSELF ELIGIBLE – REPAYMENT OF OUTSTANDINGS 

 

Matter: Numetal Limited vs. Satish Kumar Gupta & Others Order dared: 07 September 2018
 

Summary:

 

Numetal Limited (Numetal) and ArcelorMittal Limited (ArcelorMittal) filed their respective appeals at the NCLAT, thereby challenging the order of the NCLT, Ahmedabad Bench dated 19 April 2018, whereby the NCLT declared both, Numetal and ArcelorMittal to be ineligible to submit their respective resolution plans under section 29A of the Code.

 

The NCLAT inter alia observed the following,

 

a)  Section 29A(c) of the Code only provides for one mode for an ineligible person to make itself eligible to submit a resolution plan, that is, by making payments towards all overdue amounts with interest thereon and charges relating to non-performing asset accounts before submitting the resolution plan.

 

b)  The Code does not prescribe any provision that permits an ineligible person to become eligible (for submitting a resolution plan) by any other mode including by transferring / selling the shares thereby exiting as a member of the company whose account has been classified as non-performing asset accounts in accordance with the guidelines of the Reserve Bank of India.

 

c)  As pert he Code, if any‘ word or expression’ is not defined in the Code, it shall have the meaning as prescribed under certain statutes, which includes the SEBI Act. Hence, for the purpose of expression of ‘person acting in concert’, reliance was placed upon the SAST Regulations, since the SAST Regulations was enacted under the powers conferred under the SEBI Act.

 

d)  ArcelorMittal would be required to make payment of all its overdue amount with interest thereon and charges relating to the non-performing accounts of both Uttam Galva and KSS Petron in their respective accounts on or before 11 September 2018, in order make itself eligible to participate in the CIRP of Essar Steel. Whereas, Numetal’s second bid for Essar Steel was declared eligible under the Code.

 

Note: An appeal was filed at the Hon’ble Supreme Court of India by ArcelorMittal challenging the abovementioned NCLAT order dated 07 September 2018. Under the said order the Hon’ble Supreme Court of India passed a judgement dated 04 October 2018, wherein it inter alia held that both ArcelorMittal and Numetal were ineligible under the Code as both ArcelorMittal and Numetal have non performing assets i.e. (a) outstanding dues of KSS Petron and Uttam Galva in the case of ArcelorMittal; and (b) outstanding dues of Essar Steel as well as those corporate debtors of the Ruia Group which were declared as non performing assets prior to the period of one year from the date of submitting its resolution plan. Summary of this judgement will be covered in detail in our October 2018 Newsletter.

 

5. APPLICATION FOR VOLUNTARY WINDING UP CANNOT BE CONVERTED TO AN APPLICATION FOR COMPULSORY WINDING UP 

 

Matter: Mr. Vinod Kumar Kothari, Liquidator for Inland Water Transport Corporation Limited

Order Date: 28 September 2018

 

Summary:

 

In this matter, Inland Water Transport Corporation Limited, being the corporate debtor, had initiated voluntary liquidation appointing a liquidator. However, the Liquidator observed that not only there were several litigations pending with respect to the corporate debtor but also the claim amount made against the corporate debtor exceeded the value of its assets. As per the provisions of the Code, in order for a voluntary liquidation to be initiated, it is pre-requisite that a corporate person must be able to discharge its debts to the satisfaction of the creditors and that there must be no litigation pending against the corporate person. However, in this case the pre-requisites not being fulfilled, the Liquidator filed the current application requesting the NCLT, Kolkata bench to convert the application to an application for compulsory winding up.

 

The NCLT held that since both proceedings are different i.e. voluntary winding up and compulsory winding up and both proceedings require different process, hence the NCLT suspended the procedure on voluntary winding up and directed that steps be taken for compulsory winding up of the company. 

 

6. CIRCULAR ON THE NEW FORM FOR INTIMATING CHANGE IN THE PARTNERSHIP / DIRECTORSHIP OF AN INSOLVENCY PROFESSIONAL ENTITY 

 

The IBBI has issued a circular dated 31 August 2018, bearing no. IBBI/IPE/017/2018, with respect to the new form for intimating change in the partnership / directorship of an insolvency professional entity.

 

Under this circular, the IBBI has provided a new form (by way of an annexure) for an insolvency professional entity to provide the necessary information with respect to the cessation / joining of an insolvency professional as a director / partner in the said entity. The said circular is in pursuant to regulation 13 (2) of the IBBI (Insolvency Professionals) Regulations, 2016. 

 

7. CIRCULARONWHETHERA FINANCIAL CREDITOR, WHO IS NOT YET ADMITTED AS A MEMBER OF THE COC, WOULD BE CONSIDERED A DISSENTING OR AN ABSTAINING FINANCIAL CREDITOR 

 

The IBBI has issued a circular dated 14 September 2018, bearing no. IBBI/CIRP/018/2018, with respect to the issue of whether a financial creditor, who is not yet admitted as a member of the CoC, would be considered a dissenting or an abstaining financial creditor.

 

Under this circular, the IBBI has given a clarification on the issue of whether a financial creditor, who is not yet admitted as a member of the CoC, would be considered a dissenting or abstaining financial creditor. In view of the above, the IBBI has clarified that a person who is not a member of the CoC can neither be regarded as one who has voted against a resolution plan nor can he be regarded as the one who has abstained from voting. Hence, such financial creditors cannot be regarded as a ‘dissenting financial creditor’. 

 

 

For further information, please contact:  

Souvik Ganguly, Partner, Acuity Law

al@acuitylaw.co.in