The article is authored by Kavita Ramesh, pursuing a Certificate Course in National Company Law Tribunal (NCLT) Litigation from lawsikho.com. Here she discusses “Five important decisions given by NCLT”.
This article attempts to capture the important orders passed by the National Company Law Tribunal (NCLT) and Appellate Tribunal (NCLAT) in the recent past. This article particularly focuses on insolvency and bankruptcy, and other company law matters of significance which fall under the jurisdiction of the NCLT.
The provisions relating to the NCLT under Companies Act, 2013 were notified vide gazette notification dated 12th September, 2013. However, the Ministry of Corporate Affairs constituted NCLT benches only on 1st June, 2016. A total of eleven benches were constituted in the first phase at Ahmedabad, Allahabad, Bangalore, Chandigarh, Chennai, Guwahati, Hyderabad, Kolkata and Mumbai. New Delhi is where the Principal Bench is situated as well. In the second phase, more benches were set up in Cuttack, Jaipur, Kochi, Amravati, and Indore.
With the notification of the Insolvency and Bankruptcy Code, 2016 the NCLT began exercising jurisdiction over insolvency and liquidation of companies from December, 2016.
It is important to note that the NCLT is the adjudicating authority under the Companies Act, 2013 and the Insolvency and Bankruptcy Code, 2016. The NCLAT is also the appellate authority under the Competition Act, 2002. As on 30th September, 2019 there were about 19,771 cases pending before the NCLT and out of this more than half the cases pertained to IBC.
The establishment of NCLT has eased the burden of the judiciary to a large extent. It has also enabled speedy resolution of disputes given the specialized nature of tribunals. The reduction in time has also become possible as NCLT or NCLAT must dispose of the petitions or appeals filed before them within 3 months. This can be extended by another 90 days at the discretion of the Chairperson or President.
Section 422 of the Companies Act, 2013
However, the timelines are slightly different for insolvency applications. The NCLT shall determine the admissibility of insolvency applications within 14 days. The insolvency resolution must be completed within a maximum period of 330 days (this includes the original timeline of 180 days and any extension given thereon).
The Companies Act, 2013 gives uninterrupted powers to the NCLT, as civil courts shall not have jurisdiction over such matters which fall within the powers of the NCLT. This has been reiterated by the Supreme Court in Shashi Prakash Khemka v. NEPC Micon.
NCLT is not bound by the procedure as laid down under the Code of Civil Procedure (CPC) but shall be guided by principles of natural justice while hearing and disposing of cases before them. However, they shall have the same powers as a civil court under the CPC while trying a suit.
The NCLT can take the assistance of the local courts for execution of its orders. An NCLT order can be executed just like a decree. The order can be sent for execution to the local court within whose jurisdiction the registered office of the company is situated or in case of any other person (other than a company), where the person concerned voluntarily resides or carries on business or personally works for gain.
The proceedings before the NCLT or NCLAT shall be deemed to be judicial proceedings under Section 193, 228 and 196 of the Indian Penal Code (IPC). Further, the Tribunal shall be deemed to be a civil court for the purpose of section 195 and Chapter XXVI of the Code of Criminal Procedure, 1973 (CrPC).
In light of the above, a few important and popular decisions of the tribunals are elaborated below:
- Sections 7, 9 and 10 of the Insolvency and Bankruptcy Code, 2016
- Section12 of the Code
- Section 430 of the Companies Act, 2013
- 2019 SCC OnLine SC 223
- Section 424(1) of the Companies Act, 2013
- Section 424(2) of the Companies Act, 2013
- Section 424(3) of the Companies Act, 2013
- Section 424(4) of the Companies Act, 2013
Edelweiss Asset Reconstruction Company Ltd v. Sai Regency Power Corporation Private Limited & Other
Company Appeal (AT) (Ins) No.887 of 2019, before the NCLAT, New Delhi [Arising out of Order dated 21st August, 2019 passed by National Company Law Tribunal, Division Bench, Chennai in MA/872/2019 in IBA/92/2019]
Rights of Dissenting Creditor and Interim Finance during Insolvency Resolution Process
Edelweiss Asset Reconstruction Company Limited (“EARC” or “the Appellant”) was a member of the Committee of Creditors (CoC) of Sai Regency Power Corporation Private Limited (“the Corporate Debtor”) holding 25% voting share. The Corporate Debtor was engaged in the business of power generation and had initiated insolvency proceedings under section 10 of the Insolvency and Bankruptcy Code, 2016 (“the Code”).
The Resolution Professional of the Corporate Debtor had proposed non-fund based interim finance at the meeting of the CoC which required the Appellant to provide a letter of comfort to the Lead Banker, Punjab National Bank Limited. The interim finance was required to purchase gas supply from Oil and Natural Gas Corporation Limited (ONGC) and Gas Authority of India Limited (GAIL). The Company produced power from gas and the same was an essential service/commodity to keep the corporate debtor as a going concern.
However, the Appellant dissented at the meeting of the CoC saying that it was imprudent to pump in more money into the Corporate Debtor as it would only increase leverage. The CoC however approved the interim finance by a majority of 75%.
The Counsel for the Appellant argued that it cannot be forced to provide a letter of comfort since it had dissented to the decision of the CoC. It was also argued that gas was not an essential service because as per Regulation 32 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (“CIRP Regulations”) essential services covered only inputs that were not direct to the output produced and that the Appellant could not be forced into facilitating non-essential services for the corporate debtor.
The Counsel for the RP in turn argued that that it was the duty of the RP as per section 20 of the Code to manage the operations of the corporate debtor as a going concern. The supply of gas was essential for the production of the company and sustaining it as a going concern. Further, the resolution passed by the CoC was towards non-fund based interim finance and there was no question of forcing the Appellant to pay anything. The counsel further argued that the decision of the majority of the CoC was binding on the Appellant. The refusal of the appellant to cooperate with the decision was endangering the prospect of the Corporate Debtor in procuring the tender for gas supply and thereby affecting its production and revenue and ability to survive as a going concern.
The NCLT, Chennai Bench had passed an order mandating the Appellant to provide the Letter of Comfort to the Corporate Debtor (“the Order”). Now the Appellant was appealing against the said order of the NCLT, Chennai Bench.
The National Company Law Appellate Tribunal (NCLAT), Delhi upheld the order of the NCLT, Chennai Bench. The Hon’ble NCLAT held that the Appellant could not be allowed to scuttle the CIRP process as it would render nugatory section 28(1) of the Code, which empowered the CoC to make decisions with 66% majority. It also held that if the individual creditor’s decision has not been accepted by the CoC in its collective decision, only the collective decision was enforceable.
Asset Reconstruction Company (I) Limited (ARCIL) v. Mahal Hotel Pvt Ltd & Others
Company Appeal (AT) (Insolvency) No. 633 of 2018, before the NCLAT, New Delhi [Arising out of Order dated 4th October, 2018 passed by the Adjudicating Authority (National Company Law Tribunal), Hyderabad Bench, in CA No.250 of 2018 in CP (IB) No.219/7/HDB/2018]
Amendment of List of Members in the Committee of Creditors and inclusion when Anti-Money Laundering Proceedings are pending
Asset Reconstruction Company (I) Limited (ARCIL) had initiated insolvency proceedings against Viceroy Hotels Limited (“the Corporate Debtor”). The Corporate Debtor had entered into a Business Transfer Agreement (“BTA” or “the Agreement”) with Mahal Hotel Pvt Ltd (“MHPL”) and was paid part of the consideration. Later on, MHPL cancelled the Agreement and the part consideration paid was forfeited by the corporate debtor.
After initiation of insolvency, the Committee of Creditors (CoC) was constituted and the first meeting was also held. The CoC originally constituted did not have MHPL as a creditor. The CoC directed the Resolution Professional (“RP”) to convene a second meeting for change of RP. The RP then circulated an email containing an “updated” list of the members of the CoC which included MHPL.
ARCIL filed an application before NCLAT contending that the RP was not empowered to amend the list of members of the CoC once it is constituted. It argued that the conduct of the RP was aimed at obstructing his removal and inclusion of MHPL in the CoC would change the voting share of the creditors. Further, MHPL had been accused of money laundering and was facing enquiry by the Enforcement Directorate and was not eligible to participate in the CoC.
The NCLAT ruled in favour of ARCIL stating that there was a dispute as to whether MHPL could be considered a financial creditor and it was not eligible to be included in the CoC as anti-money laundering proceedings were pending against it. Further, the RP could not amend the list of creditors after constituting the CoC and held his conduct to be improper. The NCLT did not pronounce any order against the RP but held that the CoC could approach the Insolvency and Bankruptcy Board of India (“IBBI”) for appropriate order against the RP.
Hammond Power Solutions Pvt Ltd v. Sanjit Kumar & others
Company Appeal (AT) (Ins) No. 606 of 2019 with connected appeals, before NCLAT, New Delhi [Decided on 14th February, 2020]
Whether Resolution Plan involving Nil Payment to Operational Creditors is Tenable
Hammond Power Solutions Pvt Ltd (“the Appellant”) was an operational creditor of Marsons Limited (“the Corporate Debtor”) against whom an insolvency resolution process had been initiated. The Appellant had filed its claim with the Resolution Professional (“RP”) of the Corporate Debtor. However, the CoC of the Corporate Debtor had approved a Resolution Plan (“Plan”) submitted by a consortium of resolution applicants wherein no payment was provided for to the Operational Creditors. The Appellant approached the NCLAT stating that the Resolution Plan was not in compliance with the provisions of the Insolvency and Bankruptcy Code, 2016 (“the Code”) and various judgments of the NCLAT and Supreme Court in this regard. It also argued that it was wrong on the part of the CoC to approve a Resolution Plan which only provided for payment to members of the CoC and nothing to other stakeholders.
The NCLAT ruled in favour of the Appellant and relied on the Supreme Court judgment in Essar Steel India Limited vs. Satish Kumar Gupta, in which the Hon’ble Court held that it was necessary to consider the reasons given by the CoC while approving a resolution plan. The Tribunal held that in the instant case, the CoC had not given any reason as to why NIL payment was being made to the operational creditors. The proposal was made based on the assessment that there is no liquidation value to operational creditors. The Tribunal had reason to doubt whether the Resolution Applicants were aware of the liquidation value.
The NCLAT set aside the order of the NCLT approving the Resolution Plan stating that the Plan did not take into account the interest of all stakeholders. It directed the NCLT to send back the Plan to the CoC and ask for resubmission of the same after satisfying the parameters laid down by the Supreme Court and as provided for in the Code.
Flipkart Logistics Pvt Ltd & Ors v. Regional Director, South East Region & Ors
Company Appeal (AT) No. 124 of 2019, before NCLT New Delhi [15th December, 2019]
Approval of Amalgamation when Enquiry Pending against a Group Company
The NCLT did not approve the scheme of amalgamation between the Appellant Companies as there was an enquiry pending before one of the group companies. However, the said group company was not part of the scheme of amalgamation. Further, the NCLT also stated that the Appellants had failed to disclose that one more company, Flipkart Digital Private Limited, was merging with the Transferee Company.
The NCLAT held that it was not reasonable to reject a scheme of amalgamation solely on the ground that an enquiry under the Companies Act, 2013 was pending against one of the group companies which was not even part of the scheme of amalgamation.
The issue of not disclosing the fact that another company was merging with the transferee company was not a major issue.
The NCLAT set aside the order of the NCLT and approved the scheme of amalgamation.
The South Indian Bank Limited v. S. Rajagopal, Liquidator for frontier Lifeline Private Limited & others
MA/1425/2019 & MA/1370/2019 IN, MA/1030/2019 IN, MA/697/2019 IN, CP/698/IB/CB/2017, before NCLT, Chennai [Common Order delivered on 08th January, 2020]
Modification of Provisions with respect to Personal Guarantor in a scheme under section 230 of the Companies Act, 2013
Frontier Lifeline Private Limited (“the Corporate Debtor”), a company running a group of hospitals in Chennai, had been admitted to corporate insolvency resolution process. After the CoC failed to finalize a resolution plan, the Corporate Debtor went into liquidation. The NCLAT allowed the plan of the resolution applicant, UAE based First Step Ventures, to be considered as a scheme under section 230 of the Companies Act, 2013(“the Scheme”). First Step Ventures was allowed to take over the Corporate Debtor by the NCLT Division Bench, Chennai. Majority of the financial creditors of the Corporate Debtor approved the scheme of compromise with creditors, submitted by the liquidator.
However, one of the financial creditors, i.e. The South Indian Bank Limited (“the Bank”) filed an application before the NCLT Chennai stating that the Scheme extinguished the right of the Bank to proceed against the guarantee given by the promoter-director, Dr. KM Cherian. The Scheme stated that the said personal guarantee given by the promoter-director was not bound by section 230 of the Companies Act, 2013.
The Applicant / Bank sought different treatment from the other creditors as their debt was only secured by way of moveable property whereas the other secured financial creditors had charge over immovable property.
The NCLT, Chennai bench, through a common order, dismissed the application of the financial creditor stating that there was never before a precedent in company law jurisprudence wherein the enforcement of a personal guarantee as part of a scheme of compromise has been brought into question. It further held that the current situation was neither a case of discharge of debt nor a case of determination of debt payable to creditors. If the Scheme failed to be implemented, the loan agreement including the provisions of the personal guarantee of the director would automatically come into play. Or the Company would automatically go into liquidation under section 33 of the Insolvency and Bankruptcy Code, 2016 (“the Code”). However, the current situation was one wherein a compromise was envisaged between the creditors and the Corporate Debtor. The Bank can enforce the guarantee in isolation of the compromise, not being bound by the scheme. The NCLT also held that it was not reasonable to seek a different classification to be categorized as a secured creditor not having charge over immovable property, from the one that the Bank itself had taken at the time of filing its claim.
The above judgments and orders show how the NCLT and NCLAT have been proactive in ensuring a smooth process under the Insolvency and Bankruptcy Code, 2016. The judgement of the NCLAT in the Edelweiss case shows the role of NCLT in not allowing a dissenting creditor to scuttle the resolution process, solely because it did not agree with the majority decision of the CoC. Similarly, the conduct of insolvency professionals is also being viewed seriously. This is evident from Asset Reconstruction Company (I) Limited (ARCIL) v. Mahal Hotel Pvt Ltd & Others where the NCLAT did not allow the alteration of claims by the resolution professional, taking into account both the misconduct of the professional as well as the nature of the creditor and the claim.
Although the insolvency regime faced a few challenges at the outset, it is seeing improvement over time. This is both because of the Tribunals playing the role of a facilitator as well as the Insolvency and Bankruptcy Board of India (IBBI) coming up with amendments and regulations in response to the changing economic environment.
- Website of the National Company Law Appellate Tribunal (NCLAT)- www.nclat.in
- Knowledge Reponere, published by the Institute of Insolvency Professionals (IIP) of the Institute of Company Secretaries of India (ICSI), 16th Nov-1st Dec, 2019 Issue
- Chartered Secretary, Vol. 50, No. 01, January 2020
- Chartered Secretary, Vol. 50, No. 03, March 2020
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