25 Key Corporate Laws ruling of the Year 2021

Every year Courts and Tribunals deliver thousands of judgments. Taxmann’s editorial board scrutinises every judgement to select and report all those case laws, which could help the corporate professionals to interpret the law better. In 2021, we meticulously analysed and reported 1,250+ judgments on various laws, including IBC, Companies Act, SEBI Laws, FEMA, Competition Law, etc. Out of these cases, we have shortlisted 25 cases that can be flagged as landmark rulings for future references and decipher some aspects of the law.

The 2021 year started on a good note wherein Delhi High Court held that advocates could file documents for incorporation of a company. In view of Covid-19 Pandemic, the Apex Court rightly upheld the constitutionality of RBI’s decision to ban ‘Merchanting Trade Transactions’ pertaining to PPE kits. In one significant ruling, the Apex Court held that pledging of shares without undertaking to discharge liability would not make an entity financial creditor under IBC. Apex Court also struck down the West Bengal Housing Industry Regulation Act, 2017, for conflicting with RERA 2016. Some of the noteworthy judgments passed in the year are discussed below.

1. Borrowers cannot pray to Court to grant One Time Settlement Scheme as a matter of right, rules SC

Case Details: Bijnor Urban Cooperative Bank Ltd. v. Meenal Agarwal
Citation: [2021] 133 taxmann.com 167 (SC)

In this significant ruling, the Supreme Court ruled that Borrowers cannot pray to Court to grant a one-time settlement scheme as a matter of right.

Brief Facts

The borrower had obtained a credit facility from a bank categorised as “Non-Performing Asset (NPA)”. The bank initiated proceedings under the provisions of the SARFAESI Act, 2002. The borrower applied to the bank to consider her case under the One Time Settlement (OTS) Scheme. The bank rejected the application saying that she was not eligible for settlement under the OTS Scheme as her loan account had been declared as NPA. The loan could be recovered by auction of the mortgaged property.

The borrower filed a writ petition before the High Court to challenge the order passed by the bank rejecting her application for giving the benefit of the OTS scheme. The High Court issued a writ of mandamus and directed the bank to positively consider her application for grant of benefit under the OTS Scheme.

Supreme Court’s Ruling

On appeal, the Supreme Court held that no borrower could, as a matter of right, pray for a grant of benefit of the One Time Settlement Scheme. The Apex Court observed that it might happen that a person would borrow a considerable amount, for example, Rs. 100 crores. After availing of the loan, he may deliberately not pay any amount towards instalments, though able to make the payment. He would wait for the OTS Scheme and then pray for a grant of benefit under the OTS Scheme, under which always a lesser amount will be paid than the amount due and payable under the loan account. This, despite all possible recovery of the entire loan amount, can be realised by selling the mortgaged/secured properties.

The Court further stated that if it were held that the borrower can still, as a matter of right, pray for benefit under the OTS Scheme, in that case, it would be giving a premium to a dishonest borrower, who, even though can make the payment and the fact that the bank can recover the entire loan amount even by selling the mortgaged/secured properties, either from the borrower and guarantor. Under the OTS Scheme, a debtor has to pay a lesser amount than the actual amount due and payable under the loan account. Such cannot be the intention of the bank while offering OTS Scheme, and that cannot be the purpose of the Scheme, which may encourage such dishonesty.

If prayer is entertained on the part of the defaulting unit/person to compel or direct the financial corporation/bank to enter into a one-time settlement on the terms proposed by it/him, then every defaulting unit/person which/who is capable of paying its/his dues as per the terms of the agreement entered into by it/him would like to get a one-time settlement in its/his favour. Who would not like to get his liability reduced and pay a lesser amount than the amount they are liable to pay under the loan account? Asked Court

The Apex Court ruled that no writ of mandamus can be issued by the High Court in the exercise of powers under Article 226 of the Constitution of India, directing a financial institution/bank to grant the benefit of OTS to a borrower positively.

Given the above, the High Court, in the present case, has materially erred and has exceeded in its jurisdiction in issuing a writ of mandamus in the exercise of its powers under Article 226 of the Constitution of India by directing the appellant Bank to positively consider/grant the benefit of OTS to the original writ petitioner.

The Apex Court quashed and set aside the order passed by the High Court, holding it to be unsustainable.

2. SC upholds provisions relating to personal guarantors under IBC

Case Details: Lalit Kumar Jain v. Union Of India
Citation: [2021] 127 taxmann.com 368 (SC)

In this landmark ruling, the Supreme Court upheld the provisions relating to insolvency of personal guarantors brought into force in 2019, allowing lenders to initiate insolvency proceedings against personal guarantors. 

Brief Facts

In the instant case, writ petitions were filed in the Delhi High Court and other High Courts challenging the 2019 notification and the Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process of Personal Guarantors to Corporate Debtors) Rules, 2019 as well as many similar Rules. Writ petitions challenged the constitutional validity of Part III of the IBC, which deals with insolvency resolution for individuals and partnership firms.

Considering the importance of the issues raised in the writ petitions, which needed finality of judicial determination, the Apex Court transferred all writ petitions from the High Court to itself.

The Supreme Court’s Ruling

The Apex Court held that the impugned notification is not an instance of legislative exercise or amounts to impermissible and selective application of provisions of the Code. There is no compulsion in the Code that it should, at the same time, be made applicable to all individuals (including personal guarantors) or not at all. There is sufficient indication in the Code-by Section 2(e), Section 5(22), Section 60, and Section 179 indicating that personal guarantors, though forming part of the larger grouping of individuals, were to be, in view of their intrinsic connection with corporate debtors, dealt with differently, through the same adjudicatory process and by the same forum (though not insolvency provisions) as such corporate debtors.

“The notifications under Section 1(3) (issued before the impugned notification) reveal that the Code was brought into force in stages, with consideration given to the categories of persons to whom its provisions were to apply. The contested notification, among other things, makes the Code’s provisions applicable to personal guarantors to corporate debtors, another category of persons to whom the Code has been extended. It is held that the impugned notification was issued within the power granted by the Parliament and is the valid exercise of it. As a result, the exercise of power in issuing the contested notification under Section 1 (3) is not ultra vires,” the Apex Court ruled.

The landmark ruling has greater significance in speeding up the process for the recovery of dues. It would provide lenders with the much-needed arsenal to simultaneously invoke promoters’ personal guarantees even while corporate insolvency resolution proceedings against the ailing companies are pending.

3. Forwarding of Co’s financials on WhatsApp as received from other sources wouldn’t amount to insider trading: SAT

Case Details: Shruti Vora v. Securities and Exchange Board of India
Citation: [2021] 126 taxmann.com 38 (SAT – Mumbai)

In this landmark ruling, the Securities Appellate Tribunal has set aside SEBI’s insider trading charges against individuals who had forwarded WhatsApp messages allegedly containing unpublished price-sensitive information (UPSI).

SEBI had initiated a crackdown during which search and seizure operations against 26 entities of a WhatsApp group were conducted, and about 190 devices and records, among others, were seized. As per SEBI, earnings data and other financial information of nearly 12 companies were leaked through WhatsApp messages.

The question that arose before the Court

Whether a “forwarded as received” WhatsApp message circulated on a group regarding quarterly financial results of a Company, closely matching with the vital statistics, shortly after the in-house finalisation of the financial results by the Company and some time before the publication/disclosure of the same by the concerned Company, would amount to unpublished price-sensitive information under the provisions of SEBI (Prohibition of Insider Trading) Regulations, 2015?

The Adjudicating Officer (AO) answered the question in the affirmative and imposed a penalty of Rs. 15,00,000 on the appellants. The AO reasoned that as the message was a piece of information relating to financial results and as it closely matched with the financial results published subsequently, the message was an unpublished price-sensitive information

On appeal, the SAT observed that no information could be recovered by the respondent SEBI to find out the source of information from the financial team, legal team or the audit team of the respective companies. The impugned order shows that the learned AO has expressed the inability in this regard.

The definitions of ‘Unpublished price sensitive information and ‘insider’ would show that generally, available information would not be unpublished price-sensitive information.

Setting aside the reasoning of the AO, the SAT held that the information could be branded as unpublished price-sensitive information only when the person getting the information had knowledge that it was unpublished price-sensitive information. Though knowledge is a person’s state of mind, the same can be proved on the preponderance of probabilities on attendant circumstances. In the instant case, there are no attendant circumstances except the possibilities enumerated by the Adjudicating Officer. The proximity of time, the similarity between the information were the only two factors that weighed with the Adjudicating Officer to brand the information as unpublished price sensitive information.

SAT relied on an earlier judgment of Samir Arora vs SEBI [2005] 59 SCL 96 (SAT-Mumbai) in that case; the Tribunal had rejected the arguments of SEBI that there is no need for linkage between the potential source of the unpublished price sensitive information and the person allegedly in possession of the alleged unpublished price-sensitive information. 

4. Uber drivers are workers, not independent contractors: UK Supreme Court

Case Details: Uber BV v. Aslam
Citation: [2021] 124 taxmann.com 486 (SC-UK)

In a judgment that can have implications in several countries, including India, the Supreme Court of the United Kingdom bench held that Uber drivers are ‘workers’ and not independent contractors.

Going by the ruling, the app-based taxi service provider drivers will be entitled to employment benefits like minimum wages, paid holidays, etc.

The unanimous decision by the UK’s Supreme Court in the Uber BV and Others v. Aslam and Others case ended the five-year-old legal battle in favour of the drivers.

Background

The appeal, in this case, concerned the employment status of private hire vehicle drivers who provide their services through the Uber smartphone application Uber app.

The main question raised during the appeal was whether an Uber driver is a ‘worker’ for employment legislation and entitled to receive national minimum wage, annual paid leave and other benefits.

Earlier, the employment tribunal had found that respondents worked under worker’s contracts for Uber London. The Employment Appeal Tribunal and the Court of Appeal by a majority dismissed

Uber’s Appeal

After that, Uber preferred an appeal in the Supreme Court.

The main contention of Uber was that when a ride is booked through the Uber app, a contract is thereby made directly between the driver and the passenger whereby the driver agrees to provide transportation services to the passenger. The fare is calculated by the Uber app and paid by the passenger to Uber BV, which deducts part (20% in these cases) and pays the balance to the driver.

Uber characterises this process as collecting payment on behalf of the driver and charging a “service fee” from the driver to use its technology and other services. Uber had also emphasised that drivers were free to work when they wanted and as much or as little as they wanted.

In summary, Uber argued that drivers are independent contractors who work under contracts made with customers and do not work for the company.

Supreme Court

The Supreme Court observed that the transportation service performed by drivers and offered to passengers through the Uber app is very tightly defined and controlled by Uber. Drivers are in a position of subordination and dependency in relation to Uber to such an extent that they have little or no ability to improve their economic position through professional or entrepreneurial skills.

In practice, they can only increase their earnings by working longer hours while constantly meeting Uber’s performance measures. “The drivers were rightly found to be workers”, it concluded, dismissing the appeal of Uber.

5. Advocates enrolled with Bar Council must be allowed to register as professionals on the MCA portal for Co. registration: HC

Case Details: Shikha Sharma Bagga v. Union of India
Citation: [2021] 124 taxmann.com 353 (Delhi)

In this significant ruling, the Delhi High Court held that Advocates enrolled with Bar Council must be allowed to register as professionals on the MCA portal for Co. registration. 

A petition was filed before the Delhi High Court challenging the non-providing of a field for Advocates to register companies and LLPs on the current Ministry of Corporate Affairs (‘MCA’) portal. The petitioner case was that the MCA portal permitted Chartered Accountants, Company Secretaries and Cost & Work Accountants to register as practising professionals and undertake incorporation of companies and LLPs for their clients and pursuant to an amendment in Companies Act, 2013 in 2014, even Advocates were permitted to file documents for incorporation of companies but said the amendment was not implemented in the tool kit, which was used by MCA. As a result, Advocates could not register companies/LLPs on behalf of their clients.

“A perusal of Section 7(1) (b) of the Companies Act, 2013, clearly shows that Advocates can file documents for incorporation of a Company. This would be true even in the case of LLPs. However, the MCA’s portal is stated to have no provision made for Advocates who are members of Bar Councils and Bar Councils are not provided as an option in the list of Councils. If this is the position, the same would be discriminatory qua Advocates and would need to be rectified,” said Delhi High Court

The Delhi High Court held that advocates could file documents for incorporation of a company, and this would be true even in the case of LLPs, and, therefore, the amendment was to be carried out in the MCA tool kit permitting Advocates who are enrolled with Bar Council to register as professionals in MCA portal.

6. SC strikes down West Bengal Housing Industry Regulation Act, 2017 for conflicting with RERA 2016

Case Details: Forum for People’s Collective Efforts (FPCE) v. State of West Bengal [2021]
Citation: 127 taxmann.com 129 (SC)

In this important ruling, the Supreme Court struck down the West Bengal Housing Industry Regulation Act, 2017 (WBHIRA) as unconstitutional for conflicting with Central legislation already occupying the field, i.e., the Real Estate (Regulation and Development) Act, 2016 (RERA).

The ‘Forum filed the petition For People’s Collective Efforts’, an umbrella homebuyers association, challenging the constitutional validity of the West Bengal Housing Industry Regulation Act, 2017, which is more or less identical to the Centre’s RERA.

The Court held that the State of West Bengal encroached upon the domain of Parliament in enacting WBHIRA since both WBHIRA and RERA deal with the duplicate entry in the concurrent list and a significantly large number of provisions of WBHIRA overlap with RERA.

The Court observed that the striking down of the 2017 state Act would not revive the West Bengal (Regulation of Promotion of Construction and Transfer by Promoters) Act, 1993, which was in force in the state for the regulation of promotion of construction as the same stood impliedly repealed by the enactment of the RERA.

“WB-HIRA is repugnant to the RERA, and is hence unconstitutional. We also hold and declare that as a consequence of the declaration by this Court of the invalidity of the provisions of WB-HIRA, there shall be no revival of the provisions of the WB 1993 Act since it would stand impliedly repealed upon the enactment of the RERA.” Apex Court.

Referring to section 88 of the RERA, the bench said that the Parliament does not preclude the states from enacting legislation on any cognate or allied subjects. “If any areas have been left out in RERA, the State legislatures can provide for them by way of a cognate legislation so long as they deal with a subject which is incidental”.

Court further held that

“Since its enforcement in the State of West Bengal, the WB-HIRA would have been applied to building projects and implemented by the authorities constituted under the law in the state. In order to avoid uncertainty and disruption in respect of actions taken in the past, recourse to the jurisdiction of this Court under Article 142 is necessary. Hence, in the exercise of the jurisdiction under Article 142, we direct that the striking down of WB-HIRA will not affect the registrations, sanctions and permissions previously granted under the legislation prior to the date of this judgment” the Court held.

7. Waiver of pre-deposit for filing appeal before DRAT is not sustainable in law: SC

Case Details: Kotak Mahindra Bank (P.) Ltd. v. Ambuj A. Kasliwal
Citation: [2021] 124 taxmann.com 380 (SC)

In this critical judicial ruling, the appellant-Bank filed an appeal before the Supreme Court against the order of the High Court wherein it had permitted the respondent guarantors to prosecute appeal before Debts Recovery Appellate Tribunal without pre-deposit of a portion of debt determined to be due, as provided under section 21 of Recovery of Debts and Bankruptcy Act, 1993. The Apex Court held that when the additional amount was due and payable in the discharge of decree/recovery certificate issued by DRT in favour of appellant/Bank, the High Court did not have the power to waive pre-deposit in its entirety, nor could it exercise discretion which was against the mandatory requirement of statutory provision as contained in section 21 and, therefore, any waiver of pre-deposit to the entire extent would be against statutory provisions and not sustainable in law and order of the High Court was to be set aside.

8. Corporate debtor which wasn’t an MSME on date of initiation of CIRP can’t be treated as MSME later: NCLT

Case Details: POSCO India Pune Processing Center (P.) Ltd. v. Dhaval Jitendrakumar Mistry Resolution Professional of Poggenamp Nagatsheth Powertronics (P.) Ltd.
Citation: [2021] 124 taxmann.com 401 (NCLT – Ahd.)

In the instant case, it was held that where a corporate debtor was not an MSME on the date of initiation of CIRP under section 9 of IBC, he could not be treated as MSME later on and could not take benefit of MSME in view of amendment in MSME classification norms vide notification dated 1-6-2020 with effect from 1-7-2020 by having its retrospective effect.

With regard to the applicability of retrospective effect of the amendment, the Tribunal observed that:

“It is a well-established principle of interpretation that no statute can be given retrospective effect unless statute so directs either expressly or by necessary implication. Nor can power be exercised retrospectively unless the statute expressly so provided.

It is a fundamental rule of construction that no statute shall be so construed to have a retrospective operation unless such a construction appears very clearly in terms of the Action arises by necessary and distinct implication.”

The Tribunal observed that it is a well-established principle that parties are governed by the law in force at the date when a suit or proceeding is initiated unless expressly laid down or by necessary implication inferred

Therefore, in the present case, when the application was filed and CIRP initiated, the corporate debtor was not falling in the criteria/classification of the MSME. Hence, the amendment benefit cannot be availed by the corporate debtor when it is under CIRP by giving retrospective effect.”

9. IBC and Third Party Property

Case Details: MunicipalCorporation of GreaterMumbai (MCGM) v. AbhilashLal
Citation: [2019] 111 taxmann.com 405 (SC)

In a recent but important judgment, the Supreme Court has laid down limitations on the applicability of the Insolvency and Bankruptcy Code (IBC) concerning properties belonging to a third party or the assets which do not belong to the corporate debtor facing insolvency proceedings.

The issue concerning the property of a third party came up before the Supreme Court in the Municipal Corporation of Greater Mumbai (MCGM) vs Abhilash Lal case, and the Apex Court ruled in favour of the MCGM, setting aside the contention of the National Company Law Appellate Tribunal (NCLAT).

Brief Facts

The MCGM gave plots of land to SevenHills Healthcare (P) Limited in Mumbai for developing a 1,500-bed hospital with certain conditions. SevenHills borrowed funds from banks and financial institutions for building the hospital. However, it could not complete the project in time and defaulted on repayment of loans. Axis Bank initiated insolvency proceedings against SevenHills. The NCLT appointed an insolvency resolution professional. Later, the Committee of Creditors (CoC) approved a revised resolution plan under which Dr. Sheety New Medical Centre (SNMC) agreed to invest Rs 1,000 crore. The amount was to be borrowed from banks and financial institutions by hypothecation and mortgage of the movable and immovable properties under the possession of SevenHills.

Having agreed initially, the MCGM during proceedings opposed the resolution plan, arguing that being a public body as well as a planning authority, it had to comply with the provisions of the Mumbai Municipal Corporation Act, 1888 (MMC Act), which meant that all action and approval had to be taken by the Improvement Committee of the Corporation.

The NCLT overruled the objections of the MCGM and approved the resolution plan. The MCGM approached the NCLAT but failed to obtain any relief. Aggrieved by the NCLT and NCLAT, the MCGM moved the Supreme Court.

The Supreme Court’s Ruling

One of the crucial issues that came up during the hearing was with regard to Section 238 of the Code, which said:

“the provisions of this Code shall have an effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law.”

The Supreme Court ruled that Section 238 cannot be read as overriding the MCGM’s right and its public duty to control and regulate proper, overriding the MMC Act provisions Act.

“This court is of the opinion that Section 238 could be of importance when the properties and assets are of a debtor and not when a third party like the MCGM is involved,” the judgment said while allowing the appeal.

The ruling will have implications wherever the properties belonging to a third party comes into the picture during the corporate insolvency resolution process.

10. SC upholds constitutionality of RBI’s decision to ban ‘Merchanting Trade Transactions’ pertaining to PPE kits

Case Details: Akshay N Patel v. Reserve Bank of India
Citation: [2021] 133 taxmann.com 53 (SC)

In this significant ruling, the Supreme Court upheld the measures adopted by the Reserve Bank of India to implement the ban imposed by the Union Government on the export of Personal Protective Equipment (PPE) Kits in view of the Covid-19 pandemic. 

Facts

The petitioner was the managing director of a firm that manufactured and traded pharmaceuticals and healthcare products like PPE kits. He secured a contract to serve as an intermediary for the sale of PPE products by a supplier in China to a buyer in the United States. However, the Revised Guidelines on Merchanting Trade Transactions (MTT), issued by the RBI in January 2020, banned the export of PPE products.

The petitioner wrote a letter to his bank seeking documents such as a letter of credit to execute the Merchanting Trade Transactions (MTT) contract to execute the transaction. However, he was denied the same. The petitioner argued that the prohibiting export of PPE products violates his right to equality and is arbitrary. However, the appellant received no response.

The appellant then filed a writ petition under Article 226 before the Madhya Pradesh High Court. The High Court upheld Clause 2(iii) of the Revised Guidelines on Merchanting Trade Transactions issued by the RBI.

Supreme Court’s Ruling

On appeal, disagreeing with the argument raised by the petitioner, the Apex Court reasoned that the prohibition was based on a legitimate goal. The Court said that:

“democratic interests that secure the well-being of the masses cannot be judicially aborted to preserve the unfettered freedom to conduct the business of the few”.

The Court rejected the argument of a business person that the restrictions amounted to a violation of his fundamental right to freedom to trade and business guaranteed under Article 19(1)(g) of the Constitution of India.

“When an Indian entity facilitates the trade of PPE products to another nation, it takes away from India’s possible stock in the global market. There is a rational nexus in the prohibition of MTTs in respect of PPE products and the public health of Indian citizens,” Court held.

The Apex Court held that the ban imposed on Merchanting Trade Transactions in respect of all commodities whose exports were banned by the prevailing FTP, under Clause 2(iii) of 2020 Revised Guidelines on Merchanting Trade Transactions issued by RBI under sections 10(4) and 11(1) of FEMA,1999, was proportional and not unconstitutional under Article 19(1)(g) of the Constitution of India in so far as it pertained to PPE Kits.

11. The limitation period to file an appeal begins from the day of pronouncement of the order, not the date of uploading order: SC

Case Details: V. Nagarajan v. SKS Ispat and Power Ltd.
Citation: [2021] 131 Taxmann.com 258 (SC)

In the instant case, the Apex Court held that the period of limitation for filing an appeal against an order of NCLT as per Section 61 of the IBC would start from the date of pronouncement of the order in the open court not the date of the uploading of order.

Brief Facts

The appellant had filed an appeal before the NCLAT without attaching the certified copy of the NCLT order, citing reasons they had applied for the same but hadn’t been issued. NCLAT dismissed the appeal for being time-barred. Challenging the NCLAT order, the appellant approached the Supreme Court. The appellant argued that the clock on limitation would run from the date a free copy is provided. However, the Court refuted the argument highlighting that an appeal if considered necessary and reasonable by an aggrieved party, is expected to be filed immediately without awaiting a free copy that may be received at an indefinite stage.

The questions raised

(a) When will the clock for calculating the limitation period run for proceedings under the IBC?

(b) Whether annexation of a certified copy mandatory for an appeal to the NCLAT against an order passed under the IBC?

The Supreme Court observed that the answers to the questions must be based on a harmonious interpretation of the applicable legal regime. The IBC is a Code in itself and has an overriding effect.

The Court further said that Sections 61(1) and 61(2) of the IBC consciously omit the requirement of limitation being computed from when the “order is made available to the aggrieved party”, in contradistinction to Section 421(3) of the Companies Act.

“It is not open to a person aggrieved by an order under the IBC to await the receipt of a free certified copy under Section 420(3) of the Companies Act 2013 read with Rule 50 of the NCLT and prevent limitation from running. Accepting such construction will upset the timely framework of the IBC,” the Court said

Regarding the question of attachment of a certified copy of the order and appeal, the Court held that Rule 22(2) of the NCLAT rules renders it mandatory. The Court made it clear that the litigant has to file its appeal within thirty days, which can be extended up to a period of fifteen days, and no more, upon showing sufficient cause. A sleight of interpretation of procedural rules cannot be used to defeat the substantive objective of legislation that impacts the economic health of a nation, Ruled SC.

The Court concluded that the appellant should have exercised diligence to obtain a certified copy of the order to file an appeal. Since the appeal was barred by limitation, NCLAT was correct in dismissing his appeal.

12. Burden of proving default and that plea filed isn’t barred by limitation is on financial creditor: SC

Case Details: Rajendra Narottamdas Sheth v. Chandra Prakash Jain
Citation: [2021] 131 taxmann.com 2 (SC)

In this significant ruling, the Supreme Court held that the burden of proving the occurrence of default and that the application filed under Section 7 of the IBC is within the period of limitation is entirely on the financial creditor.

Facts

In this case, the financial creditor filed an application under Section 7 of the IBC to initiate the corporate insolvency resolution process. The adjudicating authority admitted the application and rejected the corporate debtor’s contention that the application was not maintainable as a power of attorney holder filed it and that it was barred by limitation. On appeal, the appellant corporate debtor reiterated that the application under Section 7 of the Code was barred by limitation before the NCLAT.

Dismissing the appeal, the NCLAT observed that the corporate debtor could not demonstrate any error in the order of the adjudicating authority. The NCLAT examined a power of attorney given and found no merit in the argument of the corporate debtor that the application under Section 7 of the Code was not maintainable as a power of attorney holder filed it.

On further appeal, the Apex Court held that burden to prove the occurrence of the default and that the application is filed within the period of limitation is entirely on the financial creditor.

The Court held that the plea of Section 18 of the Limitation Act not having been raised by the financial creditor in the application filed under Section 7 could not rescue the appellants in the facts of this case. Accordingly, the court clarified that the onus on the financial creditor, at the time of filing an application, to demonstrate default with respect to a debt, which is not time-barred, is not sought to be diluted herein.

Dismissing the plea, the Court observed that

“In the present case, if the documents constituting acknowledgement of the debt beyond April 2016 had not been brought on record by the corporate debtor, the application would have been fit for dismissal on the ground of lack of any plea by the financial creditor before the Adjudicating Authority with respect to an extension of the limitation period and application of Section 18 of the Limitation Act.”

The Court further observed that while the decision to admit an application under Section 7 is typically made on the basis of material furnished by the financial creditor, the Adjudicating Authority is not barred from examining the material that is placed on record by the corporate debtor to determine that such application is not beyond the period of limitation.

13. Moratorium ordered under Section 14 of IBC does not apply to proceedings initiated against promoters of Corporate Debtor: SC

Case Details: Anjali Rathi v. Today Homes and Infrastructure (P.) Ltd
Citation: [2021] 130 taxmann.com 253 (SC)

In this significant ruling, the Apex Court held that petitioners-home buyers would not be prevented by the moratorium under Section 14 from initiating proceedings against the promoters of the Corporate Debtor in relation to honouring the settlements reached before the court. 

Facts

The Petitioners/home buyers and developer/corporate debtor entered into a homebuyer agreement which envisaged that delivery of possession in almost all cases was to be in 2014.

The Corporate debtor abandoned the project. As a result, the petitioners instituted proceedings before NCDRC sought a refund of their monies, and NCDRC allowed their claim.

In the meantime, proceedings were initiated against the respondent/developer under section 9 by an operational creditor, and the same was admitted. CoC approved the resolution plan submitted by the consortium of home buyers, and the Adjudicating Authority was yet to decide on the application for approval of the resolution plan.

Petitioners submitted that during the course of instant proceedings, settlements were arrived at, and hence promoters of corporate debtor/ developer should be held liable personally to honour the settlements. Petitioners urged that instant court should direct the personal properties of promoters to be attached in view of provisions contained in the resolution plan.

The Supreme Court’s Ruling

The Apex Court held that if the petitioners have any objections to the Resolution Plan, they have to submit them before the Adjudicating Authority. The NCLT was directed to ensure that the application for approval is disposed of expeditiously and preferably within six weeks from the date of receipt of a certified copy of the instant order.

The Court further clarified that the petitioners would not be prevented by the moratorium under Section 14 from initiating proceedings against the promoters of the Corporate Debtor in relation to honouring the settlements reached before an instant court. However, instant Court cannot issue a direction as sought by petitioners relying on a Resolution Plan which is still pending approval before an Adjudicating Authority.

14. Bank account of director cannot be attached merely on the ground of allegation against Co.: Delhi High Court

Case Details: Roshni Sana Jaiswal v. Commissioner of Central Taxes GST Delhi (East)
Citation: [2021] 128 taxmann.com 357 (Delhi)

In this case, the Honorable High Court of Delhi held that provisional attachment could be ordered against property belonging to taxable person and provisional attachment order of directors’ bank accounts on fake Input Tax Credit (ITC) allegations on their company is not valid. 

Facts

The petitioner acted as a director on the Board of Directors of a company between 2006 and 2008. The department initiated an investigation against that company, alleging that the company was availing ITC against fake/ineligible invoices. The petitioner was also a shareholder in the company and owned approximately 14.33% equity shares. The department, therefore, initiated proceedings under section 83 against the petitioner and provisionally attached her bank accounts. She filed a writ petition against the same. 

The High Court’s Ruling

The Honorable High Court observed that there is nothing on record to show material available with the department, linking the petitioner to purported fake invoices. In other words, in the absence of such material, the impugned action concerning provisional attachment of the petitioner’s bank accounts, which is otherwise a “draconian” step, was unsustainable. In the zeal to protect the interest of the revenue, the department cannot attach any property, including bank accounts of persons other than the taxable person. Therefore, it was held that provisional attachment orders were liable to be quashed.

15. Section 272 (1)(e) of Cos. Act is not ultra vires Constitution of India: Karnataka High Court

Case Details: Devas Employees Mauritius (P.) Ltd. v. Union of India
Citation: [2021] 127 taxmann.com 108 (Karnataka)

In the instant case, the High Court dismissed a petition which sought to quash proceedings initiated against Devas Multimedia Private limited by ISRO arm Antrix Corp. before NCLT.

The petitioner, Devas Employees’ Mauritius Pvt. Ltd., a Company incorporated under the laws of the Republic of Mauritius, had presented a writ petition with prayers to:

• • declare Section 272(1)(e) of Companies Act, 2013 as ultra vires Constitution of India;
  • to declare that the second proviso to Section 272(3) of the Act must be read to apply to the petitions presented by persons falling under Section 272(1)(e) of the Act; and
  • to issue a writ of certiorari quashing sanction order and consequently to quash all proceedings before NCLT.

The High Court held that Section 272 (1)(e) is not an ultra vires Constitution of India. As Registrar and ‘a person authorised by Central Government’ fall into different categories, it does not warrant reading down Section 272(3).

The Court observed that according to arbitration proceedings between company ‘A’ and company ‘D’ (of which petitioner was a shareholder), an award was passed in favour of company ‘A’. The Central Government authorised Chairman & Managing Director of ‘A ‘to present a petition to wind up ‘D’; there was no infirmity in the order passed by Central Government.

16. Writ filed by a home buyer without seeking to represent the entire class of home buyers wouldn’t be maintainable

Case Details: Upendra Choudhury v. Bulandshahar Development Authority
Citation: [2021] 127 taxmann.com 24 (SC)

The Petitioner buyer filed a writ petition under Article 32 of the Constitution of India seeking cancellation of all agreements with the respondent Development Authority and refund of money to purchasers, or in alternative to ensure that construction was carried out and that premises were handed over within a reasonable time.

The Petitioner also sought a forensic audit, an investigation by CBI and other authorities such as Serious Fraud Investigation Office and Enforcement Directorate.

However, it was found that a singular home buyer had filed a writ petition under Article 32 without seeking to represent the entire class of home buyers.

The Court observed that all buyers might not seek a cancellation and refund of consideration. Apart from this aspect, the petitioner sought other reliefs in aid of preliminary relief, including the constitution of a Committee presided over by a former Judge of this Court to handle developer projects.

The Court further observed that entertaining a petition of this nature would involve the court virtually carrying out day-to-day supervision of a building project. There were specific statutory provisions holding field and adequate provisions made in statute to deal with filing a complaint and for investigation according to law.

“Therefore, in view of the statutory framework, both in terms of civil and criminal law and procedure and fact that there was no reason to assume that the petitioner represented a class, petition under Article 32 could not have been entertained.” Court said

17. ‘2019 Amendment’ to Sec. 31 of the IBC is clarificatory and therefore has a retrospective effect: SC

Case Details: Ghanashyam Mishra & Sons (P.) Ltd. v. Edelweiss Asset Reconstruction Co. Ltd.
Citation: [2021] 126 taxmann.com 132 (SC)

In this landmark ruling, the Apex Court held that the 2019 amendment to Section 31 of the Insolvency and Bankruptcy Code, 2016 is clarificatory and declaratory, and therefore when NCLT approves resolution plan, claims, which are not part of the resolution plan, shall stand extinguished and proceedings related to it shall stand terminated.

Section 31 states that if the adjudicating authority is satisfied that the CoC under Section 30 has approved the resolution plan, it shall by an order approving the resolution plan, which shall be binding on corporate debtors, their employees, members, creditors, guarantors, and other stakeholders involved in the plan.

In Section 31(1), after the words ‘creditors’, the 2019 amendment added the words

“including the Central Government, any State Government or any local authority to whom a debt in respect of the payment of dues arising under any law for the time being in force, such as authorities to whom statutory dues are owed”.

The High Court in an impugned order held that since the NCLT approved the resolution plan of the petitioner Company vide its order dated 17-04-2018, which is much before the 2019 amendment, the said amendment in Section 31(1) of the IB Code, 2016 shall not apply to the resolution plan of the petitioner Company.

The question that arose before the Apex Court

• • Whether any creditor, including the Central Government, State Government or any local authority, is bound by the Resolution Plan once an adjudicating authority approves it under subsection (1) of Section 31 of the Insolvency and Bankruptcy Code, 2016?
  • Whether the amendment to Section 31 by Section 7 of Act 26 of 2019 is clarificatory/declaratory or substantive?
  • Whether after approval of resolution plan by the Adjudicating Authority a creditor including the Central Government, State Government or any local authority is entitled to initiate any proceedings for recovery of any of the dues from the Corporate Debtor, which are not a part of the Resolution Plan approved by the adjudicating authority?

The Apex Court’s Held

1. 1. Once the Adjudicating Authority duly approves a resolution plan under sub-section (1) of Section 31, the claims as provided in the resolution plan shall stand frozen and will be binding on the Corporate Debtor and its employees, members, creditors, including the Central Government, any State Government or any local authority, guarantors and other stakeholders. On the date of approval of resolution plan by the Adjudicating Authority, all such claims, which are not a part of the resolution plan, shall stand extinguished, and no person will be entitled to initiate or continue any proceedings in respect to a claim, which is not part of the resolution plan;
   2. 2019 amendment to Section 31 of the IBC is clarificatory and declaratory and therefore will be effective from the date on which IBC has come into effect;
   3. Consequently, all the dues, including the statutory dues owed to the Central Government, any State Government or any local authority, if not part of the resolution plan, shall stand extinguished and no proceedings in respect of such dues for the period before the date on which the Adjudicating Authority grants its approval under section 31 could be continued.

18. LLP can form a partnership firm with an individual or other persons, rules Kerala High Court

Case Details: Raj Shipping Agencies v. Barge Madhwa
Citation: [2020] 116 taxmann.com 707 (Bombay)

In a significant ruling, the Kerala High Court held that a Limited Liability Partnership could form a partnership with an individual or other persons. 

Facts

A partnership deed was executed between an individual and an LLP. When the said deed was submitted for registration, the Registrar of Firms refused registration of the partnership firm on the reasoning that an LLP cannot be a partner in the firm.

The Petitioner claimed that a partnership and an LLP are not prohibited under the Partnership Act and that LLP is a legal entity, as defined under the LLP Act, and it is separate from its partners. It has perpetual succession and has a common seal. The Petitioner argued that on its registration, it is capable of suing and being sued under Section 14. It can also acquire, develop, or dispose of movable or immovable properties. Therefore, the petitioner claims that the LLP is liable to be treated as a person, and there cannot be any objection to registering a partnership with an LLP.

The respondent filed a statement reiterating his stand in the impugned order. According to the respondent, Section 25, 26, and 49 of the Indian Partnership Act, 1932 makes the partners jointly and severally liable with all other partners. At the same time, under Section 28 of the LLP Act, 2008, the provisions regarding the liability of the partnership firm are restricted only to the extent provided in the agreement. Such a provision runs contrary to Section 25 and 49 of the Indian Partnership Act. It is also pointed out that foreign investment is permissible in LLP, whereas it is not permissible under the Partnership Act.

The question that arose was:

Whether LLP can be treated as a person, who can be permitted to form a partnership with an individual?

The High Court’s Ruling

The High Court of Kerala held that

“a partnership can be entered into between two persons. Such persons can be an incorporated body of individuals. LLP is a body corporate. It can be said to be a person, as defined in Section 3(42) of the General Clauses Act, 1897 if there is no repugnancy in the subject or context. To examine the same, it is necessary to look at some more provisions in both the Acts viz. Partnership Act and LLP Act”

The High Court of Kerala further held that the liability of partners of LLP and liability of the LLP as a partner under the Partnership Act would be different. The liability of partners in an LLP cannot be relevant when the LLP becomes a partner, as the provisions in the Partnership Act would bind it. The liability of the LLP would be as in the case of a company that joins a firm after entering into a partnership.

The Court also observed that Section 4 of the Partnership Act permits the constitution of a firm or partnership between one or more persons. In this case, the partnership deed was executed between an individual and an LLP, a body corporate having a legal entity and coming within the definition of “person”. The individual liability of the partners of LLP would not be relevant when the LLP itself would have liability independent of the liability of the partners. Therefore, the difference in the provisions under the Partnership Act relating to the firm’s liability or the individual partners would not stand in the way of the constitution of a partnership with an LLP. The Court held that LLP could not be disqualified from entering into a partnership with an individual or other persons.

19. Gmail didn’t abuse its dominant position by integrating “Google Meet” with Gmail App: CCI

Case Details: Baglekar Akash Kumar v. Google LLC
Citation: [2021] 125 taxmann.com 370 (CCI)

In this important ruling, the CCI held that Google did not violate the provisions of Section 4(2)(e) of the Competition Act, 2002 by integrating the Meet App into the Gmail App.

Facts

The Informant filed an information against the Google-OPs alleging contravention of provisions of section 4(2)(e) of the Competition Act, 2002. The Informant stated that Gmail is an App from Google, where users get all their emails, direct messages, etc., and that Gmail enjoyed a ‘dominant position’ in emailing and direct messaging market.

The Informant further stated that ‘Meet’ is a video-conferencing App from Google, where all kinds of virtual conferences and meetings happen. The Informant alleged that Google, a dominant player in internet-related services and products, had integrated Meet App into Gmail App, which amounted to an abuse of dominant position by Google.

The CCI held that regardless of whether Gmail was a dominant app or not in the relevant market of providing email services in India, the conduct of Google did not appear to violate provisions of section 4(2)(e).

The Commission observed that users of Gmail were not forced to use Google Meet necessarily, and there did not appear to be any adverse consequences on users of Gmail for not using Google Meet, such as withdrawal of Gmail or any of its functionalities or other services that Google was so far providing; Gmail user at their ‘freewill’ could use any of competing VC apps.

Google Meet was also available as an independent app outside the Gmail ecosystem. Consumers were free to choose from an array of video-conferencing Apps such as Zoom, Skype, Cisco Webex, We Conference, Microsoft Teams, and Google Meet would be competing with like of such Apps for providing services.

Even though the Meet tab had been incorporated in the Gmail app, Gmail did not coerce users to use Meet, and consumers were also at freewill to use either Meet or any other VC app for video-conferencing.

Therefore, no case was made against Ops for contravention of section 4 in the relevant market for providing email services in India’ and ‘market’ for providing specialised video conferencing services in India.

20. Sharing user’s personalised data by WhatsApp with Facebook is an abuse of dominance: CCI

Case Details: COMPETITION COMMISSION OF INDIA Updated Terms of Service and Privacy Policy for WhatsApp users
Citation: In re [2021] 125 taxmann.com 375 (CCI)

In a recent important ruling, the Competition Commission of India observed prima facie violation of Section 4 of the Competition Act, 2002 by Whatsapp over its new privacy policy and ordered a probe in the said matter. The CCI observed that the privacy policy terms on sharing personalised data with Facebook companies were neither fully transparent nor based on users’ specific, voluntary consent.

Brief Facts

WhatsApp has updated its privacy policy and terms of service for WhatsApp users. It was inter alia reported that the new policy made it mandatory for users to accept terms and conditions to retain their WhatsApp account information and to how it would share personalised user information with Facebook and its subsidiaries. The CCI decided to take Suo-moto cognisance of the matter.

The CCI Ruling

The Commission held that WhatsApp was dominant in the relevant market for Over the Top (OTT) messaging apps through smartphones in India. The conduct of WhatsApp in sharing users’ personalised data with other Facebook Companies in a manner that was neither fully transparent nor based on voluntary and specific user consent appeared prima facie unfair to users.

The purpose of such sharing appeared to be beyond users’ reasonable and legitimate expectations regarding quality, security, and other relevant aspects of service for which they register on WhatsApp. One of the stated purposes of data sharing viz., targeted ad offerings on other Facebook products instead indicated intended use is building user profiles through cross-linking of data collected across services. Such data concentration might raise competition concerns where it is perceived as a competitive advantage.

Impugned conduct of data-sharing by WhatsApp with Facebook amounted to degradation of non-price parameters of competition viz., the quality which resulted in objective detriment to consumers, without an acceptable justification.

Such conduct prima facie amounted to imposition of unfair terms and conditions upon users of the WhatsApp messaging app, in violation of provisions of section 4(2)(a)(i). Thus, WhatsApp had prima facie contravened provisions of section 4 through its exploitative and exclusionary conduct in grabbing the policy update.

A thorough and detailed investigation was required to ascertain the full extent, scope, and impact of data sharing through the involuntary consent of users. Accordingly, Director-General (DG) was directed to cause an investigation into the matter under section 26(1) of the Act.

21. Person ineligible under Section 29A to submit a resolution plan cannot propose a scheme of compromise & arrangement under Companies Act, 2013

Case Details: Arun Kumar Jagatramka v. Jindal Steel and Power Ltd.
Citation: [2021] 125 taxmann.com 244 (SC)

In this significant ruling, the Supreme Court held that a person who is ineligible to submit a resolution plan under Section 29A of the IBC would not be permitted to propose a scheme of compromise and arrangement under section 230 of the Companies Act, 2013.

The Apex Court also upheld the constitutional validity of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016, which prescribes that a person who is not eligible under the IBC to submit a resolution plan for corporate insolvency resolution of the corporate debtor shall not be a party in any manner to such compromise or arrangement. 

Brief Facts

Mr A preferred an appeal against an order passed by the National Company Law Tribunal in an application under sections 230 to 232 of the Act of 2013. The NCLAT held that a person who is ineligible under section 29A of the Insolvency Bankruptcy Code, 2016 to submit a resolution plan and is also barred from proposing a scheme of compromise and arrangement under section 230 of the Companies Act, 2013.

The decision of the NCLAT was challenged in the appeal before the Apex Court. According to the appellant, in the absence of a disqualification, the NCLAT could not have read the ineligibility under section 29A of the IBC into Section 230 of the Act of 2013. This would, in the submission, amount to a judicial reframing of legislation by the NCLAT, which is impermissible. 

The Supreme Court Ruling

The Apex Court held that a person who is ineligible under Section 29A of the Insolvency Bankruptcy Code to submit a resolution plan could not propose a scheme of compromise and arrangement under Section 230 of the Companies Act, 2013. The Court also rejected the contention that attaching the ineligibilities under Section 29A and Section 35(1)(f) of the IBC to a scheme of compromise and arrangement under Section 230 of the Act of 2013 would be violative of Article 14 of the Constitution as the appellant would be “deemed ineligible” to submit a proposal under Section 230 of the Act of 2013.

The Court observed that the stages of submitting a resolution plan, selling assets of a company in liquidation, and selling the company as a going concern during liquidation all indicate that the promoter or those in the management of the company must not be allowed a back-door entry in the company and are hence, ineligible to participate during these stages. Proposing a scheme of compromise or arrangement under Section 230 of the Act of 2013 while the company is undergoing liquidation under the provisions of the IBC lies in a similar continuum. Thus, the prohibitions that apply in the former situations must naturally also attach to the latter to ensure that like situations are treated equally.

22. Directors disqualified before May 2018 can continue to be directors in companies other than defaulting company: HC

Case Details: Anuj Mittal v. Union of India
Citation: [2021] 125 taxmann.com 10 (Delhi)

In the instant case, the directors of a company – ‘Nalini Limited’ were disqualified from 1st November 2017 to 31st October 2022 due to non-compliance under section 164(2)(a) of the Companies Act, 2013, i.e., non-filing of financial statements or annual returns for any continuous period of three financial years. As a result, their DINs and DSCs were de-activated.

Because of disqualification, the petitioners were facing problems in other active companies. They were appointed as directors as they claim to be directors in other active companies and now wish to start business afresh.

The Court considered the legal position relating to activation of DIN/DSC numbers of directors of defaulting companies in Anjali Bhargava v. UOI [W.P. (C) No. 11264 of 2020, dated 6-1-2021] and took reference from the MCA’s CFSS scheme and stated that the directors of struck off companies who seek to be appointed as directors of other/new companies, ought to be provided with an opportunity to avail of CFSS. The scheme seeks to provide a fresh start for directors of defaulting companies who seek appointments in other companies or wish to start new businesses.

The Court observed that since the disqualification of petitioners was before 7-5-2018, petitioners would be directors who had been disqualified before 7-5-2018, qua other companies in addition to defaulting company and proviso section 167(1)(a) would not apply. Directors would continue to be directors in companies other than defaulting company and, therefore, DINs and DSCs of petitioners would be re-activated within ten days. If the Petitioners wish to seek restoration of the struck off company, they are permitted to seek their remedies in accordance with law before the NCLT.

23. Collusive commercial arrangement between creditors and the corporate debtor wouldn’t constitute a financial debt, rules SC

Case Details: Phoenix Arc (P.) Ltd. v. Spade Financial Services Ltd
Citation: [2021] 124 taxmann.com 24 (SC)

The Supreme Court in an important ruling in the Phoenix Arc (P.) Ltd. v. Spade Financial Services Ltd. case held that entities having commercial arrangements of collusive nature with the corporate debtor could not be considered financial creditors under the Insolvency and Bankruptcy Code (IBC) provisions.

Brief Facts

In this case, the operational creditor initiated the corporate insolvency resolution process (CIRP) against AKME Projects Limited under section 9 of the IBC.

As part of the process, the Interim Resolution Professional invited claims. In response to the notice, Spade Financial Services Limited and its subsidiary AAA Landmark Private Limited filed claims as creditors.

Spade filed the claim based on an alleged Memorandum of Understanding executed with the Corporate Debtor, which stated that Inter Corporate Deposits (ICDs) of Rs. 26.55 crore have been granted to the Corporate Debtor by Spade, bearing interest of 24 per cent repayable in terms of the mutual agreement between the parties. AAA filed its claim before the IRP for a sum of Rs. 93.90 crore.

Later, the CoC was constituted on May 22, 2018. On May 25, 2018, the IRP rejected the claim of Spade, inter alia, on the ground that the claim was not in the nature of a financial debt in terms of Section 5(8) of IBC since consideration was absent for the time value of money, i.e., the period of repayment of the claimed ICDs was not stipulated.

The IRP also rejected the claim of AAA on the ground that its claim as a financial creditor in Form C was filed after the expiry of the period for filing such a claim.

Having gone through the National Company Law Tribunal (NCLT) and the National Company Law Appellate Tribunal (NCLAT), the dispute reached the Supreme Court.

Supreme Court

Based on the appeals, the Supreme Court framed three issues for consideration which are as follows:

• • Whether Spade and AAA are financial creditors of the Corporate Debtor;
  • Whether Spade and AAA are related parties of the Corporate Debtor; and
  • Whether Spade and AAA have to be excluded from the CoC.

In the present case, the Court said, there was a finding that AAA and Spade were related parties within the meaning of Section 5(24) at the time when the alleged financial debt based on which they assert a claim to be a part of the CoC was created. 

“Further, we have also concluded that the transactions between Spade and AAA on the one hand, and the Corporate Debtor on the other hand, which gave rise to their alleged financial debts were deceitful in nature. Therefore, it is evident that there existed a deeply entangled relationship between Spade, AAA and Corporate Debtor, when the alleged financial debt arose,” the Court said, adding, the pervasive influence of the promoter/director of the Corporate Debtor over the concerned entities was evident, and allowing them in the CoC would definitely affect the other independent financial creditors. 

“Due to the collusive nature of their transactions alleged to be a financial debt under section 5(8), Spade and AAA cannot be labelled as financial creditors under section 5(7),” it added.

24. Pledge of shares without undertaking to discharge liability will not make entity financial creditor under IBC

Case Details: Phoenix ARC (P.) Ltd. v. Ketulbhai Ramubhai Patel
Citation: [2021] 124 taxmann.com 90 (SC)

In a critical judgment, the Supreme Court held that pledge of shares would not make an entity financial creditor of the corporate debtor for the purpose of the Insolvency and Bankruptcy Code (IBC). The Supreme Court gave this ruling in the Phoenix Arc Private Limited v. Ketulbhai Ramubhai Patel case.

Brief Facts

In this case, the L & T Infrastructure Finance Company Limited advanced a financial facility to Doshion Limited, which was repayable in 72 structured monthly instalments. A pledge agreement was executed under which 40,160 shares of Gondwana Engineers Limited (GEL) were pledged as a security by Doshion Limited.

Later, by an agreement, L&T Infrastructure assigned all rights, title and interest in the financial facility, including any security and interest therein, in favour of Phoenix ARC, the appellant in the present case.

On failure of Doshion Limited to repay the loans, the appellant initiated action under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.

Meanwhile, the Bank of Baroda initiated a corporate insolvency resolution process against Doshion Limited (corporate debtor) under Section 7 of the IBC. Subsequently, an Interim Resolution Professional (respondent in the present case) was appointed.

Pursuant to the commencement of the corporate insolvency resolution pro regarding the corporate debtor, the appellant filed its claim for an amount of Rs. 83.49 crore with the respondent.

The respondent rejected the appellant’s claim, stating that as per the Pledge Agreement, the corporate debtor’s liability was restricted to the pledge of the shares only.

The appellant approached the National Company Law Tribunal (NCLT) and the National Company Law Appellate Tribunal (NCLAT) without success.

The Appellate Tribunal held that pledge of shares do not amount to “disbursement of any amount against the consideration for the time value of money” and hence do not fall within sub-clause (f) of sub-section (8) of Section 5 of the IBC.

The appellant moved the Supreme Court for relief.

Supreme Court

The Supreme Court held that a person having only security interest over the assets of the corporate debtor, even if falling within the description of ‘secured creditor’ by virtue of collateral security extended by the corporate debtor, would not be covered under the definition of financial creditor contained in sub-section (7) and (8) of Section 5 of the IBC.

“The appellant at best will be secured debtor qua above security but shall not be a financial creditor within the meaning of Section 5 sub-sections (7) and (8),” the Supreme Court said, upholding the decision of the NCLT that appellant was not a financial creditor of the corporate debtor.

25. Wilful breach of an undertaking given to Court would tantamount to Contempt of Court: Apex Court

Case Details: Suman Chadha v. Central Bank of India
Citation: [2021] 131 taxmann.com 161 (SC)

In the instant case, the petitioners were directors of a company ‘P’, which availed loan/credit facilities from the respondent bank. The petitioners guaranteed the loan repayment and offered their immovable property as security.

The bank loan was categorised as a Non-Performing Asset due to defaults in repayment. A notice under section 13(2) was issued, followed by a possession notice under section 13(4) the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. Aggrieved by the same, the petitioners approached Debts Recovery Tribunal (DRT) under section 17. However, the DRT declined to grant any interim relief against the physical possession of the aforesaid properties. The petitioners filed an appeal but could not deposit Rs. 7 crores being 25 per cent of the amount demanded in the notice under section 13(2). Eventually, the appeal was dismissed as withdrawn.

In addition to the foregoing, the writ petition came for admission. The petitioners admitted liability and offered, by way of a statement under oath, to deposit Rs. 7 crores, i.e., 25 per cent of the notice amount in three instalments. The bank gave its consent, and after that, the High Court ordered that the possession of the petitioners’ properties would not be disturbed subject to the petitioners depositing Rs. 7 crores.

However, the cheque deposited for instalment was dishonoured. Therefore, the bank filed a petition under sections 10 and 12 of the Contempt of Courts Act, 1971, for punishing the petitioners for willful and deliberate breach of their undertaking.

Though the petitioners resisted the contempt petition on the ground that breach of an undertaking, made with a view to secure a conditional order of stay may not be tantamount to contempt, especially when the consequences for breach of such undertaking was spelt out in the order of the Court itself, the Judge was not convinced. Therefore, High Court held the petitioners guilty of contempt and sentenced them to simple imprisonment for three months with a fine of Rs. 2000 each.

As a result, the petitioners raised a defence that they had issued post-dated cheques in the hope of receiving amounts due to them from their debtors and that their debtors failed to make payment. The petitioners also named three debtors from whom they were expected to receive money.

Doubting the genuineness of the claim made by the petitioners, the Judge before whom the contempt petition came up passed an order directing an investigation by the Serious Fraud Investigation Office (SFIO). To the misfortune of the petitioners, SFIO submitted a report that the alleged debtors of the petitioners are only shell entities of PPPL, of which the petitioners were directors.

The High Court concluded that the petitioners had actually played a fraud upon the Court and thus, held the petitioners guilty of contempt of the court. After that, an appeal was filed to the Apex Court.

After investigation, the Apex Court noted that the series of acts committed by the petitioners (i) in issuing post-dated cheques, which were dated beyond the date within which they had agreed to make payment; (ii) in allowing those cheques to be dishonoured; (iii) in not appearing before the Court on the first date of hearing with an excuse that was found to be false; (iv) in coming up with an explanation about their debtors committing default; and (v) in getting exposed through the report of the SFIO, convinced the High Court to believe that the undertaking given by the petitioners was not based upon good faith but intended to hoodwink the Court. Therefore, there is no fault with the order of the High Court holding the petitioners guilty of contempt.

In view of the fact that the immovable properties which the petitioners attempted to save, by approaching the DRT and the High Court, have already been sold. All the attempts made by the petitioners from 2015 onwards to save the mortgaged properties have been in vain.

Therefore, the SLP was disposed of upholding the finding of the High Court that the petitioners were guilty of contempt of court but reducing the period of sentence from three months to the period of imprisonment already suffered/undergone by the petitioners.