10 Landmark IBC Case Laws | 2022 | Expert Analysis and Explanations

Taxmann’s Editorial Team has identified 10 landmark rulings of the year 2022 on IBC, which were trending among the stakeholders. The judgments are selected on the basis of their relevance to the practising professionals, and settlement of a challenging position of law.  The Gist of these cases is presented hereunder:

1. Wages/salaries of only those employees who worked during CIRP are to be included in CIRP costs, rules SC

Case Details: Sunil Kumar Jain v. Sundaresh Bhatt
Citation: [2022] 137 taxmann.com 303 (SC)

Judiciary and Counsel Details

• M.R. Shah & Aniruddha Bose, JJ.
• Ms Shobha Ramamoorthy, AOR, Shilp Vinod, Nawaz Sherif, M.A. Karthik, Vincy George, Gokulakrisnan & Ms Ritika Rao, Advs. for the Appellant. 
• Alok Tripathi, AOR, Parminder Singh Bhullar, AOR, Rajeev Kumar Gupta, Dinesh Tripathi, Sanjay Kumar, Advs. & Sanjay Kumar Tyagi, AOR for the Respondent.

Dues towards wages/salaries of those workmen/employees who actually worked during CIRP are to be included in CIRP cost and have to be paid in full first a per section 53(1)(a); rest of claims towards wages/salaries of workmen/employees shall be governed by section 53(1)(b) and (c)

Section 36(4)(iii) specifically excludes all sums due to any workman or employee from provident fund, pension fund and gratuity fund from ambit of liquidation estate assets and, therefore, liquidator shall have no claim over such dues

Facts of the Case

In the instant case of Sunil Kumar Jain v. Sundaresh Bhatt [2022] 137 taxmann.com 303 (SC), the NCLAT had dismissed an appeal filed by the workmen/employees of ABG Shipyard Limited against the impugned order of NCLT denying any relief to them with regard to their claim relating to salary, which they claimed for a period involving CIRP and the prior period. Appellants filed an appeal against the order of the NCLAT.

The question before the Court was whether the wages/salaries of those workmen/employees who had not worked at all during CIRP shall have to be treated and/or included in the CIRP costs?

Supreme Court Held

The Court observed that the wages/salaries of the workmen/employees of the corporate debtor for the period during CIRP could be included in the CIRP costs provided it is established and proved that the Interim Resolution Professional/Resolution Professional managed the operations of the corporate debtor as a going concern during the CIRP and that the concerned workmen/employees of the corporate debtor actually worked during the CIRP.

The Court held that in such an eventuality, the wages/salaries of those workmen/employees who actually worked during the CIRP period when the resolution professional managed the operations of the corporate debtor as a going concern shall be paid treating it and/or considering it as part of CIRP costs and the same shall be payable in full first as per Section 53(1)(a) of the IB Code.

The Court further held that even if RP has not submitted the claims towards the wages/salaries as part of CIRP costs, still the claims submitted/to be submitted by the appellant’s workers will have to be adjudicated upon and considered by the Liquidator.

The Liquidator has to consider and adjudicate (i) whether the corporate debtor was a going concern during the CIRP; (ii) how many workmen/employees actually worked during the CIRP while the corporate debtor was a going concern.

2. State is a secured creditor for tax purposes under GVAT Act; Section 53 of IBC doesn’t override Section 48 of GVAT Act: SC

Case Details: State Tax Officer v. Rainbow Papers Ltd.
Citation: [2022] 142 taxmann.com 157 (SC)

Judiciary and Counsel Details

• Indira Banerjee & A.S. Bopanna, JJ.
• Ms Aastha Mehta, Adv. & Ms Deepanwita Priyanka, AOR for the Appellant. 
• Rajesh Srivastava, AOR, Gaurav Verma, Neeraj Datt Gaur, Ankur Kashyap, Ayush Agarwala, Ms Aditi Mittal, Ms Arushi Kaularkar, Ms Swati Khanvisara, Aman Bajaj, Advs. & Arnav Narain, AOR for the Respondent.

Section 3(30) defines secured creditor as a creditor in favour of whom security interest is credited by operation of law and it does not exclude any Government or Governmental Authority and, thus, if resolution plan ignores statutory demands payable to a secured creditor, which includes State under GVAT or any legal authority, NCLT is bound to reject said plan

Facts of the Case

In the landmark ruling, the Supreme Court held that the State is a secured creditor for tax purposes under GVAT Act, and Section 53 of IBC doesn’t override Section 48 of the GVAT Act.

In the instant case, the following questions were placed before the Supreme Court:

(a) Whether State is a secured creditor under IBC for tax purposes under Gujarat VAT (GVAT Act)?

(b) Whether Section 53 of IBC overrides Section 48 of the Gujarat VAT (GVAT Act) or not?

Supreme Court Held

The Apex Court held that the State is a secured creditor under the GVAT Act. Section 3(30) of the IBC defines the secured creditor as “Secured creditor means a creditor in favour of whom security interest is created”.

The Court further held that such security interest could be created by the operation of law. The definition of a secured creditor in the IBC does not exclude any Government or Governmental Authority. Therefore, the State will be treated as the secured creditor under IBC for tax purposes.

In view of the above, the Supreme Court concluded that State is a secured creditor for VAT under GVAT Act, and Section 53 of IBC doesn’t override Section 48 of the GVAT Act.

With regard to the overriding effect of Section 53 of IBC, it was held that Section 48 of the GVAT Act is not contrary to or inconsistent with Section 53 or any other provisions of the IBC. Section 53 of the IBC deals with the distributions of the asset. As per Section 53, proceeds from the sale of the liquidation assets shall be distributed in the order of priority and within such period as prescribed in the provision.

Under Section 53(1)(b)(ii), the debts owed to a secured creditor, which would include the State under the GVAT Act, shall rank equally with other specified debts, including debts on account of workman’s dues for 24 months preceding the liquidation commencement date.

The term “Secured Creditor”, as defined under the IBC, is comprehensive and wide enough to cover all types of security interests, namely, the right, title, interest or a claim to the property created in favour of or provided for a secured creditor by a transaction, which secures payment or performance of an obligation and includes mortgage, charge, hypothecation, assignment and encumbrance or any other agreement or arrangement securing payment or performance of any obligation of any person.

In view of the statutory charge in terms of Section 48 of the GVAT Act, the claim of the tax department of the State squarely falls within the definition of “Security Interest” under Section 3(31) of the IBC, and the State becomes a secured creditor under Section 3(30) of the Code.

3. CIRP proceedings could be initiated against both corporate co-borrowers, but the recovery of the same amount could not be made from both parties: SC

Case Details: Maitreya Doshi v. Anand Rathi Global Finance Ltd.
Citation: [2022] 142 taxmann.com 484 (SC)

Judiciary and Counsel Details

• Indira Banerjee & J.K. Maheshwari, JJ.
• K.V. Vishwanathan, Sr. Adv., Ms Dhanyashree Jadeja, Ankit Lohia, Advs., Samiron Borkataky, AOR & Manas Kotak, Adv. for the Appellant. 
• Prateek Sakseria, Saket Mone, Nishant Chottani, Vishesh Kalra, Ms Smriti Churiwal, Ms Priyashree Sharma PH, Jaiveer Kant, Syed Faraz, Advs. & Kush Chaturvedi, AOR for the Respondent.

CIRP proceedings under section 7 can be initiated against corporate debtors who are co-borrowers but there can be no double recovery of same amount from both

Financial creditor disbursed loan to corporate debtor and company ‘D’ had been referred to in Loan Agreement as borrower and pledgor, which had pledged its shares in corporate debtor in favour of financial creditor, prima facie, ‘D’ was a party to Loan-cum-Pledge Agreement in its dual capacity and, thus, section 7 petition was maintainable against ‘D’ on corporate debtor’s failure to repay

Facts of the Case

In the Instant case, an appeal was filed before the Supreme Court against the order of the NCLAT, whereby the NCLAT ordered that CIRP proceedings under Section 7 could be initiated against both corporate co-borrowers.

The respondent was an NBFC (a Financial Creditor) that disbursed a loan to Premier Limited (“Premier”) under three separate Loan-cum-Pledge Agreements. According to the appellant (a director in Premier & Doshi Holdings), Doshi Holdings pledged shares held by it in Premier, in favour of the Financial Creditor, by way of security for the loan.

The Premier failed to make repayments in terms of the Loan-cum-Pledge Agreements. The Financial Creditor filed a petition under Section 7 of the IBC to initiate CIRP against Premier for default in repayment of the loan. The Financial Creditor also filed a petition against Doshi Holdings, under Section 7 of the IBC, for initiation of CIRP in respect of the same claim based on the same loan documents.

The NCLT admitted both CIRP applications. An appeal lied against the order of the NCLT admitting the CIRP application initiated against the Doshi holdings. The NCLAT dismissed the appeal and upheld the order of admission of the petition under Section 7 of the IBC. Thereafter, the appellant filed an appeal to the Supreme Court against the order of the NCLAT.

Appellant’s Submission

The appellant submitted that no amount under the Loan-cum-Pledge Agreements was disbursed by the Financial Creditor to Doshi Holdings. The loans were disbursed to Premier, and Doshi Holdings did not utilise any part of the money disbursed. Doshi holding did not fit in the definition of a corporate debtor; therefore, no CIRP can be initiated against Doshi holdings, as the definition of ‘financial debt’ in Section 5(8) of the IBC does not include a pledge.

The counsel appearing on behalf of the respondent submitted as follows:

(a) Doshi Holdings was party to the Loan-cum-Pledge Agreements in its dual capacity as co-borrower and pledgor, which had pledged its shares in Premier in favour of the Financial Creditor.

(b) The appellant had signed documents on behalf of Doshi Holdings in its capacity as co-borrower. The Appellant was Director of both, Premier and Doshi Holdings.

(c) The Premier and Doshi Holdings have been described as borrowers in the Loan-cum-Pledge Agreements.

(d) The definition of Corporate Debtor does not require as a pre-condition that monies should have been disbursed to the Corporate Debtor. The sine qua non for an entity to be considered a Corporate Debtor is that such person/entity should owe a debt to any person and not that a disbursal has to be made to such a person/entity.

Supreme Court Held

After hearing both the parties, the Supreme Court dismissed the appellant’s plea and upheld the order as passed by the NCLAT. The Court held that if two borrowers or two corporate bodies fall within the ambit of corporate debtors, then CIRP can be initiated against both the Corporate Debtors. However, the same amount cannot be realised from both the Corporate Debtors. If the dues are partly realised from one Corporate Debtor, the balance may be realised from the other Corporate Debtor being the co-borrower.

4. Bombay High Court has territorial jurisdiction to entertain a Writ plea if Insolvency Professional has an assignment in Maharashtra

Case Details: Partha Sarathy Sarkar v. Insolvency & Bankruptcy Board of India (IBBI)
Citation: [2022] 144 taxmann.com 51 (Bombay)

Judiciary and Counsel Details

• S.V. Gangapurwala & Madhav J. Jamdar, JJ
• Vijay Kurle & Samkit Shah for the Petitioner. 
• Pankaj Vijayan, Ms Tejashree Choudhari, Mohammed Varawala, Ashish Mehta & Komal Bhoir for the Respondent.

Though registration of petitioner as Insolvency Professional was suspended for a period of three years by impugned order in respect of proceedings against a company based at Delhi but petitioner was already having assignments in Bombay as a Resolution Professional, part of cause of action had arisen within territorial jurisdiction of Bombay High Court and, therefore, Bombay High Court had territorial jurisdiction to entertain writ petition filed by petitioner challenging his suspension

Facts of the Case

In the instant case, the petitioner was an Insolvency Professional (IP). He was a professional member of the ICSI Institute of Insolvency Professionals (ICSI and IIP) and an Insolvency Professional (IP) registered with the IBBI.

A show cause notice was issued to the petitioner, and his registration as an IP was suspended for three years under the impugned order in respect of the proceedings against a company based in Delhi.

High Court Held

The petitioner assailed the order of registration suspension before the Bombay High Court. The Respondents raised a preliminary objection of the territorial jurisdiction to entertain the Writ Petition of this court as the order of suspension was passed by the authority at Delhi.

The Respondent contended that the petitioner had already filed an application before the Adjudicating Authority (NCLT), Delhi seeking a direction to hold a show cause notice issued by the Respondent to be an attempt to interfere in the course of proceedings qua the said application and issue appropriate directions. The said application was pending adjudication before the NCLT, Delhi, and this fact had been materially suppressed.

The Respondent also submitted that the entire cause of action had arisen at Delhi, and no part of the cause of action had arisen within the jurisdiction of the Bombay High Court. As such, the Bombay High Court may not entertain the Writ Petition.

High Court’s Ruling

The High Court held that the petitioner already had assignments in the State of Maharashtra as a Resolution Professional. Pursuant to the order of suspension, the petitioner would not be in a position to work as a Resolution Professional with assignments on hand in the State of Maharashtra.

The High Court further held that the petitioner would feel the effect of the impugned order in the State of Maharashtra and it could safely be concluded that part of the cause of action had arisen with the territorial jurisdiction of the Bombay High Court.

5. Section 33(5) of IBC doesn’t bar legal proceeding against a ship owned by Corporate Debtor in liquidation: Bombay HC

Case Details: Angre Port (P.) Ltd. v. TAG 15 (IMO. 9705550)
Citation: [2022] 134 taxmann.com 48 (Bombay)

Judiciary and Counsel Details

• B.P. Colabawalla, J.
• Prathamesh Kamat, Pooja Tidke, Krushi Barfiwala & Ryan Menedes for the Applicant. 
• Amir Arsiwala, Dhrupad Vaghani, Ms Naveli Reshamwalla, Ajiz M.K., Farzeen Pardiwalla & Nidhi Shah for the Respondent.

Section 33(5) prohibits institution of a suit or other legal proceeding against corporate debtor, however, it does not in any way prohibit institution of a legal proceeding against a Vessel owned by corporate debtor because under Admiralty Act, Vessel is treated as a separate juristic entity which can be sued without joining owner of said Vessel to proceeding

Facts of the Case

Angre Port Private Ltd filed an interim application under the provisions of order XIII-A read with Order XII Rule 6 of the Code of Civil Procedure, 1908 seeking a summary judgment against TAG 15 (IMO. 9705550), the ship owned by Tag Offshore Ltd. for a sum of Rs.9,37,19,098 together with interest at the rate of 18% p.a. from 18th December 2020.

Plaintiff said that the vessel was docked at its port on 13th February 2019, and they had raised timely bills as berthing charges. The plaintiffs had also paid other expenses to secure the ship during a storm. Meanwhile, the company that owned the ship went into liquidation under the IBC and Defendant No. 2 was appointed as the Liquidator. Plaintiff initiated the Admiralty suit to recover the berthing charges and other costs.

High Court Held

The High Court observed that Port authorities are not barred by Section 33(5) from invoking the Admiralty jurisdiction of High Court to enforce their maritime claim against a defaulting Ship/Vessel of a Corporate Debtor in liquidation and to recover the amount of the claim from the vessel by an admiralty sale of the vessel and for payment out of the sale proceeds. Section 33(5) only bars suit/legal proceedings against the corporate debtor in liquidation and not any suit/proceeding against vessel/ship of the corporate debtor under the Admiralty Act as the vessel/ship is treated as a separate legal entity.

What sub-section 5 of Section 33 contemplates is that subject to Section 52, when a liquidation order is passed against the Corporate Debtor, no suit or other legal proceeding shall be instituted by or against the Corporate Debtor. Section 52 deals with the rights of the secured creditor in liquidation proceedings. The proviso to Section 33(5) stipulates that a suit or other legal proceeding may be instituted by the Liquidator, on behalf of the Corporate Debtor, with the prior approval of the Adjudicating Authority.

When one reads Section 33(5), it is ex-facie clear that the said provision prohibits the institution of a suit or other legal proceeding against the Corporate Debtor only. It does not in any way prohibit the institution of a suit or other legal proceeding against a ship/Vessel owned by the Corporate Debtor when invoking the Admiralty Jurisdiction of the High Court because under the Admiralty Act, the vessel is treated as a separate juristic entity which can be sued without joining the owner of the said vessel to the proceeding.

The action against the vessel under the Admiralty Act, is an action in rem and a decree can be sought against the vessel without suing the owner of the said vessel. Under the Admiralty Act, a ship, or a Vessel, as commonly referred to, is a legal entity that can be sued without reference to its owner.

The purpose of an action in rem against the vessel is to enforce the maritime claim against the vessel and recover the amount of the claim from the vessel by an admiralty sale of the vessel and for payment out of the sale proceeds.

It is the vessel that is liable to pay the claim. This is the fundamental basis of an action in rem. The Claimant/Plaintiff is not concerned with the owner, and neither is the owner a necessary or a proper party. In other words, the presence of the owner is not required for adjudication of the Plaintiff’s claim.

For this very reason, there is no requirement to serve the writ of summons on the owner of the vessel and the service of the warrant of arrest on the vessel is considered adequate.

For the purposes of an action in rem under the Admiralty Act, the ship/vessel is treated as a separate juridical personality, an almost corporate capacity having not only rights but also liabilities (sometimes distinct from those of the owner).

The fundamental legal nature of an action in rem, as distinct from its eventual object, is a proceeding against the res. Thus, when a vessel represents such res as is frequently the case, the action in rem is an action against the vessel itself.

The action is a remedy against the corpus of the offending vessel. It is distinct from an action in personam, which is a proceeding inter-parties founded on personal service on the defendant within the jurisdiction of the Court, leading to a judgment against the person of the defendant. In action in rem, no direct demand is made against the owner of the res personally.

6. Bar under Section 14 of IBC applies only to corporate debtors; Directors being natural persons continue to be liable for cheque bounce

Case Details: Narinder Garg v. Kotak Mahindra Bank Ltd.
Citation: [2022] 137 taxmann.com 476 (SC)

Judiciary and Counsel Details

• Uday Umesh Lalit, S. Ravindra Bhat & Pamidighantam Sri Narasimha, JJ.
• Gopal Sankarnarayanan, Aman Preet Singh Rahi, Advs. A. Venayagam Balan, AOR, Ms V.S. Lakshmi, AVS Subramanyam, Kamil Khan, Advs., T.R.B. Sivakumar, Ms Jaspreet Gogia, AOR’s., Ms Mandakini Singh, Karanvir Gogia, Ms Shivangi Singhal, Ms Ashima Mandla, Advs., Ms Aishwarya Bhati, ASG, Ms Sonia Mathur, Sr. Adv., Ms Praveena Gautam, Ms Swarupama Chaturvedi, O.P. Shukla, Kanu Agrawal, Advs., Arvind Kumar Sharma, AOR, Chetanya Singh, Adv., Nishanth Patil, AOR Gaurav Goel, & Abhinav Agrawal, AOR’s for the Appearing Parties.

Moratorium provisions contained in section 14 would apply only to corporate debtor and natural persons mentioned in section 141 of Negotiable Instrument Act would continue to be statutorily liable under provisions of Negotiable Instrument Act

Facts of the Case

In the instant case, writ petitions were filed seeking:

(a) Directions to quash the criminal complaints filed against the corporate debtors and its directors under Section 138 of the Negotiable Instruments Act, 1881 on the ground that the resolution plan was approved by the Committee of Creditors (CoC) under Section 30(4) of the IBC.

(b) Quashing the criminal complaint initiated after the order of moratorium passed by the NCLT, as it cannot proceed even if the old management and its director take over the corporate debtor.

Supreme Court Held

The Supreme Court held that there is no bar under Section 14 of IBC for initiating or continuing a cheque bounce case against natural persons mentioned in Section 141 of the Negotiable Instruments Act during the period of moratorium. Section 14 only bars initiating or continuing a cheque bounce case against the corporate debtor during the moratorium period.

7. Unqualified acknowledgement of debt in the balance sheet extends the period of limitation for filing of CIRP: Supreme Court

Case Details: State Bank of India v. Krishidhan Seeds (P.) Ltd.
Citation: [2022] 138 taxmann.com 326 (SC)

Judiciary and Counsel Details

• Dr Dhananjaya Y. Chandrachud & Surya Kant, JJ.
• Niranjan Reddy, Sr. Adv., Divyam Agarwal, AOR, Ms Fatema Kachwalla, Ms Pallavi Kumar & Karan Singh, Advs. for the Appellant. 
• Shyam Divan, Sr. Adv., Manu Agarwal, Vinayak Bhandari, Advs. & Mrs Pragya Baghel, AOR for the Respondent.

An acknowledgement in a balance sheet without a qualification can furnish a legitimate basis for determining as to whether period of limitation would stand extended, so long as acknowledgement was within a period of three years from original date of default

Facts of the Case

In the instant case, the NCLT rejected an application filed by the State Bank of India (the ‘appellant’) under Section 7 of the IBC against the Corporate Debtor (‘the respondent’) initiating the Corporate Insolvency Resolution Process (CIRP).

The respondent had received credit facilities from the appellant, and the outstanding amount under the credit facility totalled Rs. 102.4 crores. In place of these credit facilities, the respondent (along with other persons) provided securities in favour of the appellant.

However, the respondent failed to honour the terms of credit facilities and defaulted on repayments. Hence, the respondent’s account with the appellant was classified as a Non-Performing Asset on June 10, 2014.

Supreme Court Held

Then, the appellant aimed to seek recourse at various junctures to the SARFAESI Act 2002 and Recovery of Debts Due to Banks and Financial Institutions Act, 1993 while continuing to engage in negotiations with the respondent.

Thereafter, a letter was issued by the respondent to the appellant dated January 19, 2016, offering a one-time settlement of Rs 61 crores in lieu of its debts, which was conditionally accepted by the appellant. However, the respondent, by a letter dated September 18, 2017, unilaterally revised the one-time settlement to Rs 40.6 crores, which was refused by the appellant.

In addition to this, an application for initiation of the CIRP was filed by the appellant on the ground that there was a default on the part of the respondent in paying a financial debt of approximately Rs 189 crores (calculated along with interest as of June 30, 2018).

While rejecting the application under Section 7 of the IBC on the grounds of limitation, the NCLT observed that the respondent’s loan account was declared as NPA on June 10, 2014, while the proceeding under Section 7 was instituted on September 19, 2018, i.e. beyond a period of three years from the date on which the right to apply accrued.

Referring to the decision given by NCLAT in case of “V Padmakumar v. Stressed Assets Stabilisation Fund and Another”, the Appellate Tribunal held that a statement contained in the balance sheet could not be treated as an acknowledgement of liability under Section 18 of the Limitation Act 1963 and the proposal for one-time settlement which was submitted by the respondent on September 18, 2017 was also beyond three years from the date of default.

On appeal, the Supreme Court observed that an acknowledgement in a balance sheet without qualification could be relied upon for the purpose of the proceedings under the IBC.

The Supreme Court held that unqualified acknowledgement of debt in a Corporate Debtor’s balance sheet within three years from the original date of default extends the limitation for filing CIRP under Section 7 of IBC, as Section 238A of IBC makes Section 18 of Limitation Act applicable to proceedings under IBC. Therefore:

(a) the provisions of Section 18 of the Limitation Act are not alien to and are applicable to proceedings under the IBC; and

(b) An acknowledgement in a balance sheet without qualification can furnish a legitimate basis for determining whether the period of limitation would stand extended, so long as the acknowledgement was within three years from the original date of default.

With the above clarification, the Supreme Court allowed the appeal and set aside the impugned judgment and order of the NCLAT and the NCLT.

8. SC resorts to Article 142 of the Constitution to cut short IBC technicalities to benefit home-buyers

Case Details: Amit Katyal v. Meera Ahuja
Citation: [2022] 136 taxmann.com 55 (SC)

Judiciary and Counsel Details

• M.R. Shah & B.V. Nagarathna, JJ.
• Ms Sheena Taqui, Dhvanit Chopra, Akansha Saini, Shiv Vinayak Gupta, Advs. & Mrs Bina Gupta, AOR for the Appellant. 
• Nakul Dewan, Sr. Adv., Kapil Shankla, Adv., Shyam D. Nandan, AOR, Ms Meghna Shankla, Ms Radhika Gupta, Advs., Hrishikesh Baruah, Archit Upadhayay, Randhir Kumar Ojha, AORs, K. V. Viswanathan, Sr. Adv., Bhargavi Kannan, Pracheta Kar, Rahul Sangwan, Amartya Sharan, Advs. Siddhant Buxy, Amarjeet Singh, AORs, Shiv Kumar Pandey, Chandrashekhar A. Chakalabbi, Awanish Kumar, Anshul Rai, Abhinav Garg, D. Girish Kumar, Kumar Vinayakam Gupta & Batra Shubham Parveen, Advs. for the Respondent.

NCLT admitted CIRP petition filed by respondent-home buyer against corporate debtor/builder on its failure to complete construction work of housing project in time, in view of fact that corporate debtor had agreed to refund consideration amount with applicable/accrued interest to respondent, it had also undertook to complete entire project and hand over possession to home buyers (who want possession), within a period of one year, this was a fit case to exercise power under Article 142 and to permit respondents were permitted to withdraw application filed by them under section 7

Facts of the Case

In the instant case in the matter of Amit Katyal v. Meera Ahuja – [2022] 136 taxmann.com 55 (SC) , the builder-(corporate debtor) came up with a housing project in Gurgaon which could not be completed in eight years. On 06.12.2018, three home buyers (original applicants) preferred an application under Section 7 of the IBC before the NCLT to initiate the CIRP process against the corporate debtor. The application was admitted and a Resolution Professional was appointed and the moratorium was declared.

The promoters of the corporate debtor challenged the admission of Section 7 application before the NCLAT, during the hearing before the NCLAT, the appellant tried to settle the matter with the original applicants, however, the settlement did not go through, the NCLAT dismissed the appeal and directed commencement of CIRP. The IRP issued a public announcement and constituted the Committee of Creditors (CoC). In the meantime, the promoters preferred the present appeal before the Apex Court challenging the order passed by the NCLAT.

Supreme Court Held

 The Apex Court allowed withdrawal of the Corporate Insolvency Resolution Process plea filed against a builder filed by three homebuyers on being paid a settlement amount along with applicable interest as agreed upon by the majority of them. The Apex Court, in the larger interest of the homebuyers, exercised power under Article 142 to permit withdrawal of the CIRP proceedings and set aside all matters pending between the parties. The Court observed that under Section 12A NCLT may allow withdrawal of the application admitted under Section 7 on an application filed by the applicant with approval of 90% voting share of CoC.

Taking note of Swiss Ribbons Pvt. Ltd. And Anr. v. Union of India And Ors. (2019) 4 SCC 17, in which the Court had permitted the original applicants to withdraw the CIRP proceedings in view of the settlement entered between parties, the Court noted that the COC comprises 91 members, of which 70% are the members of the Flat Buyers Association who are willing for the CIRP proceedings being set aside subject to the appellant and the Corporate Debtor – company honoring its undertaking given to this Court as per the settlement plan.

The Court also observed that out of the total 128 home buyers of 176 units, 82 homebuyers are against the insolvency proceedings and the original applicants have also settled their dispute with the appellant and corporate debtor. Even the object and purpose of the IBC is not to kill the company and stop/stall the project, but to ensure that the business of the company runs as a going concern.

9. NOIDA isn’t a financial creditor under IBC as leasing a plot with a restrictive clause didn’t amount to a finance lease: SC

Case Details: New Okhla Industrial Development Authority v.Anand Sonbhadra
Citation: [2022] 138 taxmann.com 293 (SC)

Judiciary and Counsel Details

• K.M. Joseph & Hrishikesh Roy, JJ.
• Sudhir Naagar & Sourav Roy, AORs for the Appellant. 
• Pulkit Srivastava, AOR, Ms Kriti Ranjan, Adv., Ritin Rai, Sr. Adv., Ninad Dogra, AOR, Nipun Gautam, Ms Ritika Sinha, Ms Gunjan Mathur, Parth Maniktala, Prateek, Advs., Krishna Dev Jagarlamudi, AOR, Devashish Bharuka, Rajiv Shankar Dwivedi, Justine George, Ms Sarvshree, Anil Kumar Sharma, Advs., Abhishek Agarwal, Som Raj Choudhury, AORs, Ms Shrutee Aradhana, Adv., Anand Varma, AOR, Dr Abhishek Manu Singhvi, Sr. Adv., Shohit Chaudhry, AOR, Pankaj Agarwal & Amit Bhandari, Advs. for the Respondent.

Wherein lease in question there was no disbursement of any debt (loan) or any sums by appellant to lessee, appellant would not be a financial creditor

Lessee/corporate debtor had not raised any amount from appellant-lessor under lease, such lease would not fall within meaning of section 5(8)(f)

Facts of the Case

The appellant ‘NOIDA’ initially submitted Form ’B’ and claimed as an operational creditor in regard to the dues outstanding under the lease. Subsequently, the appellant filed a claim in Form ‘C’ and claimed as a financial creditor. Some correspondence revealed that the appellant insisted upon being treated as a financial creditor.

Finally, the matter was considered by the adjudicating authority (NCLT), which held that there was no financial lease in terms of the Indian Accounting Standards and there was no financial debt. By the impugned order, the NCLAT has affirmed the view taken by the NCLT.

The dispute involves the question of whether the lease executed by NOIDA (lessor) in favour of the lessee is a financial lease under Section 5 (8)(d) and 5(8)(f) of IB Code?

Supreme Court Held

On appeal, the Apex Court observed that where NOIDA leased out a plot of land for 90 years with a clause, the lessee builder will construct residential buildings on it within 7 years with a maximum extension of 3 years with a penalty. If the lease is cancelled due to non-fulfilment of conditions, the land with any building on it to revert to NOIDA.

Further, the lessee would require to take prior permission from NOIDA to create a mortgage over it. It was clear that the lessee builder does not get substantial risks and rewards of ownership as he is not free to do whatever he likes with the plot of land. Therefore, the lease does not qualify as a financial or capital lease under section 5(8)(d) read with Paras 61 to 67 of Ind AS 116 and will not qualify as “financial debt”.

“A lease, which is not a finance or a capital lease under Section 5(8)(d), may create a financial debt within the meaning of Section 5(8)(f),if, on its terms, the Court concludes that it is a transaction, under which, any amount is raised, having the commercial effect of the borrowing. The lease in question does not fall within the ambit of Section 5(8)(f) as lessee has not raised any amount from the appellant under the lease, which is a transaction. The raising of the amount, which, according to the appellant, constitutes the financial debt, has not taken place in the form of any flow of funds from the appellant/lessor, in any manner, to the lessee. The mere permission or facility of moratorium, followed by staggered payment in easy installments, cannot lead us to the conclusion that any amount has been raised, under the lease, from the appellant, which is the most important consideration.”

Said Supreme Court

In view of the above, the Court held that NOIDA is not a ‘financial creditor’ and is an ‘operational creditor’ under the provisions of IBC, 2016

10. Provisions of IBC are intended to bring the corporate debtor to its feet and are not of money recovery proceedings: SC

Case Details: Invent Asset Securitisation and Reconstruction (P.) Ltd. v. GirnarFibresLtd.
Citation: [2022] 137 taxmann.com 462 (SC)

Judiciary and Counsel Details

• Dinesh Maheshwari & Aniruddha Bose, JJ.
• Harshvir Pratab Sharma, Sr. Adv., Anoop Prakash Awasthi, AOR & P. Singh, Adv. for the Appellant.

Right to sue accrued when default occurred way back in 28-2-2002 and material on record did not evidence any acknowledgement of liability in terms of section 18 of Limitation Act, 1963, application to initiate CIRP filed on 1-10-2018 was barred by limitation

Facts of the Case

In the instant case in the matter of Invent Asset Securitisation and Reconstruction (P.) Ltd. v. Girnar Fibres Ltd. – [2022] 137 taxmann.com 462 (SC) , an application was moved before the Hon’ble Supreme Court against the order of the Hon’ble National Company Law Appellate Tribunal, Delhi Bench. An application was filed by the appellant under section 7 of the Insolvency and Bankruptcy Code, 2016 against the corporate debtor.

Supreme Court Held

The corporate debtor defaulted on 28-02-2002. The applicant filed an application before the Hon’ble National Company Law Tribunal (NCLT). The NCLT held that right to sue accrued when the default occurred way back on 28-2-2002, and that the material on record does not evidence any acknowledgment of liability in terms of Section 18 of the Limitation Act, 1963. Therefore, the debt has become time-barred now. No insolvency proceedings can be initiated against the corporate debtor.

The applicant filed an appeal before the Hon’ble National Company Law Appellate Tribunal against the order of the NCLT. NCLAT took the same view as that of the NCLT.

On further appeal, the Supreme Court dismissed the plea and held that both NCLT & NCLAT have rightly taken the view that the application as moved by the present appellant under Section 7 of the Insolvency and Bankruptcy Code, 2016 (‘the Code’) was barred by limitation.

Although the counsel for the appellant has attempted to refer to the documents towards restructuring of the loan and the alleged revival letter etc. Court is satisfied that the said documents cannot enure to the benefit of the appellant so far as the application under Section 7 of the Code is concerned.

The provisions of the Code are essentially intended to bring the corporate debtor to its feet and are not of money recovery proceedings as such. The intent of the appellant had only been to invoke the provisions of the Code so as to enforce recovery against the corporate debtor.