A case for Continuing Legal Education (CLE) for Judiciary.

Recently I came across some contradictory judgements of NCLAT, which are as follows;

Situation 1. Filing  Claim in  Guarantor’s CIRP (Maturity of claim - invocation of guarantee) The question here was whether a creditor can file claim in the CIRP of  Corporate Guarantor, without invoking guarantee, in other words when the claim has not matured.

NCLAT (14.08.2018) In the matter of Export Import Bank of India and Ors. Vs. RP JEKPL Pvt. Ltd. and Ors. [CA No. 304 of 2017, 16 of 2018 and 302 of 2017]  

- # 53 …………. Any person who has right to claim payment, as defined under Section 3(6), is supposed to file the claim whether matured or unmatured. The question as to whether there is a default or not is not to be seen.

- # 54. Therefore, stand taken by the respondents that the claim has not been matured cannot be ground to reject the claim.

- # 56. Therefore, we hold that maturity of claim or default of claim or  invocation of guarantee for claiming the amount has no nexus with filing of claim pursuant to public announcement made under Section 13(1)(b) r/w Section 15(1)(c) or for collating the claim under Section 18(1)(b) or for updating claim under Section 25(2)(e).

NCLAT (23.04.2019) Edelweiss Asset Reconstruction Company Limited  Vs Orissa Manganese and Minerals Limited & Ors.[CA (AT) (Insolvency) No. 437, 438, 444,500 of 2018] 

- # 26. It is also not the case of the Appellant- ‘Edelweiss Asset Reconstruction Limited’ that it has not received the amount from the ‘Principal Borrower’ on default and, therefore, it was liable to invoke the Bank Guarantee which it invokes. In this background, the claim having not matured in absence of alleged default on the part of the ‘Principal Borrower’ and for non-invocation of the Bank Guarantee, the Appellant- ‘Edelweiss Asset Reconstruction Limited’ claim cannot be accepted the debt payable by the ‘Corporate Debtor’ as on the date of the admission (initiation of Corporate Insolvency Resolution Process’).

Situation 2. Filing for  insolvency of Principal Borrower & Corporate Guarantor by the same Financial Creditor.

Question here was whether a financial creditor can file application U/s 7, against Corporate Debtor & Corporate Guarantor, simultaneously. As per sub-section (2) of section 60, of the Code, a creditor can file an application relating to the insolvency resolution or liquidation of a corporate guarantor, during the pendency of  CIRP or liquidation proceeding of a corporate debtor.

NCLAT (18.04.2018) State Bank of India Vs. D. S. Rajender Kumar [CA (AT) (Insolvency) No. 87 to 91/2018] 

- #5……….. However, it is made clear that order of ‘Moratorium’ will be applicable only to the proceedings against the ‘Corporate Debtor’ and the ‘Personal Guarantor’, if pending before any court of law/Tribunal or authority but the order of ‘Moratorium’ will not be applicable for filing application for triggering ‘Corporate Insolvency Resolution Process’ under Sections 7 or 9 or 10 of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as “I&B Code”) against the ‘Guarantor’ or the ‘Personal Guarantor’ under Section 60(2).

NCLAT (08.01.2019) in Dr. Vishnu Kumar Agarwal  Vs M/s. Piramal Enterprises Ltd [CA (AT) (Insolvency) No. 346 of 2018]

- #32. There is no bar in the ‘I&B Code’ for filing simultaneously two applications under Section 7 against the ‘Principal Borrower’ as well as the ‘Corporate Guarantor(s)’ or against both the ‘Guarantors’. However, once for the same set of claim application under Section 7 filed by the ‘Financial Creditor’ is admitted against one of the ‘Corporate Debtors’ (‘Principal Borrower’ or ‘Corporate Guarantor(s)’), second application by the same ‘Financial Creditor’ for same set of claim and default cannot be admitted against the other ‘Corporate Debtor’ (the ‘Corporate Guarantor(s)’ or the Principal Borrower’). Further, though there is a provision to file joint application under Section 7 by the ‘Financial Creditors’, no application can be filed by the ‘Financial Creditor’ against two or more ‘Corporate Debtors’ on the ground of joint liability (‘Principal Borrower’ and one ‘Corporate Guarantor’, or ‘Principal Borrower’ or two ‘Corporate Guarantors’ or one ‘Corporate Guarantor’ and other ‘Corporate Guarantor’), till it is shown that the ‘Corporate Debtors’ combinedly are joint venture company.

Situation 3. Distribution of funds under resolution plan approved by the CoC.

The question here is whether CoC is empowered to decide the distribution of funds under resolution plan amongst ‘Financial Creditor’ or ‘Operational Creditor or ‘Secured Creditor’ or ‘Unsecured Creditor’ and whether the same can be adjudicated by NCLT / NCLAT.

NCLAT (02.05.2018) in  Darshak Enterprise Pvt. Ltd. Vs.Chhaparia Industries Pvt. Ltd. & Ors.[Company Appeal (AT) (Insolvency) No. 327 of 2017]

- # 6. ………………………..In a particular case, what should be the percentage of claim amount payable to one or other ‘Financial Creditor’ or ‘Operational Creditor or ‘Secured Creditor’ or ‘Unsecured Creditor’ can be decided by the Committee of Creditors based on facts and circumstances of each case. In absence of any discrimination or perverse decision, it is not open to the Adjudicating Authority or this Appellate Tribunal to modify the plan.

SCI (05.02.2019) in  K. Sashidhar :Vs. Indian Overseas Bank & Ors.(Civil appeal no..10673 of  2018)

- # 61. ………………Concededly, if the objection to the resolution plan is on account of infraction of ground(s) specified in Sections 30(2) and 61(3), that must be specifically and expressly raised at the relevant time. For, the approval of the resolution plan by the CoC can be challenged on those grounds. However, if the opposition to the proposed resolution plan is purely a commercial or business decision, the same, being nonjusticiable, is not open to challenge before the Adjudicating Authority (NCLT) or for that matter the Appellate Authority (NCLAT).

NCLAT (04.07.2019) in Standard Chartered Bank Vs. Satish Kumar Gupta, R.P. of Essar Steel Ltd. & Ors.[Company Appeal (AT) (Ins.) No. 242 of 2019] 

- # 200. In view of the aforesaid observations, instead of rejecting the ‘Resolution Plan’ submitted by ‘ArcelorMittal India Pvt. Ltd.’, we modify the plan to safeguard the rights of the ‘Operational Creditors’ and other ‘Financial Creditors’. The impugned order dated 8th March, 2019 stands modified to the extent above.

From the above cases, it can be observed that NCLAT, not only had passed the contradictory judgements, but in situation 3, it had disregarded the law laid down by the Hon’ble SCI in its judgement dated 05.02.2019 quoted supra above. Probably it has lost sight of provisions of the Constitution of India & The Doctrine of “Per Incuriam”.

Constitution of India

As per Article 141 of The Constitution of India, the law laid down by the Hon’ble Supreme Court of India is binding on all courts in India. 

# Article 141. The law declared by the Supreme Court shall be binding on all courts within the territory of India.

The Doctrine of “Per Incuriam”.

i). Constitution Bench of Hon’ble SCI in Union of India v. Raghubir Singh [(1989) 2 SCC 754], observed as under:

-"The doctrine of binding precedent has the merit of promoting certainty and consistency in judicial decisions, and enables an organic development of the law, besides providing assurance to the individual as to the consequence of transactions forming part of his daily affairs. And, therefore, the need for a clear and consistent enunciation of legal principle in the decisions of a court."

ii). Hon’ble SCI  in Government of A.P. and Another v. B. Satyanarayana Rao (dead) by LRs. and Others [(2000) 4 SCC 262], observed as under:

- "The rule of per incuriam can be applied where a court omits to consider a binding precedent of the same court or the superior court rendered on the same issue or where a court omits to consider any statute while deciding that issue."

Another important question arises, whether the contradictory judgements does not infringe the “Fundamental Rights of Equality” of the individuals (litigants) guaranteed under Article 14  the constitution of India.

Article 14. Right to Equality The State shall not deny to any person equality before the law or the equal protection of the laws within the territory of India.

In all professions, the professionals are required to  undergo continuing professional education to update the knowledge and skills of the profession. It is suggested that members of the judiciary also be required to undergo “Continuing Legal Education” so that the above situations may not recur in future.

References;

1. Constitution of India.

2. The Insolvency and Bankruptcy Code, 2016.

3. eBook  "Claims of Creditors" by Arvind Mangla, a publication of Amazon Kindle Store.


'Disclaimer: The sole purpose of this blog  is of creating awareness on the subject and must not be used as a guide for taking or recommending any action or decision. A reader must do his own research and seek professional advice if he intends to take any action or decision in the matters covered in this blog.

Hon'ble Supreme Court renders Govt. toothless to recover Taxes & dues.

A recent judgement of the Hon’ble SCI has gone unnoticed, which has vast implications  on the recovery of Govt. taxes & dues. While deciding the issue of limitation for filing application under IBC, 2016, in the matter of Gaurav Hargovindbhai Dave,Vs. Asset Reconstruction Company (I) Ltd [ Civil appeal 4952 of 2019], Hon’ble SCI observed as under;

• # 6. Having heard the learned counsel for both sides, what is apparent is that Article 62 (of the Limitation Act) is out of the way on the ground that it would only apply to suits. The present case being “an application” which is filed under Section 7, would fall only within the residuary article 137 (of the Limitation Act). As rightly pointed out by learned counsel appearing on behalf of the appellant, time, therefore, begins to run on 21.07.2011, as a result of which the application filed under Section 7 would clearly be time-barred.

With the above ruling Hon’ble SCI, decided that for initiating  action under the Code (IBC, 2016) limitation period is of three years from the date of default by the debtor, irrespective of limitation period which might have been available i.e. 12 years for filing of mortgage suit (Article 62 of the Limitation Act.). Hon’ble SCI in its above judgement did not give the benefit of the sun-set clause. However the benefit of sun-set clause would have been available upto 30.11.2019, as IBC was implemented w.e.f. 01.12.2016.

Now let’s take a look at the various provisions of the Code (IBC. 2016).

# Section 2. Application. – The provisions of this Code shall apply to;

(a) any company incorporated under the Companies Act, 2013 (18 of 2013) or under any previous company law;

(b) any other company governed by any special Act for the time being in force, except in so far as the said provisions are inconsistent with the provisions of such special Act;

(c) any Limited Liability Partnership incorporated under the Limited Liability Partnership Act, 2008 (6 of 2009);

# Section 3. Definitions. –

(6) “claim” means –

(a) a right to payment, whether or not such right is reduced to judgment, fixed, disputed, undisputed, legal, equitable, secured, or unsecured;

(10) “creditor” means any person to whom a debt is owed and includes a financial creditor, an operational creditor, a secured creditor, an unsecured creditor and a decree-holder;

(11) “debt” means a liability or obligation in respect of a claim which is due from any person and includes a financial debt and operational debt;

(12) “default” means non-payment of debt when whole or any part or instalment of the amount of debt has become due and payable and is not paid by the debtor or the corporate debtor, as the case may be;

# Section 5. Definitions. – 

(20) “operational creditor” means a person to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred;

(21) “operational debt” means a claim in respect of the provision of goods or services including employment or a debt in respect of the payment of dues arising under any law for the time being in force and payable to the Central Government, any State Government or any local authority;

# Section 6. Persons who may initiate corporate insolvency resolution process. –

Where any corporate debtor commits a default, a financial creditor, an operational creditor or the corporate debtor itself may initiate corporate insolvency resolution process in respect of such corporate debtor in the manner as provided under this Chapter.

# Section 63. Civil court not to have jurisdiction. No civil court or authority shall have jurisdiction to entertain any suit or proceedings in respect of any matter on which National Company Law Tribunal or the National Company Law Appellate Tribunal has jurisdiction under this Code. Civil court not to have jurisdiction

# Section 238. Provisions of the Code to override other laws.The provisions of this code shall have 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.

Under the Code (IBC, 2016) the dues of Govt. (Taxes or other dues under any law) have been defined as operational debt of the company & Govt. as operational creditor.  Upon default by the company in payment of Govt. dues (operational debt), action against the company can be initiated by an operational creditor (Central Government, any State Government or any local authority)  only under the provisions of the code, due to non-obstante clauses, section 63 & 238 of the Code. With the above judgement of the Hon’ble SCI, the limitation period for initiation of action under the Code is  3 years. Thus the concepts of “Sovereign Dues” & “Recovery as Land Revenue” have been left meaningless with the implementation of the Code. Further Govt. can not adopt any coercive actions, such as arrests etc. as the Code does not provide for the same for recovery of dues in default.

 

'Disclaimer: The sole purpose of this article  is of  creating awareness on the subject and must not be used as a guide for taking or recommending any action or decision. A reader must do his own research and seek professional advice if he intends to take any action or decision in the matters covered in this article.