Covid19 - Extension of Limitation & Exclusion of Lockdown period in CIRP/Liquidation process.

Following are the orders of Hon’ble SCI , NCLAT & amendments in CIRP / Liquidation process regulations for extension of limitation & exclusion of lockdown period in CIRP/Liquidation process.

 

1.  Extension of Limitation.

Hon’ble SCI (23.03,2020) in Suo Motu Writ Petition (Civil) No(s).3/2020, ordered for extension of limitation period in all proceedings as follows;

• “This Court has taken Suo Motu cognizance of the situation arising out of the challenge faced by the country on account of Covid-19 Virus and resultant difficulties that may be faced by litigants across the country in filing their petitions/applications/suits/ appeals/all other proceedings within the period of limitation prescribed under the general law of limitation or under Special Laws (both Central and/or State). 

• To obviate such difficulties and to ensure that lawyers/litigants do not have to come physically to file such proceedings in respective Courts/Tribunals across the country including this Court, it is hereby ordered that a period of limitation in all such proceedings, irrespective of the limitation prescribed under the general law or Special Laws whether condonable or not shall stand extended w.e.f. 15th March 2020 till further order/s to be passed by this Court in present proceedings.

• We are exercising this power under Article 142 read with Article 141 of the Constitution of India and declare that this order is a binding order within the meaning of Article 141 on all Courts /Tribunals and authorities.”

 

2, Exclusion of Lockdown period from CIRP / Liquidation process

i). NCLAT (30.03.2020) in Suo Moto - Company Appeal (AT) (Insolvency) No. 01 of 2020, ordered for exclusion of lockdown period in CIRP as applicable,  where the registered office of the Corporate Debtor may be located;

• # (1) That the period of lockdown ordered by the Central Government and the State Governments including the period as may be extended either in whole or part of the country, where the registered office of the Corporate Debtor may be located, shall be excluded for the purpose of counting of the period for ‘Resolution Process under Section 12 of the Insolvency and Bankruptcy Code, 2016, in all cases where ‘Corporate Insolvency Resolution Process’ has been initiated and pending before any Bench of the National Company Law Tribunal or in Appeal before this Appellate Tribunal.

 

ii). Board on 29.03.2020, amended CIRP Regulations [Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) (Third Amendment) Regulations, 2020], for exclusion of lockdown period.

• # Regulation “40C. Special provision relating to time-line. Notwithstanding the time-lines contained in these regulations, but subject to the provisions in the Code, the period of lockdown imposed by the Central Government in the wake of COVID-19 outbreak shall not be counted for the purposes of the time-line for any activity that could not be completed due to such lockdown, in relation to a corporate insolvency resolution process.”.

 

iii). Board on 17.04.2020, amended Liquidation process regulations [Insolvency and Bankruptcy Board of India (Liquidation Process) (Second Amendment) Regulations, 2020] for exclusion of lockdown period.

• # Regulation 47A “Exclusion of period of lockdown.

Subject to the provisions of the Code, the period of lockdown imposed by the Central Government in the wake of COVID-19 outbreak shall not be counted for the purposes of computation of the time-line for any task that could not be completed due to such lockdown, in relation to any liquidation process.”.

 

Caution;

It can observed that while NCLAT orders excludes the period of lockdown, under section 12 of the code, ordered by the Central Government and the State Governments, including the period as may be extended either in whole or part of the country, where the registered office of the Corporate Debtor may be located, but the amendments in the CIRP & Liquidation process regulations speaks for the period of lockdown imposed by the Central Government only. As such in the case of CIRP process, the orders of NCLAT shall prevail, but in the case of the Liquidation process, concerned amendment regulations have to be followed.

Disclaimer: The sole purpose of this blog is to create 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.

Rule In Clayton’s Case - Claims management during CIRP

This rule, which was laid down in the famous case, Devayanas Vs. Noble by an English Court in 1816, states the rule of appropriation in running accounts like cash credit and overdraft accounts. As per this rule, each withdrawal in a cash credit account is considered as a new loan and each deposit as a repayment of the loan in the order in which it is made. The first debit in the account is considered to have been discharged or reduced by the first item in the credit side and accordingly other entries follow suit in chronological order.

It is to avoid application of this rule, the bankers stop operation of the account in case of death / insolvency of a partner / guarantor / joint account holder.

Section 61 of the Indian Contract Act, 1872 states that, “Where neither party makes any appropriation, the payment shall be applied in discharge of the debts in order of time, whether they are or are not barred by the law in force for the time being as to the limitation of suits. If the debts are of equal standing, the payment shall be applied in discharge of each proportionally”.

In Indian context, the ratio laid down in Clayton’s case has been approved in the case of Gurpreet Singh v. Union of India [Civil Appeal 4570 of 2006] by Hon’ble Supreme Court of India’

Clayton’s Case.

“Mr Clayton had an account with a banking firm, a partnership named Devaynes, Dawes, Noble, and Co. One of the partners, William Devaynes, died.

The amount then due to Clayton was £1,717.

The surviving partners, thereafter paid out to Mr Clayton more than that amount while Clayton himself, on his part, made further deposits with the firm.

The banking firm subsequently went bankrupt. And Mr Clayton also claimed the money.

Sir William Grant Master of the Rolls, in Devaynes v Noble [(1816) 35 ER 781] held that the estate of the deceased partner was not liable to Clayton, as the payments made by the surviving partners to Clayton must be regarded as completely discharging the liability of the firm to Clayton at the time of the particular partner’s death.”

From Clayton's case the following rules are derived -

(1) A debtor making a payment has a right to appropriate it to the discharge of any debt due to the creditor,

(2) if at the time of payment there is no express or implied appropriation thereof by the debtor, then the creditor has a right to make the appropriation;

(3) in the absence of any appropriation by either debtor or creditor, an appropriation is made by presumption of law, according to the items of account, the first item on the debit side being the item discharged or reduced by the first item on the credit side.

The Earl of Selborne, L.C., in In re Sherry, London and County Banking Company v. Terry (1884, 25 Ch. D. 692), said:

• "The principle of Clayton's case, and of the other cases which deal with the same subject, is this, that where a creditor having a right to appropriate moneys paid to him generally, and not specifically appropriated by the person paying them, carries them into a particular account kept in his books, he prima facie appropriates them to that account, and the effect of that is, that the payments are de facto appropriated according to the priority in order of the entries on the one side and on the other of that account.

A situation may arise that Insolvency proceedings have been initiated against the CD  by some operational / financial creditor (FC) , whereas the CD is a corporate guarantor (CG) of the accounts of some other company (CD-2) with the (same or other) financial creditor (FC-2). The accounts (cash credit or overdraft) of CD-2, with the financial creditor are operational. In such a situation, the  Creditor (FC-2's) claim against corporate guarantor (CD/CG), gets fixed on the date of commencement of insolvency of the CD [section 5(8)(i)]. Thus with the operation of “Rule in Clayton’s case” the liability of the corporate debtor/guarantor (CD/CG) will  continue to get reduced by the amount of credits in the accounts (cash credit or overdraft) of the CD-2 with the financial creditor after the date of commencement of insolvency of the CD.

Now let’s look at the provisions of the Code for the definition of “Claim” & “Financial Debt” with related case law.

# 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;

• (b) right to remedy for breach of contract under any law for the time being in force, if such breach gives rise to a right to payment, whether or not such right is reduced to judgment, fixed, matured, unmatured, disputed, undisputed, secured or unsecured;

# Section 5. Definitions. -

(8) “financial debt” means a debt alongwith interest, if any, which is disbursed against the consideration for the time value of money and includes–

• (h) any counter-indemnity obligation in respect of a guarantee, indemnity, bond, documentary letter of credit or any other instrument issued by a bank or financial institution;

• (i) the amount of any liability in respect of any of the guarantee or indemnity for any of the items referred to in sub-clause (a) to (h) of this clause;

Filing  Claim in Corporate Guarantor’s Insolvency (Creditor’s double dip)

NCLT (PB) New Delhi, (23.01.2018) in the matter of ICICI Bank V/s CA Ritu Rastogi,[ CA 366 (PB)/2017 and (IB)-102(PB)/2017]. In another matter, CIRP were going on against the principal debtor as well as the guarantor separately. ICICI Bank filed its claim with RP of the principal debtor as well as with the RP of the guarantor (both). RP of the guarantor rejected the claim of ICICI since the same had already been admitted by RP of the principal debtor and if such claim is admitted then the recovery amount may exceed the total claimed amount of ICICI which may be prejudicial to others. However, NCLT allowed the said claim since it falls within the definition of financial debt and RP is not allowed to raise objection contrary to the provisions of the guarantee agreement.

Filing  Claim in  Corporate Guarantor’s Insolvency. (Maturity of claim - invocation of guarantee)

The question here was whether a creditor can file a claim in the CIRP of  Corporate Guarantor, without invoking guarantee, in other words when the claim has not matured. It was held 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 (13.07.2018) in Andhra Bank Vs. M/s. F.M Hammerle Textiles Ltd. [Company Appeal (AT) (Insolvency) No.61 of 2018], Facts of the case -  IRP rejected claims of the bank since the same were not matured at the time of commencement of CIRP against the CD. Thereafter, NCLT reaffirmed the decision of IRP. In appeal, the NCLAT held that any person, who has a right to claim payment under Section 3(6) of IBC, can file its claim irrespective of the fact whether the same is matured or not at the time of commencement of CIRP & held as under:- 

• # 9. It is not necessary that all the claims are submitted by the Creditor should be a claim matured on the date of initiation of Resolution Process / admission, even in respect of debt, which is due in future on its maturity, the ‘Financial Creditor’ or ‘Operational Creditor’ or ‘Secured Creditor’ or ‘Unsecured Creditor’ can file such claim. Therefore, the definition of ‘Claim’ as defined under Section 3(6) is to be read along with Section 13 read with Section 15 of the ‘I&B Code’. 

NCLAT (14.08.2018) In 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] Facts of the case - JEKPL had given counter corporate guarantee in favour of EXIM Bank, which invoked guarantee on 30 March, 2017. The RP rejected to consider EXIM Bank as a FC in the CIRP of JEKPL. The AA vide order dated  27 November, 2017 affirmed the decision of the RP. 

The NCLAT held that default of debt has nothing to do with the claim of a person. It observed:

• # 53 ………..  Any person who has the 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.

• # 55……………The matter can be looked from another angle. It is only in case of ‘debt’ and ‘default’, a ‘Financial Creditor’ or ‘Operational Creditor’, may file applications under Section 7 or 9. The ‘Corporate Applicant’ has also right to file an application under Section 10 for initiation of Corporate Insolvency Resolution Process against itself, if it has defaulted to pay the ‘debt’. It does not mean that the persons whose debt has not been matured cannot file claim. The ‘Financial Creditors’ or ‘Operational Creditors’ or ‘secured or unsecured creditors’ all are entitled to file 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)

Corollary; Thus the IRP/RP while admitting the claim of a financial creditor, where “ Rule in Clayton’s Case” is operational, must flag the claim amount for re-verification, to account for the credits in  the operational accounts of the principal borrower, at the time  of settlement of the claim.

References;-   

1. Insolvency and Bankruptcy Code, 2016.

2. Indian Contract Act, 1872.

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

Disclaimer: The sole purpose of this blog is to create 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.

Whether, the cost incurred pre-admission with the approval of CoC will form part of IRPC.

Clause D(vi) of  “Statement of Best Practices” on “Payment of Corporate Insolvency Resolution Process Costs”  of Society for Insolvency Practitioners of India (SIPI),  reads as under;

• # Clause 4(vi) An insolvency professional should endeavour only  pay costs incurred pre-admission with the approval of the committee of creditors. However, if incurring these costs are integral to keep the corporate debtor a going concern, these costs may be paid without approval of the  committee of creditors.

Why are we discussing the “Statement of Best Practices” issued by a private organization, SIPI ? Insolvency & Bankruptcy Board of India vide circular No. IBBI/IP/013/2018 dated 12th June, 2018, has adopted the “Statement of Best Practices” on “Payment of Corporate Insolvency Resolution Process Costs” of Society for Insolvency Practitioners of India (SIPI). Annexure B of the said circular reads as under;

Annexure B

What is Reasonable ‘Cost’ and Reasonable ‘Fee’

I. As regards reasonable costs, the Society for Insolvency Practitioners of India, in its statement of best practices on “PAYMENT OF CORPORATE INSOLVENCY RESOLUTION PROCESS COSTS” observes:

“Insolvency professionals must ensure that the costs incurred are reasonable. To determine the reasonability of these costs, they should consider if the costs are-

(a) directly related to the insolvency resolution process,

(b) necessary for meeting the objectives of the insolvency resolution process, and the Code,

(c) proportional to the work required to be done and the assets of the corporate debtor, and

(d) determined on an arms’ length basis, in consonance with the requirements of integrity and independence.”

http://www.insolindia.com/uploads_insol/draft_best_practices/files/-1013.pdf

The Board, by specifically  mentioning the “Statement of Best Practices” on “PAYMENT OF CORPORATE INSOLVENCY RESOLUTION PROCESS COSTS” of SIPI & providing link to the said statement in the circular, has given credence to the entire “Statement of Best Practices” of SIPI,  as guidelines  of the Board under section 196(p).

Following are the provisions of the Code & Regulation on Insolvency Resolution Process Cost (IRPC). 

# Section 3(32) “specified” means specified by regulations made by the Board under this Code and the term “specify” shall be construed accordingly;

# Section 5(13) “insolvency resolution process costs” means –

(a) the amount of any interim finance and the costs incurred in raising such finance;

(b) the fees payable to any person acting as a resolution professional;

(c) any costs incurred by the resolution professional in running the business of the corporate debtor as a going concern;

(d) any costs incurred at the expense of the Government to facilitate the insolvency resolution process; and

(e) any other costs as may be specified by the Board;

# Regulation 31. Insolvency resolution process costs.

“Insolvency resolution process costs” under Section 5(13)(e) shall mean-

(a) amounts due to suppliers of essential goods and services under Regulation 32;

(aa) fee payable to authorised representative under sub-regulation (8) of regulation 16A;

(ab) out of pocket expenses of authorised representative for discharge of his functions under section 25A;

(b) amounts due to a person whose rights are prejudicially affected on account of the moratorium imposed under section 14(1)(d);

(c) expenses incurred on or by the interim resolution professional to the extent ratified under Regulation 33;

(d) expenses incurred on or by the resolution professional fixed under Regulation 34; and

(e) other costs directly relating to the corporate insolvency resolution process and approved by the committee.

# Regulation 32. Essential supplies.

The essential goods and services referred to in section 14(2) shall mean-

(1) electricity;

(2) water;

(3) telecommunication services; and

(4) information technology services,

to the extent these are not a direct input to the output produced or supplied by the corporate debtor.

Illustration- Water supplied to a corporate debtor will be essential supplies for drinking and sanitation purposes, and not for generation of hydro-electricity.

# Regulation 33. Costs of the interim resolution professional.

(1) The applicant shall fix the expenses to be incurred on or by the interim resolution professional.

(2) The Adjudicating Authority shall fix expenses where the applicant has not fixed expenses under sub-regulation (1).

(3) The applicant shall bear the expenses which shall be reimbursed by the committee to the extent it ratifies.

(4) The amount of expenses ratified by the committee shall be treated as insolvency resolution process costs.

Explanation. - For the purposes of this regulation, “expenses” include the fee to be paid to the interim resolution professional, fee to be paid to insolvency professional entity, if any, and fee to be paid to professionals, if any, and other expenses to be incurred by the interim resolution professional.

# Regulation 34. Resolution professional costs.

The committee shall fix the expenses to be incurred on or by the resolution professional and the expenses shall constitute insolvency resolution process costs.

Explanation. - For the purposes of this regulation, “expenses” include the fee to be paid to the resolution professional, fee to be paid to insolvency professional entity, if any, and fee to be paid to professionals, if any, and other expenses to be incurred by the resolution professional.

From the above it can be observed that neither the Code, nor the Regulations permit the pre-admission cost to be included in the IRPC. Thus the guidelines of the Board are in contravention of the provisions of the Code.

In my opinion the Board should immediately issue clarification in the matter. The Board, in the first place should not have mentioned & provided the link in the circular, of a document issued by a private organisation.

Disclaimer: The sole purpose of this blog is to create 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.