Whether Rule11 of NCLT Rules is in violation of Article 142 & 14 of Constitution of India.

It's quite interesting to note that Rule 11 of NCLT Rules has become a very powerful tool for Adjudicating Authority under IBC proceedings, as an alternative to Article 142 of the Constitution of India, under which powers lie with the Hon'ble Supreme Court only.

Article 142 of the Constitution of India

• “142. Enforcement of decrees and orders of Supreme Court and unless as to discovery, etc.-

• (1) The Supreme Court in the exercise of its jurisdiction may pass such decree or make such order as is necessary for doing complete justice in any cause or matter pending before it, and any decree so passed or orders so made shall be enforceable throughout the territory of India in such manner as may be prescribed by or under any law made by Parliament and, until provision in that behalf is so made, in such manner as the President may by order prescribe.

• XXXXX

National Company Law Tribunal Rules, 2016.

• 11. Inherent Powers.- Nothing in these rules shall be deemed to limit or otherwise affect the inherent powers of the Tribunal to make such orders as may be necessary for meeting the ends of justice or to prevent abuse of the process of the Tribunal.

Constitution of India, through Article 142, authorizes only Hon’ble Supreme Court to travel beyond the Statutes while imparting justice. No other court/tribunal can travel beyond the provisions of  Statutes while passing orders. It is for this reason, Hon’ble Supreme Court while passing orders, invoking Article 142, specifically mentions that the said order will not be treated as a precedent. Thus Rule11 of NCLT Rules, does not carry sanctions of the Constitution, & is bad in law and needs to be struck down.

The rule of Per Incuriam 

Hon’ble Supreme Court (02.12.2010)  in Siddharam Satlingappa Mhetre vs. State of Maharashtra [Criminal Appeal No. 2271 of  2010. - Arising out of SLP (Crl.) No.7615 of 2009) held that:

• #139.” . . . .A decision is given per incuriam when the court has acted in ignorance of a previous decision of its own or of a court of coordinate jurisdiction which covered the case before it, in which case it must decide which case to follow . . . “ 

• #141 "  . . . .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. . . "

• #142. "The doctrine of Binding Precedent has the merit of promoting a 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."

• #147. “ . . .It must be remembered that predictability and certainty is an important hallmark of judicial jurisprudence developed in this country in the last six decades and increase in the frequency of conflicting judgments of the superior judiciary will do incalculable harm to the system inasmuch as the courts at the grass roots will not be able to decide as to which of the judgments lay down the correct law and which one should be followed."

If we look into the provisions of Article 142 of the Constitution through the prism of Fundamental Rights enshrined in the Constitution, it would appear that Article 142 is in conflict with Article 14 of the Constitution of India. Article 142 permits the Hon'ble Supreme Court to travel beyond the provisions of statues, whereas Article 14 guarantees equality before law.

Article 14 of the Constitution states that:

• “The State shall not deny to any person equality before the law or the equal protection of the laws within the territory of India.”

Second question which arises, whether powers under Rule11 of NCLT Rules can be invoked for cases falling under Part-III of the Code where Adjudicating Authority / Appellate Authority is DRT / DRAT. If not, equity demands uniform applicability of rules throughout the provisions of the Code.

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.

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The Doctrine of "Debts due and payable"

This article is with particular reference to “Debts due and payable” in context to Claims filed by creditors with IRP/RP in response to public announcement. 

1. Definitions under Section 3 of the Code;

# Section 3(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 3(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;

# Section 3(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 1[paid] by the debtor or the corporate debtor, as the case may be;

 

# Section 238A. Limitation. – The provisions of the Limitation Act, 1963 (36 of 1963) shall, as far as may be, apply to the proceedings or appeals before the Adjudicating Authority, the National Company Law Appellate Tribunal, the Debt Recovery Tribunal or the Debt Recovery Appellate Tribunal, as the case may be.

 

What is conspicuous by its absence in this Section (238A) are the expressions “under this Act” or “subject to the provisions of this Act”. Thus Section 238A restricts the application of The Limitation Act to the proceedings or appeals before the Adjudicating Authority, the National Company Law Appellate Tribunal, the Debt Recovery Tribunal or the Debt Recovery Appellate Tribunal only.

 

2. Important SCI judgements on Limitation & debts due and payable.

i). SCI (20.12.1957) in Bombay Dyeing & Mfg. Co. Ltd. v. State of Bombay & Ors. (Civil Appeal No. 167 of 1954) held that;

“ . . . On this, the question arises for consideration whether a debt which is time-barred can be the subject of transfer, and if it can be, how it can benefit the Board to take it over if it cannot be realised by process of law. Now, it is the settled law of this country that the statute of Limitation only bars the remedy but does not extinguish the debt. Section 28 of the Limitation Act provides that when the period limited to a person for instituting a suit for possession of any property has expired, his right to such property is extinguished. And the authorities have held-and rightly, that when the property is incapable of possession, as for example, a debt, the section has no application, and lapse of time does not extinguish the right of a person thereto. Under S. 25(3) of the Contract Act, a barred debt is good consideration for a fresh promise to pay the amount. When a debtor makes a payment without any direction as to how it is to be appropriated, the creditor has the right to appropriate it towards a barred debt. (Vide s. 60 of the Contract Act). It has also been held that a creditor is entitled to recover the debt from the surety, even though a suit on it is barred against the principal debtor. .  . .”

 

ii). Hon’ble SCI (20.04.1992) Punjab National Bank And Ors vs Surendra Prasad Sinha (Criminal Appeal No. 254 of 1992.) held that;

“. . . . The rules of limitation are not meant to destroy the rights of the parties. Section 3 of the Limitation Act 36 of 1963, for short "the Act" only bars the remedy, but does not destroy the right which the remedy relates to. The right to the debt continues to exist notwithstanding the remedy is barred by the limitation. Only exception in which the remedy also becomes barred by limitation is that right itself is destroyed. For example under s.27 of the Act a suit for possession of any property becoming barred by limitation, the right to property itself is destroyed. Except in such cases which are specially provided under the right to which remedy relates in other case the right subsists. Though the right to enforce the debt by judicial process is barred under S.3 read with the relevant Article in the schedule, the right to debt remains. The time barred debt does not cease to exist by reasons of S.3. That right can be exercised in any other manner than by means of a suit. The debt is not extinguished, but the remedy to enforce the liability is destroyed. What S.3 refers is only to the remedy but not to the right of the creditors. Such debt continues to subsists so long as it is not paid. It is not obligatory to file a suit to recover the debt. It is settled law that the creditor would be entitled to adjust, from the payment of a sum by a debtor, towards the time barred debt. It is also equally settled law that the creditor when he is in possession of an adequate security, the debt due could be adjusted from the security in his possession and custody. . . .”

 

iii). SCI (11.10.2018) in B.K. Educational Services Private Limited Vs. Parag Gupta and Associates [Civil Appeal  No.23988 of 2017] observed as under;

# 19. Shri Dholakia also referred to and relied upon Section 60 and 61 of the Contract Act which are set out hereunder:

• “60. Application of payment where debt to be discharged is not indicated.—Where the debtor has omitted to intimate, and there are no other circumstances indicating to which debt the payment is to be applied, the creditor may apply it at his discretion to any lawful debt actually due and payable to him from the debtor, whether its recovery is or is not barred by the law in force for the time being as to the limitation of suits. 

• 61. Application of payment where neither party appropriates.—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 proportionably.”

These Sections also recognize the fact that limitation bars the remedy but not the right. In the context in which Section 60 appears, it is interesting to note that Section 60 uses the phrase “actually due and payable to him….” whether its recovery is or is not barred by the limitation law. The expression “actually” makes it clear that in fact a debt must be due and payable notwithstanding the law of limitation. From this, it is very difficult to infer that in the context of the Contract Act, the expression “due and payable” by itself would connote an amount that may be due even though it is time-barred, for otherwise, it would be unnecessary for Section 60 to contain the word “actually” together with the later words, “whether its recovery is or is not barred by the law in force for the time being as to the limitation of suits”.

# 20. Shri Dholakia went on to cite Bhimsen Gupta v. Bishwanath Prasad Gupta, (2004) 4 SCC 95, and In re Sir Harilal Nemchand Gosalia, AIR 1950 Bom 74 for the proposition that debts “due and payable” must be differentiated from debts “due and recoverable”. . . . . .

Similarly, in Sir Harilal Nemchand Gosalia (supra), the expression used is “amount of debts due and owing from the deceased, payable by law out of the estate” which appeared in the third schedule of the Court Fee Act, 1870. It was held that an executor of a will is entitled to pay time-barred debts and cannot be confused with a creditor who may sue the executor in relation to those debts. The creditor would fail in his action because although the debt subsists, the remedy has been extinguished due to the law of limitation. Since the executor is duty bound to pay the amounts due and owing under the will without going to Court, he is entitled to pay a time-barred debt. This, the Court held, is made clear by Section 323 of the Succession Act, 1925, which made no exception in case of time-barred debts. It is in this context that the Court noted the difference between “payable” and “recoverable”.

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3. In light of the definition of the “claim” & other provisions of the Code read with the observations of the Hon’ble Supreme Court of India in various judgements mentioned supra above, it can be safely deduced that the claims received during CIRP are "Debts Due and Payable", irrespective of limitation.

 

4. NCLAT (31.07.2019) in Sunil Kumar Aggarwal vs. New Okhla Industrial Development Authority & Ors. [Company Appeal (AT) (Insolvency) No. 775 of 2019] held that;

• ‘we find that the ‘Interim Resolution Professional’ is already directed to examine the claim of the NOIDA, who is the Applicant before the Adjudicating Authority and no final decision has been taken and the Adjudicating Authority has made it clear that the claim of the NOIDA cannot be rejected on the ground that it is time barred or the claim is by an entity other than the ‘financial Creditor’

 

Disclaimer: The sole purpose of this article 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 article.

 

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Multiple CIRP Assignments .

Board vide Extraordinary Gazette Notification dated 22.07.2021 amended Insolvency and Bankruptcy Board of India (Insolvency Professionals) Regulations, 2016 (IPR). Now the amended clause 22 of “Code of Conduct for Insolvency Professional” (CCIP) reads as under;

Occupation, employability and restrictions.

# 22. An insolvency professional must refrain from accepting too many assignments, if he is unlikely to be able to devote adequate time to each of his assignments.

“Clarification: An insolvency professional may, at any point of time, not have more than ten assignments as resolution professional in corporate insolvency resolution process, of which not more than three shall have admitted claims exceeding one thousand crore rupees each.

The above clause of CCIP under IPR is violative of the provisions of the Code. Lets look into the provisions of the Code.

 

# Section 17. Management of affairs of corporate debtor by interim resolution professional. -

(1) From the date of appointment of the interim resolution professional, -

(a) the management of the affairs of the corporate debtor shall vest in the interim resolution professional;

(b) the powers of the board of directors or the partners of the corporate debtor, as the case may be, shall stand suspended and be exercised by the interim resolution professional;

(c) the officers and managers of the corporate debtor shall report to the interim resolution professional and provide access to such documents and records of the corporate debtor as may be required by the interim resolution professional;

(d) the financial institutions maintaining accounts of the corporate debtor shall act on the instructions of the interim resolution professional in relation to such accounts and furnish all information relating to the corporate debtor available with them to the interim resolution professional.

(2) The interim resolution professional vested with the management of the corporate debtor, shall -

(a) act and execute in the name and on behalf of the corporate debtor all deeds, receipts, and other documents, if any;

(b) take such actions, in the manner and subject to such restrictions, as may be specified by the Board;

(c) have the authority to access the electronic records of corporate debtor from information utility having financial information of the corporate debtor;

(d) have the authority to access the books of accounts, records and other relevant documents of corporate debtor available with government authorities, statutory auditors, accountants and such other persons as may be specified; and

(e) be responsible for complying with the requirements under any law for the time being in force on behalf of the corporate debtor.

 

Section 17(2)(e) specifically provides that IRP in management of the affairs of the corporate debtor (CD/company under insolvency), shall be responsible for complying with the requirements  under any law for the time being in force. Thus as far as management of the CD is concerned, provisions of the Code or Regulations cannot override the requirements under any law for the time being in force.

 

Now let's look into the relevant provisions of “The Companies Act, 2013.

 

The  Companies Act,2013;

# Section 203. Appointment of key managerial personnel.—

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(3) A whole-time key managerial personnel shall not hold office in more than one company except in its subsidiary company at the same time :

Provided that nothing contained in this sub-section shall dis-entitle a key managerial personnel from being a director of any company with the permission of the Board:

Provided further that whole-time key managerial personnel holding office in more than one company at the same time on the date of commencement of this Act, shall, within a period of six months from such commencement, choose one company, in which he wishes to continue to hold the office of key managerial personnel:

XXXXX

(5) If any company makes any default in complying with the provisions of this section, such company shall be liable to a penalty of five lakh rupees and every director and key managerial personnel of the company who is in default shall be liable to a penalty of fifty thousand rupees and where the default is a continuing one, with a further penalty of one thousand rupees for each day after the first during which such default continues but not exceeding five lakh rupees.

Key managerial personnel has been defined in Section 2(51) of The Companies Act, 2013, as under;

# Section 2(51) - key managerial personnel , in relation to a company, means—

(i) the Chief Executive Officer or the managing director or the manager;

(ii) the company secretary;

(iii) the whole-time director;

(iv) the Chief Financial Officer; 

(v) such other officer, not more than one level below the directors who is in whole-time employment, designated as key managerial personnel by the Board; and

(vi) such other officer as may be prescribed

# Section 2(53) “manager”, means an individual who, subject to the superintendence, control and direction of the Board of Directors, has the management of the whole, or substantially the whole, of the affairs of a company, and includes a director or any other person occupying the position of a manager, by whatever name called, whether under a contract of service or not;

# Section 2(54) “managing director”. means a director who, by virtue of the articles of a company or an agreement with the company or a resolution passed in its general meeting, or by its Board of Directors, is entrusted with substantial powers of management of the affairs of the company and includes a director occupying the position of managing director, by whatever name called.

 

Duties of IRP detailed under section 17(1) falls within the definitions of managing director as per section 2(54) of The Companies Act,2013.

 

Thus, Section 17(2)(e) of the Code read with section 203(3) of “The Companies Act,2013, prohibits handling of multiple CIRP assignments by an Insolvency Professional. 

 

Here it is important to note that besides section 17, no other section of the Code directs for complying with the requirements under any law for the time being in force on behalf of the corporate debtor.

 

Besides above, as the Code does not have specific provisions on this aspect of the number of assignments an Insolvency Professional can handle at any one point of time, the provisions of Section 203 of “The Companies Act, 2013” shall prevail . 

 

Though nothing has been specified in the Code, on this aspect, the Board by incorporating the clause mentioned supra above in the “Code of Conduct for Insolvency Professionals”, has become complicit in violation of the “Law of the Land”. 

 

As per section 240(1) Board can frame regulations which are consistent with the Code.

Insolvency and Bankruptcy Code, 2016.

# Section 240. Power to make regulations. –

(1) The Board may, by notification, make regulations consistent with this Code and the rules made thereunder, to carry out the provisions of this Code.

 

Hon’ble Supreme Court (24.03.2006) in Kerala Samsthana Chethu Thozhilali Union v. State of Kerala [Appeal (civil) 1732 of 2006] held that: 

• "A rule is not only required to be made in conformity with the provisions of the Act where under it is made, but the same must be in conformity with the provisions of any other Act, as a subordinate legislation cannot be violative of any plenary legislation made by the Parliament or the State Legislature.” 

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.

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Confusion prevails on treatment of Margin Money provided by CD for Bank Guarantee.

Following are the excerpts of various judgements of NCLT/NCLAT, on treatment of Margin Money provided by CD for Bank Guarantees, in chronological order, without  any comments, for information and reference of stakeholders during CIRP.

i). NCLAT (20.02.2020)  in Bank of Baroda Vs. Sundaresh Bhatt, Resolution Professional, [Company Appeal(AT)(Insolvency) No. 635 of 2019] held that;

• Considering the submission made by both the sides, looking into the documents and keeping in view the reasons recorded by the Adjudicating Authority, it does appear that money which was lying with the Bank as margin money in the Form of 3 FDs in the name of Corporate Debtor were appropriated after the CIRP was initiated and thus the same could not have been done under Section 14 of IBC. What internal instructions the Bank gave on 01.08.2017 is not relevant. Admittedly, F.D. Accounts were closed on 02.08.2017 when Moratorium was in force. We do not find any error in the Impugned Order passed by the Adjudicating Authority.

• 5.5.7 Accordingly, the instant IA is disposed of with the following directions:

• a) The Respondent Bank is directed to roll back/reverse the wrongfully appropriated amount of Rs. 9.74,62,608/- (Rupees Nine Crore Seventy- Four Lakh Sixty-two Thousand Six Hundred and Eight only) into the TRA account of the Corporate Debtor Company maintained with ICICI Bank.

• b) The Respondent Bank is directed to pay the Applicant accrued interest on the wrongfully appropriated amount of Rs. 9,74,62,608/- (Rupees Nine Crore Seventy-Four Lakh Sixty-two Thousand Six Hundred and Eight only) from the date of wrongful appropriate of the fixed deposit till the actual date of the reversal/roll back into the TRA account of the Corporate Debtor Company maintained with ICICI bank.

 

ii). NCLT (PB) New Delhi (04.08.2020) in Phoenix ARC Pvt. Ltd. Vs. Anush Finleash & Construction Pvt. Ltd. [IA-2057(PB)/2020 in (IB)-1705(PB)/2018] held that; 

• the resolution applicant in its resolution plan, cannot seek to terminate agreements that have created legal rights in favour of third parties without adhering to due process of law by which those agreements could have been terminated in case there was no CIRP in place. Such termination of legally binding agreements would violate law under which such contracts are governed and, would thus be in violation of section 30(2)(e).”

• We must say that as per RBI guidelines and also as per the ratio decided in various judgements, margin money is construed as substratum of a Trust created to pay to the beneficiary to whom Bank Guarantee is given. Once any asset goes into trust by documentation for the benefit of beneficiary, the original owner will not have any right over the said asset unless is it is free from the trust.

• When margin money has character of Trust for the benefit of the beneficiary, as long as the Bank Guarantee Contract is not determined, the margin money will have the character of Trust. When it is not the asset of the Corporate Debtor, the Corporate Debtor, either during the CIRP process or after the CIRP period, will not have any legal right to have a claim on the said asset.

• Since it has been mentioned that Security Interest shall not include the Performance Guarantee, the incidental actions to the performance guarantee cannot be called as falling within the ambit of the Code. On the day the Bank is discharged, the applicant can get back this money from the Bank.

iii). NCLAT (28.09.2020)  in Indian Overseas Bank Vs. Arvind Kumar RP/Liquidator M/s Richa Industries Ltd [Company Appeal (AT)(Insolvency) No. 558 of 2020] held that;

• The ‘margin money’ is the contribution on the part of the borrower who seeks ‘Bank Guarantee’. The said margin money remains with the Bank, as long as the Bank Guarantee is alive. If the Bank Guarantee expires without being invoked, then the margin money reverse back to the borrower, and in case the bank guarantee is invoked by the beneficiary, the margin money goes towards payment of bank guarantee to the beneficiary, and nothing remains with the financial institutions, which can be reversed to the Corporate Debtor.

• In this case, Bank Guarantee was invoked on 27th December 2018 by the beneficiary M/s Tata Steel Processing & Distribution Limited, and the margin money amount was used towards the payment of the Bank Guarantee. Once this margin money was used to honour the bank guarantee, nothing remained with the Bank, and as such, the Respondent Resolution Professional cannot demand that amount.

iv). NCLAT (19.07.2021) in C & C Construction Ltd. Vs. Power Grid Corporation of India Ltd. (Company Appeal (AT) (Insolvency) No. 781 of 2019 & I.A No. 746, 951 & 952 of 2021) held that; 

• It is now amply clear that the bank guarantee issued by the bankers are also the responsibility of the bankers and the fund will go out of the fund of the banks and not directly the fund from the corporate debtor. 

• However, in order to keep the corporate debtor alive during moratorium, keeping in minds the provisions of Section 14 (1) (c) r/w Section 14 (3) (b), if any, such bank guarantee is liquidated, it can be restricted to the full value of the guarantee minus margin money provided by corporate debtor to the banker for taking that bank guarantee and accordingly, banks can release the fund to the extent of full value of the bank guarantee minus margin money provided by the corporate debtor to the banker for the bank guarantee.

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.

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