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.

Unfair treatment of Operational Creditors ( Albeit - MSME's) in IBC

With the latest amendments to the Code (IBC,2016) effective from 16.08.2019, the funds under resolution plan and in liquidation process are to be distributed according to the following priority, as per section 53(1) of the code.

S.No.	Part	Creditors	Priority**
1		Secured Creditor
	(a)	Secured Financial Creditor	2
	(b)	Secured Operational Creditor	2
2		Unsecured Creditor
	(a)	Unsecured financial creditor
		- Banks / FI’s / others	4
		- Related parties.	4
	(b)	Unsecured Operational Creditors
		- Workmen Dues	2
		- Employees Dues	3
		- Govt Dues & taxes etc	5
		- Suppliers of goods & services.(Majorly MSME’s)	6

**Priority of Payment in IBC in brackets

Notably, distinction under section 53 is a two-fold distinction – (i) secured / unsecured, and (ii) operational / financial. As regards secured creditors, it does not matter whether the creditor is financial or operational, since section 53(1)(b) uses the expression “secured,” and there is no indication as to the nature of debt (financial / operational) owed to such secured creditor. However, when it comes to unsecured creditors, unsecured financial creditors appear in the 4th rank; but unsecured operational creditors come in the 6th rank.

Contractually, unsecured financial creditors and unsecured operational creditors stand in the same ranking. The operational creditors have been given priority two ranks below the unsecured financial creditors.

An economy runs not merely on the financial system, but on the system of supply of goods and services. Goods and services are supplied for credit, which is why operational creditors arise. Supply of goods and services on credit becomes a part of the working capital for the entity, which exactly serves the same purpose as served by financial lenders.

Supply of goods and services on credit is a crucial part of the economy. The base of the economy of any country is its real sector; financial sector is important, but not at the cost of the real sector. Suppliers of goods and services, including MSME's, are a part of the real sector.

How will MSME’s continue to supply goods and services on credit to their customers, if they were to be told that if the customer goes into a default, all the money will go first to bankers, and money will be paid to the suppliers only if there is a surplus left ?

The UNCITRAL legislative guide on insolvency law, provides”- 

- that similarly ranked creditors are treated equally.

- that “related persons claim to be subordinated to the claims of the ordinary unsecured claims. 

Related parties claims should  rank inferior to the claims of other unsecured creditors. Under I & B Code, 2016, unsecured financial creditors, even though that creditors happens to be a related party of the corporate debtor, are rank higher to the claims of operational creditors in water fall mechanism, which appears to be discriminatory.     

MSME’s  contribution towards  the industrial production is about 45% & in the services sector it is about.30.5%,  MSME’s are also the biggest employment provider in the country. Subordination of the debt for supply of goods & services to the dues of Related parties, as provided in IBC, is neither logical nor justified. Dues of MSME’s for supply of goods & services must be given priority equal to unsecured financial creditors & unsecured dues of related parties be subordinated to the dues of all outside parties.

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, commercial or otherwise. One 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.

RP's Dilemma - Collate or Verify claims of creditors

One of the  important aspects of an insolvency proceeding is the collection & collation / verification of claims of creditors and formation of the committee of creditors. Let’s look into the provisions of the law and the law laid down by the Hon’ble Supreme Court of India & rulings of NCLT / NCLAT, on this issue. 

The Insolvency and Bankruptcy Code, 2016

# Section 18. Duties of interim resolution professional. -

(b) receive and collate all the claims submitted by creditors to him, pursuant to the public announcement made under sections 13 and 15;

(c)  constitute a committee of creditors;

# Section 21. Committee of creditors. -

(1) The interim resolution professional shall after collation of all claims received against the corporate debtor and determination of the financial position of the corporate debtor, constitute a committee of creditors.

Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016.

# Regulation 10. Substantiation of claims.

The interim resolution professional or the resolution professional, as the case may be, may call for such other evidence or clarification as he deems fit from a creditor for substantiating the whole or part of its claim.

# Regulation 13. Verification of claims.

(1) The interim resolution professional or the resolution professional, as the case may be, shall verify every claim, as on the insolvency commencement date, within seven days from the last date of the receipt of the claims, and thereupon maintain a list of creditors containing names of creditors along with the amount claimed by them, the amount of their claims admitted and the security interest, if any, in respect of such claims, and update it.

On collation / verification of claims during CIRP, the provisions of Code & Regulations are in variance.

Hon’ble Supreme Court of India (25.01.2019) in Swiss Ribbons Pvt. Ltd. & Anr. V/s Union of India & Ors. [Writ Petition (CIVIL) NO. 99 OF 2018] held that:-

• # 58 ...It is clear from a reading of the Code as well as the Regulations that the resolution professional has no adjudicatory powers.
• # 59…..It is clear from a reading of these Regulations that the resolution professional is given administrative as opposed to quasi-judicial powers.
• # 60.....As opposed to this, the liquidator, in liquidation proceedings under the Code, has to consolidate and verify the claims, and either admit or reject such claims under Sections 38 to 40 of the Code. Sections 41 and 42, by way of contrast between the powers of the liquidator and that of the resolution professional, are set out herein below: Section 41 and 42 It is clear from these Sections that when the liquidator - “determines” the value of claims admitted under Section 40, such determination is a - decision”, which is quasi-judicial in nature, and which can be appealed against to the Adjudicating Authority under Section 42 of the Code.

Thus the ruling of the Hon’ble SCI, made it clear that during CIRP, the IRP / RP does not have the powers to determine / verify  the amount of claims of the creditors, he (IRP / RP) can only receive & collate the claims of the creditors (duly substantiated). IRP / RP does not have any powers to either admit or reject or partially admit / reject the claims of the creditors.

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

• # 65. The Adjudicating Authority has noticed that the ‘Resolution Professional’ has no jurisdiction to decide and / or reject the claim, it is only required to collate the claim.

Recently, NCLT (PB) New Delhi (08.08.2019) in  S. A. Consultants & Forwarders Private Ltd. V/s Cargo Planners Limited [ CP No. IB-867(PB) 2019 ] while admitting the application U/s 9 of the Code directed the IRP as under:-

• # 14 There is a general complaint received against the financial creditors, banks, NBFC’s and Asset Reconstruction Companies that the amount claimed by them is far more than what is owed by the corporate debtor to them. Many a times the rate of interest is alleged to be exorbitant and allegations are levelled that a penal interest compounded monthly has been charged. We have no mechanism of rectification of claims made. However, the RP, ordinarily have professionals & experts at their disposal and in case the ex- management raises any such issue then the RP must get it settled in order to avoid any injustice to the corporate debtor.

Thus in the above case, the IRP / RP will have to collate the claims as per the supporting documents, as per the provisions of the Code and law laid down by the Hon’ble SCI, and to comply with the directions of the AA, he will have to move the application for avoidance of transactions, for exorbitant rate of interest & penal interest U/s 25(2) read with section 50. IRP / RP, does not have any powers to either rectify or reject the claim.

Now comes the amendments to the Code, notified on  16.08.2019. Amended section 30(4) of the Code reads as under:-

# Section 30(4) The committee of creditors may approve a resolution plan by a vote of not less than sixty-six  per cent. of voting share of the financial creditors, after considering its feasibility and viability, the manner of distribution proposed, which may take into account the order of priority amongst creditors as laid down in sub-section (1) of section 53, including the priority and value of the security interest of a secured creditor, and such other requirements as may be specified by the Board:

The above amendments has two dimensions

• distribution proposed, which may take into account the order of priority amongst creditors as laid down in sub-section (1) of section 53. 

• including the priority and value of the security interest of a secured creditor.

The  amended provisions of the Code now mandates that the resolution plan approved by the CoC provides for the distribution of funds as per Section 53(1) of the Code. Prerequisite to the distribution of funds of resolution plan as per Section 53(1) is the preparation of the list of creditors accordingly. In my view the said amendments, indirectly thrust upon RP, the duty to follow the provisions of Section 38 to 42 of the Code in preparing the list of creditors.

An unsecured financial creditor has 4th priority in distribution of funds u/s 53(1) and as such. Inclusion of a portion of unsecured financial credit in 2nd priority will affect the rights of employees who have 3rd priority under the waterfall. Amendments under section 30 of the code has implications to identify and determine the secured and unsecured portion, and as such the function of IRP /RP has widened from simply collecting and collating the claims of creditors in CIRP.

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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