NCLAT: Security for refund of advance amount cannot change the nature of transaction for supply of goods into financial debt

The National Company Law Appellate Tribunal, Principal Bench, New Delhi (“NCLAT”), in its judgement dated January 11, 2024, in the matter of Sainik Industries Private Limited v. Ritesh Raghunath Mahajan, Resolution Professional, Indian Sugar Manufacturing Company Limited [Company Appeal (AT) (Insolvency) No. 1614 of 2023], has held that the security of refund of the advance amount cannot change the nature of the transaction into a financial debt.

Facts

Indian Sugar Manufacturing Company Limited (“Corporate Debtor”) was engaged in the business of manufacturing and sale of sugar. Sainik Industries Private Limited (“Appellant”) and the Corporate Debtor entered into an agreement dated July 28, 2016, towards the supply of 5200 M.T. of white crystal sugar to the Appellant (“Supply Agreement”). Pursuant to the Supply Agreement, the Appellant advanced an amount of INR 10 Crores to the Corporate Debtor. As per the Supply Agreement, a penalty was to be imposed in the event Corporate Debtor failed to deliver the entire/part quantity of sugar, and contemplated giving security cheques towards refund of the advance amount paid by the Appellant.

Upon the Corporate Debtor’s failure to meet its obligations under the Supply Agreement, the Appellant issued a legal notice dated January 31, 2017, calling upon the Corporate Debtor to pay applicable interest and damages. The Corporate Debtor having failed to deliver sugar as well as making payment of applicable interest prompted the Appellant to deposit the security cheques towards refund of the advance amount. However, the security cheques were dishonoured, and consequently, the Appellant initiated proceedings under Section 138 (Dishonour of cheque for insufficiency, etc., of funds in the account) of the Negotiable Instruments Act, 1881, against the Corporate Debtor.

The Appellant also filed a petition seeking initiation of corporate insolvency resolution process (“CIRP”) against the Corporate Debtor under Section 9 (Application for initiation of corporate insolvency resolution process by operational creditor) of the Insolvency and Bankruptcy Code, 2016 (“IBC”). Further, the Appellant also filed a commercial suit seeking grant of money decree of an admitted amount of INR 19,55,30,723/-, after which a summary judgement was awarded on January 12, 2023 for an amount of INR 3,75,35,765/-.

CIRP was initiated against the Corporate Debtor by virtue of an application filed by Saisidha Sugar Equipments and Engineering Company Private Limited under Section 7 (Initiation of corporate insolvency resolution process by financial creditor) of IBC, by way of an order dated March 23, 2023 (“CIRP Order”), passed by the National Company Law Tribunal, Mumbai Bench (“NCLT”). On June 1, 2023, the Appellant submitted its claim to the interim resolution professional, classifying its debt of INR 34,65,36,490/- as a financial debt. Mr. Ritesh Raghunath Mahajan (“Respondent”), the resolution professional of the Corporate Debtor, rejected the claim of the Appellant and categorised the claim as an operational debt, vide his e-mail dated June 5, 2023.

Aggrieved by the same, the Appellant filed an interlocutory application before the NCLT to direct the Respondent to accept the Appellant’s claim as a financial debt. However the same was rejected by the NCLT, vide its order dated October 17, 2023 (“Impugned Order”). Further, the Appellant’s petition filed under Section 9 of IBC was also dismissed by the NCLT as infructuous since CIRP against the Corporate Debtor had already commenced by the CIRP Order.

Owing to the above, the Appellant filed an appeal before the NCLAT challenging the Impugned Order.

Issue

Whether security of refund of advance amount can change the nature of the transaction from an operational debt into a financial debt.

Arguments

Contentions of the Appellant:

The Appellant submitted that the NCLT had committed an error in appreciating the real nature of the transaction between the Appellant and the Corporate Debtor and had erroneously held that the claim of the Appellant was an operational debt, while the terms and conditions of the Supply Agreement made it clear that the claim was in fact a financial debt.

The Appellant contended that the judgement of the Hon’ble Supreme Court (“SC”) in the case of Consolidated Construction Consortium Limited v. Hitro Energy Solutions Private Limited [(2022) 7 SCC 164] (“Consolidated Consortium Case”), relied upon by the NCLT, was not applicable to the facts of the present case, since the Consolidated Consortium Case only related to advance money given by the creditor as an operational debt. Further, the specific terms and conditions as laid down in the Supply Agreement were absent in the Consolidated Consortium Case.

In order to support its arguments, the Appellant relied on the judgement of the SC in the case of Pioneer Urban Land and Infrastructure Limited and Another v. Union of India and Others [(2019) 8 SCC 416] (“Pioneer Urban Case”), wherein the SC had laid down the test for establishing a financial debt, which in the Appellant’s view, was applicable to the facts of the present case.

Contentions of the Respondent:

The Respondent contended that the transaction between the Appellant and the Corporate Debtor was a transaction for the supply of sugar and the debt arising out of such a transaction was clearly an operational debt within the definition of ‘operational debt’ under Section 5(21) (Definition of ‘operational debt’) of IBC.

The Respondent submitted that the Appellant itself had filed a petition under Section 9 of IBC claiming its operational debt, which was thereafter dismissed by the NCLT as infructuous. Hence, the Appellant could not be allowed to change its stand and contend that the debt arising from the transaction was a financial debt, since the terms and conditions of the Supply Agreement clearly indicated that the nature of the transaction was that of the supply of goods and services. Besides, the provision in the Supply Agreement to give security was not uncommon even in cases of supply of goods and services. Merely because security was given to the Appellant by the Corporate Debtor, it could not lead to a conclusion that the transaction amounted to a financial debt.

Observations of the NCLAT

The NCLAT examined the definition of ‘operational debt’ under Section 5(21) of IBC and observed that any claim in respect of the provision of goods or services would fall within the said definition. The NCLAT observed that the Supply Agreement clearly indicated that the Appellant and the Corporate Debtor had entered into an agreement for the sale and delivery of 5200 M.T. of white crystal sugar. The NCLAT further observed that in the Consolidated Consortium Case, the SC had considered the provisions of Section 5(21) of IBC and held that the expression ‘in respect of’ in Section 5(21) of IBC ought to be interpreted in a broad and purposive manner in order to include all those who provided or received operational services from a corporate debtor, ultimately leading to operational debts.

In NCLAT’s view, the Consolidated Consortium Case was squarely applicable to the facts of the instant case, since in that case an advance was given for carrying out the supply of goods, the project was subsequently cancelled and a claim for return of advance was laid in the said context. A similar question as to whether an advance payment was an operational debt or not arose in the said case and the SC had ruled that the advance constituted an operational debt.

The NCLAT analysed the clauses set out in the Supply Agreement and observed that the provision providing for penalty in case of failure or refusal to deliver the sugar was not uncommon in an agreement of supply and that the existence of such a clause would not mean that the Appellant’s claim would constitute a ‘financial debt’. Moreover, the clauses of the Supply Agreement relied upon by the Appellant in no manner reflected that the transaction between the Appellant and the Corporate Debtor was a financial transaction, and that the debt due was in the nature of a financial debt.

The NCLAT observed that the Appellant while filing an application under Section 9 of IBC claiming its operational debt indicated that the Appellant considered itself as an operational creditor. Thus, the conduct of the Appellant fully supported the stand taken by the Respondent that the Appellant’s claim was an operational debt.

Decision of the NCLAT

The NCLAT found that no error had been committed by the NCLT in rejecting the interlocutory application filed by the Appellant, and that the Appellant’s claim had rightly been held as an operational debt. Hence, the NCLAT dismissed the appeal filed by the Appellant.

VA View:

The NCLAT has rightly observed that none of the clauses in the Supply Agreement reflected that the deal between the parties was a financial transaction and that the debt due to the Appellant was a financial debt. Besides, the Appellant filing an application under Section 9 of IBC, claiming its operational debt, indicated that the Appellant considered itself as an operational creditor and not a financial creditor.

Through this judgement, the NCLAT has emphasized that the debt arising out of a transaction for the supply of goods and services is an operational debt within the definition of ‘operational debt’ under Section 5(21) of IBC. The provision in an agreement providing for penalty in case of failure or refusal to deliver goods is not uncommon in an agreement of supply and that the existence of such a clause had no bearing on the nature of the transaction.

For any query, please write to Mr. Bomi Daruwala at [email protected]

NCLT: Corporate insolvency resolution process cannot be initiated under Section 7 of IBC based on transfer agreement for purchase of debentures from financial creditors

The National Company Law Tribunal, Mumbai (“NCLT”), vide its judgment dated January 29, 2024, in the matter of Edelweiss Asset Reconstruction Company Limited v. Ajmera Realty and Infra India Limited [CP (IB) No. 877/MB/2023], has held that if the element of disbursal against the consideration for time value of money is absent, such transaction, cannot amount to financial debt under Section 5(8) (Definition of ‘financial debt’) of the Insolvency and Bankruptcy Code, 2016 (“IBC”).

Facts

On December 27, 2006, Meeti Developers Private Limited (“MDPL”) had executed a Development Agreement (“Development Agreement”) with New Kamal Kunj Cooperative Housing Society (“Society”) for redevelopment of the Society’s building. For the aforesaid purpose, MDPL had issued Non-Convertible Debentures (“NCDs”) to the tune of INR 55 Crores to the predecessor of Edelweiss Asset Reconstruction Company Limited (“Petitioner”) under a Debenture Trust Deed dated November 29, 2016 (“Debenture Trust Deed”). Subsequently, by virtue of a deed of assignment executed on May 21, 2019, the NCDs were assigned in favour of the Petitioner.

Thereafter, upon default in repayment of the NCDs, the Petitioner filed a company petition against MDPL under Section 7 (Initiation of corporate insolvency resolution process by financial creditor) of IBC (“Company Petition”). Subsequent to admission of MDPL in corporate insolvency resolution process (“CIRP”), Ajmera Realty and Infra India Limited (“Respondent”) along with MDPL had approached the Petitioner to enter into an arrangement whereby the Respondent would purchase the NCDs from the Petitioner for a sum of INR 31,66,00,000/-. In view of the afore-mentioned, the Petitioner and the Respondent executed a Transfer Agreement dated July 8, 2022 (“Transfer Agreement”) and Financial Undertaking dated July 8, 2022 (“Financial Undertaking”). The afore-mentioned agreements recorded the terms and conditions for purchase of NCDs by the Respondent and expressly stipulated that the liability of the Respondent to pay the sum of INR 31,66,00,000/- shall be absolute, unconditional and irrevocable. Further, it was stipulated that out of the sum of INR 31,66,00,000/-, the Respondent shall make an upfront payment of INR 3,26,00,000/- (“Upfront Amount”) and the balance sum of INR 28,40,00,000/- (“Balance Amount”) was to be paid by December 31, 2022. In case of any default in making payment in the aforesaid manner, the Respondent was liable to imposition of interest at the rate of 24% per annum. It was also agreed that the NCDs would not be transferred to the Respondent until the Respondent complies with the payment obligations under the Transfer Agreement and Financial Undertaking. Furthermore, it was agreed that upon payment of the Upfront Amount, the Petitioner shall withdraw the Company Petition.

Clause 3 of the Transfer Agreement provided for “Undertaking for Financial Obligation”. Pertinently, the aforesaid clause stipulated that the Respondent agrees, undertakes, confirms and declares that it shall furnish an irrevocable and unconditional undertaking, that is, the Financial Undertaking in favour of the Petitioner and guarantees to make payment of the Balance Amount. It was further stipulated that the Petitioner shall be considered as financial creditor qua the Respondent subject to the terms and conditions as set out in the Transfer Agreement.

Accordingly, the Petitioner withdrew the Company Petition. However, despite the aforesaid withdrawal, the Respondent did not make timely payment of the Balance Amount and continued to seek extension of time for payment of the same. However, despite the Petitioner granting additional time upon acknowledgement of liability by the Respondent, the Respondent sought another extension and kept on repeatedly seeking additional time to make the balance payment. On account of the aforesaid default committed by the Respondent, the Petitioner filed the present Company Petition before NCLT. Further, the Petitioner, having a separate remedy against MDPL, filed another company petition being CP No. 624 of 2023.

Issue

Whether CIRP can be initiated under Section 7 of IBC on the basis of transfer agreement for purchase of debentures if the element of disbursal against the consideration for time value of money is absent, thereby, the debt not amounting to financial debt under Section 5(8) of IBC.

Arguments

Contentions of the Petitioner:

Petitioner submitted that the Respondent had issued a public notice dated January 14, 2023 to investigate right, title and interest of MDPL in the subject property for redevelopment. The Society had issued a reply to the aforesaid notice and alleged that MDPL had committed default of its obligations under the Development Agreement. Further, the Society had issued a notice dated February 24, 2023, thereby terminating the Development Agreement with MDPL on account of several defaults committed by MDPL. Further, the Respondent had addressed a letter dated March 14, 2023, thereby informing the Petitioner about the termination of the Development Agreement. Further, the Society and MDPL had filed cross-petition against each other under Section 9 (Interim measures, etc., by Court) of the Arbitration and Conciliation Act, 1996 before the High Court of Bombay. In the aforesaid proceeding, the Hon’ble High Court of Bombay passed an order dated September 12, 2023, thereby granting reliefs in favor of the Society and against MDPL. Further, by way of letter dated October 25, 2023 the Respondent terminated the Transfer Agreement and Financial Undertaking.

Petitioners submitted that under the Transfer Agreement and Financial Undertaking, the Respondent had inter alia given an indemnity/guarantee under the Debenture Trust Deed. Pertinently, under the afore-mentioned agreements, the Respondent had undertaken that it guarantees that it shall, upon demand, forthwith pay to the Petitioner without demur the Balance Amount, together with interest at the rate of 24% per annum (compounded annually) and further that the Petitioner shall be considered as a financial creditor of the Respondent until the aforesaid financial obligation is fully discharged to the satisfaction of the Petitioner. Further, the Respondent had also given an indemnity to the Petitioner in terms of the afore-mentioned agreements.

The Petitioner also submitted that the Transfer Agreement and Financial Undertaking are commercial contracts as mutually and bilaterally entered into between the Petitioner and Respondent. The terms of the aforesaid agreements are clear and unambiguous and the same needs to be construed strictly without altering the nature of the contract. In this regard, the Petitioner relied upon the judgment pronounced by the Hon’ble Supreme Court in the matter of Ramana Dayaram Shetty v. International Airport Authority of India and Others [(1979) SCC (3) 489], which reiterates the legal position that as a matter of judicial interpretation, courts should interpret the language of a document on the understanding that parties intended to be bound by the interpretation of the language in its literal sense.

Further, the transaction between the Petitioner and Respondent arose pursuant to the issuance of NCDs as per the transaction between the Petitioner and MDPL. Considering the fact that the transaction between the Petitioner and MDPL falls within the scope of financial debt, an indemnity/guarantee given by the Respondent for such financial debt would also be classified as a financial debt. The Petitioner submitted that the clauses of Transfer Agreement and Financial Undertaking also specify that the liability owed by the Respondent qua the Petitioner is in the nature of financial debt.

On account of the afore-mentioned, it was contended that the transaction between the Petitioner and Respondent fulfils the test of “commercial effect of borrowing” under Section 5(8)(f) of IBC.

Contentions of the Respondent:

The Respondent contended that there has been no borrowing whatsoever by the Respondent from the Petitioner. The Respondent further submitted that there has been no disbursal of any amount by the Petitioner to the Respondent till date against consideration for time value of money. Further, it was contended that reliance on the clauses of Transfer Agreement and/or Financial Undertaking would not constitute a financial debt under Section 5(8) of IBC.

Respondent further submitted that the entire premise of the arrangement as agreed by the Respondent was that MDPL continues to have valid and subsisting development rights over the subject property in question, which in turn, would ensure that the NCDs are duly secured and assigned by the Petitioner in favour of the Respondent. However, by virtue of termination of Development Agreement on account of defaults by MDPL, the entire premise of the transaction between the Petitioner and the Respondent as contemplated under the Transfer Agreement and Financial Undertaking stood extinguished.

It was contended that the Financial Undertaking also records that the Petitioner is obligated to transfer the NCDs in favour of the Respondent along with all rights, title, interest, claims. causes of action available with the Petitioner under the debenture documents. However, the Respondent had neither taken over the liabilities of MDPL nor guaranteed the obligations of MDPL under the debenture documents. In fact, contrary thereto, Petitioner had agreed to transfer the NCDs to the Respondent along with its security interest and actionable claims against MDPL and that Petitioner had represented to the Respondent that the Petitioner has considerable value on account of the underlying security on the subject property in question, from the perspective of a valuable consideration. However, no security for payment of the aforesaid amount of balance purchase price under the Transfer Agreement has been created by the Respondent in favour of the Petitioner either under the Transfer Agreement or under the Financial Undertaking. Further, on account of the termination of the Development Agreement by the Society, MDPL neither has development rights over the subject property in question nor possession or control over the same. Therefore, the security interest created in favour of the Petitioner stands completely deteriorated and the NCDs have been rendered without any value. On account of the aforesaid reason, it was contended that the Transfer Agreement has become incapable of performance and thus stands terminated, cancelled, null and void.

Observations of the NCLT

NCLT examined the Transfer Agreement and Financial Undertaking and analyzed the nature of transaction in the present case so as to determine whether the same amounts to financial debt in terms of Section 5(8) of IBC. Basis analysis of the afore-mentioned agreements, NCLT arrived at the inference that the relation between the Petitioner and Respondent in the present transaction was that of a transferor and transferee.

In so far as the contention raised by the Petitioner that the Respondent had provided guarantee as well as indemnity to the Petitioner under the aforesaid agreements is concerned, NCLT observed that the relevant clauses of the aforesaid agreements merely provide that the Respondent was liable to pay the balance purchase price towards debentures and by merely stipulating in an agreement that the Petitioner is a financial creditor qua the Respondent shall not give the status of financial creditor to the Petitioner, unless the requirements of financial debt under Section 5(8) of the IBC are fulfilled. It was also observed that the present transaction lacks the basic criteria of disbursal against the consideration for time value of money. In this regard, NCLT relied upon the landmark judgment pronounced by the Supreme Court in the matter of Anuj Jain v. Axis Bank Limited [Civil Appeal Nos. 8512-8527 of 2019] whereby it has been observed that for a debt to qualify as a financial debt under Section 5(8) of IBC, the basic criteria to be met are that there must be a disbursal of amount against the consideration for time value of money and that the scope of interpretation of financial debt as set out under Section 5(8) of IBC cannot be stretched beyond what is provided therein. Therefore, the aforesaid criteria set out under Section 5(8) of IBC is the genesis for any debt to fall under the purview of financial debt.

Decision of the NCLT

In light of the above-mentioned observations, it was held that in the present case, the transaction was for purchase of debentures for consideration and the element of disbursal against the consideration for time value of money is absent. Therefore, NCLT held that CIRP cannot be initiated under Section 7 of IBC based on Transfer Agreement for purchase of debentures from financial creditors, when the essential criteria of disbursal against the consideration for time value of money is not getting fulfilled.

Therefore, NCLT was pleased to dismiss the present company petition.

VA View:

Since the enactment of IBC, there have been multiple occasions whereby lenders have approached the Adjudicating Authority without understanding and appreciating that all kinds of debt do not fall within the criteria of financial debt under Section 5(8) of IBC, thereby leading to wastage of precious time of the Adjudicating Authority as well as of the litigants.

This judicial pronouncement is a welcome step that will set the right precedent for parties in refraining from filing cases seeking initiation of CIRP against the debtor, without ascertaining as to whether or not the nature of debt fulfils the essential criteria of disbursal against the consideration for time value of money.

In the present case, it has been clearly held that CIRP cannot be initiated under Section 7 of IBC on the basis of transfer agreement for purchase of debentures if the element of disbursal against the consideration for time value of money is absent, thereby, the debt not amounting to financial debt under Section 5(8) of IBC.

For any query, please write to Mr. Bomi Daruwala at [email protected]

NCLAT: Liquidator is not entitled to charge any fee from a scheme proponent submitting a scheme under Section 230 of the Companies Act

The National Company Law Appellate Tribunal, Principal Bench, New Delhi (“NCLAT”), in its judgement dated December 8, 2023, in the matter of CA Jai Narayan Gupta v. Radhasiriya Properties Private Limited [Company Appeal (AT) (Insolvency) No. 1473 of 2023], has held that a liquidator is not entitled to charge any fee from a scheme proponent who has submitted a scheme under Section 230 (Power to compromise or make arrangements with creditors and members) of the Companies Act, 2013 (“Companies Act”) read with Regulation 2B (Compromise or arrangement) of the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 (“Liquidation Regulations”).

Facts

On January 24, 2022, the liquidation process of M/s. Barcle Enterprises Limited (“Corporate Debtor”) was initiated and CA Jai Narayan Gupta (“Appellant”) was appointed as the liquidator in terms of Section 33(2) (Initiation of liquidation) of the Insolvency and Bankruptcy Code, 2016 (“IBC”). Pursuant to this, Radhasiriya Properties Private Limited (“Respondent”) sent an intimation to the Appellant expressing its interest to submit a scheme of compromise and arrangement. On March 15, 2022, the Respondent submitted the scheme to the Appellant, and the scheme was accepted by the Appellant on May 12, 2022. An interlocutory application was filed by the Appellant before the National Company Law Tribunal, Kolkata (“NCLT”) seeking directions from NCLT for conducting a meeting of the creditors of the Corporate Debtor in terms of Section 230 of the Companies Act read with Regulation 2B of the Liquidation Regulations.

Thereafter, the Appellant sent several reminders to the Respondent demanding payment towards the cost and fee incurred by the Appellant, and for depositing the estimated amount under the scheme. Upon various requests, the Respondent paid the Appellant an amount equal to INR 23,88,280/- for the time period between April 20, 2022 to February 28, 2023.

On February 17, 2023, the Appellant convened a meeting of the creditors of the Corporate Debtor, wherein the Respondent’s scheme was rejected. Consequently, the Respondent filed an application before NCLT to direct the Appellant to refund the amount of INR 23,88,280/- paid by the Respondent towards the Appellant’s fee and liquidation costs (“Application”). The Appellant in his reply to the Application, attempted to justify the payments received by him from the Respondent, and pleaded that he was entitled to receive his fees amounting to INR 23,88,280/- for the period of compromise and arrangement in terms of the Liquidation Regulations.

The NCLT, vide its order dated October 3, 2023 (“Impugned Order”), held that the Appellant was not entitled to receive any fee from the Respondent given that the creditors of the Corporate Debtor had rejected the Respondent’s scheme. NCLT therefore directed the Appellant to refund the entire amount of INR 23,88,280/- to the Respondent.

Owing to the above, the Appellant filed the present appeal to NCLAT challenging the Impugned Order by relying on the provisions of Regulation 4(2)(a) (Liquidator’s fee) read with the proviso to Regulation 2B(3) of the Liquidation Regulations.

Issues

• Whether the Appellant’s claim to retain the amount received from the Respondent towards the Appellant’s fee and liquidation costs was justified.
• Whether the NCLT had committed any error in directing the Appellant to refund the said amount to the Respondent.

Arguments

Contentions of the Appellant:

The Appellant submitted that the liquidation fees had been charged by him in accordance with Regulation 4(2)(a) read with the proviso to Regulation 2B(3) of the Liquidation Regulations. The Appellant contended that Regulation 2B of the Liquidation Regulations had been enacted to encourage only serious proposals of compromise or arrangements, and where such compromise or arrangement was not sanctioned by the adjudicating authority, the scheme proponent of such compromise or arrangement (the Respondent in this case) ought to have been burdened with the cost.

The Appellant further contended that if such liquidation fee and costs were not imposed on the Respondent, several non-serious parties or parties with vested interest and mala fide motives would propose schemes for compromise and arrangement, thereby halting the liquidation process without any pecuniary consequences on them.

The Appellant submitted that he was not required to work free of cost during the period of consideration of the scheme of compromise and arrangement, and it was the Respondent who was liable to bear the liquidation fee. Therefore, NCLT was utterly unjustified in depriving the Appellant of his legitimate fee and passing the Impugned Order against the provisions of IBC and the Liquidation Regulations.

Contentions of the Respondent:

The Respondent contended that the amount of INR 23,88,280/- was paid by it upon being pressurised to do so at the insistence of the Appellant. Moreover, even upon the scheme being rejected by the creditors of the Corporate Debtor in their meeting held on February 17, 2023, the Appellant accepted such amount from the Respondent.

The Respondent submitted that as per Regulation 2B(3) of the Liquidation Regulations, the costs in relation to the compromise and arrangement is to be borne by the parties who propose such compromise and arrangement. The term ‘cost’ only indicates costs incurred by the liquidator in respect of such compromise and arrangement, and no other cost as sought to be asserted by the Appellant could have been paid. Further, in cases where the scheme of arrangement submitted by the scheme proponent is rejected, then the scheme proponent would be liable to contribute towards the expenses in relation to such compromise or arrangement. The Respondent contended that the Appellant would be entitled to his fee as per the provisions of Section 34(9) (Appointment of liquidator and fee to be paid) of IBC, for conducting the liquidation proceedings, out of the proceeds of the liquidation estate. The Respondent submitted that the Appellant had incorrectly and inaptly interpreted Regulation 2B of the Liquidation Regulations, and had wrongfully withheld the amount remitted by the Respondent. Hence, the appeal filed by the Appellant was liable to be dismissed by the NCLAT.

Observations of the NCLAT

The NCLAT observed various provisions of IBC and the Liquidation Regulations governing the payment of fees and costs of liquidation. From a reading of Sections 34(8) and 34(9) of IBC, it was clear that the liquidator’s fee for conducting the liquidation proceedings ought to be paid from the proceeds of the liquidation of estate assets. Further, the proviso to Regulation 2(1)(ea) (Definitions) of the Liquidation Regulations, which defines the term ‘liquidation cost’, clearly provides that any cost incurred by a liquidator in relation to compromise or arrangement under Section 230 of the Companies Act does not form part of the liquidation cost.

The NCLAT further observed that Regulation 2B(3) of the Liquidation Regulations provides that any costs incurred by a liquidator in relation to compromise or arrangement is to be borne by the corporate debtor, where such compromise or arrangement is sanctioned by the adjudicating authority under Section 230(6) of the Companies Act, and in cases where such compromise or arrangement is not sanctioned by the adjudicating authority under Section 230(6) of the Companies Act, such costs are to be borne by the parties who proposed the compromise or arrangement. Thus, the statutory provision is clear that the Appellant could have claimed for costs only from the parties who proposed the compromise or arrangement. The NCLAT observed that while Regulation 2B of the Liquidation Regulations deals with the costs incurred by a liquidator in relation to a compromise and arrangement, Regulation 4 of the Liquidation Regulations deals with the liquidator’s fee. The rule making authority is fully aware of the difference between the terms cost and fee. Moreover, Regulation 2B of the Liquidation Regulations does not indicate that liquidator’s fee can be charged from a scheme proponent.

The NCLAT observed that the Appellant was entitled to claim fee as per the statutory provisions of Sections 34(8) and 34(9) of IBC read with Regulation 4 of the Liquidation Regulations. No fee could have been charged from the Respondent, who has submitted the scheme under Section 230 of the Companies Act read with Regulation 2B of the Liquidation Regulations.

With respect to the Appellant’s contention that if the fee was not imposed on the Respondent, the same would lead to the submission of compromise and arrangement proposals by non-serious scheme proponents intended to halt the liquidation process, the NCLAT observed that Regulation 2B of the Liquidation Regulations mandates that the consideration of the scheme of compromise or arrangement must be completed within 90 days from the order of liquidation. Since the statutory provision itself provides a period for completion of the compromise or arrangement, a delay could not be caused by misuse of the provisions. Hence, the submission of the Appellant that the Respondent ought to be saddled with the liquidation fee was contrary to the statutory scheme of the Liquidation Regulations.

In NCLAT’s view, the Appellant was not entitled to claim any liquidation fee from the Respondent for the period during which the compromise and arrangement scheme was under consideration, and was only entitled to receive, at the highest, the expenses that the Appellant had incurred towards the compromise and arrangement. The NCLAT observed that the NCLT had rightly directed the Appellant to refund the amount which was wrongfully claimed from the Respondent.

Decision of the NCLAT

In view of the above, the NCLAT modified the refund amount payable to the Respondent and ordered the Appellant to refund an amount of INR 22,77,108 /- in favour of the Respondent, after deducting the expenses incurred by the Appellant towards the compromise and arrangement. The NCLAT found no other reason to interfere with the Impugned Order and dismissed the appeal filed by the Appellant.

VA View:

In this judgement, the NCLAT has rightly observed that while Regulation 2B of the Liquidation Regulations specifies that if the compromise or arrangement is not sanctioned by the adjudicating authority, the costs in relation to compromise or arrangement has to be borne by the parties who proposed the compromise or arrangement, it does not make reference to any fee that can be charged by the liquidator from the scheme proponent.

The NCLAT, has emphasized on the distinction between the cost incurred under: (i) Regulation 2B of the Liquidation Regulations; and (ii) the fee of the liquidator payable under Sections 34(8) and 34(9) of IBC and Regulation 4 of the Liquidation Regulations payable out of the proceeds of the liquidation estate. Hence, the NCLAT has rightly held that Appellant was not entitled to claim any fee from the Respondent for the period during which the scheme of compromise and arrangement was under consideration.

For any query, please write to Mr. Bomi Daruwala at [email protected]