NCLAT: A writing to be an acknowledgement of liability must involve an admission of subsisting jural relationship between the parties and a conscious affirmation of an intention of continuing such relationship in regard to an existing liability

The National Company Law Appellate Tribunal (“NCLAT”) in the case of Mr. R.R. Gopaljee v. Indian Overseas Bank and Others (decided on June 24, 2020) upheld the order dated July 05, 2019 passed by the NCLT, special bench, Chennai (“Adjudicating Authority”) under Section 7 (initiation of corporate insolvency resolution process by financial creditor) of the Insolvency and Bankruptcy Code (“IBC”) and held that a writing to be an acknowledgement of liability must involve an admission of subsisting jural relationship between the parties and a conscious affirmation of an intention of continuing such relationship in regard to an existing liability and that the said admission need not be in regard to any precise amount nor by expressed words.

Facts
Indian Overseas Bank (“Financial Creditor”) granted financial assistance to Malar Energy and Infrastructure Private Limited (“Corporate Debtor”) on various dates between June 13, 2011 and May 29, 2015. Post disbursement of the loan, the Corporate Debtor defaulted in repayment and thus, its account was declared as a Non-Performing Asset (“NPA”) by the Financial Creditor.

The Financial Creditor thereafter, sent a legal notice dated March 15, 2017 demanding the repayment of INR 21,86,26,661 along with interest and the Corporate Debtor in its reply dated March 27, 2017 acknowledged the debt and stated that it is in process of settling the dues of the Financial Creditor. The Corporate Debtor, on April 13, 2017 sent a One-time Settlement (“OTS”) proposal to the Financial Creditor and the said OTS proposal was accepted by the Financial Creditor on certain terms and conditions by its letter dated July 3, 2017. However, the letter dated April 13, 2017 is not on record.

The said OTS period was also extended by the Financial Creditor by its letter dated August 28, 2017 at the request of the Corporate Debtor. However, the Corporate Debtor failed in repayment of the amount as per the OTS proposal and hence, the Financial Creditor by its letter dated November 22, 2017 cancelled the said OTS proposal and initiated recovery proceedings under Section 19 of the Recovery of Debts and Bankruptcy Act, 1993 and also under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (“SARFAESI Act”) but the proceedings did not reach to a logical end. Therefore, the Financial Creditor filed an application under Section 7 of the IBC on March 15, 2019.

The Adjudicating Authority by order dated July 5, 2019 admitted the application to initiate the corporate insolvency resolution process (“CIRP”) against the Corporate Debtor, issued moratorium and appointed Mr. Radha Krishnan Dharamrajan as the interim resolution professional. Being aggrieved by the said order, Mr. R.R. Gopaljee, promoter and shareholder of the Corporate Debtor filed an appeal before the NCLAT under Section 61(1) (appeals and appellate authority) of the IBC.

Issue
Whether the letter dated March 27, 2017 be treated as an acknowledgment of debt in terms of Section 18 of the Limitation Act, 1963 (“Limitation Act”) in absence of any specific acknowledgment of liability by the Corporate Debtor.

Arguments
The submission of the counsel for the appellant were:

1. The Adjudicating Authority did not observe the principal of natural justice and passed the order without providing an opportunity to file objections on the application under Section 7 of IBC.
2. The correct date of NPA is not clear as the Financial Creditor in the notice sent under Section 13(2) of the SARFAESI Act, 2002 mentioned the NPA date as June 30, 2015 whereas, in the additional affidavit filed before the Adjudicating Authority, the NPA date is disclosed as April 1, 2015.
3. The debt is time barred as the application under Section 7 is filed on March 15, 2019.
4. The Adjudicating Authority wrongly relied upon the letter dated March 27, 2017 as an acknowledgment of debt, as the said letter only states that the Corporate Debtor will settle issue with the Financial Creditor and that there is no specific acknowledgment of debt. Also, for the purpose of acknowledgment of debt, the exact amount of debt due and the timeline for payment has to be specifically admitted and clearly stated.
5. High Court of Delhi in the Case of Dorham Carelline India Limited. v. Studio Line [2009 DLT 123] held that Section 18 of Limitation Act requires: (i) An admission or acknowledgement; (ii) that such acknowledgement must be in respect of a property or right; (iii) that it must be made before the expiry of limitation; (iv) that it should be in writing and signed by the party against whom such property or right is claimed. None of these conditions were fulfilled by the letter dated March 27, 2017.
6. The Supreme Court of India (“SC”) in the case of State of Kerala v. T.M. Chackoo, [(2000) 9 SCC 722] held that “The person acknowledging must be conscious of his liability and commitment should be made towards that liability. It need not be specific, but if necessary facts which constituted the liability are admitted, an acknowledgement may be inferred from such an admission.”As the letter dated March 27, 2017 does not specify any commitment towards the liability and is merely a reply stating certain meetings with the officials of the Financial Creditor, it cannot be treated as an acknowledgment.

The submission of the counsel for Financial Creditor was that as the Corporate Debtor defaulted in repayment of the loan, a legal notice dated March 15, 2017 was sent to it and the Corporate Debtor replied to the said notice on March 27, 2017 wherein it acknowledged the claim. Thereafter, the Corporate Debtor sent an OTS proposal which was accepted by the Financial Creditor. However, the Corporate Debtor failed to repay the loan and therefore, an application under Section 7 of the IBC was filed.

Observations of the NCLAT

In the additional affidavit filed on behalf of the Financial Creditor, date of default is shown as April 1, 2015. However, in the notice under Section 13(2) of the SARFAESI Act, 2002, the NPA date is shown as June 30, 2015. The Adjudicating Authority considered the objection and held that according to the Corporate Debtor, the Financial Creditor declared its account as NPA on June 30, 2015 and the NCLAT agreed with the said finding of the Adjudicating Authority.

Further, the Application under Section 7 of IBC was filed on March 15, 2019, that is, after three years from the date of default. Therefore, the question for consideration is whether the Corporate Debtor has acknowledged the debt as per the requirement under Section 18 of the Limitation Act, only then, the date of default can be forwarded to a future date as held by the NCLAT in Sh. G Eswara Rao v. Stressed Assets Stabilisation Fund [Company Appeal (At) (Ins) No. 1097 of 2019].

The SC in the case of J.C. Budhraja v. Chairman Orissa Mining Corporation Limited [(2008) 2 SCC 444] held that Section 18 of the Limitation Act, deals with the effect of acknowledgment in writing and provides that a fresh period of limitation shall be computed from the time when the acknowledgment was signed before the expiration of the prescribed period for a suit or application in respect of a right. The explanation to the section provides that an acknowledgment may be sufficient though it omits to specify the exact nature of the right or avers that the time for payment has not yet come or is accompanied by a refusal to pay, or is coupled with a claim to set off, or is addressed to a person other than a person entitled to the right.

Further in the case mentioned above, a reference is also made of the SC’s ruling in the case of Shapoor Freedom Mazda v. Durga Prosad Chamaria [AIR 1961 SC 1236] wherein the SC stated that words used in the acknowledgment must indicate existence of jural relationship between the parties such as that of debtor and creditor, and it must appear that the statement is made with the intention to admit such jural relationship.

Making a reference from the SC’s ruling in the above said case, the NCLAT further stated that it is now well settled that a writing to be an acknowledgement of liability must involve an admission of subsisting jural relationship between the parties and a conscious affirmation of an intention of continuing such relationship in regard to an existing liability. The admission need not be in regard to any precise amount nor by expressed words. The SC in the aforesaid judgment also held that in construing words used in the statement made in writing on which a plea of acknowledgement rest, oral evidence has been expressly excluded but surrounding circumstances can always be considered. It is also held that the statement on which a plea of acknowledgement is based must relate to a person’s subsisting liability though the exact nature or the specific character of said liability may not be indicated in words.

Thereafter, in reference to the principal laid down in the above case, the NCLAT examined the case in hand and stated that the Corporate Debtor in its reply dated March 27, 2017 to the demand notice, admitted the jural relationship between the parties and a conscious affirmation of an intention of continuing such relationship in regard to an existing liability.

The Corporate Debtor in its reply to the demand notice did not dispute the amount and admitted the liability and stated that it is in process of settling the dues of Financial Creditor. Subsequent to the same, on April 13, 2017, the Corporate Debtor also sent an OTS proposal to the Financial Creditor and on July 3, 2017 the same was accepted by the Financial Creditor on certain terms and conditions. An extension for time of payment was also granted by the Financial Creditor. However, the Corporate Debtor failed to make the payment and the said OTS proposal was revoked by the Financial Creditor on November 22, 2017. The NCLAT observed that it is true that the letter dated April 13, 2017 is not on record, however, the Corporate Debtor does not deny that it had not sent an OTS on April 13, 2017 to the Financial Creditor.

On the basis of the above discussion, the NCLAT held that it is proved that Corporate Debtor had acknowledged the debt within three years, that is, before the expiration of the prescribed period for a suit or application.

Decision of the NCLAT
The NCLAT upheld the admission order passed by the Adjudicating Authority under Section 7 of IBC as the same was well within limitation and hence, the appeal was dismissed.

Vaish Associates Advocates View
In the present case, the Corporate Debtor contended that the letter by which it offered to settle the dues of the Financial Creditor cannot be treated as an acknowledgment of debt as there was no specific acknowledgment of debt in the letter and neither the exact amount of debt due was admitted in the said letter.

However, the NCLAT rejected this contention of the Corporate Debtor and stated that the said letter admitted the jural relations between both the parties and a conscious affirmation of an intention of continuing such relationship in regard to an existing liability. Even though the said letter made no express acknowledgment of debt but the NCLAT emphasised that it is the intent of the parties which will determine the nature of the acknowledgment and that the admission need not be with regard to any precise amount nor by expressed words, if the intent is clearly established and thus by virtue of Section 18 of the Limitation Act, the limitation period would be extended.

Also, it can be inferred from the subsequent letters exchanged between both the parties, wherein an OTS was arrived, that the Corporate Debtor was aware of the debt and had also shown its intent to settle the same. The said intent can very well be treated as an admission of debt as the execution of an OTS makes it clear that the Corporate Debtor was conscious of its liability towards the Financial Creditor and made a commitment to clear the same.

For more information please write to Mr. Bomi Daruwala at [email protected]

Supreme Court: Dispute as to inheritance of shares cannot be adjudicated upon in proceedings under Section 241/ 242 of Companies Act, 2013

The Supreme Court (“SC”) has in its judgment dated July 6, 2020 (“Judgment”) in the matter of Aruna Oswal v. Pankaj Oswal and Others [Civil Appeal No. 9340 of 2019], held that disputes pertaining to inheritance of shares cannot be pronounced upon in proceedings initiated under Sections 241 and 242 of the Companies Act, 2013 (“CA 2013”).

Facts
Brief facts of the case are that one Mr. Abhey Kumar Oswal held 53,53,960 shares in M/s. Oswal Agro Mills Limited (“Respondent No. 2”) and had on June 18, 2015, filed a nomination in favour of his wife, Mrs. Aruna Oswal (“Appellant”) under Section 72 of the CA 2013 expressly stating that “This nomination shall supersede any prior nomination made by me/us and any testamentary document executed by me/us.” Mr. Abhey Oswal passed away intestate on March 29, 2016 and on April 16, 2016, the name of the Appellant was registered as the holder against the shares held by the late Mr. Abhey Oswal.

Thereafter, Mr. Abhey Oswal’s son, Mr. Pankaj Kumar Oswal (“Respondent No. 1”) filed a partition suit on February 3, 2017 before the Delhi High Court (“DHC”), claiming entitlement to onefourthof Mr. Abhey Oswal’s estate which, inter alia, included shares constituting 39.88% shareholding in Respondent No. 2 and 11.11% shareholding in M/s. Oswal Greentech Limited (“Respondent No. 16”). Under an order dated February 8, 2017,the DHC directed the parties to maintain status quo on the shares and other immoveable property of Mr. Abhey Oswal. Consequently, the said shares continued to remain registered in the name of the Appellant.

Additionally, Respondent No. 1 also filed a Company Petition with the National Company Law Tribunal, Chandigarh (“NCLT”) alleging oppression and mismanagement in the affairs of the Respondent No. 2. Respondent No. 1 claimed eligibility to maintain the said petition on the ground of being the holder of 0.03% shareholding of Respondent No. 2 and claiming entitlement over and legitimate expectation over one-fourth shareholding (constituting 9.97% shareholding) of Mr. Abhey Oswal in Respondent No. 2.

Pursuant to the above, an application dated May 2018 was filed by the Appellant before the NCLT challenging the maintainability of the above stated Company Petition. However, by an order dated November 13, 2018, the NCLT dismissed the said application and held that Respondent No.1 was the legal heir to Mr. Abhey Oswal and thereby entitled to one-fourth share of his shares/ property. Aggrieved by the said order of the NCLT, the Appellant filed three appeals before the National Company Law Appellate Tribunal, Delhi (“NCLAT”), which appeals were also dismissed by a judgment and order of the NCLAT dated November 14, 2019. The present appeal was filed by the Appellant against the aforementioned order of the NCLAT.

Issue
Whether the question of inheritance of shares can be decided upon under a company petition for oppression and mismanagement.

Arguments
Contentions raised by the Appellant:

The Appellant, inter alia, contended that she was the sole nominee of the late Mr. Abhey Kumar Oswal and that in view of the provisions contained in Section 71of the CA 2013, Respondent No. 1 could not claim any interest over the shares in Respondent No. 2 registered in the name of the Appellant.

It was further contended that, upon excluding shares in the name of the Appellant, Respondent No. 1 would hold only 0.03% shareholding in Respondent No. 2 and therefore, would not constitute qualified threshold (on account of holding less than 10% shares) under Section 244 of the CA 2013, due to which the application under Sections 241 and 242 of the CA 2013 was not maintainable. Moreover, the shareholding to the extent of 0.03% in May, 2017 was purchased/ acquired by Respondent No. 1 after filing of the civil suit before the DHC.

It was also contended that since Mr. Abhey Kumar Oswal died intestate, in view of the provisions of Section 72 of the CA 2013, all the rights to the shares are now vested in the Appellant. It was further contended that although Respondent No. 1 had settled in Australia and had nothing to do with the management of Respondent No. 2, he was trying to illegally interfere in the management of Respondent No. 2.

The Appellant further contended that the NCLT and NCLAT had ignored and overlooked the rights of the deceased shareholder that had vested on the Appellant as his nominee. It was also contended that Respondent No. 1 did not claim waiver on the rigors of Section 244 of the CA 2013 and also did not file an application seeking a waiver under the proviso to Section 244 of the CA 2013.

Contentions raised by the Respondent No. 1:

Respondent No. 1 on the other hand argued that the application filed under Sections 241 and 242 of the CA 2013 was maintainable since the nomination was made only to hold the shares for the benefit of legal representatives. It was further contended that it was permissible for a legal representative to maintain the proceedings for oppression and mismanagement in the affairs of the company, though his/her name was not entered as a registered owner of the shares. Reliance was placed upon World Wide Agencies Private Limited and Another v. Margarat T. Desor and Others [(1990) 1 SCC 536], wherein the legal representatives had been given the right to maintain the application with respect to oppression and mismanagement.

It was argued further that the waiver requirement to hold 10% shares, had been pleaded in the company petition filed by Respondent No. 1. Respondent No. 1 argued that the NCLT, as well as the NCLAT rightly held the petition to be maintainable and the civil suit’s pendency could not have come in the way of maintaining the application concerning oppression and mismanagement as only civil rights have to be determined in the civil suit. Respondent No. 1 also relied upon various decisions of the SC namely: Smt. Sarbati Devi and Another v. Smt. Usha Devi [(1984) 1 SCC 424]; Vishin N. Khanchandani and Another v. Vidya Lachmandas Khanchandani and Another [(2000) 6 SCC 724]; and Ram Chander Talwar and Another v. Devender Kumar Talwar and Others [(2010) 10 SCC 671] and contended that the company petition was prima facie maintainable in view of the verdicts held by SC in the said matters. Hence, no case for interference in the appeals had been made out.

Observations of the Supreme Court

The SC observed that it was apparent from a bare reading of the provisions of Section 72(1) of CA 2013 that every holder of securities has a right to nominate any person to whom his securities shall “vest” in the event of his death. In the case of joint holders also, they have a right to nominate any person to whom “all the rights in the securities shall vest” in the event of death of all joint holders. The SC noted that sub-section(3) of Section 72 of the CA 2013 contains a non-obstante clause in respect of anything contained in any other law for the time being in force or any disposition, whether testamentary or otherwise, where a nomination is validly made in the prescribed manner, it purports to confer on the person “the right to vest” the securities of the company, and therefore, all the rights in the securities shall vest in the nominee unless a nomination is varied or cancelled in the prescribed manner.

The SC further noted that prima facie shares vest in a nominee, and he becomes the absolute owner of the securities on the strength of nomination.

The SC also noted that while in World Wide Agencies Private Limited and Another v. Margarat T. Desor and Others [(1990) 1 SCC 536], the SC had held that a legal representative has a right to maintain an application regarding oppression and mismanagement without being registered as a member against the securities of a company, but at the same time the question of nomination was not involved in the said decision, and as such, the SC was not required to decide the question of the effect of nomination. There is no doubt that in the absence of nomination, a legal representative cannot be denied the right to maintain a petition regarding oppression and mismanagement. In the instant case however, the nomination had been made, and the nominee was registered as the holder of shares. The effect of the same was required to be decided to determine the extent of shareholding of Respondent No. 1, concerning which civil suit filed earlier in point of time was pending consideration.

The SC further observed that presently, Respondent No. 1 was not holding the shares to the extent of the eligibility threshold of 10% as stipulated under Section 244 of the CA 2013 in order to maintain an application under Sections 241 and 242 of the CA 2013 since the shareholding ownership was under dispute under a civil suit for partition. The question as to the right of Respondent No. 1 was required to be adjudicated finally in the civil suit, including the effect of nomination in favour of the Appellant, and whether absolute right, title, and interest in the shares is vested in the nominee or not, was to be finally determined in the said suit. The decision in the civil suit would be binding between the parties on the question of right, title, or interest and it was the domain of a civil court to determine the right, title, and interest in an estate in a suit for partition.

The SC observed that in the case of Sangramsinh P. Gaekwad and Others v. Shantadevi P. Gaekwad (Dead) through LRs and Others [(2005) 11 SCC 314], the SC had held that the dispute as to inheritance of shares is eminently a civil dispute and cannot be said to be a dispute as regards oppression and/ or mismanagement so as to attract company court’s jurisdiction under Sections 397 and 398 of the Companies Act, 1956. In view of the aforesaid decision, the SC was of the opinion that the basis of the petition in the present case was the claim by way of inheritance of one-fourth shareholding so as to constitute 10% of the holding, which right cannot be decided in proceedings under Section 241 or 242 of the CA 2013. Thus, filing of the petition under Sections 241 and 242 seeking waiver was a misconceived exercise.

Decision of the Supreme Court

In allowing the appeal, the SC took note of its judgement in World Wide Agencies Private Limited and Another v. Margarat T. Desor and Others [(1990) 1SCC 536] and the fact that the Respondent No. 1, as pleaded by him, had nothing to do with the affairs of Respondent No. 2 and he was not a registered owner and that the rights in estate/shares, if any, of Respondent No. 1 were protected in the civil suit. Thus, the SC was satisfied that Respondent No. 1 did not represent the body of shareholders holding requisite percentage of shares in Respondent No. 2, necessary in order to maintain such a petition.

The SC observed that it was undisputed that the DHC had, in the pending civil suit, passed an order directing that status quo be maintained with respect to the shareholding and other properties of Mr. Abhey Oswal. The shares have to be held in the name of the Appellant until the suit is finally decided because of the status quo order. It would not be appropriate to entertain these parallel proceedings and give waiver as claimed under Section 244 of the CA 2013 before the civil suit’s decision.

The SC was of the opinion that the proceedings before the NCLT filed under Sections 241 and 242 of the CA 2013 should not be entertained because of the pending civil dispute and considering the minuscule extent of the Respondent No. 1’s holding of 0.03%.

The SC directed dropping of the proceedings filed before the NCLT regarding oppression and mismanagement under Sections 241 and 242 of the CA 2013 and also granted Respondent No. 1 the liberty to file a fresh suit, on all the questions, in case of necessity, if the civil suit was decreed in favour of Respondent No. 1 and the shareholding of Respondent No. 1 in Respondent No. 2 increased to 10%.

The SC reiterated that it had left all the questions to be decided in the civil suit pending before the DHC. The impugned orders passed by the NCLT as well as NCLAT were set aside, and the appeal was allowed.

Vaish Associates Advocates View
The SC has, in the present case, clearly outlined the principle applicable in respect of the ownership rights bestowed upon nominee holders of shares under Section 72 of CA 2013. Deviating from previously upheld precedents by the Bombay High Court (“BHC”), the SC passed an order in favour of the nominees. One of the most prominent cases pertaining to the instant subject matter is Shakti Yezdani v. Jayanand Jayant Salgaonkar where the BHC held that the non-obstante clause in the erstwhile Section 109A of the Companies Act, 1956 cannot supersede the general laws of succession. Further, the BHC interpreted the erstwhile Section 109A of the Companies Act, 1956, by drawing parallels with the Life Insurance Act, 1939 (“LIC Act”). In the instant case, the SC, dismissing this argument, differentiated between the LIC Act and Section 72 of CA 2013, emphasizing that unlike the former, the latter does not treat a nominee as merely an interim holder. The LIC Act on the other hand considers nominees to be holders of the assets that eventually become estate of the deceased upon his death, devolving upon the legal heirs of the deceased.

Furthermore, the SC has in essence reconfirmed the legislative intent behind the qualifying percentage prescribed for maintenance of an application under Sections 241 and 242 of the CA 2013, which is to discourage frivolous litigation in the guise of allegations of oppression and mismanagement by shareholders not having quantifiable and established ownership in companies.

Also, by dropping the proceedings filed before NCLT for oppression and mismanagement in the present case during the pendency of the civil suit before the DHC, the SC has once again added to the already set and established precedent of not allowing the same legal question to be put up for adjudication before different forums.

For more information please write to Mr. Bomi Daruwala at [email protected]

NCLAT: Contract termination notice issued to the Corporate Debtor post initiation of CIRP stayed

The National Company Law Appellate Tribunal (“NCLAT”), in the case of Tata Consultancy Services Limited v. Vishal Ghisulal Jain (decided on June 24, 2020) has decided that a contract termination notice issued by Tata Consultancy Services Limited (“Appellant”) to S.K Wheels Private Limited (“Corporate Debtor”), a company undergoing Corporate Insolvency Resolution Process (“CIRP”) under the Insolvency and Bankruptcy Code, 2016 (“IBC”) should be stayed.

Facts

The Appellant and the Corporate Debtor entered into an agreement on December 01, 2016 (“Facilities Agreement”) to avail services from the Corporate Debtor to enable conduct of examinations deploying National Technology Infrastructure for the Appellant’s clients. By order dated March 29, 2019, the National Company Law Tribunal, Mumbai (“NCLT”) initiated CIRP proceedings against the Corporate Debtor.

Subsequently, since the Corporate Debtor failed to remedy alleged breaches to the Facilities Agreement, the Appellant terminated the same by termination notice dated June 10, 2019. Pursuant to the same, the Corporate Debtor filed proceedings before the NCLT seeking, inter alia, stay of the termination notice issued by the Appellant.

The NCLT by an order dated December 18, 2019 granted an interim stay of the termination notice issued by the Appellant, in order to enable the Corporate Debtor to remain a going concern.

The Appellant was aggrieved by the same on the grounds that the NCLT failed to appreciate the arbitration agreement contained in Clause 12(d) of the Facilities Agreement, and failed to appreciate that a valid notice of termination was issued by the Appellant, which were, in the Appellant’s view not in contravention to Section 14 of the IBC.

Issue

Whether the termination of the Facilities Agreement is valid pursuant to Section 14 of the IBC.

Arguments

The Appellant stated that the NCLT had failed to appreciate that a valid notice of termination was issued by theAppellant and that the notice of termination was not in contravention of Section 14 of the IBC.

The Corporate Debtor stated that as per the Facilities Agreement, the Corporate Debtor was under the obligation to, inter alia, fit the premises with the materials as per specification mentioned in the agreement and provide certain facilities. Previously, when there was a situation pertaining to non-compliance with the terms of the Facilities Agreement, the parties had discussed the same and mutually resolved the same.

Further, it was stated that all the deficiencies were cured at the cost of the Corporate Debtor. Furthermore, meetings were held in April and May, 2019, whereby, the Interim Resolution Professional intimated the Appellant that no prejudice would be caused to the Appellant and all the services and facilities would be provided as contained in the Facilities Agreement. The learned counsel for the Corporate Debtor further submitted that the Appellant issued termination notice as per the Clause 11(b) of the Facilities Agreement, however, the same was not in accordance with the said clause. As per the abovementioned Clause 11(b), a 30 days’ notice needs to be given in the event of any material breach by either party. However, no notice was received in this case by the Corporate Debtor.

The Appellant stated that the Appellant noticed the material breaches of obligations by the Corporate Debtor including deployment of personal lacking requisite level of scale, non-adherence of design guidelines, nonreplacement of furniture and air conditioners, etc., pursuant to which multiple notices were issued, however, the Corporate Debtor failed to remedy the contractual breaches which led to the serving of a termination notice. To this, it was stated by the Corporate Debtor they have cured all the deficiencies and the termination notice after the initiation of CIRP is against the main object of the IBC.

Observations of the NCLAT

The NCLAT observed that per the termination clause, it is mandatory to issue notice to the party in the event of a material breach and if the same is not cured, the aggrieved party was liable to terminate the agreement. It was observed that in view of Section 14 of the IBC, once a moratorium was imposed by the adjudicating authority and on appointment of Interim Resolution Professional, the Interim Resolution Professional will be at the helm of affairs of the company in view of the suspension of the board of directors of the Corporate Debtor.

Further, the IBC sets out the duty of Resolution Professional to preserve and protect the assets of the Corporate Debtor and lays down the functions he may perform in order to ensure the same.

It was observed that as per the IBC, post the initiation of the CIRP, the Corporate Debtor shall function and continue its business activities. It is the duty of the Interim Resolution Professional/ Resolution Professional, as the case may be, to keep the Corporate Debtor as a going concern.

Decision of the NCLAT

The appeal was disposed, and it was held that the NCLT rightly stayed the termination of notice and there is no illegality in the order passed by the NCLT.

Vaish Associates Advocates View
This judgement can have interesting and wide ramifications. Curiously, the NCLAT has not expanded or provided any reasoning for why and how the provisions of Section 14 are applicable in such cases. A purposive approach has been taken by the NCLAT by stating that the main aim of the IBC is to encourage sale of a corporate debtor on a going concern basis and not liquidation.

The NCLAT reasoned that in order to keep the corporate debtor viable, the termination of the contract should be stayed for the time being. The absence of any specific reasoning as to how the IBC empowers the NCLT/ NCLAT, as the case may be, to interfere in commercial agreements may result in the order being challenged on substantive grounds.

For more information please write to Mr. Bomi Daruwala at [email protected]

NCLT, Mumbai: Reference to arbitration in an insolvency petition under Insolvency and Bankruptcy Code, 2016

The National Company Law Tribunal, Mumbai (“MNCLT”) has, by an Order dated June 9, 2020 (“Order”), allowed an application under Section 8 (power to refer parties to arbitration where there is an arbitration agreement) of the Arbitration and Conciliation Act, 1996 (“ACA”) thereby referring a matter pending before it to arbitration. The said Section 8 application was filed by Indus Biotech Private Limited (“Corporate Debtor”) for settlement of a dispute between the Corporate Debtor and Kotak India Venture Fund-I (“Financial Creditor”). Upon allowing the Section 8 application, the MNCLT dismissed the company petition that had been filed before it by the Financial Creditor, under Section 7 of the Insolvency and Bankruptcy Code, 2016 (“IBC”) towards seeking the initiation of Corporate Insolvency Resolution Process (“CIRP”) against the Corporate Debtor.

Facts
Brief facts of the case are that in the years 2007-2008, four entities of the Kotak Private Equity Group namely, (i) Kotak India Venture Fund-I (Financial Creditor), (ii) Kotak India Venture (Offshore) Fund, (iii) Kotak Mahindra Investments Limited and, (iv) Kotak Employees Investment Trust – (collectively referred to as the “Kotak Group”), subscribed to the share capital of the Corporate Debtor under four separate share subscription and shareholders agreements. In all, the Kotak Group invested INR 27,00,00,000 towards subscribing to equity shares and Optionally Convertible Redeemable Preference Shares (“OCRPS”) of the Corporate Debtor.

Thereafter, the Financial Creditor sought to have the Corporate Debtor make a Qualified Initial Public Offering(“QIPO”) of its securities and opted to convert the OCRPS held by it into equity shares, in view of Regulation 5(2) of the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018, which mandates that any company which has any outstanding convertible securities or any other right which would entitle any person with any option to receive equity shares of the issuer, is not entitled to make a QIPO.

During the QIPO process, a dispute arose between the Corporate Debtor and the Financial Creditor and the other entities of the Kotak Group with regard to the conversion formula to be applied while converting the OCRPS held by them into equity shares of the Corporate Debtor. While the Kotak Group sought to apply a calculation formula upon application of which they would collectively hold approximately 30% of the total paid-up share capital of the Corporate Debtor, the Corporate Debtor wanted to apply a formula under which the Kotak Group would hold about 10% of the total paid-up share capital of the Corporate Debtor.

In terms of the 2007 Share Subscription and Shareholders Agreement (“SSSA”), the OCRPS issued thereunder were to be redeemed by the Corporate Debtor on or before April 15, 2019. Upon conversion of the OCRPS and the consequent QIPO being stalled due to the dispute between the parties and failure of the Corporate Debtor to redeem the said OCRPS within the aforementioned date, the Financial Creditor filed a company petition under Section 7 of the IBC on August 16, 2019, seeking the initiation of CIRP against the Corporate Debtor. Thereafter, by a letter dated September 20, 2019, the Corporate Debtor sought to refer the dispute between the parties to arbitration under the provisions of the arbitration clause of the 2007 SSSA. Consequently, the Corporate Debtor filed an Interlocutory Application (“IA”) before the MNCLT under Section 8 of the ACA.

Issue

Whether the provisions of the ACA would prevail over the provisions of the IBC? If so, under what circumstances?

Arguments

Contentions raised by the Corporate Debtor:

The Corporate Debtor, inter alia, contended that a reading of the arbitration clause of the 2007 SSSA showed that the parties had bound themselves to settle any dispute, controversy or claim arising out of, relating to or in connection with the 2007 SSSA, to be finally settled by arbitration.

It was further contended that in essence, the dispute between the parties are in relation to: (i) valuation of the Financial Creditor’s OCRPS; (ii) right of the Financial Creditor to redeem such OCRPS when it had participated in the process to convert its OCRPS into equity shares of the Corporate Debtor; and (iii) fixing of the QIPO date, all of which together constitute more than one bona fide and substantial dispute between the parties under the 2007 SSSA since August 2018.

It was further submitted that the Corporate Debtor was a highly profitable and debt-free company. It was contended that the Financial Creditor had itself benefitted by receiving dividends from the Corporate Debtor in excess of INR 13 crores on an investment of approximately INR 19 crores. Hence, the Corporate Debtor was clearly not in need of resolution.

The Corporate Debtor also submitted that the underlying company petition is in the nature of a ‘dressed-up’ petition, inasmuch as the real dispute between the parties is with regard to matters pertaining to the agreement reached between the parties and interpretation of its various clauses and therefore, the provisions of the IBC ought not to be used as a pressure tactic to extort money from profitable companies.

The Corporate Debtor also highlighted that Section 8 of the ACA, which provides power to a judicial authority before which an action is brought to refer parties to arbitration, is mandatory in nature.

Contentions raised by the Financial Creditor:

The Financial Creditor, on the other hand, submitted that the only issue to be decided in the present matter is whether the reliefs claimed are capable of being referred to arbitration or being granted by an arbitral tribunal. If the answer is no, then the present IA should be dismissed, and the underlying company petition should be heard on merits.

The Financial Creditor further contended that a Section 7 petition under the IBC (being an insolvency petition) belongs to that class of litigation which is incapable of being referred to arbitration on account of being a cause/dispute in rem. The Financial Creditor submitted that initiation of CIRP cannot be granted by an arbitrator. The Financial Creditor also submitted that a Section 7 petition under the IBC is not for recovery of debts and that the IBC is a code for dealing with insolvency, either for revival or for liquidation. Only upon there being a debt and default based on a claim, should the NCLT decide to admit the petition.

It was contended that the existence of an arbitration clause can never affect a Section 7 petition under the IBC. The Financial Creditor referred to certain judgments in which the ratio decidendi was that while deciding the scope of a Section 8 petition under the ACA, only such disputes or matters which an arbitrator is competent or empowered to decide, can be referred to arbitration.

It was further argued that, in a Section 7 petition under the IBC, the claim itself may be disputed. It was also contended that the notice for redemption was given on March 31, 2019, at which point of time, there was no reference to arbitration. The Financial Creditor submitted that the first reference to arbitration was made only on September 20, 2019, which was after the filing of the petition under Section 7 of IBC on August 16, 2019.

Therefore, the present IA was only an attempt by the Corporate Debtor to wriggle out of the CIRP. It was contended that this was a diversionary tactic to prevent the main company petition from being argued. The Financial Creditor also submitted that as per the 2007 SSSA if the QIPO did not take place by the assigned date, the investment would be redeemable. If unredeemed, it was to be treated as a ‘debt’.

Observations of the National Company Law Tribunal, Mumbai

The MNCLT observed that seeking a reference to arbitration in a petition filed under Section 7 of the IBC was something that was res integra. The MNCLT relied on the judgment of Booz Allen and Hamilton v. SBI Home Finance Limited [(2011) 5 SCC 532] where it was held by the Supreme Court that “generally and traditionally, all disputes relating to rights in personam are considered to be amenable to arbitration; and all disputes relating to rights in rem are required to be adjudicated by courts and public tribunals, being unsuited for private arbitration. This is not however a rigid or inflexible rule. Disputes relating to subordinate rights in personam arising from rights in rem have always been considered to be arbitrable.”

The MNCLT further noted that it was a settled law that generalia specialibus non derogant – special law prevails over general law – and the Supreme Court in the case of Consolidated Engineering Enterprises v. Principal Secretary, Irrigation Department and Others [(2008) 7 SCC 169] had held that the ACA is a special law, consolidating and amending the law relating to arbitration and matters connected therewith or incidental thereto. Reiterating the Supreme Court’s view in the judgement of Hindustan Petroleum Corporation Limited v. Pinkcity Midway Petroleums [(2003) 6 SCC 503], the MNCLT was of the view that where an arbitration clause exists, the court has a mandatory duty to refer any dispute arising between the contracting parties to arbitration.

With respect to Section 7 of the IBC, the MNCLT referred to Innoventive Industries Limited v. ICICI Bank, [(2017) SCC OnLine NCLAT 70] where the National Company Law Appellate Tribunal held that sub-section (5) of Section 7 of the IBC provides for admission or rejection of application of a financial creditor where the adjudicating authority is satisfied that the documents are complete or incomplete. In other words, the statute mandates the adjudicating authority to ascertain and record satisfaction as to the occurrence of default before admitting the petition. Mere claim by the financial creditor that the default has occurred is not sufficient. Therefore, in a Section 7 petition under the IBC, there has to be a judicial determination by the adjudicating authority as to whether there has been a ‘default’ within the meaning of Section 3(12) of the IBC.

Decision of the National Company Law Tribunal, Mumbai

In allowing the application, the MNCLT held that the facts of the case did not seem to convey satisfactorily that a default had occurred. Unnecessarily pushing an otherwise solvent, debt-free company into insolvency, was not a very desirable result at that stage. The disputes that formed the subject matter of the underlying company petition were all arbitrable since they involved valuation of the shares and fixing of the QIPO date. Therefore, an attempt should be made to reconcile the differences between the parties and their respective perceptions. Accordingly, the application under Section 8 of the ACA filed by Corporate Debtor was allowed and the company petition under Section 7 of the IBC filed by the Financial Creditor was dismissed.

Vaish Associates Advocates View
While the MNCLT has in the present case allowed the application for arbitration under Section 8 of the ACA, the judgment clearly demonstrates that the decision was made purely on the basis of the facts and circumstances peculiar to the present case. In passing the said Order, the MNCLT has not gone by the general principle laid down by the Supreme Court in its decision in the case of Booz Allen and Hamilton v. SBI Home Finance Limited,[(2011) 5 SCC 532] wherein it was held that matters concerning insolvency are non-arbitrable and beyond the jurisdiction of an arbitrator.

In this context, it would be pertinent to note that in the case of Shalby v. Dr. Pranav Shah [2018 SCC OnLine NCLT 137], the National Company Law Tribunal, Ahmedabad (“NCLT Ahmedabad”) was faced with a similar application for reference to arbitration in an insolvency petition pending before it wherein, the tribunal proceeded to dismiss the said application and also imposed costs upon the applicant. While dismissing the said application, the NCLT Ahmedabad held that irrespective of an arbitration clause in the agreement between the parties, the arbitrator does not have jurisdiction over the subject matter of an insolvency petition.

The orders passed by the MNCLT, Supreme Court and the NCLT Ahmedabad in the abovementioned matters is based on the facts applicable to each case. However, the MNCLT’s decision in the present matter should, to a certain extent, deter the initiation of CIRP against healthy, debt-free companies purely as a pressure tactic before an already burdened judiciary.

For more information please write to Mr. Bomi Daruwala at [email protected]

NCLAT: To prevent detriment to the liquidation process and other secured creditors, company not having a minimum of 60% value in the security interest could not be allowed to realize security interest under the provisions of SARFAESI Act, 2002

The present appeal arose from order dated November 20, 2019 (“Impugned Order”) passed by the National Company Law Tribunal, Chennai (“NCLT”). By way of the Impugned Order, the NCLT had dismissed the liquidator’s application seeking permission to enable the sale of assets of ‘Surana Power Limited’ (“SPL”) on the basis of consent given by majority of the secured creditors. The National Company Law Appellate Tribunal (“NCLAT”) by its judgment (decided on June 18, 2020) set aside the Impugned Order passed by the NCLT.

Facts
The NCLT had passed an order on January 20, 2019 initiating Corporate Insolvency Resolution Process (“CIRP”) against SPL under Section 9 (application for initiation of corporate insolvency resolution process by operational creditor) of the Insolvency and Bankruptcy Code, 2016 (“IBC”). However, when no resolution came to be approved, SPL was ordered to be liquidated and Mr. Srikanth Dwarakanath (“Appellant Liquidator”) was appointed as the liquidator.

Before the CIRP had been initiated, Bharat Heavy Electricals Limited (“Respondent Company”) had secured an exparte award on January 24, 2018 (“Arbitral Award”) against SPL in an arbitration proceeding. Basis the Arbitral Award: (i) lien was created on the equipment and goods lying at the site of SPL (“Secured Assets”); (ii) a charge was created over entirely or partially erected facilities at SPL’s site; (iii) the Secured Assets on which a lien had now been created in favour of the Respondent Company owing to the Arbitral Award, had already been hypothecated to all other secured creditors by a deed of hypothecation dated September 24, 2010 (“Hypothecation Deed”).

The Appellant Liquidator had not been able to commence liquidation process earlier as some of the secured creditors had not intimated their decision concerning relinquishment of securities, well in time. The Respondent Company was one of the last remaining secured creditors required to intimate its decision on relinquishment. However, by letter dated August 23, 2019, the Respondent Company expressed unwillingness to relinquish its security interest. In fact, all other secured creditors had relinquished their security interest into the liquidation estate of SPL.

The Appellant Liquidator, however, was not able to proceed with any sale of asset without the receipt of relinquishment of security interest from all the secured creditors. Therefore, the Appellant Liquidator approached the NCLT seeking permission to sell all assets of SPL. The Appellant Liquidator’s application came to be rejected by way of the Impugned Order. Thereafter, this appeal was filed before NCLAT to challenge the Impugned Order.

Issue
Whether all the assets of SPL could be sold owing to non-relinquishment of security interest by the Respondent Company, when other secured creditors having value of 73.76% had already relinquished their security interest.

Arguments

Contentions of the Appellant Liquidator:

The NCLT had not appreciated that ten out of eleven secured creditors, representing 73.76% (in value of the admitted claims) of the total secured assets had already relinquished their security interest into the liquidation estate of SPL. It was only because of the Respondent Company’s unwillingness to relinquish its security interest that the Appellant Liquidator had been unable to proceed with the sale of assets.

Further, the secured creditors other than the Respondent Company had a prior charge over the Secured Assets by way of the Hypothecation Deed. Notably, the Hypothecation Deed was executed in the year 2010, much before the Arbitral Award which was passed in the year 2018.

The NCLT had also failed to consider that IBC did not provide for different categories of secured creditors either based on the nature of charge/ security interest or on the basis of the rankings of the respective charge. The Appellant Liquidator was to attempt the sale of SPL assets on a slump sale basis, however owing to the Respondent Company’s unwillingness to relinquish its security interest, the Appellant Liquidator was unable to conduct the sale as aforesaid. The Respondent Company’s refusal, had created a ‘deadlock situation’ wherein SPL assets could not be sold due to the proviso to Regulation 32 (sale of assets, etc.) of the Insolvency and Bankruptcy Board of India (Liquidation Process), Regulations, 2016 (“Liquidation Process Regulations”). As per the proviso, an asset which is subject to
security interest is not to be sold unless the security interest therein has been relinquished to the liquidation estate. The view taken by the NCLT violated the ‘waterfall mechanism’ provided under Section 53 (distribution of assets) of IBC.

Furthermore, during the pendency of this present appeal, the Respondent Company had written a letter dated January 27, 2020 to the Appellant Liquidator, inter alia, notifying its intention to realize security interest in respect of the Secured Assets.

Contentions of the Respondent Company:

It was contended that the Respondent Company had exercised its rights as per Section 52 (secured creditor in liquidation proceedings) of IBC. The exercise of the Respondent Company’s rights under Section 52 of IBC could not be subjected to the majority of the security creditors who had relinquished their security interest. As under Section 52(1)(b) of IBC, the Respondent Company had chosen to realize its security interest as per section 52(iv) of IBC.

As per section 52(iv) of IBC, a secured creditor may enforce, realise, settle, compromise or deal with the secured assets in accordance with such law as applicable to the security interest being realised and to the secured creditor and apply the proceeds to recover the debts due to it. The right of the Respondent Company under Section 52 of IBC is unqualified and unbridled. Such right could not be subjected to the majority of other secured creditors having relinquished their security interests.

Further, SPL had never acquired unencumbered right, title or interest in the Secured Assets. Therefore, hypothecation of the Secured Assets would always be subject to the Respondent Company’s lien. The Respondent Company also cited the decision of the NCLAT in JM Financial Asset Reconstruction Company Limited v. Finquest inancial Solutions Private Limited and Others [2019 SCC OnLine NCLAT 918].

Observations of the NCLAT

The NCLT had rejected the application filed by the Appellant Liquidator primarily because the Respondent Company was a secured creditor, and could proceed under Section 52 of IBC to realize its security interest. The Appellant Liquidator could not cause the sale of asset filed under Section 52 of IBC in the manner specified under Section 53 (distribution of assets) of IBC unless the security interest was relinquished by the Respondent Company. All secured creditors representing value of 73.76% in the secured assets had relinquished their security interest in the liquidation estate of SPL. This would have enabled the Appellant Liquidator to proceed under Regulation 32 of the Liquidation Process Regulations and dispose all SPL assets.

However, in light of the proviso to Regulation 32 of the Liquidation Process Regulations and on account of the Respondent Company’s unwillingness to relinquish its security interest, the Appellant Liquidator could not sell SPL assets.

The NCLT had held that the Respondent Company’s lien had a preference over the hypothecation created in favour of other secured creditors. The NCLAT noted that the NCLT had failed to appreciate that all secured creditors were on the same footing, irrespective of the mode of creation of charge. The Respondent Company, was a secured operational creditor by the Arbitral Award, by way of which, the Respondent Company was claiming lien over the Secured Assets. While, all other secured creditors, that is, (financial creditors) had relinquished their security interest, the Respondent Company’s refusal had created a deadlock situation.

Clearly, as per the proviso to Regulation 32 of the Liquidation Process Regulations, the Appellant Liquidator could not proceed to sell all SPL assets. This was despite the fact that more than 73% of the secured creditors had already relinquished their security interests.

Decision of the NCLAT

The Respondent Company is a secured creditor at par with ten other remaining secured creditors. The enforcement of security interest is governed under Section 13 (enforcement of security interest) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (“SARFAESI Act”). Further, as per Section 13(9) of the SARFAESI Act, any steps about the realization of assets by the secured creditors required confirmation from creditors having at least 60% of the value of total debt.

It would be prejudicial to stall the liquidation process because of a single creditor having value of only 26.24% in the secured assets when other secured creditors having value of 73.76% had already relinquished their security interest into the liquidation estate of SPL. The Respondent Company did not hold a superior charge from the rest of the secured creditors.

Further, Section 13 of the SARFAESI Act would be applicable in this case, in order to end the deadlock, and the decision of majority secured creditors would be made binding on the dissenting Respondent Company. Moreover, the facts of the case in JM Financial Asset Reconstruction Company Limited v. Finquest Financial Solutions Private Limited and Others [2019 SCC OnLine NCLAT 918] were different from the instant case. This is because in the aforesaid case, NCLAT was dealing with the issue whether more than one secured creditor could enforce security interest simultaneously under Section 52 of IBC. In the instant case, the question was if the Respondent Company had a right to realize its security interest as per section 52 of IBC.

In the instant case, the Appellant Liquidator had already concluded that the Respondent Company’s lien on the Secured Assets was not exclusive. Further, since the Respondent Company did not have at least 60% value in the total security interest, the Respondent Company could not exercise right to realize its security interest. If the Respondent Company was to be allowed to do so, it would be detrimental to the process of liquidation and interest of ten other remaining secured creditors. The Impugned Order was set aside and the Appellant Liquidator was directed to complete the process of liquidation.

Vaish Associates Advocates View
This is a progressive view taken by the NCLAT in protecting the interests of the majority of the secured creditors. The liquidation process should not have been affected given the facts and circumstances of this case.

In the instant case, ten out of eleven creditors holding more than 73% of the total debt had already consented to relinquishing their security interests. As far as the Respondent Company was concerned, there were two main reasons that were working in opposition to itssubmissions. First and foremost, it did not have 60% of the value in the secured interest and secondly, as far as the Secured Assets were concerned, it neither had an exclusive charge, nor a superior charge from the rest of the secured creditors.

If the sale of SPL assets would have been stalled merely because the Respondent Company without having the requisite value of at least 60% debt was unwilling to relinquish its interest, it would have been very detrimental to the liquidation process and would have affected the remaining ten other creditors.

In view of the provisions of IBC, a secured creditor’s claim could be allowed only if they had met the minimum threshold of 60% of the debt. Accepting the Respondent Company’s claim, therefore, would have affected the entire liquidation process and set a bad judicial precedent.

For more information please write to Mr. Bomi Daruwala at [email protected]