Page 83 – Vaish Associates Advocates

Supreme Court: Non-signatory to an arbitration agreement cannot be impleaded in arbitration unless a clear intention can be gathered from the correspondences, even if the non-signatory falls under ‘group of companies’ doctrine

The Supreme Court in the case of Reckitt Benckiser (India) Private Limited v. Reynders Label Printing India Private Limited and Another (decided on July 01, 2019), refused to apply ‘group of companies’ doctrine to implead a non-signatory party in arbitration on the ground that a clear intention to such effect was not manifest from the correspondences between the parties.

FACTS
Reynders Label Printing India Private Limited (“Respondent”) approached Reckitt Benckiser (India) Private Limited (“Petitioner”) with an offer to print labels for its products. Pursuant to the offer, exhaustive negotiations were held leading to various correspondences. Post negotiation, an agreement was executed which inter-alia included an arbitration clause. The Respondent and Reynders Ttiketten NV (“Foreign Affiliate”) are group companies of “Reynders Label Printing Group”. Under indemnity clause of the agreement, the supplier group (which includes the Foreign Affiliate) had assumed the liability to indemnify the Petitioner in case of any loss, damage, etc., caused to it on account of acts and omissions of the Respondent. Disputes arose between the parties and a petition was filed under Section 11 of the Arbitration and Conciliation Act, 1996 before the Supreme Court for the appointment of sole arbitrator. The Petitioner also made the Foreign Affiliate a party to the petition. The Foreign Affiliate objected to be made a party as it was not a signatory to the agreement.

ISSUE
Whether the Foreign Affiliate could be impleaded as a party to the arbitration proceedings despite being nonsignatory to the arbitration agreement merely because it is a part of the same ‘group of companies’ as Respondents?

ARGUMENTS
Firstly, the Petitioner argued that the Foreign Affiliate has been impleaded because it was the holding company of the Respondents. Secondly, it mentioned that the Foreign Affiliate had assumed the liability by the indemnity clause of the agreement. It made the Foreign Affiliate an integral party to the agreement. Lastly, it argued that on multiple occasions during the course of negotiations, the Respondent had replied through Mr. Frederik Reynders, who is a promoter of the Foreign Affiliate. In one of the e-mails, he had made a counter proposal concerning the indemnity clause. According to the Petitioner, it meant that the Foreign Affiliate had knowledge of the extension of the indemnity and it was the disclosed principal on whose behalf the Respondent had executed the agreement. It was also argued that the Foreign Affiliate had participated in the escalation meeting after the dispute arose which further goes to prove that the Foreign Affiliate despite being a non-signatory had assented to the arbitration agreement. Therefore, the Foreign Affiliate should be impleaded in the arbitration proceedings.

The Respondent refuted the arguments of the Petitioner by stating that the Foreign Affiliate was not the holding company at all. The Respondent and the Foreign Affiliate in fact form a part of the same group and there was no holding-subsidiary relationship. There was no privity of contract between the Petitioner and the Foreign Affiliate. The Respondent also stated that Mr. Frederik Reynders was not the promoter of the Foreign Affiliate, but was merely an employee of the Respondent.

OBSERVATIONS OF THE SUPREME COURT
The Supreme Court basis its earlier decision in Chloro Controls India Private Limited v. Severn Trent Water Purification Inc. and Others [(2013) 1 SCC 641], observed that the arbitration agreement can bind even nonsignatory parties, if they are a part of same ‘group of companies’, provided the circumstances in which they have entered into them may reflect an intention to bind both signatory and non-signatory entities within the same group. The Supreme Court examined the correspondences exchanged between the Petitioner, Respondent and Mr. Frederik Reynders. It read these correspondences in light of the arguments advanced by the parties and observed that the basis of Petitioner’s claim was the assent of the Foreign Affiliate to the arbitration agreement attributed by the communications made by Mr. Frederik Reynders. Hence, once it became clear that Mr. Frederik Reynders was merely an employee of the Respondent and not related to the Foreign Affiliate in any manner; the argument of Petitioner became irrelevant.

The Supreme Court observed that neither the Foreign Affiliate was a party to the arbitration agreement nor did it have any causal connection with the process of negotiations preceding the arbitration agreement or its execution. The fact that the Respondent and the Foreign Affiliate are a part of the same group, holds no consequence in this instance. Further, the Supreme Court held that the reliance of the Petitioner on the post contractual correspondences (relating to the escalation meeting after the dispute arose) would also not be useful in this instance, by relying on its earlier decision in case of Godhra Electricity Company Limited and another v. State of Gujarat [(1975) 1 SCC 199], where it was held that post-negotiations in law would not bind the foreign affiliate qua the arbitration agreement limited between the petitioner and the respondent.

DECISION OF THE SUPREME COURT
The Supreme Court held that burden of establishing a clear intention of the Foreign Affiliate to assent and be a party to the arbitration agreement was not discharged by the Petitioner. Therefore, the Foreign Affiliate cannot be impleaded to the arbitration proceedings. The Supreme Court held that the Petitioner can pursue remedy against the Respondent for appointment of sole arbitrator to conduct the arbitration proceedings as ‘domestic commercial arbitration’. However, in this particular case, upon request of both the parties, Supreme Court appointed former chief justice of Jammu and Kashmir High Court as the sole arbitrator.

Vaish Associates Advocates View
In Chloro Controls India Private Limited v. Severn Trent Water Purification Inc. and Others (supra) and Cheran Properties Limited v. Kasturi and Sons Limited and Others (2018) 16 SCC 413, the Supreme Court allowed nonsignatories of arbitration agreements to be made parties to arbitration proceedings. The legal basis to connect an arbitration agreement entered by a company within a group of companies with its non-signatory affiliates would be mutual intention, that is, if the circumstances demonstrate that the mutual intention of the parties was to bind both the signatory as well as the non-signatory parties. This meant that the parties which were holding the strings of the transaction behind the curtains would be brought to the forefront to face the music and simply by refusing to be a signatory to an arbitration agreement, they could not take the benefit of exclusion from arbitration proceedings.

However, in order to apply the ‘group company doctrine’ to implead non-signatories, the court ought to be satisfied that the non-signatory was actually involved and played a significant role in the transaction at hand. The burden of proof would lie on the party who would want the non-signatory to be impleaded. Circumstances and correspondences before signing the arbitration agreement can be the primary tools to satisfy this burden. In this case, in light of the pre-contractual facts and correspondences, as this burden was not adequately satisfied, the Supreme Court refused to unnecessarily involve the non-signatory Foreign Affiliate at the initial stage of the arbitration proceedings.

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

NCLT: Foreign courts cannot intervene in insolvency proceedings

The National Company Law Tribunal, Mumbai Bench (“NCLT”), in the case of State Bank of India v. Jet Airways (India) Limited (decided on June 20, 2019) held that foreign courts cannot intervene or create parallel proceedings for the insolvency proceedings of an Indian company.

FACTS
The State Bank of India filed an application under Section 7 of Insolvency and Bankruptcy Code, 2016 (“Code”) for initiation of corporate insolvency resolution process (“CIRP”) against Jet Airways (India) Limited (“Jet Airways”), which was clubbed with the applications made by operational creditors under Section 9 of the Code. While it was under consideration, the NCLT was apprised of insolvency proceedings against Jet Airways which had already been initiated by a Dutch Court (the Noord Holland District Court). In the judgement of the Noord Holland District Court dated May 21, 2019, Mr R. Mulder (“Intervener”) was appointed as the “administrator in bankruptcy” of Jet Airways.

ISSUE
Whether the initiation of CIRP against Jet Airways is maintainable before the NCLT, considering ongoing parallel proceedings in the Noord Holland District Court in the Netherlands?

ARGUMENTS
The Intervener stated that insolvency proceedings against Jet Airways in the Netherlands had commenced and if the NCLT passes an order of commencement of CIRP in India, a peculiar situation would emerge where the same company has two parallel insolvency proceedings in different jurisdictions, which could lead to complications and delays. This will further create uncertainty and impair the chances of attracting potential resolution applicants for Jet Airways. It was also contended by the Intervener that even though Sections 234 and 235 of the Code, which deal with agreements with foreign countries and letters of request to other countries in certain cases, have not been notified by the Central Government, there is no bar or prohibition under the Code forbidding the NCLT to recognise insolvency proceedings in a foreign jurisdiction. It was also contended that the judgement of the Noord Holland District Court dated May 21, 2019 is final and binding on Jet Airways and its lenders and neither Jet Airways nor any operational/financial creditors of Jet Airways have appealed against the judgement.

OBSERVATIONS OF THE NCLT
The NCLT analysed the contentions put forth by the Intervener. The NCLT stated that though Sections 234 and 235 of the Code deal with the matters regarding agreements with foreign countries and a letter of request to a country outside India in the insolvency resolution process where the assets of the corporate debtor exist outside India, these sections have not yet been notified and hence are not enforceable. Further, since the registered office of Jet Airways is in India, the jurisdiction lies with the NCLT. Section 234 of the Code states as follows:

“234. Agreements with foreign countries.-
(1) The Central Government may enter into an agreement with the Government of any country outside India for enforcing the provisions of this Code.

(2) The Central Government may, by notification in the Official Gazette, direct that the application of provisions of this Code in relation to assets or property of corporate debtor or debtor, including a personal guarantor of a corporate debtor, as the case may be, situated at any place in a country outside India with which reciprocal arrangements have been made, shall be subject to such conditions as may be specified.”

The NCLT observed that since the Government of India and the Government of the Netherlands have no such agreement, no other court has the power to pass on order under the Code. Further, the NCLT observed that the contention of Mr. Mulder that the two parallel proceedings will lead to complications, is not sustainable, as the order of the foreign court is a nullity in the eye of law and such order cannot be given effect.

DECISION OF THE NCLT
Considering the above, the NCLT held that the order passed by Noord Holland District Court, Netherlands which resulted in bankruptcy proceedings commencing against Jet Airways under Dutch law is nullity ab-initio. It further stressed that since Jet Airways has over 20,000 employees, its debt resolution is of ‘national importance’. The NCLT further analysed the report of the Bankruptcy Law Reforms Committee of November 2015, which stated that speed is of the essence. Keeping the above points in mind, the NCLT stated that any further delay in the CIRP proceedings against Jet Airways would be against the provisions of the Code and since both the debt and default in repaying the debt are proved, the petition seeking invocation of the CIRP was admitted and moratorium under Section 14 of the Code was imposed. Since Jet Airways’ debt resolution was of ‘national importance’, the resolution professional was directed to attempt to complete the CIRP process within the statutory period of 180/270 days.

Vaish Associates Advocates View
The NCLT has, in this case, correctly stated that parallel insolvency proceedings should be avoided and that since Jet Airways is an Indian company, Indian law should be applicable to it. By stating that Sections 234 and 235 of the Code are not notified and the Government of India has not entered into an agreement with the Government of the Netherlands and since the registered office of Jet Airways is situated in India, the NCLT has correctly held that any insolvency proceedings for such companies outside India shall be null and void and Indian courts should have a primary and exclusive jurisdiction.

In October 2018, Insolvency Law Committee constituted by the Ministry of Corporate Affairs to recommend amendments to the Code, submitted a report to the government on Cross Border Insolvency, where it suggested that the government shall adopt the ‘UNCITRAL Model Law on Cross-Border Insolvency, 1997’. This has been accepted by approximately 44 nations already, and deals with major principles of cross-border insolvency such as coordination between two or more concurrent insolvency proceedings in different countries, which was the bone of contention in the instant matter. Therefore, adoption of such a framework seems to be in the best interests of all the stakeholders concerned and can result in effective maximisation of value of assets in similar cases and in prevention of parallel proceedings.

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

NCLAT approves the resolution plan submitted by ArcelorMittal in the resolution proceedings in respect of Essar Steel India Limited while modifying the distribution of money to the financial and the operational creditors

National Company Law Appellate Tribunal (“NCLAT”) in case of Standard Chartered Bank v. Satish Kumar Gupta, R.P. of Essar Steel Limited and Others (decided on July 4, 2019), approved the resolution plan submitted by ArcelorMittal India Pvt. Ltd. (“ArcelorMittal”) in the resolution proceedings in respect of Essar Steel India Limited (“Corporate Debtor”) while modifying the distribution of money to the financial and the operational creditors.

FACTS
In the corporate insolvency resolution process (“CIRP”) initiated against the Corporate Debtor, the committee of creditors (“COC”) approved the resolution plan submitted by ArcelorMittal. Thereafter, the National Company Law Tribunal, Ahmedabad (“NCLT”) approved the said resolution plan with certain modifications by its order dated March 8, 2019. A number of applications were preferred by the operational creditors and the financial creditors against the said order in relation to distribution of assets to different financial creditors and the operational creditors on the ground of discrimination or the modification of resolution plan as suggested by the NCLT. Mr. Prashant Ruia, promoter of the Corporate Debtor (“Promoter”) also challenged the order of the NCLT on the ground that the Resolution Applicant is ineligible in terms of Section 29A of the Insolvency and Bankruptcy Code, 2016 (“Code”). NCLAT clubbed the said applications/ appeals and the following issues came up for determination:

ISSUES
1. Whether ArcelorMittal is eligible to file the resolution plan under Section 29A of the Code?

2. Whether the Promoter has right of subrogation under Section 140 and right to be indemnified under Section 145 of the Contract Act, 1872 (“Contract Act”)?

3. Whether COC can delegate its power to a sub-committee or core-committee for negotiation with the resolution applicant for revision of plan and distribution of the amount amongst the financial and the operational creditors?

4. Whether the power of distribution of amount to the lenders, that is, financial creditors, operational creditors and other stakeholders is with the resolution applicant or with the committee of creditors?

5. Whether distribution of amount amongst the financial creditors, operational creditors and other stakeholders as shown in the NCLT order dated March 8, 2019 was discriminatory?

6. Whether the financial creditors can be classified on the ground of a ‘Secured Financial Creditor’ having charge on project assets of the Corporate Debtor and ‘Secured Financial Creditor’ having no charge on the project assets of the Corporate Debtor or on the ground that the financial creditor is an ‘Unsecured Financial Creditor’?

7. Whether the resolution plan can provide for priority of payment of dues to one class of creditors over others?

8. Whether the operational creditors can be validly classified on the ground of (a) employees of the Corporate Debtor; (b) those who have ‘supplied goods’ and ‘rendered services’ to the Corporate Debtor; and (c) the debt payable under the existing law (statutory dues) to the Central Government or the State Government or the local authorities?

FINDINGS OF THE NCLAT

Issue 1:
Promoter argued that ArcelorMittal was ineligible in terms of Section 29A(c) read with Section 29A(j) of the Code. It submitted that Mr. L.N. Mittal held 10 shares in ‘Navoday Consultants Ltd.’ and as per the statutory filings, Mr. L.N. Mittal was classified as a person holding shares as a promoter and as part of the promoter group. Further, ‘Navoday Consultants Limited’ was a promoter of ‘GPI Textiles Limited’ (“GPI Textiles”) and ‘Gontermann Piepers India Limited’ (“GPIL”). Hence, Mr. L.N. Mittal can be called as a member of the promoter group of GPI Textiles and GPIL and therefore, ArcelorMittal was ineligible to file the resolution plan under Section 29A of the Code.

The NCLAT observed that the Supreme Court in its judgment in case of Arcelormittal India Private Limited v. Satish Kumar Gupta and Others [(2018) SCC OnLine SC 1733], already rejected the objections with respect to nonperforming assets (NPAs) of GPIL and GPI Textiles. Any attempt to reopen those issues would effectively amount to review or reconsideration of the order of the Hon’ble Supreme Court. An issue which has been settled by the Supreme Court cannot be re-agitated again and again. Any such attempt is clearly barred by the principles of res judicata. Further, the NCLAT observed that such appeal was also barred by delay and laches, as the facts stated above were within the knowledge of Promoter and the shareholders of the Corporate Debtor.

Issue 2:
Promoter argued that its right of subrogation under Section 140 of the Contract Act and right to be indemnified under Section 145 of the Contract Act are statutory rights, which have been extinguished by ArcelorMittal in the resolution plan in violation of Section 30(2)(e) of the Code.

The NCLAT observed that the Promoter had executed a ‘Deed of Guarantee’ between the lenders and the Corporate Debtor. Such guarantee was with regard to clearance of debt. Once the debt payable by the Corporate Debtor stands cleared in view of the approval of the plan by making payment in favour of the lenders, the effect of ‘Deed of Guarantee’ comes to an end as the debt stands paid. The guarantee having become ineffective in view of payment of debt by way of resolution to the original lenders, the question of right of subrogation of the Promoter’s right under Section 140 of the Contract Act and the right to be indemnified under Section 145 of the Contract Act does not arise.

Issue 3:
In the instant case, the NCLAT observed that the COC instead of going through the resolution plan for approval by vote, delegated the power to a sub-committee/ core committee. The NCLAT held that a sub-committee or corecommittee is unknown and against the provisions of the Code. There is no provision under the Code, which permits constitution of a core-committee or sub-committee nor the Code or the regulations made thereunder empowers the committee of creditors to delegate their duties to such core-committee/ sub-committee. The NCLAT held that the committee of creditors do not enjoy any authority to delegate to itself the role of the resolution applicant including the manner of distribution of amount amongst the stakeholders, which is exclusively within the domain of the resolution applicant and thereafter before the adjudicating authority, if found discriminatory. Such being the position, the COC cannot delegate its power to a sub-committee or core-committee for negotiating with the resolution applicant(s).

Issue 4:
The NCLAT examined the issue by considering various provisions of the Code and regulations made thereunder. The NCLAT observed that under Section 30(2)(b) of the Code, it is clear that the resolution professional is required to notice whether the resolution plan provides for the payment of the debts of the operational creditors in such manner as may be specified by the Insolvency and Bankruptcy Board of India (“IBBI”). The said provision makes it clear that the resolution applicant in its resolution plan must provide the amount it proposes to pay to one or other creditors, including the operational creditors and the financial creditors. The NCLAT also examined Section 30(3) of the Code, which suggests that the resolution professional is required to present before the committee of creditors, the resolution plan which confirms the conditions referred to in Section 30(2) of the Code. It means that if the resolution plan does not show the distribution amongst the financial creditors and the operational creditors, it cannot be placed before the committee of creditors.

The NCLAT also examined Section 30(4)of the Code, which provides that the resolution plan is required to be approved by a vote of not less than 66% of voting share of the financial creditors, “after considering its feasibility and viability and such other requirements as may be specified by the Board”. Thereby, all members of the committee of creditors, who are present, are required to go through the resolution plan to find out whether it is in accordance with Section 30(2) of the Code; and whether it is feasible and viable and meets all the requirements as specified by IBBI. With regard to Regulation 38 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (“Regulations”), the NCLAT observed that the resolution plan must include a statement as to how it has dealt with the interests of all stakeholders, including financial creditors and the operational creditors, of the corporate debtor. Therefore, the distribution of amount to the operational creditors, financial creditors and other stakeholders are to be made by the resolution applicant and required to be reflected in the resolution plan.

The financial creditors being the claimants at par with other claimants like other financial creditors and the operational creditors, having conflict of interest, cannot distribute the amount amongst themselves. The members of the committee of creditors being interested party are also not supposed to decide the manner in which the distribution is to take place. Thus, it is clear that the committee of creditors have not been empowered to decide the manner in which the distribution is to be made between one or other creditors.

Issue 5:
The NCLAT observed that the suggestion of ArcelorMittal to distribute the financial package offered by it, only to the secured financial creditors, denying the right of operational creditors and other stakeholders, was against the provisions of Section 30(2) of the Code and Regulation 38(1A) of the CIRP Regulations, which thereby cannot be upheld.

The NCLAT relied on the Supreme Court judgment in case of Swiss Ribbons Pvt. Ltd. & Another v. Union of India & Others [2019 SCC OnLine SC 73], and observed that Regulation 38 of CIRP Regulations strengthens the rights of the operational creditors by statutorily incorporating the principle of fair and equitable dealing of operational creditors rights, together with priority in payment over financial creditors. The Supreme Court in the said judgment noticed that the NCLAT, while looking into viability and feasibility of the resolution plan that are approved by the committee of creditors, had always gone into whether operational creditors are given roughly the same treatment as financial creditors. If it is not the case then such plans are either rejected or modified so that the operational creditors rights are safeguarded.

In the instant case, the NCLAT noticed that a huge discrimination was made by the COC in distribution of proposed amount to the operational creditors qua financial creditors. Majority of the financial creditors were allowed over 90% of their claim amount, whereas ‘NIL’ that is 0% was allowed in favour of the operational creditors. The NCLAT observed that such distribution was not only discriminatory but also arbitrary. Further, the financial creditors have discriminated amongst themselves on the grounds of having charge or no charge on the project assets of the corporate debtor. Even though it is accepted that the ‘Standard Chartered Bank’ is also a secured financial creditor, however, it has been discriminated by the COC on the ground of it having no charge on project assets of the corporate debtor.

Issue 6:
The NCLAT on a conjoint reading of the definitions of financial creditor and financial debt under Sections 5(7) and 5(8) of the Code, respectively, found that it is evident that there was no distinction made between one or other financial creditors. All persons to whom a financial debt is owed by the corporate debtor constitute one class, that is, financial creditor, irrespective of whether they fall within the purview of different clauses of Section 5(8) of the Code. They cannot be sub-classified as secured or unsecured financial creditor for the purpose of preparation of the resolution plan by the resolution applicant.

Issue 7:
With regard to priority of payment of dues of a financial creditor, it was noted that a resolution plan provides for upfront payment in favour of the creditors including the financial creditors, operational creditors and the other creditors. It is not a distribution of assets from the proceeds of sale of liquidation of the corporate debtor and, therefore, the resolution applicant cannot take advantage of Section 53 of the Code for the purpose of determination of the manner in which distribution of the proposed upfront amount is to be made in favour of one or other stakeholders namely, the financial creditor, operational creditor and other creditors. Hence, the NCLAT held that Section 53 cannot be made applicable for distribution of amount amongst the stakeholders, as proposed by the resolution applicant in its resolution plan.

The NCLAT referred to its earlier decision in case of Binani Industries Limited v. Bank of Baroda and Another (decided on November 14, 2018), where it observed that “Any ‘Resolution Plan’ if shown to be discriminatory against one or other ‘Financial Creditor’ or the ‘Operational Creditor’, such plan can be held to be against the provisions of the I&B Code”.

The NCLAT observed that Section 30(2)(b) of the Code mandates that the resolution plan must provide for the payment of the debts of operational creditors in such manner as may be prescribed by the IBBI which shall not be less than the amount to be paid to the operational creditors in the event of a liquidation of the corporate debtor under Section 53 of the Code. That means, the operational creditors should not be paid less than the amount they could have received in the event of a liquidation out of the asset of the corporate debtor. It does not mean that they should not be provided the amount more than the amount they could have received in the event of liquidation; which otherwise amount to discrimination.

Issue 8:
The NCLAT examined the definition of ‘Operational Debt’, and concluded that the following classification has been made by the Parliament: (i) those who have ‘supplied goods’ and ‘rendered services’ and thereby entitled for payment; (ii) the employees who have ‘rendered services’ for which they are entitled for payment; and (iii) the Central Government, the State Government or the local authority who has not rendered any services but derive the advantage of operation of the ‘Corporate Debtor’ pursuant to existing law (statutory dues). The NCLAT observed that from the aforesaid definition, the ‘Operational Creditors’ can be classified in three different classes for determining the manner in which the amount is to be distributed to them. However, they are to be given the same treatment, if similarly situated.

For the aforesaid reasons, the NCLAT held that if the employees or those who have ‘supplied goods’ and ‘rendered services’ having claim less than INR 1 Crore are given 100% of their dues, the other ‘Operational Creditors’ whose claim are more than INR 1 Crore or the ‘Central or State Government’ or the ‘Local Authority’, who raise their claim on the basis of the statutory dues, cannot ask for same treatment as allowed in favour of the aforesaid class of ‘Operational Creditors’. For the said reasons, the NCLAT held that 100% payment as suggested in the resolution plan in favour of the workmen and employees, unsecured financial creditors whose claim was less than INR 1 Crore and the operational creditors whose admitted claim was less than INR 1 Crore was not discriminatory and the other operational creditors or financial creditors cannot ask for 100% of their claim on the ground that they should also be provided with same treatment.

DECISION OF THE NCLAT
In view of the aforesaid observations, the NCLAT decided not to reject the resolution plan submitted by ArcelorMittal, and modified the plan as approved by the NCLT by its judgement dated March 8, 2019 to safeguard the rights of the operational creditors and other financial creditors. However, the other conditions laid down by the NCLT and as mentioned in the resolution plan were not interfered with.

With respect to the amount to be paid to the financial creditors and operational creditors whose claim was more than INR 1 Crore, the NCLAT calculated the percentage of amount to be paid to the relevant stakeholders against their original admitted claim by dividing the amount available for distribution (as offered by ArcelorMittal in its resolution plan) by the total debt amount payable to the stakeholders. After calculation, the NCLAT held that financial creditors with claim of more than INR 1 Crore will be eligible for 60.7% of the amount of debt claimed. The NCLAT also calculated the revised percentage for amount to be paid to operational creditors with claim of more than INR 1 Crore, and held that 59.614% shall be payable to such operational creditors. The aggregate amount allocated to all the operational creditors and the financial creditors was 60.7% of their respective admitted claims. The operational as well as the financial creditors with claim of less than INR 1 Crore were allowed 100% of their respective admitted claims.

The NCLAT also made a direction to the effect that after the distribution of the amount of INR 42,000 Crores, if any amount would be found to have been generated as profit during the CIRP after due verification by the auditors, it cannot be given to the successful resolution applicant as the successful resolution applicant has not invested any money during the CIRP. If one or other financial creditors would have invested money during the CIRP to keep the corporate debtor as a going concern, it can claim that it should get the interest out of the profit amount. In the present case, since the financial creditors had not invested money during the CIRP, the NCLAT held that it should be distributed amongst all the financial creditors and the operational creditors on pro-rata basis of their claims subject to the fact that it should not exceed the admitted claim.

With regard to disputed claims and remedies available in respect thereof, the NCLAT referred to its earlier judgements and held that the cases where the adjudicating authority or the appellate authority could not decide the claims on merits, the applicants can raise the issue before the appropriate forum in terms of Section 60(6) of the Code. However, the creditors, whose claims have already been decided, cannot avail any remedy under Section 60(6) of the Code. Further, the financial creditors in whose favour guarantee were executed, can also not reagitate such claim from the principal borrower as their total claim stands satisfied pursuant to the resolution plan.

Vaish Associates Advocates View
This judgement will have a significant impact on the status of operational creditors as it places the operational creditors at the same pedestal as financial creditors who form part of the committee of creditors. For the first time, the NCLAT also dealt with profit generated during the CIRP and held that the same should be distributed amongst all the creditors on pro-rata basis of their claims subject to the fact that it should not exceed the admitted claim.

The NCLAT in this judgment criticized the committee of creditors for deciding the distribution of money to the creditors and reiterated that this is the duty and responsibility which vests with the resolution applicant. The NCLAT further stated that the formation of sub-committee/ core committee to renegotiate the terms of the plan are against the provisions of law and any delegation of power to such committees shall be invalid.

It will be interesting to note the fate of this judgment in the pending appeals filed before the Supreme Court. Further in light of this judgement, the Government has acted swiftly and moved an amendment to the Code in respect of the primacy of secured creditors over unsecured creditors in recovery of their dues and setting strict timelines for the resolution and litigation process. Moreover, the amendment proposes to vest the power with committee of creditors in respect of commercial decisions on distribution of funds to various classes of creditors as against the aforesaid judgement of NCLAT, where the NCLAT has given such power to the resolution applicant. The proposed amendments will help in cutting legal delays and help banks to recover more dues and boost India’s credit market for future growth.

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

Supreme Court: Limitation Act shall be applicable to suits, appeals and applications filed in courts, but does not extend to statutory authorities or tribunals

The Supreme Court, in the case of Ganesan v. The Commissioner, The Tamil Nadu Hindu Religious and Charitable Endowments Board and Others (decided on May 3, 2019), held that Limitation Act, 1963 (“Limitation Act”) is applicable in case of suits, appeals and applications filed in courts, but is not applicable to suits, appeals or applications filed before any statutory authority or tribunals.

FACTS
Mr. Ganesan (“Appellant”), to claim his ambalam right, had filed an application under Section 63 (Joint Commissioner or Deputy Commissioner to decide certain disputes and matters) of the Hindu Religious and Charitable Endowments Act, 1959 (“Endowments Act”) before the Joint Commissioner of the Hindu Religious & Charitable Endowments Board (“Board”). The Joint Commissioner after holding an enquiry, on December 21, 2010, passed an order stating that the Appellant is entitled to the ambalam right, and should also receive first respect as ambalam in the Tirupathartalu village.

Mr. P.R. Ramanathan (“Respondent 3”) filed an appeal under Section 69 (Appeal to the Commissioner) of the Endowments Act before the Commissioner of the Board (“Respondent 1”) against the order of the Joint Commissioner. He also filed a writ petition in the Madras High Court seeking a direction to decide his statutory appeal filed before the Respondent 1. The Madras High Court by an order dated March 7, 2013, directed the Respondent 1 to dispose of the appeal within 4 months from the date of order.

Subsequently, Respondent 3 on April 30, 2013, filed an application for condonation of delay of 266 days in filing the appeal before the Respondent 1 due to ill health of the Respondent 3 for over 7 months due to which he was unable to travel to Chennai to discuss with his counsel. The Appellant filed a counter affidavit pleading that Section 5 (Extension of prescribed period in certain cases) of the Limitation Act, is not applicable to the present appeal. The Respondent 1, by an order, condoned the delay of 266 days. The Appellant filed a writ petition against this order allowing condonation of delay.

A Single judge of the Madras High Court held that Section 5 of the Limitation Act fully applies to the present case and that there was sufficient cause for condonation of delay, and held the order of the Respondent 1 to be valid and correct. On an appeal to the division bench of the Madras High Court, it was held that the Endowments Act does not prevent the application of the provisions of the Limitation Act and hence, the order of the Respondent 1 was valid. Aggrieved by this decision, an appeal was filed by the Appellant before the Supreme Court.

ISSUES

Whether the Respondent 1 was a “Court” while hearing appeal under Section 69 of the Endowments Act?
Whether Section 29(2) of the Limitation Act is with respect to suits, appeals or applications filed before Court(s) or does it apply to suits, appeals and applications filed before statutory authorities and tribunalsalso?
Whether the Respondent 1, while hearing an appeal under Section 69 of Endowments Act had the authority to condone any delay?
Whether the statutory scheme of the Endowments Act indicates that Section 5 of the Limitation Act is applicable to proceedings before authorities mentioned under the Limitation Act?

ARGUMENTS
The Appellant’s main contention was that the Respondent 1 had no authority to decide an application filed under Section 5 of the Limitation Act. He argued that the Endowments Act has clearly and distinctly defined the term “Court” under Section 6(7) and the term “Commissioner” under Section 6(6), which shows the intent of the legislature that a “Commissioner” is not a “Court” and hence, Section 5 of the Limitation Act was not applicable. He also stated that Section 115 of Endowments Act specifically provided that only Section 12(2) of the Limitation Act shall be applicable, which means that all other provisions were expressly excluded.

The Respondent 1 countered the arguments of the Appellant by saying that even though the terms “Court” and “Commissioner” have been defined separately in the Endowments Act and that a “Commissioner” is not a “Court”, as per the definition, a “Commissioner” shall be a “Court” for the purpose of Section 5 of the Limitation Act. The Respondent 1 also stated that Section 110 of Endowments Act, which provides for procedure for hearing of appeals, is similar to the procedure provided for trial of suits or hearing of appeals under the Code of Civil Procedure, 1908. He thus stated that a Respondent 1 has all the powers of a Court. The Respondent 1 also relied on Section 29(2) of the Limitation Act and submitted that Section 5 of the Limitation Act has not been specifically excluded and thus, was fully applicable.

OBSERVATIONS OF THE SUPREME COURT
Issue 1: The Supreme Court looked at the definition of “Commissioner” and “Court” given under Section 6(6) and Section 6(7) of the Endowments Act. The Supreme Court also looked into the provisions under Section 8 of the Endowments Act, which provides for authorities under the Endowments Act, and Section 9 which provides for appointment of a Commissioner. The Supreme Court observed that the definition of “Court” as provided under Section 6(7) of the Endowments Act refers to a civil court that is established in a state. The Endowments Act clearly provides that a “Commissioner” is an authority who shall be appointed by the government and is empowered to perform certain functions under the Endowments Act, which includes hearing of appeals under Section 69 of the Endowment Act. Section 70 of the Endowments Act, clearly provides that any person who is aggrieved by the order of a Commissioner can file a suit with the Court.

Thus, the Supreme Court observed that where an appeal against order of Commissioner lies with the Court, the Commissioner cannot be treated as Court under the Endowments Act. The Supreme Court also relied on its earlier judgment in case of The Commissioner of Sales Tax, U.P. Lucknow v. M/s Parsons Tools and Plants, Kanpur [(1975) 4 SCC 22], where it was held that “Appellate Authorities” and “Judges (Revisions)” Sales tax, do not fall under definition of “Courts” and hence Section 14 of the Limitation Act was not applicable. Thus, the Supreme Court held that Respondent 1 is not a Court while hearing appeal under Section 69 of the Endowments Act.

Issue 2 and 3: The Supreme Court answered the two questions jointly by relying on the provisions of the Limitation Act as well as various other judgements. The Supreme Court looked at two sets of cases wherein in the first set of cases, it was held that provisions of the Limitation Act, shall only apply to suits, appeals and applications made in Court unless there is a specific provision for the same in special or local law, and in the second set of cases it was held that provisions of the Limitation Act, shall also apply to suits, appeals and applications filed in tribunals or statutory authorities. The Supreme Court also referred to the judgments which held that provisions of the Limitation Act are only applicable to suits, appeals or applications filed in Court and not before other authorities, however, Section 14 of the Limitation Act shall apply. After referring to and interpreting all earlier judgements, the Supreme Court in the present case observed that Section 29(2) of the Limitation Act is with respect to different period of limitations for suits, appeals and applications filed in a Court and cannot be applied to suits, appeals and applications filed under any special or local law before any statutory authority or tribunal. Hence, the Respondent 1 cannot, by applying Section 5 of the Limitation Act, condone a delay while hearing appeal under Section 69 of the Endowments Act.

Issue 4: The Supreme Court observed that any special or local law may either expressly include or exclude the applicability of sections under the Limitation Act. The Supreme Court looked into the provisions of the Endowments Act, including Section 110 which provides for procedure and powers for inquiries, Section 115 which deals with limitation and Section 69 (supra). After such perusal, the Supreme Court held that it was never the intention of the legislature to expressly include the application of Section 5 of the Limitation Act in case of condonation of delay in filing appeal under Section 69 of the Endowments Act.

DECISION OF THE SUPREME COURT
After answering the above questions, the Supreme Court laid down the following principles:

The suits, appeals and applications referred to in the Limitation Act are suits, appeals and applications which are to be filed in a Court and are not the suits, appeals and applications which are to be filed before a statutory authority like Respondent 1 under the Endowments Act.
Operation of Section 29(2) of the Limitation Act is confined to the suits, appeals and applications referred to in a special or local law to be filed in Court and not before statutory authorities like Respondent 1 under Endowments Act.
However, special or local law by statutory scheme can make applicable any provision of the Limitation Act or exclude applicability of any provision of Limitation Act, which can be decided only after looking into the scheme of particular, special or local law.

Relying on the aforesaid principles, the Supreme Court set aside the judgement of the Madras High Court and also the order of the Respondent 1.

Vaish Associates Advocates View
The Supreme Court has, by this decision, finally given clarity to an issue over which there were various contradictory judgements. However, this decision shall have certain implications adversely affecting bona fide applicants seeking benefit of the Limitation Act. In other words, restricting the application of Limitation Act to just suits or appeals or applications filed in Courts shall affect those who seek to take benefit of provisions under Limitation Act while filing any appeal or application under any special or local law before any statutory authority or tribunal. Even if any person was unable to file any application or appeal in any tribunal due to a genuine, bona fide reason, they cannot take benefit of Section 5 of the Limitation Act.

This judgment, while clearing the air on the application of the Limitation Act before any tribunal or statutory authority, has left a void on the litigant’s remedy to seek condonation in case of statutes where the Limitation Act’s application has not been specifically extended by an explicit legislation.

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

NCLT Chennai: Creditors having vested interest in corporate debtor should not be a part of the committee of creditors

All provisions cited in this case analysis, unless specified otherwise, refer to the provisions of the Insolvency and Bankruptcy Code, 2016 (“Code”).

The National Company Law Tribunal (“NCLT”), Chennai in the case of M/s. Asset Reconstruction Company (India) Limited v. Mr. Gopal Krishna Raju and Others (decided on March 5, 2019), on the basis of a business arrangement between the corporate debtor and certain unsecured creditors, laid down that such creditors would be disqualified from participating in the committee of creditors.

FACTS
M/s. Anandram Developers Private Limited (“Corporate Debtor”) had taken a loan from two financial institutions namely Indian Overseas Bank and Oriental Bank of Commerce. The loans were assigned by the said banks to M/s. Asset Reconstruction Company (India) Limited (“Applicant”).

On June 6, 2018, corporate insolvency resolution process (“CIRP”) was initiated against the Corporate Debtor and Mr. Gopal Krishna Raju was appointed as the interim resolution professional (“Respondent 1”). Respondent 1 sent out a public announcement and called for claims, following which the Applicant filed a claim as a financial creditor. On receipt of the claims, Respondent 1 constituted the committee of creditors (“CoC”) and sent out a notice for convening the first CoC meeting. From the notice, the Applicant discovered that M/s. Jayapushpam Investments and Trading Private Limited (“Respondent 2”), M/s. JDA Consultancy Private Limited (“Respondent 3”) (Respondent 2 and Respondent 3 are collectively referred to as “Claimants”), and M/s. Anand Cine Services Private Limited had also submitted their claims as financial creditors. M/s. Anand Cine Services Private Limited was categorized by Respondent 1 as related party under Section 5(24)(a) and hence, was not allowed any right of representation, participation or voting in the CoC, as stated in proviso to Section 21(2).

Following this, the Applicant sent an e-mail to the Respondent 1 asking for the details of claims submitted by Claimants, which the Respondent 1 made available to the Applicant only after the first CoC meeting was convened. The Applicant, on perusal of the claims, found that the claims of the Claimants were based on alleged assignment of debts of unsecured loans by parties who fall under the category of “related party” under Section 5 and hence, even the Claimants must have been prohibited from participating or voting in the CoC as under proviso to Section 21(2). Respondent 1, however, admitted the claims of the Claimants and included them in the CoC.

Based on this knowledge, the Applicant filed a petition in the NCLT, Chennai which passed an order directing the Respondent 1 to resolve the issue raised by the Applicant within 3 weeks. Ignoring this, the Respondent 1 conducted two CoC meetings and in the third meeting, the Respondent 1 circulated an information memorandum which showed debt due from related parties as NIL, which was contrary to the Respondent 1’s decision of categorizing M/s. Anand Cine Services Private Limited as related party. Aggrieved by the conduct of the Respondent 1, the Applicant filed the present application before the NCLT, Chennai.

ISSUE
Whether the Claimants are related parties of the Corporate Debtor as under proviso to Section 21(2) read with Section 5(24)?

Relevant provisions
For ease of reference, Section 5(24)(a) and Section 21(2) of the Code involving related party are reproduced below:

“5. Definitions. –
In this Part, unless context otherwise requires,-
(24) “related party” in relation to a corporate debtor, means-

(a) a director or a partner of the corporate debtor or a relative of a director or partner of the corporate debtor;”

“21. Committee of creditors. –

(2) The committee of creditors shall comprise all financial creditors of the corporate debtor:
Provided that a financial creditor or the authorised representative of the financial creditor referred to in sub-section (6) or sub-section (6A) or sub-section (5) of section 24, if it is a related party of the corporate debtor, shall not have any right of representation, participation or voting in a meeting of the committee of creditors….”

ARGUMENTS
The Applicant submitted that the Claimants were camouflaged as financial creditors based on documents which were created for the purpose of such claims. It was argued that the Claimants were related parties to the Corporate Debtor. The basis for this was twofold. First being that the original unsecured creditors (assignors) would be hit by the related party transactions (being suspended directors and shareholders of the Corporate Debtor) and therefore the Claimants being assignees cannot have a better title. Second being that the Claimants were a part of a project under which land belonging to the Claimants was being developed by the Corporate Debtor. A joint development agreement (“JDA”) was executed between the parties whereby post the development, certain plots would be allotted to the Claimants. It was argued that the assignment agreements were entered into between the related party individuals and interested parties in order to secure the recoverability of the amounts in the hands of the interested parties, since they also owned a share of the property. Hence, the Claimants were in the position to influence the decision making in their capacity as business partners in developing the property who have a bearing on the activities of the Corporate Debtor. In view of the same, they are liable to be declared as related parties.

Respondent 2 pleaded that the Claimants were not related parties under Section 5(24). It argued that the stand of the Applicant was based on the deeds of assignment between the suspended directors and the Claimants. The assignment took place in 2017, that is, prior to commencement of CIRP. The assignment was not challenged by the Applicant and what was challenged was the consequence of the assignment. In response to the argument that the Claimants fall under the purview of related parties, Respondent 2 referred to the case of Swiss Ribbons Private Limited v. Union of India (decided on January 25, 2019), wherein it was held by the Supreme Court that a person who can be directly connected as related party to the corporate debtor itself can only be termed as related party and not others. Thus, they stated that the assignees to the loan cannot be held as related party as they are not directly connected to the Corporate Debtor. They further referred to a National Company Law Appellate Tribunal judgement in the case of Edelweiss Asset Reconstruction Company Limited v. Synergies Dooray Automotive Limited (decided on December 14, 2018) and pointed out that assignee of a related party cannot be held as a related party and hence, they have the right to participate, represent and vote in the committee of creditors. The arguments of Respondent 3 too were on similar lines.

OBSERVATIONS OF THE NCLT, CHENNAI
NCLT, Chennai after review of the deeds of assignment came to the conclusion that the elements of partnership between the suspended directors of the Corporate Debtor and the Claimants were clearly established in view of the JDA. The deeds of assignment were akin to assignments cum partnership deeds, which point out towards the JDA between the Claimants and the Corporate Debtor. Therefore, the relationship between the assignors, being the suspended directors/ertswhile shareholders of the Corporate Debtor, and the assignees, being the Claimants, is of a partnership for the purpose of the joint ownership and development of the land. Thus, the Claimants were in a position to influence the decision making in their capacity as business partners as owners of the property, who have a say in the activities of the Corporate Debtor, which falls within the purview of the definition of “related party” given under Section 5(24)(a). Further, the consideration for the assignors under the deeds of assignment was allotment of equity shares in the capital of the Respondent 2 which would clearly make Respondent 2 a related party to the Corporate Debtor.

DECISION OF THE NCLT, CHENNAI
The Claimants were held to be related parties of the Corporate Debtor and were barred from participating in the CoC.

Vaish Associates Advocates View
Section 5(24) and proviso to Section 21(2) were enacted to ensure that the corporate insolvency resolution process is not influenced by any party, who stands in an interested position as regards the corporate debtor. The decision of the NCLT, Chennai in this judgment, supports the intent of the legislature to keep the CoC independent. In the instant case, the NCLT, Chennai investigated into the past relationship of the assignor (related party) and the assignee (financial creditor) to conclude that the assignees were in a position to influence the decision making in their capacity as business partners of the Corporate Debtor and hence were considered as related parties to the Corporate Debtor.

However, the application of Section 5(24)(a) seems to be erroneous. Neither were the Claimants, directors or partners of the Corporate Debtor, nor were they relatives of a director or partner of the Corporate Debtor. Sub-section (h) of Section 5(24) which states that “any person on whose advice, directions or instructions, a director, partner or manager of the corporate debtor is accustomed to act” would have been an appropriate provision to determine the disqualification of the Claimants as related parties of the Corporate Debtor in this instance.

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

NCLAT: Resolution plans must ensure continuity of operations of the Corporate Debtor

The National Company Appellate Law Tribunal (“NCLAT”), in the case of Industrial Services v. Burn Standard Company Limited and Others (decided on May 13, 2019), held that a resolution plan which shall result in closure of the operations of the corporate debtor is against the scope and intent of the Insolvency and Bankruptcy Code, 2016 (“Code”).

FACTS
Burn Standard Company Limited (“Corporate Debtor”) is a government owned, West Bengal based wagon maker. Due to consistent losses and erosion of net worth, the Corporate Debtor was referred to Board of Industrial and Financial Reconstruction (BIFR) in the year 1994 under Sick Industrial Companies (Special Provisions) Act, 1985 and was declared as a sick company. Upon enactment of the Code, the Corporate Debtor filed an application under Section 10 of the Code to initiate corporate insolvency resolution process (“CIRP”) against itself.

In an order dated March 6, 2018, the National Company Law Tribunal (“NCLT”), Kolkata approved Corporate Debtor’s insolvency resolution plan, which included INR 417 Crores financial package to pay back creditors and suppliers, and a voluntary retirement scheme of all the employees. The resolution plan submitted by the Corporate Debtor showed that the Ministry of Railways proposed to use the entirety of the abovementioned financial package to repay the dues and shut down the company.

The NCLT, Kolkata while approving the resolution plan stated in its order that “The Resolution Plan in the case in hand is a unique plan which provides no revival of the corporate debtor but to close it by discharging its debts to all stakeholders inclusive of its staff and workmen.”

Aggrieved by the contents of the resolution plan approved by the NCLT, Kolkata, Industrial Services (“Appellant 1”), an operational creditor of the Corporate Debtor, whose claim was not accepted by the resolution professional of the Corporate Debtor (“RP”), filed an appeal against the NCLT, Kolkata’s decision. Further, the Burn Standard Ex-Employee Welfare Association (“Appellant 2”) also filed an appeal against the NCLT, Kolkata’s order, and stated that a resolution plan cannot be used to close the operations of the Corporate Debtor.

ISSUES
1. Whether the resolution plan is against the statement of objects and reasons of the Code?

2. Whether the application under Section 10 of the Code was filed by the Corporate Debtor with malicious intent for any purpose other than for the resolution of insolvency, or liquidation of the Corporate Debtor?

ARGUMENTS
The Appellant 1 contended that the resolution plan is bad in law, as the provisions of Section 29A of the Code are not fulfilled. It was also stated that the procedure prescribed under the Code was not complied with. For example, no evidence was provided to show that the information memorandum was published, as required under Section 25 of the Code or operational creditors or their representatives were called in the meeting of the committee of creditors, as required under Section 24 of the Code. Another contention was that the resolution plan provides for no revival of the Corporate Debtor but closure and retrenchment of all the workmen.

On the other hand, the Corporate Debtor submitted that, being an undertaking of the Indian Railways, it cannot be held to be ineligible in terms of Section 29A of the Code. It was submitted that it is not an undischarged insolvent nor a willful defaulter. Further, its account has not been declared as a non-performing asset.

OBSERVATIONS OF THE NCLAT
The NCLAT observed that during the resolution process, and thereafter, the resolution applicant is required to ensure that the company remains as a going concern, but contrary to the provisions of the Code, closure of the Corporate Debtor has been proposed and approved by the NCLT, Kolkata.

The NCLAT referred to the decision of the Supreme Court in the case of Swiss Ribbons Private Limited v. Union of India and Others (decided on January 25, 2019), where it was stated that the primary intention of the legislature in enacting the Code was to ensure revival of the corporate debtor by protecting the corporate debtor from its own management and from a corporate’s death by liquidation. It was also held that the preamble of the Code shows that the Code is first and foremost, a Code for reorganization and insolvency resolution of corporate debtors. The Supreme Court opined that the fact that the preamble of the Code does not even mention ‘liquidation’, it can be stated that liquidation is only available as a last resort, in the event no suitable resolution plans are received.

Therefore, the Supreme Court stated that the Code is a beneficial legislation which puts the corporate debtor back on its feet, and is not a mere recovery legislation for creditors. The interests of the corporate debtor have, therefore, been bifurcated and separated from that of its promoters/those who are in management. Thus, the resolution process is not adversarial to the corporate debtor but, in fact, protective of its interests.

The NCLAT also referred to its decision in Y. Shivram Prasad v. S. Dhanapal and Others (decided on February 27, 2019) where it held that steps should be taken for resolution at different stages including the liquidation stage to keep the company as a going concern in the interest of the employees, and that liquidation should only happen as a last resort.

In view of the abovementioned precedents, the NCLAT observed that, the resolution plan goes against the object of the Code and the application under Section 10 of the Code was filed with intent of closure of the Corporate Debtor for a purpose other than for the resolution of insolvency. Therefore, the part of the resolution plan which relates to closure of the Corporate Debtor is against the scope and intent of the Code and is in violation of Section 30(2)(e) of the Code, which states that the resolution plan should not contravene any law in force.

DECISION OF THE NCLAT
The NCLAT, set aside the part of the resolution plan that stated that the Corporate Debtor would be closed, but upheld the rest of the resolution plan. Further, it stated that consequential orders, including the order of closure of the Corporate Debtor and the order of retrenchment issued to the employees of the Corporate Debtor are also to be set aside. The NCLT, Kolkata was directed to make necessary correction in the resolution plan by asking the Corporate Debtor to delete the portion of the resolution plan requiring the closure of the Corporate Debtor. If the Corporate Debtor refuses to do so, the plan approved will be treated to be set aside by the NCLAT and the NCLT, Kolkata will proceed asking the RP to call for fresh expressions of interest and resolution plans and proceed in accordance with law.

Vaish Associates Advocates View
In the instant case, in order to reaffirm the central theme of the Code, which is to ensure revival of the corporate debtor, the NCLAT held that the resolution plan shall ensure that the Corporate Debtor shall remain a going concern. In an earlier case of K. Sashidhar v. Indian Overseas Bank and Others (decided on February 5, 2019), the Supreme Court had held that the NCLT and NCLAT should not question the commercial wisdom of the committee of creditors, but should only examine the resolution plan through the lens of Section 30(2) of the Code, which provides for requirements of a resolution plan. In the present case, the ‘commercial wisdom’ of the banks favored the resolution plan submitted, however the NCLAT overrode the same, as the proposed resolution plan did not fulfil the requirements under the Code.

The ratio decidendi of this case, that the resolution plans must ensure that the company continues to operate as a going concern is important and it can be said that with this judgement, the NCLAT is nailing its colours to the mast. Therefore, resolution plans must provide for the continuation of the corporate debtor as a going concern and the aspiration of the Code, is to ensure revival, not repayment.

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