MAINTAINABILITY OF APPLICATIONS FOR INITIATION OF CORPORATE INSOLVENCY RESOLTUION PROCESS

[Mr. M. GOVINDARAJAN]

Introduction

The Insolvency and Bankruptcy Code, 2016 (‘Code’ for short) provides for the initiation of corporate insolvency resolution process (‘CIRP’ for short).  The same may be initiated either by the Financial creditor under section 7 of the Code or by the Operational creditor under section 9 of the Code or by the Corporate applicant itself under Section 10 of the Code.  The application shall be in the prescribed form and the required fee is to be paid along with the application and to be filed before the Adjudicating Authority.

Maintenance of applications

The Adjudicating Authority is to consider the application filed by the applicants and it should be satisfied that the application is complete in all aspects.  If the application is complete in all aspects and there is no disciplinary case is pending against the proposed interim resolution professional, the same will be admitted by the Adjudicating Authority.  If the application is not complete and there is a disciplinary case pending against the proposed interim resolution professional, the Adjudicating Authority may reject the application.   Before rejecting an application, give a notice to the applicant to rectify the defects in his application within seven days from the date of receipt of such notice from the Adjudicating Authority.

Some case laws are given as below in which the Adjudicating Authority held that the applications filed by the applicants are not maintainable for CIRP.

By operational creditors

In ‘SWITCHING AVO ELECTRO POWER LTD. VERSUS AMBIENT COMPUTRONICS PVT. LTD.’ – 2020 (10) TMI 1068 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL, NEW DELHI, the appellant filed an application under Section 9 of Insolvency and Bankruptcy Code, 2016 before the Adjudicating Authority, Kolkata.    The Appellant is in business of supply of UPS Power Storage Equipment and in ordinary course of business.  The appellant, the Operational Creditor supplied UPS Power Storage to the Corporate Debtor.   The Corporate Debtor made default in making payment of the balance of amount of ₹ 21,07,916/-.  Demand Notice under section 8 of the Code was sent on 10th April, 2018.   The Corporate Debtor received the Notice on 24th April, 2018.   The Company (corporate debtor) had internal disputes with one of the directors. The Corporate Debtor informed the Operational Creditor in Reply to bear with the Corporate Debtor to know about lapse and conspiracy behind raised situation between the two reputed companies. The Corporate Debtor informed that they need sufficient time for confirmation of the transaction purchase, sale, payment and receipt.  The Adjudicating Authority observed that there was no supporting evidence to prove that Corporate Debtor had placed orders for purchasing the goods referred to in the invoices. For such and other reason, the Application came to be rejected by the Adjudicating Authority.

The appellant filed appeal against the order of the Adjudicating Authority.  The Appellate Authority observed that the internal disputes of the directors would not be relevant for throwing out of the Application under Section 9 of the Code. In any case, that was not a dispute which was raised or communicated to the Operational Creditor any time before Notice under Section 8 was sent. In the facts of the matter, the Appellate Tribunal found that the Adjudicating Authority erred in approaching the Application under Section 9 and the form submitted in a manner as if a plaint was being examined or it was some suit. Considering the format and particulars required to be given in the format, if the application is complete, it is required to be admitted unless the Corporate Debtor shows pre-existing Dispute. Here the dispute raised was that there was no dealing between the Corporate Debtor and the Operational Creditor; that there was no agreement. However, the same Corporate Debtor had in reply referred to its dispute with the branch office and stated that they wanted to verify the transaction.

Limitation

Section 238A of the Code provides that the provisions of the Limitation Act, 1963 (hall, as far as may be, apply to the proceedings or appeals before the Adjudicating Authority, the National Company Law Appellate Tribunal, the Debt Recovery Tribunal or the Debt Recovery Appellate Tribunal, as the case may be.

In ‘P.H. COMBINES (A PROPRIETORSHIP CONCERN REPRESENTED BY ITS PROPRIETOR, MR PRAVINKUMAR SURESHCHANDRA BHOOT) VERSUS MDA AGROCOT PRIVATE LIMITED’ – 2020 (10) TMI 964 - NATIONAL COMPANY LAW TRIBUNAL , MUMBAI BENCH, the present petition was filed on 08.11.2018 on the ground that the Corporate Debtor failed to make payment of a sum of ₹1,97,96,082.00 as principal as on 21.09.2013, which is the date of default.   There has been no repayment by the Corporate Debtor. The Financial Creditor sent written communication dated 21.09.2013 demanding payment of the debt due from the Corporate Debtor.

The Adjudicating Authority observed that the amount in question has been claimed in a civil suit before the Civil Judge (Senior Division), Amravati, by the Financial Creditor, which dismissed the application of the Financial Creditor for attachment before judgment, the appeal against the order has also been dismissed by the Bombay High Court.

 The date of default mentioned in the application to be 21.09.2013. Also, the Financial Creditor has relied heavily on the acknowledgements in the balance sheets for the Financial Years 31.03.2013, 31.03.2014, 31.03.2015, 31.03.2016, 31.03.2017 and 31.03.2018, which have been attached to the petition at pp.133-219, to contend that the application filed under section 7 of the Code to be within the period of limitation.   The present application filed under section 7 of the Code fails the test of limitation in so far as the Code is concerned.  The Adjudicating Authority dismissed the application.

Section 10A

Section 10A was inserted by Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020, dated 05.06.2020.  Section 10A provides for the suspension of CIRP due to COVID – 19 pandemic.  Section 10A provides that notwithstanding anything contained in sections 7, 9 and 10, no application for initiation of corporate insolvency resolution process of a corporate debtor shall be filed, for any default arising on or after 25.03.2020 for a period of six months or such further period, not exceeding one year from such date, as may be notified in this behalf.  The said prohibition is up to 25.12.2020.  No application shall ever be filed for initiation of corporate insolvency resolution process of a corporate debtor for the said default occurring during the said period.

In ‘RAMESH KYMAL VERSUS M/S. SIEMENS GAMESA RENEWABLE POWER PRIVATE LIMITED’ – 2020 (10) TMI 915 - NATIONAL COMPANY LAW APPEALLATE TRIBUNAL, NEW DELHI, the Adjudicating Authority held that it is now well settled that a substantive administrative right cannot be taken away except by clear indication of intention to that effect by an express statutory provision or by necessary implication. No statute, unless it deals with procedure only, can be construed to have retrospective operation unless there is an express provision to that effect or same can be inferred by necessary implication.

Section 10A, beginning with a non-obstante clause overriding provisions of Sections 7, 9 & 10 of the Code places an embargo on filing of application for initiation of CIRP of a Corporate Debtor for any default arising on or after 25th March, 2020 for a period of six months or such further period as may be notified but not exceeding one year from such date. This provision is clearly prohibitory in nature and filing of applications under Sections 7, 9 & 10 in respect of default arising on or after 25.03.2020 is clearly barred for the specified period of six months or the extended period not exceeding one year, if so notified. Proviso to this main provision creates a further bar qua a default that may occur during the specified period. This construction is placed on the proviso adopting purposive interpretation to advance the intended object of the Ordinance viz. to prevent corporate persons experiencing distress due to impact of COVID-19 pandemic. Any other interpretation would lead to absurdity and defeat the object of the amending Ordinance. The explanation clarifies that Section 10A cannot be interpreted to apply the embargo in terms of main provision to any default committed before 25.03.2020. An eligible applicant could, by no stretch of imagination, have the foresight of having even an inkling of the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020 being promulgated. The bar on initiation cannot operate in respect of applications filed for initiation of CIRP by the eligible applicant in respect of default committed before 25.03.2020 though such application has been filed after 25.03.2020 but before enforcement of Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020 on 05.06.2020. Such interpretation not only serves the object of basic legislation but also goes along the tone and tenor of Section 10A with the explanation appended thereto clarifying the mist, if any, surrounding, the newly inserted provision.

In the present case, it can be seen that in Form-5 i.e., the application to the Adjudicating Authority as also in Form-3 i.e. Demand Notice, the Appellant Operational Creditor has specified 30.04.2020 as the date of default which clearly goes beyond the cut-off date. Therefore, the Adjudicating Authority was perfectly justified in rejecting the application under Section 9 of the Code at the instance of Appellant Operational Creditor as the default has occurred after the cut-off date and the bar imposed under Section 10A was clearly attracted.

Unpaid operational debt

In ‘JAIPUR TRADE EXPOCENTRE PVT. LTD. VERSUS METRO JET AIRWAYS TRAINING PVT. LTD.’ – 2020 (10) TMI 868 - NATIONAL COMPANY LAW TRIBUNAL , JAIPUR BENCH,  in the present Application the claim of the Applicant has arisen out of a Licence Agreement whereby the Applicant had granted, to the Respondent, the right to use its immovable property to carry out business. It can be concluded that the claim arising out of grant of licence to use immovable property does not fall in the category of goods or services including employment and is also not a debt for the payment of dues arising under any law for the time being in force and payable to the Central Government, any State Government, or any Local Authority, as defined under Section 5(21) of IBC, 2016. Thus, the amount claimed in the present petition is not an unpaid operational debt and therefore the Application cannot be allowed.

No financial debt

In ‘ARENJA ENTERPRISES PRIVATE LIMITED VERSUS EDWARD KEVENTER (SUCCESSORS) PRIVATE LIMITED’ – 2020 (10) TMI 825 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL, NEW DELHI, the Financial Creditor filed a suit before Delhi High Court in 1992 and on the direction of the  High Court the Corporate Debtor returned principal amount, i.e. ₹ 2 crores to the Financial Creditor in January 1995 and to compensate interest-free security of ₹ 2 crores for five years, given the terms of the settlement, the Applicant and Corporate Debtor entered into an agreement dated 10th April 1996, whereby the Applicant/Appellant was allotted 34000 sq. ft. area of built-up area. It was also agreed upon that in case the project is delayed; the Applicant would get an additional 5100 sq. ft area of built-up area. The 'debt' as alleged by the Financial Creditor is not a 'financial debt' as defined under sub Clause (8) of Section 5 of the Code, because no sum has been raised from an allottee under the Real Estate Project. The Financial Creditor and its associates have not paid any money towards the allotment of built-up area. Given the terms of settlement Financial Creditor and its associates entitled to 34000 sq. ft. In other words, nothing is paid in terms of money to the Financial Creditor and its associates in the light of the ‘consent decree and settlement terms’. The Corporate Debtor has not raised any money from the Financial Creditor in terms of the explanation provided to sub-clause (8) of Section 5 of Code, 2016. Thus, it is clear that the alleged debt is not a ‘financial debt’ in terms of Sec 5(8) of the Code. Thus it cannot be said that there is any default by the Respondent under the Code, as the time for performance has not arrived yet and therefore in terms of various decisions of Supreme Court it is clear that even if the consent decree is a ‘debt’, even then there is no default by the Respondent in terms of the Code.  The Appellate Tribunal dismissed the appeal filed by the appellant.

Discrepancy

IN RE : PONDICHERRY EXTRACTION INDUSTRIES PVT. LTD. - 2020 (10) TMI 680 - NATIONAL COMPANY LAW TRIBUNAL , CHENNAI BENCH, the present application has been filed by the corporate applicant for initiation of CIRP under Section 10 of the Code.   The Adjudicating Authority observed that from the financial statements submitted by the Corporate Applicant, as to the query raised by this Authority, the Corporate Applicant was unable to explain as to why there is a depletion in the amount of General Reserve as evidenced from the heading Reserves and Surplus, which appears in the Balance Sheet as on 31.03.2018 at ₹ 1,02,95,314/- vis-a-vis and the amount is shown at ₹ 29,96,364/- as per the last balance sheet which is purportedly on 31.03.2019.  The Corporate Applicant goes on to show that there are various discrepancies in the records, more particularly with respect to the Audited Balance Sheet as on 31.03.2018 and further Rule 7 of the Insolvency & Bankruptcy (Application to Adjudicating Authority) Rules, 2016, empowers this Adjudicating Authority to look into the documents which are being filed by the Corporate Applicant and to ascertain whether the said documents are in order. The Adjudicating Authority is required to apply its mind in relation to the veracity of the documents filed correlating with Annexure required to be enclosed under the Form 6 under the Insolvency & Bankruptcy (Application to Adjudicating Authority) Rules, 2016.  

The discrepancies in the documents still persist and the Corporate Applicant was unable to explain as to why there is depletion in the amount of General Reserve as on 31.03.2018 as compared to 15.09.2019. The reason for drain in reserve could not be explained by the Applicant to the satisfaction the Adjudicating Authorityl.ly Form 6 under the Insolvency & Bankruptcy (Application to Adjudicating Authority) Rules, 2016.   The Adjudicating Authority held that it is not deem fit for considering the present application under section 10 of the Code.