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TMI Blog2023 (4) TMI 266X X X X Extracts X X X X X X X X Extracts X X X X ..... e of the I B Code - The devaluation of assets of a Corporate Debtor by passing time is well accepted phenomena. The I B Code, thus, provide for strict timeline to resolve insolvency with speed. To accept the submission that Corporate Debtor who is in red and further deteriorate by passing of time be taken out of insolvency process is to completely act against the statutory scheme. Since the asset size of JFIL became less than Rs.500 Crore as on 31.03.2021, the Adjudicating Authority shall lose jurisdiction to proceed further and this Tribunal shall also have no jurisdiction to proceed in the matter, cannot be accepted. Jurisdiction will be there with the Adjudicating Authority, as per Notification dated 18.11.2019, which has to exercise on the date when application can be filed against the Financial Service Provider for insolvency. As a corollary, an application under section 95 can be filed against the Personal Guarantor only when on the same date insolvency can be commenced against the Financial Service Provider. On the date when application was filed under Section 95 by the Financial Creditor against the Personal Guarantor an application could have filed against the Financ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th Singh and Ajay Kumar Singh executed Deeds of Personal Guarantee. (iii) An amount of Rs.24,86,50,000/- was disbursed by the Appellant to the JFIL, receipt of which amount was duly confirmed. (iv) JFIL delayed repayment of principal and interest instalments. A Recall Notice dated 27.01.2021 was issued by the Appellant to JFIL and all the three Personal Guarantors. By notice dated 27.01.2021, the JFIL as well as all the three Personal Guarantors were called upon to make payment of Rs.11,92,91,681/-. In the month of February, 2021, three cheques given to the Appellant were deposited and returned as being dishonoured. A Demand Notice dated 02.03.2021 was issued to JFIL and all the three Personal Guarantors by the Appellant calling upon the Personal Guarantors to make payment. No payment was made by the Personal Guarantors. Several notices thereafter were issued to the JFIL and Personal Guarantors for making payment but neither the JFIL nor the Respondents Personal Guarantors made payment towards the facility. (v) The Appellant filed three separate Company Petitions dated 03.06.2021 under Section 95 of the I B Code against the Personal Guarantors i.e. Rekha Singh (CP No. (I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sset size as per Note 17 of the Balance Sheet as on 31.03.2020 is approximately Rs.487 Crores, therefore, no CIRP can be initiated against JFIL. Hence, there was no occasion for filing any application against the Personal Guarantor under Section 95. Relying on the judgment of NCLT Mumbai Bench in Insta Capital Private Limited vs. Ketan Vinod Kumar Shah , it was submitted that unless and until CIRP has been initiated against the Corporate Debtor, no insolvency application against Personal Guarantor can be filed. (ix) The Adjudicating Authority heard the counsel for the parties and referring to the Balance Sheet for year ending 31.03.2020 held that asset size of JFIL is approx. Rs.487 Crore, hence, as per Notification dated 18.11.2019 insolvency proceeding cannot be initiated against the JFIL. Hence, Principal Borrower does not falls within the definition of Corporate Person and the application against the Personal Guarantor under Section 95 is not maintainable. The Adjudicating Authority, however, rejected the contention of the Personal Guarantors that unless and until CIRP against Corporate Debtor is pending, no application under Section 95 can be filed. Conclusions are recor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ror in only relying on Note 17 to come to the conclusion that asset size of JFIL is only Rs.487 Crores. It is submitted that Note 17 only refer to loan receivables and was not details of the assets of the JFIL. Assets of the JFIL includes both non-current assets and current assets, total of which as per the Balance Sheet is more than Rs.500 Crores. It is submitted that due to above mistake committed by the Adjudicating Authority, the Adjudicating Authority came to the conclusion that JFIL is not covered under the definition of Corporate Person. It is submitted that the total assets being more than Rs.500 Crores as per the last Balance Sheet, application filed under Section 95 against the Personal Guarantors were fully maintainable. It is further submitted that personal guarantee is between the Appellant Financial Creditor and the Personal Guarantor which can very well be invoked by the Financial Creditor and even as per Notification dated 18.11.2019 issued under Section 227 of the I B Code, CIRP can very well be initiated against JFIL, hence, applications filed by the Personal Guarantors have been wrongly allowed rejecting the Company Petitions filed by the Appellant. 3. Learne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3(7) corporate person means a company as defined in clause (20) of section 2 of the Companies Act, 2013, a limited liability partnership, as defined in clause (n) of sub-section (1) of section 2 of the Limited Liability Partnership Act, 2008, or any other person incorporated with limited liability under any law for the time being in force but shall not include any financial service provider; 3(8) corporate debtor means a corporate person who owes a debt to any person; 6. It is to be noticed that as per Section 3(7) the definition of the Corporate Persons is an exhaustive definition which expressly provides that shall not include any financial service provider . Section 3(17) defines Financial Service Provider and Section 5(22) defines Personal Guarantor , which are to the following effect: 3(17) financial service provider means a person engaged in the business of providing financial services in terms of authorisation issued or registration granted by a financial sector regulator; 5(22) personal guarantor means an individual who is the surety in a contract of guarantee to a corporate debtor; 7. We may also notice Section 227 of the I B C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies companies) with asset size of Rs.500 crore or more, as per last audited balance sheet Reserve Bank of India To be notified separately [F. No. 30/4/2017-Insolvency Section] GYANESHWAR KUMAR SINGH, Jt. Secy. 9. The provision of Section 3(7) of the Code provides for exclusion of any Financial Service Provider from the definition of Corporate Person. Thus, any Financial Service Provider cannot be a Corporate Debtor when we read Section 3(7) and 3(8). However, Section 227 dealing with Power of Central Government to notify financial service providers starts with non-obstante clause Notwithstanding anything to the contrary contained in this Code . Thus, Section 227 has been given overriding effect to the provisions contained in the Code itself for a purpose and object. Thus, Financial Service Providers can be brought under the insolvency code for the purpose of their insolvency and liquidation if the Central Government deems fit after consultation with the financial sector regulator. Notification dated 18.11.2019 is within the exercise of power under Section 227 by which Financial Service Providers have been brought ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 01/-. The Adjudicating Authority has relied on this figure of Rs.487,80,22,601/- which is details of loan receivables. Now, the question to be considered is as to whether the expression used in the Notification dated 18.11.2019 asset size of Rs.500 crore or more can be confined to the loan receivables only or asset shall include non-current and current assets. We have noticed that in the Balance Sheet as on 31.03.2020 under the heading Assets both non-current assets and current assets have been included. Word asset size indicate that what is meant is total assets. When total assets are looked into, as are given under heading Assets , the amount comes to more than Rs.600 Crores in the Balance Sheet as on 31.03.2020. The Adjudicating Authority has committed an apparent error in only considering the loan receivables. A Financial Service Provider admittedly have loan receivables but what is meant by asset size in Notification dated 18.11.2019 cannot be confined to loan receivables. We, thus, are of the view that the Adjudicating Authority committed error in applying the Notification dated 18.11.2019 by taking the figure of only loan receivables as referred to in Note 17 but ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s jurisdiction to proceed with the application, shall not be having any more jurisdiction to proceed with the application is the question which needs to be answered. It is submission of learned counsel for both the parties that jurisdiction to proceed against the Personal Guarantors under Section 95 shall be dependent on entitlement to proceed against the Financial Service Provider i.e. JFIL and in event there is no jurisdiction to proceed against the Financial Service Provider, there is no jurisdiction to proceed against the Personal Guarantors. We, thus, have to proceed to examine the issue as per above submission of learned counsel for the parties. 15. We may, as observed above, for argument sake if we take a case where asset size of the Financial Service Provider which on the date of filing the application as per last Balance Sheet was more than Rs.500 Crore and if it is reduced from Rs.500 Crore during the pendency of the application as per any further audited Balance Sheet available, whether the Adjudicating Authority shall lose jurisdiction is the question to be answered. 16. We may first notice the judgement of Hon ble Supreme Court in the matter of Mafatlal Industri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es or a nullity or without jurisdiction and the ouster clauses are construed restrictively, and such provisions whatever their stringent language be, have been held, not to prevent challenge on the ground that the decision is ultra vires and being a complete nullity, it is not a decision within the meaning of the Act. The concept of jurisdiction has acquired new dimensions . The original or pure theory of jurisdiction means the authority to decide , and it is determinable at the commencement and not at the conclusion of the enquiry. The said approach has been given a goby in Anisminic case99 as we shall see from the discussion hereinafter [see De Smith, Woolf and Jowell - Judicial Review of Administrative Action (1995 Edn.) p. 238; Halsbury's Laws of England (4th Edn.) p. 114, para 67, footnote (9)]. As Sir William Wade observes in his book, Administrative Law (7th Edn.), 1994, at p. 299; The tribunal must not only have jurisdiction at the outset, but must retain it unimpaired until it has discharged its task. 17. In the above paragraph, there has been an observation quoted which laid down that the Tribunal which has jurisdiction at the outset must retain it un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to asset size going down during pendency of the application is the basis of the contention of the Respondent that Adjudicating Authority shall lose jurisdiction to proceed with the application. For answering this question, we need to notice the objective and purpose of the I B Code. Hon ble Supreme Court in Swiss Ribbons Pvt. Ltd. Anr. vs. Union of India Ors., (2019) 4 SCC 17 had occasion to notice the purpose and objective of the I B Code under the heading The raison d tre for the Insolvency and Bankruptcy Code . The Hon ble Supreme Court had noticed statement of objects and reasons of the I B Code, its preamble and thereafter laid down that timelines within which the resolution process is to take place is for protecting the Corporate Debtor s assets from further dilution. In Para 28 following observations have been made by the Hon ble Supreme Court: 28. It can thus be seen that the primary focus of the legislation is to ensure revival and continuation of the corporate debtor by protecting the corporate debtor from its own management and from a corporate death by liquidation. The Code is thus a beneficial legislation which puts the corporate debtor back on its feet, n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d highest costs by world standards to resolve any problems that arise while repaying dues on debt. This problem leads to grave consequences: India has some of the lowest credit compared to the size of the economy. This is a troublesome state to be in, particularly for a young emerging economy with the entrepreneurial dynamism of India. xxx xxx xxx Speed is of essence for the working of the bankruptcy code, for two reasons. First, while the calm period can help keep an organization afloat, without the full clarity of ownership and control, significant decisions cannot be made. Without effective leadership, the firm will tend to atrophy and fail. The longer the delay, the more likely it is that liquidation will be the only answer. Second, the liquidation value tends to go down with time as many assets suffer from a high economic rate of depreciation. From the viewpoint of creditors, a good realization can generally be obtained if the firm is sold as a going concern. Hence, when delays induce liquidation, there is value destruction. Further, even in liquidation, the realization is lower when there are delays. Hence, delays cause value destruction. Thus, achieving a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... R Act, 1957, rejecting the proposal for deemed extension of the lease. Question arose as to whether the Adjudicating Authority has jurisdiction to consider challenge to said order of the State Government and in the above reference, Hon ble Supreme Court has laid down that the Adjudicating Authority has no jurisdiction to entertain the challenge to order of the Government. In Para 37 and 41 following has been laid down: 37. From a combined reading of Subsection (4) and Subsection (2) of Section 60 with Section 179, it is clear that none of them hold the key to the question as to whether NCLT would have jurisdiction over a decision taken by the government under the provisions of MMDR Act, 1957 and the Rules issued thereunder. The only provision which can probably throw light on this question would be Subsection (5) of Section 60, as it speaks about the jurisdiction of the NCLT. Clause (c) of Subsection (5) of Section 60 is very broad in its sweep, in that it speaks about any question of law or fact, arising out of or in relation to insolvency resolution. But a decision taken by the government or a statutory authority in relation to a matter which is in the realm of public law, c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... No. 983 of 2019, Nirmal Kumar Agarwal vs. State Bank of India Ors., decided on 19.12.2022 . In the above case, an application was filed by the State Bank of India for initiation of insolvency against Sungrowth Share and Stocks Limited as a Corporate Guarantor who was a Financial Service Provider whose registration continued till 11.07.2018. Application under Section 7 was filed against Sungrowth Share and Stocks Limited as a Corporate Guarantor which was admitted by the Adjudicating Authority at instance of State Bank of India which was the Financial Creditor which order was under challenge before this Tribunal. This Tribunal noticed that the application under Section 7 was filed on 08.06.2018 on which date Sungrowth Share and Stocks Limited was registered as Financial Service Provider and no application could have been entertained against Financial Service Provider by virtue of provision of Section 3(7) r/w Section 3(8). In Paras 10 and 11 following has been laid down: 10. Section 3(7) defines corporate person. It categorically states that it will not include any financial service provider. Section 3(8) defines corporate debtor, which means a corporate person. Meaning there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irmal Kumar Agarwal s case, hence, said case has no applicability in the facts of the present case. 29. In view of the foregoing discussion, we are of the view that submission of learned counsel for the Respondent that since the asset size of JFIL became less than Rs.500 Crore as on 31.03.2021, the Adjudicating Authority shall lose jurisdiction to proceed further and this Tribunal shall also have no jurisdiction to proceed in the matter, cannot be accepted. We are of the view that jurisdiction will be there with the Adjudicating Authority, as per Notification dated 18.11.2019, which has to exercise on the date when application can be filed against the Financial Service Provider for insolvency. As a corollary, an application under section 95 can be filed against the Personal Guarantor only when on the same date insolvency can be commenced against the Financial Service Provider. 30. The objection of the Respondent that application filed by the Financial Creditor under Section 95 is not maintainable since no insolvency proceedings are pending against the Principal Borrower has already been overruled by the Adjudicating Authority. The issue is fully covered by judgment of this Tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng of the Corporate Debtor are pending before the NCLT. In result, we set aside the order dated 05th October, 2021 passed by the Adjudicating Authority. The Application filed by the Appellant under Section 95(1) of the Code is revived before the NCLT which may be proceeded in accordance with the law. 31. It is further noted that the above judgment of this Tribunal dated 27.01.2022 was appealed before the Hon ble Supreme Court by means of Civil Appeal No. 1871-1872/2022, Mahendra Kumar Jajodia vs. State Bank of India Stressed Asset Management Branch , which Appeal has been dismissed by order dated 06.05.2022, which is to the following effect: ORDER We have heard learned Solicitor General and learned senior counsel for the parties and perused the record. We do not see any cogent reason to entertain the Appeals. The judgment impugned does not warrant any interference. The Appeals are dismissed. 32. The question is as to whether the Section 95 application which was filed by the Financial Creditor against the Personal Guarantor was maintainable or not. 33. We having held that on the date when application was filed under Section 95 by the Financial Cre ..... X X X X Extracts X X X X X X X X Extracts X X X X
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