India: Update: Recent Case-Laws On Insolvency And Bankruptcy Code

We are sharing updates on some recent Indian case-laws on insolvency matters that have contributed to developing the insolvency jurisprudence. The same are given below.

I. WHETHER NCLT CAN EXERCISE ITS RESIDUARY JURISDICTION UNDER SECTION 60(5)(C) OF THE I&B CODE TO ADJUDICATE UPON THE CONTRACTUAL DISPUTES ?

In TATA Consultancy Services Limited v. Vishal Ghisulal Jain, Resolution Professional, SK Wheels Private Limited; Civil Appeal No 3045 of 2020, the Supreme Court dealt with the issues as to whether the NCLT can exercise its residuary jurisdiction under Section 60(5)(c) of the Code to adjudicate upon the contractual dispute between the parties; and whether in the exercise of such a residuary jurisdiction, it can impose an ad-interim stay on the termination of the Facilities Agreement. With regard to the facts of the case, the Apex Court held that since there was nothing to indicate that the termination of the Facilities Agreement was motivated by the insolvency of the Corporate Debtor, the NCLT does not have any residuary jurisdiction to entertain the contractual dispute which arose dehors the insolvency of the Corporate Debtor. Further, in the absence of jurisdiction over the dispute, the NCLT could not have imposed an ad-interim stay on the termination notice. With regard to the second issue, it was clarified that even if the contractual dispute arises in relation to the insolvency, a party can be restrained from terminating the contract only if it is central to the success of the CIRP. Crucially, the termination of the contract should result in the corporate death of the Corporate Debtor.

II. WHEN WILL PERIOD OF LIMITATION BEGIN TO RUN FOR FILING APPEAL UNDER THE I&B CODE?

In V Nagarajan v. SKS Ispat and Power Ltd.& Ors., Civil Appeal No. 3327 of 2020, the Apex Court dealt with two issues: (i) when will the clock for calculating the limitation period run for appeals filed under the Code; and (ii) is the annexing of a certified copy mandatory for an appeal to the NCLAT against an order passed under the Code. The Supreme Court, inter alia, held and observed that an appeal, if considered necessary and expedient by an aggrieved party, is expected to be filed forthwith without awaiting a free copy which may be received at an indefinite stage. With regard to the second question, it was held that it cannot be said that the parties can automatically dispense with their obligation to apply for and obtain a certified copy for filing an appeal. Any delay in receipt of a certified copy, once an application has been filed, have been envisaged by the legislature and duly excluded to not cause any prejudice to a litigant's right to appeal. It was further held that the act of filing an application for a certified copy is not just a technical requirement for computation of limitation but also an indication of the diligence of the aggrieved party in pursuing the litigation in a timely fashion. Rule 22(2) of the NCLAT Rules mandates the certified copy being annexed to an appeal, which continues to bind litigants under the Code. While it is true that the tribunals, and even the Apex Court, may choose to exempt parties from compliance with this procedural requirement in the interest of substantial justice, as re-iterated in Rule 14 of the NCLAT Rules, the discretionary waiver however does not act as an automatic exception where litigants make no efforts to pursue a timely resolution of their grievance.

III. WHO HAS BURDEN TO PROVE OCCURRENCE OF DEFAULT AND THAT APPLICATION UNDER SECTION 7 IS FILED WITHIN THE PERIOD OF LIMITATION?

Burden of prima facie proving occurrence of default and that application filed under Section 7 of the Code is within period of limitation, is entirely on financial creditor. In case an application under Section 7 is filed beyond a period of three years from date of default and financial creditor furnishes required information relating to acknowledgement of debt, in writing by corporate debtor, before the Adjudicating Authority, with such acknowledgement having taken place within initial period of three years from date of default, a fresh period of limitation commences and application can be entertained, if filed within this extended period - Rajendra Narottamdas Sheth v. Chandra Prakash Jain, [2021] 131 taxmann.com 2 (SC).

IV. BURDEN ON CORPORATE APPLICANT TO MAINTAIN STATUS QUO WHILE ITS APPLICATION UNDER SECTION 10 OF THE CODE IS PENDING

In Prithivraj Spinning Mill (P.) Ltd. v. Indian Overseas Bank, Coimbatore, [2021] 129 taxmann.com 384 (NCLT- Chennai), the Adjudicating Authority held that if a company chooses to file an application under Section 10, it ought to maintain status quo as on date of filing of Section 10. Change in name of corporate debtor and its registered office address, pending disposal of Section 10 application by applicant would lead to an irresistible conclusion that application has been filed by applicant company with a malicious intention to defraud creditors as creditors would not be able to identify the applicant company in its new avatar once public announcement is made in newspapers. It was further held that since name of company as mentioned in application was not in existence on the date of filing of the application, Adjudicating Authority could not pass an order of CIRP, and the application was to be dismissed.

V. CAN A RESOLUTION PROFESSIONAL CHARGE 'SUCCESS FEE'?

In Jayesh N. Sanghrajka, Erstwhile R.P. of Ariisto Developers Pvt. Ltd. v. The Monitoring Agency nominated by the Committee of Creditors of Ariisto Developers Pvt. Ltd., Company Appeal (AT) (Insolvency) No. 392 of 2021, an appeal was filed by the Resolution Professional of Corporate Debtor- Ariisto Developers Pvt. Ltd.  The Appeal was filed against observations and findings of the Adjudicating Authority whereby the Adjudicating Authority while approving the Resolution Plan submitted by the successful Resolution Applicant 'Prestige Estates Projects Ltd.', disagreed with the Committee of Creditors which approved 'success fees' to the Resolution Professional of an amount of Rs.3 Crores. The grievance raised before the Appellate Authority was that the approval of the success fees was a commercial decision of the committee of creditors and the Adjudicating Authority could not have interfered with the same while approving the Resolution Plan and directing distribution of the amount set apart for success fees. While dismissing the appeal, the Appellate Authority, inter alia, observed and held that claim of success fee squeezed in at the last moment when the Resolution Plan is being approved is more in the nature of taking a reward or gift than expenditure incurred on or by the Resolution Professional. If the Resolution Professional seeks to have success fee at the initial stage of CIRP, it would interfere with independence of Resolution Professional which can be at the cost of Corporate Debtor. If success fee is claimed when the Resolution Plan is going through or after the Resolution Plan is approved, it would be in the nature of gift or reward. "Success fee"- term is contrary to what the Board has provided in its Circular dated 16.01.2018 that Insolvency Professional shall render services for a fee which is a reasonable reflection of his work. The fee has to be related to acts performed or to be performed for furtherance of the CIRP, for dues or expenses actually incurred. It has to be directly related to acts done or expenses incurred which are necessary for the CIRP. The role of the Resolution Professional has to be like a dispassionate person concerned with performance of his duties under the Code for reasonable fees and it cannot be result oriented.

VI. CAN APPLICATION FOR RESTORATION OF AN APPEAL UNDER SECTION 37 OF ARBITRATION AND CONCILIATION ACT CONSTITUTE REQUIREMENT OF EXISTENCE OF A "PRE-EXISTING DISPUTE"?

In M/S. Jai Balaji Industries v. D.K. Mohanty & Anr., Civil Appeal No. 5899 of 2021, appeals under Section 37 of the Arbitration and Conciliation Act, 1996 were dismissed in default on 22.11.2019, the respondent company moved the applications for restoration on 17.12.2019 with advance notice to the appellant. As such, on the date of issuance of the notices under Section 9 of the Code (i.e., 14.02.2020), the appellant was aware of the fact that the appeals under Section 37 of the Act of 1996 had not been decided on merits and the applications for restoration had been moved within 30 days of such default dismissal. The Court referred to its decision in K. Kishan v. M/S Vijay Nirman Company Pvt. Ltd., Civil Appeal No. 21824 of 2017 wherein it observed that even if a Section 34 petition had been instituted in a wrong Court and application under Section 14 of the Limitation Act to get over the bar of limitation was being pursued, the insolvency process cannot be put into operation without an adjudication on the applicability of Section 14 of the Limitation Act. The court observed that same analogy would apply, rather with more emphasis and force, in relation to a default dismissal where there had not been any adjudication on merits and where the prayer for restoration is pending consideration. It was therefore held that without a final decision on the prayer for restoration, the insolvency process at the instance of an operational creditor cannot be put into operation. The fact of moving an application for restoration of appeal under Section 37 of the Act of 1996 and bringing it to the notice of the operational creditor was held to be sufficient to bring the matter within the four corners of "pre-existing dispute", so as to effectively negate any attempt by the operational creditor to seek insolvency resolution.

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