Tag Archives: NCLAT

APPLICABILITY OF LIMITATION ACT UNDER IBC (BK EDUCATIONAL SERVICES PVT. LTD Vs. PARAG GUPTA ASSOCIATES)

Background

Under the Insolvency and Bankruptcy Code 2016 (the Code), there has been an ambiguity with respect to applicability of the Limitation Act, 1963 (the Limitation Act). This has been deliberated upon in several judgments of the National Company Law Tribunal (the NCLT) and the National Company Law Appellate Tribunal (the NCLAT). In the case of Mis Deem Roll Tech Limited, the NCLT held that the Limitation Act is applicable to proceedings under the Code and dismissed the debt of the petitioner as being time barred and in the case of Neelkanth Township and Construction Private Limited Vs. Urban Infrastructure Trustees Limited, the NCLAT held that the provisions of the Limitation Act, 1963 would not apply to the Code. As observed above, it may be noted that applicability is being interpreted on the merit of each case and this has led to the confusion. The Supreme Court in case of Parag Gupta Vs. B. K. Educational Services held that the provisions of the Limitation Act is applicable for initiation of Corporate Insolvency Resolution Process.

Facts of the Case

  • There was a dispute on liability between Parag Gupta & Associates, Chartered Accountants (Financial Creditors) and B. K. Educational Services Private Limited, (Corporate Debtor).
  • The Corporate Debtor denied the financial liability and contended that the all the financial claims were false except one genuine debt, being immovable property allotted by Greater Noida Industrial Development Authority (GNIDA).
  • The Corporate Debtor further alleged that the records were tampered and manipulated by the relatives of the Financial Creditors.
  • The amounts claimed were time-barred.
  • It was showed that there was nothing on record that would extend the limitation to recover the same since the period was between 01 October 2012 to 05 February 2013.

The NCLT held that documents produced by the applicants were not justifiable for the purpose of extending limitation. Therefore, the amounts stated by the petitioner are not legally recoverable. But with respect to liability of sum which was given by petitioner on 25 February 2015, it was entitled to be recovered.  However, that amount the debtor had liquidated the recoverable after admission of the application. Subsequently, the NCLT held that there were no further actions acquired and disposed of the application.

Challenging the order of NCLT, the Financial Creditor had appealed the said order of the NCLT and filed an appeal before the NCLAT. Contrary to the NCLT order, the NCLAT held that the provisions of the Limitation Act were not applicable for initiation of Corporate Insolvency Resolution Process (CIRP) under the Code and passed an order to accept the application for initiation of CIRP. Consequent upon this, the Supreme Court stayed the order of the NCLAT dated 7 November 2017. The Supreme Court[1] pointed out that ‘NCLAT Order has erred in holding that the right to apply under Section 7 of the Code for initiating Corporate Insolvency Resolution Process, accrues from 1 December 2016 i.e. from the date the Code came into force. It is submitted that in the event the rational given by the NCLAT is given effect to, it will lead to an anomalous situation where even in case of defaults in respect of debts more than fifty years ago a party will be able to initiate Corporate Insolvency Proceedings under the IBC.

The Indian jurisprudence opines that if a law is a complete code, then an express or necessary exclusion of the Limitation Act should be respected. In light of the confusion in this regard, the Insolvency Law Committee, set up on 16 November 2017 deliberated on the issue and unanimously agreed that the intent of the Code could not have been to give a new lease of life to debts which are time-barred. It is settled law that when a debt is barred by time, the right to a remedy is time-barred. This requires being read with the definition of ‘debt’ and ‘claim’ in the Code. Further, debts in winding up proceedings cannot be time-barred, and there appears to be no rationale to exclude the extension of the principle of law to the Code.

Conclusion

In view of the above the Committee recommended that it would be fit to insert a specific section applying the Limitation Act to the Code. The relevant entry under the Limitation Act may be on a case to case basis. However, in the absence such explicit provisions in the Code, the creditors would get a right to make an application for time-barred debts too. Given this, a need is felt for more clarity pertaining to entry under the Limitation Act as it is vague and criteria is not recommended, which once again leaves the question unanswered.

It is pertinent to note that the non-application of the law of limitation creates the following glitches: (i) It re-opens the right of financial and operational creditors holding time-barred debts under the Limitation Act to file for CIRP, the trigger for which is default on a debt above INR One Lakh. The purpose of the law of limitation is “to prevent disturbance or deprivation of what may have been acquired in equity and justice by long enjoyment or what may have been lost by a party’s own inaction, negligence or latches”. Though the Code is not a debt recovery law, the trigger being ‘default in payment of debt’ renders the exclusion of the law of limitation counter-intuitive.  (ii) It re-opens the right of claimants (pursuant to issuance of a public notice) to file time-barred claims with the Insolvency Resolution Professional/Resolution Professional, which may potentially be a part of the resolution plan. Such a resolution plan restructuring time-barred debts and claims may not be in compliance with the existing laws for the time being in force pursuant to Section 30(4) of the Code.

[1] http://supremecourtofindia.nic.in/supremecourt/2017/41322/41322_2017_Order_10-Jan-2018.pdf

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NOTIFICATION OF THE NATIONAL COMPANY LAW APPELLATE TRIBUNAL (AMENDMENT) RULES 2017.

NOTIFICATION OF THE NATIONAL COMPANY LAW APPELLATE TRIBUNAL (AMENDMENT) RULES 2017.

The MCA vide its notification dated 23 August 2017 has amended Rule 63 of National Company Law Appellate Tribunal Rules 2016  notified on 21 July 2016 regarding Appearance by Authorised Representative, as under:

  • Subject to provisions of section 432 (Right to Legal Representation) of the Companies Act 2013, a party to any proceedings or appeal before the Appellate Tribunal may either appear in person or authorise one or more chartered accountants or company secretaries or cost accountants or legal practitioners or any other person to present his case before the Appellate Tribunal.
  • The Central Government, the Regional Director or the Registrar of Companies or Official Liquidator may authorise an officer or an Advocate to represent in the proceedings before the Appellate Tribunal.
  • The officer authorised by the Central Government or the Regional Director or the Registrar of Companies or the Official Liquidator shall be an officer not below the rank of Junior Time Scale or company

Source: http://www.mca.gov.in/Ministry/pdf/NCLATAmendmentRules2017_25082017.pdf

Insolvency & Bankruptcy Code- Protection FROM Creditor or Protection FOR Creditor

Background

The Insolvency and Bankruptcy Code, 2016 (“Code”) was notified effective 28 May 2016 with an aim amongst many others, to complete insolvency resolution process in time bound manner, to revive the entity and to ensure/safeguard the value of creditors (specifically unsecured creditors) and to protect the entity itself from coercive action of creditors (with an introduction of moratorium period). This legislation is very much needed, along with the rigour that it propounds.

The Code gives powers to creditors (both operational creditor & financial creditor) to drag the corporate debtor to the National Company Law Tribunal (the Adjudicating Authority) for insolvency resolution process in cases of default of payment. However, in the absence of specific opportunity to the corporate debtor to address the very reason for such default, the intent of the Code appears to below-sided towards creditors.

Should the corporate debtors be given an opportunity to be heard?

Position of Corporate Debtor under the Code

The existing procedure under the Code in case of operational creditor being an applicant involve a notice of dispute being issued against the corporate debtor, following which a time period for response is given to the corporate debtor to prove the existence of a dispute. After the mandated time period of 10 days has been exhausted, the operational creditor files an application. Following the filing of an application, there is a limited period of 14 days, following which the same has to be admitted by the NCLT.In case of financial creditor being an applicant to the insolvency process, an application would be made to Adjudicating Authority and a copy of such application would be sent to the corporate debtor.

Upon application being accepted by the Adjudicating Authority, there is a time period of 30 days within which the insolvency resolution professional is appointed by the creditors to put together all the relevant material in this regard and call for a meeting of various creditors.

The insolvency resolution professional (IRP)  is the individual who is proposed by the resolution applicant (i.e. creditor) and appointed by the Adjudicating Authority. A corporate debtor does not and cannot have any role in such appointment. IRP works to protect the interest of creditors and provides for a revival plan to protect the interest of the creditors.

Upon IRP being appointed, the IRP takes charge of the running of the business. The corporate debtor cannot make any management decisions.The resolution plan is then placed before the committee of creditors, and if more than 75 percent of the creditors approve, then the plan is approved. If not approved, the company goes into liquidation.

It may be noted that once an application is filed by the creditor, the Code rides excessively on the word of the corporate creditor.While there are few judicial precedents in which the Court has ruled that the Adjudicating Authority has to adhere to the principle of natural justice while deciding applications, the point of emphasis remains that the Code by itself does not provide any recourse for the corporate debtor to raise the grievance. It is for the Adjudicatory Authority to make ways for the corporate debtor to represent himself. Moreover, there is no structured procedure laid down for a fair hearing to be given to the corporate debtor.

Possible Remedies for safeguarding the rights of the corporate debtors against the frivolous threats of the creditors.

A corporate debtor who has intimate knowledge of the business, technical and professional experience of running the business should also be heard in appointing an IRP. An IRP who is not experienced in running a particular business or does not have the intimate knowledge required of the industry may cause damage, which perhaps can be evaluated prior to appointing the IRP.

Considering principles of natural justice, a right must be provided to the corporate debtor to be heard and present its side of the facts. It would be essential to have a provision in the Code to provide that opportunity to the debtor. With the rise of frivolous threats from many stakeholders a business has – employees, small value (amount) vendors, it helps in stopping frivolous threats.

Author: Ashwin Bhat

Supreme Court Judgement on ‘Existence of Dispute’ under Insolvency and Bankruptcy Code

‘Existence of Dispute’ in case of application by Operation Creditor

This blog is in continuation to our earlier blog dated 15 September 2017 which was titled as “Dispute” is heavily disputed under Insolvency and Bankruptcy Code (IBC) and written about the NCLT Order.  https://novojuris.com/2017/09/15/dispute-is-heavily-disputed-under-insolvency-and-bankruptcy-code/ On appeal, Supreme Court has weighed in on “existence of dispute” under IBC.  Read on.

Background:

Kirusa Software Private Limited (Kirusa) had filed an application before the National Company Law Tribunal (NCLT), Mumbai for initiation of Corporate Insolvency Resolution Process (CIRP) of Mobilox Innovations Private Limited (Mobilox) under Insolvency and Bankruptcy Code, 2016 (the Code).  The NCLT, Mumbai dismissed Kirusa’s application on the ground that Mobilox has issued a Notice of Dispute. An appeal against the NCLT order was filed by Kirusa before the National Company Law Appellate Tribunal (NCLAT). The NCLAT allowed Kirusa’s appeal on the ground that Mobilox’s reply to the demand notice does not raise any dispute within the meaning of Section 5 (6) or Section 8 (2) of the Code, that Mobilox has disputed the payment merely on “some or other account” and that its defence was “vague, got up and motivated to evade the liability”. Accordingly, the NCLAT had set aside the order of NCLT, Mumbai and remitted the case to it for consideration. Mobilox has appealed the NCLAT order with the Supreme Court of India (the Court) to set aside the order of the NCLAT highlighting that there is an “existence of dispute” and therefore the CIRP application has to be dismissed.

Excerpts of the Judgement by the Supreme Court

While passing an order by the Court in relation to aforementioned case in determining “existence of a dispute” occurring in Section 8(2)(a) of the Code, the Court uplifted Mobilox’s appeal holding that there was a dispute in existence which was sufficient to withhold and dismiss the CIRP application filed by Kirusa with the NCLT, Mumbai. Few considerations by the Court before its verdict is discussed below:

Existence of Dispute prior to the Demand notice issued by the Operational Creditor

The Court contented that the CIRP applications filed by operational creditors should be dismissed, in case if it is corporate debtor is able to prove that the existence of the dispute and/or the suit or arbitration proceeding must be “pre-existing” i.e. it must exist before the receipt of the Demand Notice.

Test to be tried by the adjudicating authority and ambit of the “Dispute”

The NCLT, while admitting the CIRP application is only required to identify is whether there is a plausible contention which requires further investigation and that the “dispute” is not a deliberate legal argument or an assertion of fact unsupported by evidence. The Court also contended that, the NCLT while determining whether dispute exists or not, it is not required to satisfy itself that the defence is likely to succeed or examine the merits of the dispute. So long as a dispute truly exists in fact and is not spurious, hypothetical or illusory, the adjudicating authority has to reject the application.

One of the arguments made by Kirusa was that since Non-Disclosure Agreement executed between Kirusa and Mobilox does not fall under any of the three sub-clauses of Section 5(6), no “dispute” is there on the facts of this case. However, the Court rejected the argument and said that the intention of legislature was to make the definition of “dispute” to be an inclusive one and therefore, the word “includes” substituted the word “means” which occurred in the first Insolvency and Bankruptcy Bill. The “dispute” is said to exist, so long as there is a real dispute as to payment between the parties that would fall within the inclusive definition contained in Section 5(6). The correspondence between the parties would show that on 30 January 2015, the appellant clearly informed the Kirusa that they had displayed the Mobilox’s confidential client information and client campaign information on a public platform which constituted a breach of trust and a breach of the NDA between the parties. They were further told that all amounts that were due to them were withheld till the time the matter is resolved. Basis this Mobilox in response to the demand notice, disputed in detail in its reply dated 27 December, 2016, which set out the e-mail of 30th January, 2015. Going by the test of “existence of a dispute”, the Court held noted that without going into the merits of the dispute, the Mobilox had raised a plausible contention requiring further investigation which is not a deliberate legal argument or an assertion of facts unsupported by evidence. The defense is not spurious, mere bluster, plainly frivolous or vexatious. A dispute does truly exist in fact between the parties, which may or may not ultimately succeed, and the Appellate Tribunal was wholly incorrect in characterizing the defense as vague, got-up and motivated to evade liability.

Conflict between “AND” – “OR” in Section 8(2)(a) of the Code

Section 8(2)(a) of the Code reads that the corporate debtor in within 10 days from the date of receipt of Demand Notice from operational creditor, had to bring to the notice of operational regarding the existence of a dispute, if any, and record of the pendency of the suit or arbitration proceedings filed before the receipt of such notice or invoice in relation to such dispute. In this case, the Court has highlighted that the word ‘and’ occurring in Section 8(2)(a) must be read as ‘or’ and also highlighted that the legislative intent and the fact that it will be inconsistent if it is not read as ‘or’. Further, one may note that if the aforementioned section is read as ‘and’, then the corporate debtor could stave off the CIRP only if the dispute is already pending in a suit or arbitration proceedings and not otherwise before the demand notice is received from operational creditor. This would lead to great hardship; in that a dispute may arise a few days before triggering of the insolvency process, in which case, though a dispute may exist, there is no time to approach either an arbitral tribunal or a court. This would cease the right of the corporate debtor available under the said section.

Timelines under the I&B Code – Mandatory

The Court held that the timelines fixed under the Code are intrinsic to the CIRP and are important to its effectiveness. It pointed out that the intention of the legislature is to speedy CIRP and both the NCLT and NCLAT shall be adhere to the timelines prescribed under the Code. The Court, referred to the judgment delivered in Innoventive Industries Ltd. v. ICICI Bank & Anr, wherein, it has clearly laid down that strict adherence of the timelines is of essence to both the triggering process and the insolvency resolution itself. It also stated that one of the principal reasons why the Code was enacted was because liquidation proceedings went on perpetually, thereby damaging the interests of all stakeholders and in which case the management would continue to hold on to the company without paying its debts. Therefore, Court directed both the NCLT and the NCLAT to keep in mind this principal objective sought to be achieved by the Code and to strictly adhere to the time frame within which they are to decide matters thereunder.

Considering above-mentioned points, the Court has set aside the order passed by the NCLAT and rejected the application made by the Kirusa for CIRP.

Conclusion

Since the Code become effective, there were ambiguity and the conflicting interpretation of Dispute and the Existence of Dispute. With the intervention of the Court, there is a clear instruction to the NCLT and NCLAT on the tests to be adopted while entertaining the CIRP application from the operational creditor with reference to the “existence of dispute” and it is hoped that the uncertainties and ambiguities in the Code, would get settled. However, the wide meaning that has been accorded to the term ‘dispute’ may become a shackle around the necks of operational creditors.

It is also pertinent to note that with the clear instruction of the Court in adhering to stricter timelines, it can be expected that the NCLT and NCLAT would take note of the principal objective of the Code as discussed above and completion of CIRP process would be expected within the timeline provided under the Code.

Author: Ashwin Bhat is a Senior Associate with NovoJuris Legal