Insolvency and Bankruptcy

Insolvency and Bankruptcy

 

 

Summary of Question-   Arbitration after moratorium

Question – Whether  Arbitration proceeding can be started after imposition of moratorium under I&B Code .
Answer- No. 
Rationale-


In Civil Appeal No. 16929 of 2017, decided on October 23, 2017, in Alchemist Asset Reconstruction Company Limited v. M/s Hotel Gaudavan Private Limited & ORS. , the Hon’ble Supreme Court observed and held :

"5)The mandate of the new Insolvency Code is that the moment an insolvency petition is admitted, the moratorium that comes into effect under Section 14(1)(a) expressly interdicts institution or continuation of pending suits or proceedings against Corporate Debtors.

6) This being the case, we are surprised that an arbitration proceeding has been purported to be started after the imposition of the said moratorium and appeals under Section 37 of the Arbitration Act are being entertained. Therefore, we set aside the order of the District Judge dated 06.07.2017 and further state that the effect of Section 14(1)(a) is that the arbitration that has been instituted after the aforesaid moratorium is non est in law."

 

Summary of Question-   Insolvency and Bankruptcy Code Vs. SARFAESI Act

Question –  A  Bank has taken action under SARFAESI Act against a debtor ;  an Operational Creditor initiates action under Insolvency and Bankruptcy Code against the same debtor then  whether action taken under Insolvency Code will continue.

Answer- Yes. Insolvency and Bankruptcy Code prevails over SARFASI Act. 
 

Rationale-


In a Company Appeal  before  the Hon'ble NCLAT , the Appellant Bank's (Financial Creditor) case was that it  (Bank) has already taken action under SARFAESI against the Corporate Debtor and taken possession of certain land of the Corporate Debtor so action under Insolvency and Bankruptcy Code (I & B Code) against the Corporate Debtor by one Operational Creditor cannot proceed.

 Hon'ble NCLAT relied on (2018) 1 SCC 407 and observed  that if an application under section 9 of the I & B  Code is complete and there is "existence of dispute" and there is "debt" and "default" then the Adjudicating Authority (National Company Law Tribunal) is bound to admit the application and held:

"I & B Code will prevail over SARFAESI Act"

 

Summary of Question-   Insolvency and Bankruptcy Code Vs. O A before DRT

Question –  Whether a proceeding under Insolvency and Bankruptcy Code would continue even if a OA filed by a creditor Bank is pending.

Answer- Yes.  Pendency of OA filed by a Bank against a debtor before DRT  is no bar for action under Insolvency and Bankruptcy Code
 

Rationale-

Before the Hon'ble NCLT, New Delhi Bench in a Company Petition, one of the contentions of a creditor bank was that the corporate applicant has filed the application under Insolvency and Bankruptcy Code to defeat the pending DRT proceedings lodged against the applicant company.

 

The NCLT observed and held :
"In this regard it is no longer res Integra that pendency of a suit or court proceedings is no bar for initiation of insolvency proceedings under the Code. In view of the overriding effect given by the provisions of Section 238 of the Code, the initiation and pendency of proceedings before DRT is no bar for initiation of resolution and insolvency proceedings under the Code.Hence, the objections raised by the financial creditor cannot sustain."

                                                                                                                                                     [Emphasis Supplied]
 

 

Summary of Question-   Moratorium under section 14 of the Insolvency and Bankruptcy Code

Question –  Whether  moratorium under section 14 of the Insolvency and Bankruptcy Code applies to a surety / guarantor of corporate debtor.

Answer- No.  Section 14 of the Insolvency and Bankruptcy Code provides for a moratorium or a stay on institution or continuation of proceeding, suits, etc. against the corporate debtor and its assets. This Moratorium under section 14 of the Insolvency Code does not apply to a surety to a corporate guarantor as per the amended provision in section 14(3) of the Insolvency and Bankruptcy Code, and this amendment is retrospective.  

Rationale-

1. The Hon’ble Supreme Court in the case reported in AIR 2018 SC 3876 examined the amendment made in section 14 (3) of the Insolvency and bankruptcy Code  :

“ We now come to the argument that the amendment of 2018, which makes it clear that Section 14(3), is now substituted to read that the provisions of Sub-section (1) of Section 14 shall not apply to a surety in a contract of guarantee for corporate debtor. The amended Section reads as follows:

14. Moratorium.--

xxx xxx xxx

 (3) The provisions of Sub-section (1) shall not apply to--

(a) such transactions as may be notified by the Central Government in consultation with any financial sector regulator;

(b) a surety in a contract of guarantee to a corporate debtor.”

 

2. The Apex Court referred to the report dated 26.3.2018 of  the Insolvency Law Committee, appointed by the Ministry of Corporate Affairs and observed  that such clarificatory amendment is retrospective in nature.

 

Summary of Question-   Operational Creditor and Existence of Dispute

Question –  Whether a  Corporate  debtor ( against which Insolvency and Bankruptcy Code has been triggered by an operational creditor)  can successfully pray to the concerned NCLT  not to initiate Corporate Insolvency Resolution process (CIRP) on the ground of    ‘existence of  Dispute’  between  the  corporate debtor and the operational creditor without  NCLT being  required to  adjudicate the dispute that  the corporate debtor would, as to dispute,  succeed or not in the court of law.

Answer- Yes. 
 

Rationale-

In the  case reported in  (2018) 1 SCC 353, the Hon’ble Supreme Court observed and held:

“ The scheme Under Sections 8 and 9 of the Code, appears to be that an operational creditor, as defined, may, on the occurrence of a default (i.e. on non-payment of a debt, any part whereof has become due and payable and has not been repaid), deliver a demand notice of such unpaid operational debt or deliver the copy of an invoice demanding payment of such amount to the corporate debtor in the form set out in Rule 5 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 read with Form 3 or 4, as the case may be [Section 8(1)]. Within a period of 10 days of the receipt of such demand notice or copy of invoice, the corporate debtor must bring to the notice of the operational creditor the existence of a dispute and/or the record of the pendency of a suit or arbitration proceeding filed before the receipt of such notice or invoice in relation to such dispute [Section 8(2)(a)]. What is important is 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 or invoice, as the case may be. In case the unpaid operational debt has been repaid, the corporate debtor shall within a period of the self-same 10 days send an attested copy of the record of the electronic transfer of the unpaid amount from the bank account of the corporate debtor or send an attested copy of the record that the operational creditor has encashed a cheque or otherwise received payment from the corporate debtor [Section 8(2) (b)]. It is only if, after the expiry of the period of the said 10 days, the operational creditor does not either receive payment from the corporate debtor or notice of dispute, that the operational creditor may trigger the insolvency process by filing an application before the adjudicating authority Under Sections 9(1) and 9(2). This application is to be filed Under Rule 6 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 in Form 5, accompanied with documents and records that are required under the said form. Under Rule 6(2), the applicant is to dispatch by registered post or speed post, a copy of the application to the registered office of the corporate debtor. Under Section 9(3), along with the application, the statutory requirement is to furnish a copy of the invoice or demand notice, an affidavit to the effect that there is no notice given by the corporate debtor relating to a dispute of the unpaid operational debt and a copy of the certificate from the financial institution maintaining accounts of the operational creditor confirming that there is no payment of an unpaid operational debt by the corporate debtor. Apart from this information, the other information required under Form 5 is also to be given. Once this is done, the adjudicating authority may either admit the application or reject it. If the application made Under Sub-section (2) is incomplete, the adjudicating authority, under the proviso to Sub-section (5), may give a notice to the applicant to rectify defects within 7 days of the receipt of the notice from the adjudicating authority to make the application complete. Once this is done, and the adjudicating authority finds that either there is no repayment of the unpaid operational debt after the invoice [Section 9(5)(i)(b)] or the invoice or notice of payment to the corporate debtor has been delivered by the operational creditor [Section 9(5)(i)(c)], or that no notice of dispute has been received by the operational creditor from the corporate debtor or that there is no record of such dispute in the information utility [Section 9(5)(i)(d)], or that there is no disciplinary proceeding pending against any resolution professional proposed by the operational creditor [Section 9(5)(i)(e)], it shall admit the application within 14 days of the receipt of the application, after which the corporate insolvency resolution process gets triggered. On the other hand, the adjudicating authority shall, within 14 days of the receipt of an application by the operational creditor, reject such application if the application is incomplete and has not been completed within the period of 7 days granted by the proviso [Section 9(5)(ii)(a)]. It may also reject the application where there has been repayment of the operational debt [Section 9(5)(ii)(b)], or the creditor has not delivered the invoice or notice for payment to the corporate debtor [Section 9(5)(ii)(c)]. It may also reject the application if the notice of dispute has been received by the operational creditor or there is a record of dispute in the information utility [Section 9(5)(ii)(d)]. Section 9(5)(ii)(d) refers to the notice of an existing dispute that has so been received, as it must be read with Section 8(2)(a). Also, if any disciplinary proceeding is pending against any proposed resolution professional, the application may be rejected [Section 9(5)(ii)(e)].”

 

“ Therefore, the adjudicating authority, when examining an application Under Section 9 of the Act will have to determine:

(i) Whether there is an "operational debt" as defined exceeding Rs. 1 lakh? (See Section 4 of the Act)

(ii) Whether the documentary evidence furnished with the application shows that the aforesaid debt is due and payable and has not yet been paid? and

(iii) Whether there is existence of a dispute between the parties or the record of the pendency of a suit or arbitration proceeding filed before the receipt of the demand notice of the unpaid operational debt in relation to such dispute?

If any one of the aforesaid conditions is lacking, the application would have to be rejected.

Apart from the above, the adjudicating authority must follow the mandate of Section 9, as outlined above, and in particular the mandate of Section 9(5) of the Act, and admit or reject the application, as the case may be, depending upon the factors mentioned in Section 9(5) of the Act.”

                                                                                                                                               [Emphasis Supplied]

“ This being the case, is it not open to the adjudicating authority to then go into whether a dispute does or does not exist?”

                                                                                                                                                [Emphasis Supplied]

 “ It is clear, therefore, that once the operational creditor has filed an application, which is otherwise complete, the adjudicating authority must reject the application Under Section 9(5)(2)(d) if notice of dispute has been received by the operational creditor or there is a record of dispute in the information utility. It is clear that such notice must bring to the notice of the operational creditor the "existence" of a dispute or the fact that a suit or arbitration proceeding relating to a dispute is pending between the parties. Therefore, all that the adjudicating authority is to see at this stage is whether there is a plausible contention which requires further investigation and that the "dispute" is not a patently feeble legal argument or an assertion of fact unsupported by evidence. It is important to separate the grain from the chaff and to reject a spurious defence which is mere bluster. However, in doing so, the Court does not need to be satisfied that the defence is likely to succeed. The Court does not at this stage examine the merits of the dispute except to the extent indicated above. So long as a dispute truly exists in fact and is not spurious, hypothetical or illusory, the adjudicating authority has to reject the application.”

                                                                                                                                                [Emphasis Supplied]

 

Summary of Question-   Pendency of proceedings against Corporate debtor for bouncing of cheque under N.I. Act  vis-s vis section 9 of the Insolvency and Bankruptcy Code.

Question –  Whether pendency of proceedings against a  Corporate  debtor for bouncing of cheque under N.I. Act is ‘existence of dispute’ for the purpose of section  9 of the Insolvency and Bankruptcy Code .

Answer- No. 
 

Rationale-

1.  In the  Company Appeal (AT) (Insolvency) No. 623 of 2018, decided on 12.11.2018 by NCLAT, the learned counsel for the Appellant,  referring to the  decision of Hon’ble Supreme Court  reported in  (2012) 1 Supreme Court Cases 260, submitted that the proceeding under Section 138 is really a civil cases of recovery of the money, therefore, in view of the pendency of such case, application under section 9 of I&B Code is not maintainable.

2. The Hon’ble NCLAT , relied on para 29 of the decision of the Hon’ble Supreme Court in the case of Innoventive Industries reported in (2018) 1 SCC 407 and  observed and held :

“ In the present case, it is not in dispute that there is a debt payable to the Operational Creditor and default on the part of the Corporate Debtor. The pendency of the case under Section 138/441(sic) of the Negotiable Instruments Act, 1881, even if accepted as recovery proceeding, it cannot be held to be a dispute pending before a court of law. Thereby we hold that the pendency of the case under Section 138/441 (sic) of Negotiable Instruments Act, 1881 actually amounts to admission of debt and not an existence of dispute. We find no merit in this appeal. It is accordingly dismissed.”

                                                                                                                                                     [Emphasis Supplied]

 

Summary of Question-    Adjudicating Authority ;  Not Court ;  cannot decide the legality of a foreign decree

Question –  Whether an Operational Creditor’s petition under section 9 of the Insolvency and Bankruptcy Code would be maintainable against a Corporate Debtor if there is foreign decree against the Corporate Debtor.

Answer-  Yes. But the petition must be filed by an Operational Creditor as defined in I & B Code.

Rationale-


In Company Appeal (AT) (Insolvency) No. 44 of 2018, decided on 30.11.2018, the Hon’ble NCLAT referring  to its earlier judgment dated 14th November, 2018 given in Binani Industries Limited Vs. Bank of Baroda & Anr. – Company Appeal (AT) (Insolvency) No. 82 of 2018 (in which the NCLAT  discussed the principles of Insolvency and Bankruptcy Code)  observed and held :

 

“7. In view of the aforesaid decision in “Binani Industries Limited (Supra)”, we hold that the Adjudicating Authority not being a Court or ‘Tribunal’ and ‘Insolvency Resolution Process’ not being a litigation, it has no jurisdiction to decide whether a foreign decree is legal or illegal. Whatever findings the Adjudicating Authority has given with regard to legality and propriety of foreign decree in question being without jurisdiction is nullity in the eye of law.”

 

“13. From plain pleadings of the appeal and the statement made by the Appellant and the decree, we find that the money claim do not relate to supply of goods or services and, therefore, the application under Section 9 by the Appellants against the ‘Corporate Debtor’ was not maintainable.”

 

“14. In the circumstances, we answer the first question in favour of the Appellant and hold that the Adjudicating Authority has no jurisdiction to decide the question of  legality and propriety of a foreign judgment and decree in an application under Sections 7 or 9 or 10 of the ‘I&B Code’. The second question relating to maintainability is answered against the Appellants, they being not the ‘Operational Creditor’.”

 

Summary of Question- Arbitration Award in favour of Operational Creditor, Corporate debtor challenges Award under Section 34.  

Question –  Whether there is ‘existence of dispute’ as to debt based on Award which is under challenge under section 34 of the Arbitration and Conciliation Act and whether the Corporate Creditor can successfully pray to the concerned NCLT not to initiate  Corporate Insolvency Resolution process (CIRP) on the ground that proceeding under section 34 of Arbitration and Conciliation Act is pending.

 Answer- Yes. 
 

Rationale-

In 2018(10)SCALE256, the Hon’ble Supreme Court observed & held :

“Mr. Gourab Banerji, learned Senior Advocate, appearing on behalf of the Appellant has relied upon certain observations made in our judgment in Mobilox Innovations Private Limited v. Kirusa Software Private Limited (2018) 1 SCC 353 and argued that the object of the Code is not to replace debt adjudication and enforcement under other Acts including the Arbitration Act, 1996. He has relied, in particular, on para 51 under which, according to him, the moment there is a real dispute between the parties, which need not be a "bona fide dispute" which is likely to succeed in point of law, the Insolvency Code cannot be applied. In the present case, according to him, the very fact that a Section 34 petition is pending is reflective of a real dispute between the parties, which was pre-existing, and which culminated in an Arbitral Award which has yet to attain finality….”

“…The alarming result of an operational debt contained in an arbitral award for a small amount of say, two lakhs of rupees, cannot possibly jeopardize an otherwise solvent company worth several crores of rupees. Such a company would be well within its rights to state that it is challenging the Arbitral Award passed against it, and the mere factum of challenge would be sufficient to state that it disputes the Award. Such a case would clearly come within para 38 of Mobilox Innovations (supra), being a case of a pre-existing ongoing dispute between the parties. The Code cannot be used in terrorem to extract this sum of money of Rs. two lakhs even though it may not be finally payable as adjudication proceedings in respect thereto are still pending. We repeat that the object of the Code, at least insofar as operational creditors are concerned, is to put the insolvency process against a corporate debtor only in clear cases where a real dispute between the parties as to the debt owed does not exist.”

                                                                                                                                                      [Emphasis Supplied]

“We repeat with emphasis that under our Code, insofar as an operational debt is concerned, all that has to be seen is whether the said debt can be said to be disputed, and we have no doubt in stating that the filing of a Section 34 petition against an Arbitral Award shows that a pre-existing dispute which culminates at the first stage of the proceedings in an Award, continues even after the Award, at least till the final adjudicatory process Under Sections 34 & 37 has taken place.”

                                                                                                                                                      [Emphasis Supplied]

Section 238 of the Code would apply in case there is an inconsistency between the Code and the Arbitration Act in the present case. We see no such inconsistency. On the contrary, the Award passed under the Arbitration Act together with the steps taken for its challenge would only make it clear that the operational debt, in the present case, happens to be a disputed one.”

                                                                                                                                                   [Emphasis Supplied]

 

Summary of Question-   Initiation of CRP after settlement  between Financial Creditor and Corporate Debtor

Question –  Whether corporate resolution process (CRP) can be initiated by NCLT if settlement is entered into between Financial Creditor and Corporate Debtor after filing of petition by Financial Creditor under section  7 of I&B Code but before order of NCLT for initiation of CRP.

Answer- No.

Rationale-


1. In Company Appeal (AT) (Insolvency) No. 714 of 2018, decided on 30.11.2018 by the Hon’ble NCLAT, short fact, among others,   was  that  that a settlement was  reached between the parties  (Corporate Debtor and Financial Creditor) and the settlement  had been brought to the notice of the learned Adjudicating Authority on the very date of pronouncement of order of admission of the  application filed under Section 7 of I&B Code by the Financial Creditor.

2. The Hon’ble NCLAT observed and held:

“The parties have brought on record the ‘Settlement Deed’ dated 1st November, 2018. The Contesting Respondent (Financial Creditor) filed the application under Section 7 of the I&B Code. From the ‘Settlement Deed’ filed it  appears that e-stamp was purchased on 30th October, 2018 at 01:41 PM and the settlement was reached on 1st November, 2018. Thus, it is clear that the parties have reached for settlement much prior to the date of admission of application on 13th November, 2018. From the aforesaid fact, it is clear that there was no default of payment on the part of the appellant as on 13th November, 2018 and thereby no occasion for the Adjudicating Authority (National Company Law Tribunal), Chandigarh Bench, Chandigarh to admit the application under Section 7…”

                                                                                                                                                    [Emphasis Supplied]

“For the reasons aforesaid, we set aside the order dated 13th November, 2018 passed by the Adjudicating Authority, Chandigarh in CP (IB) No. 197/Chd./HP/2018.”

“In effect, order (s) passed by Ld. Adjudicating Authority appointing ‘Interim Resolution Professional’, declaring moratorium, freezing of account and all other order (s) passed by Adjudicating Authority pursuant to impugned order and action taken by the ‘Resolution Professional’, including the advertisement published in the newspaper calling for applications all such orders and actions are declared illegal and are set aside. The application preferred by the 1st Respondent under Section 7 of the I&B Code is dismissed. The Adjudicating Authority will now close the proceeding.”

 

Summary of Question-   Appeal by Corporate Debtor after initiation of CRP.

Question –  Whether a Corporate debtor can file Appeal to NCLAT after application under section 7 of the I&B Code, filed  by a Financial Creditor, has been admitted  by NCLT.

Answer- No. But Shareholder / Dirctor of the Corporate Debtor can.  

Rationale-

1. In Company Appeal (AT) (Insolvency) No. 535 of 2018, decided by the Hon’ble NCLAT on 13.11.2018, short fact was that  the Corporate Debtor  - M/s Radius Infratel Pvt. Ltd. filed Appeal  against order dated 23rd July, 2018 passed by the Adjudicating Authority (concerned National Company Law Tribunal) , whereby and whereunder application under Section 7 preferred by ‘Union Bank of India’ (Financial Creditor) was  admitted, order of moratorium was  passed and Interim Resolution Professional was appointed.

1.1. The Hon’ble NCLAT,  relying  on para 11 of the Innoventive Industries case reported in  (2018)1 SCC 407,  held that  appeal at the instance of the Corporate Debtor is  not maintainable in view of the decision of the Hon’ble Supreme Court.

1.2.  The  appellant prayed  to substitute the ‘Corporate Debtor’ with a shareholder of the Corporate Debtor and to transpose ‘Radius Infratel Private Limited’ through ‘Resolution Professional’ as  a Respondent. But since no such application for substitution was filed when matter was taken up on November 13, the Hon’ble NCLAT  dismissed the appeal as not maintainable with following observation:

“However, this order will not come in the way of Shareholder/ Director of the Corporate Debtor to move an appeal in accordance with law, if not barred by limitation.”

 

2.  In Company Appeal (AT) (Insolvency) No. 92 of 2017, decided on 8th. January 2019, Hon'ble  NCLAT  observed and held :

"5. Learned Senior Counsel referred to a decision of this Appellate Tribunal  in ‘Starlog Enterprises Limited Vs. ICICI Bank Limited – Company Appeal (AT)(Ins.) No. 5 of 2017’ and submitted that this Appellate Tribunal held that the appeal by ‘corporate debtor’ is also maintainable, however, we are not inclined to accept such submission in view of the specific finding in ‘Innoventive Industries Ltd. (Supra)’  that the appeal at the instance of the ‘Corporate Debtor’ through (suspended) Board of Directors is not maintainable.   After admission of an application under Section 7 or 9 or 10, as ‘Interim Resolution Professional’ is appointed and the Board of Directors stands suspended, the (suspended) Board of Directors have no right to move an appeal on behalf of the ‘Corporate Debtor’ though it is open to the Director(s) or shareholder(s) to challenge the same"

                                                                                                                        [Emphasis Supplied]

 

Summary of Question-   Challenge of section 7  petition on the ground of being hit by Usurious Loan Act.  

Question – Whether an Adjudicating Authority can  reject an application, filed under Section 7 of the I&B Code  by a Financial Creditor,  on the ground that the interest is usurious  being  hit by Usurious Loan Act.

Answer- No.   

Rationale-

 1. The Hon’ble NCLAT  in Company Appeal (AT) (Insolvency) No. 336 of 2017 with Company Appeal (AT) (Insolvency) No. 07 of 2018 with Company Appeal (AT) (Insolvency) No. 10 of 2018 ,  decided on 29.11.2018, referred to its earlier decision in the case of  Binani Industries Limited Vs. Bank of Baroda & Anr. – Company Appeal (AT) (Insolvency) No. 82 of 2018 etc. dated 14th November, 2018 and relied on Hon’ble Supreme Court decision in the case of   Innoventive Industries case reported in  (2018) 1 SCC 407.

 

2. The Hon’ble NCLAT observed and held as under:

“28. From the aforesaid Sections 3 & 4 of the ‘Usurious Loans Act, 1918’, the following facts emerge:

a) Section 3 is applicable only in the suit(s) to which the ‘Usurious Loans Act, 1918’ applies; and

b) Which is being heard and decided by ‘a Court’;

c) It should relate to ‘excessive interest’ and the transaction between the parties which is substantially unfair;”

 

“30. From the ‘I&B Code’, it will be evident that the ‘Corporate Insolvency Resolution Process’ is not a litigation and are not decided by Court of Law. Now, the ‘Adjudicating Authority’ deals with the matter of insolvency, which in its first stage is required to take steps for ‘resolution’ of the ‘Corporate Debtor’. Therefore, the Adjudicating Authority being not a Court of law and as the Adjudicating Authority do not decide a money claim or suit, it cannot exercise any of the power vested under Sections 3 or 4 of the ‘Usurious Loans Act, 1918’.”

 

“31. ‘The Presidency- Towns Insolvency Act, 1909’ having repealed, and there being a bar of jurisdiction under Section 231 (sic) of the ‘I&B Code’ as no civil court have jurisdiction in respect of any matter in which the Adjudicating Authority is empowered to decide under the Code, we hold that the provisions of Sections 3 & 4 of the ‘Usurious Loans Act, 1918’ are not applicable to any of the proceeding under Section 7 or 9 of the ‘I&B Code’.”

 

“32. Further, as initiation of ‘Corporate Insolvency Resolution Process’ under Sections 7 or 9 do not amount to recovery proceedings, the question of deciding the claim, which may include the interest by the Adjudicating Authority does not arise for the purpose of triggering the ‘Corporate Insolvency Resolution Process’.”

 

Summary of Question-  Resolution Professional’s Power

 

Question – Whether a Resolution Professional is empowered to take  decision as to  ineligibility of a Resolution Applicant.

Answer- No.  A Resolution Professional under I & B Code is not empowered to take decision as to ineligibility of a  Resolution Applicant but to examine eligibility or ineligibility of the Resolution Applicant and submit report with  Resolution Plans  to the Committee of Creditors (COC) to take decision 

Rationale-

In CIVIL  APPEAL  Nos. 9402-9405  of  2018, decided on 4th. October 2018, the Hon'ble Supreme observed and held :


"77.  However,   it   must   not   be   forgotten   that   a   Resolution Professional   is   only   to   “examine”   and   “confirm”   that   each resolution  plan  conforms  to  what  is  provided  by  Section  30(2). Under   Section 25(2)(i),   the   Resolution   Professional   shall undertake  to  present  all  resolution  plans  at  the  meetings  of  the Committee  of  Creditors.    This  is  followed  by  Section  30(3),  which states   that   the   Resolution   Professional   shall   present   to   the Committee  of  Creditors,  for  its  approval,  such  resolution  plans which  confirm  the  conditions  referred  to  in  sub-section  (2).    This provision  has  to  be  read  in  conjunction  with  Section  25(2)(i),  and with  the  second  proviso  to  Section  30(4),  which  provides  that where  a  resolution  applicant  is  found  to  be  ineligible  under  Section 29A(c),  the  resolution  applicant  shall  be  allowed  by  the  Committee of  Creditors  such  period,  not  exceeding  30  days,  to  make  payment of  overdue  amounts  in  accordance  with  the  proviso  to  Section 29A(c).    A  conspectus  of  all  these  provisions  would  show  that  the Resolution  Professional  is  required  to  examine  that  the  resolution plan  submitted  by  various  applicants  is  complete  in  all  respects, before  submitting  it  to  the  Committee  of  Creditors.    The  Resolution Professional  is  not  required  to  take  any  decision,  but  merely  to ensure  that  the  resolution  plans  submitted  are  complete  in  all respects   before   they   are   placed   before   the   Committee   of Creditors,  who  may  or  may  not  approve  it.    The  fact  that  the Resolution  Professional  is  also  to  confirm  that  a  resolution  plan does  not  contravene  any  of  the  provisions  of  law  for  the  time-being in  force,  including  Section  29A  of  the  Code,  only  means  that  his prima  facie  opinion  is  to  be  given  to  the  Committee  of  Creditors that  a  law  has  or  has  not  been  contravened.    Section  30(2)(e) does  not  empower  the  Resolution  Professional  to  “decide ”  whether the  resolution  plan  does  or  does  not  contravene  the  provisions  of law.  Regulation  36A  of  the  CIRP  Regulations  specifically  provides as  follows:

“(8)   The  resolution   professional   shall   conduct   due diligence  based  on  the  material  on  record  in  order  to satisfy   that   the   prospective   resolution   applicant complies  with- 
a)  the  provisions  of  clause  (h)  of  sub-section  (2) of  section  25; (b)  the  applicable  provisions  of  section  29A, and (c)   other   requirements,   as   specified   in   the invitation  for  expression  of  interest.

(9)   The   resolution   professional   may   seek   any clarification  or  additional  information  or  document  from the  prospective  resolution  applicant  for  conducting  due diligence  under  sub-regulation  (8).

(10)   The   resolution   professional   shall   issue   a provisional   list   of   eligible   prospective   resolution applicants   within   ten   days   of   the   last   date   for submission  of  expression  of  interest  to  the  committee and   to   all   prospective   resolution   applicants   who submitted  the  expression  of  interest.

(11)   Any  objection  to  inclusion  or   exclusion  of  a prospective  resolution  applicant  in  the  provisional  list referred  to  in  sub-regulation  (10)  may  be  made  with supporting  documents  within  five  days  from  the  date  of issue  of  the  provisional  list.

(12)  On  considering  the  objections  received  under  subregulation  (11),  the  resolution  professional  shall  issue the  final  list  of  prospective  resolution  applicants  within ten  days  of  the  last  date  for  receipt  of  objections,  to  the committee.” 
                                                                

                                                                                                                                                     [Emphasis Supplied]
 

78. Thus,  the  importance  of  the  Resolution  Professional  is  to ensure  that  a  resolution  plan  is  complete  in  all  respects,  and  to conduct  a  due  diligence  in  order  to  report  to  the  Committee  of Creditors  whether  or  not  it  is  in  order.  Even  though  it  is  not necessary  for  the  Resolution  Professional  to  give  reasons  while submitting  a  resolution  plan  to  the  Committee  of  Creditors,  it  would be  in  the  fitness  of  things  if  he  appends  the  due  diligence  report carried  out  by  him  with  respect  to  each  of  the  resolution  plans under  consideration,  and  to  state  briefly  as  to  why  it  does  or  does not  conform  to  the  law."

                               [Emphasis Supplied]

 

Summary of Question-  Corporate Guarantor under  I&B Code

Question – Whether   guarantee given by a person / promoter (personal guarantee) to secure financial assistance given to a 'Corporate debtor' is 'Corporate guarantor'. 

Answer- Yes.

Rationale-

In Company Appeal (AT) (Insolvency) No. 92 of 2017, decided on 8th. January 2019, the Hon’ble   NCLAT observed and held :


"7. According to the learned Senior Counsel per se of the I&B Code does not use the concept or the phrase ‘corporate guarantor’.  This is in contradiction to specific inclusion of ‘personal guarantor’ in multiple provisions.   ‘Corporate Guarantor’ is, therefore, conspicuous by its absence in the I&B Code.  It was submitted that there is no definition of ‘Corporate Guarantor’ in Section 3 or 5, the two definitional provisions.  However, Section 5(22) of the I&B Code defines ‘personal guarantor’ which means an individual who is a surety to a ‘corporate debtor’.  Use of the word ‘individual’ precludes any corporate person or entity."


"34. The provision of the I&B Code do not bar a ‘financial creditor’ from initiating ‘corporate insolvency resolution process’ against the ‘guarantor’, who comes within the meaning of ‘corporate debtor’.  The aforesaid matter can be noticed from the statutory inter-se rights, obligations and liabilities of : (i) A surety qua the creditor (the relationship as defined under the Indian Contract Act); or (ii) Guarantor qua financial creditor. "

                                                                                                                  [Emphasis supplied]