Chapter 7 Liquidation of Corporate Person – CS Professional Insolvency Law and Practice Notes is designed strictly as per the latest syllabus and exam pattern.
Liquidation of Corporate Person – CS Professional Insolvency Law and Practice Study Material
Question 1.
‘Liquidation is the last process, when the resolution plan fails’. What are the triggers when there is no alternate except to move for the liquidation? (June 2019, 6 marks)
Answer:
Section 33 of the Insolvency and Bankruptcy Code, 2016 lists out the triggers for initiating the liquidation process for corporate persons. Section 33 of the Code provides as under:
1. Where the Adjudicating Authority,
(a) before the expiry of the insolvency resolution process period or the maximum period permitted for completion of the corporate insolvency resolution process under section 12 of the Code or the fast track corporate insolvency resolution process under section 56 of the Code, as the case may be, does not receive a resolution plan under sub-section (6) of section 30 of the Code; or
(b) rejects the resolution plan under section 31 for the non-compliance of the requirements specified therein, it shall
- pass an order requiring the corporate debtor to be liquidated in the manner as laid down in this Chapter;
- issue a public announcement stating that the corporate debtor is in liquidation; and
- require such order to be sent to the authority with which the corporate debtor is registered.
2. Where the resolution professional, at any time during the corporate insolvency resolution process but before confirmation of resolution plan, intimates the adjudicating Authority of the decision of the committee of creditors approved by not less than sixty-six per cent of the voting share to liquidate the corporate debtor, the Adjudicating Authority shall pass a liquidation order as referred to in sub-clauses(i), (ii) and (iii) of Clause (b) sub-section (1).
3. Where the resolution pan approved by the Adjudicating Authority is contravened by the concerned corporate debtor, any person other than the corporate debtor, whose interests are prejudicially affected by such contravention, may make an application to the Adjudicating Authority for a liquidation order as referred to in sub-clauses (i),(ii),(iii) of clause (b) sub-section (1).
4. On receipt of an application under sub-section (3), if the Adjudicating Authority determines that the corporate debtor has contravened the provisions of the resolution plan, it shall pass a liquidation order as referred to in sub-clauses(i),(ii) and (iii) of clause (b) of sub-section(l).
Question 2.
In an Insolvency Resolution Process, a secured creditor enjoys preferential treatment in the process when compared to other categories of creditors. What are the rights of a secured creditor? (Dec 2019, 4 marks)
Answer:
Section 31B of the Recovery of Debts and Bankruptcy Act, 1993: Priority to Secured Creditors.
Notwithstanding anything contained in any other law for the time being in force, the rights of secured creditors to realize secured debts due and payable to them by sale of assets over which security interest is created, shall have priority and shall be paid in priority over all other debts and government dues including revenues, taxes, cesses and other rates due to the Central Government, State Government or local authority. Explanation- For the purposes of this section, it is hereby clarified that on or after the commencement of the Insolvency and Bankruptcy Code, 2016, in cases where insolvency or bankruptcy proceedings are pending in respect of secured assets of the borrower, priority to secured creditors in payment of debt shall be subject to the provisions of that Code.
- any amount due to Central Government and the State Government including the amount to be received on account of the Consolidated Fund of India and the Consolidated Fund of a State, if any, in respect of the whole or any part of the period of two years preceding the liquidation commencement date;
- debts owed to secured creditor for any amount unpaid following the enforcement of security interest;
Question 3.
What is the relevant period for avoiding any undervalued transactions? (Dec 2019, 3 marks)
Answer:
The relevant period for avoiding any undervalued transaction is contained in Section 46 of the Insolvency and Bankruptcy Code, 2016. It states that if in an application, the Liquidator or Resolution Professional demonstrates,
(a) That the transaction was entered with any person within the period of one year preceding the Insolvency Commencement Date; or
(b) That the transaction was made within a related party within a period of two years preceding the Insolvency Commencement Date.
The Adjudicating Authority may require an independent expert to assess evidence relating to the value of the transactions mentioned in this section.
Question 4.
You have been invited to ‘attend a Committee of Creditors meeting in which you are proposed to be appointed as Resolution Professional. At the Meeting, the Interim Resolution Professional has informed the Committee that certain ‘preferential transactions’ and ‘undervalued transactions’ might have taken place in the Corporate Debtor. Write a brief note to the Committee of Creditors about ‘preferential transactions’, ‘undervalued transactions’, relevant time of such transactions and exceptions to such transactions as per the provisions of the Insolvency and Bankruptcy Code, 2016. (Dec 2020, 12 marks)
Answer:
Preferential Transactions and Relevant Time
Related parties often possess information of the corporate debtor’s financial affairs and may collude with him to siphon off assets with the knowledge that the corporate debtor might become insolvent in the near future.
Section 43 of the Insolvency and Bankruptcy Code, 2016 deals with Preferential Transactions and Relevant Time. Section 43(1) of the Code provides that where the liquidator or the resolution professional, as the case may be, is of the opinion that the corporate debtor has at a relevant time given a preference in such transactions and in such manner as laid down in sub-section (2) to any persons as referred to in sub-section (4), he shall apply to the Adjudicating Authority for avoidance of preferential transactions and for, one or more of the orders referred to in Section 44.
Exception: According to Section 43(2) of the Code, a corporate debtor shall be deemed to have given a preference, if- (a) there is a transfer of property or an interest thereof of the corporate debtor for the benefit of a creditor or a surety or a guarantor for or on account of an antecedent financial debt or operational debt or other liabilities owed by the corporate debtor; and (b) the transfer under clause (a) has the effect of putting such creditor or a surety or a guarantor in a beneficial position than it would have been in the event of a distribution of assets being made in accordance with Section 53.
Section 43(3) of the Code states that for the purposes of sub-section (2), a preference shall not include the following transfers- (a) transfer made in the ordinary course of the business or financial affairs of the corporate debtor or the transferee; (b) any transfer creating a security interest in property acquired by the corporate debtor to the extent that – (i) such security interest secures new value and was given at the time of or after the signing of a security agreement that contains a description of such property as security interest, and was used by corporate debtor to acquire such property; and (ii) such transfer was registered with an information utility on or before thirty days after the corporate debtor receives possession of such property: Provided that any transfer made in pursuance of the order of a court shall not, preclude such transfer to be deemed as giving of preference by the corporate debtor.
Explanation: For the purpose of sub-section (3) of this Section, “new value” means money or its worth in goods, services, or new credit, or release by the transferee of property previously transferred to such transferee in a transaction that is neither void nor voidable by the liquidator or the resolution professional under this Code, including proceeds of such property, but does not include a financial debt or operational debt substituted for existing financial debt or operational debt.
As per Section 43(4) of the Code, a preference shall be deemed to be given at a relevant time, if – (a) It is given to a related party (other than by reason only of being an employee), during the period of two years preceding the insolvency commencement date; or (b) a preference is given to a person other than a related party during the period of one year preceding the insolvency commencement date.
When transaction shall be considered undervalued: Section 45(2) of the Insolvency and Bankruptcy Code, 2016 provides that a transaction shall be considered undervalued where the corporate debtor:
(a) makes a gift to a person: or
(b) enters into a transaction with a person which involves the transfer of one or more assets by the corporate debtor for a consideration the value of which is significantly less than the value of the consideration provided by the corporate debtor, and such transaction has not taken place in the ordinary course of business of the corporate debtor.
Relevant Period for Avoidable Transactions: Section 46 of the Insolvency and Bankruptcy Code, 2016 prescribes the relevant period during which a transaction must be entered into for it to be challenged as a transaction at undervalue. According to Section 46(1), in an application for avoiding a transaction at undervalue, the liquidator or the resolution professional, as the case may be, shall demonstrate that
- such transaction was made with any person within the period of one year preceding the insolvency commencement date: or
- such transaction was made with a related party within the period of two years preceding the insolvency commencement date.
Section 46(2) empowers the Adjudicating Authority to require an independent expert to assess evidence relating to the value of the transactions mentioned in Section 46.
Question 5.
A Financial Creditor filed an Application for a declaration that the Resolution Applicant. ABC Ltd. and its promoters have knowingly contravened the terms of the resolution plan, having failed to implement the same and for the reinstatement of the Committee of Creditors (CoC) to run the Corporate Debtor, as a going concern. Referring relevant case explain whether the Financial Creditor will succeed. (Aug 2021, 6 marks)
Answer:
In the case of Corporate Bank vs. Amtek Auto Ltd. & Ors. the Financial Creditors filed an Application for a declaration that the Resolution Applicant, Liberty House Group PTE Ltd. and its promoters have knowingly contravened the terms of the resolution plan, having failed to implement the same and for the reinstatement of the Committee of Creditors (CoC) to run the Corporate Debtor, as a going concern.
The NCLT held that the Resolution Applicant is not capable of implements of resolution plan. It allowed the application and excluded the time from the date when Decan Valuers Investors LP, the only other Resolution Applicant, submitted its plan up to the date of receipt of this order from the CIRP period. It observed: “No matter if the corporate debtor ultimately has to face liquidation, but the permission to restart process, make advertisement and invite fresh plans etc., would defeat the very mandate of Section 12 of the Code.”
The Committee of Creditors can only discuss the Resolution Plan which was submitted by DVI (Decan Valuers Investors LP) only by exculsion of certain period of time while calculating 270 days. “It, however, granted liberty to any member of the CoC or the Resolution Professional to file a complaint before the IBBI of the Central Government with a request to file a criminal complaint.“
Question 6.
Read the following carefully and answer the questions given at the end:
Pine Food Industries Limited (“PFIL”) is one of the top FMCG player and listed entity in India. It is a leading manufacturer and marketer of various edible oils, food products and eatables. Its Authorized Capital is ₹252.00 crore and Paid-up Capital is ₹65.00 crore. PFIL has borrowed from various Banks and Financial institutions in India and its borrowings were around ₹12,000 Crore.
Due to unprecedented crash in global prices of the oil seeds coupled with falling revenues in the oil business gave a crippling blow to PFIL.
AB Bank and BC Bank filed an application under section 7 of the Insolvency and Bankruptcy Code, 2016 (“Code”) for initiating the insolvency resolution process against PFIL (hereinafter called as the Corporate Debtor (“CD”)). After hearing both the parties, National Company Law Tribunal (“NCLT1) admitted the petition filed. The Financial Creditor proposed the name of Kapoor to act as Interim Resolution Professional (“IRP”).
An application was filed before NCLT by one of the creditors who made a claim before the Resolution Professional (“RP”) stating that the CD owed to pay USD 10.00 crore, based on the Bills of Exchanges, ordering the CD to pay this creditor for the goods supplied by another party. On making of such claim before the RP, it has been rejected by him saying that it is not a Financial Debt as it is an Operational Debt therefore, it could not be considered as Financial Debt as claimed by applicant therein.
Vijay Kumar Jain, suspended Director of the CD, filed an application before the NCLT under section 60(5) of the Code seeking an order for setting aside the decision taken by the Committee of Creditors (“CoC”) disallowing the erstwhile representatives of the Corporate Debtor including Vijay to participate in the CoC meetings; declare that the CoC meeting is non est; direct the RP to ensure active participation of the applicant in the meetings of CoC; provide all the documents and information to the applicant.
RP filed application in NCLT under section 43(1) of the Code for seeking reversal of the amounts that were debited from the current accounts of the CD maintained with XYZ Bank which had been debited by the XYZ Bank before the insolvency commencement date and were utilized against the payment of the dues owed by the CD to a Bank in relation to the Letter of Credit issued by them.
The RP submits that the payment of the impugned amount lead to preferential treatment towards XYZ Bank by the CD as such payment has the effect of putting Respondents (i.e. XYZ Bank) in a beneficial position than it would have been in liquidation of the CD in accordance with Section 53 of the Code. It is further stated by the RP that the payments of the impugned amount by the Corporate Debtor were not in the “ordinary course of business” of the CD.
NCLT, vide its order, held that the respondent Bank, which had debited an amount aggregating to ₹65.98 crores from the current accounts of the Corporate Debtor is directed to reverse the said amount within 30 days from the date of the said order. Since the resolution plan is already submitted and under examination of the CoC without consideration of this amount, therefore the appropriation of this amount will be decided by the CoC. XYZ Bank filed appeal in NCLAT against the order of NCLT.
The main plea taken by the Appellant Bank is that the RP before filing an application under Section 43(1) of the Code formed no independent opinion nor afforded an opportunity to the Appellant to explain about the transactions in question.
The RP called for Expression of Interest (“EOI”). 28 prospective resolution applicants showed their interest out of which two prospective resolution applicants were rejected as one was disqualified under Section 29 A of the Code (being related party) and the other was a financial investor who did not meet the criteria in the EOI evaluation parameters. The applicant reviewed the four Resolution Plans submitted by the Resolution Applicants and found that only the plans submitted by 2 Resolution Applicants (RAI and RA2) provided for the corporate insolvency resolution of the Corporate Debtor as a whole and on a going concern basis.
The RP filed application under section 30(6) of the Code, seeking order for approval of the resolution plan for the Corporate Debtor submitted by the consortium led by PAL. (RA2) as approved by the members of Committee of Creditors (CoC). The said resolution plan was approved by a vote share of 96.85%. RP filed application in NCLT for approval of Resolution Plan. While the said application was pending for consideration before the NCLT, Hon’ble Supreme Court, in Vijay Kumar Jain Vs. Standard Chartered Bank & Ors pronounced the judgment. Under the Judgment of Hon’ble Supreme Court, the approval of the NCLT to the resolution plan of RA2 was interdicted. In compliance of the above-mentioned Hon’ble Supreme Court order, NCLT by its order directed as follows :
“Resolution Professional is directed to comply with the directions of the Hon’ble Supreme Court and submit the report within the stipulated time as provided by the Hon’ble Supreme Court.”
Thereafter, NCLT approved the Resolution Plan submitted by RA2 and passed orders and directions on the reliefs and concession sought.
Since in Para 38, NCLT in their order rejected some of the relief sought, RA2 moved to NCLT for modification of order of NCLT.
In the application filed, RA2 had sought substitution of Para 38 of the order of NCLT approving the Resolution Plan of RA2 as under:
Existing Para
“38. Any relief sought for in the Resolution Plan, where the contract/agreement/understanding/ proceedings/actions/notice etc is not specifically identified or is for future and contingent liability, is at this moment rejected.”
Proposed Para
“All claims that were either not filed or not admitted during CIRP in terms of the provisions of the Insolvency and Bankruptcy Code, 2016 shall stand extinguished. Further, claims admitted/ verified by the Resolution Professional shall stand settled and extinguished as per the Resolution Plan.”
Resolution Plan approved by NCLT of RA2 leads to a 60% haircut for the lenders. RA2 completed its acquisition of PFIL. Referring decided case and relevant provisions of the Insolvency and Bankruptcy Code (IBC), 2016 and Rules and Regulations made thereunder, answer the following questions:
(a) Whether formation of Joint Lender Forum will have any bearing over filing of this case or not ? Brief, referring the provisions of IBC, 2016, who can initiate the case under the Code. (Aug 2021, 10 marks)
(b) In the instant case explain whether Vijay Kumar Jain succeeded in his contention. Referring Supreme Court’s decision, discuss the role and position of suspended Board of Directors in the Committee of Creditors. (Aug 2021, 10 marks)
(c) Explain the decision of NCLAT in the aforesaid case filed by XYZ Bank for Section 43 transactions. Referring relevant provisions, brief against whom the application under Section 43 of the IB Code can be filed and what orders can be passed thereunder. (Aug 2021, 10 marks)
(d) Whether Resolution Applicant has powers to request for modification of NCLT’s Order on Resolution Plan. Discuss whether NCLT has powers to modify or revise its own order made under the IB Code. (Aug 2021, 10 marks)
Answer:
(a) It has already been held by the Hon’ble NCLAT in the case of Innoventive Industries Ltd.vs. ICICI Bank Ltd. that Joint Lender Forum proceeding pending against the corporate debtor will not have any bearing on the cases initiated under Insolvency and Bankruptcy Code (IBC), therefore, this plea is hereby dismissed without having any further consideration on this point.
The corporate debtor counsel relied upon IDFC Bank Ltd vs. Ruchi Soya Industries (Bom HC Com. Petition 570/2016, Central Bank of India vs. Ravindra (2002) 1 sec 367, Essar Steel India Ltd. vs. RBI (SCA 12434 of 2017 dated 31.07.2017) to say that when a scheme is proposed for settlement of the creditors dues, the creditors will have to wait for settlement of their dues, it is not correct proposition of law as against IBC proceedings for two reasons, one-a mechanism recommended by RBI Circular will not have any bearing on IBC proceedings owing to non-obstante clause present in Insolvency and
Bankruptcy Code, it has been settled by Hon’ble NCLAT as well as Hon’ble Supreme Court in Innoventive Industries Ltd. vs. ICICI Bank Ltd. (SC dated 31.08.2017) and this Bench in between Indian bank vs. Varun Resources Ltd. (NCLT Mumbai dated 14.06.2017) that RBI Circulars will not have any binding nature on the proceeding under IBC.
Based on the above, Joint application made by the Financial Creditors are allowed. Section 7(a) of the IBC also allows filling of joint application by the Financial Creditors.
The following persons can initiate the case under IBC, in case of default:
Financial Creditors: Financial creditors may either be secured creditors or unsecured creditors. The main difference between secured and unsecured financial creditors is that in the event of liquidation and asset distribution proceedings, secured creditors are given a higher priority than unsecured creditors.
When compared to operational creditors, the procedure for financial creditors to initiate insolvency proceedings is a lot easier.
The IBC allows financial creditors to make an application to the NCLT directly and such financial creditors will only need to show that there is a default.
It is also important to note that only financial creditors constitute the committee of creditors, and no operational can be part of this committee.
Operational Creditor: The term operational creditor has been defined under Section 5(20) of the IBC as any person to whom operational debt is owed or to whom such debt has be’en assigned.
Operational debt has been defined in the IBC as a claim in respect of the provision of goods or services, inculding employment or dues payable of any governmental authority.
An operational creditor, while filling an application for corporate insolvency resolution before the NCLT against an operational debtor, in addition to the requirements of proving default, will also have to prove that there is no dispute which exists between the operational creditors and the debtor with respect to the amounts due.
Corporate Debtor: Under Section 6 of the IBC, the Company itself (being a corporate debtor) can initiate the Corporate Insolvency Resolution Process.
(b) In the case of Vijay Kumar Jain vs.Standard Chartered Bank and others 2019 SCC online SC103, The Hon’ble NCLT held that the directors have the right to attend the Committee of Creditor (COC) meetings as per Section 24 of the Insolvency and Bankruptcy Code (IBC).
However, the directors could not receive information that is considered confidential by the resoluation professional or the COC, including the resolution plans.
In the first appeal, the decision of the NCLT was upheld by the Appellate Tribunal. The Director then moved the Supreme Court, challenging the decision of the Appellate Tribunal.
The Hon’ble Supreme Court held that the scheme of the code makes it clear that the directors, thought not members of the COC, have a right to participate in every meeting of The COC. Ind addition, for effective participation as vitally interested parties in discussion on resolution plans, they have the right to receive copies of the resolution plans presented to the COC.
The Hon’ble Supreme Court also clarified that under Regulation 21 (3)(iii) of the CIRP Regulations, the notice of the CoC meeting, which is required to be given to the directors as well must contain copies of all the documents relevant for matters to be discussed, including the resolution plans.
The Hon’ble Supreme Court considered the directors to be vitally interested on two counts:
1. Such directors are often guarantors and bound by the approved plan, which may scale down their own debts.
2. The directors, being well versed in the affairs of the company, may be able to assist the CoC, on determining whether the resolution plan addresses the cause of default by the company (a mandatory requirement for resolution plans).
The Hon’ble Supreme Court also clarified that any concerns over breach of confidentiality may be alleviated by the resolution professional obtaining a confidentiality undertaking from the directors, which may also contain an indemnity to the resolution professional against any breach.
Of course, this judgement operates along with the judgements of the Hon’ble Supreme Court in Swiss Ribbons Pvt. Ltd. & Anr. Vs. Union of India and K. Sashidharvs. indian Overseas Bank & Ors., that have established the finality and non-justifiability of the decisions of the CoC as regards commercial feasibility and viability of a resolution plan. On a positive note, this will enhance transparency and openness in CoCs. For now, the Suspended directors, though they have no vote, have a seat on the table.
(c) In the case of Shailendra Ajmera, R.P. of RuchiSoya Industries Ltd. vs. ICICI Bank & Others, Resolution Professional filed an application in NCLT, Mumbai Bench under section 43(1) of the Code for seeking reversal of the amounts that were debited from the current accounts of the Corporate Debtor (CD) maintained with ICICI Bank which had been debited by the ICICI Bank before the insolvency Commencement date and were utilized against the payment of the dues owed by the CD to the ICICI in relation to the Letter of Credit issued by ICICI.
The Applicant submitted that the payment of the impugned amounts lead to preferential treatment towards it by the Corporate Debtor as such payment has the effect of putting Respondents in a beneficial position that it would have been in liquidation of th e Corporate Debtor in accordance with Section 53 of the insolvency and Bnakruptcy Code (IBC). It was further stated by the Resolution Professional that the payments of the impugned amount by the Corporate Debtor were not in the “ordinary course of business” of the Corporate Debtor.
The Respondent submitted that the said three transactions, like all other LC transactions involving the Corporate Debtor, were carried out by the Respondent, as per the aforesaid ordinary course of conduct. It was hence submitted by the Respondent that the LC transactions are excluded from the provisions of Section 43 since they were in the “ordinary course of business.”
NCLT vide its order directed the respondent ICICI Which had debited ₹ 27.35 crore, ₹ 10.63 crore and ₹ 28 crore aggregating of ₹ 65.98 crores from the current accounts of the Corporate Debtors to reverse the said amount within 30 days from the date of order. Since the resolution plan is already submitted and under examination of the CoC without consideration of this amount, therefore, the appropriation of this amount will be decided by the CoC.
The appellant Bank filed appeal in NCLAT against the order. The proceeding were related to transactions were the transaction undertake by the Appellant pursuant to the ‘Working Capital Consortium Agreement’ entered into between the Appellant and the ‘Corporate Debtor’ and the ‘Renewal Credit Arrangement’ executed between the Appellant and the ‘Corporate Debtor’ providing overall limit of ‘Letter of Credit’ facility for the period ending 15th December 2017.
The main plea taken by the Appellant Bank is that the ‘Resolution Professional’ before filling an application under Section 43(1) of the insolvency and Bankruptcy Code (IBC) formed no opinion independently nor afforded an opportunity to the Appellant to explain about the transactions in question.
NCLAT after hearing both the parties held that NCLT failed to notice that fact that all the transactions were not made on or after the date of commencement of the ‘Corporate insolvency resolution process’ and in ordinary course of business and in View of such position set aside the impugned order and allowed the appeal.
(d) In the case of M/s Ruchi Soya Industries Limited vs. Patanjali Ayurveda Ltd, NCLT clarified that no party had any right to dictate the terms of order. There was no need to substitute Para 38 with the proposed para as mentioned in the application.
Anyone who had not filed its claim then he would not have any right to agitate the same after the approval of the resolution plan. Resolution Applicants accepted the terms of the modified resolution plan as had been approved by this Bench by submitting an affidavit in compliance of the order.
The NCLT has got powers to review its own orders as given below: Section 420(2) of the Companies Act, 2013:
The tribunal may, at any time within two years from the date of the order, with a view to rectifying any mistake apparent from the record, amend any order passed by it, and shall make such amendment, if the mistake is brought to its notice by the prices:
Provided that no such amendment shall be made in respect of any order against which an appeal has been preferred under this Act.
Rule 11 of the NCLT Rules, 2016:
Nothing in these rules shall be deemed to limit or otherwise affect the inherent posers of the Tribunal to make such orders as may be necessary for meeting the ends of justice or to prevent abuse of the process of the Tribunal.
Rule 155 of the NCLT Rules, 2016:
The Tribunal may, within a period of thirty days from the date of completion of pleadings, and on such terms as to costs or otherwise, as it may think fit, amend any detect or error in any proceeding before it; and all necessary amendments shall be made for the purpose of determining the real question or issue raised by or depending on such proceeding.
Question 7.
A Resolution Professional appointed under Insolvency & Bankruptcy Code, 2016 (IBC, 2016), placed before the Committee of Creditors (CoC), a Consortium of Banks, a Resolution Plan submitted to him. The CoC approved the Resolution Plan and National Company Law Tribunal (NCLT), sanctioned it. As the Liquidation Value is not sufficient and there is a hair-cut involved in the dues payable to the secured financial creditors, nothing is provided for the Operational Creditors under the Resolution Plan. The Operational Creditor aggrieved by the decision of the NCLT filed Appeal before National Company Law Appellate Tribunal (NCLAT). The contention of the Operational Creditor is that the Resolution Plan approved is not in compliance with the provisions of the Insolvency and Bankruptcy Code, 2016 and the Regulations made thereunder:
(a) Referring suitable case law answer whether the contention of Operational Creditor is Correct. (Aug 2021, 6 marks)
(b) Will your answer be different if it is a Liquidation case, listing out the order of priority in case of corporate persons, explain the position of the unsecured Financial creditor and unsecured Operational creditor of a Corporate Debtor under Liquidation? (Aug 2021, 6 marks)
Answer:
(a) In case of Hammond Power Soluation Pvt. Ltd. vs. Sanjit Kumar & ORS, the Hon’ble NCLAt has set aside the Resolution plan and Matter remitted back to NCLT and observed that:
If the above minutes are perused, it can be hardly said that there are any reasons given by the Committee to demonstrate that it has taken care of interest of all stakeholders. Para-46 of the Judgement in the matter of “Committee of Creditor of Essar Steel India Limited vs. Satish Kumar Gupta & Ors.” (Civil Appeal No. 8766-67 of 2019) in the judgement dated 15th November, 2019 [“Essar Steel”] requires to see “the reasons given by the Committee of Creditors while approving a resolution plan” from point of view stated in the paragraph.
The reasons for giving NIL to operational Creditors is not reflected from record. We have already reproduced portion from Part-B Financial Proposal with regards to what the approved Resolution Plan states regarding dues to the Operational Creditors. The proposal is based on the assessment that there is no liquidation value due to Operational Creditors. Although it is not stated but there is reason to doubt that the Resolution Applicants were aware of the liquidation value. There is no dispute that so many of the Operational Creditors have been left high and dry giving them nil amount which Hon’ble Supreme Court has observed that giving NIL to Operational Creditors “would certainly not balance the interest of all stakeholders of maximise the value of assets of the Corporate Debtor if it becomes impossible to continue running its business as a going concern.”
For these reasons, we find that the impugned Order accepting the Resolution Plan cannot be upheld. The Resolution Plan does not appear to have taken care of interest of all stakeholders including Operational
Creditors and the decision of the CoC also does not reflect that it has taken into account the fact that the Corporate Debtor needs to be kept as a going concern and that there is need to maximise the value of the assets and that the interest of all the stakeholders including Operational Creditors has to be taken care of.
For the above reasons, we set aside the impugned Order and remit the matter back to the Adjudicating Authority with a direction to send back the Resolution Plan to the Committee of Creditors to resubmit the Plan after satisfying the parameters as laid down by the Hon’ble Supreme Court in the Judgement in the matter of “Essar Steel”, portions of which have been reproduced above, and IBC.
The Adjudicating Authority may give specific time period of the Resolution Professional to place matter before Committed of Creditors for resubmitting the Resolution Plan satisfying the parameter laid down by the Hon’ble Supreme Court and IBC. Further incidental Orders may also be passed. On resubmission of the Resolution Plan, the Adjudicating Authority will deal with the same in accordance with law.
(b) In case of Liquidation the order of Priority as set out in Section 53 of the Insolvency andl Bankruptcy Code (IBC) have to be followed. In case no amount is left with after satisfaction of Secured Creditors, Operational Creditors cannot claim any amount.
Order of priority-Sub-section (1) of Section 53 provides that notwithstanding any thing to the country contained in any law enacted by the Parliament of any State Legislature for the time being in force, the proceeds from the sale of the liquidation assets shall be distributed in the following order of priority and within such period as may be specified, namely: –
(a) the insolvency resolution process costs and the liquidation costs paid in full
(b) the following debts which shall rank equally between and among the following:
(i) Workmen’s dues for the period of twenty-four mnonths proceding the liquidation commencement dat; and
(ii) debts owed to a secured creditor in the event such secured creditor has relinquished security in the manner set out in section 52
(c) wages and any unpaid dues owed to employees other than workmen for the period of twelve months preceding the liquidation commencement date
(d) financial debts owed to unsecured creditors
(e) the following dues shall rank equally between and among the following:
(i) Any amount due to the Central Government and the State Government including the amount to be received on account of the Consolidated Fund of India and the Consolidated Fund of a State, If any, in respect of the whole or any party of the period of two years preceding the liquidation commencement date
(ii) debts owed to a secured credit or for any amount unpaid following the enforcement of security interest
(f) any remaining debts and dues
(g) preference shareholders, if any; and
(h) equity shareholders, or partners, as the case may be. As per the order of priority as mentioned above, unsecured Financial Creditors ranks above the Operational Creditors.
Question 8.
Liquidation of corporate person is considered to be the last resort in order to recover money. Comment.
Answer:
- Liquidation of corporate person is considered to be the last resort in order to recover money.
- When the resolution plan has failed and no other way could be adopted then dissolution of company is the only resort.
- An auction is conducted where the assets of the company is sold to realize money to return it to the lenders.
- The provisions dealing with the liquidation of corporate persons are covered in the chapter III of the Part II of the Insolvency and Bankruptcy code.
- Sections 33 to 54 in Chapter III of Part II of the Insolvency and Bankruptcy Code, 2016 lays down the law relating to liquidation process for corporate persons.
Question 9.
When can the process of liquidation of corporate person can be initiated?
Answer:
Section 33 of the Code lists out the triggers for initiating the liquidation process for corporate persons. Section 33 of the Code states that:
1. Where the Adjudicating Authority,
(a) before the expiry of the insolvency resolution process period or the maximum period permitted for completion of the corporate insolvency resolution process under section 12 or the fast track corporate insolvency resolution process under section 56, as the case may be, does not receive a resolution plan under sub-section (6) of section 30; or
(b) rejects the resolution plan under section 31 for the non-compliance of the requirements specified therein
2. Where the resolution professional, at any time during the corporate insolvency resolution process but before confirmation of resolution plan, intimates the Adjudicating Authority of the decision of the committee of creditors approved by not less than sixty-six per cent, of the voting share to liquidate the corporate debtor, the Adjudicating Authority shall pass a liquidation order
3. Where the resolution plan approved by the Adjudicating Authority is contravened by the concerned corporate debtor, any person other than the corporate debtor, whose interests are prejudicially affected by such contravention, may make an application to the Adjudicating Authority for a liquidation order and if the Adjudicating Authority determines that the corporate debtor has contravened the provisions of the resolution plan, it shall pass a liquidation order.
Thus, Section 33 provides for the liquidation of the corporate debtor in following four scenarios:
- Where the Adjudicating Authority does not receive a resolution plan
- Where the Adjudicating Authority rejects the resolution plan
- Where, at any time before confirmation of resolution plan, the committee of creditors resolve to liquidate corporate debtor
- Where the corporate debtor violates the terms of the resolution plan.
Question 10.
Briefly explain the provisions related to appointment of liquidator?
Answer:
Section 34(1) provides that where the Adjudicating Authority passes an order for liquidation of the corporate debtor under section 33, the resolution professional appointed forthe corporate insolvency resolution process under Chapter II shall, subject to submission of a written consent by the resolution professional to the Adjudicatory Authority in specified form, shall act as the liquidator for the purposes of liquidation unless replaced by the Adjudicating Authority under subsection (4).
Question 11.
Explain the list of powers and duties of the liquidator as per Section 35 of the Act.
Answer:
Section 35(1) provides that subject to the directions of the Adjudicating Authority, the liquidator shall have the following powers and duties:
(a) to verify claims of all the creditors;
(b) to take into his custody or control all the assets, property, effects and actionable claims of the corporate debtor;
(c) to evaluate the assets and property of the corporate debtor in the manner as may be specified by the Board and prepare a report;
(d) to take such measures to protect and preserve the assets and properties of the corporate debtor as he considers necessary;
(e) to carry on the business of the corporate debtor for its beneficial liquidation as he considers necessary;
(f) subject to section 52, to sell the immovable and movable property and actionable claims of the corporate debtor in liquidation by public auction or private contract, etc.
(g) to draw, accept, make and endorse any negotiable instruments including bill of exchange, hundi or promissory note in the name and on behalf of the corporate debtor.
(h) to take out, in his official name, letter of administration to any deceased contributory and to do in his official name any other act necessary for obtaining payment of any money due and payable from a contributory or his estate which cannot be ordinarily done in the name of the corporate debtor.
(i) to obtain any professional assistance from any person or appoint any professional, in discharge of his duties, obligations and responsibilities;
(j) to invite and settle claims of creditors and claimants and distribute proceeds in accordance with the provisions of this Code;
(k) to institute or defend any suit, prosecution or other legal proceedings, civil or criminal, in the name of on behalf of the corporate debtor;
(l) to investigate the financial affairs of the corporate debtor to determine undervalued or preferential transactions;
(m) to take all such actions, steps, or to sign, execute and verify any paper, deed, receipt document, application, petition, affidavit, bond or instrument and for such purpose to use the common seal, if any, as may be necessary for liquidation, distribution of assets and in discharge of his duties and obligations and functions as liquidator;
(n) to apply to the Adjudicating Authority for such orders or directions as may be necessary for the liquidation of the corporate debtor and to report the progress of the liquidation process in a manner as may be specified by the Board
(o) to perform such other functions as may be specified by the Board.
(p) the liquidator shall have the power to consult any of the stakeholders entitled to a distribution of proceeds under section 53.
Question 11.
Section 36 provides for the creation of a liquidation estate comprising the assets of the corporate debtor. Briefly explain the meaning of liquidity estate?
Answer:
Meaning of Liquidation estate:
- Section 36 provides for the creation of a liquidation estate comprising the assets of the corporate debtor
- Section 36(1) provides that for the purpose of liquidation, the liquidator shall form an estate of the assets mentioned in sub-section (3), which will be called the liquidation estate in relation to the corporate debtor
- Section 36(2) further provides that the liquidator shall hold the liquidation estate as a fiduciary for the benefit of all the creditors.
Question 12.
Which are the assets that will form part of Liquidation estate?
Answer:
Section 36(3) provides that subject to sub-section (4), the liquidation estate shall comprise all liquidation estate assets which shall include the following:
(a) any assets over which the corporate debtor has ownership rights, including all rights and interests therein as evidenced in the balance sheet of the corporate debtor or an information utility or records in the registry or any depository recording securities of the corporate debtor or by any other means as may be specified by the Board, including shares held in any subsidiary of the corporate debtor;
(b) assets that may or may not be in possession of the corporate debtor including but not limited to encumbered assets;
(c) tangible assets, whether movable or immovable;
(d) intangible assets including but not limited to intellectual property, securities (including shares held in a subsidiary of the corporate debtor) and financial instruments, insurance policies, contractual rights;
(e) assets subject to the determination of ownership by the court or authority;
(f) any assets or their value recovered through proceedings for avoidance of transactions in accordance with this Chapter;
(g) any asset of the corporate debtor in respect of which a secured creditor has relinquished security interest;
(h) any other property belonging to or vested in the corporate debtor at the insolvency commencement date;
(i) all proceeds of liquidation as and when they are realised. What shall not be included in the liquidation estate assets.
Question 13.
Which are the assets that will not form part of Liquidation estate?
Answer:
According to section 36(4), the following shall not be included in the liquidation estate assets and shall not be used for recovery in the liquidation:
(a) assets owned by a third party which are in possession of the corporate debtor, including –
- assets held in trust for any third party;
- bailment contracts;
- all sums due to any workmen or employee from the provident fund, the pension fund and the gratuity‘fund;
- other contractual arrangements which do not stipulate transfer of title but only use of the assets;
- such other assets as may be notified by the Central Government in consultation with any financial sector regulator;
(b) assets in security collateral held by financial services providers and are subject to netting and set-off in multi-lateral trading or clearing transactions;
(c) personal assets of any shareholder or partner of a corporate debtor as the case may be provided such assets are not held on account of avoidance transactions that may be avoided under this Chapter;
(d) assets of any Indian or foreign subsidiary of the corporate debtor;
(e) any other assets as may be specified by the Board, including assets which could be subject to set-off on account of mutual dealings between the corporate debtor and any creditor.
Question 14.
Explain the procedure to be followed by liquidator with regards to claims of creditors.
Answer:
- Section 38(1) provides that the liquidator shall receive or collect the claims of creditors within a period of thirty days from the date of the commencement of the liquidation process
- According to section 38(2), a financial creditor may submit a claim to the liquidator by providing a record of such claim with an information utility.
- An operational creditor may submit a claim to the liquidator in such form and in such manner and along with such supporting documents required to prove the claim as may be specified by the Board
- According to section 39(1), the liquidator shall verify the claims submitted under section 38 within such time as specified by the Board.
- The liquidator may, after verification of claims under section 39, either admit or reject the claim, in whole or in part, as the case may be
- The liquidator shall communicate his decision of admission or rejection of claims to the creditor and corporate debtor within seven days of such admission or rejection of claims.
- Section 41 provides that the liquidator shall determine the value of claims admitted under section 40 in such manner as may be specified by the Insolvency and Bankruptcy Board of India.
Question 15.
Explain the provisions of preferential transactions as per Section 43 of the Act.
Answer:
- Related parties often possess information of the corporate debtor’s financial affairs and may collude with him to siphon off assets with the knowledge that the corporate debtor might become insolvent in the near future.
- Section 43 invalidates transfer of property or an interest thereof given during the relevant time to a person for the benefit of a creditor, surety or guarantor on account of antecedent debt or other liabilities which have the effect of putting such creditor, surety or guarantor in a better position than the position which he would have been in if such transfer had not been made.
- Section 43(1) lays down that where the liquidator or the resolution professional, as the case may be, is of the opinion that the corporate debtor has at a relevant time given a preference in such transactions and in such manner as laid down in sub-section (2) of section 43 to any persons as referred to in sub-section (4), he shall apply to the Adjudicating Authority for avoidance of preferential transactions and for, one or more of the orders referred to in section 44.
- According to section 43(2), a corporate debtor shall be deemed to have given a preference, if-
- there is a transfer of property or an interest thereof of the corporate debtor for the benefit of a creditor or a surety or a guarantor for or on account of an antecedent financial debt or operational debt or other liabilities owed by the corporate debtor; and
- the transfer has the effect of putting such creditor or a surety or a guarantor in a beneficial position than it would have been in the event of a distribution of assets being made in accordance with section 53.
- Section 43(3) provides that for the purposes of sub-section (2), a preference shall not include the following transfers:
- transfer made in the ordinary course of the business or financial affairs of the corporate debtor or the transferee;
- any transfer creating a security interest in property acquired by the corporate debtor to the extent that –
(i) such security interest secures new value and was given at the time of or after the signing of a security agreement that contains a description of such property as security interest, and was used by corporate debtor to acquire such property; and
(ii) such transfer was registered with an information utility on or before thirty days afterthe corporate debtor receives possession of such property.
- Section 43(4) lays down that a preference shall be deemed to be given at a relevant time, if –
- It is given to a related party (other than by reason only of being an employee), during the period of two years preceding the insolvency commencement date; or
- a preference is given to a person other than a related party during the period of one year preceding the insolvency commencement date.
Question 16.
Explain the power of Adjudicating Officer with regards to preferential transactions.
Answer:
Section 44 lays down that the Adjudicating Authority, may, on an application made by the resolution professional or liquidator, by an order:
(a) require any property transferred in connection with the giving of the preference to be vested in the corporate debtor;
(b) require any property to be so vested if It represents the application either of the proceeds of sale of property so transferred or of money so transferred;
(c) release or discharge (in whole or in part) of any security interest created by the corporate debtor;
(d) require any person to pay such sums in respect of benefits received by him from the corporate debtor, such sums to the liquidator or the resolution professional, as the Adjudicating Authority may direct;
(e) direct any guarantor, whose financial debts or operational debts owed to any person were released or discharged (in whole or in part) by the giving of the preference, to be under such new or revived financial debts or operational debts to that person as the Adjudicating Authority deems appropriate;
(f) direct for providing security or charge on any property for the discharge of any financial debt or operational debt under the order, and such security or charge to have the same priority as a security or charge released or discharged wholly or in part by the giving of the preference; and
(g) direct for providing the extent to which any person whose property is so vested in the corporate debtor, or on whom financial debts or operational debts are imposed by the order, are to be proved in the liquidation or the corporate insolvency resolution process forfinancial debts or operational debts which arose from, or were released or discharged wholly or in part by the giving of the preference:
Question 17.
Explain the provisions of “Application by Creditor in Cases of Undervalued Transactions”.
Answer:
- According to section 47(1), where an under valued transaction has taken place and the liquidator or the resolution professional as the case may be, has not reported it to the Adjudicating Authority, a creditor, member or a partner of a corporate debtor, as the case may be, may make an application to the Adjudicating Authority to declare such transactions void and reverse their effect in accordance with this Chapter
- the Adjudicating Authority, after examination of the application is satisfied that
(a) undervalued transactions had occurred; and
(b) liquidator or the resolution professional, as the case may be, after having sufficient information or opportunity to avail information of such transactions did not report such transaction to the Adjudicating Authority, - the Adjudicating Authority shall pass an order-
(a) restoring the position as it existed before such transactions and reversing the effects;
(b) requiring the Board to initiate disciplinary proceedings against the liquidator or the resolution professional as the case may be.
Question 18.
Explain the provisions of Extortionate Credit Transactions.
Answer:
- Section 50(1) lays down that where the corporate debtor has been a party to an extortionate credit transaction involving the receipt of financial or operational debt during the period within two years preceding the insolvency commencement date, the liquidator or the resolution professional as the case may be, may make an application for avoidance of such transaction to the Adjudicating Authority if the terms of such transaction required exorbitant payments to be made by the corporate debtor.
- The Board may specify the circumstances in which a transactions which shall be covered under sub-section (1).
- Any debt extended by any person providing financial services which is in compliance with any law for the time being in force in relation to such debt shall in no event be considered as an extortionate credit transaction.
Question 19.
Explain the powers of Adjudicating Authority in Respect of Extortionate Credit Transactions.
Answer:
Section 51 provides that where the Adjudicating Authority after examining the application made under sub-section (1) of section 50 is satisfied that the terms of a credit transaction required exorbitant payments to be made by the corporate debtor, it shall, by an order – (a) restore the position as it existed prior to such transaction;
(b) set aside the whole or part of the debt created on account of the extortionate credit transaction;
(c) modify the terms of the transaction;
(d) require any person who is, or was, a party to the transaction to repay any amount received by such person;
(e) require any security interest that was created as part of the extortionate credit transaction to be relinquished in favour of the liquidator or the resolution professional, as the case may be.
Question 20.
Briefly explain the rights of secured creditor in case of liquidation.
Answer:
- According to section 52(1), a secured creditor in the liquidation proceedings may
(a) relinquish its security interest to the liquidation estate and receive proceeds from the sale of assets by the liquidator in the manner specified in section 53; or
(b) realise its security interest in the manner specified in this section. - A secured creditor may enforce, realise, settle, compromise or deal with the secured assets in accordance with such law as applicable to the security interest being realised and to the secured creditor and apply the proceeds to recover the debts due to it.
- Where the enforcement of the security interest yields an amount by way of proceeds which is in excess of the debts due to the secured creditor, the secured creditor shall- (a) account to the liquidator for such surplus; and (b) tender to the liquidator any’surplus funds received from the enforcement of such secured assets.
- Where the proceeds of the realisation of the secured assets are not adequate to repay debts owed to the secured creditor, the unpaid debts of such secured creditor shall be paid by the liquidator in the manner specified in clause (e) of sub-section (1) of section 53.
Question 21.
Explain the order of priority with regards to distribution of assets in case of liquidation.
Answer:
Sub-section (1) of section 53 provides that notwithstanding anything to the contrary contained in any law enacted by the Parliament or any State Legislature for the time being in force, the proceeds from the sale of the liquidation assets shall be distributed in the following order of priority and within such period as may be specified, namely:
(a) the insolvency resolution process costs and the liquidation costs paid in full;
(b) the following debts which shall rank equally between and among the following:
(i) workmen’s dues for the period of twenty-four months preceding the liquidation commencement date; and
(ii) debts owed to a secured creditor in the event such secured creditor has relinquished security in the manner set out in section 52;
(c) wages and any unpaid dues owed to employees other than workmen for the period of twelve months preceding the liquidation commencement date;
(d) financial debts owed to unsecured creditors;
(e) the following dues shall rank equally between and among the following:
(i) any amount due to the Central Government and the State Government including the amount to be received on account of the Consolidated Fund of India and the Consolidated Fund of a State, if any, in respect of the whole or any part of the period of two years preceding the liquidation commencement date;
(ii) debts owed to a secured creditor for any amount unpaid following the enforcement of security interest;
(f) any remaining debts and dues;
(g) preference shareholders, if any;
(h) equity shareholders or partners, as the case may be.
For the purpose of this section-
(i) at each stage of the distribution of proceeds in respect of a class of recipients that rank equally, each of the debts will either be paid in full, or will be paid in equal proportion within the same class of recipients, if the proceeds are insufficient to meet the debts in full; and
(ii) the term “workmen’s dues” shall have the same meaning as assigned to it in section 326 of the Companies Act, 2013.
Question 22.
Explain the provisions of dissolution of corporate debtor.
Answer:
- Section 54 provides that after the affairs of the corporate debtor have been wound up and its assets are completely liquidated, the liquidator shall make an application to the adjudicating authority for the dissolution of the corporate debtor.
- Where the assets of the corporate debtor have been completely liquidated, the liquidator shall make an application to the Adjudicating Authority for the dissolution of such corporate debtor.
- The Adjudicating Authority shall on application filed by the liquidator that the corporate debtor shall be dissolved from the date of that order and the corporate debtor shall be dissolved accordingly.
- A copy of an order shall within seven days from the date of such order, be forwarded to the authority with which the corporate debtor is registered.