10. Anand Rao Korada (Resolution
Professional) vs. Varsha Fabrics (P) Ltd. [2019] 111 taxmann.com 474 (SC) Civil Appeal Nos. 8800-8801 of 2019 Date of order: 18th November,
2019
Sections 14, 231 and 238 of Insolvency and
Bankruptcy Code, 2016 – High Court cannot continue with auction proceedings to
sell the assets of corporate debtor if the proceedings under the Code have been
initiated and order declaring the moratorium has been passed by the NCLT
FACTS
I Co held shares in H Co. Pursuant to a
share purchase agreement (SPA) dated 10th July, 2006 it sold its
entire shareholding in H Co to V Co, IF Co and M Co. H Co shut down its factory
on 8th May, 2007. Subsequently, their stake in H Co was sold to IW
Co.
The workers of
H Co through their union (hereinafter referred to as the Union) filed writ
petitions before the Odisha High Court for cancellation of the SPA dated 10th
July, 2006 and payment of the arrears and current salaries of the
workmen. The High Court vide order dated 14th March, 2012 directed
the Deputy Labour Commissioner to recover the workmen’s dues by sale of the
assets of H Co through a public auction. The Supreme Court in the said matter
passed an order dated 3rd August, 2015 wherein it was directed that
the issue of quantifying the compensation payable to the workmen should be
determined by the Labour Court. In the event V Co, IF Co and M Co failed to pay
the compensation so determined, the assets of H Co would be sold in a public
auction and the proceeds would be used to disburse the arrears of workmen.
Pursuant to an order of the High Court dated
12th January, 2017, the sale of a parcel of land of H CO was
completed and the amounts recovered compensated a portion of the total dues of
the workmen.
During the pendency of proceedings with the
High Court, N Co, a financial creditor of H Co, initiated corporate insolvency
resolution proceedings (CIRP) against H Co for default in payment of financial
debt. The National Company Law Tribunal (NCLT) admitted the petition and
declared a moratorium in accordance with the provisions of sections 13 and 15
of the Insolvency and Bankruptcy Code, 2016 (the Code) vide order dated 4th
June, 2019.
The writ petitions came up for further
hearing and orders were passed by the High Court on 14th August,
2019 and 5th September, 2019. The Resolution Professional filed a
civil appeal to challenge the interim orders of the High Court on the ground
that since CIRP were already underway, the proceedings before the High Court
ought to be stayed.
HELD
The Supreme Court heard the parties at
length. It examined the provisions of sections 13, 14, 231 and 238 of the Code
and observed that section 238 gave an overriding effect to the Code over all
other laws. The provisions of the Code vested exclusive jurisdiction on the
NCLT and the NCLAT to deal with all issues pertaining to the insolvency process
of a corporate debtor and the mode and manner of disposal of its assets.
Further, section 231 of the Code bars the jurisdiction of civil courts in
respect of any matter in which the adjudicating authority, i.e. the NCLT or the
NCLAT, is empowered by the Code to pass any order.
In view of the said provisions, it was held
that the High Court ought not to have proceeded with the auction of the
property of H Co once the proceedings under the Code had commenced and an order
declaring moratorium was passed by the NCLT. It was observed that if the assets
of H Co were alienated during the pendency of the proceedings under the Code,
it would seriously jeopardise the interest of all the stakeholders.
The interim orders of the High Court were
set aside by the Supreme Court and it was held that the sale or liquidation of
assets of H Co would now be governed by the Code. Further, the union was
directed to file its claim under Regulation 9 of the Insolvency and Bankruptcy
Board of India (Insolvency Resolution Process for Corporate Persons)
Regulations, 2016 for payment of arrears, salaries and other dues before the
competent authority. All the parties were granted liberty to pursue the
available remedies in accordance with law.
11. Omega Finvest LLP vs. Direct News (P)
Ltd. [2019] 112 taxmann.com 297 (NCLT, N.Del.) C.P. (IB) No. 1478 (PB) of 2019 Date of order: 30th September,
2019
Section 5 of Insolvency and Bankruptcy
Code, 2016 – Providing a place on lease for the purpose of carrying on
day-to-day activities was a supply of services – Lessor was an operational
creditor who was entitled to commence resolution proceedings when there was a
default in payment of rent
FACTS
D Co, a private
limited company, had entered into a lease agreement with S Co on 28th
August, 2008. S Co was demerged into O Co and O Co was converted into an LLP in
the year 2012. In order to continue the lease of the premises, the parties had
entered into a lease deed dated 13th July, 2016 for a period of
three years from 1st July, 2016 to 30th June, 2019. D Co
paid a sum of Rs. 1.25 crores to O Co pursuant to the lease deed. O Co submitted
that upon execution of the modification deed dated 14th June, 2018,
D Co issued 13 post-dated cheques for payment of rent for each month from 1st
June, 2018 to 30th June, 2019 for a sum of Rs. 21,60,000,
inclusive of the base rent of Rs. 20,00,000 along with Goods and Services Tax @
18% amounting to Rs. 3,60,000. It is claimed by O Co that cheques issued
towards payment of rent for the months of April, 2019 and May, 2019 got
dishonoured.
O Co furnished a demand notice dated 28th
May, 2019 to D Co u/s 8 of the Insolvency and Bankruptcy Code, 2016 (the Code).
O Co alleged that there was no reply to the notice so served.
D Co opposed the petition on the ground that
the debt claimed does not fall in the ambit of the definition of ‘operational
debt’ and therefore O Co was not an ‘operational creditor’. D Co further
submitted that a reply to the demand notice was communicated in due time. There
was prior communication to adjust the rent against the security deposit and
accordingly, it was alleged that there was a pre-existing dispute even before
notice u/s 8 was served.
HELD
The National Company Law Tribunal (NCLT)
heard both the sides at length. It examined the provisions of sections 5(20)
and 5(21) of the Code which define operational creditor and operational debt.
It was observed that in the facts of the present case, lease of premises was
for functioning of day-to-day operations and it was directly related to the
input and output of the supply of services by D Co. O Co had provided
infrastructure services to D Co for its functioning. Thus, leasing of premises
was held to be supply of services. Reliance was also placed on the report of
the Bankruptcy Law Reforms Committee dated 4th November, 2015 which
also mentions that… ‘the lessor. that an entity rents out space from is an
operational creditor to whom the entity owes monthly rent’. It was held
that O Co was an ‘operational creditor’ within the meaning of section 5(20) of
the Code.
NCLT perused the communication between D Co
and O Co regarding adjustment of security deposit towards rent. The request for
adjustment was not met with by O Co and it proceeded to deposit the cheques
issued and the same were returned for want of sufficient funds.
NCLT also examined the provisions of the
rent agreement and observed that the security deposit had an entirely different
purpose. O Co had never agreed to adjust the rent from the security deposit.
The assumption of D Co that the agreement would extend to August, 2019 was
unfounded and the submission that there was a pre-existing dispute could not be
accepted.
As the default
stood established, NCLT proceeded to admit the petition
for initiating corporate insolvency resolution
process against D Co and declared a moratorium over its assets. An
interim resolution professional was also appointed.
12. Anil Syal
vs. Sanjeev Kapoor [2020] 113
taxmann.com 52 (NCLAT) Company Appeal
(AT)(Insolvency) No. 961 of 2019 Date of order:
8th November, 2019
Sections 8 and 9 of the Insolvency and
Bankruptcy Code, 2016 – Dues claimed in the demand notice related to sister
concern of the corporate debtor and not the corporate debtor itself – Service
of such a notice was not valid – Application for initiating corporate
insolvency resolution proceedings was not maintainable for want of appropriate
notice
FACTS
A service
contract was entered into and executed between Sanjeev Kapoor, proprietor of
Kapoor Logistics (operational creditor) and Flywheel Logistics Solutions
Private Limited (corporate debtor) for running route vehicles in freight-line
haul operations between Pantnagar and Pune. Anil Syal is ex-director and
shareholder of the company Flywheel Logistics Solutions Pvt. Ltd. (corporate
debtor).
The operational creditor submitted that
Logistics Services were provided to the corporate debtor and pursuant to that
invoices were raised for the amount totalling Rs. 66,00,860 for the period
January, 2017 to August, 2017. Part payment of Rs. 35,68,484 was received from
the corporate debtor against the pending bills. Anil Syal stated that the balance
confirmation of Rs. 30 lakhs was admitted by the corporate debtor vide e-mail
dated 27th July, 2018. But despite repeated e-mails and reminders,
the outstanding dues were not paid by the corporate debtor. The operational
creditor claimed that a demand notice was furnished calling upon the corporate
debtor to pay the total outstanding amount of Rs. 33,69,997.
The corporate debtor challenged the
submission stating that the demand notice and invoices were never received and
therefore the application was not maintainable for want of a valid demand
notice. Further, it was alleged that the demand notice was furnished to a
sister concern which was a separate legal entity by the name of Flywheel
Logistics Pvt. Ltd. having a different CIN and registered address, separate and
distinct from the corporate debtor. It was also submitted that the National
Company Law Tribunal (NCLT) which passed an order for initiation of the
corporate insolvency resolution process (CIRP) against the corporate debtor did
not take into account the evidence establishing a pre-existing dispute.
HELD
The National Company Law Appellate Tribunal
(NCLAT) observed that invoices were issued against M/s Flywheel Logistics Pvt.
Ltd. but the demand notice was issued to Flywheel Logistics Solutions Pvt. Ltd.
being the corporate debtor. The two are different corporate entities having
different CIN numbers and registered addresses.
NCLAT held that the operational creditor had
no right to claim dues relating to the invoices issued against ‘M/s Flywheel
Logistics Pvt. Ltd.’ from the corporate debtor, ‘M/s Flywheel Logistics
Solutions Pvt. Ltd.’ which is a separate corporate entity, having a different
CIN number.
It was observed that the mandatory primary
requirement for filing a petition u/s 9 of the Code was the service of the
demand notice u/s 8 of the Code. Since the demand notices related to the dues
of another corporate entity, it could not be treated as a valid and proper
service. The order passed by NCLT was thus set aside by NCLAT. It was further
held that this order would not prejudice the right of the operational creditor
to proceed against Flywheel Logistics Pvt. Ltd.
13. Indiavidual Learning (P) Ltd. vs.
Registrar of Companies [2019] 112 taxmann.com 101 (NCLT-Beng.) Date of order: 10th October, 2019
In the Board
Report of the company filed with the ROC, certain matters were unintentionally
omitted to be reported – It could be permitted to revise the said Board Report
if the same would not prejudice the interests of the company, its shareholders
or stakeholders, or violate any provisions
FACTS
The Audited Financial Statements of I Pvt.
Ltd. (company), which included the Board’s Report for the financial year
2015-16, were approved by the Board of Directors. The Auditor’s Report attached
to the Financial Statements was sent to the shareholders of the company. The
same were laid before and adopted at the Annual General Meeting. The Audited
Financial Statements, together with the Board’s Report, was filed with the ROC
in due course.
It was brought
to the notice of the Bench that in the aforesaid Board’s
Report for the financial year 2015-16, certain matters to be covered in terms
of the provisions of section 134 of the Companies Act, 2013 were
unintentionally omitted to be reported. Those inadequacies were noticed by
the company later on, when it was reviewing the documents filed with the NCLT
in connection with a proposed reduction of share capital. It was further stated
in the petition that the inadequacies and omissions arising from non-compliance
of various applicable provisions happened purely due to inadvertence and no
part of it was prejudicial to the interests of any of the stakeholders.
A decision was taken at the meeting of the
Board of Directors of the company to revise the Board’s Report for the
financial year 2015-16, subject to approval of the Tribunal, and accordingly
the petition filed sought permission to revise the Board’s Report.
The notice of the petition was served on the
ROC concerned. Even though notice was served on the ROC and sufficient time
granted, ROC had not filed any response.
HELD
The proviso to section 131(1) of the
Companies Act, 2013 mandates that the Tribunal shall give notice to the
statutory authorities and it shall take into consideration the representations,
if any made by such authorities, before passing any order under this section.
Since ROC had not filed any representation on the petition, it appeared to the
Bench that it had no representation against the petition. Therefore, on the
principle of ease of doing business, it was held that orders are to be passed as
per merits of the case.
The inadequacies noticed in the Board’s
Report were as under:
(i) The financial highlights of the performance
of the company in terms of Rule 5(i) of the Companies (Accounts) Rules, 2014;
(ii) Details of subsidiaries, joint ventures or
associate companies in terms of Rule 5(iv) of the said Rules;
(iii) Details relating to deposits in terms of Rule
5(v) of the said Rules;
(iv) Details in respect of frauds reported by
auditors in terms of section 134(3)(ca) of the Companies Act, 2013;
(v) Disclosures on details of the Employee Stock
Option Scheme in terms of the Companies (Share Capital and Debentures) Rules,
2014;
(vi) The statutory auditor had made a qualification
stating that ‘no employee compensation expenses is accounted as required by
ICAI guidelines in absence of the fair value option, the impact on loss for the
year is not ascertained’. As per provisions of section 134(2)(f) of the
Companies Act, 2013, the Board was required to include in the Board’s Report
explanations or comments of the Board on every qualification, reservation or
adverse remark or disclaimer made by the Auditor in his report, if any.
However, there was an omission in this respect also since in the Board’s Report
dated 6th September, 2016 no explanation was provided for the
adverse remarks / comments of the statutory auditors in their Report;
(vii) In terms of the provisions under the Sexual
Harassment of Women at Workplace (Prevention and Prohibition and Redressal)
Act, 2013 the company had to make certain disclosures on the complaints
received, if any, under the said Act. While the company had during the F.Y.
2015-16 complied with the requirements under the said Act, a statement to that
effect was omitted in the Board’s Report; and
(viii) In respect of the paragraph under
Directors’ Responsibility Statement in terms of section 134(3)(c) read with
section 134(5) of the Companies Act, 2013, the wording in the said paragraph
was not on the lines prescribed under the Act and, therefore, warranted a
correction.
On perusal of
the inadequacies of the Board’s Report as noticed and pointed out, it was
observed that they were not serious in nature and happened due to inadvertence
and if permitted to be revised as sought for, would not prejudice the interests
of the company, its shareholders, or stakeholders, or violate any provisions of
the Act. They have also declared that the company has been prompt in all annual
filings with the ROC in the past and all statutory registers and records were
maintained in accordance with the provisions of the Act. Therefore, considering
the fact that the instant petition is filed duly following the provisions of
the Act and the rules made thereunder and thus, by following the principle of
ease of doing business, the company petition is to be disposed of subject to
compliance of provisions of the applicable NCLT rules.
In the result, the company was permitted to
revise its Board’s Report for the financial year 2015-16 in terms of section
131(1) of the Companies Act, 2013.
However, it was made clear to the company
that the order would not absolve the company of any other violation(s)
committed by it and the statutory authorities were entitled to take appropriate
action in accordance with law.
