1. Shweta
Vishwanath Shirke vs. Committee of Creditors [2019] 109 taxmann.com 30 (NCLAT) Company Appeal (AT) (Insolvency) Nos. 601,
612, 527 of 2019 Date of order: 28th August, 2019
Sections 12A and 29A of Insolvency and
Bankruptcy Code, 2016 – The directors / promoters reached a settlement with the
CoC – More than 90% of voting shares of the CoC approved the withdrawal of
corporate insolvency resolution process – NCLT should have accepted the
application of withdrawal especially when the settlement was being made by
promoters in their individual capacity and not by using the proceeds of crime –
Section 29A would not apply when examining an application u/s 12A
FACTS
About 90% of the Committee of Creditors
(CoC) approved the withdrawal of S Co from the Insolvency Resolution Process
and filed an application u/s 12A of the Code. National Company Law Tribunal
(NCLT) rejected the application on the ground that since the promoter was not
eligible to file a resolution plan u/s 29A it could not have filed an
application for withdrawal u/s 12A of the Code.
Andhra Bank, which was on the CoC, also
challenged the order of NCLT on the ground that section 29A would not apply to
an application filed u/s 12A which has been approved by more than 90% of the
CoC.
The Enforcement Directorate, SEBI and CBI
were also investigating the matter against S Co. The ED submitted that the
assets of S Co were based on the proceeds of crime and, accordingly, they could
not be given to anyone.
The matter for examination before the NCLAT
was whether section 29A of the Code would apply to the applicant, if he intends
to withdraw the petition u/s 7 or 9, if the CoC approves a proposal with 90%
voting share in terms of section 12A.
HELD
NCLAT examined the provisions of section 29A
of the Code which provides for persons not eligible to be resolution
applicants. It was observed that if any person including the ‘Promoter’ /
‘Director’ was ineligible in terms of any one or more clauses of section 29A,
he / she was not entitled to file any ‘resolution plan’ individually or jointly
or in concert with another. Section 12A, on the other hand, dealt with
withdrawal of the application filed by an ‘applicant’ u/s 7 or section 9 of the
Code, if the CoC with more than 90% voting share approved the proposal.
The NCLAT, relying on the observations of
the Supreme Court in the decision of Swiss Ribbons Pvt. Ltd. vs. Union of
India (2019 SCC Online SC 73) held that promoters / shareholders are
entitled to settle the matter in terms of section 12A and in such case, it was
always open to an applicant to withdraw the application under section 9 of the
Code on the basis of which the Corporate Insolvency Resolution Process was initiated.
Thus, section 29A would not apply for entertaining / considering an application
u/s 12A as the applicants are not entitled to file an application u/s 29A as
‘resolution applicant’.
NCLAT held that since the application u/s 7
was filed by Andhra Bank and the application for withdrawal was approved by
more than 90% of voting shares in CoC, it was not in the purview of NCLT to
reject the application for withdrawal. The order of liquidation passed by the
NCLT was, accordingly, set aside.
It was further held that if the ED concludes
that the assets of S Co are based on the proceeds of crime, it could exercise
its powers under the Prevention of Money Laundering Act, 2002 (PMLA) and seize
those assets.
As the
settlement with creditors was to be paid by the directors / shareholders in
their individual capacity, from the funds held in their accounts and not from
proceeds of crime, the application for withdrawal was approved by NCLAT. It was
further held that the order would not amount to interference with any order
passed by the ED with regard to the assets of S Co. Proceedings under PMLA will
continue against S Co in accordance with the law.
It was further directed that the fees of the
liquidator and the resolution professional would be determined and paid by
Andhra Bank on behalf of the CoC and it may adjust the same with the members.
2. State
Bank of India vs. Moser Baer Karamchari Union [2019] 108 taxmann.com 251 (NCLAT New Delhi) Company Appeal (AT) (Insolvency) No. 396 of
2019 Date of order: 19th August, 2019
Section 36 of
Insolvency and Bankruptcy Code, 2016 – All sums due to an employee or a workman
from the provident fund, pension fund and gratuity fund do not fall in the
ambit of the liquidation assets and accordingly cannot be a part of waterfall /
distribution mechanism laid down u/s 53 of the Code
FACTS
Corporate Insolvency Resolution Process was
initiated against M Co and an order for liquidation was passed on 20th
September, 2018. Pursuant to the judgement by the National Company Law Tribunal
(NCLT) the workmen stood discharged u/s 33(7) of the Code.
The liquidator, vide email dated 5th
December, 2018, denied the payment of the gratuity fund, the provident fund and
the pension fund preferentially and included the same for payments under the
waterfall mechanism provided in section 53 of the Code.
In January, 2019 the Moser Baer Karamchari
Union (MBKU) filed a prayer for exclusion of provident fund, pension fund and
gratuity fund from the waterfall mechanism and payment of their dues as they
did not form a part of liquidation estate. NCLT upheld the prayer. SBI, the
secured creditor, filed an appeal to the National Company Law Appellate
Tribunal (NCLAT) against the order passed by the NCLT.
SBI submitted that waterfall mechanism
provided under the Code included the contribution to provident fund. Reliance
was also placed on Explanation below section 53 of the Code which suggested
that the ‘workmen’s dues’ shall have the same meaning as assigned to it in
section 326 of the Companies Act, 2013. MBKU highlighted the provision of
section 36 of the Code which defines liquidation assets. It was submitted that
in terms of section 36(4)(a)(iii), liquidation assets specifically excluded all
sums due to any workman or employee from the provident fund, pension fund and
gratuity fund.
HELD
NCLAT heard counsel for both sides. The
matter for consideration before NCLAT was whether provident fund, pension fund
and gratuity fund come within the meaning of assets of M Co for distribution
u/s 53 of the Code.
NCLAT examined the provisions of sections 36
and 53 of the Code as well as sections 326 and 327 of the Companies Act, 2013.
It was observed that all sums due to any workman or employee from the provident
fund, the pension fund and the gratuity fund shall not be included in the
liquidation estate assets and cannot be used for recovery in the liquidation as
per section 36 of the Code. Further, as the sums mentioned were not a part of
the liquidation estate / liquidation assets, the question of their distribution
in order of priority u/s 53 did not arise at all.
Further, while applying section 53 of the
Code, section 326 of the Companies Act, 2013 is relevant for the limited
purpose of understanding ‘workmen’s dues’ which can be more than provident
fund, pension fund and the gratuity fund kept aside and protected u/s
36(4)(iii).
It was thus held that the provident fund,
gratuity fund and pension fund do not come within the meaning of ‘liquidation estate’ for the purpose of distribution of assets u/s 53.
The NCLAT upheld the order passed by NCLT
and dismissed the appeal.
3. Pioneer
Urban Land & Infrastructure Ltd. vs. Union of India [2019] 108 taxmann.com 147 (SC) Writ Petition (Civil) Nos. 43, 99, 124, 121,
129 of 2019 & Ors. Date of order: 9th August, 2019
Sections 21(6A)(b), 25A and Explanation to
section 5(8)(f) of the Insolvency and Bankruptcy Code, 2016 – Amendments made
to the Code which deem the allottees of real estate projects to be ‘financial
creditors’ such that it gives them the right to enforce the Code u/s 7 are
constitutionally valid
FACTS
Amendments were carried out to the
Insolvency and Bankruptcy Code, 2016 (the Code) pursuant to a report prepared
by the Insolvency Law Committee dated 26th March, 2018 (Insolvency
Committee Report). The amendments so made deemed allottees of real estate
projects to be ‘financial creditors’ so that they may trigger the Code, u/s 7
thereof, against the real estate developer. In addition, being financial
creditors, they were entitled to be represented in the Committee of Creditors
by authorised representatives.
The Supreme Court in the case of Chitra
Sharma vs. Union of India (Writ Petition [Civil] No. 744 of 2017)
appointed a representative to protect the interest of home buyers on the
Committee of Creditors. The Insolvency Committee Report suggested that
amendments be made in the Code seeking to clarify, as a matter of law, that
allottees of real estate projects are financial creditors. On 17th
August, 2018, Parliament passed the Insolvency and Bankruptcy Code (Second
Amendment) Act, 2018 (Amendment Act) incorporating the aforesaid amendments as
were provided for by the Amendment Ordinance.
The real estate developers filed a petition
challenging the provisions saying it violates two facets of Article 14. One,
that the amendment is discriminatory inasmuch as it treats unequals equally,
and equals unequally, having no intelligible differentia; and two, that there
is no nexus with the objects sought to be achieved by the Code. The amendments
were alleged to be arbitrary, irrational and without determining principle and
in violation of public interest under Article 19(6). Further, there was a
specific legislation on the subject of real estate, namely, Real Estate
(Regulation and Development) Act, 2016 (RERA) which provides for adjudication
of disputes between allottees and the developer, together with a large number
of safeguards in favour of the allottee.
Reliance was placed on the decision of Swiss
Ribbons vs. Union of India (2019) 4 SCC 17 to drive home the point that
not a single one of several characteristics of financial creditors stated in
that judgement would apply to allottees / home buyers.
HELD
The Supreme Court heard the parties and
observed that the Legislature must be given free play in the joints when it
comes to economic legislation. Apart from the presumption of constitutionality
which arises in such cases, the legislative judgement in economic choices must
be given a certain degree of deference by the courts.
Further, the Supreme Court observed that
from the introduction of the explanation to section 5(8)(f) of the Code, it was
clear that Parliament was aware of RERA and applied some of its definition
provisions so that they could apply when the Code was to be interpreted. The
fact that RERA is in addition to and not in derogation of the provisions of any
other law for the time being in force, also made it clear that the remedies
under RERA to allottees were intended to be additional and not exclusive
remedies. Further, the Code as amended, is later in point of time than RERA and
must be given precedence over RERA in view of section 88 of RERA. Given the
different spheres within which these two enactments operate, different parallel
remedies are given to allottees – under RERA to see that their flat / apartment
is constructed and delivered to them in time, barring which compensation for
the same and / or refund of amounts paid together with interest at the very
least comes their way. If, however, the allottee wants that the corporate
debtor’s management itself be removed and replaced, so that the corporate
debtor can be rehabilitated, he may prefer a section 7 application under the
Code.
As regards unequal treatment afforded, the
Supreme Court observed that home buyers / allottees can be assimilated with
other individual financial creditors like debenture holders and fixed deposit
holders who have advanced certain amounts to the corporate debtor. The Court
gave the example that fixed deposit holders, though financial creditors, would
be like real estate allottees in that they are unsecured creditors. Financial
contracts in the case of these individuals need not involve large sums of money.
Debenture holders and fixed deposit holders, unlike real estate holders, are
involved in seeing that they recover the amounts that are lent and are thus not
directly involved or interested in assessing the viability of the corporate
debtors. Though not having the expertise or information to be in a position to
evaluate the feasibility and viability of resolution plans, such individuals,
by virtue of being financial creditors, have a right to be on the Committee of
Creditors to safeguard their interest. The allottees, being individual
financial creditors like debenture holders and fixed deposit holders and
classified as such, show that they were within the larger class of financial
creditors and there was infraction of Article 14.
It was held that home buyers / allottees
give advances to the real estate developer and thereby finance the real estate
project at hand (and) qualified as financial creditors.
The Code was observed to be a beneficial
legislation which can be triggered to put the corporate debtor back on its feet
in the interest of unsecured creditors like allottees, who are vitally
interested in the financial health of the corporate debtor, so that a replaced
management may then carry out the real estate project as originally envisaged
and deliver the flat / apartment as soon as possible and / or pay compensation
in the event of late delivery, or non-delivery, or refund amounts advanced
together with interest. It could not be said that amendment to section
5(8) was therefore manifestly arbitrary, i.e., excessive, disproportionate or
without adequate determining principle.
The Supreme Court also turned down the
argument of the petitioners that allottees be treated as operational creditors.
It was further held that all persons who have advanced monies to the corporate
debtor, like other financial creditors, be they banks and financial
institutions, or other individuals, should have the right to be on the
Committee of Creditors. Even though allottees were unsecured creditors, but
they did have a vital interest in amounts that were advanced for completion of
the project, maybe to the extent of 100% of the project being funded by them
alone.
The Court held that section 5(8) would
subsume within it amounts raised under transactions which are not necessarily
loan transactions, so long as they have the commercial effect of a borrowing.
Amounts raised from allottees under real estate projects would, thus, be
subsumed within section 5(8)(f) of the Code.
The Supreme Court thus held that:
(i) The Amendment Act to the Code does
not infringe Articles 14, 19(1)(g) read with Article 19(6), or 300-A of the
Constitution of India.
(ii) The RERA is to be read harmoniously
with the Code, as amended by the Amendment Act. It is only in the event of
conflict that the Code will prevail over the RERA. Remedies that are given to
allottees of flats / apartments are therefore concurrent remedies, such
allottees of flats / apartments being in a position to avail of remedies under
the Consumer Protection Act, 1986, RERA as well as the triggering of the Code.
(iii) Section 5(8)(f) as it originally
appeared in the Code being a residuary provision, always subsumed within it
allottees of flats / apartments. The explanation together with the deeming
fiction added by the Amendment Act is only clarificatory of this position in
law.
