CORPORATE LAW CORNER

4. B.
K. Educational Services (P). Ltd. vs. Parag Gupta & Associates [2018] 98
taxmann.com
213 (SC)

Date
of Order: 11^th October, 2018

Section 238A of the Insolvency and Bankruptcy Code, 2016 –
Provisions of Limitation Act, 1963 are applicable to applications filed under
Insolvency and Bankruptcy Code – Applications under the Code cannot be filed
where the default has occurred more than three years prior to the date of
filing of application, except in cases where delay is condoned in terms of
section 5 of the Limitation Act

FACTS

National Company Law Appellate
Tribunal (“NCLAT”) in a batch of appeals held that Limitation Act, 1963 did not
apply to applications made u/s. 7 and 9 of Insolvency and Bankruptcy Code, 2016
(“Code”) from the date of its commencement of which was 01.12.2016 till the
date on which the Code was amended to incorporate section 238A which was
06.06.2018. The matter was taken up before the Supreme Court to determine
whether section 238A of the Code applied retrospectively or was prospective in
nature. Section 238A was inserted on 06.06.2018 and reads as follows:

The provisions of the Limitation
Act, 1963 (36 of 1963) shall, as far as may be, apply to the proceedings or
appeals before the Adjudicating Authority, the National Company Law Appellate
Tribunal, the Debt Recovery Tribunal or the Debt Recovery Appellate Tribunal,
as the case may be.

Section 238 A has the same language
as section 433 of the Companies Act, 2013.

HELD

The Supreme Court referred to the
Report of the Insolvency Law Committee of March, 2018 and perused the
provisions of Companies Act as well as the Code and observed that the Code
cannot be used as a tool to revive debt which is no longer due as the same was
time barred. It was held that amendment of section 238A would not serve its
object unless it is construed as being retrospective, as otherwise,
applications seeking to resurrect time-barred claims would have to be allowed,
not being governed by the law of limitation.

Supreme Court further referred to
its decision in Innoventive Industries Ltd. vs. ICICI Bank & Anr.,
(2018) 1 SCC 407 in order to conclude that expression “debt due” in the
definition sections of the Code would only refer to debts that are “due and
payable” in law, i.e., the debts that are not time-barred.

It was observed that the Insolvency
Law Committee Report of March, 2018 made it very clear that the object of the
Code from the very beginning was not to allow dead or stale claims to be resuscitated.
The intention of the Legislature from the very beginning was to apply the
Limitation Act to the NCLT and the NCLAT while deciding applications filed u/s.
7 and 9 of the Code and appeals therefrom. Section 433 of the Companies Act,
2013 which applies to the NCLT and the NCLAT, expressly applies the Limitation
Act to the NCLAT, as well. Both, section 433 of the Companies Act as well as
section 238A of the Code, applied the provisions of the Limitation Act “as far
as may be”. Where periods of limitation were laid down in the Code, these
periods would apply notwithstanding anything to the contrary contained in the
Limitation Act.

It was held that since the
Limitation Act is applicable to applications filed u/s. 7 and 9 of the Code
from the inception of the Code, Article 137 of the Limitation Act would get
attracted. Article 137 of the Limitation Act provides the period of limitation
in case of “any other application for which no period of limitation is
provided elsewhere” to be three years from the time when the right to
apply accrues. “The right to sue”, therefore, accrues when a default occurs. If
the default had occurred over three years prior to the date of filing of the
application, the application would be barred under Article 137 of the Limitation
Act, save and except in those cases where, in the facts of the case, section 5
of the Limitation Act may be applied to condone the delay in filing such
application.

5.  Nikhil Mehta & Sons (HUF) vs. AMR
Infrastructure Ltd. [2018] 98 taxmann.com 8 (NCLT – New Delhi)

Date
of Order: 29^th September, 2018

Section 22(2) of the Insolvency and Bankruptcy Code, 2016 –
Threshold voting share for decision of the Committee of Creditor (“CoC”) by 66%
would be directory and not mandatory in the cases of class of creditors where
the prospective buyers of Real Estate (Commercial & Residential) alone
constitute the CoC.

FACTS

CP No. (IB)-02(PB)/2017 (Nikhil
Mehta& sons (HUF) &Ors. vs. M/s. AMR Infrastructure Ltd.) was
admitted for initiating Corporate Insolvency Resolution Process (“CIRP”) on
10.05.2018 by the National Company Law Tribunal (“NCLT”). Mr. Vikram Bajaj was
appointed as Interim Resolution Professional (“IRP”). IRP took various steps in
discharge of his duties as required under law.

A new class of financial creditors
was introduced in the Insolvency and Bankruptcy Code, 2016 (“Code”) by
Amendment Act of 2018 with effect from 06.06.2018 being Real Estate
(Commercial) and Real Estate (Residential). Two representatives were appointed
to represent the aforesaid new classes through order dated 14.08.2018. The
representatives were given a list of 906 financial creditors, full details of
meeting, the electronic Id of the creditors for electronic communication etc.
The electronic window was kept opened for 48 hours for easy facilitation of
voting and understanding the agenda with clarifications.

236 financial creditors in the Real
Estate (Residential) forming 16.36% of voting share and 227 financial creditors
of Real Estate (Commercial) constituting 36.4% voted in the meeting of
Committee of Creditors (“CoC”). Overall, 463 financial creditors consisting of
52.78% voted up to 10.00 AM on 25.08.2018. Majority of the financial creditors
gave voting instructions to their authorised representative in favour of the
resolution proposed by the IRP. None of the resolutions proposed could meet the
voting threshold of 66% prescribed under the Code and none of the resolution
has been approved as per the existing provisions.

IRP therefore approached NCLT to
resolve the deadlock created by the low percentage of votes cast by a new
category of financial creditor. The NCLT was to decide if the threshold of
voting shares’ in respect of the class of financial creditors Real Estate
(Commercial) and Real Estate (Residential) as provided in various provisions of
the Code (e.g. section 22(2) provides threshold of 66%) was mandatory or not.

HELD

The Tribunal observed that
different thresholds have been provided for various provisions under the Code.
Having read section 22(2), it was observed that the expression ‘may’ in section
22(2) was associated with the phrase ‘either resolve to appoint the interim
resolution professional as a resolution profession or to replace the interim
resolution professional by another resolution professional’ and would not have
any bearing on the expression ‘by a majority vote of not less than sixty six
percent of the voting shares of the financial creditors’.

The threshold for the purposes of
seeking extension of a period of CIRP, appointing IRP as RP etc. is 66% for all
the financial creditors irrespective of class to which they belong.

NCLT relied on Supreme Court ruling
in case of Delhi Transport Corporation vs. D.T.C Mazdoor Congress and Ors.
(1991) Supp (1)SCC 600 and Tinsukhia Electrical Supply Co. Limited vs.
State of Assam [1989] 3 SCC 709 to apply the principle that interpretation
which need to be adopted has to be such that sustains the constitutional
validity of a statute rather than leaning in favour of interpretation which
results in its declaration as ultra vires.

Applying the purposive
interpretation above, it was held that threshold voting share for decision of
the committee of creditor by sixty six percent would not be mandatory in the
cases of class of creditors where the prospective buyers of Real Estate
(Commercial & Residential) alone constitute the CoC. In case of deadlock
the preference can be given to the decisions taken by the highest percentage in
the CoC and section 22(2) must be regarded as directory in nature in case CoC
is comprised 100% of class of creditors Real Estate (Commercial &
Residential).

The resolutions polled for in the
said case were held to be passed.

6.  Loyz Oil PTE Ltd. vs. Interlink Petroleum
Ltd.

[2018]
97 taxmann.com 627 (NCLT – New Delhi)

Date
of Order: 7^th September, 2018

Ss. 5(2), 5(8) and 7, of the Insolvency and Bankruptcy Code, 2016
–Mere waiver of interest by the Financial creditor on the request of corporate
debtor would not alter the commercial nature of loan advanced – Contention that
amounts would be paid in future would not be sufficient and the financial
creditor continued to hold the right to proceed and seek remedy provided for in
the Code

FACTS

I Co obtained loan from L Co as
External Commercial Borrowing (“ECB”) after obtaining due permission from
Reserve Bank of India (“RBI”) in this regard. I Co entered in to two loan
agreements with L Co on 26.12.2012 and 23.05.2014 respectively for USD
12,50,000 and USD 90,00,000. On 30.06.2016 I Co requested L Co to waive of the
interest from the loan amount. L Co agreed to claim only the principal amount
and reversed the interest charged.

On 18.04.2018, L Co vide an e-mail
demanded the repayment of ECB of USD 1,02,50,000. I Co was unable to clear the
requested amounts. I Co in its reply dated 10.08.2018 acknowledged that it was
in receipt of the aforesaid e-mail. It stated that it made huge investment in
exploration activity but due to failure in commercial discovery and adverse
business conditions for the past few years the company was facing financial
difficulties. I Co proceeded to state that amounts due would be repaid once
steps taken for discovery of oil became fruitful.

All loans given by L Co are duly
reflected in the audited financial statements of I Co for the financial year
2016-17.

L Co filed for Corporate Insolvency
Resolution Process (“CIRP”) against I Co by filing an application u/s. 7 of the
Code and proposed the appointment of Shri Atul Mittal as Interim Resolution
Professional (“IRP”).

HELD

National Company Law Tribunal
(“NCLT”) examined the provisions of sections 5(7) and 5(8) of the Code which
define the terms “financial creditor” and “financial debt”.

In the facts of the present case, L
Co had indeed disbursed the loan to I Co which was recoverable with interest
pursuant to validly executed loan agreements. Merely because there was a
subsequent waiver of interest pursuant to the request made by I Co, would not
alter the commercial nature of the transaction. It was held that the claim
would continue to qualify as a “financial debt” and L Co would be regarded as a
“financial creditor” eligible to file the application u/s. 7 of the Code.

It was observed that financial
creditor could file a claim as long as the following conditions were satisfied:

(a)    Default
has occurred.

(b)    Application
is complete, and

(c)    No
disciplinary proceeding against the proposed IRP is pending

In the facts of the present case,
application u/s. 7 was maintainable as the records showed the advancement of
loan, occurrence of existence of default and the amount of default in excess of
Rs. 1 lakh. Merely because I Co contended that it would repay the debt in
future would not alter the fact there was a default on its part.