Indian Insolvency Quarterly Overview – January to March 2022 – Insolvency/Bankruptcy/Restructuring

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In recent times, several noteworthy judgments have been rendered by Indian courts and tribunals in cases involving the legal framework of insolvency. Certain decisions rendered during the first quarter of 2022 which discuss and establish the legal position regarding the interpretation and applicability of the provisions of the Insolvency and Bankruptcy Code, 2016 (“IBC”) have been summarized below :

1. BANK OF BARODA v. MBL INFRASTRUCTURES LIMITED & ORS.

Decision dated: January 18, 2022

Reference: 2022 SCC online SC 48

Guarantor prohibited from being a rescission seeker under IBC Section 29A(h) if the guarantor is invoked and an insolvency proceeding commenced by creditors in a similar position.

Quick facts: The respondent, M/s. MBL Infrastructures Limited, had obtained credit facilities which it did not repay in accordance with the repayment terms. As a result of this default, the guarantor’s personal guarantee was invoked by the lenders. In addition, the lenders have issued a notice under section 13(2) of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Act 2002 (“SARFAESI Law“) and also filed a petition under Section 7 of the IBC in the National Company Law Tribunal (“NCLT“) Kolkata Bench, which was admitted. Two resolution plans were received by the resolution professional, one of which was submitted by the guarantor. In the meantime, a new provision under Section 29A was introduced under the IBC’s Amendment Order 2017, which enlists all persons ineligible to be a resolution seeker (“AR“). The provision of sub-section (h) of Article 29 A states that a person who “has executed an enforceable security in favor of a creditor, against a debtor company under insolvency resolution or winding-up proceeding under this Code” is not eligible to submit a resolution plan.

In the present case, when the NCLT bench in Kolkata ruled that the guarantor was eligible to submit a resolution plan under Section 29A(h) of the Code, two appeals were filed in the National Company Law Appellate Tribunal ( “NCLAT”), which were later removed. The guarantor’s plan was approved by the Committee of Creditors (“CoC”) with a 78.5% majority vote. As the NCLT approved the guarantor’s resolution plan in April 2018, the lenders challenged the NCLT’s order approving the resolution plan before the NCLAT. While the appeal is pending, Section 29A(h) was further amended in 2018 to state that anyone who has “signed an enforceable guarantee in favor of a creditor, with respect to a debtor company against which a request for resolution of insolvency made by this creditor has been admitted under this code and this guarantee has been invoked by the creditor and remains unpaid in whole or in part“is a person who is not eligible to submit a request for resolution. Notwithstanding this amendment, in August 2019, the NCLAT also approved the guarantor’s plan and affirmed the NCLT’s previous order on this matter. Pursuant to the reaffirmation of the NCLAT, Guarantor’s resolution plan went into effect and a fundraiser of INR 300 crore was approved at MBL’s Annual General Meeting. lenders – Bank of Baroda challenged the NCLAT order in the Supreme Court.In the present case, while looking at the facts of the case, it is also imperative to note that the submission of a resolution plan by the guarantor occurred concurrently with the unfolding of the amendment, and thus a judicial interpretation of IBC Section 29A(h) was also sought before the Supreme Court in this appeal.

Publish: Can a guarantor be eligible to be a resolution applicant and submit a resolution plan?

Decision: The Supreme Court held that the words “that creditor” within the meaning of Article 29A(h) should be interpreted as referring to creditors placed in the same position after the insolvency claim has been granted by the adjudicating authority. Therefore, the criterion of disqualification under that provision is the invocation of a personal guarantee by a single creditor, even if the application for the opening of insolvency is filed by another creditor. Thus, once an application for resolution of insolvency is admitted in the name of a “creditor”, the procedure would then be a rem procedure, and thus, all creditors of the same category would have their respective rights at the same level as others. The Supreme Court has also emphasized that it is only interested in the perspective of corporate creditors and corporate debtors. Any other interpretation would lead to an absurdity striking the very objective of Article 29A, and therefore of the IPC. In addition, on the question of whether the plan presented by the guarantor is ineligible, the court ruled that the plan has been implemented since 18.04.2018 and from now on the debtor company is in operation. Therefore, the Court did not interfere with the guarantor’s resolution plan while dismissing the appeal.

2. DEVARAJAN RAMAN c. BANK OF INDIA LTD

Decision dated: January 5, 2022

Citation: 2022 CSC Online SC 14

NCLT must make a reasonable assessment of the fees and expenses payable to the IRP and not place trades on an ad hoc basis

Quick facts: The appellant is the resolution professional and Bank of India is the financial creditor. The appellant submitted a technical and financial offer for the appointment of an interim resolution professional (“IRP“), and also filed a Section 7 claim under the IBC against the debtor company which was admitted by the NCLT with the Appellant as an IRP. However, the order was overturned on appeal and the proceeding remitted to the NCLT to rule on the costs of the corporate insolvency settlement process (“CIRP“) which were to be paid to the appellant by the financial creditor. As per the order, the financial creditor only reimbursed the appellant INR 5,66,667 out of a claimed total of INR 14,75,660. When the appellant applied to the NCLT for the release of the remaining funds, the NCLAT granted the application and ordered the respondent to disburse funds to the appellant.The NCLT’s order was appealed by the ‘respondent before the NCLAT, which was dismissed because expenditures had been authorized in total and the consolidated amount authorized because the resolution professional’s fees for the entire period were not unreasonable. The NCLAT based its decision on the principle that the setting of fees is not a commercial decision dependent on the commercial wisdom of the creditors’ committee (“CoCaggrieved by the same, the case went to the Supreme Court on appeal.

Publish: Did the NCLT and NCLAT review the reasonableness of the fees claimed by the IRP?

Decision: The Apex Court noted that the appellant had previously submitted a technical and financial offer to the finance creditor, on the basis of which the assignment was awarded. He also took note of the circular dated 12.06.2018 issued by the Insolvency and Bankruptcy Board of India (“IBBI“), that the insolvency practitioner should satisfy itself that the fees owed to him were reasonable. Even as part of the application filed with the NCLAT, the appellant had attached a statement of costs, the amount which was refunded along with the balance owing.However, none of these aspects were considered by the NCLT, who only ordered the Respondent to pay an amount of INR 5,00,000 + GST ​​for the fees of the appellant without regard to the reasonableness or merits of the claim against the NCLT or the NCLAT for awarding the appellant the amounts set forth above.Thus, the Supreme Court observed that the NCLT and the NCLAT did not had not sufficiently ruled on the merits of the claim, and set aside the NCLT and NCLAT orders and referred the matter back to the NCLT for expedited re-determination. He also noted that the courts must proceed to a reasonable assessment of the fees and expenses p ayable to the IRP, a d not place orders ad-hoc; because an unreasoned order would also amount to an abdication of jurisdiction.

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