The following is a snapshot of the important orders passed by the National Company Law Appellate Tribunal (“NCLAT”), under the Insolvency and Bankruptcy Code, 2016 ("Code”), during the period between November 16, 2024 – November 30, 2024.

For ease of reference, the orders have been categorized and dealt with in the following categories i.e., Pre-admission stage, Corporate Insolvency Resolution Process (“CIRP”) stage, Post CIRP, Liquidation and Miscellaneous.

A. Pre-admission Stage

1. In Mr. Atul Nathalal Patel v. Mr. Manish Pardasani and Ors. (Company Appeal (AT) (Insolvency) No. 1008 of 2023), the NCLAT had an opportunity to consider the limitation period for filing of a CIRP application by a financial creditor, where the financial creditor’s right to seek refund of the amount extended was conditional upon the project failing to commence. After taking note of the actual circumstances, the NCLAT allowed the appeal against the admission of the Section 7 application by observing that this was not a case where the limitation stood extended on the basis of a continuous wrong and hence the application was time-barred.

In this case, the NCLAT also deprecated the action of the IRP providing his opinion regarding the existence of debt and default by observing that such opinion was uncalled for while giving consent to act as a resolution professional. It was also observed that while giving consent to act as a resolution professional, the IRP is not required to provide its opinion regarding the existence of debt and default.

2. In Murlidhar Vincom Private Limited v. Skoda (India) Private Limited (Company Appeal (AT) (Insolvency) No. 1334 of 2024), the issue before the NCLAT was, whether share application money can be treated as financial debt, where such money had not been refunded within the period prescribed under Section 42 of the Companies Act, 2013 read with Companies (Acceptance of Deposit) Rules, 2014.

To answer the question, the NCLAT took note of the specific facts and went onto observe that in the instant case, the share application money was not advanced in compliance with the private placement mechanism specified under the Companies Act. These facts led NCLAT to observe that such money, advanced not in compliance with the statutory norms would not qualify as deposit or, accordingly, as financial debt.

In our humble view, while the conclusion derived by the NCLAT that share application money would not be treated as a financial debt is correct, the grounds taken to justify the same requires some criticism. In our view, share application money would not have been a financial debt, even if it was given in compliance with the Companies Act provisions because it lacked the ingredients to qualify as financial debt within the meaning of Section 5(8) of the Code. If at all any CIRP application could have been maintained on the basis of unpaid share application money, the appropriate way would have been to file a Section 9 application as an operational creditor, by treating the shares as goods (as has been defined under the Sale of Goods Act, 1930) and the share application money being akin to an advance money paid towards the procurement of such goods.

3. In Decor Paper Mills Limited v. Mahashakti Plasto Private Limited (Company Appeal (AT) (Insolvency) No. 2022 of 2024 & I.A. No. 7591 of 2024), the NCLAT held that the bar contained under Section 10A of the Code continues to apply to the subject debt even if such liability has been acknowledged subsequently post the Section 10A period.

The NCLAT further observed that interest under MSME Act can be looked into in proceedings initiated under the said Act but not as operational debt.

4. In Ravi Auto Limited v. Surana Mercantiles Private Limited (Company Appeal (AT) (Insolvency) No. 1059 of 2022), the NCLAT overturned the Adjudicating Authority’s decision to reject a Section 7 application, by observing that if the transaction can be proved from other materials on record, then the requirement of a written financial contract is not a pre-condition for proving debt. It further observed that the omission to specify the date of default in Part IV of the application is not fatal if it can be determined from the materials brought on the record along with the application. It was lastly also observed that non-stamping of the promissory note was inconsequential when there were other documents on record to prove the disbursement and default.

5. In Mr. Ashmeet Singh Bhatia v. Three C Properties Private Limited (Company Appeal (AT) (Insolvency) No.2021 of 2024), the NCLAT held that the appellant, being a stakeholder in the sister concern of the corporate debtor, had no locus standi to challenge the order since it was neither an allottee, nor did it have any stake in the real estate project.

It was further observed that in a residential project comprising of both commercial and residential units, the threshold requirement of 10 per cent would be considered vis-a-vis the specific development. In the instant case, the applicants, comprising residential unit holders, met the relevant threshold - taking into account only the residential units - and the application was found to be in compliance with the statutory provisions.

6. In Getz Cables Private Limited v. State Bank of India (Company Appeal (AT) (Insolvency) No.1953 of 2024), the NCLAT observed that merely because proceedings under Sections 13(2) and 13(4) of the SARFAESI Act, 2002 has been initiated by the creditor prior to filing of a Section 10 application under the Code, it cannot be a ground to hold that the Section 10 application was filed with a malicious and fraudulent intent as per the materials on record, or to reject such a Section 10 application.

7. In Kashyap Infraprojects Private Limited v. Hi-Tech Sweet Water Technologies Private Limited (Company Appeal (AT) (Insolvency) No. 33 of 2023), the NCLAT upheld the rejection of a Section 9 application by noting that a pre-existing dispute existed between the parties, and the mere holding of a meeting between the parties post the issuance of a demand notice did not imply the settlement of dispute. In this case, the NCLAT also refused to treat a WhatsApp communication between the parties as evidence, in absence of the relevant certificate issued in terms of Section 65B of the Indian Evidence Act, 1872.

8. In Entegra Limited v. Shree Maheshwar Hydel Power Corporation Limited (Comp. App. (AT) (Ins.) No. 1287 & 1291 of 2022), the NCLAT had an occasion to consider the locus of the lenders of the company to maintain a Section 7 application, where the lenders had acquired the majority of the shares of the corporate debtor by invoking their pledge.

Upholding such right, the NCLAT went onto observe that the lenders have an independent right to file a Section 7 application despite controlling the majority of shares due to the invocation of pledge and such filing cannot be challenged on the basis that the proper course of action would have been filing of the Section 10 application instead. It was further observed that the ingredients of Section 7 of the Code do not prescribe any formal demand notice to be issued by the financial creditors and while entertaining a Section 7 application, the Adjudicating Authority cannot consider presumed facts to arrive at any conclusion.

9. In M Ramakanth v. Nagarjuna Fertiliser and Chemicals Limited (Company Appeal (AT) (CH) (Ins) No.213/2024), the question before the NCLAT was whether a variable pay payable to an employee would qualify as an operational debt. Answering the question in negative, it was observed that an employment related debt would qualify as an operational debt only if the dues are settled and predetermined. Correspondingly, if any amount required to be determined based on arithmetical analysis has a variable factor, the said amount would not qualify as operational debt.

10. In Mrs. Rita Kedia v. Ashika Global Securities Private Limited (Company Appeal (AT) (Insolvency) No. 1536 of 2023), the NCLAT went onto observe that a Section 7 application is maintainable based on interest payable on the financial debt alone, where the amount of interest exceeded the threshold.

11. In Suresh Kumar v. Central Bank of India (Company Appeal (AT) (Insolvency) No. 1592 of 2024), the NCLAT held that a personal guarantor, who had not made any payment in discharge of his guarantee obligations, cannot be accepted as financial creditor. To arrive at the aforesaid conclusion, the NCLAT observed that the right of payment is an essential criterion for the maintainability of the claim and for a guarantor, such right of payment arises only after it has discharged its liability.

B. CIRP Stage

1. In Apnaghar Builders Private Limited v. Intense Fitness and Spa Private Limited (Comp. App. (AT) (Ins.) No. 1025 of 2022), the NCLAT held that even when the ingredients of Section 7 of the Code are fulfilled, the CIRP can be set aside if collusion amongst the parties is proved, or the same is initiated for purposes other than the genuine resolution of insolvency. The NCLAT found that the involvement of one of the respondents, who was a director and shareholder in all three companies, along with evidence of related party transactions, indicated collusion between the parties. As a result, the petition was dismissed and the CIRP was set aside.

C. Post-CIRP Stage

1. In Pakhi Infra v. Jabalpur MSW Private Limited (Comp. App. (AT) (Ins) No. 2175 of 2024), the NCLAT held that no extracts of the resolution plan can be provided to the operational creditor until the same has been approved by the Adjudicating Authority.

D. Liquidation Stage

1. In Prabhat Jain v. MP Industrial Development Corporation Limited (Comp. App. (AT) (Ins.) No. 697 of 2023), the NCLAT held that the liquidator is not entitled to grant sub-leases over properties that are not owned by the corporate debtor under Section 35(1)(d) of the Code. The NCLAT also observed that Section 238 of the Code does not override the statutory powers of a public body to regulate public lands, such as the MP State Industrial Land and Building Management Rules, 2019.

2. In Arkay Logistics Limited v. Mr. Abhijit Guhathakurta (Company Appeal (AT) (Insolvency) No.836 of 2024), the NCLAT went onto observe that while Section 60(5) of the Code cannot be utilized for initiating proceedings to recover the debt owed to the corporate debtor, such restriction does not apply to seeking a refund of margin money paid by the corporate debtor towards a performance bank guarantee, which guarantee had subsequently been surrendered.

E. Miscellaneous

1. In Rakesh J. Shah v. Sanjay Kumar Agarwal (Company Appeal (AT) (Insolvency) No. 1490 of 2024), the NCLAT held that the question of whether the closure of the corporate debtor's factory was violative of the Industrial Disputes Act, 1947 due to lack of obtaining prior permission from the State government was an issue which was required to be raised only before the Labour Courts or the Industrial Courts and not before the Adjudicating Authority.

Noting that in terms of Section 53(1)(b) of the Code, only the workmen’s dues for a period of 24 months preceding the liquidation commencement date ranks equally along with secured creditors, in the instant case, the NCLAT also upheld the liquidator’s decision to reject a claim filed by the workmen of the closed factory by observing that the workmen did not render any service during the two year period prior to the liquidation commencement date on account of the factory being closed. 

In our view, the decision is not free from criticism for a failure to record that Section 53(1)(b) only deals with the waterfall mechanism in terms of the distribution of assets and does not lay down any principle regarding admission or rejection of claims. In other words, while the claims of the workmen for the period prior to two years from the liquidation commencement date would not have gotten priority with the secured creditors under Section 53, it was definitely not the ground to not admit such a claim in the first place.

2. In Clarion Health Food LLP v. Goli Vada Pav Private Limited (Company Appeal (AT) (Ins.) No. 1522 of 2023), the NCLAT observed that a dispute between shareholder or claims of oppression or mismanagement were not grounds to invalidate the admission of the corporate debtor into CIRP on the basis of claims by an operational creditor. It was further observed that a shareholder or investor in the corporate debtor would not be considered "aggrieved parties" under Section 61 of the Code and would not have the locus standi to move an appeal against the admission of CIRP.

This update has been contributed by Arka Majumdar (Partner), Juhi Wadhwani (Senior Associate), Vikram Chaudhuri and Aakriti Garodia (Associates).

The update was first published on Bar & Bench.

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