The Reserve Bank of India (“RBI”) vide its notification dated March 6, 2024 (“Circular”), has directed the card issuers to provide an option to its customers to choose their preferred card network for credit cards. Further, RBI has restricted the card issuers (banks and non-banks) from entering into arrangements with card networks where they are restrained from availing services from other card networks. It is to be noted that card issuers who issue credit cards on their own authorized card networks are exempted under this circular. Further, the requirement to provide option to the customers to choose the preferred card network will not be applicable to credit card issuers with number of active cards being ten (10) lakh or less. The Circular shall be effective from 6 (six) months from the date of the Circular i.e., March 6, 2024.
Author: Chitrangada Singh
Various appeals under section 61 of the IBC were filed before the Hon’ble NCLAT Delhi in the matter of Chanderpati v. Soni Realtors Pvt. Ltd., against the impugned order of the Adjudicating Authority (“NCLT”) that allowed the Application of the Resolution Professional (“RP”) approving the Resolution Plan submitted by the Successful Resolution Applicant.
The maintainability of the said appeals was challenged by the RP inter alia, on the ground that the period of 30 days prescribed for filing the appeal along with further period of 15 days upon show casing sufficient cause, had also expired but these appeals have been filed without annexing the certified copy of the impugned order and the certified copies of the impugned order were applied much after the expiry of period of 45 days for which reason the appeals deserved to be dismissed.
The Bench considered the Hon’ble Supreme Court’s interpretation of Rule 22(2) of the National Company Law Appellate Tribunal Rules 2016 (“NCLAT Rules”), in the case of V. Nagarajan v. SKS Ispat whereby it was held that the filing of the certified copy of the impugned order for the purpose of appeal is mandatory. However, Rule 14 of the NCLAT Rules gives the power to the Appellate Tribunal to exempt the parties from complying with any of the requirement of the Rules on sufficient cause being shown and, on the application moved in that regard. Such waiver is usually granted in case of a downloaded online copy, in lieu of a certified copy of the order. The Supreme Court also emphasised that parties are not dispensed with their obligation to apply for and obtain a certified copy of the order for filing an appeal. The limitation to file an appeal commences from the date of order and the time taken by the Court to provide the certified copy is excluded, provided a certified copy is applied within the period of limitation prescribed under Section 61(2) of IBC.
However, the issue that came up in the above appeals before NCLAT was whether the limitation period expires if the certified copy of the order is not applied for within 30 days?
NCLAT held that since it has the jurisdiction to grant exemption under Rule 14 of NCLAT Rules from compliance of the said Rules upon sufficient cause shown in an appropriate application filed by the Appellant, it allowed the appeals where sufficient cause was made out by the Appellants under their application for exemption. The Bench further, directed such Appellants to file the certified copy of the impugned order within a period of 30 days from the date of passing of this order. Further, the applications for condonation of delay in filing the said appeals were declared to be heard individually in due course.
Furthermore, the Bench rejected/dismissed the appeals wherein exemption under Rule 14 through an application was not sought by the Appellants.
IBBI introduces key amendments to the IBBI (Liquidation Process) Regulations, 2016, with effect from 12th February 2024.
The amendment provides for exclusion of the flat in possession of the allottee form the liquidator estate,
“46A. Exclusion of certain assets from the liquidation estate.
For the purposes of clause (e) of sub-section (4) of section 36, wherever the corporate debtor has given possession to an allottee in a real estate project, such asset shall not form a part of the liquidation estate of the corporate debtor.“
The amendment was introduced in the backdrop of numerous applications pending before Tribunals across states to adjudicate the claims of homebuyers against the real estate developers under liquidation. Prior to the amendment, the homebuyer who had received possession of their property were bundled together with homebuyers who had not received the possession of their property eventually leaving them with no remedy except being entitled to a refund of the consideration amount paid by the homebuyers in the event of the developer going into liquidation.
The lauded move of the IBBI will certainly come to the relief of the homebuyers who put in their hard-earned money to have their dream home.
Circular Ref. No. IBBI/PR/2024/07
The Hon’ble Bombay High Court in the recent case of Lyka Labs Limited & Anr. vs. The State of Maharashtra & Anr. & connected matters was faced with common questions of law arising under the Negotiable Instruments Act, 1881 (“NI Act”), pursuant to a batch of matters listed before it. The questions of law posed before the court for decision were as follows:
i) Whether the signatory of the cheque, authorized by the “Company”, is the “drawer” and whether such signatory could be directed to pay interim compensation in terms of section 143A of the NI Act leaving aside the company?
ii) Whether deposit of a minimum sum of 20% of the fine or compensation is necessary under Section 148 of NI Act in an appeal filed by persons other than “drawer” against the conviction and sentence under section 138 of the NI Act?
In view of the facts and circumstances discussed, and issues raised in the batch of matters before it, the Hon’ble High Court relied upon various judgements of the Hon’ble Supreme Court and thereby, held the following in its judgement pronounced on March 8, 2023:
a) That the legislature’s purpose was to provide interim relief to the drawee by directing the “drawer” to pay temporary compensation in terms of section 143A of the NI Act. This compensation liability was specifically fastened on the cheque’s “drawer or issuer” excluding anyone else from being made liable to pay interim compensation, vicariously or severally. Therefore, the words of the enactment are clearly intended to be limited to “drawers”, be they natural persons or companies.
b) Under company law, the company’s liability is generally not transferred onto the directors. As per the Companies Act 2013, a company has a separate legal identity. The directors and members of the company act as representatives and mutually exist in a fiduciary relationship. Directors serve as an agent and hence are not liable personally for the acts and actions of the company. However, a director can be held personally responsible if he acts beyond his powers and duties. It is so done by lifting the corporate veil.
c) The relief under section 143A is an interim immediate relief which by literal interpretation of the provision has only been fastened to the drawer/issuer of the cheque. The same can be granted immediately after the stage of recording plea of the Accused by the magistrate. In case the provision is understood to include an ‘authorised signatory of the company’ being a defaulter in terms of section 141 of the NI Act, then such an enquiry as regards breach of fiduciary duty or instance of fraud would defeat the purpose of granting such immediate interim compensation to obviate delay in disposal of cheque dishonour case, which was not contemplated by the legislature while inserting section 143A. Therefore, the power to direct interim compensation cannot be traced under section 141 in addition to section 143(A) of the NI Act.
d) Every person signing a cheque on behalf of the company on whose account a cheque is drawn does not become a “drawer” of the cheque. Such a signatory is only a person duly authorized to sign the cheque on behalf of the company/drawer of the cheque.
e) Further, having held that the expression “drawer” in section 143A does not include the ‘authorized signatory of a company’, the amended section 148 also needs to be interpreted accordingly. The plain language of section 148 makes it clear that the Appellate Court is granted the power to direct deposit of a minimum sum of 20% of the fine or compensation awarded by the Trial Court “in an appeal by the drawer” only and no other person.
f) However, in an appeal filed by persons other than a “drawer”, the Appellate Court can exercise power under section 389 of Code of Criminal Procedure to direct deposit of amount in an appeal filed under section 148 of NI Act against conviction under section 138 of the NI Act, while considering the application for suspension of conviction or sentence.
In a recent decision of the Hon’ble Division Bench compromising of Hon’ble Justice Shri. G. S. Patel and Smt. Neela Gokhale, in the case of Adityaraj Builders v. State of Maharashtra & Ors. & Group Matters, wherein several Petitions were decided on a common question of law under the Maharashtra Stamp Act 1958, relating to Stamp Duty sought to be levied on Permanent Alternate Accommodation Agreements (“PAAA”).
- The cause of action arose pursuant to the following impugned circulars:
- Circular dated 4th June 2013 by the State Government stating that stamp duty would be chargeable on PAAAs, and the value would be computed on the basis of the costs of construction of the flats and the market value of the additional area, if any.
- Circular dated 7th November 2013 issued by the Chief Controlling Revenue Authority of the Maharashtra State with guidelines for charging stamp duty on PAAAs, that would be computed on the costs of construction of the retained area. Where fungible FSI was used, stamp duty would be computed on the construction cost and the premium paid on the fungible area.
- Circular dated 23rd June 2015 issued by the Chief Controlling Revenue Authority states that if the development agreement is executed only between the Co-operative Housing Society and Developer, the document to transfer the premises/ tenements, which is for the personal benefit of the original member of the housing society, is not to be construed as an incidental agreement pursuant to the original development agreement (“DA”) and shall be treated as an independent agreement. The impugned circular contemplates that any PAAAs between the Society members and the developer is different from the DA between the Society and the developer.
- Circular dated 30th March 2017, issued by the Chief Controlling Revenue Authority as a clarificatory circular which purports to specify criteria that must be complied with and goes on to specify that only on such compliance PAAAs with individual society members would be treated as documents incidental to the DA, attracting the application of Section 4 of the Maharashtra Stamp Act. This ‘clarificatory’ circular purports to say that compulsorily the individual society members must join in the execution of the original DA, i.e., that every single society member must countersign the DA and that the DA is thus to be multipartite.
- To resolve the issues arisen pursuant to the above impugned circulars, the Hon’ble Bench discussed the provisions of Maharashtra Stamp Act (“Act”), particularly section 4(1) which provides for payment of stamp duty only on the principal instrument as prescribed in Schedule I of the Act, where in the case of any conveyance, development agreement, lease, mortgage or settlement, several instruments are employed for completing the transaction.
- In view thereof, the Hon’ble Bench observed that for the purposes of Section 4(1), all the PAAA executed with each member of the society may be physically included in a DA. If that be done, then there is only one Agreement covering the whole of the DA and charging of stamp duty by the stamp authority simply would not arise because there is no method by which the stamp authority could levy stamp on every annexure to a DA.
- The Hon’ble Bench set aside the impugned circular dated 30th March 2017 requiring every member to also sign the DA, for the reasons that firstly, it is entirely beyond the jurisdictional remit of the revenue authorities to dictate what form the instrument must take and that a revenue authority must take the instrument as it finds. Secondly, there is no concept in law of a society not representing the interests of all its members while entering into a DA and the requirement by the stamp office that unless a member personally signs the DA, Section 4(1) of the Act would not attract is erroneous. Further, the circular dated 23rd June 2015 that purports to exclude PAAAs from Section 4(1) was held ultra vires the Stamp Act and was quashed.
- The Bench clarified that in situations regardless of how the redevelopment takes place, from the perspective of a society member, when she or he is getting:
(a) a home in replacement of a home;
(b) a larger home in replacement of a smaller home; and
(c) the option of purchasing additional area for the replacement home.
It is only in the third case i.e., (c) that stamp duty becomes payable and not otherwise as in the former two cases of (a) & (b).
The Bench thus, finally summarised its finding as follows:
(a) A DA between a cooperative housing society and a developer for development of the society’s property (land, building, apartments, flats, garages, godowns, galas) requires to be stamped.
(b) The DA need not be signed by individual members of the society and the same is optional. Even if individual members do not sign, the DA controls the re-development and the rights of society members.
(c) A PAAA between a developer and an individual society member does not require to be signed on behalf of the society and the same is also optional.
(d) Once the DA is stamped, the PAAA cannot be separately assessed to stamp beyond Rs. 100 requirement of Section 4(1) if it relates to and only to rebuild or reconstruct premises in lieu of the old premises used/occupied by the member, and even if the PAAA includes additional area available free to the member because it is not a purchase or a transfer but is in lieu of the member’s old premises. The stamp on the DA includes the reconstruction of every unit in the society building and the same cannot be levied twice.
(e) To the extent that the PAAA is limited to rebuilding of the premises without the actual purchase for consideration of any additional area, the PAAA is an incidental document within the meaning of Section 4(1) of the Stamp Act.
(f) A PAAA between a developer and a society member is to be additionally stamped only to the extent that it provides for the purchase by the member for actual stated consideration and a purchase price of additional area over and above any area that is made available to the member in lieu of the earlier premises.
(h) The provision or stipulation for assessing stamp duty on the PAAA on the cost of construction of the new premises in lieu of the old premises was held unsustainable.
Most importantly, the aforesaid findings were ordered as not limited to the facts of the cases before the bench but to be applicable as a rule in general.
- A Petition was filed before the Hon’ble Gujarat High Court, in the matter of M/S Abaj Foods Private Limited vs The Authorized Officer, Punjab, challenging the actions/measures taken by the Bank under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (“SARFAESI Act”).
- The Petitioner contended that the Notice under section 13(2) of the SARFAESI Act issued by the Respondent Bank mentioning the balance outstanding as on the date of NPA without giving break up of principal and interest outstanding amount is defective and in contravention of the provisions of the SARFAESI Act.
- In view of the above facts and circumstances, the Hon’ble High Court relied upon the observations made by the Division Bench in the case of Punjab National Bank Vs. Mithilanchal Industries Pvt. Ltd.:
“29. The words used in Section 13(3) of the SARFAESI Act are “details of the amount payable by the borrower as also the details of the secured assets intended to be enforced by the Secured Creditor.” So, the notice under Section 13(2) of the SARFAESI Act has to necessarily contain the details on the above two counts.”
- In view thereof, the Hon’ble Court affirmed that as per section 13(3) of the SARFAESI Act, providing details and relevant calculations in respect of the outstanding amount under the heads of principal amount and interest amount is necessary for the purpose of making demand in the notice under section 13(2) of the SARFAESI Act. In fact, section 13 (3A) of the SARFAESI Act gives right to the borrower to make a representation or raise an objection against the notice under section 13(2). Unless the borrower has the details of the amounts being demanded under a notice under section 13(2), the borrower would not be in a position to make any representation or raise any objection. It is only when the amounts under different heads are provided to the borrower that it could raise objection under any of the heads where the borrower finds that the amount quantified is not correct. Without there being any details mentioned in the notice, the very purpose of section 13 (3A) would also be lost to a large extent.
- Thus, the petition was allowed by the Hon’ble Court, and the Bank was restrained from taking any possession of the secured assets of the Petitioners pursuant to the notice issued under section 13(2) of the SARFAESI Act and the actions under sections 13(4) and 14 of the SARFAESI Act till the final disposal of the Securitisation Application pending before the Debt Recovery Tribunal.
- An Appeal was filed before the Hon’ble National Company Law Appellate Tribunal (“NCLAT”), in the matter of Shapoorji Pallonji & Co. Pvt. Ltd. vs Korba West Power Company Ltd. & Ors., challenging the Impugned Order passed by the Learned Adjudicating Authority (NCLT, Ahmedabad Bench) allowing the Interlocutory Application filed by the Resolution Professional (“RP”) of the Corporate Debtor/M/s. Korba West Power Company Limited, seeking approval of the ‘Resolution Plan’.
- The fact of the matter was that the corporate insolvency resolution process (“CIRP”) was initiated by the Corporate Debtor itself by invoking Section 10 of the Insolvency and Bankruptcy Code (“IBC”) and that there were three Arbitration Proceedings pending between the Appellant and the Corporate Debtor prior to the initiation of the CIRP. The RP did not communicate the rejection of claim of the Appellant in writing but instead, as per Regulation 13(2)(c) of the CIRP Regulations, 2016, which did not provide for any ‘Individual Notice’ to be served on the ‘Creditors’ regarding admission or non-admission all their claims, uploaded the status of the claims on the website of the Corporate Debtor twice. The RP rejected the claim of the Appellant deeming it ‘not verifiable’ in the light of the pending Arbitration Proceedings.
- It was the case of the RP that there is no provision in IBC to give any communication in writing regarding the rejection of claims to the creditors and that the Appellant never challenged the rejection of its claim and filed this Appeal belatedly after a lapse of a period of 152 days and that too against the Order approving the Resolution Plan.
- To adjudicate the issue at hand, the Hon’ble NCLAT discussed and relied upon the ratio in the case of Fourth Dimension Solutions Vs. Ricoh India Limited & Ors. wherein the Hon’ble Apex Court held that ‘Operational Creditor will have the liberty to pursue Arbitration Proceedings which are pending at the time of CIRP, even after the Resolution Plan is approved and all contentions would be decided on its own merits’.
- Thus, in the similar facts and circumstances, the NCLAT vide its order dated February 23, 2023, observed that there was no illegality in the Order of ‘Approval of the Resolution Plan’ by the Adjudicating Authority and therefore, no reason to set aside the Resolution Plan per se except for observing that the RP ought to have made a ‘Contingent Provision’ with respect to the Appellant having regard to the specific facts of this case, which would be subject to the result of the Arbitration Proceedings. Thus, liberty was granted to the Appellant to pursue all contentions available to them in the pending Arbitration Proceedings and the same be decided in the said proceedings on its own merits in accordance with law.
- The Delhi High Court recently passed an omnibus order restraining the world at large from using the name, image, voice, likeness, and goodwill of Mr. Amitabh Bachchan.
- The Plaintiff in Amitabh Bachchan v. Rajat Negi & Ors. alleged violation of his publicity rights as a celebrity. Mr. Bachchan approached the Court to restrain various persons who were using his characteristics and personality for commercial exploitation including hosting illegal lotteries, selling shirts with his pictures, books, operating websites in his names, selling wall posters bearing his name, photographs and likeness without his approval and knowledge.
- The Hon’ble Court in this matter observed that there was no doubt regarding the Plaintiff’s celebrity status, and the plaint also satisfied the three essentials for grant of injunction, i.e. prima facie case, irreparable harm, and balance of convenience in favour of the Plaintiff. Hence the Court passed an order in favour of the Plaintiff injuncting the Defendants from using the name, likeness, voice, and other aspects of the Plaintiff’s persona.
- In Shivaji Rao Gaikwad v. Varsha Productions, the Madras High Court in 2015 restrained the Defendants from using the name of the plaintiff in their movie “Mai hoon Rajnikanth” without his prior permission.
- The aforementioned cases thus form benchmarks for recognition of personality and celebrity rights in the Indian Courts, which are not expressly recognized by any statutory provision but derive their existence from Right to Privacy under Article 21 of the Constitution.
Introduction
The Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (“SARFAESI Act”) was brought into effect to regulate the process of recovery of debts through enforcement of security interest, in the event of default by the borrower(s), and to further regulate the securitisation and reconstruction of financial assets of a borrower in distress. The SARFAESI Act enables the creditors like banks and other financial institutions to recoup the delinquent debts by selling the collateral in an auction, without the requisite of contesting its claim before a court of law.
While the SARFAESI Act is more focused on recovery of financial debt in favor of the banks and other financial institutions than insolvency; the Insolvency and Bankruptcy Code, 2016 (“IBC”) primarily focuses on the reorganisation and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximisation of value of assets of such persons, and to promote entrepreneurship and availability of credit as well as ensure balancing of interests of all the stakeholders, and for matters connected therewith or incidental thereto.
The Tussle Between IBC & SARFAESI Act:
In Encore Asset Reconstruction Company Pvt. Ltd. v. Ms. Charu Sandeep Desai[1], it was confirmed by the National Company Law Appellate Tribunal, (“NCLAT”) that, section 238 of the IBC has a non-obstante provision that states that IBC shall take precedence over any act in force at the time.
IBC is a special code and thus, its provisions apply regardless of anything that is in conflict with the same in any other law(s) that is/are in force or any instruments that are in force because of any such law(s) including the SARFAESI Act.
Period of Limitation for Initiation of Corporate Insolvency Resolution Process (“CIRP”) in lieu of pending SARFAESI Act proceedings:
The NCLAT in Bimal Kumar v. Bank of India[2] held that the period of limitation to initiate proceedings under IBC would not be extended in lieu of the proceedings pending under SARFAESI Act before the debt recovery tribunal(s) (“DRT”). The NCLAT, relied on the decision of the Hon’ble Supreme Court in B.K. Educational Services Pvt. Ltd. v. Parag Gupta & Associates[3], wherein it was ruled that the initiation or pending of proceedings before DRT under the SARFAESI Act, 2002, or the RDDBFI Act, 1993, could not be regarded as an extension of the limitation period under the IBC and that the limitation period for proceedings under sections 7 and 9 of the IBC were governed by Article 137 of the Limitation Act, 1963.
Moratorium’s Impact on SARFAESI Proceedings:
Moratorium in terms of IBC means a period wherein no judicial proceedings for recovery, enforcement of security interest, sale or transfer of assets, or termination of essential contracts can be instituted or continued against the Corporate Debtor.
CIRP is a time bound process and the relief of moratorium is available to the Corporate Debtor only during the CIRP period i.e. for a period of 180 days which can further be extended to 90 days but not thereafter and even the period of 180 days is also not absolute because the Committee of Creditors (“CoC“) anytime within such period may conclude to liquidate the Corporate Debtor and the moratorium will cease to have its effect.
The Hon’ble Supreme Court in its judgment dated May 18, 2022, in the matter of Indian Overseas Bank v. M/s RCM Infrastructure Limited and Anr.[4] observed that, “any action to foreclose, collect, or enforce any security interest generated by the Corporate Debtor in respect of its property, including any action under the SARFAESI Act, is suspended when the CIRP is launched……..The words “including any action under the SARFAESI Act” are significant. The legislative aim is obvious in prohibiting any proceedings, including those taken under the SARFAESI Act to foreclose, collect, or enforce any security interest, once the CIRP has been started”.
Taking Charge/Possession of Properties of Corporate Debtor- SARFAESI v. IBC:
In the peculiar facts of the case of Encore Asset Reconstruction Company Pvt. Ltd. vs. Ms. Charu Sandeep Desai & Ors.[5], before the NCLAT, an appeal was preferred by the Appellant against the order passed by National Company Law Tribunal (“NCLT”) Mumbai Bench, in the matter of State Bank of India Vs. Calyx Chemicals & Pharmaceuticals Ltd., whereby ‘Dena Bank’ was directed to handover the possession of the mortgaged property to the IRP. In the proceedings before the NCLT, ‘Dena Bank’ pleaded that the ‘Corporate Debtor’ had availed a loan against creation of a charge by way of exclusive mortgage of an unencumbered property held in the name of the borrower to be treated as a security against the loan. Since the loan had become bad and was declared as a “non-performing asset”, Dena Bank initiated proceedings under Section 13(4) of the SARFAESI Act and took physical possession before the date of commencement of ‘moratorium’. Encore Asset Reconstruction Company Pvt. Ltd. was an assignee of the Dena Bank.
In view of the aforesaid facts, and submissions on behalf of the parties, NCLAT observed that from the explanation below Section 18 of IBC, it is clear that the term ‘assets’ does not include the assets owned by a third party in possession of the ‘Corporate Debtor’, but includes the assets over which the Corporate Debtor has ‘ownership rights’, as stated in the balance sheet of the Corporate Debtor, including the assets that the Corporate Debtor which may or may not be in its possession. Further, it was not the case of the Appellant that the title of the assets had already been transferred or that they had been sold in terms of Section 13(4) of the SARFAESI Act. Furthermore, in case the assets owned by the Corporate Debtor are not in possession of the ‘Corporate Debtor’, a person who is in possession of the same, including the Dena Bank or Encore Asset Reconstruction Company Pvt. Ltd. is bound to hand over the same to the ‘Resolution Professional’, when the title still vests with the ‘Corporate Debtor’.
The NCLAT clarified that the ruling in M/s. Transcore v. Union of India & Anr. was different since it was given before the coming of IBC and that pursuant to Section 238 of IBC, IBC takes precedence over the provisions of SARFAESI Act. In the aforesaid background, the bench held that Section 18 of the IBC will prevail over Section 13(4) of the SARFAESI Act, and the Dena Bank/Encore Asset Reconstruction Company Pvt. Ltd. cannot retain the possession of the property in question of which the ‘Corporate Debtor’ was the owner.
Hence, it is settled that the Corporate Debtor’s assets including the property and other assets pledged as security are to be gathered into one pile for further consideration by a Resolution Applicant or for the purposes of liquidation. These assets are a component of a pool of assets that can be used in any way in accordance with a resolution plan that has the necessary majority of the CoC’s approval (which includes both secured and unsecured Financial Creditors).
Realisation of Security by Creditor(s) under IBC:
A secured creditor can enforce its secured asset(s) in accordance with Section 52 of the IBC only after the CIRP fails, and the process of liquidation kickstarts. The process of realization of security interest by a secured creditor is laid down under Regulation No. 37 of the Insolvency And Bankruptcy Board of India (Liquidation Process) Regulations, 2016. A secured creditor can enforce its security interest in accordance with the provisions as laid down under the said Regulation No. 37 or under the provisions of SARFAESI Act or RDDBFI Act, in which case the provisions of the aforesaid Regulation shall not apply.
In the case of State Bank of India v Anuj Bajpai[6], the Appellant (State Bank of India) challenged the order of the NCLT, Mumbai Bench, whereby the bench had partly allowed the permission to the ‘secured creditors’ to opt out of the liquidation process under Section 52(1)(b) of the IBC but imposed bar on the ‘secured creditors’ to sell the assets of the ‘Corporate Debtor’ to disqualified persons under Section 29A of IBC. The NCLAT discussed the scope of the provision of Section 35(1)(f) whereby it was clear that the ‘Liquidator’ cannot sell the assets of the Corporate Debtor to the persons who are ineligible in terms of Section 29A of the IBC. Relying upon the decision of the Apex Court in Arcelor Mittal India Private Limited vs. Satish Kumar Gupta & Ors., the NCLAT held that even if Section 52(4) is silent relating to sale of secured assets to one or other persons, the Explanation below Section 35(1)(f) makes it clear that the assets cannot be sold to who are ineligible under Section 29A. If during the liquidation process assets cannot be sold to a person who is ineligible under Section 29A, the said provision is not only applicable to the ‘Liquidator’ but also to the ‘secured creditor’, who opts out of Section 53 to realise the claim in terms of Section 52(1)(b) read with Section 52(4) of the IBC.
In view of the above, clause (8) to Regulation No. 37 of the Insolvency And Bankruptcy Board of India (Liquidation Process) Regulations, 2016, was inserted w.e.f. January 6, 2020, barring a secured creditor to sell or transfer an asset to any person who is not eligible under IBC to submit a resolution plan for insolvency resolution of the Corporate Debtor.
Treatment of Secured Creditors in a Resolution Plan:
The position of secured creditors in CIRP has been affirmed in the recent decision of the Hon’ble Supreme Court in India Resurgent ARC Private Limited v Amit Metaliks[7], wherein it relied upon its former decision in Jaypee Kensington Boulevard Apartments Welfare Association and Ors. v. NBCC (India) Ltd. and Ors., that a dissenting Financial Creditor in respect of a Resolution Plan would receive the payment of the amount as per his entitlement; and that entitlement could also be satisfied by allowing him to enforce the security interest, however, only to the extent of the value receivable by him in terms of Section 53 of IBC. It has never been laid down that if a dissenting Financial Creditor is having a security available with him, he would be entitled to enforce the entire of security interest or to receive the entire value of the security available with him. It is but obvious that his dealing with the security interest, if occasion so arise, would be conditioned by the extent of value receivable by him. It has not been the intent of the legislature that a security interest available to a dissenting Financial Creditor over the assets of the Corporate Debtor gives him some right over and above other Financial Creditors so as to enforce the entire of the security interest and thereby bring about an inequitable scenario, by receiving excess amount, beyond the receivable liquidation value proposed for the same class of creditors. Thus, what amount is to be paid to different classes or sub- classes of creditors in accordance with provisions of IBC and the related Regulations, is essentially the commercial wisdom of the CoC; and a dissenting secured creditor cannot suggest a higher amount to be paid to it with reference to the value of the security interest.
The bench thus held that if the contentions on behalf of the Appellant were to be accepted, the result would be that rather than undergoing insolvency resolution and maximization of the value of assets of the Corporate Debtor, the processes would lead to more liquidations, with every secured Financial Creditor opting to stand on dissent. This would defeat the very purpose envisaged by IBC which is to first ensure that resolution of distressed assets takes place and only if the same is not possible should liquidation follow.
It is also pertinent to note that Regulation No. 38 of the Insolvency And Bankruptcy Board of India (Insolvency Resolution Process For Corporate Persons) Regulations, 2016 provides that one of the mandatory contents of a resolution plan as regards the amount payable under a resolution plan to the financial creditors, who have a right to vote under sub-section (2) of section 21 and did not vote in favour of the resolution plan, is that they shall be paid in priority over financial creditors who voted in favour of the plan.
Therefore, in accordance with IBC, regardless of whether a lender’s debt is secured or not, a successful resolution plan must have a minimum of 66% of the CoC’s vote in its favour. However, it is the liquidation “waterfall” (i.e., the rules determining precedence in the distribution of a profit realization) which gives secured creditors higher priority in the pecking order if the CIRP doesn’t go through and the Corporate Debtor has to undergo liquidation.
Liquidation Process and the Waterfall Mechanism:
As a part of the liquidation process, the Corporate Debtor’s assets are distributed in accordance with section 53 of the IBC read with the Insolvency and Bankruptcy Board of India (liquidation Process) Regulations, 2016, often known as the “Waterfall Mechanism“. Under section 53 of IBC ‘the debts owed to a secured creditor in the event such secured creditor has relinquished security in the manner set out in Section 52 of IBC’ is ranked second along with workmen’s dues for the period of twenty-four months preceding the liquidation commencement date.
Issue of First Charge Holder/Subordination Agreements/Inter-Creditor Agreements:
In terms of the claims of the first charge-holder and the second charge-holder, the law is very clear that the first charge-claim holders shall prevail over the second charge-claim holders and that it shall be realised from the immovable property owned by the borrower entity. The amounts owed to the first charge-holder shall also be paid back prior to those owed to the second charge-holder.
According to a typical inter-creditor agreement between the first charge holder and the second charge holder, the second charge holder can only enforce the security with the first charge holder’s permission or departure. The first charge-holder will have a priority entitlement over the assets, even where the asset cover of the borrower is substantially higher than the amounts raised by it from the first and second lender, thereby making remedy of a second charge-holder redundant. Therefore, only one secured creditor can enforce his right for realization of its debt out of the secured assets as per section 52 of IBC.[8] Nonetheless, this may not be relevant in the case of relinquishment of security interest by the secured creditor under Section 53 of IBC.
The NCLAT in its recent landmark judgment in the case of Technology Development Board vs. Anil Goel, Liquidator of Gujarat Oleo Chem Limited (GOCL) & Ors.[9] held that: “Whether the secured creditor holds a first charge, or second charge is material only if the secured creditor elects to realize its security interest. However, once a secured creditor opts to relinquish its security interest, the distribution of assets would be governed by Section 53(1)(b)(ii), which states that – all secured creditors who have renounced security interests rank equally.”
Joint Sale of property/assets under SARFAESI Act and IBC:
In the case of Ayan Mallick v. Pratime Bayal[10] a joint auction under IBC and SARFAESI Act was carried as part of the land on which the factory was built was owned by guarantors and without contiguous land sale, the liquidator was unable to sell the building. The guarantors challenged the joint auction notice before the Hon’ble NCLT, Kolkata and prayed for a stay. The Hon’ble NCLT rejected the prayer of the Guarantors. The Hon’ble NCLAT upheld the order of the NCLT observing that a joint sale would bring maximization of assets of the Corporate Debtor since the possession of the properties of the Guarantors had already been taken under SARFAESI Act. Therefore, both land and factory were needed to be sold together to maximize the value of the assets and thus, the bench found no substance to the fact that how the Appellant Guarantors were prejudiced in any manner and their appeal was thereby dismissed.
Conclusion The initial interplay of the provisions of SARFAESI Act and IBC was obscure and uncertain until the legal precedents interpreted and settled the supremacy of IBC over any other law in force including the SARFAESI Act. Eventually, the law as it stands today has been dealt and discussed in detail hereinabove. It is quite clear that the purpose of both the legislations is different and yet becomes overlapping when it comes to enforcement of security interest of a secured creditor. However, once the moratorium kicks in, the procedures and compliances of IBC shall prevail over all laws in force including the SARFAESI Act.
[1] Encore Asset Reconstruction Company Pvt. Ltd. v. Charu Sandeep Desai, 2019 SCC OnLine NCLAT 284.
[2] Company Appeal (AT) (Insolvency) No. 1166 of 2019.
[3] B.K. Educational Services (P) Ltd. v. Parag Gupta & Associates, (2019) 11 SCC 633.
[4] Indian Overseas Bank v. RCM Infrastructure Ltd., 2022 SCC OnLine SC 634.
[5] Company Appeal (AT) (Insolvency) No. 719 of 2018.
[6] Company Appeal (AT) (Insolvency) No. 509 of 2019) (Delhi Bench).
[7] Civil Appeal No. 1700 OF 2021.
[8] ICICI Bank Ltd. v SIDCO Leathers Ltd., (2006) 10 SCC 452.
[9] Company Appeal (AT) (Insolvency) No.731 of 2020.
[10] Company Appeal (AT) (Insolvency) No. 456 of 2022.
The Hon’ble Supreme Court recently decided 7 Appeals in the case of Gujarat State Civil Supplies Corporation Ltd. v. Mahakali Foods Pvt. Ltd., though factually distinct, however, involving common questions of law.
Upon hearing and considering the submissions, both in favour and against the proposition that ‘the provisions regarding delayed payments under the MSME Act would have precedence over the provisions of the Arbitration Act, the Apex Court observed and held the following’:
Chapter-V of the MSME Act would override the provisions of the Arbitration Act having been enacted subsequent to the enactment of the Arbitration Act and more particularly in view of Section 24 of the MSME Act which specifically gives an overriding effect to the provisions of Sections 15 to 23 of the Act over any other law for the time being in force, which would also include Arbitration Act.
Once the statutory mechanism under sub-section (1) of Section 18 is triggered by any party, it would override any other agreement independently entered into between the parties, including an Arbitration Agreement. Therefore, even in the existence of an Arbitration Agreement, any party can resort to making a reference to the Micro and Small Enterprises Facilitation Council (“Facilitation Council”) under Section 18 of the MSME Act.
The provisions of Arbitration Act would apply to the proceedings conducted by the Facilitation Council only after the process of conciliation initiated by the same under Section 18(2) fails. Further, the Facilitation Council either can itself take up the dispute for arbitration or refer it to any institute or centre for such arbitration as contemplated under Section 18(3) of the MSME Act and would be competent to rule on its own jurisdiction as also other issues in view of Section 16 of the Arbitration Act.
The Facilitation Council, which initiates the conciliation proceedings under Section 18(2) of the MSME Act would be entitled to act as an arbitrator despite the bar contained in Section 80 of the Arbitration Act.
A party who is not a ‘Supplier’ as per the definition contained in Section 2(n) of the MSME Act on the date of entering into contract cannot seek any benefit as the ‘Supplier’ under the MSME Act. If any registration is obtained subsequently, the same would have a prospective effect and would apply to the supply of goods and rendering services subsequent to the said registration.