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Tag: IBC

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NCLT cannot reject approval of Resolution Plan submitted by Successful Resolution Applicant being an ex-promoter, by rejecting the validity of the MSME registration obtained by Corporate Debtor post initiation of CIRP: NCLAT New Delhi

The Hon’ble NCLAT Delhi in the matter of Ramesh Shah in consortium with Masitia Capital Services Pvt. Ltd. v. Central Bank of India & Ors. vide its order dated February 29, 2024, allowed two Appeals preferred by the Resolution Applicant and the Resolution Professional, wherein the issues that arose for consideration were as follows:

  • Whether the Resolution Applicant being an ex-promoter of the Corporate Debtor is eligible to submit a Resolution Plan when the Corporate Debtor has acquired a change in its status to that of an MSME after initiation of the CIRP proceedings?
  • Whether the Adjudicating Authority can raise concerns over the plausibility of the reports which had validated the MSME entitlement of the Corporate Debtor, by going under the computation exercise conducted by the Corporate Debtor and thereby reject the MSME status of the Corporate Debtor?

The peculiar facts of the case are such that the Corporate Debtor had been issued an MSME Certificate by the competent authority on the basis of an online application filed by an employee of the Corporate Debtor on the instructions of the Resolution Professional. Since the MSME Registration Certificate was obtained prior to the date of submission of the resolution plan, the Resolution Applicant (ex-promoter) filed a Resolution Plan seeking benefits of Section 240A of the IBC.

The said resolution plan was approved by the CoC with 77.56% vote share. The RP filed an Interlocutory Application for approval of the said resolution plan, which was dismissed by the Adjudicating Authority thereby rejecting the proposal for approval of the resolution plan. Also, the Central Bank of India, as a dissenting Financial Creditor, filed an Interlocutory Application seeking stay of the approval of the resolution plan before the Adjudicating Authority and challenged the eligibility of the ex-promotor as a Successful Resolution Applicant (“SRA”). The Adjudicating Authority allowed the Application of the dissenting Financial Creditor and held the SRA to be ineligible under Section 29A read with Section 240A of the IBC to submit a resolution plan. Hence, the two appeals were filed before the NCLAT.

The law as laid down by the Hon’ble Supreme Court in the matter of Hari Babu Thota in Civil Appeal No. 4422 of 2023 [(2024) 242 Comp Cas 1], was discussed “that not having MSME status at the time of commencement of the CIRP proceedings does not disqualify the ex-promoter from being a Resolution Applicant under Section 29A of the IBC as long as this status is attained well before the submission of the resolution plan”. However, the aforesaid ratio was questioned by the Respondent on the ground that the facts were distinguishable, as unlike in the present facts of the case, there was no dispute regarding the calculation, basis which MSME registration was obtained.

In view of the aforesaid facts and circumstances, the Hon’ble NCLAT observed and held that,

  • The MSME registration can only be revoked by the competent authority and the Adjudicating Authority cannot claim this jurisdiction upon itself to modify/revise/revoke or interfere in any manner with the MSME registration granted by the competent authority.
  • The RP was not required to seek permission of the CoC under Section 28(h) of IBC since the CoC was all along kept apprised by the RP regarding MSME registration and the CoC had therefore clearly found the Corporate Debtor to be eligible for MSME status and the SRA to submit a resolution plan.
  • RP who is running the business of the Corporate Debtor is best suited to take the decision for applying for MSME registration of the Corporate Debtor as long as it is not detrimental to the continued business operations of the Corporate Debtor.
  • The SRA is eligible to submit a resolution plan for the Corporate Debtor now being an MSME.
  • The Adjudicating Authority was thus directed to proceed to pass a fresh order in the Application filed by the RP seeking approval of the resolution plan along with necessary directions.
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Limitation Period to File an Appeal Before NCLAT Along with Certified Copy of the Order, Doesn’t Necessarily Expire if the Certified Copy of the Order is not Applied for Within 30 Days of the Order

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.

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Flat in Possession of Allottee Not to be Included in the Liquidation Estate

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

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NCLAT Answers Whether an ‘Operational Creditor’ Can Be Allowed To Pursue Prior Arbitration Proceedings Post Approval of Resolution Plan.

  • 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.
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Articles

Fate of Secured Creditor(s): IBC v. SARFAESI Act

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.

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Madras High Court affirms: Protection of Moratorium under section 14 of I&B Code is extended only to Corporate Debtor and not to the persons involved in its affairs vis-à-vis. the proceedings under section 138 of the Negotiable Instruments Act, 1881

The Accused No. 3 being the Managing Director of the Accused No. 1 Company filed a Petition before the Hon’ble Madras High Court under section 482 of Cr.P.C. for quashing of the Criminal Complaint filed inter alia against him by the Respondent being the Complainant therein, for an offence under section 138 of the Negotiable Instruments Act, 1881 (“NI Act”).

A cheque was issued by the Accused No. 2 on behalf of the Accused Company as part payment towards the goods supplied by the Complainant. Upon presentation of the said cheque, the same was returned with an endorsement “Account Blocked”. In view thereof, a statutory notice under section 138 of the NI Act was issued by the Respondent/Complainant to the Accused and subsequently, a Complaint was filed in respect thereof.

Admittedly, two of the financial creditors of the Accused Company had also initiated proceedings before the NCLT, wherein an order of admission was passed, and the moratorium had come into effect.

The Petitioner/Accused contended that the cheque was issued after the management of the Accused Company had been taken over by the Interim Resolution Professional. Therefore, the Petitioner/Accused was not in charge of the management/business of the Accused Company and was in no way connected with the Accused Company and the Complaint against him was liable to be quashed.

Further to considering of the above submissions, the Hon’ble Bench also discussed inter alia the decisions given in the cases of M/s Indorama Synthetics (I) Ltd. vs. State of Maharashtra and Anr., M/s. Nag Leathers Pvt. Ltd. vs J.L. Sobhana, Jik Industries Ltd. & Ors. vs. Amarlal v. Jumani & Anr. etc. and held that the issue as to whether by operation of provisions of I&B Code, the criminal prosecution under section 138 r/w 141 of the NI Act, r/w section 200 of Cr. P.C. can be terminated was not something that had not been dealt and decided before. In fact, in view of the judgement of the Hon’ble Supreme Court in P. Mohanraj vs. M/s. Shah Brothers Ispat Pvt. Ltd., wherein it was held that section 138 r/w 141 proceeding against the Corporate Debtor is covered by section 14(1) (a) of I&B Code, however, the moratorium order would not cover the persons other than the Corporate Debtor; it is clear that in respect of the persons other that the Corporate Debtor viz. the Director or the Managing Director, as the case may be, Section 14 of I&B Code would not apply to the proceedings under section 138 NI Act.

In view thereof, the Hon’ble Madras High Court did not find it appropriate to intervene in and/or quash the trial proceedings against the Accused persons associated with the Corporate Debtor. In view thereof, the plea of the Petitioner/Accused was negated by the Hon’ble High Court.