- IBC OVERRIDES ELECTRICITY ACT; DUES TO SECURED CREDITORS AT HIGHER FOOTING THAN ELECTRICITY DUES
Paschimanchal Vidyut Vitran Nigam Ltd vs Raman Ispat Private Limited: Supreme Court (2023 SCC OnLine SC 842)
Background Facts: The Appellant, a statutory company distributing electricity, assailed an order of the National Company Law Appellate Tribunal (“NCLAT”) before the Supreme Court (the “SC”), as the NCLAT directed District Collector and Tehsildar to release the Corporate Debtor’s assets which had been attached in the course of recovery proceedings under electricity laws. The charge on the Corporate Debtor’s properties was created by the operation of a clause in an electricity supply agreement of 2010 between the Appellant and the Corporate Debtor. The clause enabled the Appellant to create a “charge on the assets of the company” pursuant to outstanding dues. Upon the Corporate Debtor’s default in payment of electricity dues, the Tehsildar attached the Corporate Debtor’s properties in furtherance of enforcement. Subsequently, in the proceedings before the National Company Law Tribunal (NCLT), Allahabad Bench, the Liquidator applied to NCLT to direct the Tehsildar to release the attached properties in favour of the Liquidator. NCLT directed the Tehsildar to release the attached properties in favour of the Liquidator in 2018. The Appellant filed an appeal from NCLT’s order which was dismissed in 2019, leading to a second appeal before the SC.
Issue: Whether the Appellant can enforce its security interest over the Corporate Debtor’s assets through the procedure prescribed under electricity laws, as opposed to opting for the stand-out procedure prescribed under Section 52 of the Insolvency & Bankruptcy Code (“Code”/”IBC”)?
Verdict: The Court affirmed the validity of the security interest created in favour of the Appellant and clarified that the dues payable to statutory corporations like the Appellant (and not to the Central Government or State Government) are to be classified as ‘financial debt’ or ‘operational debt’, depending upon the nature of the transaction entered upon with the Corporate Debtor. Hence, such dues do not fall under the ambit of dues owed to the Central Government or State Government under Section 53 (1) (e)(i) of the Code.
Rainbow Papers was distinguished on facts as the Corporate Debtor in that case was undergoing corporate insolvency resolution process (“CIRP”) as opposed to the Corporate Debtor in the present case which is undergoing liquidation. Further, the Court observed that Rainbow Papers did not consider the waterfall mechanism under Section 53 of the Code, consequently treating the state government as a “secured creditor”. The Court emphasised upon the inclusion of “government dues” in the scheme of Section 53 of the Code, highlighting the intention of the Parliament to treat dues owed to the government as distinct from dues owed to a secured creditor.
The SC further observed that Section 52 of the Code gives an option to a secured creditor to stand outside the liquidation proceedings if the secured creditor chooses not to relinquish its security in favour of the liquidation estate. The Code and allied regulations lay down a procedure and a timeline for a secured creditor to exercise this option and require such a secured creditor to make payment of insolvency and liquidation costs from the recoveries made pursuant to enforcement.
- SENDING DEMAND NOTICE UNDER RULE 7(1) TO PERSONAL GUARANTOR CANNOT BE TERMED AS ARBITRARY
Vineet Saraf v Rural Electrification Corporation Ltd.: Delhi High Court (2023 SCC OnLine Del 4291)
Background Facts: In 2009, FACOR Power Ltd. (“FPL” / “Principal Borrower”) had availed loan from Rural Electrification Corporation Ltd. (“Respondent”). Mr. Vineet Saraf (“Petitioner” / ”Personal Guarantor”) stood as a personal guarantor to the said loan and a Deed of Personal Guarantee was executed. The said loan was also secured by Ferro Alloys Corporation Ltd. (“FACOR” / “Corporate Guarantor”) as a corporate guarantor.
The Principal Borrower defaulted in repayment of loan. In 2017, the NCLT initiated CIRP against FACOR under the Code. In 2019, Sterlite Power Transmission Limited (“SPTL” / “Resolution Applicant”) submitted a resolution plan for FACOR which was approved by the Committee of Creditors (“CoC”) as well as the NCLT.
On December 9, 2022, the Respondent issued a Demand Notice under Rule 7(1) of the Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rules, 2019 (“Rules, 2019”), invoking the personal guarantee of Mr. Vineet Saraf (Petitioner).
A writ petition was filed before the High Court, seeking issuance of writ of prohibition to prevent the Respondent from approaching NCLT and to quash the Demand Notice dated December 9, 2022. It was argued that the Respondent has assigned the entire debts to FACOR, while excluding the personal guarantees under the terms of the Resolution Plan and the Assignment Agreement. Therefore, the Respondent can no longer invoke the guarantee furnished by the Petitioner. Further, the Demand Notice was indicative of the Respondent’s intention to approach NCLT under Section 95 of Code against the personal guarantor over a ‘non-existent’ debt.
The Respondent argued that the discharge or release of the principal debtor does not absolve the surety/guarantor of his liability. The Respondent is only seeking to recover the part of the debt that was left unrecovered after the CIRP of FACOR was concluded. Lastly, since the personal guarantees were specifically excluded from the Resolution Plan and the said Assignment Agreement, the terms of the Resolution Plan cannot be altered.
Issue: Whether such issuance of a Demand Notice is arbitrary or valid ?
Verdict: The Delhi High Court opined that the Respondent has merely issued a demand notice in order to comply with the statutory requirement of IBC, so that it can agitate before the NCLT that there is a debt owed by the Petitioner to the Respondent. Such act cannot be termed as arbitrary.
- NCLT DELHI IMPOSES MORATORIUM ON LEASED AIRCRAFTS, CATEGORIZE THEM AS ‘PROPERTY’ U/S 3(27) OF IBC
Voluntary Liquidation Go Airlines: NCLT Delhi (Company Petition No. (IB)-264(PB)/2023)
Background Facts: M/s Go Airlines India Limited (“Go Airlines”) is engaged in aviation business and is the third largest airline operator in India.
Go Airlines filed a petition under Section 10 of Code, voluntarily seeking initiation of the CIRP against itself. On May 10, 2023, the NCLT admitted the petition and initiated CIRP against Go Airlines.
While imposing Moratorium under Section 14 of the Code, the NCLT had specifically stayed the recovery of any property by an owner or lessor, where such property is occupied by or in the possession of the Corporate Debtor.
SMBC Aviation Capital Limited, GY Aviation and SFV Aircraft Holdings (“Lessors”) had leased out aircrafts to Go Airlines. The Lessors contended that they had terminated the Lease Agreement of aircrafts prior to initiation of CIRP and imposition of moratorium. The assets belonging to third parties could not be covered under moratorium and must be reverted to the Lessors. Further, the aircraft engines are highly delicate and complex machines, therefore, require timely servicing and maintenance.
Accordingly, the Lessors filed an application under Section 60(5) of IBC before the NCLT seeking the following reliefs:
- To direct Go Airlines to refrain from operating or flying the Aircraft for commercial use;
- To permit to depute an agency or an inspector to conduct inspection of the Four Engines; and
- To direct the Resolution Professional of Go Airlines to protect and maintain the Subject Aircraft, and ensure that the Aircraft, engines, and other parts are duly protected from any unauthorized access, removal, replacement, operation or use by the personnel of Go Airlines and/or any other person.
Issue: Whether the prayers sought by the Petitioner can be granted in lieu of the provisions of IBC?
Verdict: Aircrafts leased by Lessor are Property as per S. 3(27) and subject to imposition of moratorium.
Section 14 of IBC states that post commencement of CIRP, the NCLT is empowered to declare moratorium. Further, Section 14(1)(d) of the IBC empowers the NCLT to prohibit recovery of any ‘property’ by an owner or lessor, where such property is occupied by or in the possession of the Corporate Debtor.
The Bench observed that Section 3(27) of IBC defines ‘Property’ as “money, goods, actionable claims, land and every description of property situated in India or outside India and every description of interest including present or future or vested or contingent interest arising out of, or incidental to, property”;
Based on these provisions, the Bench took the view that the aircrafts leased to Go Airlines by Lessors come within the definition of ‘Property’ and thus moratorium can be imposed over leased aircrafts.
The Bench also stated that “In the aviation industry, the prevailing practice is that most airlines lease the aircrafts for their operation rather than own them. In other words, the aircrafts are not as such the property of the airlines. Therefore, the application of the provision of the IBC and the process of insolvency would have no meaning in respect of airlines as Corporate Debtors if the sole essence of the Corporate Debtor’s business is taken away. It would result in corporate death of the Corporate Debtor, leaving no scope for resolution of the Corporate Debtor.”
Additionally, the Bench observed that the Directorate-General of Civil Aviation (“DGCA”) has not deregistered the aircrafts. Therefore, it is open for Go Airlines to resume flight operations. In order to maintain Go Airlines as a going concern, the Bench has permitted it to operate the aircrafts. However, the safety norms prescribed by the regulators must be adhered.
The Bench has rejected the prayers of the Lessors and has granted interim relief only to the extent of protection and maintenance of subject aircraft/engines by the Resolution Professional.
- THERE CAN’T BE DISCRIMINATION BETWEEN ONE CLASS OF CREDITORS’
Akashganga Processors Pvt. Ltd. v Shri Ravindra Kumar Goyal & Ors: NCLAT (2023 SCC OnLine NCLAT 330)
Background Facts: The Corporate Debtor was admitted into CIRP. The State Tax (Government of Gujrat) and Central Excise (Government of India), being Operational Creditors of the Corporate Debtor, submitted their claims before the Resolution Professional. There were statutory dues of Gujarat Industrial Development Corporation and Surat Municipal Corporation in the capacity of Operational Creditors as well.
A Resolution Plan was submitted by the Successful Resolution Applicant (“SRA”) for the Corporate Debtor, which was approved by the CoC with 99.84% voting share. The Resolution Plan proposed to pay INR 32,78,102/- (Thirty-Two Lakh Seventy-Eight Thousand One Hundred and Two only) to Gujarat Industrial Development Corporation and Surat Municipal Corporation, to keep the Corporate Debtor as a going concern. However, no sums were allocated for State Tax (Government of Gujrat) and Central Excise (Government of India)
The Resolution Professional filed an application under Section 30(6) before NCLT, seeking approval of the Resolution Plan. The NCLT refused to approve the plan on the premise that it violates Section 30(2)(e) and 30(2)(f) of IBC.
Issue: Can a resolution plan prioritise allocation of funds, for creditors who are in the same class?
Verdict: The Bench placed reliance on the Supreme Court judgment in Committee of Creditors of Essar Steel India Limited vs. Satish Kumar Gupta & Ors., (2020) 8 SCC 531, where it was held that there can be differential payment in payment of debts of Financial Creditors and Operational Creditors, however, there can be no difference in inter se payment within a class of creditors.
It was opined that the Resolution Applicant was at liberty to not allocate any amount to any of the Operational Creditor in view of Section 53 of IBC. “However, when the Successful Resolution Applicant was making payment to other two Operational Creditors, there cannot be any discrimination between payment of one class of Creditors”.
The Bench directed distribution of INR 32,78,102/- (Thirty-Two Lakh Seventy-Eight Thousand One Hundred and Two only) to all the four (4) Operational Creditors on a pro rata basis, in order to save the plan from being invalidated.
The Bench opined that in place of rejecting the Resolution Plan, the NCLT could have directed for compliance of IBC provisions by distributing the amount of INR 32,78,102/- (Thirty-Two Lakh Seventy-Eight Thousand One Hundred and Two only)amongst the remaining Operational Creditors. This would have ensured compliance without affecting the terms and conditions of the Plan.
- LIEN CREATED ON CD’S ACCOUNT PRIOR TO CIRP CANNOT CONTINUE AFTER MORATORIUM IS IMPOSED U/S 14 OF IBC
Rani Agro Private Limited Vs S & H Gears Private Limited: NCLT Mumbai (2020 SCC OnLine NCLT 11413)
Background Facts: The Employees Provident Fund and Miscellaneous Provisions Act, 1952 (“EPF Act”) was applicable on the Corporate Debtor. An inquiry was initiated under Section 7A of the EPF Act and Regional Provident Fund Commissioner found INR 3,10,68,057/- (Three Crores Ten Lakhs Sixty-Eight Thousand Fifty-Seven only) to be outstanding from the Corporate Debtor.
Alleging the Corporate Debtor to be a defaulter, the Regional Provident Fund Commissioner (“EPFO”) attached the current account of Corporate Debtor in HDFC bank on August 24, 2018 and created its lien on the said account.
Subsequently, on January 24, 2020 the Corporate Debtor was admitted into CIRP by the NCLT. EPFO also filed its claim in the CIRP, which was admitted by the Resolution Professional.
In a meeting of CoC dated December 14, 2020, permission was granted to the Resolution Professional to operate the current account in HDFC Bank for receipt and payment for the CIRP period.
In the meanwhile, a Resolution Plan was approved for the Corporate Debtor, and it proposed to pay the EPFO dues.
When the Resolution Professional became aware of the attachment of bank account by EPFO, it filed an application before NCLT seeking de-freezing of the account.
Issue: Whether an Attachment on Corporate Debtor’s bank account that was imposed before the initiation of CIRP, can continue during moratorium under Section 14 of IBC?
Verdict: The Bench observed that moratorium under Section 14 of IBC is imposed post initiation of CIRP to ensure that no depletion of assets take place, and the Corporate Debtor continues as a going concern. It has been held that moratorium would cover attachment of bank account by EPFO. Any lien created prior to CIRP cannot sustain post initiation of CIRP to avoid hindering the resolution process.
“Accordingly, this Bench is of the considered view that Section 14(1)(a) imposes complete embargo on any proceeding against the Corporate Debtor by any Authority till the completion of CIRP. Moratorium covers attachment of Bank accounts by any Authority including `EPFO’ and it is required to be lifted to grant Corporate Debtor a fair chance of revival and to ensure that Resolution Plans are received. It may also be inferred from the circumstances and intent of legislation that in the present cases, the lien created prior to the initiation of the ‘Corporate Insolvency Resolution Process cannot sustain as it will hinder the entire resolution process”.
The Bench accordingly set aside the lien created by EPFO on the Corporate Debtor’s account, and necessary authority has been extended to the Resolution Professional to deal with the said account.
– Dhruv Gandhi, Partner and Deepam Rangwani, Associate
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