Category Archives: Insolvency and Bankruptcy

In a recent order passed in Somesh Choudhary v Knight Riders Sports Private Limited & Anr. under Company Appeal (AT) Insolvency No. 501 of 2021, the Hon’ble National Company Law Appellate Tribunal, Principal Bench, New Delhi (“NCLAT“)  dismissed the appeal filed under Section 61 of the Insolvency and Bankruptcy Code, 2016 (“Code“) and upheld the order dated passed by the National Company Law Tribunal, New Delhi, and held that the claims arising out of the grant of an exclusive license to use intellectual property rights fall within the ambit of the definition of operational debt.

Global Fragrances Pvt Ltd (“Corporate Debtor“) and Knight Riders Sports Private Limited (“Respondent“) entered into a licensing agreement. The Respondent granted exclusive rights and allowance to the Corporate Debtor to use the trademark ‘KKR‘ to manufacture, distribute and advertise licensed products including deodorants, hair gels, and perfumes in return of payment of Minimum Guaranteed Royalties by the Corporate Debtor as compensation for enjoying the exclusive rights. On delivery of the rights, the Respondent raised invoices for an aggregate sum of Rs. 40,60,147/- towards the outstanding Minimum Guaranteed Royalties payable by the Corporate Debtor as per the agreement. The Respondent received only a part payment. Since the Corporate Debtor failed to keep its payment obligations the Respondent filed an application for initiation of the corporate insolvency resolution process under Section 9 of the Code, claiming the amount due as an operation debt under the Code. The application was admitted by the National Company Law Tribunal, New Delhi and aggrieved by the same, Mr Somesh Choudhary (a shareholder of the Corporate Debtor) filed this appeal.

The Corporate Debtor had opposed the petition on the ground that claims arising out of non-payment of Minimum Guaranteed Royalties did not pertain to non-payment of any goods or services as proided under section 5(21) of the Code and therefore Minimum Guaranteed Royalties were not operational debt. The Corporate Debtor further contented that the Respondent has failed to show that how the Corporate Debtor has used the trademark of the Respondent for sale, marketing etc. and hence does not fulfill the parameter set out in the judgment of the NCLAT in M. Ravindranath Reddy v Mr. G. Kishan & Ors. [Company Appeal (AT) (Ins.) No. 331/2019], which held that any “‘debt’ arising without nexus to the direct input to the output produce or supplied by the ‘Corporate Debtor’, cannot be considered as an ‘Operational Debt’.

In order to test the direct nexus, the NCLAT examined the licensing agreement between the parties and held that the trademark ‘KKR‘ was used in the development, packaging and advertisement of the Licensed Products which established a direct nexus between the payment of the MGR and the business operations of the Corporate Debtor. NCLAT, however, dismissed the argument advanced by the Corporate Debtor referring to M. Ravindranath Reddyjudgment and stated that Ravindranath Reddy judgment had been overturned as it did not correctly deal with the meaning of “service” under section 5(21) of the Code and referred to the judgment  by the larger  bench in Jaipur Trades Expocentre Private Limited v. M/s. Metro Jet Airways Training Private Limited  [2022 SCC OnLine NCLAT 263]. The NCLAT dismissed the appeal and upheld the order of NCLT stating that Minimum Guaranteed Royalties are operational debts to be paid against the licensing of trademarks which in turn constitute moveable property and accordingly would be considered as “goods” under the Sale of Goods Act, 1930 wherein the term “goods” includes all moveable property other than actionable claims and money. The NCLAT relied on the decision of the Hon’ble Supreme Court in Vikas Sales Corporation v. Commissioner of Sales Tax [(1996) 4 SCC 433]. Further, the NCLAT observed that pursuant to Section 7 of the Central Goods and Service Act 2017, any utilisation or enjoyment of intellectual property rights would be considered a service provided by the intellectual property rights holder. The NCLAT referred to the decision of the Madras High Court in the matter of AGS Entertainment Private Limited v. Union of India [2013 SCC Online Mad 1823] and held that by providing the Corporate Debtor with a right to utilise the trademark of ‘KKR‘ in its Licensed Products, the Respondent had temporarily provided permission to use its trademark, which would constitute the provision of a service by the Respondent. The Appellate Tribunal further reasoned that a guaranteed minimum royalty is a periodic payment made by a licensee towards a licensor to utilise a licensed product for an agreed period.

The Supreme Court on the appeal of a Sales Tax Officer of the Gujarat government against the 2019 judgment passed by the National Company Law Appellate Tribunal (NCLAT), in the matter of State Tax Officer (1) Vs. Rainbow Papers Ltd. [Civil Appeal NO. 1661 of 2020 decided on 06.09.2022] while answering the issue whether the provisions of the IBC, in particular, Section 53, overrides Section 48 of the Gujarat Value Added Tax, 2003 (GVAT Act), has held that the provisions are neither inconsistent or in conflict with one another and therefore there is no question of overriding. The State would be considered a secured creditor under the GVAT Act under Section 53(1)(b)(ii) and a resolution plan which ignores the statutory demands payable to state governments, or legal authorities, is liable to be rejected. The Court observed that the definition of secured creditor in the Insolvency and Bankruptcy Code (IBC) does not exclude any government or legal authority.

Section 48 of the GVAT Act provides that : “Notwithstanding anything to the contrary contained in any law for the time being in force, any amount payable by a dealer or any other person on account of tax, interest or penalty for which he is liable to pay to the Government shall be a first charge on the property of such dealer, or as the case maybe, such person.” Section 53 of Insolvency and Bankruptcy Code, 2016 provides for the waterfall mechanism for the distribution of liquidated assets amongst the creditors of the corporate debtor.

While interpreting the Government dues under section 48 of the GVAT as one of secured creditor within the waterfall mechanism, the Court clarified that the financial creditors of a company cannot secure their own dues in approving the resolution package of a bankrupt company at the expense of other obligations including statutory dues owed to a government authority. The court also clarified that a company would have to be liquidated and its assets sold and distributed in accordance with Section 53 of the IBC if it was unable to pay its debts, which should include any statutory obligations to the government or other authorities, and there is no plan that contemplates dissipating those debts in a phased, uniform proportional reduction.

The appeal was against the National Company Law Tribunal (NCLT) order had passed holding that the government cannot claim first charge over the property of a corporate debtor, as Section 48 of the Gujarat Value Added Tax (GVAT) Act, 2003, which provides for first charge on the property of a dealer in respect of any amount payable by the dealer on account of tax, interest, penalty, among others, under the said GVAT Act, does prevail over Section 53 of the IBC. The NCLAT affirmed the order of the NCLT.

Setting aside the NCLAT order, the Apex Court held, “In our considered view, the NCLAT clearly erred in its observation that Section 53 of the IBC over-rides Section 48 of the GVAT Act”.

Recently, the Supreme Court once again upheld the overriding effect of Insolvency and Bankruptcy Code, 2016 (“Code”) in the matter of Sundaresh Bhatt vs. Central Board of Indirect Taxes & Custom[Civil Appeal No. 7667 of 2021] and held that the provisions of the Code will prevail over the provisions of the Customs Act, 1962 (“Customs Act”).

The Liquidator of  ABG Shipyard Ltd. (“Corporate Debtor”), challenged the order of the NCLAT wherein inter alia it was held that the goods lying in the customs bonded warehouses are not the assets of Corporate Debtor as the Corporate Debtor failed to take positive steps to take control of its assets by failing to pay customs duties and for that reason, the Corporate Debtor is deemed to have relinquished its title to its goods by legal implication in terms of the Customs Act. Therefore, a separate proceeding by Customs Authorities of confiscation of goods in the name of the Corporate Debtor undergoing liquidation, was not bad in law.

The question that came for consideration before the Hon’ble Supreme Court was whether the provisions of the Code will prevail over the provisions of the Customs Act and whether the Customs Authority was entitled to confiscate the goods of the Corporate Debtor which is currently undergoing liquidation in terms of the Code?  

The Supreme Court held that goods belonged to the corporate debtor despite the fact that the Custom Duty was not paid and title to the goods did not pass on to the Customs Authority. The Custom Authority therefore could not have confiscated the goods, which were the assets of the Corporate Debtor, for the purposes of recovering customs duties. Further, on the imposition of moratorium, no proceedings could have been initiated/continued by the Customs Authority against the Corporate Debtor. After the initiation of CIRP and consequent imposition of the moratorium, IRP/Resolution Professional/Liquidator takes control of the assets belonging to the corporate debtor and in this case also he had the right to take control over the goods lying in the custom bonded warehouse. Therefore, the Customs Authority was only required to assess the custom duty payable and thereafter could have filed a claim with the Resolution Professional/Liquidator (as the case may be) with respect to outstanding custom duties. The judgment is in line with the very objective of the Code which is essentially to maximize the value of assets of the corporate debtor. The goods lying with the Custom Authorities were part of the transaction the Corporate Debtor entered into consequent to which the goods were received at Customs but could not be procured by Corporate Debtor on account of insolvency.

The Hon’ble National Company Law Tribunal admitted the application of Axis Bank under section 7 of the Insolvency and Bankruptcy Code, 2016 for initiation of Corporate Insolvency Resolution Process (CIRP) of Vidarbha Industries Power Limited, the Appellant who approached the Hon’ble Supreme Court in the matter of Vidarbha Industries Power Limited v. Axis Bank [CIVILAPPEAL NO. 4633 OF 2021] after Hon’ble Appellate Tribunal, NCLAT refused to stay the proceedings initiated by Axis Bank (Respondent).

The Appellant is a Generating Company within the meaning of Section 2(28) of the Electricity Act, 2003.  Under the Act, the business of electricity generating companies is regulated and controlled by the State Electricity Regulatory Commission which determines the tariff chargeable by former. Maharashtra Industrial Development Corporation (MIDC) floated the tender where the Appellant was awarded the contract for implementation of a Group Power Project (GPP). The GPP was later converted into an Independent Power Project (IPP). The Appellant was subsequently permitted to expand the capacity of its power plant by adding a second unit of 300 MW as an IPP. By an order dated 20^th February 2013, the Maharashtra Electricity Regulatory Commission (MERC) approved a Power Procurement Agreement between the Appellant and Reliance Industries Limited (RIL) subject to No Objection Certificate (NOC) of MIDC. MIDC granted its NOC to the Power Project Agreement. On 21^st June 2013, the Cabinet Committee on Economic Affairs (CCEA) amended the New Coal Distribution Policy 2007. Accordingly, Ministry of Coal (MOC) issued an order directing Coal India Limited (CIL) to sign Fuel Supply Agreements (FSA) with Power Projects with an aggregate capacity of 78,000 MW. The Ministry of Power issued a list of Power Projects with an aggregate capacity of 78,000 MW that were eligible to execute FSAs with CIL. The Appellant was not included in the list.

When the MERC granted approval to RIL to procure power from the Appellant’s Unit, a consolidated Power Purchase Agreement was executed between the Appellant and RIL under which the Appellant agreed to supply and RIL agreed to purchase, power generated from both units of the Appellant’s Power Plant. The agreement was duly implemented by the parties. As a matter of routine in January 2016, the Appellant filed an application before the MERC for the purpose of truing up the three year Aggregate Revenue Requirement and for determination of tariff in terms of MERC (Multi Year Tariff) Regulation 2011, in view of, inter alia, the increase in fuel costs, consequential to the rise in the cost of procuring coal for the purpose of running the power plant. The MERC vide its final order disallowing a substantial portion of the actual fuel costs as claimed by the Appellant for the Financial Years 2014-2015 and 2015-2016 and also capped the tariff for the Financial Years 2016-2017 to 2019-2020. The Appellant filed an appeal being before the Appellate Tribunal for Electricity (APTEL). The APTEL allowed the appeal and directed MERC to allow the Appellant the actual cost of coal purchased for Unit-1, capped to the fuel cost for Unit 2 in terms of the FSA that had been executed, till such time as a FSA was executed in respect of Unit 1.

As per the Appellant a sum of Rs.1,730 Crores was due to the Appellant in terms of the said order of APTEL. When the Appellant filed an application before the MERC for implementation of the directions contained in the APTEL order, MERC filed an appeal before the Supreme Court, challenging the order of APTEL. The Appeal has been pending. In view of the pending appeal of MERC in the Apex Court, the Appellant was unable to implement the directions of APTEL. The Appellant was therefore, for the time being, short of funds. According to the Appellant, implementation of the orders of the APTEL would enable the Appellant to clear all its outstanding liabilities.

Based on this ground of not being able to repay the loan on account of the pending appeal before the Supreme Court and the company being solvent otherwise, the Appellant had filed a Miscellaneous Application before the NCLT when Axis Bank filed a section 7 Application. The MA was rejected and so was the appeal before the NCLAT.

The Appellant approached the Supreme Court mainly contesting the impugned order delivered by NCLAT on the ground that Appellant had been unable to realize the sum of Rs.1,730 Crores and pay the dues of the Respondent, only because an appeal filed by MERC was pending in the Supreme Court. Essentially, the argument of Appellant was that it is in the current situation for no fault of its own, but due to the statutory authorities. MERC had prevented the Appellant from availing the benefit of favourable orders passed by APTEL. While interpreting the provisions of IBC, the Counsel of the Appellant further contended that Section 7(5)(a) of the IBC uses the expression ‘may’ instead of ‘shall’ which has been used in section 9 of the IBC. The word ‘may’  enables NCLT to reject an application, even if there is existence of debt, for any reason that the NCLT may deem fit, for meeting the ends of justice and to achieve the overall objective of the IBC i.e. revival of the company and value maximization. Additionally, NCLT has been given inherent power under rule 11 of the NCLT Rules. Therefore, the Adjudicatory Authority has discretion to admit or not admit an application made under section 7 of the IBC. The given interpretation was strenuously opposed by Axis Bank.

After hearing the arguments on both sides, the Supreme Court observed that the Adjudicating Authority in this matter had found Section 7(5) (a) of the IBC to be mandatory. The NCLAT also indicated that no other extraneous matter should come in the way of expeditiously deciding a petition under Section 7 or under Section 9 of the IBC. The Apex Court, in principle, agreed to the findings of the NCLT and NCLAT. The Court went on to add that the viability and overall financial health of the Corporate Debtor, however, are not extraneous matters.

While applying the same to the facts of the case, Court held that an award of the APTEL in its favour, where a sum of Rs.1,730 crores (an amount far exceeding the claim of the Financial Creditor), is realisable by the Corporate Debtor, cannot be completely disregarded. The Court applied the rule of literal interpretation and agreed with the interpretation given by the Counsel for the Appellant that the word “may” in section 7(5)(a) confers discretion to admit or reject the application made by a financial creditor even if the dual conditions of debt and default are fulfilled. The Court in this regard referred to the judgments in Lalita Kumari v. Government of Uttar Pradesh and Ors [(2014) 2 SCC 1], B. Premanand v. Mohan Koikal [(2011) 4 SCC 266 ] and Hiralal Rattanlal v. State of Uttar Pradesh [(1973) 1 SCC 216].

The Court then went on to underline the ‘noticeable differences’ between the procedure under section 7 and section 9 of the IBC. After deliberating on the provisions, the Court observed that “Significantly, Legislature has in its wisdom used the word ‘may’ in Section 7(5)(a) of the IBC in respect of an application for CIRP initiated by a financial creditor against a Corporate Debtor but has used the expression ‘shall’ in the otherwise almost identical provision of Section 9(5) of the IBC relating to the initiation of CIRP by an Operational Creditor” which persuaded the Courts to conclude that Legislature intended Section 9(5)(a) of the IBC to be mandatory and Section 7(5)(a) of the IBC to be discretionary. Therefore, while dealing with an application under section 7 of the IBC, the Adjudicatory Authority may examine the “expedience of initiation of CIRP, taking into account all relevant facts and circumstances, including the overall financial health and viability of the Corporate Debtor.”

While reiterating the difference laid down in Swiss Ribbons case between the financial and operational creditors, the Court observed that the Legislature has consciously differentiated the two. While the credits extended by financial creditors are often long term credits which are secured and on which the operation of the corporate debtor depends, operational debts are usually unsecured, of a shorter duration and of lesser amount. The two cannot be equated. Further the financial strength and nature of business of a financial creditor cannot be compared with that of an Operational Creditor, engaged in supply of goods and services as the “impact of the non-payment of admitted dues could be far more serious on an Operational Creditor than on a financial creditor.” Therefore, a little more flexibility has been conferred to admit the application of the financial creditor. The Court held that “If facts and circumstances so warrant, the Adjudicating Authority can keep the admission in abeyance or even reject the application.” The Court, however, clarified that once the application under section 7 is rejected by the Adjudicatory Authority but its dues continue to remain unpaid, the financial creditor may apply afresh for initiation of CIRP.

The Court while concluding touched upon the difference between a company temporarily defaulting in repayment of its financial debts and a company which has actually become insolvent or bankrupt. It is only in the latter circumstances that the question of time bound initiation and completion of CIRP shall arise. The Court further clarified that the judgment in Swiss Ribbons case was delivered in the context of a challenge to the vires of the IBC. It does not consider the question of whether Section 7(5)(a) of the IBC is mandatory or discretionary and thus shall not be applicable to the issue involved in the case in hand. The Court cautioned that ordinarily the Adjudicatory Authority shall admit the application under section 7 of the IBC where the twin conditions are fulfilled. It is only when there are good reasons not to admit the petition that the NCLT shall exercise its discretion to decide otherwise. The Supreme Court thus gave its judgment setting aside the impugned order and directing the NCLT to reconsider the matter in the light of the prevailing law.

Hindustan Petroleum Corporation Limited (HPCL) filed an application under section 9 of the Insolvency and Bankruptcy Code, 2016 before National Company Law Tribunal (NCLT), Kolkata, for initiation of the Corporate Insolvency Resolution Process (CIRP) against HPCL Biofuels Ltd. (HBL), a wholly owned subsidiary of HPCL. NCLT allowed the application while rejecting the contention raised by HBL that there were pre-existing disputes between the parties in respect of the claim. National Company Law Appellate Tribunal, Principal Bench, New Delhi, on appeal, set aside the order of NCLT which was challenged before the Hon’ble Supreme Court in M/S S.S. Engineers & Ors. v. Hindustan Petroleum Corporation Ltd. [CIVIL APPEAL NO. 4583 OF 2022].

S.S. Engineers & Ors. (the “Appellant”) and HBL entered into a contract agreement pursuant to tenders floated by HBL for enhancing the capacity of the Boiling Houses. Purchase Orders were issued by HBL to the Appellant for the work on a turnkey basis. The Appellant raised invoices in respect of the purchase orders. HBL, through mails, disputed any liability of payment alleging that Appellant had been violating the terms of the purchase order and backing out from its commitments causing huge losses to HBL as it had to procure materials from other vendors. The Appellant allegedly also raised invoices for material that were not supplied and that did not renew its Bank Guarantee and delivered poor quality materials.

While all this was communicated to the Appellant by HBL, the latter issued Form C to the Appellant under Section 8 of the Central Sales Tax Act read with Rules 12(1) of the Central Sales Tax (Registration and Turnover) Rules, 1957. The Appellant issued a Legal Notice for invocation of arbitration, followed by Demand Notice under section 8 of the IBC. HBL disputed the claim. Nonetheless, the Appellant filed an application for initiation of CIRP against HBL. The NCLT was of the opinion that even if all the amount disputed by HBL is taken into consideration, the amount due to the Appellant shall exceed Rs. 1 Lakh (threshold limit under section 4 of IBC at the relevant time). Moreover, since HBL awarded new work orders to the Appellant subsequently, it meant that all the disputes relating to the contract were resolved. Further, NCLT also underlined the fact that HBL had also issued Form C.

The Hon’ble Supreme Court in the first instance clarified that the statutory duty of issuance of C-forms under the Central Sales Tax, do not and cannot constitute acknowledgment of any liability to make payment. While quoting from the judgment in Mobilox Innovations Private Limited v. Kirusa Software Private Limited (2018) 1 SCC 353, the Court reiterated the three questions that need to be examined by the Adjudicating Authority in order to determine an application under section 9 of the IBC – (i) whether there was an operational debt exceeding Rupees 1,00,000/( Rupees One Lac); (ii) whether the evidence furnished with the application showed that debt exceeding Rupees one lac was due and payable and had not till then been paid; and (ii) whether there was existence of any dispute between the parties or the record of pendency of a suit or arbitration proceedings filed before the receipt of demand notice in relation to such dispute. Additionally, the adjudicating authority must follow the mandate of Section 9(5) of the IBC. The adjudicating authority must reject the application under Section 9(5)(2)(d) if notice of dispute has been received by the operational creditor. What Court has to essentially examine is “…whether there is a plausible contention which requires further investigation and that the “dispute” is not a patently feeble legal argument or an assertion of fact unsupported by evidence.” The Tribunal shall not examine the merits of the dispute and determine if defence is likely to succeed. The Court also referred to its judgment in K Kishan vs. Vijay Nirman Co. (P) Ltd. (2018) 17 SCC 662 wherein the Court ruled that the “Code cannot be used in terrorem” to extract moneys. It held that “operational creditors cannot use the Insolvency Code either prematurely or for extraneous considerations or as a substitute for debt enforcement procedures.” Applying the law laid previously by the Apex Court, it was observed that HBL had been disputing the claims of the Appellant which evinces a real dispute in terms of the IBC and thus, there was no reason to interfere with the ruling of the NCLAT.