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Role of NCLT in insolvency proceedings

Table of Contents

The National Company Law Tribunal (NCLT) and the National Company Law Appellate Tribunal (NCLAT) are governed by the Companies Act, 2013, the Insolvency and Bankruptcy Code, 2016, and the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016. Both are pivotal in insolvency resolution and the liquidation process of corporate persons, playing a crucial role of NCLT in insolvency proceedings by adjudicating applications, appointing resolution professionals, and approving resolution plans.

What is the National Company Law Tribunal?

NCLT is quasi-judicial authority incorporated for dealing with corporate disputes that are of civil nature under the Companies Act, such as oppression and mismanagement, and winding up of companies. The National Company Law Tribunal (NCLT) is the Adjudicating Authority in the insolvency process and is the constituted under section 408 of the Companies Act 2013, as defined under  the section 5(1)Insolvency and Bankruptcy Code, 2016 (hereon forward known as the “IBC”). The NCLT is constituted by the Central Government through a notification and comprises the President and  Judicial and Technical members that the Central Government deems necessary.

Jurisdiction of National Company Law Tribunal

Under section 60(1) of IBC, the NCLT has territorial jurisdiction over the place where the registered office of the corporate person is located. An application for voluntary liquidation by the corporate debtor, the NCLT shall pass an order to dissolve the corporate debtor as per section 59(8). As per section 60(4), the NCLT is vested with the powers of the Debt Recovery Tribunal for Part III of the IBC. As per this, the NCLT has the authority to deal with the applications relating to insolvency resolution or bankruptcy of a personal guarantor of a corporate debtor. 

Admission of Insolvency Resolution Application before NCLT  

There are three corporate persons who can initiate the resolution application before the NCLT, the financial creditor, operational creditor, and the corporate debtors themselves through an online portal https://ibbi.gov.in/en/intimation-applications/iaaa. 

1. Financial creditor

Under section 7 of IBC, the financial creditor can file an application for initiation of the corporate insolvency resolution process (CIRP) before the NCLT when a default occurs. This default is about the financial debt owed to the financial creditor who has filed the application, but also the financial creditors of the corporate debtor. The financial creditor must submit the necessary details as per Form 1 of the Insolvency and Bankruptcy (Application Authority) Rules, 2016

List of Documents Required by the Financial Creditor

The documents are required for a financial creditor to file an application with the NCLT is listed under section 7(3) of IBC and the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (hereon forward to the “CIRP Regulations”):

  1. Record of default by corporate debtor recorded with the information utility 
  2. Evidence of default, such as certified copy of entries in the relevant account in the bankers’ book. 
  3. Name of the proposed interim resolution professional
  4. Account statement stating that the financial creditor has made the financial debt payment
  5. Legal notice sent by the financial creditor
  6. Reply, if any received by the financial creditor
  7. Board resolution authorising person who signed the petition
  8. Evidence of payment of Rs 25,000 to the Ministry of Corporate Affairs
  9. Written consent given by the Insolvency Resolution Professional
  10. Application for an interim stay order

2. Operational Creditor

For an insolvency resolution by an operational creditor, under section 8, an operational creditor has to deliver a demand notice of an operational debt  to the corporate debtor. On the expiry of 10 days from the date of delivering the demand notice or a copy of the invoice and the operational creditor has not received the payment or notice of dispute, the operational creditor may file an application for initiation of CIRP before the NCLT under 9 of IBC. 

List of Documents Required by the Operational Creditor

Section 9(3) of the IBC and the CIRP Regulations states the necessary for an operational creditor’s insolvency petition:

  1. Copy of invoice demanding payment or demand notice delivered by the operational creditor to the corporate debtor
  2. Affidavit that no notice given by the corporate debtor relating to a dispute of the unpaid operational debt
  3. Copy of the certificate from the financial institutions maintaining accounts of the operational creditor confirming that there is no payment of an unpaid operational debt
  4. Copy of any record with information utility confirming that there is no payment of an unpaid operational debt by the corporate debtor
  5. Statement of account
  6. Consent of insolvency resolution professional
  7. Copy of Articles of Association and Memorandum of Association
  8. Board resolution authorising person who singed it
  9. Evidence of fee payment of Rs. 25,000 to the Ministry of Corporate Affairs.

3. Corporate Debtors

The corporate can apply for initiating the insolvency process under section 10  of IBC, when the corporate debtor has committed a default, the corporate applicant may file an application. The NCLT may pass an order to  admit or reject the application within 14 days of receiving  the application. 

List of Documents Required by the Corporate Debtor

  1. Information relating to its books of accounts and other documents 
  2. Information relating to the resolution professional (RP) proposed to appointed as the interim resolution professional
  3. The special resolution passed by the shareholders of the corporate debtor or the resolution passed by at least 3/4th of the total number of partners of the corporate debtor approving filing of the application. 

Scrutinisation of Debt by the NCLT

The NCLT shall ascertain the existence of a default from the records of the information utility or on the basis of the evidence submitted by the financial creditor within 14 days of receiving the application of the financial creditor under section 7.  The NCLT before rejecting an application must given a notice to the applicant to rectify the defect in the application within 7 days of the date of receiving the notice from the NCLT.  If the NCLT passes an order to reject the application, whether it be by the financial creditor, operational creditor, or corporate debtor, the CIRP is not initiated, hence there is no moratorium period, no appointment of insolvency professionals, etc. However, the applicant does have an option under section 61 to file for appeal before the National Company Law Appellate Tribunal (NCLAT) within 30 days of the NCLTs order. 

Declaration of Moratorium by NCLT

After admitting the application for initiation of CIRP, the NCLT under section 12(1)(a) of IBC  shall declare a moratorium for the purposes in section 14(1). An order of moratorium shall have effect from the date of the order till the completion of CIRP.

What is the Scope of Moratorium?

The scope of moratorium is given under section 14(1) of IBC and it states that a moratorium order by the NCLT prohibits the following:

  1. Institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgement, decree or order in any court of law, tribunal, arbitration panel or other authority
  2. Transferring, encumbering, alienating or disposing off by the corporate debtor any of its assets or any legal right or beneficial interest 
  3. Any action to foreclose, recover or enforce any security interest created by the corporate debtor in respect of its property including any action under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002
  4. Recovery of any property by an owner or lessor where such property is occupied by or in possession of the corporate debtor. 

Power of the NCLT to Extend the Time Limit

Under section 12(1) of IBC, the CIPR should be completed within 180 days from the date of admitting the application for initiation. The resolution professional (RP), may file an application before the NCLT to extend the time limit of the CIRP, if instructed to do so by a resolution passed by a meeting of the Committee of Creditors (CoC) by a vote of 66%. If the NCT is satisfied that the process cannot be completed within 180 days, they have the power to extend the period for no more than 90 days as stated under section 12(3). This period cannot be granted more than once. It is mandatory that the entire CIRP be completed within 330 days from the insolvency commencement date, which includes the extension period and the time taken for legal proceedings.  

Approval of Resolution Plan by the NCLT

Once the CoC has approved the resolution plan under section 31(1) of IBC, the NCLT must also approve it to decide whether or not the corporate debtor will move forward with the resolution process or liquidation proceedings. As per Regulation 39(4) of the CIRP Regulations, the RP will submi the resolution plan approved by the CoC at least 15 days before the maximum period for completion of CIRP as per section 12 of IBC. The RP will then  send the resolution plan to the NCLT for their approval or rejection.If the NCLT approves the resolution plan,, the RP shall within 15 days from the NCLT order, initiate each claimant, the principle or formulate for the payments of debts under the approved resolution plan.

Power of the NCLT to Initiate Liquidation Process

The NCLT has the power to initiate the liquidation process under section 33of IBC if the NCLT does not receive the resolution plan within the timeline under the IBC, that is, before the expiry of the insolvency resolution process period, or the maximum period of CIRP under section 12, or the period of fast track corporate insolvency resolution process under section 56, or the  NCLT rejected the resolution plan for the non-compliance of the requirements. If the resolution plan has been approved by the NCLT and the corporate debtor has contravened the resolution plan, any person other than the corporate debtor may make an application to the NCLT for liquidation. The NCLT has the power to pass a liquidation order according to this application. 

Dissolution Order of the NCLT

The liquidator will file an application to the NCLT once the assets of the corporate debtor have been liquidated. Referring to  section 54(2) of IBC, the NCLT will dissolve the corporate debtor upon receiving this application and forward a copy of the order within 7 days from the date of the dissolution order to the authority with with the corporate debtor is registered. 

Avoidance of Preferential Transactions

According to section 43(2) of IBC, preferential transactions include:

  1. If there  is a transfer of property or an interest thereof of the corporate debtor for the benefit of a creditor or a surety or a guarantor for or on account of an antecedent financial debt or operational debt or other liabilities owed by the corporate debtor
  2. This transfer has the effect of putting the creditor, surety, guarantor in an beneficial position than it would have been in the event of a distribution of assets being made in accordance with section 33 of IBC. 

Under section 43(1), the RP or the liquidator can apply to the NCLT for the avoidance of preferential transactions. The NCLT may pass order on this application to require any property transferred in connection with the giving of the preference to be vested in the corporate debtor, require any property to be so vested if it represents the application either of the proceeds of sale of property so transferred or of money so transferred, release or discharge any security interest created by the debtor, require any person to pay such sums in respect of benefits received by him from the corporate debtor, such sums to the liquidator or RP directed by the NCLT, direct any guarantor, whose financial debts or operational debts owed to any person were released or discharged (in whole or in part) by the giving of the preference, to be under such new or revived financial debts or operational debts to that person as the NCLT finds it appropriate, providing security or charge on any property for financial debt or operational debt, or direct for providing extent to which any person whose property is vested in the debtor or on whom the financial debt or operational debt are imposed by the order. 

Avoidance of Undervalued Transactions

Undervalued transactions included those transactions not taken during the ordinary course of business, where the corporate debtor make a gift to a person or enters into a transaction which involves a transaction of one or more assets by the debtor for consideration of a value that is significantly less than the value of the consideration provided by the debtor. The NCLT may require an independent expert opinion  to assess evidence relating to the value of the transaction. The NCLT may pass an order regarding undervalued transactions that any person transferred as part of this transactions be vested with the corporate debtor, release or discharge any security interest by the debtor, order than any person who has received benefits from such transaction to be pay in sums to the liquidator or the RP, or order the payment of such consideration for the transaction as determined by the independent expert. The NCLT may pass an order to restore the position before such transactions and reverse its effects or require the Insolvency and Bankruptcy Board of India (IBBI) to initiate disciplinary proceedings on an application by the creditor regarding undervalued transactions under section 47. 

Avoidance of Extortionate Credit Transactions

The liquidator or the RP may file an application for avoidance of extortionate credit transactions under section 50(1) to the NCLT. If the NCLT is satisfied that the terms of a credit transactions required exorbitant payments to be made by the corporate debtor, the NCLT may pass an order stating that:

  1. Restore the position as it existed prior to such transaction
  2. Set aside whole or part of the debt created on account of the extortionate credit transaction
  3. Modify the terms of transactions
  4. Require any person who is/ was a party to the transaction to repay any amount received by such person
  5. Require any security interest that was created as part of such transactions to be relinquished in favour of the liquidator or RP. 

Power in Case of Malicious and Fraudulent Proceedings

Under section 65 of IBC, ‘malicious’ or ‘fraudulent’ proceedings are insolvency process or liquidation proceedings that are initiated fraudulently or with malicious intent for any reason other than for resolution or liquidation. In such a case, the NCLT may impose a penalty of Rs 1 lakh – Rs. 1 crore. If a person initiates voluntary liquidation with intent to defraud, the NCLT may impose a penalty of Rs 1 lakh – Rs. 1 crore. The NCLT may impose a penalty of Rs 1 lakh – Rs. 1 crore if any person initiated the pre-packaged insolvency resolution process fraudulently, with malicious intent or with the intent to defraud any person. 

Power in Case of Fraudulent or Wrongful Trading

Under section 66(1) of IBC, on an application by the RP, the NCLT may make an order than any persons who during the CIRP or liquidation proceedings, found that the corporate debtor business had been carried on with the intent to defraud the corporate debtor. Hence, the NCLT may pass an order that any person who is a party to such business transactions should be liable to make contribution to the assets of the  debtor or pass an order direct that a director or partners of the debtor shall be liable to make contributions to the assets of the corporate debtor as per section 66(2).  

Conclusion

The Adjudicating Authority, or the NCLT, has an important role in preserving the credibility of the Insolvency and Bankruptcy Code, 2016, ensuring that there is strict adherence to the timelines, and balancing the interests of the corporate debtors, its creditors, and other stakeholders. Its role in the insolvency, bankruptcy, or liquidation proceedings is central to the implementation of IBC and resolving the financial distress of the companies as per the Insolvency and Bankruptcy Code, 2016, Companies Act, 2013, and relevant regulations. 

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  1. Classic Transformers Private Limited (Corporate Debtor or CD) was incorporated in 1985. It is classified as Non-Government company and it has its registered office in Ahmedabad. It has one manufacturing unit in Talegaon district in Pune, Maharashtra and a principal office in New Delhi. As per records of MCA, its authorized share capital and paid-up share capital is Rs. 200 lacs. It carries on the business of manufacture of television and radio transmitters and wireless apparatus. The directors of Classic Transformers Private Limited are Mr. Paras Singhania and Mr. Raman Nair.
  2. One of the operational creditors, Best Tradex Private Limited filed an application for initiating corporate insolvency resolution process of Classic Transformers Private Limited for non-payment of its dues to the tune of Rs. 1.30 crores. The Adjudicating Authority, after issuing notice to the CD passes an order of admission on 30th August, 2023. Mr. Rajiv Khosla was appointed as Interim Resolution Professional (IRP)on the same date. In its first meeting held on 10th October, 2023, committee of creditors appointed Ms. Anamika Rajendran as Resolution Professional (RP) in place of Mr. Rajiv Khosla.
  3. IRP had made a public announcement in Form A on 1st September, 2023 in two newspapers (one english language newspaper and one regional language newspaper) in english language circulating at the location of the registered office of the company and in Pune, as the IRP felt that the CD conducts material business operations from Pune also. It was also published on the website of CD and website designated by IBBI. The last date for submission was stated as 13th September, 2023. Mr. Rajiv Khosla incurred Rs. 80,000/- as cost of publishing. The committee of creditors ratified the expense on publication to the tune of Rs. 50,000/- in its first meeting. IRP has filed application (IA 510 of 2023) against CoC and Best Tradex Pvt Ltd. for payment of remaining publication expenses.
  4. The following claims were received and admitted by Mr. Rajiv Khosla, IRP and later on by Ms. Anamika Rajendran, RP :

S. No.

Name

Amount

Status

Date of

Admission/Rejection

1.

Janta Bank

3.60 crores

Financial Creditor

20.9.2023

2.

Parivaar Bank

3.00 crores

Financial Creditor

20.9.2023

3.

Rashi Singhania(wife of Paras

Singhania)

50 Lakhs

Financial Creditor

20.9.2023

4.

Best Tradex

1.60 crores

Operational Creditor

20.9.2023

5.

Electrolux

Supplies Inc

45 lacs

 

 

Rejected as filed late

18.12.2023

6.

70 workmen

1.60 crores

Operational creditors

20.9.2023

7.

15 Employees

1.50 crores

Operational creditors

20.9.2023

8.

GST dues

70 lacs

Operational creditors

20.9.2023

9.

Income Tax dues

30 lacs

Operational creditors

20.9.2023

10.

Provident Fund Dues

20 lacs

Operational creditors

20.9.2023

11.

Revive Finance(filed on 4th

September, 2023)

1.50 crores

Financial Creditor

10.12.2023

12.

Raman Nair (Loan to company

without interest)

1 crore

Financial Creditor

20.9.2023

13.

Electricity dues

25 lacs

Operational Creditor

20.9.2023

14.

Big Lease -Landlord forarrears of Rent onlease of Principal

Office

10 lacs

Financial Creditor

20.9.2023
  1. The break-up of claims admitted till date is as under :

Financial Creditors         – Rs. 9.70 crores

Operational Creditors – Rs. 6.15 crores

 Total                               Rs. 15.85 crores

  1. The committee of creditors was constituted by IRP as follows:
  2. Janta Bank
  3. Parivaar Bank
  4. Revive Finance
  5. Big Lease
  6. According to IRP, though Raman Nair is a financial creditor but being a suspended director, he is not part of committee of creditors. IRP had written to all operational creditors to select one of their representatives to participate in the meeting of committee of creditors but despite sending 3 emails, the operational creditors collectively have not named a single representative. 
  7. IRP and RP invited suspended directors Paras Singhania and Raman Nair to attend meeting of committee of creditors by sending them notices of all committee of creditors meetings. Three meetings of committee of creditors were held until 12th December, 2023.
  8. One of the operational creditors Electrolux Supplies Inc based in New Delhi files its claim on 15th December, 2023 with the RP for Rs. 45 lacs. After receiving the claim RP writes e-mail to Electrolux Supplies Inc. that its claim cannot be considered as it has been filed after the time limit mentioned in the Code read with CIRP Regulations though the books of account also show that Rs. 45 lacs is due to Electrolux Supplies Inc. Based on legal advice, Electrolux Supplies Inc files an application (IA 810 of 2023)  under section 60(5) before Adjudicating Authority against rejection of the claim on the ground that the delay occurred on the following grounds: 
  9. Electrolux Supplies Inc was not aware of the initiation of CIRP against the CD as it is based in Gurugram (adjacent to New Delhi) and the public announcement was not made in newspapers circulating in New Delhi. 
  10. RP should have admitted the claim of Electrolux Supplies Inc on the basis of books of account and it was not necessary for Electrolux Supplies Inc. to file its claim.
  11. Best Tradex has also filed an application (IA 633 of 2023) before Adjudicating Authority that they have not been included in committee of creditors in terms of section 21 and 24 of the Code. RP’s stand is that since individually the operational creditor’s claim is not more than 10% of the total dues, IRP or RP was under no obligation to send notice of committee of creditors meeting to operational creditors. Best Tradex, while reiterating that since total claims of OC’s is more than 10%, being a largest OC, it is entitled to participate in committee of creditors.
  12. Revive Finance, whose claim was admitted after more than 3 months of its filing, moved an application (IA 754 of 2023) to the Adjudicating Authority stating that the  decisions taken in all three meetings of committee of creditors held before they were included in committee of creditors as invalid. In these 3 meetings, they claimed, crucial decisions were taken relating to appointment of RP, ratification of expenses, appointment of valuers, approval of fees of RP and other crucial decisions relating to running of CD as a going concern. Thy also claimed that unnecessary queries were raised by IRP/RP to delay the admission of claim. On behalf of RP, it was stated that 3 emails were sent as documents filed by them are deficient, they did not submit loan agreement despite repeated emails.
  13. On 1st January, 2024, the promoters of Classic Transformers Private Limited entered  into a settlement with the Applicant Best Tradex and agreed to pay all their dues in exchange of Best Tradex filing an application for withdrawal of corporate insolvency resolution process. The promoters of the CD have filed an application (IA No. 17 of 2024) to Adjudicating Authority for withdrawal on 15th January, 2024 on the basis that their claims have been paid by the promoters in full and final.
  14. The books of account of the CD shows that loan of Rs. 1 crore was taken from Raman Nair in 2018 and is still outstanding. Another account “Advance to Raman Nair” appeared in the books of account and the last 2 financial years, 2021-22 and 2022-23 showed the following transactions:

Date

Particulars

Debit

Credit

Balance

1.4.2021

Opening Balance (Payable by Raman Nair)

 

 

20,00,000

15.5.2021

Expense Adjustment/Received by CD

 

5,00,000

15,00,000

17.8.2021

Paid by CD

7,00,000

 

22,00,000

20.12.2021

Paid by CD

2,00,000

 

24,00,000

12.4.2022

Expense Adjustment/Received by CD

 

3,00,000

21,00,000

18.9.2022

Paid by CD

1,00,000

 

22,00,000

2.1.2023

Expense Adjustment/Received by CD

 

5,00,000

17,00,000

28.8.2023

Paid by CD

6,00,000

 

23,00,000

RP has filed an application with the Adjudicating Authority (IA 25 of 2024) on 20th January 2024 claiming Rs 31 lacs (amount outstanding as on 30.8.2021 plus amounts paid by CD to Raman Nair on 20.12.2021, 18.9.2022 and 2.1.2023) as preferential transactions u/s 43 of the Code and prayed for recovery of these amounts. Raman Nair has filed a reply stating that these transactions are not preferential on the following grounds:

  1. Advance account was a running account for the expenses to be incurred on behalf of the CD and he has in his possession bills not accounted for in the books of account.
  2. RP has aggregated the amounts paid by CD and does not take into account the expense adjustment done or amounts received back by CD.
  3. He has given an interest free loan and his claim has been admitted to that extent. Assuming but not admitting that RP is correct, Raman Nair is entitled for set off.
  4. RP has filed the application beyond the stipulated period as provided in Regulations and hence the application is time barred.
  5. Draft of Forensic Audit report was not shared with the suspended directors and hence there is violation of principles of natural justice.
  6. Even otherwise the transactions were in the ordinary course of business.

RP, in rejoinder, claims that payment transaction is not to be mixed with expense adjustment or amount received from Raman Nair. For amounts paid by Raman Nair, he should file a claim and there is no provision of set off in CIRP. The application in filing preferential transaction application was delayed due to non-cooperation of suspended directors in providing information to forensic auditor who had sent 2 emails to them. The final report was placed before committee of creditors who had directed RP to file application.

  1. RP, based on forensic audit, in the same IA 25 of 2024, also alleged that substantial amounts to the tune of Rs. 1.50 crores, shown as investments, were written off on 31.3.2023 by the suspended directors as reflected in books of account. The amount was paid to 2 related parties, namely, Hi-life Technologies Pvt Ltd (Rs. 70 lacs) and Super Motors Private Limited (Rs. 80 lacs). These amounts were paid as investment in 2016 and 2017. RP has treated them as fraudulent transactions and has prayed for recovery of the amounts from suspended transactions as fraudulent and wrongful trading under section 66 of the Insolvency and Bankruptcy Code, 2016 (31 of 2016).  

Suspended directors have filed a common reply stating that by no stretch of imaginations, write offs can be treated as fraudulent transaction as there is no outflow. RP has the freedom to revise the accounts and reverse the transactions in books. The amounts relate to 2016 and 2017 and is beyond the purview of scope of RP. Further, the investments were made in good faith to expand the business of CD but could not fructify. Moreover, RP has filed a single IA u/s 43 and 66, which is not permitted.

RP, argues that suspended directors had the knowledge of the fact that CD is going under insolvency and they should have taken steps to recover the amounts. The amounts written off in the books of CD are still being shown in the books of account of Hi-life Technologies Pvt Ltd and Super Motors Private Limited and produced financial statement of both the companies filed with Registrar of companies for FY 2022-23. 

  1. The plant and machinery of CD is charged to Janta Bank and is worth 8 crores @ 18% p.a. interest. IRP  was in need of funds to run the CD as a going concern and hence obtained interim  finance of Rs 1 crore by charging plant and machinery to Perfect Finance. Janta Bank has now objected to this action by IRP by stating that neither its consent nor CoC’s consent was obtained. Janta Bank has filed the application (IA 603 of 2023) before the adjudicating authority praying that the amount received from Perfect Finance should not be classified as Interim Finance and the mortgage created on Plant and Machinery should be set aside.
  2. RP has taken up the issue of completion of audit but the statutory auditor, RAK Associates is not cooperating. RP has filed an application for non-cooperation against the statutory auditor u/s 19(2) of the Insolvency and Bankruptcy Code, 2016 (IA 540 of 2023).  Statutory auditor contends that he is not covered u/s 19 of the Insolvency and Bankruptcy Code, 2016 (31 of 2016) and hence the application should be dismissed in limine. Secondly, he has provided all documents to the RP whatever was in his possession. RP states that the statutory auditor has not supplied working papers containing details of debtors of CD. 
  3. RP has also issued a letter terminating the appointment of statutory auditor and appointing a new one. Having done that, he places this fact before the committee of creditors in their meeting, who ratify his action unanimously. Previous statutory auditor is aggrieved and he files an application  (IA 56 of 2024) challenging the decision of RP and its ratification by committee of creditors to replace him.
  4. Janta Bank has filed an IA 602 of 2023 objecting the inclusion of Big Lease as financial creditor in the committee of creditors. As per them, Big Lease is an operational creditor and not financial creditor.

CSM 2 Case Study on PPIRP

ABC Ltd., a medium-sized manufacturing company based in India, has been struggling with financial difficulties exacerbated by the economic downturn caused by the COVID-19 pandemic. With mounting debt and dwindling revenues, ABC Ltd. finds itself in a situation where it needs to explore insolvency resolution options to salvage its operations and protect the interests of its stakeholders.

ABC Ltd. is classified as a medium enterprise under the Micro, Small and Medium Enterprises Development Act, 2006 though registration is pending. ABC Ltd. has committed a default of Rs 54 lacs to My Bank. The company has not undergone any insolvency resolution process in the past three years. Financial creditors representing at least 66% of the financial debt due to them have proposed the appointment of an insolvency professional for conducting the PPIRP.

A majority of the directors of ABC Ltd. have made a declaration stating the intent to initiate the PPIRP and affirming that it is not for fraudulent purposes. A special resolution has been passed by the members of ABC Ltd. approving the initiation of the PPIRP. There is an application under section 43 against one of the directors of ABC Limited for his involvement in Bright Star Limited, a company under CIRP. ABC Limited has prepared a draft Base Resolution Plan. ABC Limited files an application to the Adjudicating Authority for initiating pre-packaged insolvency resolution process. Base Resolution Plan prepared by ABC Ltd contains lower payment to financial creditors with a proposal to pay in full to the operational creditors.

CSM 3- Case Study on Voluntary Liquidation

 

Sunmark Enterprises Limited, a medium-sized manufacturing company, has been experiencing financial difficulties for the past several years due to a decrease in demand for its products and heightened competition in the market. Following a comprehensive evaluation of its financial standing and future outlook, the Board of Directors opts to commence voluntary liquidation pursuant to Section 59 of the Insolvency and Bankruptcy Code (IBC) to ensure a systematic conclusion of the company’s operations.

  1. Appointment of Liquidator:
    • On 20th December 2023, the Board of Directors convenes a meeting and passes a resolution proposing voluntary liquidation.
    • Mr. John, a registered insolvency professional, is appointed as the liquidator to oversee the liquidation process on 10th February 2024.
  2. Declaration of Solvency:
    • A board meeting is held, during which a declaration of solvency is made, affirming that Sunmark Enterprises Ltd. is solvent and capable of settling its debts within a specified period not exceeding one year from the onset of liquidation.
  3. Approval of Shareholders:
    • On 10th January 2024, shareholders of Sunmark Enterprises Ltd. pass a special resolution, endorsing the decision to commence voluntary liquidation.
    • The resolution garners approval by a majority vote representing at least 75% of the shareholders’ voting power.

Following the shareholders’ approval by a special resolution, creditors of the company also consent to the voluntary liquidation with a two-thirds majority on 1st February 2024. Despite incurring losses in the previous year and anticipating further losses, the liquidator expresses intent to continue business operations during the liquidation period. Seeking professional guidance, the liquidator faces several challenges and scenarios:

  1. Preparation of Preliminary Report:
    • The liquidator drafts a Preliminary Report, estimating the assets and liabilities as of the liquidation commencement date. However, doubts arise regarding the reliability of the company’s financial records.
  2. Unfiled Claims and Foreign Creditor:
    • Despite issuing announcements inviting claims, three employees fail to file their claims. Additionally, a foreign creditor submits a claim of $2000, prompting uncertainty regarding the applicable foreign exchange rate for claim admission.
  3. Rejected Claim and Lack of Reasons:
    • One creditor disputes the rejection of their claim by the liquidator, citing a lack of justification for the decision.
  4. Bank Account Establishment:
    • The liquidator establishes a separate bank account in the name of the corporate entity for liquidation purposes.
  5. Salary Payment and Unsold Machinery:
    • An employee urgently requests a cash payment of their salary amounting to Rs. 20,000.
    • Despite extensive efforts, the liquidator struggles to sell an old machinery valued at Rs. 50,000, with consultants and brokers indicating its low marketability. However, a creditor expresses willingness to accept the machinery as part of their claim settlement.

In navigating these complexities, the liquidator must adhere to legal requirements and seek appropriate guidance to ensure fair and efficient resolution throughout the voluntary liquidation process. He seeks your answwer to following questions: –

CSM 4 – Part III Case Study

Raj Shekhar’s bankruptcy process commenced on 1st April 2024 after the unsuccessful resolution of his insolvency proceedings initiated on 1st August 2023. The Bankruptcy Trustee issued a public notice on 4th April 2024, with the deadline for claim filing set for 25th April 2024.

He possesses the following assets under his and his family’s ownership:

  •   A 2 BHK property in NOIDA acquired in 2001 for Rs. 11 lakhs.
  • A 3BHK residence in Mumbai purchased in 2015 for Rs. 50 lakhs.
  • A 2 BHK dwelling in Gurgaon under his wife Alka’s name, assessed at Rs. 66 lakhs.
  • A jointly-owned flat in Indore with his wife, booked for Rs. 27 lakhs.
  • A laptop valued at Rs. 52,000.
  • A Honda City utilized for office purposes, valued at Rs. 8.50 lakhs.
  • A Wagon R utilized for personal use, valued at Rs. 4 lakhs.
  • An Enfield Motorcycle used for leisure activities, valued at Rs. 2.50 lakhs.
  • Leased office space in Munirka with a monthly rent of Rs. 25,000.
  • A diamond ring procured for Rs. 1.50 lakhs.
  • Gold jewelry valued at Rs. 15 lakhs.
  • Gold jewelry under his wife’s name, including a Mangal sutra, valued at Rs. 22 lakhs.
  • Ornaments for his home temple amounting to Rs. 3 lakhs.
  • An iPad worth Rs. 45,000.
  • Watches valued at Rs. 1.50 lakhs.
  • Office books valued at Rs. 1.20 lakhs.
  • Home furniture worth Rs. 2.50 lakhs and office furniture worth Rs. 1 lakh.
  • Life insurance policies in various names totaling Rs. 225 lakhs.
  • Children’s bicycle valued at Rs. 5000.
  • Shares in companies worth Rs. 3.5 lakhs.
  • Mutual fund investments worth Rs. 2 lakhs.
  • Public Provident Fund (PPF) investments totaling Rs. 3 lakhs.
  • Assets belonging to his second sister residing abroad, valued at Rs. 5 lakhs.

His liabilities include:

  • Business sundry liabilities amounting to Rs. 15 lakhs.
  • GST liability totaling Rs. 2 lakhs.
  • Unpaid electricity bills of Rs. 50,000.
  • Outstanding traffic challan of Rs. 3,000.
  • Maintenance payment to his ex-wife at Rs. 50,000 per month, pending for the last six months.
  • Personal loans from friends totaling Rs. 45 lakhs.
  • Loan from his brother-in-law amounting to Rs. 3 lakhs.
  • Loan against Honda City from a bank worth Rs. 5 lakhs.
  • Student loan taken for his sister’s son, amounting to Rs. 10 lakhs.
  • Damages of Rs. 55,000 awarded by the court due to water leakage from his Mumbai flat.
  • Business loan of Rs. 75 lakhs.
  • Outstanding credit card dues of Rs. 1.60 lakhs.
  • Income tax liability of Rs. 10 lakhs.
  • School fees for his two children, unpaid for three months, at Rs. 20,000 per month each.
  • Outstanding dues at a local grocery store totaling Rs. 32,000.

 

Case Study on Business and General Laws

Avanti Roadways Pvt. Ltd., incorporated under the Companies Act, 2013, operates from its registered office situated at Plot No.1, First Floor, East Chamber, Gwalior, Madhya Pradesh. The company is structured with an authorized capital of INR 5,00,000, which is fully issued, subscribed, and paid-up. The core activities of the company are focused on constructing residential and commercial buildings and educational institutions.

The Registrar of Companies in Gwalior, citing non-compliance with the statutory requirement to file Annual Returns and Financial Statements for the fiscal years 2014-15 through 2017-18, initiated proceedings under Section 248(1) of the Companies Act, 2013, read with Rule 7 and Rule 9 of the Companies (Removal of Names of Companies from the Register of Companies) Rules, 2016. Consequently, a notice of intent to remove the company’s name from the register was issued. In response to this notification, the company filed an appeal with the National Company Law Tribunal (NCLT) in Gwalior under Section 252 of the Companies Act, 2013, asserting that it continued to engage actively in business operations throughout the period in question. The company admitted oversight in the non-filing of the required documents, attributing it to lapses by the management.

During the period under review, the company was involved in several significant projects, including constructing a multi-functional educational complex under a government contract, which involved intricate compliance with environmental regulations and state educational mandates. This project, along with other private commercial ventures, significantly contributed to its revenue streams, though it complicated the operational and regulatory reporting requirements.

As part of its defense, Avanti Roadways Pvt. Ltd. demonstrated through detailed documentation—including contracts, invoices, and bank statements—that it was operational and financially active during the years for which filings were not completed. Following the notice from the Registrar, the company undertook substantial revisions to its management structures, enhancing its regulatory compliance processes to include automated systems for tracking and reporting essential corporate activities and statutory filings.

The appeal by Avanti Roadways Pvt. Ltd. is pending before the NCLT, where the company seeks not only to contest the Registrar’s decision but also to establish a precedent for considering operational continuity and factual business engagement in decisions related to statutory compliance enforcement.

Case Study: The Case of Rajesh Kumar and the Corporate Insolvency Resolution Process

Background: Rajesh Kumar, an Insolvency Professional (IP) registered with the Insolvency and Bankruptcy Board of India (IBBI), faced disciplinary action following a Show Cause Notice (SCN) by the IBBI. This action originated from procedural issues during the Corporate Insolvency Resolution Process (CIRP) of M/s Indore Developers Private Limited, where he was appointed as the Resolution Professional (RP).

Legal Framework: This case is governed by the Insolvency and Bankruptcy Code, 2016 (IBC), specifically focusing on the duties and responsibilities of an insolvency professional overseeing the CIRP. Kumar was accused of providing unequal treatment to certain decree-holding homebuyers in the resolution plan, potentially breaching several sections of the IBC and related regulations.

Investigation and Proceedings: Following a complaint from a homebuyer, the IBBI launched an investigation into Kumar’s conduct during the CIRP. After receiving the investigation report, the IBBI issued a SCN, which was later handled by its Disciplinary Committee (DC) for resolution. Kumar defended his conduct through various submissions and a personal hearing, arguing that his decisions were aligned with legal precedents and the decisions of the Committee of Creditors (CoC).

Findings and Contraventions: The DC identified discrepancies in Kumar’s management of the claims of decree-holding homebuyers. Despite legal opinions indicating that these claims should be treated as those of financial creditors, they were categorized differently in the resolution plan submitted to the CoC. This action raised concerns about Kumar’s adherence to the statutory requirements and the broader principles of fairness and transparency in the CIRP. Kumar also admitted the claim of the aforesaid decree holders as “Creditors in class” based on the said legal opinions. However, it is observed that despite having admitted the claims of these decree holders as “Creditors in class”, he has treated the claim of the said decree holders as “Other Creditors” in the resolution plan placed before the CoC, instead of “Creditors in Class”.

Legal Issues and Analysis: The main legal issue involved the interpretation and application of sections 30(2)(e) and (f) of the IBC concerning the treatment of creditors in a resolution plan. Kumar’s handling of these claims brought up questions regarding the compliance with these statutory provisions and the fundamental principles of equitable treatment of creditors.

Arguments by Kumar: Kumar submitted that he had admitted the claim of the decree holders under the category of creditors in a class based on the legal opinion. However, the resolution applicant has provided a specific treatment to all such creditors which was then approved by the CoC and the AA. As elaborated above, (a) this was in line with the applicable law at the relevant time; (b) the resolution applicant has the discretion to provide the treatment for the stakeholders including the decree holders; (c} the resolution plan has been approved by the committee of creditors in its commercial wisdom which is paramount; (d) the resolution plan has been approved by the AA. He submitted that he has not ‘deprived the decree holders from their legal rights and claims as homebuyers’, he has conducted the CIRP in terms of the Code and the treatment to be provided to the stakeholders is beyond his ambit. 

 

The DC upholds his contravention of section 30(2)(e), 30(2)(f), 208(2) (a) & (e) of the Code, regulation 39(2) of the CIRP Regulations, regulations 7(2) (a) & (h) of the IP Regulations read with clauses 1, 3 and 14 of the Code of Conduct.
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