Indian Insolvency Quarterly Overview – April to June 2022 – Insolvency/Bankruptcy

In recent times, several remarkable judgments have been rendered by Indian courts in cases relating to insolvency law in India. Certain decisions rendered during the second quarter of 2022 which address the legal situation regarding the interpretation and applicability of the provisions of the Insolvency and Bankruptcy Code 2016 have been summarized below:

1. Indian Overseas Bank v RCM Infrastructure Ltd.

Quote: Civil Appeal No. 4750 OF 2021

Date of decision: May 18, 2022

The SARFAESI procedure cannot continue against the debtor company once the CIRP begins and the moratorium is announced

Quick facts: The appellant Indian Overseas Bank had extended certain credit facilities to the debtor company. However, the debtor company did not repay the assessment and the debtor company’s loan account became irregular. Subsequently, on June 13, 2016, the debtor company’s loan account was classified as a “Non-performing asset” (postal code). The appellant bank then issued a formal notice under section 13(2) of the Securitization and Reconstitution of Financial Assets and Enforcement of Security Act 2002 (SARFAESI Law), inviting the debtor company and its guarantors to repay the outstanding amount due to the appellant bank. The debtor company having failed to comply with the formal notice and to repay the arrears, the appellant bank symbolically took possession of two secured assets mortgaged exclusively with it. The appellant bank did the same in the exercise of the powers conferred upon it under section 13(4) of the SARFAESI Act read together with Rule 8 of the Security (Enforcement) Rules 2002 (Rules). One of the said buildings was in the name of the debtor legal person and the other in the name of the guarantor legal person. An electronic auction notice was issued by the appellant bank to recover the public money available to the debtor company.

In the meantime, the debtor company has filed an application under Section 10 of the Insolvency and Bankruptcy Code 2016 (IBC) before the National Court of Company Law (NCLT). At the first auction held on 06.11.2018, no bids were received. In the second online auction scheduled for 12.12.2018, three people became successful bidders by jointly bidding a price of INR 32.92 crore for the two secured assets. On 13.12.2018, the sale was confirmed in favor of the bidders/winners of the public auction. In accordance with this, the winning bidders deposited 25% of the bid amount, i.e. INR 8.23 ​​crore, inclusive of deposit of deposit of said amount and the calling bank issued them with a certificate of sale. Auction buyers were asked to pay the balance of 75% of the bid amount within 15 days, i.e. before 28.12.2018. However, on 28.12.2018, the buyers of the auction sent a letter to the appellant bank requesting the release of peaceful and vacant possession of the secured assets and also requested an extension of time to pay the balance of 75% of the amount. of the offer until 08.03. 2019. Nevertheless, the request made by the acquirers was accepted by the calling bank on 29.12.2018. In exercise of its powers under Rule 9(4)(a) of the Regulations, the appellant bank extended the deadline to 08.03.2019 for payment of the balance of 75% of the offer amount.

The NCLT has granted the motion filed by the ex-promoter of the debtor company. As a result of said IBC Section 10 order, the corporate insolvency resolution process (CIRP) of the debtor company began. A moratorium as provided for in article 14 of the IBC has been notified and an interim resolution professional (IRP) was also named.

Having learned of the admission of the insolvency petition filed by the debtor company, the appellant bank, on 21.01.2019, filed its claim with the IRP. According to the appellant bank, since the balance of 75% of the amount of the offer had not yet been received by the said date, it was not excluded from the claim filed with the IRP. While waiting for the CIRP, the calling bank accepted the balance of 75% of the bid amount, i.e. INR 24.69 crore. Upon receipt of payment, the appellant bank submitted its revised claim to the IRP, and it also informed the IRP of the successful sale of said secured assets. Subsequently, the promoter of the debtor company filed a petition with the NCLT to cancel the enforcement of the security during the CIRP period effected by the appellant bank or, in the alternative, to cancel the disputed transaction. Following this, the NCLT issued an order reversing the sale of the building owned by the debtor company. The appellant bank appealed to the NCLAT, but the appeal was dismissed. Injured by the same, the appellant appealed to the Supreme Court in this case.

Problems: Could the bank continue the SARFAESI auction process once the CIRP had been launched and a moratorium had been notified?

Decision: The Supreme Court observed that after the initiation of the CIRP, there is a moratorium on any action to seize, recover or enforce any security created by the debtor company in respect of its assets, including any action under of the SARFAESI law. The words “including any action under the SARFAESI Act” are important to clarify the legislative intent that, after the initiation of the CIRP, all actions, including any action under the SARFAESI Act to seize, recover or asserting security, are prohibited. The Supreme Court further noted that Section 14(1)(c) of the IBC has overriding effect over any other law. Finally, while dismissing the appeal, the Supreme Court held that the appellant bank could not have pursued the procedure under the SARFAESI law once the CIRP had been initiated and the moratorium ordered.

2. Sunil Kumar Jain and others v. Sundaresh Bhatt and others.

Quote: Civil Appeal No. 5910 of 2019

Date of decision: April 19, 2022

Claims for payment of wages/salaries of only workers/employees who actually worked during the CIRP should be included in the CIRP costs

Quick facts: M/s ABG Shipyard Limited, the corporate debtor (CD), is a private sector shipyard with its manufacturing operations in Dahej Yard and Surat Yard in Gujarat and having its head office in Mumbai. Prior to the initiation of the corporate insolvency resolution process (CIRP), the CD had more than 1000 laborers and employees, whose appellants in this case are the 272 employees and laborers employed at the Mumbai head office and at the Dahej yard of the CD. By order of 25.04.2018, the Judging Authority (hereinafter defined) ordered the Resolution Professional (PR) to deposit INR 2,75,00,000 in the contracting authority’s register to settle unpaid wages/salaries for the period preceding the CIRP. However, the order was subject to the result of IA No. 348/2017, which was filed by the appellant begging to order the PR to use the amount of INR 9,75,33,236 to be received from the Guard Indian coastal only for employees. /workers.

In 2019, as no agreed resolution plan could be adopted from the CD, the RP filed for liquidation, which was admitted by the National Company Law Tribunal, Ahmedabad Bench, Ahmedabad (Contracting authority), which then issued an order for the winding up of the CD and named the respondent hereto as liquidator. At the time of the liquidation order, IA No. 348/2017 was also eliminated and therefore the earlier relief of INR 2,75,000,000 was also not available to the appellants in the case. This order by the jurisdictional authority not to grant relief in respect of certain wage claims was appealed to the Appeals Tribunal of the National Company Law Appeals Tribunal, New Delhi (NCLAT), where this too was rejected. Finally, this appeal was brought by the workers/employees of CD, after they were unhappy with the NCLAT order.

The workers/employees argued that wages/salaries and contributions due to them during the CIRP period will qualify as CIRP costs under section 5(13) of the Insolvency and Bankruptcy Code, 2016 (IBC) and are likely to be disbursed even before the amount distributed under IBC Section 53. It was further argued that the amounts of the provident fund, gratuities and the pension fund remain outside liquidation under section 36(4) of the IBC. On the other hand, the Respondent argued that the wages and salaries claimed by the Appellants who did no work during the CIRP period and did not assist the PR/Liquidator during the CIRP, would not fall within the parameters CIRP costs as defined in Article 5(13)(c) of the IPC.

Problems: Are the wages/salaries of workers/employees during the period of the CIRP and the amount due and payable to the respective workers/employees towards the pension fund, gratuity fund and provident fund have priority in the event of liquidation of the company? debtor ?

Decision: After reviewing the relevant provisions and legislative history regarding worker/employee contributions to wages/salaries, including the amount due and payable to the provident fund, gratuities and pension fund, the Supreme Court held that even if the RP is under obligation to keep the debtor company in operation, there is a serious dispute as to whether the CD was operational during the CIRP or not and whether the workers/employees concerned actually worked during the CIRP or not . Consequently, the Appellant’s allegation that the CD is a going concern cannot be accepted without actually inquiring about the facts and the status of the CD. Accordingly, the appellants were asked to submit their claims before the liquidator and to prove that during the CIRP, IRP/RP managed the operations of the CD as a going concern and that they indeed worked during the CIRP, and for the liquidator to then rule on these claims. in accordance with the law and on its own merits. The Supreme Court has ruled that workers’/employees’ claims can only be included in CIRP costs if it can be verified that the debtor company was indeed operating as a going concern and that the workers/employees actually worked during CIRP.

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