Insolvency Law – Multidisciplinary Case Studies Important Questions
Question 1.
The official Liquidator of Vasudha LTD. receives a notice for a trade creditor of the Company that the Tribunal has passed a decree in its favour, relating to the dues for services rendered to Vasudha LTD. and that the amount specified in the Tribunal decree should be paid first, prior to the clearing of dues of workmen. The same is opposed by the workmen. Advise the official Liquidator suitably; with reference to provisions of the Companies Act, 2013.
Answer:
According to Section 326 (Overriding preferential payments) of the Companies Act 2013, the dues of the workmen and the dues of the secured creditors are to be treated at same footing. Both these dues are to be discharged on priority over all other dues of the company.
Section 326 is overriding (means above) all other provisions and states clearly that workmen’s dues and debts due to secured creditors shall be paid in priority to all other debts. Hon’ble Supreme Court has also confirmed this in UCO Bank 1994 that provisions of Section 326 of the Companies Act, 2013 will override all other claims of the creditors.
Question 2.
Instable Fertilizers LTD. has been continuously incurring losses the company mortgaged its machinery to MR. BULLY one of its creditors on 1st September, 2009 relating to outstanding of ₹ 15 lakhs due to him. The other creditors of the company filed a petition for winding up the Company on 19th December, 2009. The company was ordered to be wound up on 30th April, 2010. Discuss whether the Official Liquidator can declare the transaction of mortgage with Mr. Bully as invalid.
Answer:
This relates to Section 328 of the Companies Act, 2013 (Fraudulent ) preference) of the Companies 2013. According to Section 531, a transaction will be treated as invalid if all the following conditions are satisfied:
- Transaction relates the property of the company.
- It occurred within 6 months before the start of winding-up of company.
- There was no pressure relating to transaction.
- The main motive was to give preference to one creditor over other, creditors.
When the Tribunal orders winding-up of company, the effective date of commencement of winding up is not the date of order of the Tribunal but the , date when the petition for winding up was presented to the Tribunal. Thus in the current case, the winding up will be deemed to have commenced on 19th December, 2009 on which other creditors filed the petition.
Let us examine the above conditions in the current case:
- Transaction relates the property of the company. This is true as machinery was mortgaged which is property of the company.
- It occurred within 6 months before the start of winding up of company. This is true because the date of transaction is 1st September, 2009 which is within 6 months from the date of winding up of company i.e. 19th December, 2009.
- There was no pressure relating to transaction. This is true as the 1 transaction was a voluntary act of the company and there was no pressure on the company.
- The main motive was to give preference to one creditor over other creditors. This is true as the company gave preference to Mr. Bully over other creditors.
Conclusion: The official liquidator can declare the mortgage of machinery to Mr. Bully as invalid and void.
Question 3.
At the time of winding up of SIMON HOTEL LTD. (SHL),a supplier of .company named MKG LTD., presents to the official liquidator, a Tribunal decree in their favour ordering payment of certain sum. The claim of MKG LTD. is that they should be paid in preference over the claims of the workmen for their dues. The same is not accepted by the workmen. Examine the validity of the rival claims in the light of the provisions of the Companies Act, 2013.
Answer:
Preferential dues during winding up proceedings:
The situation given in the question is covered by the provisions of Section 326 (Overriding Preferential Payments) of Companies Act, 2013. The ‘effect of combined reading of these sections is that the workmen of the company become secured creditors by operation of law to the extent of the workmen’s dues and are entitled to proportional payment along with other, secured creditors.
If there is no secured creditor, in such an event, to the extent of workmen’s dues, the workmen of the company become unsecured preferential creditors under Section 326 the object of Section 326 is to ensure that the:
- Workmen should not be deprived of their legitimate claims in the event of the liquidation of the company.
- The assets of the company would remain charged for the payment of workmen’s dues, and
- Such charge will be pari passu (means in proportion, proportionally) with the charge of other secured creditors.
There is no other statutory provision overriding the claim of the secured creditors except the said Section 326. Thus, the law is very much clear in this respect and the Honble Supreme Court of India held in the case of UCO Bank [(1994) 81 Comp. Case 780] that the provisions of Section 326 of the Companies Act, 2013 will override all other claims of the creditors even where a decree has been passed by a Tribunal.
In view of the above stated legal position, the contention of the-workmen of SUMON HOTEL LTD. is valid and the Official Liquidator will have to pay their dues as provided in Section 326 of the Companies Act, 2013.
Question 4.
Rose Garden Ltd. was incurring continuous losses and its financial position went bad to worse. Black Stone (Private) Ltd., a trade creditor, issued notice under Section 271 of the Companies Act, 2013 for winding up of Rose Garden Ltd. on the ground that Rose Garden Ltd. was unable to pay its debts. After some time, Black Stone (Private) Ltd. being an operational creditor filed a petition before the Adjudicating Authority to initiate insolvency process under the Insolvency and Bankruptcy Code, 2016. Demand Notice and copy of invoice were not served to Rose Garden Ltd.
since a notice was earlier issued for winding up. All other formalities were complied with. The Adjudicating Authority initiated Insolvency Resolution Process by admitting the application and appointed Resolution Professional. After complying required formalities, the Adjudicating Authority issued orders for moratorium and other relief within the stipulated time. Being aggrieved by the order of Adjudicating Authority, Rose Garden Ltd. (Corporate debtor) filed an appeal before NCLAT under the Insolvency and Bankruptcy Code, 2016. Determine will the Company succeed in its appeal?
Answer:
1. After the commencement of corporate insolvency resolution a claim period for 180 days is declared, during which all suits and legal proceedings etc. against the Corporate Debtor are held in abeyance to give time to the entity to resolve its status. It is called Moratorium Period [Section 14].
2. So as per Sec. 14 of the code, all the proceeding by the corporate debtor shall be keep in abeyance.
3. In this case, adjudicating authority issued an order for moratorium. So as ‘ moratorium period is started no proceeding can be initiated by the Corporate Debtor. So here, Rose Garden Ltd. wants to file an appeal before NCLAT. Since, moratorium period is already started so Corporate Debtor will not succeed in its appeal.
Question 5.
As on March 31,2018, the audited balance sheet of M/s Sharp Industries Limited, revealed total assets of ₹ 1 Crore. M/s Sharp Industries Limited, in the capacity of a Corporate Debtor, filed an application on July 1, 2018 with the Adjudicating Authority for initiating a fast track corporate insolvency resolution process. Explain under the provisions of Insolvency and Bankruptcy Code, 2016 the following :
(i) Whether the application made by M/s Sharp Industries Ltd. for initiating a fast track corporate insolvency resolution process is admissible?
(ii) The time period including the extension of time period, if any, within which the fast track corporate insolvency resolution process shall be completed?
Answer:
1. The Insolvency and Bankruptcy Code, 2016 provides that any corporate debtor with the assets and income below a level as may be notified by the Central Government can make application for conducting fast track insolvency resolution process. In this regard, Notification issued by Central Government vide Notification No. 5.a 1911 (E) dated 14th June, 2017 provides that an unlisted public company with the total assets as reported in financial statements of the immediately preceding financial year, not exceeding rupees one crore can apply for fast track insolvency resolution process.
(i) Here, M/s. Sharp Industries Ltd. having total assets of ₹ 1 crore have applied for conducting fast track insolvency resolution process. So, in light of above provisions and notification M/s. Sharp , Industries Ltd. can apply for corporate insolvency resolution process.
(ii) The fast track insolvency resolution process shall be completed within a period of ninety days from the insolvency commencement date. However, adjudicating Authority may extend time period for fast track corporate insolvency resolution process. The aggrieved may make an application to the Adjudicating Authority and it is satisfied that the fast track corporate insolvency process cannot be compelled within a period of ninety days, it may, by order; extend the duration of such process to a further period which shall not be exceeding forty-five days.
The extension of the fast track corporate insolvency resolution process under this Section shall not be granted more than once.
Question 6.
XY Ltd. filed a petition under Insolvency and Bankruptcy ; Code, 2016 with NCLT against DF Ltd. (Corporate Debtor) and the petition was admitted. There were only three financial creditors including XY Ltd. During the Corporate Insolvency Resolution process, the Corporate Debtor settled the claims of all the 3 financial creditors. Whether such settlement agreement could be termed as a valid resolution plan? Also discuss whether a financial creditor in respect of whom there is no default can file an, application before Adjudicating Authority (NCLT) for initiating corporate insolvency resolution process. Discuss.
Answer:
1. As per Insolvency and Bankruptcy Code, 2016, where any petition was admitted. The corporate debtor shall not required to make any settlement at its own. The resolution process as initiated by NCLT shall be followed. So, settlement agreement as initiated by XY Ltd. a corporate debtor at its own after admission of petition is not valid.
2. As per Section 59 of the Insolvency and Bankruptcy Code, 2016, a corporate person who intends to liquidate itself voluntarily and has not committed any default may initiate voluntary liquidation proceedings under the provisions of this Chapter V of Part II of the code.
Question 7.
Continental Rubber Limited is a supplier of raw materials to Smooth Latex Limited. It filed a petition before the NCLT for the recovery of ₹ 10,00,000 from Smooth Latex Limited. Smooth Latex Limited, the Corporate Debtor, has other financial creditors to the extent of ₹ 1,50,00,000 and they also joined together and filed petitions to NCLT. The Corporate Debtor has a total of 40 financial creditors and 2 operational creditors. Further, all the financial creditors are having equal voting rights/shares.
Notice was issued on 151 August, 2018 for the conduct of the first meeting to be held on 5th August, 2018 at a common venue. The meeting was attended by all 40 financial creditors and 2 operational creditors.
A resolution was passed to appoint Mr. TK as a Resolution Professional. 25 of the financial creditors voted in favour of the resolution and 10 voted against the resolution and 5 financial creditors and 2 operational creditors abstained from voting. Decide whether the resolution passed is valid? In the light of the provisions of Insolvency and Bankruptcy Code, 2016 read with rules framed thereunder, explain the requirements of issue of notice and quorum for the conduct of the meeting.
Answer:
As per provisions of Insolvancy and Bankruptcy Code, 2016 a meeting of creditors shall quorate if members of the committee of creditors representing at least 33% of Voting rights are present either in person or by audio video means.
Resolution passed in the meeting of committee of creditors shall be approved by a majority of not less than 75%.
Here, Total No. of Creditors = 42
Creditors Present = 42
So, required quorum is present.
Majority required for resolution = 21
Voted Creditors in favor = 25
So, required majority is present
So, resolution in the meeting of committee of creditors is validly passed. Notice of the meeting of committee of creditors shall be required to be sent to following persons.
(a) Members of Committee of Creditors.
(b) Members of the Suspended Board of Directors or the partners of the corporate persons, as the case maybe,
(c) Operational Creditors or their representatives if the amount of their aggregate dues is not less than 10% of debt.
Question 8.
A multiproduct company catering to applications in diverse sectors had borrowed from various financial institutions including Kundan Bank Ltd. A corporate debt restructure plan (CDR) was framed between 19 lenders and the company in 2014 and a master restructuring agreement (MRA) was made by which funds were to be infused by the creditors and certain obligations were to be met by the debtors. The aforesaid restructuring plan was implementabie over a period of 2 years. On 07-12-2016 Kundan Bank Ltd.
made an application in which it was stated that the company being a defaulter within the meaning of the Insolvency and Bankruptcy Code, 2016, the insolvency resolution process ought to be set in motion. To this application, a reply was filed by means of an interim application on behalf of the company by the erstwhile Directors. It was claimed that there was no debt legally due in as much as vide two notifications issued under the Maharashtra Relief Undertakings (Special Provision Act), 1958 (hereinafter referred to as the Maharashtra Act), all liabilities of the appellant and remedies for enforcement thereof were temporarily suspended for a period up to 18-07-2017.
The company made a second application on 16-1-2017. It pleaded that owing to non-release of funds under the MRA, it was unable to pay back its debts. Will the company succeed in its contentions? Give reasons in support of your answer.
Answer:
On a bare reading of the judgement of Innovative Industries Ltd. Vs /C/C/ Bank & another, it seems that the case involved more adjudication on grounds related to Constitutional Law than on the Code. This case related to the first-ever application filed for initiating insolvency proceedings under the new Code. The Court was cognizant of the fact and hence wanted to settle the law so that all ‘Courts and Tribunals take notice of the paradigm shift in the Law’.
The case involved contradictory provisions in the Code and a State law of State of Maharashtra, Maharashtra Relief Undertakings (Special Provisions) Act, 1958. This state law provided for overtaking of industries by the state by declaring therr. ‘relief undertakings’. Such overtaking can be done through government notifications to that effect under the Act. This is done to protect employment of the people who are working in such an undertaking.
The Code instead provides for overtaking of an undertaking’s business by an ‘Insolvency Professional’ through a committee of creditors. In the instant case, insolvency application was filed against Innoventive Industries Ltd. which later claimed to be a relief undertaking under the Maharashtra Act. This brought the two legislation on a collision course, for the simple reason that enforcement of one will hinder the enforcement of the other.
Supreme Court dealt with the constitutional law doctrine of repugnancy. This doctrine stems from the operation of Article 254 of the Constitution. As per this doctrine, whenever central and state laws are framed on the same subject and are contradictory to each other, it is the central law which prevails and the state law is rendered void.
A plain reading of Article 254 gives an impression that if both central and state governments frame laws on a same entry under the concurrent list, only then the Central law will prevail. In the instant case, however, the laws even though coming in conflict with each other, were framed under different entries of the concurrent list. This involved an adjudication by the Supreme Court on this point. The National Company Law Tribunal (NCLT) had ruled that Innoventive Industries Ltd. can’t claim any relief under Maharashtra Act.
It also decided that there is no repugnancy between the two laws, as they operate in different fields. The appeal to the Supreme Court, hence involved two major questions. One was. whether the petitioner can seek relief under the Maharashtra Act at the cost of the Code. The second was, whether both the laws are repugnant to each other.
Invoking a lot of international cases, especially of the Commonwealth countries and previous Judgments of the Supreme Court, the bench ruled that there is indeed repugnancy between the two laws. The court held that even if the two legislations are framed on different entries of the concurrent list, the Central law will always prevail if it comes in conflict with the State law. The State law, therefore was held inoperable to the extent that it was in contradiction to the Code.
The court delved into great detail of the provisions of the Code and held it to be intended as an ‘exhaustive legislation by the Parliament, to cover the whole field of its operation. In such instances involving an exhaustive law. even though the State law may not be in strict violation of the code, it will even then be rendered inoperative to give way to implement the exhaustive law on the point.
Question 9.
(a) Alkaline Private Limited is a chemical manufacturing company, which had availed many bank loans and other facilities to fund its operations. The company has not been able to repay the loan and interests thereon to the banks due to its dwindling sales and other cost/labor issues. Over a period, as the company was not repaying its loans, its account was classified as Non-Performing Asset (NPA) by the banks.
Various negotiations with the banks did not materialize and the banks-initiated proceedings under Insolvency and Bankruptcy Code, 2016 (IBC) against the company. The Company is of the view that IBC does not have constitutional validity and accordingly, it appealed in court of law. Will the Company succeed?
Answer:
The present case is similar to the case of the Swiss Ribbons Pvt. Ltd. v. Union of India [SC] Writ Petition (Civil) No. 99 of 2018 [Decided on 25/01/2019], In Swiss Ribbons Pvt. Ltd. case the Supreme Court observed that ‘the Insolvency and Bankruptcy Code, 2016 (the Code) is a legislation which deals with economic matters and, in the larger sense, deals with the economy of the country. Earlier experiments, as we have seen, in terms of legislations having failed, ultimately led to the enactment of the Code.
The experiment contained in the Code, judged by the generality of its provisions and not by so-called crudities and inequities that have been pointed out by the petitioners, passes constitutional muster. To stay experimentation in things economic is a grave responsibility, and denial of the right to experiment is fraught with serious consequences to the nation.
We have also seen that the working of the Code is being monitored by the Central Government through Expert Committees that have been set-up in this behalf. Amendments have been made in the short period in which the Code has operated, both to the Code itself as well as to subordinate legislation made under it. This process is an ongoing process which involves all stakeholders, including the petitioners.
In the working of the Code, the flow of financial resource to the commercial sector in India has increased exponentially as a result of financial debts being repaid. Approximately 3300 cases have been disposed of by the Adjudicating Authority based on out-of-court settlements between corporate debtors and creditors which themselves involved claims amounting to over INR 1,20,390 crores.
Eighty cases have since been resolved by resolution plans being accepted. Of these eighty cases, the liquidation value of sixty- three such cases is INR 29,788.07 crores. However, the amount realized from the resolution process is in the region of INR 60,000 crores, which is over 202% of the liquidation value. This shows that the experiment conducted in enacting the Code is proving to be largely successful. The defaulter’s paradise is lost. In its place, the economy’s rightful position has been regained.’
Based on the above ruling of the Apex Court, it can be concluded in the given case that the constitutional validity of Insolvency and Bankruptcy Code, 2016 cannot be challenged.
Hence, the company will not succeed.
Question 10.
A Kerala based company had a cement unit in Salem in the State of Tamil Nadu. Unit became Sick and the Company was not in position to pay wages to its labours. The workers approached Labour Court. Labour Court passed an award in favour of workers. In the meantime, a lender in Kerala attached Company’s properties and sold in public auction. Workers filed writ before Kerala High Court seeking deposit of 50% of their dues by the lender. Single Judge overruled the jurisdiction issue in favour of workers. Lenders preferred an appeal before Division Bench and the same was allowed by the Bench.
Aggrieved by the decision, workers appealed before Supreme Court. Will they succeed?
Answer:
The present problem is similar to the case of Cement Workers Mandal v. Global Cements Ltd. (HMP Cements Ltd) & Ors [SC] Civil Appeal No.5360 of 2010. The short question, which arises for consideration in this appeal, is whether the Division Bench was justified in holding that the Special Civil Appeal (SCA) filed by the appellant was not maintainable for want of territorial jurisdiction of the High Court.
The Supreme Court held that the Division Bench erred in not noticing Article 226(2) of the Constitution of India while deciding the question arising in this case. In other words, the question as to whether the High Court has territorial jurisdiction to entertain the appellants petition (SCA) or not, should have been decided keeping in view the provisions of Article 226(2) of the Constitution read with Section 20 of the Code of Civil Procedure, 1908 (for short, “CPC”).
Article 226(2) of the Constitution further empowers a High Court to issue any order, directions or writ as provided in clause (1) of Article 226 of the Constitution in such writ petition notwithstanding that seat of such Government or the Authority or the residence of such person against whom the writ petition is filed does not fall within the territories of the “A” High Court but falls in the territories of the “B” High Court.
In the light of these three reasons, we are of the view that the part of the cause of action as contemplated in Article 226 (2) of the Constitution has arisen within the territorial jurisdiction of the High Court for filing the petition (SCA) to claim appropriate reliefs in relation to such dispute against respondent No. 1 Company.
In our considered opinion, the expression “the cause of action, wholly or in part, arises” occurring in Article 226(2) of the Constitution has to be read in the context of Section 20(c) of CPC which deals with filing of the suit within the local limits of the jurisdiction of the Civil Courts.
In the light of the foregoing discussion, we are of the view that the appellants petition (SCA) was maintainable in the High Court in as much as the part of the cause of action to file such petition did accrue to the appellant herein (petitioner) within the territorial jurisdiction of the Gujarat High Court. In these circumstances, the SCA was required to be decided on merits by the Gujarat High Court.
In view of the foregoing, the appeal will succeed in the given case.