Thursday, 9 June 2022

Mr. Ashok Oswal, Managing Director (Suspended) Oswal Spinning and Weaving Mills Ltd. Vs. Hemanshu Jetley (Liquidator) - This Authority, therefore, finds no reason to keep the liquidation proceeding in abeyance, and thus, rejects the Applicant’s prayer that the Liquidator should await the final adjudication of the claims before the Hon’ble DRT before accepting the claims of the Respondents and subsequently disbursal of the amounts.

NCLT Chandigarh (03.06.2022) in Mr. Ashok Oswal, Managing Director (Suspended) Oswal Spinning and Weaving Mills Ltd. Vs. Hemanshu Jetley (Liquidator)   [IA No.368/2020 in CP (IB) No.136/Chd/Pb/2017 ] held that;

  • it is clear that the Liquidator is required to verify the claims with reference to the date of liquidation and if there is no crystallization of a debt through a decree on that date, the Code does not direct the Liquidator to wait for the same. 

  •  . . . . . and nowhere requires the Liquidator to wait for the decisions of other court before commencing with the process of distribution.

  • In view of Section 238 of the I&B Code, 2016 steps taken under the Code by the authority would have precedence over other authorities in parallel proceedings. Thus, the provisions of I&B Code, 2016 should prevail in case of any conflict.

  • This Authority, therefore, finds no reason to keep the liquidation proceeding in abeyance, and thus, rejects the Applicant’s prayer that the Liquidator should await the final adjudication of the claims before the Hon’ble DRT before accepting the claims of the Respondents and subsequently disbursal of the amounts.


Excerpts of the order;  

# 2. In the present application, the applicant prays to quash the acceptance of the claim of Respondent Nos.2 to 5 by the Respondent No.1; and direct Respondent No.1 to await the final adjudication of the claims pending before the Hon'ble Debt Recovery Tribunal or the Hon'ble Punjab and Haryana High Court, or any other authority/Court/Tribunal as the case may be, before any claim for payment of financial dues on behalf of Respondent Nos.2 to 5 can be accepted and monies accordingly disbursed; direct the Respondent No.1, to effectively contest the claims made by the corporate debtor before various Courts/Tribunals, in order to discharge his legal obligations under the IB Code, 2016; pending consideration of the reliefs as aforesaid, restrain the Respondent No.1 from disbursing any funds to Respondent Nos.2 to 5; and direct the Respondent No.1, to effectively contest the claims made by the Corporate Debtor before various Hon'ble Courts/Tribunals, in order to discharge his legal obligations under the IB Code 2016.


# 3. The brief facts as outlined in the application are as under:

# 3.1 The Respondent No.1-Liquidator has accepted the claims of Respondent No.2 to 5, which the applicant states to be without any legal basis. The aforementioned respondents are banks and financial institutions which at some point in time issued credit facilities to the corporate debtor. These claims by the respondents are stated to be disputed by the corporate debtor and except in the case of respondent No.5. These claims are stated to be not reflected in the books of the corporate debtor. It is further stated that during the pendency of the CIRP process, the respondent No.1 as the Resolution Professional had accepted certain claims of the said respondents for the purpose of constituting the Committee of Creditors (CoC). This action by the Respondent No.1, presently the Liquidator, was assailed by the applicant though various applications but in the meanwhile, the CIRP proceed relating to the corporate debtor was completed with no Resolution Applicant being selected to take over the company and consequently, the corporate debtor has been ordered to be liquidated. In the present application the applicant has sought liberty to agitate the issue at the appropriate stage in accordance with law. By its order dated 18.12.2019, this Adjudicating Authority has dismissed the CA No.615/2018, 148/2019 & 255/2019 filed in this case as infructuous with the liberty to avail the remedies in accordance with the law. Subsequently, the respondent Nos.2 to 5 i.e. banks and financial institutions have filed their respective claims before Respondent No.1-Liquidator which is stated to be against the provisions of the Code. The applicant has cited the various provisions in the IBBI (Liquidation Process) Regulations, 2016 regarding the submission and verification of claims and their distribution in Para 12 of the application. He has also furnished the details of claims and counter-claims pending adjudication before the Hon’ble Debt Recovery Tribunal (DRT) pertaining to the corporate debtor as well as respondents No.2 to 5. Based on such facts, the applicant has assailed the issue of whether the Respondent No.1-Liquidator is competent to determine and admit a specific amount of money as payable to a particular creditor, when there is pending litigation that the company is contesting before the appropriate forum, such as the Hon’ble Debt Recovery Tribunal.


# 11. In the written submissions filed on behalf of the Respondent No.1-Liquidator by Diary No.00794/11 dated 12.04.2022, a reference has been made to the following Sections of the Code and Regulations of the IBBI (Liquidation Process) Regulations, 2016 relating to verification of the claims of the Financial Creditors:

a) Section 38 of IBC 2016 -Consolidation of claims.

b) Section 39 of IBC 2016 -Verification of claims.

c) Section 42 Appeal against the decision of liquidation.

d) Section 53 -Distribution of assets.

e) Section 238 -Provisions of this Code to override other laws.

f) Regulation 16 of IBBI (Liquidation Process) Regulations 2016- Submission of claim.

g) Regulation 18 of IBBI (Liquidation Process) Regulations 2016- Claims by Financial Creditors.

h) Regulation 30 of IBBI (Liquidation Process) Regulations, 2016- Verification of Claims.

i) Regulation 31 of IBBI (Liquidation Process) Regulations, 2016- List of Stakeholders

i) Regulation 44 of the IBBI (Liquidation Process) Regulations, 2016- Completion of liquidation

k) Regulation 47 of IBBI (Liquidation Process) Regulations 2016- Model Time-line for liquidation process.


# 11.1 It is also stated that the claims and counter claims filed before the various Courts including DRT are not crystallized as on the date of the liquidation commencement date. Therefore the liquidator has correctly verified the claims under Regulation 16(2) of the IBBI (Liquidation Process) Regulations, 2016 which states that “A person shall prove its claim for debt or dues to him, including interest, if any, as on the liquidation commencement date”. It is also emphasized that the liquidation process is a strictly time bound process and the liquidation is bound by the Regulation 44 and 47 of the IBBI (Liquidation Process) Regulations, 2016 which is to the following effect:- 

“Regulation 44 "Completion of liquidation":- "The liquidator shall liquidate corporate debtor within a period of one year from the liquidation commencement date.. “Regulation 47 provides "Model time-line for liquidation process.”


# 11.2 The Respondent No.1-Liquidator also submitted in detail the grounds on which the claims by the respondent banks have been admitted. It is also stated that the present application should be rejected on the following grounds:-

i. The Director of the Suspended Board has no locus to file this application under Section 60 (5) of the Code read with section 42 of the Code 2016 Applicant has tactfully exploited/used Section 60(5) including Section 42. Applicant is not eligible under Section 42, because he is not claimant and to surpass the specific Section 42 of the Code 2016 used Section 60(5) read with Section 42 of the Code to file this application. Therefore application is defective to that extent.

ii. There is no judgment of any Hon'ble NCLT bench, Hon'ble NCLAT bench or even by the Hon'ble SC in support of the Applicant's view that the liquidator should refrain himself from admitting the claims of creditors or from distributing the realization proceeds due to ongoing disputes as to existence of debt or any counter claim thereto pending before any other forum.

iii. Section 238 of the IBC code 2016 specifically states that the Code has overriding effects over other laws:-"The provisions of this Code shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law”. Therefore, in terms of Section 238 of the IBC Code 2016 proceeding pending with Hon'ble DRT has no bearing on the proceedings of the IBC.

iv. The Liquidator appointed under the provisions of IBC, is bound by the provisions of code which specifically lays down the manner in which he has to discharge his duties i.e. regarding receiving the claims, verification of the same, realization the assets of CD and distribution of the same among the stakeholders of CD in the manner prescribed under Section 53 of the Code. Liquidator has duly acted within the scope of IBC. It is further submitted that Liquidator has verified the claim on the basis of Form D submitted by FC along-with documents filed along-with Form D and on the basis of available records and financial statements. No where liquidator has said in his reply that he has adjudicated the claim.

v. RP, now Liquidator, has already filed application u/s 19(2) for the non co-cooperation of the promoter director including applicant of 368/2020 for not providing the books and documents with an ulterior motive to conceal the factual position in the accounts Application is still pending CA 143/2019.


# 11.3 After submitting the detailed reasons for admitting the claims with reference to documents and correspondences before him, the respondent No.1-Liquidator has also clarified that the Liquidator in no way adjudicated the claims of any stakeholder. Claims have been admitted after the verification in terms of the Section 38 and 39 of the Code, 2016 and Regulations 16, 18, 30 & 31 of IBBI (Liquidation Process) Regulations, 2016. The Liquidator, in accordance to the aforementioned regulations, has simply verified the claims of the stakeholders based on the information provided by the claimants along-with affidavit and as per the record available, and subsequently filed the ‘List of Stakeholders' before this Adjudicating Authority. Hence, there is no ‘Adjudication of Claims’ by the Liquidator. It is also stated that the Liquidator has only verified the claim amount that is currently on record of this Adjudicating Authority on 26.02.2020. It is also stated that the Liquidator has complied with the duties assigned under the Act, Section 25(2)(b) of the Code, 2016 for early disposal of matter pending before DRT. It is also informed that the matter could not be taken-up in DRT due to Covid situation and also due to the pending re-constitution of the Bench at DRT Chandigarh.


# 14. We have gone through the arguments along with their submissions filed by all the parties and have perused the records carefully. 


# 15. To put the discussion in the proper context, we feel it necessary to mention certain observations by the Hon'ble Supreme Court and the Hon’ble NCLAT on the issues related to the case in hand. On an appeal filed by Kotak Mahindra Bank Limited-Respondent No.4 in the present case, the Hon’ble Supreme Court noticing the proceedings taken on IA No.368/2020 (present application) and IA No.555/2020 and the orders of the Hon’ble NCLAT passed on 19.01.2021 and 10.08.2021, by order dated 26.11.2021 disposed of the appeal and made interalia the following observations:-

“16. ………… the submissions before us on behalf of the respondent No.1(applicant) are to the effect that there ought not to be “tearing hurry” in deciding those applications. Such a proposition on the part of the applicant cannot be countenanced, particularly looking to the previous orders passed in the matter, as noticed hereinabove. …….”


# 15.1 Subsequently, the Hon’ble NCLAT in its order dated 04.04.2022 in Company Appeal (AT) (Insolvency) No.575 of 2021 in Kotak Mahindra Bank Limited vs. Ashok Oswal & Ors. has allowed the application IA No.555/2020 by modifying the order dated 09.09.2020 and deleting the following part of the order dated 09.09.2020:

“In the meantime, the respondent No.1-Liquidator shall maintain status quo with regard to the distribution of funds to respondent Nos.2 to 5.”


# 15.2 It is also noted that in its order dated 15.05.2019, the Hon’ble NCLAT in para 4 has duly recorded the fact that the counterclaim filed by the corporate debtor against the UCO Bank has been rejected by the learned DRT, Chandigarh.


# 15.3 In the present application, the issues before this Adjudicating Authority are whether the acceptance of claims of Respondent Nos.2 to 5 by the Liquidator is not in accordance with the provisions of the Code and the Rules made there in; and whether the Liquidator should wait for the final adjudication of the claims of the Respondents pending before the learned DRT and other Judicial Authorities, before admitting the claims and disbursing the amounts.


# 15.4 It is clarified that the I&B Code, 2016 is a complete Code and the relevant provisions in the Code and the Rules made therein as extracted below will determine the appropriateness of the actions of the Liquidator:

Section 38: Consolidation of claims.

*38. (1) The liquidator shall receive or collect the claims of creditors within a period of thirty days from the date of the commencement of the liquidation process.

(2) A financial creditor may submit a claim to the liquidator by providing a record of such claim with an information utility: 

Provided that where the information relating to the claim is not recorded in the information utility, the financial creditor may submit the claim in the same manner as provided for the submission of claims for the operational creditor under sub-section(3).

(3) An operational creditor may submit a claim to the liquidator in such form and in such manner and along with such supporting documents required to prove the claim as may be specified by the Board.

(4) A creditor who is partly a financial creditor and partly an operational creditor shall submit claims to the liquidator to the extent of his financial debt in the manner as provided in sub-section (2) and to the extent of his operational debt under sub-section (3).

(5) A creditor may withdraw or vary his claim under this section within fourteen days of its submission.

Section 39: Verification of claims.

39. (1) The liquidator shall verify the claims submitted under section 38 within such time as specified by the Board.

(2) The liquidator may require any creditor or the corporate debtor or any other person to produce any other document or evidence which he thinks necessary for the purpose of verifying the whole or any part of the claim.

16. Submission of claim.

(1) A person, who claims to be a stakeholder, shall submit its claim, or update its claim submitted during the corporate insolvency resolution process, including interest, if any, on or before the last date mentioned in the public announcement.

(2) A person shall prove its claim for debt or dues to him, including interest, if any, as on the liquidation commencement date.

18. Claims by Financial Creditors.

(1) A person claiming to be a financial creditor of the corporate debtor shall submit proof of claim to the liquidator in electronic means in Form D of Schedule II.

(2) The existence of debt due to the financial creditor may be proved on the basis of-

(a) the records available in an information utility, if any; or

(b) other relevant documents which adequately establish the debt, including any or all of the following-

(i) a financial contract supported by financial statements as evidence of the debt;

(ii) a record evidencing that the amounts committed by the financial creditor to the corporate debtor under a facility has been drawn by the corporate debtor;

(iii) financial statements showing that the debt has not been repaid; and 16

(iv) an order of a court or tribunal that has adjudicated upon the non-payment of a debt, if any.

30. Verification of claims.

The liquidator shall verify the claims submitted within thirty days from the last date for receipt of claims and may either admit or reject the claim, in whole or in part, as the case may be.

31. List of stakeholders.

(1) The liquidator shall prepare a list of stakeholders, category-wise, on the basis of proofs of claims submitted and accepted under these Regulations, with-

(a) the amounts of claim admitted, if applicable,

(b) the extent to which the debts or dues are secured or unsecured, if applicable,

(c) the details of the stakeholders, and

(d) the proofs admitted or rejected in part, and the proofs wholly rejected.

(2) The liquidator shall file the list of stakeholders with the Adjudicating Authority within forty-five days from the last date for receipt of claims, and the filing of the list shall be announced to the public in the manner specified in Regulation 12(3).

(3) The liquidator may apply to the Adjudicating Authority to modify an entry in the list of stakeholders filed with the Adjudicating Authority, when he comes across additional information warranting such modification, and shall modify the entry in the manner directed

by the Adjudicating Authority.

(4) The liquidator shall modify an entry in the list of stakeholders filed with the Adjudicating Authority, in the manner directed by the Adjudicating Authority while disposing off an appeal preferred under section 42.

(5) The list of stakeholders, as modified from time to time, shall be- 

(a) available for inspection by the persons who submitted proofs of claim;

(b) available for inspection by members, partners, directors and guarantors of the corporate debtor;

(c) displayed on the website, if any, of the corporate debtor.”


# 16. It is an undisputed proposition that the Liquidator is mandated to discharge his duties strictly as per the provisions quoted above while verifying/admitting the claims. On a careful perusal of these provisions, it is clear that the Liquidator is required to verify the claims with reference to the date of liquidation and if there is no crystallization of a debt through a decree on that date, the Code does not direct the Liquidator to wait for the same. As regards the admission of the claims, we have carefully gone through the voluminous evidence including correspondences etc. produced in the course of proceedings and also the grounds on which the claims have been admitted in the cases of Respondent Nos.2 to 5 by the Liquidator with reference to. Prima facie, the Liquidator has verified the claims on the basis of Form-D submitted by the Financial Creditors along with documents, records and financial statements filed with the same. It is also noted that the Liquidator has accepted only partial amounts of the total claims made by the financial creditors and have sought legal opinion upon some of the issues before reaching a conclusion. The issues have also been discussed in the meetings of the Stakeholders Consultation Committee (SCC). The records show that he has simply verified the claims of the stakeholders based on the information provided by the claimants along with the affidavit and by considering all the evidence before him and has filed a “List of Stakeholders” before this Adjudicating Authority. No particular procedural mistake on the part of the Liquidator has been pointed out by the applicant during the current proceedings. It may be noted that word adjudication has been used by the Liquidator in more than one place while verifying the claim of the respondents but it seems to be a typographical or mistake through inadvertence, and the same is ignored.


# 16.1 In view of the above discussion, we hold that the allegation of the applicant that the Liquidator has “adjudicated” the claims filed by the respondent-financial creditors and has wrongly accepted their claims is misconceived.


# 17. It is trite law that timelines are sacrosanct in a liquidation proceedings as is apparent from the Regulation 47 laying down Model TimeLine for liquidation process. We also note that Section 53 dealing with Distribution of Assets also commences with a Non-obstante’ clause which specifically overrides any law enacted by the Parliament or any State Legislature for the time being in force and nowhere requires the Liquidator to wait for the decisions of other court before commencing with the process of distribution.The relevant part of the said Section is extracted below for the sake of clarity:

  • 53. (1) Notwithstanding anything to the contrary contained in any law enacted by the Parliament or any State Legislature for the time being in force, the proceeds from the sale of the liquidation assets shall be distributed in the following order of priority and within such period and in such manner as may be specified………”


# 18. Furthermore, Regulation 43 of the Liquidation Process Regulations 2016 quoted below itself provides the remedy, if any, undue benefit is given to a stakeholder in distribution:-

  • 43. Return of money.

A stakeholder shall forthwith return any monies received by him in distribution, which he was not entitled to at the time of distribution, or subsequently became not entitled to.”


# 19. Now coming to the Applicant’s contention that proceedings before Hon’ble DRT need to be completed before the distribution under the IBC can take place, it is clarified that the general principle of construction in a circumstance where two special Acts are in conflict with each other is that, the Act made later should prevail vide the maxim “leges posteriores priores abrogant”. The DRT was constituted under Recovery of Debts Due to Banks & Financial Institutions Act, 1993, much prior to the I&B Code, 2016. In view of Section 238 of the I&B Code, 2016 steps taken under the Code by the authority would have precedence over other authorities in parallel proceedings. Thus, the provisions of I&B Code, 2016 should prevail in case of any conflict. Furthermore, this contention of the Applicant does not hold much water in view of the a catena of judgements of the Hon’ble NCLAT in the following matter of Bimal Kumar Manubhai Savalia vs. Bank of India and Ors. Company Appeal (AT) (Insolvency) No. 1166 of 2019 wherein it has been inter-alia held as follows:

  • (Para No. 9; page 07): "We are of the view that the SARFAESI and DRT proceedings are independent and as per Section 238 of IBC, the Insolvency and Bankruptcy Code is a complete code and will have an overriding effect on other laws. Therefore, the proceedings imitated (initiated) or pending in DRT, either initiated under SARFAESI or under Debts due to the Banks and Financial Institutions cannot be taken into account for the purpose of limitation." (emphasis supplied)


# 19.1 The Hon'ble NCLAT in the case of Rakesh Kumar Gupta V. Mahesh Bansal and others [Company Appeal (AT) (Insolvency) No. 1408 of 2019] has also held inter alia that:

  • "The pendency of actions under the SARFAESI Act or actions under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 does not create obstruction for filling an Application under Section 7 of Insolvency and Bankruptcy Code 2016, specially in view of Section 238 of IBC The Application is more to bring about a Resolution of Corporate Debtor than any penal action or any recovery proceedings." (emphasis supplied)


# 19.2 Furthermore, the Hon'ble NCLAT in the matter of Harkirat S. Bedi Vs. Oriental Bank of Commerce MANU/NL/0207/2019 : [2019] 108 taxmann.com 110 (NCLAT) held as under:

  • "From the aforesaid finding, it is evident that even if a claim is disputed and if the amount payable is more than Rupees 1 lakh, the application u/s. 7 of the I &. B Code is maintainable. Mere pendency of the case before the DRT for adjudication of such disputed amount cannot be a ground to reject the application u/s. 7 of the I & B Code, if the Adjudicating Authority is satisfied that there is a 'debt' and 'default' and the application is complete. On the other hand, in view of Section 14 all such proceedings in respect of any debt will remain stayed and cannot proceed during the period of moratorium." (emphasis supplied)


# 20. This Authority, therefore, finds no reason to keep the liquidation proceeding in abeyance, and thus, rejects the Applicant’s prayer that the Liquidator should await the final adjudication of the claims before the Hon’ble DRT before accepting the claims of the Respondents and subsequently disbursal of the amounts.


# 21. Before parting with this order, this Bench records the fact that there are applications by the Liquidator regarding the non-cooperation by the applicant. In this context, the Liquidator is directed to expeditiously complete the present liquidation proceedings. He is also directed to actively pursue the cases pending before the Hon’ble DRT, Chandigarh other Judicial Authorities and include the results in the Status Report.


# 22. Consequently, IA No.368/2020 is dismissed and accordingly stands disposed of.

 

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The sole purpose of this post is to create awareness on the "IBC - Case Law" and to provide synopsis of the concerned case law, must not be used as a guide for taking or recommending any action or decision. A reader must refer to the full citation of the order & do one's own research and seek professional advice if he intends to take any action or decision in the matters covered in this post.