Wednesday 7 December 2022

SM Milkose Ltd. Vs. M/s Onyx Components and Systems Pvt. Ltd. - Accordingly, Section 60(5)(a) and (b) shall not be available for the Successful Resolution Applicant/Corporate Debtor at this juncture which is 18 months after the approval of resolution plan by the Adjudicating Authority.

NCLAT (06.12.2022) in SM Milkose Ltd. Vs. M/s Onyx Components and Systems Pvt. Ltd. [Company Appeal (AT) (Ins) No.833 of 2021] held that the consideration of application of successful resolution applicant for recovery of debt (advance given by CD during CIRP for supplies), does not fall under the jurisdiction of the Adjudicating Authority.

  • Accordingly, Section 60(5)(a) and (b) shall not be available for the Successful Resolution Applicant/Corporate Debtor at this juncture which is 18 months after the approval of resolution plan by the Adjudicating Authority.

 

Excerpts of the order;

The Appellants have preferred the instant Appeal being aggrieved and dissatisfied by the order dated 16.08.2021 passed by the Adjudicating Authority (National Company Law Tribunal, New Delhi Bench-II) in (IB) 334(ND)/2017 in IA/3927/2020 & 1356/2021 whereby and whereunder Corporate Debtor filed applications i.e. I.A. No. 3927/2020 with a following prayer which are hereunder and I.A. No. 1345/2021 for seeking consideration of IA 3927/2020.

  • “a. Direct the Respondents to refund Rs. 12,30,457/- to the Corporate Debtor with interest @18% p.a. being the amounts illegally retained by them and which amounts were given during moratorium period for supply of goods/components.

  • b. Direct that the Respondent is liable to be punished for contravention of Section 14, 31 and Section 74 of IBC for siphoning off proceeds of Corporate Debtor in contravention of Moratorium imposed by this Hon’ble Tribunal.

  • c. Pass such other or further orders as this Hon’ble Tribunal may deem fit and proper in the facts and circumstances of the matter and in the interest of justice.

After hearing the parties, the Tribunal dismissed the aforesaid I.As holding that there is no violation by RP of any of the provisions contained under Section 14, 31 & 74 of IBC and the Respondents are not required to refund the amount i.e. Rs. 12,30,457/- to the Corporate Debtor.

 

# 2. The facts giving rise to this Appeal are as follows:

  • i) The Appellants herein being the Corporate Debtor and the Resolution Applicant in the proceedings before the Tribunal had preferred the aforesaid I.As as a joint application. The said application had been being filed in extreme exigency and urgency situation as the conduct of Respondents became completely dishonest, unfair, illegal and contemptuous in so far the Respondents is seeking to wrongfully and fraudulently usurp monies of the Corporate Debtor handed over to them by the IRP post imposition of moratorium but during the CIRP proceedings for supply of components/goods which were not supplied so that even during the moratorium period and during the CIRP proceedings the Corporate Debtor remains a going and operating concern.

  • ii) Further case is that post imposition of moratorium, the IRP during CIRP proceedings made payments to the Respondents on the following dates being 02.11.2017, 09.01.2018, 09.02.2018, 22.02.2018, 10.04.2018, 26.04.2018, 22.05.2018 and 30.06.2018 by bank transfers as advances for the supply of goods/components in the interest of the Corporate Debtor and to keep the Corporate Debtor as going concern. The Resolution Plan that had been submitted by the Resolution Applicant was approved under Section 31 of the IBC on 02.04.2019 which was binding on the other shareholders confirming SM Milkose Limited as the successful Resolution Applicant. The Corporate Debtor seeks Rs. 12,30,457/- which were wrongfully misappropriated by the Respondent who despite receiving the said amounts as advance for supply of goods/components, neither supplied goods/components nor refunded the amounts. The Corporate Debtor sent a legal notice to the Respondents dated 10.10.2019. The Respondent instead of refunding the Rs. 12,30,457/- rather sought Rs. 34,07,390/- from the Corporate Debtor vide legal notice dated 21.10.2019. Thereafter, the Appellant preferred the I.A. No. 3927 of 2020 in CP No. (IB) 334 (ND) of 2017 before the Tribunal and after hearing the parties, the Tribunal passed the impugned order which led to filing of this Appeal.

 

Submissions on behalf of the Appellant

# 3. The Ld. Counsel for the Appellant during the course of argument and in his memo of Appeal submitted that while passing the impugned order the Adjudicating Authority failed to consider that the acts of the Respondents to usurp the money received by the Corporate Debtor, Applied Electro Magnetic Pvt. Ltd. during the period of moratorium imposed by the Tribunal under Section 14 of the Code and the Respondents cannot retain any amounts given to them under trust during the CIRP proceedings during the moratorium period. The Respondents are violating the mandate of law claiming dues from Corporate Debtor when the Appellant Corporate Debtor cannot be made liable to pay any dues for the period prior to imposition of moratorium period when the claims have been not filed/ not admitted under the approved resolution plan as per Section 14 & 31 of the Code.

 

# 4. It is further submitted that the Appellants relying on judgment passed by the Hon’ble Supreme Court in the case of ‘Ghanashyam Mishra and Sons Private Limited through Authorized Signatory Vs. Edelweiss Asset Reconstruction Company Limited through the Director & Ors.’ reported in (2021) 9 SCC 657 held that:

  • “………….

  • 86. As discussed hereinabove, one of the principal objects of I&B Code is, providing for revival of the Corporate Debtor and to make it a going concern. I&B Code is a complete Code in itself. Upon admission of petition under Section 7, there are various important duties and functions entrusted to RP and CoC. RP is required to issue a publication inviting claims from all the stakeholders. He is required to collate the said information and submit necessary details in the information memorandum. The resolution applicants submit their plans on the basis of the details provided in the information memorandum. The resolution plans undergo deep scrutiny by RP as well as CoC. In the negotiations that may be held between CoC and the resolution applicant, various modifications may be made so as to ensure, that while paying part of the dues of financial creditors as well as operational creditors and other stakeholders, the Corporate Debtor is revived and is made an on-going concern, After CoC approves the plan, the Adjudicating Authority is required to arrive at a subjective satisfaction, that the plan conforms to the requirements as are provided in sub-section (2) of Section 30 of the I&B Code. Only thereafter, the Adjudicating Authority can grant its approval to the plan. It is at this stage, that the plan becomes binding on Corporate Debtor, its employees, members, creditors, guarantors and other stakeholders involved in the resolution plan. The legislative intent behind this is, to freeze all the claims so that the resolution applicant starts on a clean slate and is not flung with any surprise claims. If that is permitted, the very calculations on the basis of which the resolution applicant submits its plans, would go haywire and the plan would be unworkable.

  • 95. It the result, we answer the questions framed by us as under:

  • (i) That once a resolution plan is duly approved by the Adjudicating Authority under subsection (1) of Section 31, the claims as provided in the resolution plan shall stand frozen and will be binding on the Corporate Debtor and its employees, members creditors, including the Central Government, any State Government or any local authority, guarantors and other stakeholders. On the date of approval of resolution plan by the Adjudicating Authority, all such claims, which are not a part of resolution plan, shall stand extinguished and no person will be entitled to initiate or continue any proceedings in respect to a claim, which is not part of the resolution plan.

 

# 5. It is further submitted that the Tribunal while passing the impugned order failed to consider the law laid down by the Hon’ble Supreme Court in the case of ‘Committee of Creditors of Essar Steel India Limited Vs. Satish Kumar Gupta & Ors. reported in (2020) 8 SCC 531‘ wherein it has held that:

  • “67. …………. A successful resolution applicant cannot suddenly be faced with “undecided” claims after the resolution plan submitted by him has been accepted as this would amount to hydra head popping up which would throw into uncertainty amounts payable by a prospective resolution applicant who successfully take over the business of the corporate debtor. All claims must be submitted to and decided by the resolution professional so that a prospective resolution applicant knows exactly what has to be paid in order that it may then take over and run the business of the corporate debtor.

 

# 6. It is further submitted that it is evident from the fact that the Respondent has violated the clear mandate of Section 14 of the Code by retaining amounts of the Corporate Debtor given in trust to them during the moratorium period and by not returning them even after approval of the final resolution plan. Based on these submissions the impugned order is fit to be set aside and the Appeal be allowed.

 

Submissions on behalf of the Respondent

# 7. The Ld. Counsel for the Respondent during the course of argument and in his reply affidavit along with written submissions submitted that the Appellant No. 1 filed an application bearing I.A. No. 3927 of 2020 before the Adjudicating Authority. However, the same did not contain any specific provisions under which the prayers were being sought. Therefore, the Appellant filed another application bearing IA No. 1356 of 2020 seeking an amendment in its prayer. Even the amendment prayer did not specify the provisions, under which they prayers are being sought in the application. Section 60(5) of the Code has an extensive scope under which the Adjudicating Authority has ample powers. A bare perusal of Section 60(5) indicate that the Appellant No. 1 could not have initiated the proceedings under Section 60(5)(a) and (b), as the same can only be filed by or against the Corporate Debtor as Sections 20, 25 or 35 of the Code gives power to IRP, RP or the Liquidator, as the case may be to act or represent the Corporate Debtor vis-à-vis third parties, exercise rights for the benefit of the Corporate Debtor in judicial, quasi-judicial or arbitration proceedings. It is fact that on approval of the Resolution Plan, the Successful Resolution Applicant steps into the shoes of the Corporate Debtor, but does not inherit the power and duties of the IRP, RP or the Liquidator under the Code. Accordingly, Section 60(5)(a) and (b) shall not be available for the Successful Resolution Applicant/Corporate Debtor at this juncture which is 18 months after the approval of resolution plan by the Adjudicating Authority.

 

# 8. It is further submitted that the proceedings were initiated under Section 60(5)(c), which has a very broad scope that it speaks amount any question of law or fact, arising out of or in relation to the corporate insolvency resolution process or liquidation proceeding of a Corporate Debtor. Accordingly, the Adjudicating Authority has jurisdiction only over ongoing CIRP or liquidation proceeding. In this regard, Section 5(14) of the Code defines the CIRP period as the period of one hundred and eight days beginning from the insolvency commencement date and ending on one hundred and eight days. The period of 180 days of CIRP may be extended to a maximum of 330 days under Section 12 of the Code, which is the maximum period for CIRP or when the Resolution Plan gets approved by the Adjudicating Authority. In the present case the Resolution plan was approved by the Adjudicating Authority on 02.04.2019. As such, the Adjudicating Authority became functus officio on 02.04.2019. Therefore, in this case, at the time of filing of the application bearing IA No. 3927 of 2020 on 14.09.2020, there was on insolvency petition, which was pending before the Adjudicating Authority and as such, the Adjudicating Authority did not have jurisdiction to entertain the same. The aspect has also been duly dealt by the Adjudicating Authority in its impugned order at paragraphs no. 30, 31 and 32.

 

# 9. It is further submitted that the Adjudicating Authority is not even a Civil Court which has jurisdiction by virtue of Section 9 of the Code of Civil Procedure to try all suits of a civil nature. The Tribunal can exercise only such powers within the contours of jurisdiction as prescribed by the statute that it is required to administer. The Code clearly defines the circumstances in which the jurisdiction of the Adjudicating Authority can be invoked and who can invoke the same. In this case, the facts and circumstances do not fall under the scope of the Code and the issue involved herein requires trail and examination of fats and circumstances which can only be adjudicated upon by a civil court. The Ld. Counsel for the Respondent in support of his submissions reliance is placed upon the following judgments:

  • M/s Embassy Property Developments Pvt. Ltd. V. State of Karnataka & Ors.; (2020) 13 SCC 308; paragraph No. 11.

  • Ebix Singapore Pvt. Ltd. V. Committee of Creditors of Educomp Solutions Ltd. & Anr.; (2022) 2 SCC 401, paragraph No. 101.

  • Ghanashyam Mishra and Sons V. Edelweiss Asset Reconstruction Company Limited & Ors.; (2021) 9 SCC 657; Paragraph Nos. 69, 74;

 

# 10. It is further submitted that upon approval of the Resolution Plan, no claim, payable or receivable can be raised against the Corporate Debtor. After approval of the Resolution Plan, the Corporate Debtor is a clean slate and all undecided claims of Corporate Debtor stand extinguished. The objective and purpose of the Code, of a resolution and fresh start, will be defeated if such endless historical claims are raised before the Adjudicating Authority. Based on these submissions, it is submitted that the Adjudicating Authority has rightly passed the impugned order, therefore, there is no merit in the present Appeal, the Appeal is fit to be dismissed.

 

# 11. After hearing the parties and going through the pleadings made on behalf of the parties, it is an admitted case that the Resolution Plan was approved by the Adjudicating Authority on 02.04.2019 and thereafter, I.A. No. 3927 of 2020 was filed on 14.09.2020 before the Adjudicating Authority approximately after 18 months of approval of the Resolution Plan. Keeping in view of the aforenoted facts, we agree with the reasons given by the Adjudicating Authority, therefore, the impugned order dated 16.08.2021 passed by the Adjudicating Authority (National Company Law Tribunal, New Delhi Bench-II) in (IB) 334(ND)/2017 in IA/3927/2020 & 1356/2021 is hereby affirmed. The instant Appeal is hereby dismissed. No order as to costs.

 

# 12. Registry to upload the Judgment on the website of this Appellate Tribunal and send the copy of this Judgment to the Adjudicating Authority (National Company Law Tribunal, New Delhi Bench-II), forthwith.

 

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NCLAT (01.09.2022) in Shri Ramachandra D. Choudhary Vs. Bansal Trading Company [COMPANY APPEAL (AT) (INSOLVENCY) No. 810 of 2020] Held that;

  • Under Section 25(2)(b) of the IBC, 2016, the resolution professional is obliged to represent and act on behalf of the corporate debtor with third parties and exercise rights for the benefit of the corporate debtor in judicial, quasi-judicial and arbitration proceedings.

  • ………This shows that wherever the corporate debtor has to exercise rights in judicial, quasi-judicial proceedings the resolution professional cannot short-circuit the same and bring a claim before NCLT taking advantage of Section 60(5).

  • Therefore in the light of the statutory scheme as culled out from various provisions of the IBC, 2016, it is clear that wherever the corporate debtor has to exercise a right that falls outside the purview of the IBC, 2016 especially in the realm of the public law, they cannot, through the resolution professional, take a bypass and go before NCLT for the enforcement of such a right.

  • Therefore, considering the text of Section 60(5)(c) and the interpretation of similar provisions in other insolvency related statutes, NCLT has jurisdiction to adjudicate disputes, which arise solely from or which relate to the insolvency of the Corporate Debtor. 

  • However, in doing do, we issue a note of caution to the NCLT and NCLAT to ensure that they do not usurp the legitimate jurisdiction of other courts, tribunals and fora when the dispute is one which does not arise solely from or relate to the insolvency of the Corporate Debtor.The nexus with the insolvency of the Corporate Debtor must exist.

  • We hold that the remedy for recovery of debts, disputed or not, cannot be determined in summary proceedings and the Code does not contemplate adjudication of any such nature. Any such steps taken under Section 60(5) of the Code before the Adjudicating Authority, would tantamount to bypassing/short-circuiting the Judicial Proceedings.

 

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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.