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JSA Prism | Insolvency | March 2025

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Singapore High Court grants first recognition to Indian insolvency proceedings under the UNCITRAL Model Law on Cross-Border Insolvency

In a landmark judgment in Re Compuage Infocom Ltd and Anr.[1], the Singapore High Court (“Singapore HC”) has, for the very first time, recognised a Corporate Insolvency Resolution Process (“CIRP”) initiated under the Indian Insolvency and Bankruptcy Code, 2016 (“IBC”) as a ‘foreign main proceeding’ under the UNCITRAL Model Law on Cross-Border Insolvency (“Model Law”). It also extended judicial assistance to the Resolution Professional (“RP”) of Compuage Infocom Limited (“Corporate Debtor”) appointed in the Indian proceedings.

Brief facts

In 2017, Singapore adopted the provisions of the Model Law in its own Insolvency, Restructuring and Dissolution Act, 2008 (“IRDA”)[2]. Accordingly, it put in place a comprehensive regime to address issues relating to cross-border insolvency within its jurisdiction.

Subsequently, the Corporate Debtor, upon an application under Section 7 of the IBC, was admitted to CIRP by the Hon’ble National Company Law Tribunal, Mumbai Bench (“NCLT”) vide its order dated November 2, 2023. Further, the NCLT on April 29, 2024, appointed the RP of the Corporate Debtor to conduct the CIRP and manage the operations of the Corporate Debtor during such period.

Thereafter, the RP of the Corporate Debtor, necessitated by the refusal of Singapore banks to share information in relation to the Corporate Debtor’s bank accounts maintained in Singapore, approached the Singapore HC seeking recognition and assistance in relation to the Corporate Debtor’s CIRP initiated under IBC.[3] By producing the above-mentioned orders of the NCLT, the application under Section 15 of the Model Law particularly prayed for – (a) recognition of CIRP under Article 17 of the of the Model Law as a foreign main proceeding; (b) recognition of the RP as a ‘foreign representative’ as per Article 2(i) of the Model Law; and (c) additional reliefs under Article 21(1)(e) of the of the Model Law, including vesting of the Corporate Debtor’s Singapore based assets with its RP.

Issues before the Singapore HC

Whether a CIRP is a foreign proceeding?
Whether the RP of the Corporate Debtor is a foreign representative, and whether he was appointed under the CIRP?
Whether the procedural requirements under Article 15 of the Model Law were satisfied?

Analysis and findings

The Singapore HC after appreciating the submissions advanced by the RP of the Corporate Debtor, and noting the insolvency regime prevalent in India under IBC, opined as follows:-

Whether the CIRP is a foreign proceeding?
- In order to decide whether a CIRP under IBC is a ‘foreign proceeding’, the Singapore HC noted the definition of ‘foreign proceeding’ under Article 2(h) of the Model Law (as adopted by Singapore),[4] and relying on a judgment of the Singapore HC of Appeal of Singapore,[5] culled out the following requirements for a proceeding to qualify as a ‘foreign proceeding’ under the Model Law:
  - the proceeding must be collective in nature;
  - the proceeding must be a judicial or administrative proceeding in a foreign State;
- - the proceeding must be conducted under a law relating to insolvency or adjustment of debt;

- - the property and affairs of the debtor company must be subject to control or supervision by a foreign court in those proceedings; and
  - that the proceeding must be for the purpose of reorganisation or liquidation.
- With respect to the requirement under point (a) (i), the Singapore HC took note that of various characteristics of a CIRP under the framework of IBC to conclude that the same was collective in nature, particularly its public and inclusive character, structured process envisaged at each step of the procedure, and reorganisation of the Corporate Debtor by a resolution plan which deals with all its assets and is binding on all stakeholders.
- With respect to the requirement under points (a)(ii) and (iii), the Singapore HC noted the definition of a ‘foreign court’ under Article 2(e) of the Model Law,[6] and opined that as the NCLTs are quasi-judicial in nature, and are tasked with adjudication in matters relating to IBC with wide judicial powers conferred for the same, such tribunals would constitute a ‘foreign court’ under the Model Law. Thus, once the NCLTs are established as foreign courts, by extension, a CIRP being a proceeding before it, would constitute a judicial or administrative proceeding.
- With respect to the requirement under points (a)(iii), (iv) and (v), the Singapore HC was clear that CIRPs initiated under IBC related to insolvency or adjustment of debt, and that the property and affairs of a corporate debtor are subject to the requisite control or supervision of the NCLTs. Finally, the Singapore HC recognised that CIRPs are a tool for corporate reorganisation and an alternative to liquidation and thus fulfilled all 5 (five) requirements for a ‘foreign proceeding’ under the Model Law.
Whether the RP of the Corporate Debtor is a foreign representative under the foreign proceeding?

Noting the definition of a foreign representative under Article 2(i) of the Model Law,[7] the Singapore HC was unhesitant to conclude that the RP of the Corporate Debtor was clearly authorised in the CIRP to administer the reorganisation of the Corporate Debtor, and therefore unequivocally recognised him as a foreign representative within the meaning of Article 2(i) of the Mode Law.

Whether the procedural requirements of Article 15 of the Model Law were satisfied?

The Singapore HC noted that the RP of the Corporate Debtor had satisfied the procedural requirements under Article 15 of the Model Law by applying to the Singapore HC with certified copies of the NCLT’s orders and providing a statement identifying all proceedings in respect of the Corporate Debtor that are known to him.

Lastly, in order to grant recognition to the CIRP of the Corporate Debtor as a ‘foreign main proceeding’ as per Article 17 of the Model Law, the Singapore HC determined that the Corporate Debtor’s ‘Centre of Main Interests’ (“COMI”) to be India. In determining the Corporate Debtor’s COMI, the Singapore HC applied the rebuttable presumption under Article 16(3) of the Model Law and found that the registered office of the Corporate Debtor, the control of the Corporate Debtor’s Singapore branch, its assets, operations and substantial business and the majority of its creditors, are based in India.

Accordingly, the Singapore HC granted recognition to the CIRP of the Corporate Debtor as a ‘foreign main proceeding’ under Article 17(2)(a) of the Model Law, enabling the RP to exercise powers in Singapore, subject to the Singapore HC’s supervision regarding asset repatriation.

Reliefs granted

In addition to granting recognition to the CIRP of the Corporate Debtor as a foreign main proceeding, which would enable the RP of the Corporate Debtor to access information in relation to the Corporate Debtor’s assets from Singapore-based banks and other entities, the RP of the Corporate Debtor also sought the power to repatriate the assets of the Corporate Debtor based in Singapore to its estate in India.

However, the Singapore HC declined to permit repatriation of assets at this stage. It emphasised that such relief would be contingent upon prior leave of the Singapore HC, to ensure that Singapore based creditors have an opportunity to raise objections. The Singapore HC underscored the need to balance international co-operation with the protection of local creditor interests, consistent with the provisions of IRDA and to ensure that such a class of creditors are treated fairly and given an opportunity to participate in the CIRP.

Conclusion

This judgment marks a significant milestone in advancing cross-border insolvency cooperation under the Model Law framework. The Singapore High Court’s proactive and pragmatic approach stands in stark contrast to India’s current regime, where Sections 234 and 235 of the IBC have had limited practical utility.

While Indian courts, most notably in the Jet Airways case,[8] have attempted to bridge this statutory gap through judicial innovation, these measures remain ad hoc and lack the predictability and consistency of a codified framework.

India continues to await the formal enactment of Draft Part Z of the IBC and its corresponding subordinate legislation, which are designed to align India’s cross-border insolvency regime with global standards. In the interim, building reciprocal arrangements, institutional capacity, and judicial expertise will be crucial to fostering trust and facilitating the recognition of foreign insolvency proceedings.

This ruling should serve as a timely nudge for Indian policymakers to expedite legislative reform and institutionalise a comprehensive, reciprocal cross-border insolvency framework.

This Prism has been prepared by:

Varghese Thomas
Partner

Ahsan Allana
Senior Associate

Kabir Saund
Associate

For more details, please contact [email protected]

[1] [2025] SGHC 49

[2] Section 252 and Third Schedule of IRDA.

[3] HC/OA No. 1272/2024

[4] foreign proceeding means a collective judicial or administrative proceeding in a foreign State, including an interim proceeding, under a aw relating to insolvency or adjustment of debt in which proceeding the property and affairs of the debtor are subject to control or supervision by a foreign court, for the purpose of reorganisation or liquidation.

[5] Ascentra Holdings, Inc (in official liquidation) and Ors. vs. SPGK Pte. Ltd., [2023] 2 SLR 421.

[6] foreign court means a judicial or other authority competent to control or supervise a foreign proceeding.

[7] foreign representative means a person or body, including one appointed on an interim basis, authorised in a foreign proceeding to administer the reorganisation or the liquidation of the debtor’s property or affairs or to act as a representative of the foreign proceeding.

[8] NCLAT Allows Dutch Administrator To Participate In Insolvency Proceedings Of Jet Airways (https://www.livelaw.in/corporate/nclat-allows-dutch-administrator-to-participate-in-insolvency-proceedings-of-jet-airways-148532).

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JSA Prism | Insolvency | March 2025

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Interim moratorium under the Insolvency and Bankruptcy Code, 2016 does not bar execution of regulatory penalties against the personal guarantor

The Supreme Court of India (“Supreme Court”) recently in the case of Saranga Anilkumar Aggarwal vs. Bhavesh Dhirajlal Sheth and Ors.[1], held that the interim moratorium on personal guarantors under Section 96 of the Insolvency and Bankruptcy Code, 2016 (“IBC”) does not extend to regulatory penalties (such as those imposed under consumer protection laws). This judgment reaffirms that such penalties remain enforceable despite the ongoing insolvency process.

Brief facts

Several homebuyers (“Respondent Nos. 1 and 2”) filed consumer complaints before the National Consumer Disputes Redressal Commission (“NCDRC”) against East & West Builders (RNA Corp. Group Co.) (“Appellant”), a real estate developer. The complaints were arising out of the Appellant’s failure to deliver possession of residential units within the agreed timeline. By final judgment and order dated August 10, 2018, the NCDRC imposed 27 (twenty-seven) penalties on the Appellant for deficiency in service and directed the Appellant to complete construction, obtain occupancy certificates, and hand over possession of residential units to the homebuyers.

Respondent Nos. 1 and 2, as decree holders, filed execution applications before the NCDRC, seeking enforcement of the penalty orders, since the Appellant failed to comply with the NCDRC’s directions.

Subsequently, an application under Section 95 of the IBC was filed against the Appellant, triggering an interim moratorium under Section 96 of the IBC.

Accordingly, the Appellant filed an application before the NCDRC seeking a stay of the execution proceedings, on the grounds that the interim moratorium barred further legal actions. By order dated February 7, 2024, the NCDRC rejected the Appellant’s application, holding that consumer claims and penalties did not fall within the scope of the moratorium under the IBC.

Aggrieved, the Appellant challenged the NCDRC’s decision by filing a civil appeal before the Supreme Court.

Issue

Does the interim moratorium under Section 96 of the IBC extend to regulatory penalties imposed by bodies like the NCDRC?

Findings and analysis

The Supreme Court upheld the NCDRC’s order dated February 7, 2024, and dismissed the Civil Appeal. It ruled that the interim moratorium under the IBC does not bar regulatory penalties imposed under the Consumer Protection Act, 2019. The Supreme Court reasoned as follows:

Moratorium under IBC does not preclude the imposition of regulatory penalties: The Supreme Court distinguished financial liabilities from regulatory penalties, holding that the moratorium provisions under IBC are intended to safeguard the financial viability of the debtors, but do not to exempt them from the legal consequences of statutory violations.

The Supreme Court clarified that the penalties imposed by the NCDRC do not constitute recovery proceedings for financial debt by a creditor. Instead, these penalties serve as a punitive function to enforce statutory compliance and uphold public interest.

Scope of moratorium under the IBC: The Supreme Court clarified that Section 96 of the IBC imposes an interim moratorium only on legal proceedings concerning ‘debt’ when insolvency proceedings commence against individuals and personal guarantors. It was held that consumer protection penalties fall outside this definition, as they function to penalise unfair trade practices rather than enforce financial obligations.

Similarly, the Supreme Court affirmed that the moratorium under Section 14, which applies to corporate debtors, does not cover criminal or regulatory penalties aimed at ensuring compliance with statutory mandates.

IBC cannot serve as a shield against consumer protection laws: The Supreme Court noted that staying regulatory penalties would establish a dangerous precedent, enabling insolvent entities to evade liability for consumer rights violations solely by invoking insolvency proceedings.

The Supreme Court further clarified that the IBC seeks to only facilitate financial resolution. It does not absolve corporate debtors or individuals of their statutory obligations under consumer protection laws or other regulatory frameworks.

Lastly, it was held that granting a moratorium on such penalties would undermine the consumer protection laws and diminish the accountability of developers towards homebuyers.

Conclusion

The Supreme Court ruled that the interim moratorium under Section 96 of the IBC does not protect regulatory penalties imposed under consumer protection laws. The Appellant was ordered to comply with the penalties within 8 (eight) weeks, reinforcing the principle that insolvency proceedings cannot be used as a mechanism to avoid statutory duties.

This judgment clarifies the boundaries of the IBC’s moratorium provisions, ensuring that entities cannot exploit insolvency proceedings to avoid regulatory penalties. It upholds the integrity of consumer protection laws by affirming that penalties serving public interest are not to be stayed under the IBC moratorium. The decision also highlights the judiciary’s commitment to preventing the misuse of legal frameworks, ensuring that insolvency mechanisms are not abused to circumvent statutory duties. Overall, the ruling reinforces the balance between facilitating corporate debt resolution and protecting consumer rights.

This Prism has been prepared by:

Dheeraj Nair
Partner

Vishrutyi Sahni
Principal Associate

Muskaan Gupta
Associate

For more details, please contact [email protected]

[1] Civil Appeal No. 4048 of 2024, Supreme Court

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JSA Prism | Insolvency | March 2025

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NCLAT: Acknowledgement of debt cannot revive the defaults that occurred during the pre-Section 10A period under the Insolvency and Bankruptcy Code, 2016, particularly when the acknowledged debt is partially paid

The National Company Law Appellate Tribunal, Chennai (“NCLAT”) in Sudhir Bobba (Suspended Director of Servomax Limited) vs. M/s. TVN Enterprises[1], has held that defaults occurring during the pre-Section 10A period under the Insolvency and Bankruptcy Code, 2016 (“IBC“), do not continue to constitute a ‘default’ thereafter once the corporate debtor has made partial payments toward the (acknowledged) debt accumulated during the period excluded under Section 10A of IBC[2].

Brief facts

M/s. Servomax Limited (“Corporate Debtor”), placed several purchase orders with M/s. TVN Enterprises, (“Operational Creditor”), for the supply of goods until September 15, 2020. The Operational Creditor fulfilled these purchase orders and raised corresponding invoices. While the Corporate Debtor made periodic payments against the invoices, an outstanding amount of INR 1,00,49,270 (Indian Rupees one crore forty-nine thousand two hundred and seventy) remained unpaid.
On September 29, 2022, the Operational Creditor recorded the outstanding debt of INR 1,00,49,270 (Indian Rupees one crore forty-nine thousand two hundred and seventy) with the National E-Governance Services Limited (“NeSL”). Subsequently, on September 28, 2022, the Operational Creditor issued a demand notice to the Corporate Debtor under Section 8 of the IBC. Upon the Corporate Debtor’s failure to discharge the liability or raise a valid dispute, the Operational Creditor filed an application under Section 9 of the IBC before the National Company Law Tribunal, Hyderabad (“NCLT”), seeking initiation of the Corporate Insolvency Resolution Process (“CIRP”) against the Corporate Debtor.
By an order dated February 22, 2024, the NCLT admitted the Section 9 application and initiated CIRP against the Corporate Debtor, based on the following observations:
- As of November 11, 2022 (the filing date), the operational debt of ₹1,00,49,270 (Indian Rupees one crore forty-nine thousand two hundred and seventy) exceeded the statutory threshold of INR 1,00,00,000 (Indian Rupees one crore) under Section 4 of the IBC and the Corporate Debtor failed to establish any pre-existing dispute regarding the debt.
- Although certain invoices fell within the exclusion period under Section 10A of the IBC (March 25, 2020 – March 25, 2021), the NCLT held that Section 10A of the IBC did not apply because:
  - The default first occurred on March 14, 2020 (date of default mentioned in the NeSL) which is prior to the Section 10A exclusion period.
  - The default continued throughout and beyond the Section 10A exclusion period.

- - The Corporate Debtor acknowledged the outstanding debt after March 25, 2021, through financial statements for FY 2021-2022. The Corporate Debtor also issued a debt confirmation letter dated January 5, 2022, as well as 3 (three) post-dated cheques totaling INR 39,94,000 (Indian Rupees thirty-nine lakh ninety-four thousand), which were subsequently dishonored.

- Aggrieved by the NCLT’s order, Mr. Sudhir Bobba, the suspended director of the Corporate debtor, filed an Appeal before the NCLAT.

Issue

Whether the CIRP can be initiated on the basis of the default of invoices between March 25, 2020, and March 25, 2021 (during the Section 10A exclusion period under the IBC) only because the Corporate Debtor acknowledged the debt post-March 25, 2021?

Findings and analysis

The NCLAT allowed the appeal and set aside the NCLT’s order admitting the Corporate Debtor into CIRP. The NCLAT decided on the above issue in the following manner:

Applicability of Section 10A: The NCLAT emphasised that under Section 10A of the IBC, no CIRP application can be filed for defaults arising between March 25, 2020, and March 25, 2021.
Effect of Acknowledgement of Debt: Despite the Corporate Debtor acknowledging the debt post-March 25, 2021, the NCLAT held that such acknowledgment could not revive defaults occurring during the Section 10A period or circumvent the statutory bar.
Debt Calculation: Defaults arising out of invoices before the exclusion period are not covered by Section 10A of the IBC. However, in the present case, out of the total claimed debt of INR 1,00,49,270 (Indian Rupees one crore forty-nine thousand two hundred and seventy), INR 97,62,508 (Indian Rupees ninety-seven lakh sixty-two thousand five hundred and eight) related to 27 (twenty-seven) invoices that fell due during the Section 10A period. Excluding these, only an amount of INR 2,86,762 arises out of an invoice dated February 13, 2020, remained. However, the remaining amount did not meet the INR 1,00,00,000 (Indian Rupees one crore) threshold under Section 4 of the IBC.
Distinction from Precedents: The NCLAT distinguished the present case from other judgments by emphasising that each unpaid invoice constitutes a separate default, and that the debt accrued during the Section 10A period cannot be included in CIRP initiation.
Legal Remedies: The NCLAT clarified, citing the Supreme Court’s ruling in Ramesh Kymal vs. Siemens Gamesa[3], that the debt itself is not extinguished, and the Operational Creditor may seek its remedies for recovery through other legal avenues – outside the IBC framework.

Conclusion

The NCLAT’s ruling provides clarity on the interplay between Section 10A of IBC and the acknowledgment of debts incurred during the pandemic’s exclusion period. The NCLT’s decision underscores that defaults occurring within the Section 10A exclusion window cannot be revived for the purpose of initiating CIRP through subsequent acknowledgments made post-exclusion period.

For creditors, this decision highlights the importance of understanding the temporal boundaries set by Section 10A of the IBC. Acknowledging debts that accrued during the exclusion period does not extend the window for initiating CIRP beyond the statutory limits. Consequently, creditors should be vigilant about the dates of defaults and ensure that any actions taken fall within permissible periods under the IBC.

Corporate debtors, on the other hand, must recognise that while acknowledging debts is a step toward resolution, such acknowledgments cannot retroactively alter the classification of defaults that occurred during the exclusion period. This understanding is vital for accurate financial reporting and in formulating strategies for debt resolution.

In essence, the NCLAT’s decision reinforces the legislative intent behind Section 10A, ensuring that the exclusion period serves its purpose without being circumvented through post-period acknowledgments. Both creditors and corporate debtors must align their actions with the statutory framework to uphold the integrity of insolvency proceedings.

This Prism has been prepared by:

Dheeraj Nair
Partner

Vishrutyi Sahni
Principal Associate

Muskaan Gupta
Associate

For more details, please contact [email protected]

[1] Company Appeal (AT) (CH) (Ins.) No.95 of 2024, NCLAT, Chennai

[2] Section 10A of the IBC provides a temporary suspension of the initiation of CIRP for defaults arising on or after March 25, 2020, and until a specified period, due to the COVID-19 pandemic. It prevents insolvency proceedings against defaulting companies during this period to protect them from being dragged into insolvency due to the pandemic’s economic impact.

[3] (2021) 3 SCC 224

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JSA Prism | Insolvency | March 2025

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Demand notice under Rule 7 of personal guarantors rules does not constitute invocation of guarantee

The National Company Law Appellate Tribunal (“NCLAT”), recently in the case of State Bank of India vs. Mr. Deepak Kumar Singhania[1], has clarified that a statutory demand notice issued under Rule 7(1) of the Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rules, 2019 (“PG Rules”) does not amount to a valid invocation of the personal guarantee for the purpose of initiating insolvency resolution proceedings under Section 95 of the Insolvency and Bankruptcy Code, 2016 (“IBC”).

Brief facts

The State Bank of India (“Appellant”) extended financial facilities to M/s LML Limited (“Corporate Debtor”), for which Mr. Deepak Kumar Singhania (“Respondent”) and 2 (two) others executed a deed of guarantee and multi-partite agreement to secure the debt in case of default.

On March 23, 2018, the Corporate Debtor was ordered into liquidation.

On April 30, 2022, the Appellant issued a demand notice under Rule 7(1) of the PG Rules, demanding INR 125,05,28,848.56 (Indian Rupees one hundred and twenty-five crore five lakh twenty-eight thousand eight hundred forty-eight and fifty-six paise) from the Respondent. The Appellant subsequently filed an application under Section 95 of the IBC. However, the National Company Law Tribunal, Allahabad Bench, Prayagraj (“NCLT”) dismissed the application by order dated November 28, 2024, on the grounds that the Appellant had failed to invoke the guarantee prior to issuing the demand notice, rendering the application non-maintainable. The NCLT also ruled that the Respondent did not qualify as a guarantor under Rule 3(1)(e) of the PG Rules.

The Appellant challenged the decision by filing an appeal before the NCLAT.

Issue

Whether a statutory demand notice issued under Rule 7(1) of the PG Rules constitutes a valid invocation of the personal guarantee for initiating insolvency proceedings under Section 95 of the IBC?

Findings

The NCLAT upheld the NCLT’s order and dismissed the appeal. It ruled that the statutory demand notice under Rule 7(1) of the Rules does not qualify as a valid invocation of the personal guarantee. The NCLAT reasoned as follows:

Invocation of guarantee: The statutory demand notice alone does not invoke the personal guarantee. The NCLAT emphasised that invoking a personal guarantee requires strict adherence to the terms of the deed of guarantee. The NCLAT relied on the decision in the case of Syndicate Bank vs. Channaveerappa Beleri[2] and Archana Deepak Wani vs. Indian Bank[3], where the courts stressed the importance of complying with the terms of the deed of guarantee. The NCLAT emphasised that the terms of the guarantee agreement take precedence.
Triggering liability: A personal guarantor’s liability arises only upon the formal invocation of the guarantee, as per the contractual agreement. The issuance of a mere statutory notice does not amount to an invocation under the contract.
Debt and default: According to Section 3(12) of the IBC, default occurs when there is a pre-existing debt under Section 3(11) of the IBC. The guarantor is considered a debtor only after the guarantee is properly invoked.
Definition of guarantor: Rule 3(1)(e) of the PG Rules defines a ‘Guarantor’ as a person who has executed a personal guarantee, and the guarantee must have been invoked. The NCLAT rejected the interpretation that ‘and’ in the definition should be read as ‘or’, as such an interpretation would undermine the statutory framework.
‘Personal Guarantor’ under Section 5(22) vs. ‘Guarantor’ under Rule 3(1)(e): The NCLAT distinguishes between the definition of ‘Personal Guarantor’ under Section 5(22) of the IBC and ‘Guarantor’ under Rule 3(1)(e) of the PG Rules. It concludes that Rule 3(1)(e) applies in cases under Section 95 since both provisions fall under Part III of the IBC, whereas Section 5(22) falls under Part II of the IBC. This distinction is significant because, under Rule 3(1)(e), a ‘Guarantor’ refers to a debtor who is a personal guarantor to a corporate debtor and whose guarantee has been invoked by the creditor but remains unpaid, either in full or in part.

Conclusion

This NCLAT ruling is a significant clarification in insolvency law, establishing that a statutory demand notice under Rule 7(1) of the PG Rules does not constitute a valid invocation of a personal guarantee under Section 95 of the IBC. The judgment reinforces the principle that creditors must strictly comply with the terms of the Deed of Guarantee before initiating insolvency proceedings against personal guarantors.

This decision carries important implications for creditors and guarantors alike. It emphasises that a mere demand notice is insufficient to trigger a guarantor’s liability, reaffirming the necessity of formally invoking the guarantee in accordance with contractual terms and legal provisions. The ruling also strengthens protections for personal guarantors by preventing premature insolvency proceedings where the guarantee has not been properly invoked. Ultimately, it reinforces that liability under a personal guarantee arises only when the creditor adheres to both contractual and statutory requirements, ensuring procedural safeguards are upheld in insolvency proceedings.

This Prism has been prepared by:

Dheeraj Nair
Partner

Vishrutyi Sahni
Principal Associate

Muskaan Gupta
Associate

For more details, please contact [email protected]

[1] Company Appeal (AT) (Insolvency) No. 191 of 2025, NCLAT

[2] (2006) 11 SCC 506

[3] Company Appeal (AT) (Ins.) No.301 of 2023, NCLAT

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JSA Prism | Insolvency | March 2025

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For Resolution Plans involving combinations, Resolution Plan can be tabled for Committee of Creditors’ approval only after obtaining the requisite approval by the Competition Commission of Inda

The Hon’ble Supreme Court of India (“Supreme Court”) by a 2:1 majority in Independent Sugar Corporation Limited v Girish Sriram Juneja and Ors^[1], has held that in case of resolution plans proposing a combination (i.e., a merger or amalgamation of the entities) of a corporate debtor, the Competition Commission of India (“CCI”) must first grant the necessary approval before such Resolution Plan is placed before the Committee of Creditors (“CoC”) for its approval under Section 30(4) of the Insolvency and Bankruptcy Code (“IBC”).

Brief facts

The present judgment arises out of the Corporate Insolvency Resolution Process (“CIRP”) of Hindustan National Glass and Industries Limited (“HGNIL”/“Corporate Debtor”). In April 2022, 2 (two) resolution applicants, viz., AGI Greenpac Limited (“AGI”) and Independent Sugars Corporation Limited (“INSCO”) submitted their Resolution Plans for consideration (“Resolution Plans”).
Since the resolution of the Corporate Debtor constituted a combination under the Competition Act, 2002 (“Competition Act”), these plans required the requisite CCI approval.
The Resolution Professional of the Corporate Debtor (“RP”) permitted the resolution applicants to obtain the requisite CCI approval after receiving CoC’s approval to its resolution plan, but prior to filing of a plan approval application with the National Company Law Tribunal (“NCLT”).
Before the Resolution Plans were placed before CoC, AGI filed a merger notification in Form I on September 27, 2022, for its proposed acquisition of 100% of HNG’s shareholding (“First CCI Notification”). The First CCI Notification was invalidated by CCI on October 22, 2022, directing AGI to refile the merger notification in Form II (the long form merger notification).
On August 25, 2022, CoC already approved the Resolution Plan submitted by AGI with 98% votes, whereas INSCO’s Resolution Plan received only 88% votes. Accordingly, the RP filed its application seeking NCLT’s assent to AGI’s Resolution Plan under Section 31 of the IBC.
In the meantime, AGI refiled the merger notification in Form II with CCI on November 3, 2022 (“Second CCI Notification”). Subsequently:
- CCI issued 2 (two) requests for information addressing gaps in AGI’s Second CCI Notification;
- after reviewing the information provided by AGI, on February 9, 2023 (i.e., 98 (ninety-eight) calendar days (subject to clock-stops) after the Second CCI Notification was filed), the CCI formed a prima facie opinion that the transaction proposed under the Resolution Plan of AGI (“Proposed Transaction”) was likely to cause appreciable adverse effect on competition (“AAEC”) in certain relevant markets in India and issued a Show Cause Notice on February 10, 2023 (“CCI SCN”), directing AGI to demonstrate why a phase II review should not be initiated in respect of the Proposed Transaction;
- on March 10, 2023, AGI filed a response to the CCI SCN (“SCN Response”). As part of its SCN Response, AGI voluntarily proposed to divest the Rishikesh plant of the Corporate Debtor, as a modification to address the competition concerns raised by the CCI;
- on March 15, 2023, after considering all information provided by AGI and assessing the effectiveness of the voluntary modification in addressing potential AAEC, CCI conditionally approved the Proposed Transaction, subject to the modification (“Approval Order”);
- the Approval Order was a reasoned order that included CCI’s analysis in relation to the various competitive constraints imposed on AGI and the Corporate Debtor by the market forces. It also addressed the voluntary modification offered by AGI, which involved the divestment of a plant that was used in the manufacture and sale of container glass and was self-contained, such that it incentivises new entry/capacity enhancement and would provide the buyer with an additional market share of approximately 5%. To this end, CCI expressly noted that considering the Proposed Transaction in light of all relevant factors including the competitive constraints imposed by various market forces and the voluntary modification, the Proposed Transaction was not likely to cause any AAEC in the relevant market (as delineated in the Approval Order); and
- INSCO challenged the Approval Order before the National Company Law Appellate Tribunal (“NCLAT”).[2]
Aggrieved with the developments of the CIRP of the Corporate Debtor, INSCO also filed an application before the NCLT challenging the approval granted by CoC to AGI’s resolution plan,[3] given that the pre-condition of obtaining CCI approval for the proposed combination was taken only after CoC’s approval.
On April 24, 2023, the NCLT rejected INSCO’s application. Aggrieved, INSCO challenged the said order before NCLAT.[4]
By the order dated July 28, 2023, and September 18, 2023 (“Impugned Orders”), the NCLAT upheld CCI’s approval to AGI’s resolution plan, and observed that while the requirement of approval for a proposed combination by CCI was mandatory in nature, obtaining the same prior to the approval by CoC was only directory.
Aggrieved, INSCO proceeded to challenge the Impugned Orders before the Hon’ble Supreme Court.

Issue

Whether CCI’s approval for a proposed combination under a resolution plan must mandatorily precede the approval of the resolution plan by CoC, as envisaged under the proviso to Section 31(4) of the IBC?

Findings

The Hon’ble Supreme Court allowed INSCO’s appeal and in the judgment, made the following relevant findings on the position of law:

Interpretation of the proviso to Section 31(4) of the IBC

The introduction of the proviso to Section 31 (4) of the IBC and use of the term ‘prior’ makes it clear that the intent of the legislature was to create an exception in cases containing combination proposals, where the approval of CCI is to be procured prior to the approval of the CoC.
It is held that it is necessary for the courts to interpret the provisions in their natural sense, as it is through the words used in a provision that legislature expresses its intention. When the language is unambiguous, the court must respect its ordinary and natural meaning instead of wandering into the realm of speculation an unintended overreach invoking the so-called ‘spirit of law’.
The language of the proviso to section31(4) of the IBC appears to be clear with no ambiguity and in those situations, all words finding place in the provision must be given their due meaning.
The use of the word ‘prior’ in the proviso must be given some meaning as by virtue of the same, the statute requires that the act of obtaining CoC approval for the resolution plan must be done in a particular manner i.e. the necessary approval for the resolution plans containing combination proposals must be obtained prior to such plans, being granted CoC approval.
The notes on clauses and memorandum for the said provision also suggest that the approval from CCI for the combination must be procured prior to the approval of the resolution plan by the CoC.

No fundamental disharmony between timelines under the Competition Act and the IBC

The timelines for approval stipulated under the IBC and the Competition Act are not disharmonious, except in rare circumstances involving an extremely high degree of AAEC, which may require a longer review period (i.e., a large part of the 210 (two hundred and ten) days stipulated under the extant merger regime of the Competition Act).
In 2022-2023, CCI disposed of combination applications in an average of 21 (twenty-one) working days. It further noted that there has been no recorded instance till date where CCI took more than 120 (one hundred and twenty) days to approve a transaction, and it is extremely rare for a transaction to take more than 120 (one hundred and twenty) days, to receive approval. Therefore, the Hon’ble Supreme Court emphasised that undue importance need not be given to such outlier, rare and extreme examples.
In cases of CIRP under the IBC, the trigger event for filing a merger notification need not be limited to the submission of the resolution plan to the resolution professional. Instead, the merger notification can be filed post the execution of any agreement, which conveys the decision to acquire control over a target company, allowing sufficient time for CCI clearance within the IBC framework.
The timeline under the IBC can be elongated in rare circumstances, where the delay cannot be ascribed to the parties (including in such instances where delay is caused by CCI’s assessment of a transaction) (relied on Committee of Creditors Essar vs. Satish Kumar Gupta).

Relevance of CCI’s scrutiny of a proposed combination in the IBC process

Any resolution plan must comply with all existing laws, including Section 6 of the Competition Act which holds any combination that leads to an AAEC in the relevant market, void. Therefore, CoC’s approval cannot be granted until CCI decides on the legality of a proposed combination.
The Proposed Transaction was prima facie found to be in contravention of Section 6 of the Competition Act (given issuance of the SCN), and was only approved after AGI offered the voluntary modification. However, CoC approved the resolution plan prior to CCI’s approval (i.e., before the modifications (i.e., divestments)) which ought to have been considered by CoC when approving the resolution plan.

Procedural lapses under the Competition Act

CCI incorrectly issued the CCI SCN under Section 29(1) of the Competition Act only to AGI (i.e., acquirer) and not to the Corporate Debtor (i.e., target).
Both the acquirer and target are integral to the assessment of a combination, and not sending the CCI SCN to the target led to a procedural lapse, which undermined the fairness and completeness of the investigative process. The judgment interprets the use of the word ‘parties’ in plural form to mean that the CCI SCN must be addressed to both the acquirer as well as the target.
In cases where CCI forms a prima facie view that a transaction causes AAEC, CCI ought to thoroughly undertake the process prescribed under Section 29 of the Competition Act, which mandates a formal investigation (which is a far-reaching exercise of evidence-gathering and fact-finding) under the aegis of the Director General of CCI.

Practical challenges posed by conditional approvals of CCI

The conditional approvals granted by CCI depends on the parties complying with such remedies in the future, whereas the CIRP process under the IBC is based on finality and decisiveness.
In this context, the Hon’ble Supreme Court highlighted certain concerns regarding the conditional approvals granted by CCI:
- the Hon’ble Supreme Court noted that the absence of a comprehensive monitoring mechanism creates a lacuna in enforcing conditional approvals;
- conditional approvals are not equipped to effectively mitigate risks that may arise during the interim period when such remedies are being implemented. The interim period is a regulatory vacuum which increases the likelihood of anti-competitive conduct;
- the risk/lacuna is further exaggerated by the absence of oversight mechanisms as there is no active regulatory check during the execution of CCI imposed remedies; and
- a divestiture may fail to achieve its intended purpose if the acquiring party lacks the capacity or intent to compete effectively in the market.

The Hon’ble Supreme Court also rejected AGI’s objection to INSCO’s locus standi, and distinguished the cases relied upon by the NCLAT, to finally allow the appeal by INSCO (Majority judgment by Hrishikesh Roy, J. and Sudhanashu Dhulia, J.).

Dissenting judgment (S. V. N. Bhatti. J.)

The Hon’ble Supreme Court was obliged to interpret the word ‘shall’ in the proviso to Section 31(4) of the IBC as directory in nature so as to preserve the legislative effort and intent of the statute.
This conclusion was premised on the principle that the literal rule of interpretation may not necessarily be the tool of first resort merely because plain and simple words are found in the statute. IBC must be purposively interpreted so it does not cause undue hardship, inconsistency, or counteract the purpose of the legislation.
The literal interpretation of the proviso in isolation limits the number of eligible resolution applicants, thus defeating the core objects of the IBC, i.e. to maximise value for all stakeholders.
Therefore, to deem the proviso to be mandatory and compel prospective resolution applicants to obtain CCI’s approval before the stage of CoC approval (as contemplated in Section 30 of the IBC), would amount to ‘catapulting the proviso to a place not expressed by the parliament’, and cause undue hardship and difficulty to prospective resolution applicants.

Conclusion

For a resolution plan containing a combination, CCI’s approval of the resolution plan must be obtained before and consequently, CoC’s examination and approval should be only after CCI’s decision.

The statutory provision and legislative intent unequivocally affirm the mandatory nature of the Proviso to Section 31(4) of the IBC.

Observations

By requiring approval from CCI before CoC evaluates a resolution plan, the judgment aims to mitigate potential risks of combinations with high market shares which could cause prima facie concerns on market structures resulting from insolvency resolutions. This ruling tries to strike a balance between ensuring efficient debt resolution and maintaining competitive market conditions to ensure finality, ease of doing business while promoting fair competition in the market.
The decision underscores the necessity of strictly following procedural norms in insolvency proceedings. It reinforces the principle that statutory compliance, such as securing regulatory clearances is essential to preserving the credibility and effectiveness of the IBC framework.
That being said, the judgment also hinges the timelines of the CIRP process on the efficiency and timelines of CCI in granting its approvals. Effectively the 330 (three hundred and thirty) days period prescribed under the IBC may be reduced to the extent of the time taken by the CCI in granting its approval.
This judgment assumes the importance of the complimenting interplay between the IBC and the Competition Act, to achieve the collective objectives of the respective legislations in a timely, efficient and effective manner.
This judgment tries to provide clarity on the merger control process under the Competition Act and provides direction in terms of involvement of both parties (i.e., the target and acquirer). However, this is not in line with the regulations and 14 (fourteen) years old merger regime practice of target having a limited tole in an acquisition. It is important to note that merger control under the Competition Act is a trust-based process where parties and the combination division of CCI work collaboratively to ensure that combinations do not cause AAEC, while at the same time activity in India by way of mergers and acquisitions is not hindered. To this end, the combination regulations allow the parties to file voluntary remedies and voluntary commitments. This mechanism has been enacted to make competition regulation business friendly to avoid time consuming scrutiny and investigation, while ensuring that the merger control regime meets its intended objective. Therefore, while CCI ought to follow the procedural rigour prescribed under the Competition Act and the accompanying regulations, putting every transaction through the same rigour would have the unintended consequence of slowing down commerce. Further, given merger control is ex ante and involves significant disclosure of current and forward looking competitively sensitive data of the parties, CCI has rightly ring-fenced access to such data and to date has not involved the DG in any investigation even post issuance of an SCN.
AGI has filed for a review of this judgment. It is to be seen whether the Hon’ble Supreme Court would be willing to reconsider its findings within the narrow scope of its review jurisdiction.

This Prism has been prepared by:

Dheeraj Nair
Partner

Nisha Kaur Uberoi
Partner and Chair, Competition Law

Varghese Thomas
Partner

Fatema Kachwalla
Partner

Rahat Dhawan
Principal Associate

Vishrutyi Sahni
Principal Associate

Kabir Saund
Associate

Pramothesh Mukherjee
Associate

For more details, please contact [email protected]

[1] 2025 INSC 124

[2] Competition Appeal (AT) No. 7 of 2023

[3] I.A. No. 1497 of 2022

[4] Company Appeal (AT)(INS.) No. 735 of 2023

Tags Insolvency and Bankruptcy Code 2016, Insolvency Law, JSA, JSA Prism, Leading Law Firm, Leading Lawyers, Legal Updates, MSMEs

JSA Prism | Insolvency | November 2024

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Supreme Court of India orders for liquidation of Jet Airways (India) Limited and recommends reform in the Insolvency and Bankruptcy Code, 2016

On November 7, 2024, a 3 (three) judge bench of Hon’ble Supreme Court of India (“Supreme Court”) delivered their judgment in the matter of State Bank of India and Ors. vs. The Consortium of Mr. Murari Lal Jalan and Mr. Florian Fritsch and Anr.[1], inter alia, ordering liquidation of Jet Airways (India) Limited (“Jet Airways”). Interestingly, Supreme Court also suggested various points for the Parliament to reform the Insolvency and Bankruptcy Code, 2016 (“IBC”).

Brief facts

This judgment arose out of an appeal against the order passed by National Company Law Appellate Tribunal (“NCLAT”) on March 12, 2024 (“Impugned Order”), which held that the Successful Resolution Application (“SRA”) of Jet Airways had fulfilled all conditions precedent of the approved resolution plan (“Plan”). The Impugned Order, inter alia, allowed for adjustment of the Performance Bank Guarantee of INR 150,00,00,000 (Indian Rupees one hundred and fifty crore) (“PBG”) towards the first tranche payment of INR 350,00,00,000 (Indian Rupees three hundred and fifty crore) that was due from SRA under the Plan.

Issues

Whether the PBG could be allowed to be adjusted against the first tranche payment under the Plan?
Whether the non-implementation of the Plan by SRA necessarily leads to liquidation?
Whether timely implementation of Plan is also one of the objectives of IBC?

Analysis and findings

Before analysing these issues, Supreme Court rejected the preliminary objection of non-existence of any ‘question of law’ under Section 62 of IBC. Even amidst the concurrent factual findings by National Company Law Tribunal (“NCLT”), Mumbai, and NCLAT, Supreme Court held that an intervention was justified, because the Impugned Order was in violation of its earlier order dated January 18, 2024, which held against the adjustment of PBG. Supreme Court was also of the view that NCLAT also drew wrong inferences from proved facts.

For Issue (1), Supreme Court answered in negative, with the following analysis:
- Supreme Court analysed the provisions of the Plan which mandated payment of the first tranche of INR 350,00,00,000 (Indian Rupees three hundred and fifty crore) by SRA within 180 (one hundred and eighty) days of the ‘effective date’ (which was originally the 90^th day from the fulfilment of the conditions precedent (“CPs”)).[2] After multiple extensions by NCLT and NCLAT, the ‘effective date’ was frozen at May 20, 2022, when SRA claimed to have complied with the conditions precedent;
- the Supreme Court observed that, at least, after the effective date of May 20, 2022, SRA should have fulfilled its obligations under the Plan, and their undue delay reflected mala fide intention on their part; and
- Supreme Court also analysed that the provisions of the Plan, read with the ‘Request for Resolution Plan’, did not allow for any adjustment of PBG, since the PBG was to be invoked only in specific conditions prescribed therein. Such adjustment also fell afoul of Regulation 36B(4A) of the Insolvency and Bankruptcy Board of India (“IBBI”) (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, which mandated forfeiture of performance security in case the resolution applicant failed to implement the Plan. Supreme Court held that PBG had to be kept alive till the implementation of the plan and could not be set-off against any payment obligation. Thus, failure to infuse funds led to non-implementation of the Plan;
For Issue (2), Supreme Court answered in positive with the following analysis:
- Supreme Court considered that the non-infusion of funds by SRA led to the default in payment of Corporate Insolvency Resolution Process (“CIRP”) costs as well, which includes airport dues;
- Supreme Court also analysed the schedule of Plan and concluded that the SRA should have paid the provident fund and gratuity dues in time;
- Supreme Court analysed Section 33(3) of IBC to conclude that consequence of non-implementation of Plan must necessarily be liquidation and held that the creditors were entitled to invoke the PBG; and
- Supreme Court lamented on how more than 5 (five) years passed since the admission of CIRP, and the implementation of the Plan still seemed to be a ‘dim light at the far end of a long tunnel’;
For Issue (3), Supreme Court answered in positive with the following analysis:
- Supreme Court analysed the preamble to IBC and the report of the Bankruptcy Law Reforms Committee, 2015, to note that ‘time’ and ‘speed’ were of essence for the working of IBC;
- Supreme Court reasoned that minimising delay was crucial to ensure that the assets of corporate debtor do not get frittered away due to a time lag;
- Supreme Court, hence, cautioned that the powers with NCLT and NCLAT to extend the timelines^[3] cannot be exercised mechanically without any application of mind, and must be done by adequately weighing the consequences of such extension; and
- Supreme Court invoked its plenary powers under Article 142 of the Constitution of India (“Constitution”) to order for liquidation of Jet Airways, in light of the extraordinary circumstances of inordinate delay in implementation of Plan and dues of corporate debtor getting multiplied. Supreme Court observed that liquidation remained the viable last resort for corporate debtor and the creditors

Recommendations by Supreme Court

Considering the present litigation to be an eye-opener on the working of IBC, Supreme Court gave the following suggestions to improve the working of IBC:

the committee of creditors (“CoC”) exercises its commercial wisdom to approve or reject a Plan after providing a rationale for the benefit of the adjudicating authorities;
the Central Government and IBBI have an oversight committee to independently ensure enforcement of the Guidelines for CoC dated August 6, 2024, issued by IBBI;
the SRA’s role must not be merely transactional, rather of pivotal responsibility towards the distressed entity. Hence, SRA must make sustained efforts for corporate revival even when faced with operational impediments;
the creditors must not impede the implementation of Plan through unnecessary demands, and hence, provide active support to SRA to revive the corporate debtor;
the NCLT while approving a Plan should record the next steps to be taken, so that parties are ad idem and vigilant about the next round of their obligations; and
IBC may provide for a monitoring committee to ensure smooth handover of corporate debtor to SRA once the plan is approved, and the said committee can be constituted by the CoC.

Significantly, before closing the matter, Supreme Court also highlighted deficiencies in IBC and functioning of NCLTs and NCLAT, calling for immediate attention:

SRAs repeatedly approached NCLT or NCLAT for relaxation in strict compliance with the Plan and the adjudicating authorities also acceded to such requests. The Supreme Court held that such intervention must be kept at a minimum at best, and NCLT and NCLAT must not aid the SRA in circumventing the mandate of law by acceding to their request for relaxation;
there was a serious lack of timely admission and disposal of applications by NCLT and NCLAT, no practice of sitting for full working hours, lack of capacity to manage growing number of cases, no effective system for urgent listings and the registry has ‘wide power to list or not to list a particular matter’. Supreme Court observed that NCLTs and NCLAT must seriously rethink their approach towards admission and disposal of matters and must take their role seriously, with judicial propriety. It even warned that any contravention of Supreme Court’s order will not be tolerated; and
there was an issue of vacancy of members in such tribunals and that appointment of new members must be prioritised.

Conclusion

Stressing upon timely and speedy resolution of a corporate debtor, Supreme Court went ahead to exercise its plenary power under Article 142 of the Constitution to order liquidation of Jet Airways. The Supreme Court set aside the Impugned Order of NCLAT, as perverse and unsustainable in law and directed that the infused funds of INR 200,00,00,000 (Indian Rupees two hundred crore) by SRA be forfeited. It also allowed the creditors to encash the PBG of INR 150,00,00,000 (Indian Rupees one hundred and fifty crore).

This judgment is significant as it not only emphasised time and speed to be the essence of IBC, but also presented the poignant deficiencies in the functioning of NCLT and NCLAT and made recommendations to reform IBC. It is particularly important for the fact that it directed the liquidation of Jet Airways due to defaults of the SRA by observing that a delay in taking control of a company leads to liquidation as the only viable answer.

This Prism has been prepared by:

Amit Kapur
Joint Managing Partner

Ayush Agarwala
Partner

Suvaaankoor Das
Principal Associate

Rishab Aggarwal
Associate

For more details, please contact [email protected]

[1] Civil Appeal Nos. 5023-5024 of 2024

[2] Supreme Court also analysed the 5 (five) conditions precedents mentioned in the Plan, namely: (a) validation of air operator certificate, (b) approval of business plan, (c) slot allotment approval, (d) international traffic rights clearance; and (e) demerger of Airjet Ground Services Ltd.

[3] Rule 15 of the NCLT Rules, 2016; Rule 15 of NCLAT Rules, 2016.

Tags Bankruptcy Code, Insolvency Law, JSA, Leading Law Firm, Leading Lawyers, Legal Updates, Supreme Court

JSA Prism | Insolvency | August 2024

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Clean slate theory cannot be used to extinguish known claims when the promoter of a micro, small and medium enterprise is a successful resolution applicant under the Insolvency and Bankruptcy Code, 2016

The Madras High Court (“Madras HC”) in its recent judgement National Sewing Thread Co. Ltd vs. Superintending Engineer TANGEDCO and Anr.[1], has held that the clean slate theory (“CST”) does not extinguish undisclosed claims under the resolution plan of the erstwhile promoters or management (“Promoter Group”). The Madras HC has further held that in relation to such claims, the Promoter Group is jointly and severally liable. This judgement of the Madras HC is significant since it: (a) carves out an exception for the CST, especially when the Promoter Group of Micro, Small and Medium Enterprises (“MSMEs”) are the successful resolution applicant; (b) protects the creditors who did not submit claims during the Corporate Insolvency Resolution Process (“CIRP”) for want of knowledge and whose claims were deliberately excluded by the Promoter Group in the resolution plan; and (c) fastens personal liability on the Promoter Group for suppression of claims.

Brief Facts

National Sewing Thread Co. Ltd (“NSTCL”), an enterprise registered under the MSME Development Act, 2006, was subjected to CIRP under the IBC, by the National Company Law Tribunal (“NCLT”), Chennai[2]. During the CIRP, the Promoter Group of NSTCL submitted a resolution plan (“Plan”) to take over the company, which was approved by the Committee of Creditors (“CoC”) and the NCLT, Chennai[3]. The Plan provided for payment of 1% of the dues payable to identified operational creditors, which did not include the electricity department. The Plan provided for extinguishment for all prior claims of creditors including that of the electricity department. Later, the Tamil Nadu Generation and Distribution Corporation Limited (“TANGEDCO”) issued a demand notice dated January 19, 2022 (“Demand Notice”) to NSTCL claiming a payment of INR 32,86,061 (Indian Rupees thirty-two lakh eighty-six thousand and sixty one) which pertained to pre-CIRP period. NSTCL claimed that it is not liable for the claim since the same was not provided for under the Plan; and relied on the principle of CST to contend that such undisclosed claims will stand extinguished. NSTCL subsequently applied for electricity connection, which was rejected by TANGEDCO due to non-payment of arrears of due. Therefore, NSTCL filed a writ petition to quash the Demand Notice; and sought directions against TANGEDCO to provide the electricity connection.

NSTCL contended that the demand notice is against the principle of CST and the spirit of IBC. NSTCL contended that, since TANGEDCO did not submit its claim form during the CIRP and its claim having not been included in the Plan, the claim of TANGEDCO will stand extinguished. NSTCL relied on the judgment of the Supreme Court of India (“Supreme Court”) in Ghanashyam Mishra & Sons (P) Ltd. vs. Edelweiss Asset Reconstruction Co. Ltd^[4], wherein it has been held that pre-CIRP claims which were not a part of resolution plan will stand extinguished upon its approval. Therefore, NSTCL contended that TANGEDCO’s claim having been extinguished, the Demand Notice is invalid, and TANGEDCO is liable to provide the connection.

TANGEDCO contended that it is governed by the Electricity Act, 2003 and Tamil Nadu Electricity Supply Code, 2004, in terms of which all outstanding dues will have to be settled before effecting power connection; and that TANGEDCO’s claim will not get extinguished due to CIRP proceedings or approval of a resolution plan under the IBC. TANGEDCO relied on the judgement of the Supreme Court in State Tax officer vs. Rainbow Papers Limited[5] and the judgement of the Madras High Court in Empee Distilleries Limited vs. The Superintending Engineer, Pudukottai and Ors[6] and contended that the Plan having not provided for dues payable to government or its department, is invalid and contrary to IBC.

Findings and Analysis

The Madras HC referring to the judgements of the Supreme Court[7] on commercial wisdom of CoC held that the CoC’s commercial wisdom in approving a resolution plan is subject to all relevant information being placed before the CoC. On the principle of CST and extinguishment of all prior claims, the Madras HC held that the same is not an automatic consequence of approval of a resolution plan and is subject to availability of all relevant information before the CoC.

The Madras HC held that the term ‘relevant information’, includes all such information relating to assets/liabilities of the corporate debtor: (a) which are within the knowledge of the Promoter Group and which they are obligated to disclose; and (b) which a resolution professional can ascertain by exercising diligence through review of financial statements and claims received pursuant to public notice issued under IBC. The Madras HC has held that a resolution professional cannot evade his obligation to ascertain the liabilities merely because the concerned creditor did not submit the claim form.

The Madras HC reiterated the role of the NCLTs in approving a resolution plan that the NCLT’s cannot approve a resolution plan merely because it is approved by the CoC; and it must ensure that a resolution plan satisfies the above requirements.

The Madras HC held that, while the principle of CST may insulate a third-party resolution applicant from undisclosed claims, the same will not apply to the undisclosed claims which are not a part of the plans submitted by the Promoter Group and the Promoter Group cannot take advantage of their act of suppression of material facts. The Madras HC further held that, in such cases, the corporate veil will have to be lifted; and the Promoter Group will be personally liable for such undisclosed claims.

In view of the above legal principles and considering that the Promoter Group were, aware of the dues payable to TANGEDCO; had failed to disclose the same to the resolution professional during the CIRP; and had deliberately excluded TANGEDCO’s claim from the Plan for the reasons that no claim form was submitted, the High Court held that TANGEDCO’s claim is not extinguished and that it is entitled to refuse effecting electricity connection to NSTCL, even though the order of the NCLT approving the resolution plan has attained finality. Consequently, the Madras HC dismissed the writ petition.

Conclusion

The judgement emphasizes the obligations of the promoters to disclose the known liabilities to the resolution professional, CoC and in their resolution plan; and enables imposition of personal liability on the promoters for suppression of claims even when the concerned creditor does not have lodged a claim form. The judgement reiterates the requirement for fairness and equitable treatment of claims in a resolution plan. The judgement also reaffirms the just, independent and diligent role to be played by: (a) the resolution professionals in ascertaining the liabilities of the company and in conducting the CIRP; and (b) the NCLTs during the approval of a resolution plan. The judgement has created an exception to the rule of ‘clean slate theory’ vis-à-vis the extinguishment of undisclosed claims in terms a resolution plan, in order to protect bonafide creditors who were not aware of the CIRP; did not lodge claim forms; and whose claims were deliberately excluded by the Promoter Group in their resolution plan. The judgement will act as a deterrent on the promoters of MSME companies, who intend to misuse the IBC and extinguish the past liabilities by suppression of claims during the CIRP.

This Prism has been prepared by:

Vinod Kumar
Partner

Srinivasan M.D
Partner

Dharaniya Sri K.M
Associate

For more details, please contact [email protected]

[1] Judgement dated June 7, 2024, in W.P. No. 29845 of 2022

[2] Order dated August 28, 2019. in IBA/622/2019

[3] Order dated December 6, 2021, in IA/IBC/1032/CHE/2021 in IBA/622/2019

[4] (2021) 9 SCC 657

[5] 2022 SCC OnLine SC 1162

[6] 2022 SCC OnLine Mad 5272

[7] State Tax officer v. Rainbow Papers Limited (2022 SCC OnLine SC 1162); M.K. Rajagopalan v. Dr. Periasamy Palani Gounder (2024 1 SCC 42); and K. Sasihidhar v. Indian Overseas Bank (2019 12 SCC 150)

Tags CIRP, Insolvency and Bankruptcy Code 2016, Insolvency Law, JSA, JSA Prism, Leading Law Firm, Leading Lawyers, Legal Updates, Madras High Court, MSMEs

JSA Prism | Insolvency | August 2024

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National Company Law Tribunal, Hyderabad (upholding the interests of creditors) permits distribution of surplus funds generated by the corporate debtor during its ongoing corporate insolvency resolution process, to its creditors

On August 5, 2024, the National Company Law Tribunal (“NCLT”), Hyderabad Bench[1] in the corporate insolvency resolution process (“CIRP”) of KSK Mahanadi Power Company Limited (“Corporate Debtor”), has allowed an application filed by the Committee of Creditors (“CoC”) seeking distribution of surplus funds generated by the Corporate Debtor to its creditors, in accordance with Section 53 of the Insolvency and Bankruptcy Code, 2016 (“IBC”)[2].

Brief Facts

The CoC of the Corporate Debtor sought for interim distribution of surplus funds amounting to INR 8,821 crore (Indian Rupees eight thousand eight hundred and twenty-one crore) (to the extent that these funds were not required for the smooth functioning of the Corporate Debtor as a going concern), placing reliance on Section 28 of the IBC[3] and a previous order of the National Company Law Appellate Tribunal (“NCLAT”) in the IL&FS case[4], wherein NCLAT had directed the interim distribution of funds amounting to INR 16,361 crore[5] on a pro rata basis, subject to board approval.

Notable Findings

NCLT, while allowing the CoC’s application has, inter alia, noted that:

the CIRP of the Corporate Debtor had extended for a period of nearly 5 (five) years, consequently the moratorium under Section 14 of IBC had also continued for an extended period;
for the entire period of the prolonged CIRP, the Corporate Debtor was functioning as a going concern, generating revenue in excess of what was required for its day-to-day functioning;
retaining surplus funds in the Corporate Debtor’s bank accounts would be in contradiction with IBC’s primary objective of promoting credit availability and balancing stakeholder interest;
the interim distribution of surplus funds, in terms of Section 53 of IBC, will enable productive utilization of surplus funds, which are otherwise laying idle;
such distribution is contemplated in the Request for Resolution Plan (“RFRP”) and therefore would not come in the way of resolution plans of prospective resolution applicants (“PRAs”); and
resolution plans submitted by the PRAs, in compliance with the RFRP will account for cash balances accumulated in the Corporate Debtor’s accounts. If these accumulated balances are not distributed in the interim, they would nonetheless be distributed under any resolution plan submitted.

Conclusion

Insolvency jurisprudence in India does not explicitly provide for interim distribution of surplus funds of a corporate debtor during the pendency of CIRP. NCLT’s judgement serves as a step forward in upholding creditors’ interests. Necessary reliefs for creditors, especially in cases where the CIRP has been prolonged, will consequently increase credit supply in the economy, promoting growth and furthering the objectives of IBC.

This Prism has been prepared by:

Abhishek Munot
Partner

Tushar Nagar
Principal Associate

Purvi Shrivastava
Associate

For more details, please contact [email protected]

[1] In the matter of M/s. KSK Mahanadi Power Company Limited; Power Finance Corporation Limited, on behalf of the committee of creditors, vs. Mr. Sumit Binani, Resolution Professional. IA No.1365 of 2024 in CP (IB) No.492/07/HDB/2019

[2] Section 53 of IBC – Distribution of Assets which, inter alia, provides for mechanism for distribution of proceeds from the sale of liquidation assets in order of priority specified in Section 53 (1) (a) – (h)

[3] Section 28 of IBC – Approval of Committee of Creditors for certain actions outlined in Section 28 (1) (a) – (m)

[4] Order dated May 31, 2022, in Union of India v Infrastructure Leasing and Financial Services Ltd. & Ors. (I.A. No. 586 of 2022 in Company Appeal (AT) No. 346 of 2018.

[5] Refer Para 19 of Order dated May 31, 2022 [Interim Distribution – INR 11,296 crore (Indian Rupees eleven thousand two hundred and ninety-six crore) in cash and INR 5,065 crore (Indian Rupees five thousand and sixty-five crore) of InvIT Units]

Tags Insolvency Law, JSA, JSA Prism, Leading Law Firm, Leading Lawyers, Legal Updates, NCLT

Petition under Section 95 of Insolvency and Bankruptcy Code, 2016 is not maintainable against a partnership firm or its partners

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On March 6, 2024, the Hon’ble High Court of Karnataka (“Karnataka HC”), in the case of M/S Manyata Realty vs. The Registrar and Ors[1], held that the National Company Law Tribunal (“NCLT”) does not have jurisdiction to entertain a petition filed under Section 95 of the Insolvency and Bankruptcy Code, 2016 (“IBC”) against a partnership firm or its partners. The Karnataka HC declared the filing of the petition as non-est and illegal.

Brief facts

M/s Manyata Reallty, a partnership firm (“Firm”), had entered into distinct joint development agreements with Buoyant Technology Constellation Private Limited (“Company” and together with the Firm referred to as the “Parties”) between 2010 and 2015. Subsequently, a dispute arose between the Parties, leading to the Firm issuing a notice to: (a) terminate the joint development agreement; and (b) claiming damages on account of breach of the agreement. In order to resolve the dispute between the Parties, arbitration proceedings were initiated in 2022.
Thereafter, the Company issued a legal notice, invoking Section 95 of the IBC, against the Firm and its partners, demanding the Firm to repay its dues. Even though the Firm denied the claim made by the Company, a petition was filed before the NCLT.
Aggrieved by the filing before NCLT, the Firm and its partners filed separate writ petitions, under Articles 226 and 227 of the Constitution of India, before the Karnataka HC (“Writ Petitions”), challenging the jurisdiction of NCLT to entertain/ even number the Petition filed by the Company.
The Firm argued that the IBC does not cover insolvency resolution for individuals and partnership firms, and that jurisdiction should lie with the Debts Recovery Tribunal (“DRT”) or Debts Recovery Appellate Tribunal. It contended that only personal guarantors to corporate debtors can be brought under Section 90 of the IBC, and since the firm and its partners are neither a personal guarantor nor a corporate debtor, the petition filed under Section 95 of the IBC is outside the NCLT’s jurisdiction and should be dismissed, allowing arbitration proceedings to continue.

Issues

Whether a petition under Section 95 of the IBC can be numbered and maintainable against a partnership firm or its partners?

Analysis and findings

The Karnataka HC, after appreciating the submissions advanced by the Parties and having regard to settled law, held as follows:

the Karnataka HC after analysing the definitions of ‘corporate person’ and ‘corporate debtor’ under Section 3(7) and 3(8) of the IBC, held that: (a) IBC is applicable when a corporate person owes debt to any person; (b) except as provided in Part-III of IBC, partnership firm and/or its partners are not covered within the ambit of IBC. Further, the DRT is the adjudicating authority for the partnership firm and/or its partners;
the Karnataka HC observed that filing a petition under Sections 94 or 95 of the IBC triggers Section 96 of IBC immediately, leading to significant consequences. An interim moratorium is automatically imposed, freezing the corporate debtor’s activities. This moratorium also affects all partners of a firm as of the application date. Additionally, a resolution professional is appointed to handle the proceedings and must submit a report within 10 (ten) days. These consequences occur upon filing the application, not when the application is entertained by the NCLT. The DRT is the authority to entertain such applications under Part III of the IBC. Once a petition is registered under Section 95 of the IBC before the NCLT (even before it is entertained by NCLT), interim moratorium and appointment of a Resolution Professional is axiomatic. Thus, the consequence of filing such petition is dire on the Corporate Debtor as there is no requirement under the IBC for NCLT to entertain the petition in order for other provisions under the IBC to come into effect;
NCLT cannot decide the issue of its jurisdiction to entertain the petition under Section 95 of the IBC since the filing of the Petition itself leads to dire consequences. Further, the petition is not eligible for submission before the NCLT and cannot be allowed to be proceeded up to the stage of determining whether such filings are entertainable; and
the Karnataka HC held that the maintainability of the petition before the DRT is crucial, as it pertains to the NCLT’s jurisdiction to entertain the petition, which IBC does not permit. Even the acceptance of filing by the NCLT is contrary to law. As a result, the Writ Petitions were allowed by the Karnataka HC, and the e-filing of petitions by the Company under Section 95 of the IBC, was declared illegal and non-est. All proceedings before the NCLT were quashed, and the Firm was entitled to all consequential benefits from the setting aside of these proceedings. The Karnataka HC also directed that any action taken on the registration of the proceedings also stood obliterated.

Conclusion

This judgment clarifies the jurisdictional scope of the NCLT under the IBC. It underscores the principle that the jurisdiction of a tribunal is determined by the statute that governs it. The decision is significant as it protects partnership firms and their partners from insolvency proceedings under Section 95 of the IBC before the NCLT. It also highlights the importance of correctly identifying the appropriate forum for legal proceedings.

This Prism has been prepared by:

Varghese Thomas
Partner

Kunal Kaul
Partner

Fatema Kachwalla
Partner

Shaan Mamta Bhatt
Junior Associate

For more details, please contact [email protected]

[1] Writ Petition No. 26977 of 2023

Tags High Court of Karnataka, IBC Code, Insolvency, Insolvency and Bankruptcy Code, JSA, JSA Prism, Leading Law Firm, Leading Lawyers, Legal Updates, NCLT

JSA Prism | Insolvency | August 2024

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Corporate insolvency resolution process can be initiated separately and simultaneously against a corporate debtor and a corporate guarantor for the same debt and same default

In the case of BRS Ventures Investments Ltd. vs. SREI Infrastructure Finance Ltd. & Anr. ^[1], the Hon’ble Supreme Court of India (“Supreme Court”) held that simultaneous insolvency proceedings against a borrower and a corporate guarantor can be initiated for the same debt and default; and that assets of a subsidiary do not form part of the corporate insolvency resolution process (“CIRP”) of its holding company.

Brief Facts

SREI Infrastructure Finance Limited (“SREI”) had granted Gujarat Hydrocarbon and Power SEZ Limited (“GHPL”), a loan of INR 100,00,00,000 (Indian Rupees one crore) (“Loan”). The Loan was guaranteed (“Corporate Guarantee”) by GHPL’s holding company, Assam Company India Limited (“ACIL”).
The Corporate Guarantee was invoked and subsequently, CIRP of ACIL was initiated under the Insolvency and Bankruptcy Code, 2016 (“IBC”). In the CIRP of ACIL, BRS Ventures Investments Ltd, (“BRS Ventures”) emerged as the successful resolution applicant. As a part of the approved resolution plan (“Resolution Plan”), BRS Ventures paid a sum of INR 38,87,00,000 (Indian Rupees thirty-eight crore eighty-seven lakh) to SREI as full and final payment of its dues.
SREI subsequently initiated CIRP against GHPL for the balance amount under the Loan which was opposed by BRS Ventures. BRS Ventures contended that (a) upon payment to SREI in the CIRP of ACIL, the rights of SREI with regard to the Loan would stand subrogated in favour of BRS Ventures; (b) simultaneous CIRP proceedings cannot lie against GHPL and ACIL when the entire debt has been discharged; and (c) by way of initiation of CIRP against GHPL, the valuable assets of ACIL have been taken away.
The National Company Law Appellate Tribunal (“NCLAT”) had dismissed the appeal by BRS Ventures.

Issues

Whether the liability of the principal borrower continues upon extinguishment of liability of the corporate guarantor by way of a resolution plan?
Whether CIRPs against a borrower and a guarantor can be initiated and / or can continue simultaneously for the same debt and default?
Do the assets of a subsidiary company form a part of CIRP of its holding company?

Analysis and Findings

The Supreme Cour observed the following:

Co-extensive liabilities of the principal borrower and guarantor and consequence of involuntary discharge of the guarantor
- It is settled law that the liability of the surety and principal debtor is co-extensive and the creditor is entitled to proceed against both or either of them. If a creditor recovers a part of the guaranteed amount from the surety and agrees to not proceed against the surety for the remaining amount, the same does not extinguish the remaining debt payable by the principal debtor.
- As per the provisions of the Indian Contract Act, 1872 (the “Contract Act”), involuntary acts of the principal borrower or creditor do not result in the discharge of the surety. In this regard, the Supreme Court cited several judgments, including in the case of Lalit Kumar Jain vs. Union of India and Ors.^[2] where it was held that discharge of a principal debtor by an involuntary process i.e. operation of law, or due to liquidation or insolvency proceedings, does not absolve a guarantor of its liability.
- As per Section 31 of the IBC, when the CIRP of the corporate guarantor ends in a resolution plan, it will bind the creditor of the corporate guarantor. Consequently, the corporate guarantor’s liability may end in such a case by operation of law, but this does not affect the liability of the principal borrower to repay to the creditor the balance loan amount (that is, after deducting the amount recovered from the corporate guarantor or the amount paid by the resolution applicant on behalf of the corporate guarantor as per the resolution plan).
- Under Section 140 of the Contract Act, if the surety pays only a part of the amount payable to the creditor, the subrogation right the surety gets will be confined to the debt cleared. Accordingly, notwithstanding the subrogation to the extent of the amount paid on behalf of a guarantor, the right of the creditor to recover the balance debt payable by the corporate debtor is in no way extinguished.
Simultaneous proceedings under the IBC against the corporate debtor and the guarantor
- Section 60(2) of the IBC contemplates separate or simultaneous insolvency proceedings against the corporate debtor and the guarantor. Accordingly, Section 60(3) provides that if CIRP in respect of the corporate guarantor and a borrower are pending before different adjudicating authorities, CIRP proceedings against the corporate guarantor must be transferred to the adjudicating authority before whom CIRP in respect of the borrower is pending.
- Thus, consistent with the basic principles of the Contract Act that the liability of the principal borrower and surety is co-extensive, the IBC permits separate or simultaneous proceedings to be initiated under Section 7 of the IBC by a financial creditor against the borrower and the corporate guarantor.
Assets of the corporate debtor in the CIRP of the guarantor:

The Resolution Plan only deals with the assets of ACIL and the investments of ACIL in its subsidiaries, not the assets of the subsidiaries.

- Section 36 of the IBC specifically excludes assets of a subsidiary company from the liquidation estate of a corporate debtor. A similar exception is provided in Section 18, regarding the meaning of ‘assets.’ The court observed that perhaps the reason for including these 2 (two) provisions is that it is well-settled that a shareholder has no interest in the company’s assets.
- The court noted that in the case of Vodafone International Holdings BV vs. Union of India and Anr^[3], the Supreme Court took the view that if a subsidiary company is wound up, its assets do not belong to the holding company but to the liquidator. Therefore, the assets of the subsidiary company of a corporate debtor cannot be part of the resolution plan of the corporate debtor.
- Based on the above, the Supreme Court held that (i) the part payment by ACIL to SREI will extinguish the liability of GHPL only to the extent of the amount paid by ACIL and GHPL will be liable to pay the balance amount under the Loan; (ii) the assets of the subsidiary company cannot be included in the resolution plan of a holding company; and (iii) SREI is entitled to file separate and simultaneous applications under Section 7 of the IBC against GHPL and ACIL. Accordingly, the appeal was dismissed.

Conclusion

On January 8, 2019, the NCLAT had, in Vishnu Kumar Agarwal vs. M/s Piramal Enterprises Ltd^[4] (which is currently pending in appeal in the Supreme Court), observed that simultaneous applications for the same set of claims cannot be admitted against a corporate debtor and a guarantor. However, the NCLAT (on March 7, 2019) diverted from the view in Piramal (supra), in the matter of Edelweiss Asset Reconstruction Company Limited vs. Sachet Infrastructure Pvt. Ltd.^[5] Subsequently, the Insolvency Law Committee Report in 2020 also differed with the view in Piramal (supra) citing Section 60(1) to (3) of the IBC. On November 24, 2020, in State Bank of India vs. Athena Energy Ventures Private Limited^[6], relying on the same provisions, the NCLAT chose to interpret the law differently to the Piramal (supra) order.

The Supreme Court has now clarified that CIRP can be initiated simultaneously against a corporate debtor as well as a corporate guarantor for the same debt and same default. Accordingly, creditors will not be required to wait for the payment under the CIRP of a borrower / guarantor before proceeding against the other entity.

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