NATIONAL COMPANY LAW TRIBUNAL
National Company Law Tribunal (NCLT) has been constituted under Section 408 of the Companies Act, 2013 as Adjudicating Authority for insolvency resolution and liquidation for corporate persons. Further, for insolvency resolution and bankruptcy of partnership firms and individuals, the Debt Recovery Tribunal (the DRT) has been constituted under subsection (1) of Section 3 of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 as Adjudicating Authority.
JURISDICTION OF NCLT
An application that seeks for initiating the insolvency resolution process or liquidation of a corporate debtor shall be filed before the NCLT having jurisdiction over the place where the registered office of the corporate entity is situated.
Similarly, the voluntary liquidation application of a corporate person shall be filed before the NCLT having jurisdiction over the place where the registered office of the corporate entity is situated.
Where an individual is a personal guarantor of a corporate debtor and a corporate insolvency resolution process or liquidation proceedings of such corporate debtor is pending before NCLT, an application relating to the insolvency resolution or bankruptcy of personal guarantor of such corporate debtor shall also be filed before such NCLT even though DRT is recognized as adjudicating authority for partnership firms and individuals.
NCLT shall be vested with the powers of DRT dealing with the insolvency resolution or bankruptcy of an individual in dealing with the application relating to the insolvency resolution or bankruptcy of the personal guarantor of a corporate debtor.
An Insolvency Resolution Process can be initiated by
- Financial creditor or
- Operational Creditor
- Corporate itself
UNDER SECTION 7 – FINANCIAL CREDITOR can, either alone or jointly with others, file an application before NCLT for initiating IRP when a default has occurred.
Default includes a default in respect of a financial debt owed not only to the applicant’s financial creditor but to any other financial creditor of the corporate debtor.
SECTION-8 PETITION BY OPERATIONAL CREDITOR
Section 8(1) says if there is a default in payment of a debt, the creditor shall have to give 10 days’ demand notice along with a copy of the invoice demanding the payment of the invoice. It is mandatory that along with the notice, copies of the invoice must be sent to the operational debtor otherwise notice shall be held defective and the petition is liable to be dismissed.
The above provision is stated in the case law- Prem Swarup Narula vs. Bycell Telecommunications (I) Pvt. Ltd. It was stated that “It is thus evident that in the absence of demand notice under Section 8 (1) of the Code, the petitioner could not have approached this Tribunal for initiation of insolvency resolution process against the respondent company. In the present case, there are many other defects pointed out by the learned counsel for the respondent. Therefore, we find that the present application is incomplete as the same is liable to be dismissed.”
SECTION 10 – PETITION BY CORPORATE DEBTOR ITSELF.
The Corporate Debtor of its own may also file a petition for initiating the corporate insolvency resolution process with the Adjudicating Authority as stated in section 10(1) of the Code: “Where a corporate debtor has committed a default, a corporate applicant thereof may file an application for initiating corporate insolvency resolution process with the Adjudicating Authority.”
In Re: P&S Jewelers LSI-1697-NCLT-2017(MUM) NCLT Mumbai admits Corporate Applicant, P & S Jewelers, Corporate Debtor, and Petitioner application u/s. 10 of the Insolvency and Bankruptcy Code, 2016 for initiating insolvency proceedings under the Code holding Petitioner was registered as a sick industrial company with BIFR.
The Supreme Court ruled on December 14, 2021, that while acting as “courts of equity,” the National Company Law Tribunal (NCLT) and the National Company Law Appellate Tribunal (NCLAT) cannot compel parties to settle their disputes. According to a bench led by Justice D. Y. Chandrachud, the NCLT is only authorized to verify whether a default has happened. The NCLT “must either admit or deny an application,” according to its ruling. “These are the only two options available to the adjudicating authority, which cannot compel a party to the proceedings to settle a dispute,” the bench stated. While the NCLT and NCLAT can urge settlements to meet the goals of the Insolvency and Bankruptcy Code (IBC), they cannot direct any settlement by acting as courts of equity, according to the higher court.
STAGES IN THE PROCESS OF CORPORATE INSOLVENCY
CORPORATE INSOLVENCY RESOLUTION PROCESS
CIRP is fundamentally concluded in six stages, keeping variable factors constant. The stages are as follows:
Stage 1 – Petition to the NCLT:
When a company defaults in furnishing payments to its creditors, as discussed above, the creditors hold a right to bring forward a CIRP petition before the Adjudicating Authority. In instances wherein a company is a corporate debtor, the appropriate Adjudicating Authority is the National Company Law Tribunal (hereinafter referred to as “NCLT”).
Once filed, the NCLT reviews the merits of the petition considering whether the petition holds a locus standi before the tribunal or not. If the tribunal does not find merits in the petition, for instance, if the defaulted amount does not meet the minimum threshold of INR One lakh as per Section 4 of The Code (which is now INR One Crore ), then it will reject the petition. However, if the tribunal finds practicable merits in the petition, then it admits the same (u/s 7, 9, or 10 of The Code) prompting the process to commence. The NCLT is required to call for a hearing within 14 days of the filing of the petition.
Stage 2 – Appointment of Interim Resolution Professional :
A resolution professional, defined u/s 27 of The Code, is a licensed insolvency professional appointed and nominated by the Committee of Creditors. Until then, the NCLT appoints the IRP. The second stage of the process is for the IRP to enterprise between carrying out the remainder of the insolvency process and ensuring that the operations of the corporate debtor are a going concern.
Stage 3 – Moratorium: The moratorium period commences once the tribunal admits the petition. As per Section 14 of The Code, on the declaration of this period, the tribunal prohibits;
- Institution of fresh suits or continuation of pending suits (in terms of financial debt) against the corporate debtor;
- Defenestration of the corporate debtor from any operational, financial, legal, or managerial obligation;
- Any additional foreclosure or recovery of debt against the corporate debtor under the SARFAESI Act, 2002; and
- Recovery from the corporate debtor of any property that he possesses at the time of the insolvency process.
The moratorium period remains in subsistence till the time the CIRP process is concluded. The upper limit of a continuance of this period is 180 days with a possible extension of 90 days under exceptional circumstances.
Stage 4 – Collation and analysis of facts: The IRP is responsible for categorizing the claims made in the petition by the petitioner systematically, and making an analysis of the same as per Section 18 (b) of The Code. In case the IRP requires an exposition of a claim made by the petitioner, then The Code authorizes the IRP to call a meeting with the petitioner concerning the same for the clarification required.
The IRP is also required to constitute a Committee of Creditors (COC) by the virtue of Section 18 (c) of The Code within 30 days of the commencement of the CIRP. Once the COC is formed, the committee then appoints an RP. The IRP can potentially retain the position or a fresh appointment can be made depending on the decision of the committee.
Stage 5 – Resolution Plan: Once the IRP/RP collates and verifies the claims made by the petitioner, the same has to be followed by a public announcement by the COC. The announcement is indicative of the insolvency by declaring that the corporate debtor is undergoing an insolvency process and all interested candidates or bidders are invited to submit a resolution plan that could potentially be implemented. These bidders could be prospective investors, creditors, etc.
Depending on the number of resolution plans proposed, the COC peruses the same. The plan that gathers the approval of over 75 percent of the COC, is secured to be presented before the NCLT.
Stage 6 – Decision: The resolution plan approved by the COC is presented before the NCLT. If the NCLT sanctions the approved resolution plan, then the same is executed and becomes binding on the corporate debtor and all the stakeholders.
However, if the NCLT does not sanction the resolution plan or, the COC is unable to finalize a resolution plan in the designated period, then the tribunal orders the liquidation of the corporate debtor and the same has to be concluded within one year of such order.
CASE TITLE: NATIONAL TEXTILE CORPORATION LTD. V HERO SOLAR ENERGY PVT. LTD.
Counsel for Appellant: Mr. Tushar Mehta (SGI), with Ms. Mayuri Raghuvanshi, Ms. Purvat Wali, and Mr. Vyom Raghuvanshi, Advocates.
Counsel for Respondent: Mr. Pallav Mongia and Mr. Ashok Juneja, Advocates.
The National Company Law Tribunal (“NCLT”), New Delhi Bench, comprising of Mr. Dharminder Singh (Judicial Member) and Ms. Sumita Purkaysatha while adjudicating a petition filed in the above-mentioned case, has initiated Corporate Insolvency Resolution. The order was recently passed on 27.05.2022.
FACTS OF THE CASE
- The Appellant, National Textile Corporation Ltd., is a Public Sector Enterprise under the Ministry of Textiles, Government of India. It was incorporated in 1968 and has textile mills pan India for the production of yarn and fabric.
- In 2015, the Solar Energy Corporation of India (SECI) had granted a Letter of Allocation to Hero Solar Energy Pvt. Ltd. (“Operational Creditor/Respondent”), for ‘Designing, Engineering, Manufacturing, Supplying, Testing & Commissioning’ of rooftop solar panels in cities of India.
- The Operational Creditor had entered into an Agreement with National Textile Corporation Ltd. (“Corporate Debtor/Appellant”) on 07.06.2016, for the installation of a rooftop solar PV power system for power generation.
- The Agreement did not contain any clause concerning the imposition of a penalty. In 2016-17 the Operational Creditor had completed the work in view of the Agreement and the due amount was paid by the Appellant. However, an amount of Rs.13,84,254/- was retained by the Appellant from the total payment.
- The Operational Creditor had issued a demand notice dated 23.10.2019 under Section 8 of Insolvency and Bankruptcy Code, 2016 (“IBC”) to the Appellant, for the remaining payment of Rs.13,84,254/-. Following this, the Operational Creditor had filed a petition under Section 9 of the IBC before NCLT, New Delhi (“Adjudicating Authority”), seeking initiation of CIRP against the Appellant.
- The NCLT New Delhi Bench had admitted the petition under Section 9 of IBC and CIRP was initiated against the Appellant vide an order dated 27.05.2022, by observing that there was a claim due and payable and the Appellant had failed to prove the existence of any ‘pre-existing dispute’ in respect of the default.
PROCEEDINGS BEFORE THE NCLAT
The Appellant filed an appeal against the NCLT order dated 27.05.2022 before the NCLAT, submitting that it has settled the matter with the Operational Creditor, and sought liberty to place on record the Settlement Agreement entered between the parties. The Operational Creditor/Respondent also confirmed that the settlement had taken place. The NCLAT Bench has stayed the CIRP of the Appellant and has listed the matter on 01.06.2022 for taking on record the Settlement Agreement and passing orders accordingly.
The article describes the jurisdiction of NCLT, which can initiate the Insolvency Resolution Process and then stages included in the process of carrying out corporate insolvency. There will be a speedy remedy in resolving the disputes related to company law and will be disposed of expeditiously. The aggrieved party from the order or any decision passed by NCLT, appeals can be made within the period of forty-five days of the receipt of an order or any decision given by NCLT. Also within six months from the date of receipt of the appeal NCLT has to give its decision. It has been clearly mentioned no civil court has the jurisdiction to decide the cases where NCLT is empowered to do so
WRITTEN BY –
Ms. Vishva Gautam