COB Bank filed an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC) for initiating a Corporate Insolvency Resolution Process (CIRP) against the Corporate Debtor, M/s. Gupta Infra Private Limit

CS Professional · Insolvency - Law and Practice · PYQS · December 2024
COB Bank filed an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC) for initiating a Corporate Insolvency Resolution Process (CIRP) against the Corporate Debtor, M/s. Gupta Infra Private Limited (GIPL). The said application was admitted by the Adjudicating Authority (AA) during October, 2018 and a Resolution Professional (RP) was appointed as an Interim Resolution Professional (IRP). Following is the financial position of GIPL as on the date of commencement of the CIRP: Liabilities Amount in ₹ Crores Assets Amount in ₹ Crores Share Capital - Equity 100.00 Fixed Assets - Land and Building 115.00 Share Capital - Redeemable Preference Shares 75.00 Fixed Assets - Plant and Machinery 165.00 Share Capital - Convertible Preference Shares 25.00 Other Fixed Assets 70.00 Debentures (Unsecured fully convertible) 50.00 Investments in Subsidiaries 50.00 Long Term Borrowings - Fully Secured 300.00 Inventories 150.00 Short Term Borrowings - Unsecured 75.00 Receivables 110.00 Loan from Related Parties 25.00 Cash and Bank Balances 15.00 Payables 65.00 Other Current Assets 25.00 Provisions 35.00 Accumulated Losses 100.00 Deferred Tax Liabilities 15.00 Other Current Liabilities 35.00 Total Liabilities 800.00 Total Assets 800.00 Other Additional information provided by the Corporate Debtor: [Amounts stated in the table above can be treated as claims made by each of the parties in their respective category]. Other Current Liabilities include: In Crores Workmen Wages Payable for 36 months 9.00 Salary Payable for 20 months 100.00 PF Liabilities 3.80 Sales Tax/Commercial Taxes Due * 4.80 Other Statutory Dues 2.40 * On the sales tax and commercial taxes due, the Commercial Tax Authorities have already attached one of the immovable properties of the Corporate Debtor valued at ₹3.50 crores. Fixed Assets includes buildings occupied on long term lease for a period of 75 years obtained from the State Industrial Development Authority (SIDA) for ₹5 Crores. SIDA has also submitted their claim with the RP stating that their premium amount along with interest and penal interest is due for since last 7 years. SIDA has filed its claim as a Financial Creditor. Whereas, the Resolution Professional has requested SIDA to submit their claim as an Operational Creditor. (This amount is included in Other Current Liabilities). Further, it was informed by the Resolution Professional that the Corporate Debtor, M/s. Gupta Infra Private Limited, who initiated a CIRP against one of its Operational Creditor, namely C-Digital Arts Private Ltd for ₹6 Crores and going forward, the National Company Law Tribunal (NCLT) has already ordered for initiation of Corporate Insolvency Resolution Process (CIRP). However, one of the suspended Director on the Board of C-Digital Arts Private Limited filed an appeal before the National Company Law Appellate Tribunal (NCLAT) stating that there was no notice given as required under Section 8 of the Insolvency and Bankruptcy Code, 2016 read with Rule 5 of the insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 which entails that for initiation of insolvency resolution process by an Operational Creditor, a demand notice has to be served by the unpaid Operational Debtor on the Corporate Creditor. Nevertheless, the aforesaid suspended director he has not denied the debts due. This matter is pending before NCLAT for disposal. Investments includes investment in Foreign Subsidiary of ₹30 Crores and in an Indian Subsidiary of ₹18 Crores and Investment in shares amounting to ₹2 Crores in another company incorporated and registered with charitable objects and not for profit. Inventories and Receivables realisable only for 80% of its value. Loan from related parties is from wife and son of one Director of GIPL. Other Current Assets includes ₹10 Crores paid to National Highway Authority of India (NHAI) towards a bid amount for a road project. Other Current Assets includes ₹2 Crores of assets of third party held under Trust. Machinery, the carrying value of which is ₹1.50 crores belonging to an Indian Subsidiary is lying in one of the Units of the Corporate Debtor. A Machinery which was acquired for dispatching to the Foreign Subsidiary is also lying in the factory premises of the Corporate Debtor having a carrying value of ₹3 crores. Cranes worth ₹5 Crores belonging to a proprietorship concern of one of the Director is also lying the Factory premises of the Corporate Debtor. CIRP costs payable including all expenses is ₹2 Crores. The Security Interest charged for COB Bank is 91.25% and SID Bank is 8.75%. (both the financial creditors have not relinquished their security interest). During the CIRP, in one of the Meeting of the 'Committee of Creditors' (CoC), Resolution Plans were discussed. Revised Resolution Plans were submitted by the prospective Resolution Applicants. Resolution Plan was put to e-Vote and by majority of 94.79%, the Resolution Plan of 'GIPL' was approved. The Resolution plan proposes for utilisation of all assets including the assets under lease. Further, the Resolution Professional has sent a letter to the Commercial Taxes Authorities to release the property attached by them and on the contrary, the Authorities informed that the Department will get their portion as per the proposed Resolution Plan. One of the Financial Creditor (SID Bank) sent an objection with respect to the distribution of the proceeds of the resolution plan under the Resolution Plan. SID Bank also filed seeking direction to the Resolution Professional to distribute the proceeds of the Resolution Plan and made the following prayers: "It is most respectfully prayed that: 1. The present application may kindly be allowed and the directions be issued to the Respondent No. 1 to modify/clarify the distribution to dissenting members as per the Resolution Plan and distribute the proceeds of the resolution plan to the Applicant SID Bank, for an amount of ₹8.97 Crores in priority in accordance with provisions of IBC, 2016 in the interest of justice and equity. 2. Interim stay be granted on distribution of the resolution plan amount by the Resolution Professional to the Committee of Creditors till the present application is decided." The case of the Appellant, namely SID Bank in the Application was that, as per the security interest of the Appellant, the Appellant is entitled to 8.75% i.e. the amount of ₹8.97 Crores and as per voting share as approved by the CoC, the Appellant is entitled to 5.21% i.e., ₹5.34 Crores. The case of the Appellant SID Bank set up in the Application is that he is entitled for his distribution of plan amount as per value of the security interest of the Appellant. The Application was objected by the Resolution Professional. The Adjudicating Authority, by its Order, upheld the decision of the CoC for distribution of proceeds of the Resolution Plan as per the voting share. The Appellant, aggrieved by the said Order, has come up with the Appeal to the National Company Law Appellate Tribunal (NCLAT). In the light of the above case study inputs and referring to the decisions of applicable case laws with reasons and the provisions of Insolvency and Bankruptcy Code, 2016 (IBC, 2016) and the Regulations made thereunder, answer the following questions: In the given case study, it is stated that though the Corporate Debtor has succeeded in initiating the CIRP against one of its Operational Creditor, namely C-Digital Arts Pvt Ltd, nevertheless, an appeal has been preferred before the NCLAT by one of the suspended director on the Board of the aforesaid Operational Creditor contending that notice as required under IBC, 2016 was not served by the Corporate Debtor. Referring to the applicable case laws, state whether the Corporate Debtor will succeed in the appeal filed by a suspended Director of the Operational Creditor?

Answer & Explanation:

The facts of the question are similar to the case of Digvijay Kathiwada v. Haren Sanghvi & Associates and Ors. decided on December 06, 2023, by the National Company Law Appellate Tribunal. In this case, the Appellant/Corporate Debtor contended that the Adjudicating Authority had erroneously commenced the insolvency process under Section 9 of IBC, even though the Appellant/Corporate Debtor was not served any notice under Section 8 of IBC. It was also asserted that the Operational Creditor failed to adduce valid proof of delivery of the demand notice. The explanation offered by the Operational Creditor was that the Section 8 demand notice dated 04.11.2019 was addressed to the Corporate Debtor, but due to a clerical error, the proof attached was a notice copy endorsed to the Operational Creditor by its legal counsel. The Appellant vehemently contended that these grounds cited by the Advocate for the Operational Creditor for failure to give proof of service of Section 8 notices on the Corporate Debtor were flimsy and lacked credulity. Moreover, it was noticed that admittedly the Section 8 notice was sent to the corporate office and not to the registered office of the Corporate Debtor. There is no doubt that in terms of the statutory construct of the IBC, an application for initiation of corporate insolvency resolution process can be filed by an Operational Creditor only after the expiry of a period of 10 days from the date of delivery of the Section 8 demand notice on the Corporate Debtor. If we look at the impugned order, it has held at paragraph 19 that the Corporate Debtor was served with a notice dated 04.11.2019 which notice was not responded to by the Corporate Debtor. However, there is no specific finding recorded on whether the notice was actually served on the Corporate Debtor, a factum which has been seriously contested by the Corporate Debtor. Further, it is the case of the Appellant that the proof of service claimed by the Operational Creditor was wrong proof of service. In the facts of the present case, where the delivery of the Section 8 notice has itself been questioned by the Corporate Debtor, there arises a need to verify whether the statutory provisions of the IBC code have been duly complied with. In view of the mandatory provision under Section 8 of IBC read with Rule 5 of Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016, which entails that for initiation of insolvency resolution by an Operational Creditor, a demand notice has to be served by the unpaid Operational Debtor on the Corporate Debtor, we feel that the contention of the Appellant deserves due consideration. Having given thoughtful consideration to the submissions made on behalf of the Appellant and having examined the material available on record with reference to the applicable mandatory statutory provisions of the IBC, we are clearly of the view that the order of the Adjudicating Authority is silent on the actual delivery of the Section 8 notice which is a bone of contention between the two parties. We are of the considered opinion that this aspect needs to be appropriately examined and hence remand the matter back to the Adjudicating Authority to consider the Section 9 application afresh with particular reference to actual and proper delivery of the demand notice on the Corporate Debtor. In result, the appeal is allowed. The impugned order dated 13.05.2023 is set aside. The orders passed by the Adjudicating Authority initiating CIRP against the Corporate Debtor and appointing interim Resolution Professional and all other orders pursuant to the impugned order are declared illegal and set aside. The interim Resolution Professional shall be paid the actual expenses incurred and nominal fees by the Operational Creditor on production of invoices. Accordingly, the Corporate Debtor will lose in appeal against the appeal filed by the suspended Director of its operational creditor.

Topics: Corporate Insolvency Resolution Process (CIRP)

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