SUPREME COURT REMOVES TWO THRESHOLD BARS UNDER THE INSOLVENCY AND BANKRUPTCY CODE 2016

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In a recent case of Macquarie Bank Limited vs. Shilpi Cable Technologies Ltd. 2017 SCC OnLine SC 1493, the Supreme Court has removed two threshold bars to the processing of an application under Section 9 of the Insolvency and Bankruptcy Code 2016 (the Code), which provides that an application before the National Company Law Tribunal (NCLT) may be made by an operational creditor to initiate corporate insolvency resolution process against a corporate debtor who has failed to make payment for the provision of goods or services.

Herein, according to the Appellant, the Respondent had failed to pay an outstanding amount to the Appellant, against provision of services, even after repeated notices were issued to it. Therefore, the Appellant, as an operational creditor, issued a demand notice under Section 8 of the Code to the Respondent, calling upon it to pay the outstanding amount but the Respondent deniedany such liability.

Therefore, the Appellant had initiated the insolvency proceedings against the Respondent before the NCLT by filing an application under Section 9 of the Code. But the NCLT dismissed the Section 9 Application at the threshold on the grounds that along with the Application, the Appellant had not complied with the mandatory requirement of Section 9 (3) (c) of the Code, i.e. it had not filed a copy of the certificate from a financial institution maintaining the accounts of the Appellant to confirm that the Respondent had not paid to the Appellant

On appeal against this Order, the National Company Law Appellate Tribunal (NCLAT) also upheld the Order passed by the NCLT and further stated that an advocate/lawyer cannot issue a notice under Section 8 on behalf of the operational creditor, if there is nothing in the Tribunal’s record to suggest that the advocate/lawyer was authorized by the Appellant to do so or that the advocate/lawyer holds any position in the Appellant Company. Thus, for the same reasons, the NCLAT also held that the Section 9 Application was not maintainable.

The Appellant, therefore, has challenged the Order passed by the NCLAT before the Supreme Court and the Supreme Court decided upon the following issues:

  1. Whether, in relation to an operational debt, the provision contained in Section 9 (3) (c) of the Code is mandatory?

The Supreme Court has held that filing a copy of the certificate from a financial institution maintaining the accounts of the Appellant to confirm that the Respondent has not made any payment to the Appellant is not a pre- condition to triggering the insolvency process under the Code on the following grounds:

  • The expression “confirming” implies that it is only an important piece of evidence which only “confirms” that there is no payment of an unpaid operational debt.
  • Also, as per Form 5 under Rule 6 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016, the Annexure III provides for attachment of copies of the relevant accounts from the banks/financial institutions maintaining accounts of the operational creditor confirming that there is no payment of the relevant unpaid operational debt by the operational debtor, if available. The Supreme Court held that this implies that such accounts are not a pre-condition to trigger the Code, and that if such accounts are not available, a certificate based on such accounts cannot be given.
  • Otherwise, if the provision contained in Section 9 (3) (c) of the Code is made a mandatory pre-condition, then only such operational creditors who have dealings with the banks/financial institutions listed under Section 3 (14) of the Code, may be competent to fulfill the pre-condition in Section 9 (3) (c) of the Code. As a result, an operational creditor having dealings with a non-scheduled bank/foreign bank, etc would not be able to fulfill such a pre-condition and thereby, become incompetent to invoke Section 9 of the Code.

Therefore, if the provision contained in Section 9 (3) (c) of the Code is made a mandatory pre-condition to invoking Section 9, then in the latter cases, Section 9 (3) would amount to a threshold bar to the processing of an application under Section 9 of the Code.

Thus, with regard to the first issue, the Supreme Court held that the Code cannot be interpreted to be discriminatory and apply to only those operational creditors who have dealings with the banks/financial institutions listed under Section 3 (14) of the Code and not to those who have dealings with a non-scheduled bank/foreign bank, etc. It held that “shall” in Section 9(3) does not take us much further when it is clear that Section 9(3)(c) becomes impossible of compliance in cases like the present.

  1. Secondly, whether a demand notice of an unpaid operational debt can be issued by a lawyer on behalf of the operational creditor?

The Supreme Court held that a demand notice of an unpaid operational debt can be delivered by a lawyer/authorized agent on behalf of the operational creditor on the following grounds:

  • Forms 3 and 5 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 require signature of the person authorized to act on behalf of the operational creditorand the position with or in relation to the operational creditor to be appended to both the demand notice (Form 3) as well as the application under Section 9 of the Code (Form 5).
  • Section 30 of the Advocates Act 1961 states that every advocate whose name is entered in the State roll shall be entitled to practice in all courts, tribunals, and before any other authority. Referring to another Supreme Court case, the Supreme Court herein held that the term ‘practice’ includes all preparatory steps leading to the filing of an application before a court/tribunal.

Therefore, with regard to the second issue, the Supreme Court held that a conjoint reading of Section 30 of the Advocates Act 1961, Sections 8 and 9 of the Code, the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 and Forms thereunder would yield the result that a notice sent on behalf of an operational creditor by a lawyer would be in order.

Thus, the Supreme Court has hereby removed the aforesaid mentioned two threshold bars to the applications filed under Section 9 and has directed the NCLAT to proceed further with these matters under the Code.

Harini Daliparthy

Legal Associate

ARBITRATION AND SARFAESI PROCEEDINGS CAN BE CARRIED SIMULTANEOUSLY FOR RECOVERY OF LOAN ARREARS

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On Thursday, 7th December, 2017 the Delhi High Court in the case of Lalit Mohan Madhan and Ors. vs. Reliance Capital Ltd., held that arbitration and SARFAESI proceedings can be carried simultaneously for recovery of loan arrears.

Justice Navin Chawla ruled that “As the SARFAESI Act and the Arbitration /Debt Recovery Act are held to be complementary in nature and the doctrine of election has been held to be not applicable, it cannot be said that if a party has invoked one remedy, it is debarred from invoking the other during the pendency of the first one. Under the SARFAESI Act, specially under Section 13 thereof, the secured creditor will proceed against the security given for the loan. If the amount recovered from the secured asset is less than the amount claimed as due by the financial institution, it would necessarily have to go for an adjudication proceeding before proceeding against the other assets of the debtor. However, that does not mean that if it has invoked the adjudicatory process for determination of its loan amount, it stands denuded of recovering its loan from the secured assets in accordance with law i.e. SARFAESI Act,”.

The Court was hearing a Petition filed under Section 9 of the Arbitration and Conciliation Act, 1996, demanding that the Respondent, Reliance Capital Ltd., be debarred from taking any coercive action through notices issued under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) for recovery of the alleged amount of Rs. 6.4 crore.

The Petitioner had contended that the impugned notices under Section 13(2) and 13(4) of the SARFAESI Act should be stayed as the liability under the loan agreement has been adjudicated through arbitration. The arbitral award had not attained finality, as the same was under challenge before the Court.

It had further submitted that since the bank had taken recourse to the Arbitration and Conciliation Act, it cannot now resort to the SARFAESI Act for making any recovery.

The Bank, on the other hand, had contended that the SARFAESI Act provides for an alternate remedy to financial institutions for recovering loan amount. The Bank further contended that the Act itself does not bar the application of other legislations that the remedies can simultaneously sustain.

The Court relied on the decision rendered by the Supreme Court in the case of M.D. Frozen Foods Exports Pvt. Ltd. and Ors. vs. Hero Fincorp Ltd., AIR 2017 SC 4481, “the arbitration proceedings and SARFAESI Act proceedings can go hand in hand. It has held that the provisions of SARFAESI Act are a remedy in addition to the provisions of the Arbitration Act. The two Acts are cumulative remedies to the secured creditors. While SARFAESI Act proceedings are in nature of enforcement proceeding, the arbitration proceedings would be in form of an adjudicatory process. In the event that the secured assets are insufficient to satisfy the debt, the secured creditor can proceed against other assets in execution against the debtor, after determination of pending outstanding amount by a competent forum i.e. in this case the arbitration.”

The Court ruled that the Petitioner had failed to make out any prima facie case in its favour and dismissed the Petition  allowing the Bank to initiate proceedings under the SARFAESI Act.

Taruna Verma

Senior Advocate

BOMBAY HIGH COURT UPHOLDS THE VALIDITY OF REAL ESTATE (REGULATION AND DEVELOPMENT) ACT

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The Bombay High Court ruled on Wednesday, 6th December, 2017 in the matter of Neelkamal Realtors Suburban Pvt. Ltd. and Anr. vs. Union of India and Ors., that all provisions of the Real Estate (Regulation and Development) Act (RERA), 2016 are constitutional and valid.

RERA came into effect on 1st May 2017, a year after both Houses of the Parliament passed it. In September, after several petitions challenging RERA were filed in High Courts across the country, the Supreme Court stayed the proceedings in other Courts. The Supreme Court said that other Courts should wait for the Bombay High Court’s decision before hearing RERA-related matters and also asked the Bombay High Court to expedite the hearings on pending matters.

A Bench comprising of Justice Naresh Patil and Justice Rajesh Ketkar, in their 330 page Judgement, upheld various provisions of the Act in ten petitions filed by real estate developers and individual plot owners, all challenging the constitutional validity of the Act.

The builders had challenged Section 18 of the Act, under which they will have to return monies received with interest, if they fail to hand over possession or complete the project in a time bound manner, if the allottee wishes to withdraw from a project. It also contemplates the payment of monthly interest for the period of the delay to those allottees who choose not to withdraw.

To this the Court said, “….  in case the allottee wishes to withdraw from the project, without prejudice to any other remedy available, to return the amount received by him in respect of that apartment with interest at such rate as may be prescribed in this behalf including compensation.

If the allottee does not intend to withdraw from the project he shall be paid by the promoter interest for every month’s delay till handing over of the possession. The requirement to pay interest is not a penalty as the payment of interest is compensatory in nature in the light of the delay suffered by the allottee who has paid for his apartment but has not received possession of it. The obligation imposed on the promoter to pay interest till such time as the apartment is handed over to him is not unreasonable. The interest is merely compensation for use of money.”

 

The Bench, however, also allowed a significant leeway for the developers in the Judgement by permitting the State-level RERA Authority and the Appellate Tribunal to consider delays on a case-to-case basis, and not to cancel such projects or developers’ registration in cases where the delay was caused due to ‘exceptional and compelling circumstances’.

The Court ruled that “In case the promoter establishes and the authority is convinced that there were compelling circumstances and reasons for the promoter in failing to complete the project during the stipulated time, the authority shall have to examine as to whether there were exceptional circumstances due to which the promoter failed to complete the project. Such an assessment has to be done by the authority on case to case basis and exercise its discretion to advance the purpose and object of RERA by balancing rights of both, the promoter and the allottee.”

The Court also ruled on the appointment of Judicial Members to RERA Tribunals. Section 46 of the Act, which deals with appointments, allows a bureaucrat, who has held the post of Additional Secretary, to hold the post of Judicial Member, however, the Court partially struck down Section 46 (1) (b). The Court has directed that the two-member bench of the Tribunal should always consist a judicial member and majority of the members shall always be judicial members, instead of bureaucrats, as is the formation now.

While the Bench concurred with the State and the Union Government’s arguments, it said that the Authorities must also closely monitor the implementation of the Act, “We are conscious of the fact that the actual implementation of RERA needs to be closely monitored in the years to come,”.

The Bench, while upholding the provisions of RERA said, “RERA is not a law relating to only regulating concerns of the promoters but its object is to develop the real estate sector, particularly the incomplete projects, across the country. The problems are enormous and it’s time to take a step forward to fulfill the dream of the ‘Father of the Nation- To wipe out tears from every eye.”

Finally, the Bench ruled that RERA is crucial to protect the interest of flat buyers across the country.

Taruna Verma

Senior Advocate

NATIONAL GREEN TRIBUNAL IMPOSES PENALTY FOR POLLUTING RIVER YAMUNA

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The National Green Tribunal (NGT) New Delhi has recently heard the matter involving severe environmental damage caused to the flood plains of River Yamuna. The NGT had earlier in 2015 approved the Delhi Jal Board’s project for cleaning and rejuvenation of River Yamuna (Project) falling in the Delhi NCR region which included construction of sewage treatment plants, rehabilitation of sewer line systems, etc. The NGT had also prohibited carrying out any construction activity in the demarcated flood plains of River Yamuna.

The flood plains of rivers are significant in the following manner:

  1. They facilitate the self cleansing ability of the rivers and their capacity to retain floodwater,
  2. They provide habitat to several riparian plants and animals, natural vegetation including trees, shrubs and other aquatic vegetation,
  3. They create wetlands that help biological cleaning of waste water before it could enter and pollute the river, etc.

 

In the present case, the Art of Living Organization (the Respondent) had organized the World Culture Festival Celebration 2016 (Event), where, they had resorted to illegal and unauthorized dumping of debris and construction on the flood plains of River Yamuna. According to a Committee constituted by the NGT:

  • A huge gathering at this site had caused vast amounts of solid and liquid pollution,
  • Most of the wetland vegetation at the site had been removed by excavation or buried under the debris to provide access to the bridges,
  • The plains were filled with soil or debris and the ground had been leveled flat from the use of heavy vehicles at the site,
  • Construction material used in building huge stage, large cabins/tents were scattered all over,
  • Roads were constructed to provide access to the event, etc.

 

As per the Committee, all these activities led to severe damage to the environment and natural ecosystem, changes in the physical, chemical and biological characteristics of the soil and the complete destruction of the flood plains of River Yamuna, which may have adverse affects on the environment including the creation of an oxygen deficient environment, leaching of toxic substances derived from the debris and other wastes, etc.

The Delhi Development Authority (DDA) had initially permitted the Respondent to use the land in the river bed/flood plain for the Event on certain terms and conditions such as use of eco-friendly materials, no dumping of wastes, no carrying out activity in the vicinity of the River, construction of toilets, permissions and sanctions from various authorities concerned, etc. But the NGT held that the Respondent did not comply with most of the terms and conditions of the DDA.

Therefore, the NGT herein adopted the principle of no fault liability i.e. the Respondent had the onus/burden to take all the precautions that were required to be taken prior and subsequent to the Event. Failing which, the Respondent has been held responsible for the environmental degradation of the flood plains of River Yamuna and that it has to restore the place to its original condition as it was prior to the Event. The NGT has also directed the DDA to undertake and execute work of restoration/restitution of the flood plains of River Yamuna and other works connected thereto and use the compensation paid by the Respondent for this purpose, and to ensure construction/establishment of bio-diversity park at the site.

 

Harini Daliparthy

Legal Associate

SUPREME COURT ISSUES DIRECTIONS ON ROAD SAFETY

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The Supreme Court, on Thursday, 30th November 2017 issued guidelines to reduce the number of deaths that occur as a result of road accidents and directed States and Union Territories to implement Road Safety Policy dated 2010 with seriousness

The Bench comprising Justice M.B. Lokur and Justice Deepak Gupta were hearing a PIL filed by Dr. S. Rajaseekaran, who is the Chairman and Head of Department of Orthopaedic Surgery, Ganga Hospital, Coimbatore. The Petitioner had contended that 90% of deaths in road accidents are due to lack of proper implementation of Road Safety Rules.

An analysis of the Report by the Ministry of Road Transport and Highways published on September 2017 titled “Road Accidents in India-2016” shows that a total number of 4,80,652 road accidents took place in the country in the year 2016 of which 1,50,785 accidents claimed life and 4,94,624 accidents left persons with grievous injuries.

The Supreme Court noted the statistics given by the Petitioners , which reads as, “the number of deaths due to road accidents in the country was said tobe over 100,000 in a year, which translates to about one death every three minutes.”It further noted that the compensation awarded for deaths and other motor accident claims runs into hundreds of crores of rupees. During the course of arguments in the instant case, the Court had perused all documents, data and reports on road safety and accidents and deaths, which have occurred over the years.

The Apex Court after having considered all aspects in the case and after making detailed study of the suggestions and submissions issued 25 directions, which include directions to 4 Union Territories and 3 States to formulate “Road Safety Policy” by January 2018 and carry out its implementation in an effective manner. The Court has directed the Union Territories and States, which have not formed road safety policies to formulate the same by January 2018. It has also directed all States and Union Territories to prepare a “Road Safety Action Plan” by the end of March 2018. Further, the Court also mandates safety norms as part of school curriculum.

The Court noted that, “It appears that one of the main reasons for road accidents is the poor quality of roads, improper design, etc,”

The Court has now made it mandatory for States and Union Territories to establish Road Safety Fund, the corpus of which would come from traffic fines collected. The money would be used to meet the expenses for road safety.

The Union Ministry of Transport has been asked to frame a protocol for road design, road quality and identification of black spots and also, to implement “traffic calming measures” at accident spots.

One can hope with the Supreme Court judgement road safety will now be given a priority and travelling will be less disastrous.

Taruna Verma

Senior Associate