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Corporate Legal Battle: TATA vs MISTRY ( PART 1)

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Corporate Legal Battle: TATA vs MISTRY ( PART 1)

BRIEF BACKGROUND OF THE CASE

Tata conglomerate is India’s largest business group running businesses in seven sectors in more than eighty countries. Tata Sons is the holding company of the Tata Group. Tata Sons is an unlisted company. Around 66 % of its shares are owned by the various Tata trusts, most importantly Sir Dorabji Tata Trust (27.97%) and Sir Ratan Tata Trust (23.56%). 

The next major chunk of 18% is controlled by Shapoorji Pallonji Group, whose heir apparent is Cyrus Mistry. (“Mistry”). Cyrus Pallonji Mistry  is an Irish businessman of Indian origin . He was the chairman of Tata Group, an Indian business conglomerate, from 2012 to 2016.[He was the sixth chairman of the group, and only the second (after Nowroji Saklatwala) to not bear the surname Tata. In mid-2012, Cyrus Mistrywas chosen by a selection panel to head the Tata Group and took charge in December the same year. 

In 2016, the Board removed Cyrus Mistry from and the Board constituted a Selection Committee comprising Mr. Ratan N. Tata, Mr. Venu Srinivasan, Mr. Amit Chandra, Mr. Ronen Sen and Lord Kumar Bhattacharyya, as per the provisions in the Articles of Association of Tata Sons, to choose a new Chairman within four month.

 

 

BREAKING] Supreme Court to pronounce Judgment tomorrow in Tata Sons v. Cyrus Mistry dispute

STAKES OF TATA SONS 

Cyrus Mistry, son of pallonji Mistry who is the owner of the shapoorji pallonji group and one of the biggest stakeholder in the Tata Group .

He was appointed to the top position in 2012

ShareholderNo. of SharesShareholding percentage (%)
Shapoorji Pallonji Mistry1080.26723
Sterling investment Corp

Shapoorji PAllonji Group

371209.18489
Cyrus Investment

( Shapoorji Pallonji Group)

371209.18489
Ratan Tata33680.83337
Sir Dorabji Tata Trust11306727.97705
Sir Ratan Tata Trust9521123.558

COMPLAINT BY CYRUS MISTRY BEFORE HON’BLE NATIONAL COMPANY LAW TRIBUNAL 

The acts of oppression and mismanagement complaint against Tata Sons revolved around 

  1. alleged abuse of the Articles of Association, particularly Articles 121, 121A, 86, 104B and 118, to enable the trusts and its nominee Directors to exercise control over the Board of Directors; 
  2. alleged illegal removal of Cyrus Mistry as Executive Chairman without any notice and an all out attempt to remove him from the Directorship of all the operating companies of the Tata group; 
  3. alleged dubious transactions in relation to Tata Teleservices Limited, alongwith one Mr. C. Sivasankaran; 
  4.  Ratan Tata allegedly treating Tata Sons as a proprietorship concern with all others acting as puppets, resulting in the Board of Directors failing the test of fairness and probity 
  5. acquisition of Corus Group PLC of UK at an inflated price and then jeopardising the talks for its merger with ThyssenKrupp 
  6. Nano car project becoming a disaster with losses accumulating year after year and the conflict of interest that Ratan Tata had in the supply of Nano gliders to a company where he had stakes; 
  7. providing corporate guarantee to IL & FS Trust Company for the loan sanctioned by Standard Chartered Bank to Sterling 
  8. making Kalimati Investments Ltd, a subsidiary of Tata Steel to provide an inter corporate bridge loan to Sterling; 
  9. the dealings with NTT DoCoMo and Sterling resulting in an arbitration award for a staggering amount; 
  10. leaking information to Siva of Sterling that resulted in Siva issuing legal notices to Tata Teleservices and Tata Sons
  11. Ratan Tata making a personal gain for himself through the sale of a flat owned by a Tata group company to Mehli Mistry; 
  12. companies controlled by Mehli Mistry receiving favours due to the personal relationship that Ratan Tata had with him; and 
  13. fraudulent transactions in the deal with Air Asia which led to financing of terrorism.

 

REPLY OF RATAN TATA TO THE ALLEGATIONS

Tata Sons filed a reply to the company petition contending interalia: 

  1. that Cyrus Mistry, who was removed from the post of Executive Chairman, after having lost the confidence of 7 out of 9 Directors, has sought to use the complainant companies to besmirch the reputation of Tata Group; 
  2.  that even the decisions to which Cyrus Mistry was a party have been questioned in the petition;
  3. that Tata Group founded in 1868 is a global enterprise,headquartered in India, comprising over a hundred operating companies, having presence in more than 100 countries across six continents, collectively employing over 6,60,000 people; 
  4. that Articles 104Band 121 were introduced through a new version of Articles of Association at the Annual General Meeting of Tata Sons held on 13.09.2000 and Article 121 was subsequently amended byResolution dated 09.04.2014;
  5. that though the mail was marked confidential, it was simultaneously leaked to the press;
  6. that Cyrus Mistry also breached his fiduciary and contractual duties by disclosing confidential information and documents pertaining toTata Sons to third parties;
  7. that the complainant companies have cherry picked certain business decisions to launch a vitriolic attack on the Tata Trusts; 
  8. that while the complainant companies have talked about bad business deals, such as Corus acquisition and Nano Project, they have deliberately omitted to talk about Tetley acquisition by Tata Global Beverages Limited, the immensely successful Jaguar Land Rover acquisition by Tata Motors and the phenomenal success of Tata Consultancy Services;
  9. that Corus acquisition, the Nano Project, contracts awarded to the business concerns of Mr. Mehli Mistry and the investment by Mr.C. Sivasankaran have surfaced only after the replacement of Mr. Cyrus Mistry as the Executive Chairman; 
  10. that Cyrus Mistry has been the Director of Tata Sons since the year 2006 and was also the Executive Chairman from December, 2012 to October, 2016 and was fully aware of how the decisions relating to these projects were taken when they were taken;
  11. that courts cannot be called upon to sit in judgment over the commercial decisions of the Board of Directors of companies; and
  12. that even commercial misjudgments of the Board of Directors cannot be branded as instances of oppression and mismanagement.

RELIEF SOUGHT BY CYRUS MISTRY FROM HON’BLE NATIONAL COMPANY LAW TRIBUNAL 

  1. The necessity of an affirmative vote of the majority of directors nominated by the Trusts, which are majority shareholders, be deleted; 
  2. The Petitioners be entitled to proportionate representation on the Board of Directors of Respondent No .1; 
  3. The Petitioners be entitled to representation on all committees formed by the Board of Directors of Respondent No.1; and 
  4. The Articles of Association be amended accordingly

JUDGEMENT OF HON’BLE NATIONAL COMPANY LAW TRIBUNAL  (2016)

  1.  Removal of Mr. Cyrus Mistry as Executive Chairman on 24.10.2016 is because the Board of Directors and Majority of Shareholders, ie., Tata Trusts lost confidence in Mr. Cyrus as Chairman, not because by contemplating that Mr. Cyrus would cause discomfort to Mr. Tata, Mr. Soonawala and other answering Respondents over purported legacy issues. Board of Directors are competent to remove the Executive Chairman; no selection committee recommendation Is required before removing him as Executive Chairman. 
  2. Removal of Mr. Cyrus Mistry from the position of Director is because he admittedly sent the company information to Income Tax Authorities; leaked the company information to Media and openly come out against the Board and the Trusts, which hardly augurs well for smooth functioning of the company, and we have not found any merit to believe that his removal as director falls within the ambit of section 241 of Companies Act 2013. 
  3. We have not found any merit to hold that proportional representation on Board proportionate to the shareholding of the petitioners is possible so long as Articles do not have such mandate as envisaged under section 163 of Companies Act, 2013. 
  4. We have not found any merit in purported legacy issues, such as Siva issue, TISL issue, Nano car issue, Corus issue, Mr. Mehli issue and Air Asia issue to state that those issues fall within the ambit of section 241 and 242 of Companies Act 2013. 
  5. We also have not found any merit to say that the company filing application under section 14 of Companies Act 2013 asking this Tribunal to make it from Public to Private falls for consideration under the jurisdiction of section 241 & 242 of Companies Act 2013. 
  6. We have also found no merit in saying that Mr. Tata & Mr. Soonawala giving advice and suggestions amounted to interference in administering the affairs of the company, so that to consider their conduct as prejudicial to the interest of the company under section 241 of Companies Act 2013. 
  7. We have found no merit in the argument that Mr. Tata and Mr. Soonawala acted as shadow directors superimposing their wish upon the company so that action would be taken under section 241 & 242 of Companies Act 2013. 
  8. We have not found any merit in the argument that Articles 75, 1048, 118, 121 of the Articles of Association per se oppressive against the petitioners. 
  9. We have not found any merit in the argument that Majority Rule has taken a back seat by introduction of corporate governance in Companies Act, 2013, it is like corporate democracy is genesis, and corporate governance is specific. They are never in conflict with each other; the management is rather more accountable to the shareholders under the present regime. Corporate governance is collective responsibility, not based on assumed free-hand rule which is alien to the concept of collective responsibility endowed upon the Board.
  10. We have observed that prejudice remedy has been included in 2013 Act in addition to oppressive remedy already there and also included application of “just and equitable” ground as precondition to pass any relief in mismanagement issues, which was not the case under old Act.

Author: Vinay Sachdev

Editor: Adv. Aditya Bhatt & Adv. Chandni Joshi

Corporate Legal Battle: TATA vs MISTRY (PART 2)

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Corporate Legal Battle: TATA vs MISTRY (PART 2)

 

Check Part 1 of Tata vs Mistry Corporate Legal Battle, here

After the judgement of Hon’ble National Company Law Tribunal, Interlocutory Applications have been preferred by the Registrar of Companies, Mumbai for seeking amendment in Judgment.

[BREAKING] Supreme Court to pronounce Judgment tomorrow in Tata Sons v. Cyrus Mistry dispute

 

JUDGEMENT OF HON’BLE NATIONAL COMPANY LAW APPELLATE TRIBUNAL  (2018)

Hon’ble National Company Law Appellate Tribunal  held that the removal of Mistry from his post was neither discussed nor expected as the records show the company under his leadership flourished and hence a case of lack of performance cannot be built. Hence, he was restored as Director of various companies and even the Executive Chairman of Tata Sons but after four weeks of the judgment.

While Hon’ble National Company Law Appellate Tribunal , accepting the consequences of this article in light of the facts, ordered Tata sons to refrain from invoking against Shapoorji Pallonji Group. 7 Hon’ble National Company Law Appellate Tribunal , on the other hand, identified a case of prejudice and oppression by the board against the minority shareholders and the company. It held that the conversion from public to private was hurriedly done amidst a pending litigation and it was illegal and unsustainable as it did not even follow proper procedures under Section 14 clause 8. The verdict asked the Registrar of Companies to make the correction and declared Tata to remain public. . Although Hon’ble National Company Law Appellate Tribunal  accepted this claim, they refused to accept that legitimate expectations, which are a result of mutual trust and confidence, arising from such a partnership can be a factor of oppression. Through a plethora of judgments, the Hon’ble Supreme Courthas established certain principles in order to determine a company as a quasi-partnership but Hon’ble National Company Law Appellate Tribunal  ignored these principles and used its own understanding to back such reasoning. 

IT also held that mismanagement can be easily visible through the losses incurred by Tata Sons and other firms through prejudicial decisions taken by the respective Board of Directors which were essentially filled with a majority of Tata Trust’s representatives. Hon’ble National Company Law Appellate Tribunal  set aside the judgment and ruled in favour of Mistry and Shapoorji Pallonji Group. These are very contrasting judgments with respect to every aspect of law which the case dealt with. 

The same now has been appealed to the Hon’ble Supreme Court by Tata Sons. Post the stay of the Hon’ble National Company Law Appellate Tribunal  order by the Supreme Court, Mistry appealed against this same order seeking judicial protection and Board of Directors representation for his family i.e. the minority shareholders. This new appeal will be heard along with the appeal of Tata Sons before a Hon’ble Supreme Court bench comprising Chief Justice S.A. Bobde, Justice Surya Kant and Justice B.R. Gavai.

RATAN TATA APPEAL IN SUPREME COURT

Tata Sons (Private) Limited has come up with two appeals in Civil Appeal Nos.1314 of 2020, challenging a final order dated 18/12/2019 passed by the National Company Law Appellate Tribunal, which is,

  1. Holding as illegal, the proceedings of the sixth meeting of the Board of Directors of TATA Sons Limited held on 24.10.2016 in so far as it relates to the removal of Shri Cyrus Mistry.  
  2.  Restoring the position of Cyrus Mistry as the Executive Chairman of Tata Sons Limited and consequently as a Director of the Tata Companies for the rest of the tenure; 
  3.  Declaring as illegal the appointment of someone else in the place of Cyrus Mistry as Executive Chairman; 
  4. Restraining Shri Ratan N. Tata and the nominees of Tata Trust from taking any decision in advance; 
  5. Restraining the Company, its Board of Directors and Shareholders from exercising the power under Article 75 of the Articles of Association against the minority members except in exceptional circumstances and in the interest of the Company; and 
  6. Declaring it illegal, the decision of the Registrar of Companies for changing the status of Tata Sons Limited from being a public company into a private company.

QUESTION OF THE LAW ARISES IN THE CASE

  1. Whether the formation of opinion by the Appellate Tribunal that the company’s affairs have been or are being conducted in a manner prejudicial and oppressive to some members and that the facts otherwise justify the winding up of the company on just and equitable ground, is in tune with the well settled principles and parameters, especially in the light of the fact that the findings of Hon’ble National Company Law Tribunal  on facts were not individually and specifically overturned by the Appellate Tribunal ?
  2. Whether the reliefs granted and the directions issued by the Appellate Tribunal, including the reinstatement of Cyrus Mistry into the Board of Tata Sons and other Tata companies, are in consonance with the pleadings made, the reliefs sought and the powers available under Subsection (2) of Section 242 ?
  3.  Whether the Appellate Tribunal could have, in law, muted the power of the Company under Article 75 of the Articles of Association, to demand any member to transfer his ordinary shares, by simply injuncting the company from exercising such a right without setting aside the Article ?
  4. Whether the characterization by the Tribunal, of the affirmative voting rights available under Article 121 to the Directors nominated by the Trusts in terms of Article 104B, as oppressive and prejudicial, is justified especially after the challenge to these Articles have been given up expressly and whether the Tribunal could have granted a direction to Ratan Tata and the Nominee Directors virtually nullifying the effect of these Articles ?
  5. Whether the reconversion of Tata Sons from a public company into a private company, required the necessary approval under section 14 of the Companies Act, 2013 or at least an action under section 43A(4) of the Companies Act, 1956 during the period from 2000 (when Act 53 of 2000 came into force) to 2013 (when the 2013 Act was enacted) as held by Hon’ble National Company Law Appellate Tribunal  ?

ISSUES BEFORE HONOURABLE Hon’ble Supreme Court(2020)

  1. What constitutes oppression and mismanagement at a company? 
  2. How far do a tribunal’s powers go when deciding such a case? 
  3. Should nominee directors of a majority shareholder have substantial affirmative powers? 
  4. The legality of Tata Sons’ conversion from public company to private company. 
  5. The fate of Mistry’s directorship on the Tata Sons board. And, what this 5-year long battle says about India’s foremost conglomerate, the Tata Group – with over $100 billion in revenue.

HON’BLE APEX COURT JUDGEMENT ON CYRUS-MISTRY CASE

The Hon’ble Supreme Court has comprehensively dismissed every charge of oppression and mismanagement made by entities owned by Cyrus Mistry against Tata Sons Pvt. Not just that, the court has gone so far as to suggest there never was a case to begin with. That the original cause of action was Mistry’s dismissal as chairman of Tata Sons. Everything else was a dressing up of that cause. 

“Though the complainant companies padded up their actual grievance with various historical facts to make a deceptive appearance, the causa proxima for the complaint was the removal of Cyrus Mistry (Cyrus Pallonji Mistry) from the office of executive chairman.” But removal of a chairman, or even director of a company is not grounds enough to determine oppression or prejudicial behaviour, the apex court said whilst overturning the decision of the National Company Law Appellate Tribunal that had found oppression and mismanagement and ordered the reinstatement of Mistry. 

While Mistry made several specific charges against Tata Sons in the oppression case, the Hon’ble Supreme Courtexamined only a few. The court’s explanation for this was that the National Company Law Tribunal had dismissed each of the charges whereas the Hon’ble National Company Law Appellate Tribunal  overturned only a few of the tribunal’s dismissals. Since tribunals are courts of fact and the Hon’ble Supreme Court of law, it limited its proceedings to the conclusions arrived at by the Hon’ble National Company Law Appellate Tribunal .

On Mistry’s removal as executive chairman of Tata Sons, the top court noted that it is a well settled position that certain failed business decisions or a removal of a person from directorship cannot be called as acts oppressive to minority shareholders. In such a case (under Section 241, 242 of company law) a tribunal, the court said, cannot ask whether the removal was correct/valid but it has to see whether such removal would tantamount to oppression of the minority shareholders.

Both, with regard to Mistry’s oppression case and the Hon’ble National Company Law Appellate Tribunal ’s findings, the top court examined several aspects of the Articles of Association of Tata Sons, including rights such as affirmative votes, pre-consultation with Tata Trusts. It dismissed each of Mistry’s arguments and stated the Tata Group was guided by corporate governance and had included many practices, such as board committees, etc. even though it was not required by law to have them.

Article 121 of Tata Sons’ Articles of Association grants affirmative voting rights to the nominee directors of the Tata Trusts in certain matters. The top court pointed out that such rights are a global norm and in this case they confer only a limited right on the nominee directors. Going by the shareholding, Tata Trusts with 66% could have packed the board, the court said, while noting it didn’t

Article 75 allows Tata Sons to resolve by special resolution the transfer of any shareholder’s shares. Mistry has termed this as coercive. The Hon’ble Supreme Court viewed it as an exit clause. Besides, it said Article 75 had never been invoked and future action is not covered under oppression. Also, Article 75 has existed for decades and Mistry was himself party to an amendment in the year 2000 which gave article 75 in its present form.

The court opined that given the charitable objectives of the Tata Trusts, their nominee directors on board Tata Sons are not like any other ordinary directors. It also questioned whether the need for having independent directors on the board itself was an acknowledgment that not every director could be expected to exercise completely independent judgment irrespective of who nominated them. A nominee director of the Trusts holds a fiduciary duty towards their beneficiaries.

The top court also detailed the shifting arguments of the Mistry side through the five-year long litigation on seeking certain reliefs. The plea for reinstatement of Mistry was later amended to seek proportionate representation on the board. While challenging the affirmative voting rights of the Tata Trusts’ nominee directors on Tata Sons’ board, Mistry’s case sought the same rights for his SP Group. The court termed the request for the same rights as “quite funny”.

CONCLUSION

Thus in fine, all the questions of law are liable to be answered in favour of the appellants Tata group and the appeals filed by the Tata Group are liable to be allowed and the appeal filed by S.P. Group is liable to be dismissed. But before we do that we should also deal with the application moved by S.P. Group before us during the pendency of these proceedings, praying for the alternative relief of directing Tata Sons and others to cause a separation of ownership interests of the S.P. Group in Tata sons through a scheme of reduction of capital by extinguishing the shares held by the S.P. Group in lieu of fair compensation effected through a transfer of proportionate shares of the underlying listed companies, with the balance value of unlisted companies and intangibles including brand value being settled in cash.

Interestingly, such an application was filed after Tata Group moved an application for restraining S.P. Group from raising money by pledging shares and this court passed an order of status quo on 22.09.2020. For the first time S.P. Group seems to have realized the futility of the litigation and the nature of the order that the Tribunal can pass under Section 242. This is reflected in Paragraph 62 of the application, where S.P. Group has stated that they are seeking such an alternative remedy as a means to put an end to the matters complained of.

As a matter of fact, S.P. Group should have sought such relief from the Tribunal even at the beginning. As we have pointed out elsewhere a divorce without acrimony is what is encouraged both in England and in India under the statutory regime.

But in an appeal under Section 423 of the Companies Act, 2013, this Court is concerned with questions of law arising out of the order of Hon’ble National Company Law Appellate Tribunal . Therefore, we will not decide this prayer. It should be pointed out at this stage that Article 75 of the Articles of Association is nothing but a provision for an exit option (though one may think of it as an expulsion option). After attacking Article 75 before Hon’ble National Company Law Tribunal , the S.P. Group cannot ask this Court to go into the question of fixation of fair value compensation for exercising an exit option. What is pleaded in Paragraph 72 of the application for separation of ownership interests, requires an adjudication on facts,of various items. The valuation of the shares of S.P. Group depends upon the value of the stake of Tata Sons in listed equities, unlisted equities, immovable assets etc., and also perhaps the funds raised by SP group on the security/pledge of these shares. Therefore, at this stage and in this Court, we cannot adjudicate on the fair compensation. We will leave it to the parties to take the Article 75 route or any other legally available route in this regard. In the result, all the appeals except C.A. No.1802 of 2020 is allowed and the order of Hon’ble National Company Law Appellate Tribunal  dated 18.12.2019 is set aside. The Company Petition C.P. No. 82 of 2016 filed before Hon’ble National Company Law Tribunal  by the two Companies belonging to the S.P. Group shall stand dismissed. The appeal C.A. No.1802 of 2020 filed by Cyrus Investments Pvt. Ltd., and Sterling Investments Corporation Pvt. Ltd. is dismissed. There will be no order as to costs. All IAs including the one for causing separation of ownership interests of the S.P. Group in Tata Sons namely IA No.111387 of 2020, are dismissed.

 

Author: Vinay Sachdev

Editor: Adv. Aditya Bhatt & Adv. Chandni Joshi

Difference Between Operational And Financial Creditors

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Difference Between Operational And Financial Creditors

INTRODUCTION.

“creditor” means any person to whom a debt is owed and includes a financial creditor, an operational creditor, a secured creditor, an unsecured creditor and a decree holder”

The Insolvency and Bankruptcy Code, 2016 differentiates between financial creditors and operational creditors. Financial Creditors are those whose relationship with the entity is a pure financial contract, such as a loan or a debt security. Operational creditors are those whose liability from the entity comes from a transaction on operations. 

Creditors

The Insolvency and Bankruptcy Code, 2016 (IBC) has consolidated and amended the laws relating to reorganization and insolvency of corporate persons, partnership firms and individual firms. The sole intention of this legislation is to facilitate resolution of corporate bankruptcy in a time bound manner.  The IBC has introduced new and distinct concepts of ‘Financial Creditor’ and ‘Operational Creditor‘ as opposed to the Companies Act, 2013 which merely introduced the term ‘creditor’, without any classification thereof.

Today, the maintainability of applications for initiating corporate insolvency resolution process chiefly depends on the applicant first satisfying the Tribunal that it falls either within the definition of ‘Financial Creditor’ or ‘Operational Creditor’ under the IBC. In this article, we are particularly discussing the Order dated 20th February 2017 passed by the Hon’ble National Company Law Tribunal, Principal Bench, New Delhi in Col. Vinod Awasthy v. AMR Infrastructure Limited1 whereby the Hon’ble Tribunal interpreted the definition of ‘Operational Creditor’ under the IBC to ascertain the applicability of the same to a flat purchaser.

Prior to discussing the aforesaid Order, it is imperative to first understand the definitions of ‘Financial Creditor’ and ‘Operational Creditor’ under the IBC.

A financial creditor is defined under Section 5(7) of the IBC to mean

“a person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred“.

An operational creditor is defined under Section 5(20) of the IBC to mean

“any person to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred“.

In order to ascertain whether a person would fall within the definition of an operational creditor, the debt owed to such a person must fall within the definition of an operational debt as defined under Section 5(21) of the IBC.

Difference by the bankruptcy law 

Distinction between a financial creditor and operational creditor has been drawn by the Bankruptcy Law Reforms Committee in para 5.2.1 of its final report. It states:

“Here, the Code differentiates between financial creditors and operational creditors. Financial creditors are those whose relationship with the entity is a pure financial contract, such as a loan or debt security. Operational creditors are those whose liabilities from the entity comes from a transaction on operations…The Code also provides for cases where a creditor has both a solely financial transaction as well as an operational transaction with the entity. In such a case, the creditor can be considered a financial creditor to the extent of the financial debt and an operational creditor to the extent of the operational debt.”

It is clearly evident that the lawmakers have chalked out distinct definitions of ‘financial creditor’ and ‘operational creditor’ and that they are not to be interpreted as inclusive or exclusive of each other.

Detailed differences between Financial Creditor and Operational Creditor

 

particulars.Financial Creditor.Operational Creditor.
Meaning Section 5 (7) – Financial creditor

means any person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred to.

Section 5 (20) – Operational

creditor means a person to whom

an operational debt is owed and includes any person to whom such debt has been legally assigned or

transferred.

Voting shareSection 5 (28) – Voting right of a

financial creditor is based on

the proportion of the financial

debt owed to such a financial creditor. The approval of

committee of creditor shall be

obtained by a vote of not less than

seventy five percent of the voting shares. 

Operational creditor shall not have

any right to vote at the meeting

of committee of creditors. 

Initiation of corporate

insolvency resolution

process

Section 7 (1) – On occurrence of a

default, a financial creditor shall

either by itself or jointly with other

financial creditors may file an

application for initiating corporate

insolvency resolution process

against a corporate debtor before

the Adjudicating Authority

Section 8 (1) – On occurrence of a

default the operational creditor

may, deliver a demand notice of

unpaid operational debtor copy of

an invoice demanding payment of

the amount involved in the default

to the corporate debtor. The

operation creditor may file an

application after the expiry of 10

days from the date of delivery of

the notice or invoice demanding

payment under sub-section (1) of

section 8, if the operational

creditor does not receive payment

from the corporate debtor or

notice of the dispute under subsection (2) of section 8. 

Appointment of IRPSection 7 (3) – The financial

creditor shall along with the

application furnish the name of the

resolution professional proposed

to act as an interim resolution

professional. 

Section 9 (4) – An operational

creditor may propose a resolution

professional to act as an

 interim resolution

professional. 

Constitution of

Committee of Creditors

Section 21 (2) – The committee of

creditors shall consist solely of

financial creditors, and all financial

creditors of the corporate debtor. 

Operational creditors shall not

form part of the committee. 

 

Hon’ble National Company Law Tribunal on ‘Operational Creditors’

In Col. Vinod Awasthy v. AMR Infrastructure Limited, the Hon’ble Tribunal while dismissing the Petition instituted under Section 9 of the Insolvency and Bankruptcy Code, 2016 (IBC) at the admission stage itself, decided the issue of whether a flat purchaser would fall within the definition of an ‘Operational Creditor‘ as defined under Section 5(20) of the IBC to whom an ‘Operational Debt’ as defined under Section 5(21) of the IBC is owed.

The Hon’ble Tribunal observed that the framers of the IBC had not intended to include within the expression of an ‘operation debt’ a debt other than a financial debt. Therefore, an operational debt would be confined only to four categories as specified in Section 5(21) of the IBC like goods, services, employment and Government dues. The Tribunal held that the debt owed to the Petitioner (a flat purchaser in this case) had not arisen from any goods, services, employment or dues which were payable under any statute to the Centre / State Government or local bodies. Rather, the refund sought to be recovered by the Petitioner was associated with the possession of immovable property.

The Hon’ble Tribunal while deciding the question of whether a flat purchaser could be considered an operation creditor considered the observations of the Bankruptcy Law Reforms Committee in paragraph no. 5.2.1 of the Final Report:

“Operational Creditors are those whose liability from the entity comes from a transaction on operations. Thus, the wholesale vendor of spare parts whose spark plugs are kept in inventory by car mechanics and who gets paid only after the spark plugs are sold is an operational creditor. Similarly, the lessor that the entity rents out space from is an operational creditor to whom the entity owes monthly rent on a three-year lease.”

The Hon’ble Tribunal held that the Petitioner had neither supplied goods nor had rendered any services to acquire the status of an ‘Operational Creditor’.

It was further held that it was not possible to construe Section 9 read with Section 5(20) and Section 5(21) of the IBC so widely to include within its scope, cases where dues were on account of advance made to purchase a flat or a commercial site from a construction company like the Respondent especially when the Petitioner had other remedies available under the Consumer Protection Act and the General Law of the land.

Supreme Court’s View

The difference between financial and operational creditors under the Code is not merely surficial – it is fundamental. If the crux of the insolvency regime is priorities, the priorities of the two in the distribution waterfall differ, even if both are unsecured. Is this a differentiation, or discrimination?  The differentiation, along with certain other provisions of the Code, was challenged before the Supreme Court in a bunch of petitions. 

In Swiss Ribbons Ltd. v. Union of India, the Supreme Court observed that :

“A perusal of the definition of ‘financial creditor’’ and ‘financial debt’ makes it clear that a financial debt is a debt together with interest, if any, which is disbursed against the consideration for time value of money. It may further be money that is borrowed or raised in any of the manners prescribed in Section 5(8) or otherwise, as Section 5(8) is an inclusive definition. On the other hand, an ‘operational debt’ would include a claim in respect of the provision of goods or services, including employment, or a debt in respect of payment of dues arising under any law and payable to the Government or any local

authority.” And, “financial creditors generally lend finance on a term loan or for working capital that enables the corporate debtor to either set up and/or operate its business. On the other hand, contracts with operational creditors are relatable to supply of goods and services in the operation of business. Financial contracts generally involve large sums of money. By way of contrast, operational contracts have dues whose quantum is generally less.” The difference between operational and financial debt/creditors was thus upheld by the Supreme Court. The most important consideration in determining whether a debt is a financial debt or an operational debt is to “intent of the parties”. Merely because a creditor claims interest for a delayed payment, does not imply that the debt is financial – in such transactions, interest is contemplated as a ‘penalty’ and not ‘returns’. Also, lending for time value of money does not necessarily involve ‘interest’. In order to qualify to be a financial debt, what matters is that the amount was disbursed against time value of money, whether or not expressed in terms of ‘interest’. Besides financial and operational debts, there can be other types of debts too – however, such other creditors are not entitled to initiate an application under the Code, but can file claims in the specified form.

 

Corporate Debtor, Moratorium under Insolvency and Bankruptcy Code?

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Corporate Debtor, MORATORIUM UNDER IBC

What is Moratorium?

Since the implementation of the Insolvency and Bankruptcy Code, 2016, the word ‘moratorium’ has been construed by the judiciary on different levels. The word ‘Moratorium’ has not been defined anywhere in the code. According to the Oxford Dictionary, it means a legal authorization to debtors to postpone payment.

The moratorium under the code implies a period wherein no judicial proceedings for recovery, enforcement of security interest, sale or transfer of assets, or termination of essential contracts can be initiated or proceeded against the Corporate Debtor.  Under section 13(1)(a) of the Code, the adjudicating authority is required to enforce a moratorium for matters mentioned in section 14.The Adjudicating Authority (NCLT or NCLAT), whilst taking up a petition against the Corporate Debtor is required to declare the moratorium period as described under Section 14 of the Code.

When a corporate debtor goes into Corporate Insolvency Resolution Process [hereinafter alluded to as “CIRP”], after the confirmation of the petition filed against the organization, a moratorium is announced whereby all the pending cases against the insolvent organization before any court have stayed.

When Moratorium Commence?

It comes into effect immediately after the application of provisions under Section 7,9 or 10, as admitted by the Adjudicating Authority. Insolvency Commencement Date is a date on which the moratorium is applied, and insolvency application is submitted.

What is Objective of a Moratorium under IBC?

Its main purpose is to keep the corporate debtor’s assets together during the CIRP and facilitate orderly completion of the process mentioned and to ensure that the company may continue as a going concern. It also ensures a bar upon the directors of the company, who can’t take any available money at the time of declaration of the moratorium. If the said period isn’t declared, the CIRP process will be thwarted which in turn will render the objective of the code null.

Section 14 – Moratorium 

(1)Adjudicating Authority shall by order declare moratorium for prohibiting all of the following, namely

(a) the institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority.

 

Section 14 (1) (a) Judicial Interpretations: Moratorium

  1. In Anand Rao Korada Resolution vs M/S Varsha Fabrics (P) Ltd., NCLT-Supreme Court held that the High Court ought not to have proceeded with the auction of the property of the Corporate Debtor, once there is an institution of proceedings under IBC. An order reporting moratorium was passed. Provisions regarding a moratorium cannot possibly apply to cash deposits made in the court.
  2. In India Infoline Finance Ltd. Vs. The State of West Bengal & Ors., it was held that any action of police must be based on the investigation, and it can’t take additional steps in the matter unless and until the CIRP ends, in a resolution or otherwise.
  3. The arbitration proceedings cannot go on, once the moratorium is imposed under S.14(1)(a). This was discussed in Alchemist Asset Reconstruction … vs M/S. Hotel Gaudavan Pvt. Ltd.
  4. Personal/Individual Assets of a director is not the subject matter of CIRP, and the moratorium only extends to the assets of the Corporate Debtor. Held in Suresh Chand Garg Vs. Aditya Birla Finance Ltd.
  5. The NCLAT in Canara Bank v. Deccan Chronicle Holdings Limited carved out an exception holding that the moratorium will not affect any proceedings initiated or pending before the Supreme Court under Article 32 of the Constitution of India or where an order is passed under Article 136 of the Constitution of India. It also concluded that the moratorium will not affect the powers of any High Court under Article 226 of the Constitution of India.
  6. Clause (c) of the section mentions the term ‘security interest’, it doesn’t include the Performance Bank Guarantee.

Section 14(2): Continuance of Critical Supplies

It states that the supply of essential goods or services to the corporate debtor as may be specified shall not be terminated or suspended or interrupted during the moratorium period. As per Regulation 32 of Insolvency & Bankruptcy (CIRP) Regulations, 2016.

Essential supplies mentioned in Section14(2) shall mean:

  • Electricity
  • Water
  • Telecommunication Service
  • Information Technology Services

NCLT Bench of Hyderabad, in Canara Bank v. Deccan Chronicle Holdings Limited, held that with the above-mentioned essential supplies, printing ink, printing plates, printing blankets, solvents, etc. will also come under the purview of exemption from the moratorium. It shall not be terminated or suspended during the period.

Section 14(3): Retrospective Effect

After the amendment through an ordinance, the assets of corporate guarantors or personal guarantors of the corporate debtor will not get the protection of stay provisions under section 14.

NCLAT, New Delhi in Alpha and Omega Diagnostics (India)Ltd. V Asset Reconstruction Company of India held that the personal properties of the promoters were given to the bank as security. It held that the said section only applies to assets of the corporate debtor and would not bar proceedings or actions against assets of third parties.

 

Retrospective Effect,

Through the 2018 Amendment, it was held that the moratorium provisions will not apply to a surety in a contract of guarantee for the corporate debtor, is retrospective.

Section 14(4): Commencement & Effective Period

This section sets out the limit for which the moratorium can be in effect, that is until the completion of the CIRP or on the approval of a resolution plan under Section 31 by the adjudicating authority or on a resolution of the committee of creditors to liquidate the corporate debtor under Section 33, whichever is earlier.

According to Section 12, the CIRP shall be completed within 180 days from the date of admission of the application, and the period can only be extended by 90 days, subject to an application being made to the adjudicating authority after a resolution is passed at a meeting of the committee of creditors by a vote of 75% of the voting share.

Section 74: Punishment for Contravention

Under this Section, officials of the corporate debtor who knowingly or wilfully violate the moratorium provisions can be imprisoned for a min. of three years, which may extend up to five years. Min. fine is of one lakh and max. is up to five lakhs, or with both.

If any creditor violates then the imprisonment is the same as above. The min. imprisonment is one year, and max. is up to five years whereas the min. the fine is one lakh and max. fine which can be imposed is up to one crore, or with both.

Where any corporate debtor or an officer or a creditor on whom the approved resolution plan is binding under Section 31, knowingly or wilfully contravenes any of its terms or abets, the min punishment is of one year which may extend up to five years, whereas the min. the fine is one lakh which may extend up to one crore, or with both.

Conclusion

In conclusion, it can be stated that IBC is silent on the aspect of the definition of moratorium and what proceedings will fall under the ambit of Section 14 of the IBC would still require judicial assessment. Nonetheless, the language of Section 14 of IBC is wide and the intention of the legislature is also to provide complete calm period. However, the Appellate Authority has carved out an exception to the moratorium in the matter of Deccan Chronicle7 and has held that the moratorium even in favor of the Corporate Debtor is also not absolute and it will not affect the proceedings before the Hon’ble High Court and Hon’ble Supreme Court under Article 32, 136 and 226/227 of the Constitution of India. Therefore, the issue whether the proceedings under Section 138 of NI Act will also be covered under the umbrella of moratorium and to what extent would still necessitate judicial examination and only time will set the issue at rest.

 

Author: Mohit Mathur

Editor: Adv. Aditya Bhatt & Adv. Chandni Joshi

Corporate Insolvency Resolution Process

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Corporate Insolvency Resolution Process

INTRODUCTION

In India, the Corporate Insolvency Resolution Process (“CIRP”) takes place under the Insolvency and Bankruptcy Code, 2016 (“IBC”). It involves a Resolution Professional inviting resolution plans for the corporate debtor undergoing insolvency. These plans are submitted by various Resolution Applicants and the best resolution plan is approved by the Committee of Creditors and sanctioned by the National Company Law Tribunal. Thus, from an acquisition perspective, the potential acquirer of the stressed asset is required to provide the best bid (in the form of the resolution plan) for the stressed asset which would be able to garner the approval of the Committee of Creditors.

Corporate Insolvency and Resolution Process - iPleaders

 

CIRCUMSTANCES WHEN CORPORATE INSOLVENCY RESOLUTION PROCESS TRIGGERED.

Corporate social insolvency process has been defined under the Chapter II of IBC licensed professional administrators the resolution process, manages the assets of the debtor, and provides information for creditors to assist them in decision making. The CIRP Triggered under Section 6 of IBC that is Where any corporate debtor commits a default, a financial creditor, an operational creditor or the corporate debtor itself may initiate a corporate insolvency resolution process in respect of such corporate debtor in the manner as provided under preceding sections of chapter II of IBC like under section 7 Financial creditor can initiate the the resolution process by giving an application of corporate insolvency resolution process. (CIRP), same can be done by Operational creditor under section 8 & Section 9 and by Corporate applicant under section 10.

Section 7: Initiation of corporate insolvency resolution process by financial creditor.

(1) A financial creditor either by itself or jointly with other financial creditors, or any other person on behalf of the financial creditor, as may be notified by the Central Government may file an application for initiating corporate insolvency resolution process against a corporate debtor before the Adjudicating Authority when a default has occurred.

Provided that for the financial creditors, referred to in clauses (a) and (b) of sub-section (6A) of section 21, an application for initiating corporate insolvency resolution process against the corporate debtor shall be filed jointly by not less than one hundred of such creditors in the same class or not less than ten per cent. of the total number of such creditors in the same class, whichever is less:

Provided further that for financial creditors who are allottees under a real estate project, an application for initiating corporate insolvency resolution process against the corporate debtor shall be filed jointly by not less than one hundred of such allottees under the same real estate project or not less than ten per cent. of the total number of such allottees under the same real estate project, whichever is less:

Provided also that where an application for initiating the corporate insolvency resolution process against a corporate debtor has been filed by a financial creditor referred to in the first and second provisos and has not been admitted by the Adjudicating Authority before the commencement of the Insolvency and Bankruptcy Code (Amendment) Act, 2020, such application shall be modified to comply with the requirements of the first or second proviso within thirty days of the commencement of the said Act, failing which the application shall be deemed to be withdrawn before its admission.

Explanation.—For the purposes of this sub-section, a default includes a default in respect of a financial debt owed not only to the applicant financial creditor but to any other financial creditor of the corporate debtor.

(2) The financial creditor shall make an application under sub-section (1) in such form and manner and accompanied with such fee as may be prescribed.

(3) The financial creditor shall, along with the application furnish—

(a) record of the default recorded with the information utility or such other record or evidence of default as may be specified.
(b) the name of the resolution professional proposed to act as an interim resolution professional and
(c) any other information as may be specified by the Board.

(4) The Adjudicating Authority shall, within fourteen days of the receipt of the application under sub-section (2), ascertain the existence of a default from the records of an information utility or on the basis of other evidence furnished by the financial creditor under sub-section (3).

Provided that if the Adjudicating Authority has not ascertained the existence of default and passed an order under sub-section (5) within such time, it shall record its reasons in writing for the same.

(5) Where the Adjudicating Authority is satisfied that—

(a) a default has occurred and the application under sub-section (2) is complete, and there is no disciplinary proceedings pending against the proposed resolution professional, it may, by order, admit such application; or

(b) default has not occurred or the application under sub-section (2) is incomplete or any disciplinary proceeding is pending against the proposed resolution professional, it may, by order, reject such application:

Provided that the Adjudicating Authority shall, before rejecting the application under clause (b) of sub-section (5), give a notice to the applicant to rectify the defect in his application within seven days of receipt of such notice from the Adjudicating Authority.

(6) The corporate insolvency resolution process shall commence from the date of admission of the application under sub-section (5).

(7) The Adjudicating Authority shall communicate—
(a) the order under clause (a) of sub-section (5) to the financial creditor and the corporate debtor;

(b) the order under clause (b) of sub-section (5) to the financial creditor,

within seven days of admission or rejection of such application, as the case may be.

Section 8: Insolvency resolution by operational creditor.

(1) An operational creditor may, on the occurrence of a default, deliver a demand notice of unpaid operational debtor copy of an invoice demanding payment of the amount involved in the default to the corporate debtor in such form and manner as may be prescribed.

(2) The corporate debtor shall, within a period of ten days of the receipt of the demand notice or copy of the invoice mentioned in sub-section (1) bring to the notice of the operational creditor—

(a) existence of a dispute, if any, or record of the pendency of the suit or arbitration proceedings filed before the receipt of such notice or invoice in relation to such dispute.

(b) the payment of unpaid operational debt—

(i) by sending an attested copy of the record of electronic transfer of the unpaid amount from the bank account of the corporate debtor or

(ii) by sending an attested copy of record that the operational creditor has encashed a cheque issued by the corporate debtor.

Explanation.—For the purposes of this section, a “demand notice” means a notice served by an operational creditor to the corporate debtor demanding payment of the operational debt in respect of which the default has occurred.

After the expiry of the period of ten days from the date of delivery of the notice or invoice demanding payment under sub-section (1) of section 8, if the operational creditor does not receive payment from the corporate debtor or notice of the dispute under sub-section (2) of section 8, the operational creditor may file an application before the Adjudicating Authority for initiating a corporate insolvency resolution process under Section 9.

Section 10-Initiation of corporate insolvency resolution process by corporate applicant.

(1) 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.

(2) The application under sub-section (1) shall be filed in such form, containing such particulars and in such manner and accompanied with such fee as may be prescribed.
(3) The corporate applicant shall, along with the application, furnish-

(a) the information relating to its books of account and such other documents for such period as may be specified.

(b) the information relating to the resolution professional proposed to be appointed as an interim resolution professional and

(c) the special resolution passed by shareholders of the corporate debtor or the resolution passed by at least three-fourth of the total number of partners of the corporate debtor, as the case may be, approving filing of the application.

(4) The Adjudicating Authority shall, within a period of fourteen days of the receipt of the application, by an order—

(a) admit the application, if it is complete and no disciplinary proceeding is pending against the proposed resolution professional; or

(b) reject the application, if it is incomplete or any disciplinary proceeding is pending against the proposed resolution professional :

Provided that Adjudicating Authority shall, before rejecting an application, give a notice to the applicant to rectify the defects in his application within seven days from the date of receipt of such notice from the Adjudicating Authority.

(5) The corporate insolvency resolution process shall commence from the date of admission of the application under sub-section (4) of this section.

“10A. Notwithstanding anything contained in Sections 7, 9 and 10, no application for initiation of corporate insolvency resolution process of a corporate debtor shall be filed, for any default arising on or after 25th March, 2020 for a period of six months or such further period, not exceeding one year from such date as may be notified in this behalf.”

Provided that no application shall ever be filed for initiation of corporate insolvency resolution process of a corporate debtor for the said default occurring during the said period.

Explanation- For the removal of doubts, it is hereby clarified that the provisions of this section shall not apply to any default committed under the said sections before 25th March, 2020.

Further Committee of creditor is to be made under Section 21 of IBC The committee of creditors shall comprise all financial creditors of the corporate debtor party to whom a corporate debtor owes a financial debt shall not have any right of representation, participation or voting in a meeting of the committee of creditors Whereas the corporate debtor owes financial debts to two or more financial creditors as part of a consortium or agreement, each such financial creditor shall be part of the committee of creditors and their voting share shall be determined on the basis of the financial debts owed to them, The Board may specify the manner of determining the voting share in respect of financial debts issued as securities under sub-section (6) of Section 21. When a corporate debtor is accepted into the CIRP (Corporate Insolvency Resolution Process), it checks the board of directors. Further, the management is placed under an independent “interim resolution professional”. From this and till the end of the CIRP (Corporate Insolvency Resolution Process), the management ceases to have any control over the activities of the company.

MORATORIUM

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Introduction – The Insolvency and Bankruptcy Code

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The Insolvency and Bankruptcy Code, 2016 (“Code”) is a perfect platform that oversees and addresses the Corporate Insolvency Resolution Process (“CIRP”) and liquidation proceedings for individuals, firms, corporates and others. It seeks to consolidate the existing framework by creating a single law for insolvency and bankruptcy that will provide for resolution of insolvency in a speedy and time bound manner while simultaneously balancing the interest of all the stakeholders.

The ecosystem of the Code is dependent on four pillars namely, the Insolvency and Bankruptcy Board of India (IBBI), Information Utilities (IUs), Insolvency Professional Agencies (IPAs) and Insolvency Professionals (IPs).

This book attempts to cover the role of an Interim Resolution Professional (IRP) in the Corporate Insolvency Resolution Process. The role of an IRP commences from the day he/she is appointed as such by an order of the Adjudicating Authority (within fourteen days from the insolvency commencement date) and ends on the thirtieth day from the date of his appointment. During the tenure of thirty days, the IRP is provided with tasks of great responsibility and criticality that has the potential to hugely impact the implementation and success of the Code.

The IRP shall have the power of management of the corporate debtor and shall take control of the assets of the corporate debtor. The powers of the Board of Directors of the corporate debtor shall stand suspended. The IRP shall make a public announcement pertaining to his appointment and invites creditors for submission of proof of claims. On receipt of claims from various creditors, he is also entrusted with the task of verification of the claims, on the basis of which, he prepares the list of creditors. Once the list of creditors is prepared, the IRP shall constitute the Committee of Creditors (“Committee”) and file a report in this behalf with the Adjudicating Authority. Subsequently, the first meeting of the Committee is to be convened.

With the conclusion of the first meeting of the Committee, the role of the IRP also comes to an end. At the first meeting of the Committee, the role of the IRP comes to an end either by change of his role into a resolution professional, subject to approval of his appointment by a majority of seventy five percent of the voting share of the financial creditors in the Committee or by termination of his role as an IRP and appointment of another resolution professional, where his appointment is not approved by the Committee.

It is pertinent to note the importance of the IRPs under this Code, who are endowed with mammoth and pivotal tasks that needs to be undertaken within a prescribed time frame. It is their efficiency and management that provides the Code with the impetus to fulfil its objective of resolving insolvency and bankruptcy cases in a speedy and time bound manner.

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Flipakart ordered for corporate insolvency process by NCLT, Flipkart gets stay from High Court

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FLIPKART ISSUE PRESENTED BEFORE NCLT

A single judge bench of the Bengaluru National Company Law Tribunal (NCLT) ordered on  October 24, a Corporate Insolvency Process against Walmart controlled online retailer Flipkart for non-payment of the Rs 26.95 crore of dues to Mumbai based LED TV supplier CloudWalker Streaming Technologies Private Ltd after a petition by the Mumbai based company.

Cloud Walker Streaming Technologies Pvt. and Flipkart entered into an agreement for supply of LED TVs in 2016. As per the petition, Flipkart showed keen interest in selling the products of the supplier for their superior technology, features and other advantages over other suppliers of the product. Cloud Walker claimed that after placing purchase orders for LED TVs, Flipkart initially delayed accepting the order, citing the lack of a warehouse as a reason. Cloud Walker submitted that they had agreed to store the goods in their own warehouse temporarily, but Flipkart never collected the delivery, after making several excuses. Furthermore, Cloud Walker has also said that Flipkart ‘coerced’ them into selling the products at a discounted price, knowing that the order had been warehoused for Flipkart, for a while. In order to avoid any more losses and due to facing liquidity crunch, Cloud Walker agreed to offer a discount, but Flipkart still failed to collect delivery and make payment for over 70% of the stock ordered. It is Cloud Walker’s grievance that the supplier was forced to unload the collected goods at a heavily marked down price, as the goods had been in the warehouse for over 2 months. As a result of non-payment of balance dues, the supplier Cloud Walker issued a demand notice under section 8 of the IBC (Insolvency and Bankruptcy Code, 2016) but the Corporate Debtor (CD) Flipkart did not respond to the statutory notice, as is necessitated by the provisions of the IBC.

Flipkart challenged the petition on the ground of having made a payment of over Rs. 85.57 cr. towards the invoices raised against by Cloud Walker, as against the total Purchase Order (PO) amounting to Rs 103.62 cr. Flipkart also contended that there were huge disparities in the amount claimed by the Supplier, by way of invoices, and before these disputes are adjudicated upon by a competent civil court, the insolvency proceedings are a way of misusing the law. In addition, Flipkart submitted that an amount of Rs. 42.96 cr. payable to Cloud Walker had been withheld by them, due to deficiency in services.

In an order uploaded on the NCLT website on 5th November the single judge bench of Rajeswara Rao Vittanala said that Flipkart has committed default by the non-payment of dues despite repeated requests from CloudWalker. Vittanala appointed Deepak Saruparia as the resolution professional in the case. The NCLT Bench also said that Flipkart had failed to raise a dispute regarding deficiency of services on the part of Cloud Walker, before the insolvency petition was preferred by the Supplier, nor did it respond to the statutory demand notice issued under section 8. It was also observed that Flipkart had failed to notify the Supplier Cloud Walker of any substantive pending dispute, suit or arbitral proceedings.

 

Flipkart followed up with a writ petition in the Karnataka High Court and a day later obtained a stay on the NCLT order.

In its next hearing held on October 31, the Karnataka HC ordered continuation of the stay. The date of the next hearing has not been set yet. “In view of the above, it is clarified that as on date, Flipkart is not undergoing corporate insolvency resolution process and is continuing its operations on a going concern basis under its present management,” the company said in an email statement.

­The matter pertains to an agreement between CloudWalker and Flipkart that dates back to December 2016. CloudWalker, which sells TV under Cloud TV brand, had alleged that Flipkart had signed the agreement to purchase stock worth Rs 103.62 crore but only bought goods worth Rs 85.57 crore, and that too after many delays.

 

Read more about what is corporate insolvency process?

 

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What is Corporate Insolvency Resolution process? – NCLT

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Here’s a stage-wise process for Corporate Insolvency Resolution process – NCLT:-

  1. In case a corporate debtor makes a default in repayment of dues of the creditors, the financial creditor/s, an operational creditor or a corporate debtor through Corporate applicant or any authorised member, a person who has the controlling capacity over the financial affairs of the corporate debtor has the power to start the insolvency resolution process. In order to initiate the resolution process, an application has to be made to National Company Law Tribunal (NCLT) under (Section 10, IBC, 2016 in case of Corporate Debtor, Section 7 and 9 of IBC, 2016 in case of Financial Creditors and Operational Creditors).
  2. A ten days demand notice under (Section 8(2) of IBC, 2016 in case of Operational Creditors) has to be given to the corporate debtor by the Operational Creditors before he approaches the NCLT under Section 9 of IBC, 2016). However, an operational creditor can directly approach the NCLT if the corporate debtor does not repay the outstanding dues or fails to show any existing difference. (Kindly refer to Section 8: Insolvency resolution by operational creditor. & Section 9: Application for initiation of corporate insolvency resolution process by operational creditor.)
  3. The new code states that the insolvency process of a Corporate Debtor must be concluded within 180 days from the date of initiation in the NCLT (Section 12, IBC of 2016). The claims of the Creditors shall be frozen for a period of six months on admission of application by NCLT. During this time, the NCLT shall listen to the options to revive and decide the future course of action. It is further clarified that unless a resolution plan is made or liquidation process is initiated, no legal claim shall be sought against the corporate debtor in any other forum or Court (Section 14 of IBC, 2016).
  4. When the application for insolvency is accepted under Section 7/9/10 of IBC, 2016 the NCLT within fourteen days appoints an Insolvency Resolution Professional (IRP) on receiving a confirmation from Board of Insolvency and Bankruptcy. The appointed IP then takes up the responsibility of the debtor’s properties and functioning. He also collects all the information that is relevant with regard to the financial condition of the debtor from information utilities. IP is appointed for a term of thirty days only within which he does all the necessary scrutinization (Section 18, IBC, 2016).
  5. The next step is to make a public announcement about the commencement of corporate insolvency process so that claims from any other creditors can also come forward, if any. A creditor’s committee is constituted by the IRP post receiving any claims by public announcement (Section 13 of IBC, 2016). In the event any financial creditor is a related party of the defaulting debtor, such a creditor will not have the right to represent, participate or vote in the committee of creditors so constituted by the IP. In order to be a part of the Creditor’s Committee, the average dues of the operational creditors must be at least ten percent of the debt. The Committee of Creditors shall first seven days of its incorporation decide through seventy five percent votes whether the interim IRP should be used as a Resolution Professional or should be replaced with someone else.
  6. After the Committee finalizes the Resolution Professional he is appointed by the NCLT (Section 16 of IBC, 2016). The Resolution Professional so appointed can be replaced anytime by the Creditor’s Committee with a majority of seventy five percent votes. In the interim, i.e. till the appointed of any new Resolution Professional, the Creditor’s Committee can take decisions with regard to insolvency resolution by seventy five percent majority voting.
  7. In the event majority (75%) of the financial creditors are of the view that the case is very complex and more time extension is required, the NCLT may grant a one-time extension of up to a maximum of 90 days over and above the pre decided tenure of 180 days. It shall be the sole responsibility of the Resolution Professional to manage and conduct the corporate insolvency resolution procedure during such a term (Section 18 of IBC, 2016).
  8. To enable the resolution applicant for preparing a resolution plan, the Resolution Professional shall compile a statistics note. A resolution applicant can be defined as an individual who has the duty and responsibility to submit a resolution plan to the Resolution Professional. The Creditor’s Committee further receives the plan from the Resolution Professional for its approval.
  9. On the resolution being approved, the next step by the Creditor’s Committee is to come up with options on restructuring which can be either coming up with a modified repayment plan or to simply liquidate the properties of the company in order to recover dues. If the Creditor’s Committee fails to take any binding decision with regard to the repayment by the debtor, the debtor’s assets are liquidated in order to pay back the creditors. If there is a plan prepared for resolution, the same shall be sent to NCLT for approval and implementation.

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Read More here : Introduction – The Insolvency and Bankruptcy Code – NCLT