NCLAT settles the crucial Issue: Speedy Liquidation Versus Endless Resolution

In a significant ruling in Kridhan Infrastructure Private Limited vs. Venkatesan Sankaranaryan & Another[1], NCLAT has held that timely liquidation is to be preferred over endless resolution. It has also held that unless the liquidation order is shown to contain material irregularity or fraud, liquidation order cannot be set aside using inherent powersin the light of specific provisions under section 61(4) of the Code. It has also categorically ruled that stakeholders’ consultation committee is different from committee of creditors and the decision of stakeholders’ consultation committee is not binding on the liquidator.

Briefly, in this case, upon failure of implementation of the resolution plan by the Resolution Applicant, NCLT directed liquidation of the corporate debtor as proposed by the committee of creditors. The Resolution Applicant aggrieved with this order filed an appeal before NCLAT alleging that it was not provided with an opportunity of being heard and that the order of NCLT ordering liquidation be set aside preferring ‘Resolution’ over ‘Liquidation’. Resolution Applicant undertook to implement the plan.

Here is the lowdown of the issues decided by NCLAT:

Speed is the Essence

NCLAT noted that prime reason behind enactment of IBC is time bound process. It specifically noted that “if an Adjudicating Authority extends the Insolvency Resolution Process beyond the timeline mentioned u/s 12(3) of the code, the same will be in negation of the underlying policy behind the court of ensuring timely resolution of Company Insolvency”.  NCLAT held that a “Timely Liquidation is preferred over endless Resolution process.”. Making it clear that time period mentioned in section 12 is mandatory and cannot be extended. It held that “If time specified by statute is changed, then it will give room for wider complications/implications, in the considered opinion of this Tribunal.”

Specifically noting that Resolution Applicant failed to adhere to the timelines for equity infusion as per the approved plan, NCLAT held that “the speed specified in the Code cannot be diluted as there is likelihood of adversely affecting the interests of both sides. If the same is delayed, maximization of value of assets of the ‘Corporate Debtor’ will weaken the realisation of potential creditors.”

Use of Inherent Power to set aside order of liquidation

On use of inherent powers under Rule 11 to set aside the order of liquidation as prayed by the Resolution Applicant, NCLAT noted that “it is well settled principle in Law that an ‘inherent power’ cannot be resorted to when there are specific provisions in Law to deal with the situations relying on the judgment of Apex Court in ‘Durgesh Sharma’ V. ‘Jayshree’ reported in Air 2009 Supreme Court at page 285. NCLAT refused to invoke jurisdiction under Rule 11 for setting aside order of liquidation.

Eligibility under Section 29A due to later development

NCLAT noted the strong objection of the Liquidator on the ground of huge default by the Resolution Applicant through its subsidiaries outside India. NCLAT held that provisions of Sections 29A(f) and (j) get attracted.

Stakeholders Consultation Committee recommendations are not binding on Liquidator

NCLAT upheld the argument on behalf of the Liquidator that “in so far as the ‘stakeholders’ consultation committee under the Liquidation process, unlike ‘Committee of Creditors’ under ‘Resolution process’ they do not have any power to determine and even their consultation is not binding on the liquidator.”

Conclusion

The judgment is unique as it deviates the beaten path of ‘maximization of value’ which is oft quoted to persuade NCLAT and NCLAT benches. The phrase has become a monologue to justify any attempt to resolve insolvency ignoring the crucial part of preamble which speaks of ‘time bound manner’.  This judgment notes the importance of timelines under the Code and sets an example that no matter what, timely liquidation is preferable over repeated attempts to resolution. This judgment is a trend setter in the era of IBC 2.0 and the NCLT benches are now armed to counter the over used phrase maximization of value.


[1] Company Appeal (AT) (Insolvency) No. 202 of 2020

Dear NCLT : Till Now We Believed Circulars Do Not Override Law?

 

While disposing off a Petition under Section 74(2) of the Companies Act, 2013 (the 2013 Act) of Darshan Jewel Tools Private Limited, Mumbai Bench of National Company Law Tribunal (NCLT) has ruled on 17th February, 2017 that in the light of a general circular issued by the Ministry of Corporate Affairs, the petition has become redundant, effectively reversing the settled legal position on the point whether circulars can override the provisions of law?

Darshan Jewels had sought extension of time in repayment of deposits accepted from the directors and shareholders for a period of 3 years until 31st March, 2018.While the petition of the company was pending, Ministry of Corporate Affairs issued a general circular on 30th March, 2015 that the deposits accepted by private companies prior to 1st April, 2014 from the members, directors or their relatives shall not be treated as deposits under the 2013 Act and the relevant rules provided appropriate disclosure is made in the financial statement by the company. On this basis, it sought withdrawal of the Petition.

Without examining the legal validity of the general circular issued by Ministry of Corporate Affairs, NCLT dismissed the Petition. The operative part of the order is reproduced here –

“In the light of the above discussion and the present legal position, the Company Petition, now under consideration, has become redundant. The General Circular (supra) issued by Ministry of Corporate Affairs dated 30th March, 2015 has clarified that the amounts received by a Private Limited Company from their members, Directors and relatives prior to 1* April, 20L4 shall not be treated as deposits under the Companies Ad, 2013. In the financial statements and in the Petition, the Company has duly recorded the figures of such amount along with relevant details. As a consequence of the said General Circular, this Petition has now become redundant. The same is, therefore, dismissed due to non-applicability of the relevant provisions of Companies Act, 2013. No order as to cost.”

Dear NCLT, the legal position on general circulars is otherwise and not what has been ruled in the order. The circulars lack statutory recognition. Not only the Principal Bench of erstwhile Company Law Board has reiterated the position that general circulars lack statutory recognition, Bombay High Court, relying on the judgment of Supreme Court in State Bank of Travancore v. CIT [1986 AIR 757]  held that ”such an order, instruction or direction cannot override the provisions of the Act; that would be destructive of all the known principles of law as the same would really amount to giving power to a delegated authority to even amend the provisions of law enacted by the parliament.” [Banque Nationale De Paris v. CIT [(1999) 237 ITR 518 Bom].

The legal position on the validity of the circulars vis-a-vis statutory provisions stands settled. NCLT, not only ignored to examine the legal position but accepted the general circular issued by Ministry of Corporate Affairs as the ‘new legal position’. The question that arises is – whether NCLT was not bound to examine the legal validity of the general circular, which stated a position in complete contrast to the statutory provisions? The cursory manner in which the ruling has been given makes a strong case against ‘tribunalisation’ in the country. Judicial examination of the provisions is lacking.

Unfortunately, this position is likely to continue as the circular favours the companies and the MCA, having issued the circular, is not going to challenge this ruling.

© Ashish Makhija: ashish@ashishmakhija.com

Disclaimer: The views expressed here are views based on my personal interpretation for academic purposes alone and should not be deemed as legal or professional advise on the subject. If relied upon, the author does not take any responsibility for any liability or non-compliance.

#Wake up MCA – Circular on Indian Private Subsidiaries of Companies Incorporated Outside India Stokes Confusion

Ministry of Corporate Affairs (MCA) is expected to clear confusion and not compound it much less through a clarification. The clarification issued by MCA on 25th June (here is the link : http://www.mca.gov.in/Ministry/pdf/General_Circular_23_2014.pdf) about the status of Indian Subsidiaries of Foreign Companies has been lapped up by media as a major celebratory news without examining the legal status and interpretation of the words used.

Let us understand the position of Indian subsidiaries of companies incorporated outside India under Companies Act, 1956 (‘Old Act’). A private company being a subsidiary of a company incorporated outside India was deemed as subsidiary of a public company in India under Section 4(7) of Old Act. The only exception was if 100% of the shareholding of Indian private company was held by companies incorporated outside India.

After notification of Section 2(11), 2(46), 2(68), 2(71) and 2(87) of Companies Act 2013 (‘New Act’), the provisions of Section 4 of Old Act are not in operation (well, this is another story for another time but let us presume this for a moment). This means no reference to Section 4(7) is necessary while interpreting the New Act and determining status of such companies. With fangs of Section 4(7) of Old Act gone, the Indian private subsidiaries can no longer be deemed to be a subsidiary of a public company unless the New Act again brings them to such a category.

Section 2(87) makes a company or body corporate a subsidiary of another company or body corporate (i.e. holding company), if the holding company controls more than 50% of the total share capital. A holding company can be a company (which means company registered under Indian laws) or a body corporate ( which includes a company incorporated outside India). This means if a company incorporated outside India holds more than 50% shares in Indian company, then such Indian Company becomes a subsidiary of company incorporated outside India. 

So far so good. Now the big question: Whether Indian private company, a subsidiary of company incorporated outside India, retains its status as a private company or becomes a ‘deemed subsidiary of a public company’? Provision similar to 4(7) is no longer in place. This question needs interpretation of definition of a public company.

Moving over to public company under 2(71), its proviso makes interesting reading. It needs reproduction here for proper understanding:

“Provided that a company which is a subsidiary of a company, not being a private company, shall be deemed to be public company for the purposes of this Act even where such subsidiary company continues to be a private company in its articles.”

The language is plain and clear. The  interesting part is that the proviso uses the term ‘company’ and not body corporate. It does not have an explanation similar to Section 2(87) which says – “the expression company includes body corporate”. The question thus arises is, whether the Indian private company, which became a subsidiary of a company incorporated outside India by virtue of explanation in 2(87) and inclusion of ‘company incorporated outside India’ in definition of ‘body corporate’ in Section 2(11),  will be deemed to be a public company in India under proviso to Section 2(71)?”

The proviso uses the term ‘company’. It is difficult to import explanation attached to 2(87) in interpreting the term ‘company’ used in 2(71). Indian private company became subsidiary of a company incorporated outside India due to deeming provision in Section 2(87) read with 2(11). Becoming a subsidiary has its own consequences and it does not mean that it becomes a public company under 2(71) unless there is a clear cut deeming provision in 2(71).

Section 2(71) is clear in its terms and is similar to Section 3(1)(iv)(c) of Old Act. Under the Old Act, an Indian private company became a deemed subsidiary of public company by virtue of Section 4(7) and not because of Section 3(1)(iv)(c). In New Act, a provision similar to Section 4(7) does not exist. Hence, Indian private company, albeit a subsidiary of a company incorporated outside India (whether private or not private as per laws of that country), is not deemed to be a subsidiary of a public company. This view gains strength from the fact that Section 2(71) has used the term ‘company’ and this does not include body corporate. Legislature, having used different terms in different provisions, obviously meant differently.

We attain clarity to this extent. Let us examine the need of clarification by MCA. The relevant part extracted below makes interesting reading:

“An existing company, being a subsidiary of a company incorporated outside India, registered under the Companies Act, 1956, either as private company or a public company by virtue of section 4(7) of that Act, will continue as a private company or public company as the case may be, without any change in the incorporation status of such company.”

MCA clarification stokes confusion. Let me have the liberty of pointing it out:

1. Where was the need to refer to Section 4(7) though it is no longer in operation?

2. If MCA had to clarify the questions asked on 4(7), a simple clarification that since 4(7) is no longer there, the Indian private companies hitherto deemed as subsidiaries of public companies will retain their original status as private companies.

3. The use of words “registered under …..by virtue of Section 4(7)….” were unnecessary. No company was ever ‘registered’ …. ‘by virtue of Section 4(7)’  under the Old Act. Section 4(7) was a deeming provision and not a provision dealing with registration of companies.

4. The reading of the clarification leads to conclusion that the status of the company continues. What does this mean? This leads us to believe that if a company, though incorporated as private company, but was deemed as a public company ‘by virtue of Section 4(7)’  will continue to be deemed as a public company irrespective of incorporation status.

Unfortunately, Indian pink press and media is interpreting differently.  They are spreading the message that companies incorporated outside India can happily treat their India private arms as private companies. The clarification says otherwise.

Wake up MCA!

Clarifications must be issued after proper legal scrutiny. The impromptu clarifications with poor language cause more inconvenience to the stakeholders. I am sure MCA still has bench strength of persons having deep knowledge of Company Law.

© Ashish Makhija: ashish@ashishmakhija.com

Disclaimer: The views expressed here are views based on my personal interpretation and should not be deemed as legal or professional advise on the subject. If relied upon, the author does not take any responsibility for any liability or non-compliance.