Liquidation of Corporate Person

(a)Two appeals were preferred by the management of a Corporate Debtor (CD) against two orders wherein the Adjudicating authority had passed orders of liquidation under Section 33(1) of the Insolvency and Bankruptcy Board Code 2016 of companies with certain directions to the liquidator.

Prior to this, two separate appeals were preferred by resolution applicant(s) in respect of the ‘Corporate Insolvency Resolution Process’ (CIRP) initiated against the above said corporate debtor wherein opportunity was given to them to submit better revised resolution plan(s) and the ‘committee of creditors’ were directed to consider them. However, subsequently, the resolution applicants withdrew their appeals.

Sekar, the appellant, raised concerns regarding the actions of the Iiquidator, Amit, specifically regarding the handling of asset sales.

The core issue was whether the liquidator had acted in accordance with the provisions of the IBC and the associated regulations, particularly regarding the maximization of asset value and the exploration of options like “going concern” sales.

The appellant argued that the liquidator’s actions, such as selling spare parts, were detrimental to the company’s value and that a “going concern” sale should have been prioritized.

On the above background referring the relevant case law(s) and provisions of the IBC, 2016 and regulations made thereunder answer the following questions :

(a)Two appeals were preferred by the management of a Corporate Debtor (CD) against two orders wherein the Adjudicating authority had passed orders of liquidation under Section 33(1) of the Insolvency and Bankruptcy Board Code 2016 of companies with certain directions to the liquidator.

Prior to this, two separate appeals were preferred by resolution applicant(s) in respect of the ‘Corporate Insolvency Resolution Process’ (CIRP) initiated against the above said corporate debtor wherein opportunity was given to them to submit better revised resolution plan(s) and the ‘committee of creditors’ were directed to consider them. However, subsequently, the resolution applicants withdrew their appeals.

Sekar, the appellant, raised concerns regarding the actions of the Iiquidator, Amit, specifically regarding the handling of asset sales.

The core issue was whether the liquidator had acted in accordance with the provisions of the IBC and the associated regulations, particularly regarding the maximization of asset value and the exploration of options like “going concern” sales.

The appellant argued that the liquidator’s actions, such as selling spare parts, were detrimental to the company’s value and that a “going concern” sale should have been prioritized.

On the above background referring the relevant case law(s) and provisions of the IBC, 2016 and regulations made thereunder answer the following questions :

(a)Two appeals were preferred by the management of a Corporate Debtor (CD) against two orders wherein the Adjudicating authority had passed orders of liquidation under Section 33(1) of the Insolvency and Bankruptcy Board Code 2016 of companies with certain directions to the liquidator.

Prior to this, two separate appeals were preferred by resolution applicant(s) in respect of the ‘Corporate Insolvency Resolution Process’ (CIRP) initiated against the above said corporate debtor wherein opportunity was given to them to submit better revised resolution plan(s) and the ‘committee of creditors’ were directed to consider them. However, subsequently, the resolution applicants withdrew their appeals.

Sekar, the appellant, raised concerns regarding the actions of the Iiquidator, Amit, specifically regarding the handling of asset sales.

The core issue was whether the liquidator had acted in accordance with the provisions of the IBC and the associated regulations, particularly regarding the maximization of asset value and the exploration of options like “going concern” sales.

The appellant argued that the liquidator’s actions, such as selling spare parts, were detrimental to the company’s value and that a “going concern” sale should have been prioritized.

On the above background referring the relevant case law(s) and provisions of the IBC, 2016 and regulations made thereunder answer the following questions :

(a)Two appeals were preferred by the management of a Corporate Debtor (CD) against two orders wherein the Adjudicating authority had passed orders of liquidation under Section 33(1) of the Insolvency and Bankruptcy Board Code 2016 of companies with certain directions to the liquidator.

Prior to this, two separate appeals were preferred by resolution applicant(s) in respect of the ‘Corporate Insolvency Resolution Process’ (CIRP) initiated against the above said corporate debtor wherein opportunity was given to them to submit better revised resolution plan(s) and the ‘committee of creditors’ were directed to consider them. However, subsequently, the resolution applicants withdrew their appeals.

Sekar, the appellant, raised concerns regarding the actions of the Iiquidator, Amit, specifically regarding the handling of asset sales.

The core issue was whether the liquidator had acted in accordance with the provisions of the IBC and the associated regulations, particularly regarding the maximization of asset value and the exploration of options like “going concern” sales.

The appellant argued that the liquidator’s actions, such as selling spare parts, were detrimental to the company’s value and that a “going concern” sale should have been prioritized.

On the above background referring the relevant case law(s) and provisions of the IBC, 2016 and regulations made thereunder answer the following questions :

(a)Two appeals were preferred by the management of a Corporate Debtor (CD) against two orders wherein the Adjudicating authority had passed orders of liquidation under Section 33(1) of the Insolvency and Bankruptcy Board Code 2016 of companies with certain directions to the liquidator.

Prior to this, two separate appeals were preferred by resolution applicant(s) in respect of the ‘Corporate Insolvency Resolution Process’ (CIRP) initiated against the above said corporate debtor wherein opportunity was given to them to submit better revised resolution plan(s) and the ‘committee of creditors’ were directed to consider them. However, subsequently, the resolution applicants withdrew their appeals.

Sekar, the appellant, raised concerns regarding the actions of the Iiquidator, Amit, specifically regarding the handling of asset sales.

The core issue was whether the liquidator had acted in accordance with the provisions of the IBC and the associated regulations, particularly regarding the maximization of asset value and the exploration of options like “going concern” sales.

The appellant argued that the liquidator’s actions, such as selling spare parts, were detrimental to the company’s value and that a “going concern” sale should have been prioritized.

On the above background referring the relevant case law(s) and provisions of the IBC, 2016 and regulations made thereunder answer the following questions :

(a)Two appeals were preferred by the management of a Corporate Debtor (CD) against two orders wherein the Adjudicating authority had passed orders of liquidation under Section 33(1) of the Insolvency and Bankruptcy Board Code 2016 of companies with certain directions to the liquidator.

Prior to this, two separate appeals were preferred by resolution applicant(s) in respect of the ‘Corporate Insolvency Resolution Process’ (CIRP) initiated against the above said corporate debtor wherein opportunity was given to them to submit better revised resolution plan(s) and the ‘committee of creditors’ were directed to consider them. However, subsequently, the resolution applicants withdrew their appeals.

Sekar, the appellant, raised concerns regarding the actions of the Iiquidator, Amit, specifically regarding the handling of asset sales.

The core issue was whether the liquidator had acted in accordance with the provisions of the IBC and the associated regulations, particularly regarding the maximization of asset value and the exploration of options like “going concern” sales.

The appellant argued that the liquidator’s actions, such as selling spare parts, were detrimental to the company’s value and that a “going concern” sale should have been prioritized.

On the above background referring the relevant case law(s) and provisions of the IBC, 2016 and regulations made thereunder answer the following questions :

(a)Two appeals were preferred by the management of a Corporate Debtor (CD) against two orders wherein the Adjudicating authority had passed orders of liquidation under Section 33(1) of the Insolvency and Bankruptcy Board Code 2016 of companies with certain directions to the liquidator.

Prior to this, two separate appeals were preferred by resolution applicant(s) in respect of the ‘Corporate Insolvency Resolution Process’ (CIRP) initiated against the above said corporate debtor wherein opportunity was given to them to submit better revised resolution plan(s) and the ‘committee of creditors’ were directed to consider them. However, subsequently, the resolution applicants withdrew their appeals.

Sekar, the appellant, raised concerns regarding the actions of the Iiquidator, Amit, specifically regarding the handling of asset sales.

The core issue was whether the liquidator had acted in accordance with the provisions of the IBC and the associated regulations, particularly regarding the maximization of asset value and the exploration of options like “going concern” sales.

The appellant argued that the liquidator’s actions, such as selling spare parts, were detrimental to the company’s value and that a “going concern” sale should have been prioritized.

On the above background referring the relevant case law(s) and provisions of the IBC, 2016 and regulations made thereunder answer the following questions :

(a)Two appeals were preferred by the management of a Corporate Debtor (CD) against two orders wherein the Adjudicating authority had passed orders of liquidation under Section 33(1) of the Insolvency and Bankruptcy Board Code 2016 of companies with certain directions to the liquidator.

Prior to this, two separate appeals were preferred by resolution applicant(s) in respect of the ‘Corporate Insolvency Resolution Process’ (CIRP) initiated against the above said corporate debtor wherein opportunity was given to them to submit better revised resolution plan(s) and the ‘committee of creditors’ were directed to consider them. However, subsequently, the resolution applicants withdrew their appeals.

Sekar, the appellant, raised concerns regarding the actions of the Iiquidator, Amit, specifically regarding the handling of asset sales.

The core issue was whether the liquidator had acted in accordance with the provisions of the IBC and the associated regulations, particularly regarding the maximization of asset value and the exploration of options like “going concern” sales.

The appellant argued that the liquidator’s actions, such as selling spare parts, were detrimental to the company’s value and that a “going concern” sale should have been prioritized.

On the above background referring the relevant case law(s) and provisions of the IBC, 2016 and regulations made thereunder answer the following questions :

(A)Mr. K Sridhar and Mr. K. Murali are the Directors of M/s S & M Engineering Enterprises Limited (SMEEL). Unfortunately, being the victims of COVID 2019 pandemic, by both the brothers and their respective families, they could not concentrate on the day-to-day affairs of the business and in the short run, the top line and the bottom line of the business went southwards and ultimately, they had to face the brunt of huge debts.

An application for initiation of Corporate Insolvency Resolution Process (CIRP) against M/s SMEEL under the Insolvency and Bankruptcy Code, 2016 (IBC, 2016) was moved by an ‘Assignee’ of an Operational Creditor for Non-payment of dues. The Adjudicating Authority admitted the application because there was no intimation of any dispute within the 10 days.

After following all the compliances prescribed under the IBC, 2016, the Adjudicating Authority passed an order to Liquidate the Corporate Debtor, on an intimation from the Resolution Professional to do so, as decided by the Committee of Creditors (CoC) by requisite voting, before the approval of the resolution plan.

The relevant information related to M/s SMEEL for the purpose of liquidation is produced as follows :

Liabilities ₹ in Assets ₹ in Lakhs

Lakhs

Capital : Fixed Assets :

Equity 300 Land and Buildings 350 Preference 200 Plant and Machinery 150 Financial Creditors : Current Assets :

Secured 250 Inventories 100 Unsecured 150 Trade Receivables 300 Operational Creditors : Other Current Assets 50 Secured 60 Cash and Cash Equivalents 100 Unsecured 70 Fictitious Assets 190 Government Dues 50 Workmen’s Dues 80 Employees Dues 80 Total 1,240 Total 1,240 Other Information :

1.Workmen’s dues represent the amounts payable for the period of 30 months preceding the liquidation commencement date.

2.Employee’s liability includes ₹ 72 Lakhs outstanding to employees for a period of 12 months, preceding the liquidation commencement date.

3.Land and Buildings would realize 110% of its book value, Plant and Machinery would realize 60% of its book value, net of any realization cost. Inventories and Trade Receivables would realize 72% of its book value.

4.The secured financial creditors worth ₹ 45 Lakhs decided to enforce their security interest in the other current assets and they could realize 80% of its value.

5.There has been a pending court case against the Company for use of child labour which could result in a penalty of approximately ₹ 30 lakhs. This has been reflected as a contingent liability only. It has been finally decided to pay ₹ 25 lakhs and settle the case.

6.Based on the amount realized and distributed, the cost of liquidation and insolvency period cost is computed to be ₹ 20 lakhs and ₹ 12 lakhs respectively.

In the light of the above inputs and with reference to the relevant provisions of the IBC, 2016, answer the following questions :

Insolvency and Bankruptcy Code, 2016 (the Code) primarily focus on resolution of the corporate debtor but where the resolution plan fails as the Committee of Creditors (CoC) do not approve the resolution plan and no other way can be adopted then the ultimate resort is the liquidation and dissolution of the corporate debtor. However, even in the case of liquidation of corporate debtor as held by the Supreme Court the liquidator can sale the business of the corporate debtor as a ‘going concern’. The liquidation process under chapter – III of Part – II of the Code is being regulated by the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 and the order of liquidation is also being passed by the Adjudicating Authority (AA). A resolution professional is being appointed by AA to act as liquidator. However, occasions may arise where the appointed liquidator can be threatened and may not be allowed to enter the premises of corporate debtor to carry out his functions or the appointment of the liquidator is challenged by CoC after the order of liquidation is passed by the AA. Despite the order of liquidation the entire assets of the corporate debtor do not constitute liquidation estate assets. Consider the above facts and answer the following questions :

(a)Two appeals were preferred by the management of a Corporate Debtor (CD) against two orders wherein the Adjudicating authority had passed orders of liquidation under Section 33(1) of the Insolvency and Bankruptcy Board Code 2016 of companies with certain directions to the liquidator.

Prior to this, two separate appeals were preferred by resolution applicant(s) in respect of the ‘Corporate Insolvency Resolution Process’ (CIRP) initiated against the above said corporate debtor wherein opportunity was given to them to submit better revised resolution plan(s) and the ‘committee of creditors’ were directed to consider them. However, subsequently, the resolution applicants withdrew their appeals.

Sekar, the appellant, raised concerns regarding the actions of the Iiquidator, Amit, specifically regarding the handling of asset sales.

The core issue was whether the liquidator had acted in accordance with the provisions of the IBC and the associated regulations, particularly regarding the maximization of asset value and the exploration of options like “going concern” sales.

The appellant argued that the liquidator’s actions, such as selling spare parts, were detrimental to the company’s value and that a “going concern” sale should have been prioritized.

On the above background referring the relevant case law(s) and provisions of the IBC, 2016 and regulations made thereunder answer the following questions :

Insolvency and Bankruptcy Code, 2016 (the Code) primarily focus on resolution of the corporate debtor but where the resolution plan fails as the Committee of Creditors (CoC) do not approve the resolution plan and no other way can be adopted then the ultimate resort is the liquidation and dissolution of the corporate debtor. However, even in the case of liquidation of corporate debtor as held by the Supreme Court the liquidator can sale the business of the corporate debtor as a ‘going concern’. The liquidation process under chapter – III of Part – II of the Code is being regulated by the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 and the order of liquidation is also being passed by the Adjudicating Authority (AA). A resolution professional is being appointed by AA to act as liquidator. However, occasions may arise where the appointed liquidator can be threatened and may not be allowed to enter the premises of corporate debtor to carry out his functions or the appointment of the liquidator is challenged by CoC after the order of liquidation is passed by the AA. Despite the order of liquidation the entire assets of the corporate debtor do not constitute liquidation estate assets. Consider the above facts and answer the following questions :

COB Bank filed an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC) for initiating a Corporate Insolvency Resolution Process (CIRP) against the Corporate Debtor, M/s. Gupta Infra Private Limited (GIPL). The said application was admitted by the Adjudicating Authority (AA) during October, 2018 and a Resolution Professional (RP) was appointed as an Interim Resolution Professional (IRP).

Following is the financial position of GIPL as on the date of commencement of the CIRP :

Liabilities Amount in Assets Amount in ₹

₹ Crores Crores

Share Capital – Equity 100.00 Fixed Assets – Land and 115.00

Building

Share Capital – Redeemable 75.00 Fixed Assets – Plant and 165.00 Preference Shares Machinery Share Capital – Convertible 25.00 Other Fixed Assets 70.00 Preference Shares Debentures (Unsecured fully 50.00 Investments in Subsidiaries 50.00 convertible)

Long Term Borrowings – Fully 300.00 Inventories 150.00 Secured Short Term Borrowings – Unsecured 75.00 Receivables 110.00 Loan from Related Parties 25.00 Cash and Bank Balances 15.00 Payables 65.00 Other Current Assets 25.00 Provisions 35.00 Accumulated Losses 100.00 Deferred Tax Liabilities 15.00 Other Current Liabilities 35.00 Total Liabilities 800.00 Total Assets 800.00 Other Additional information provided by the Corporate Debtor :

[Amounts stated in the table above can be treated as claims made by each of the parties in their respective category].

Other Current Liabilities include :

₹ In Crores

Workmen Wages Payable for 36 months 9.00 Salary Payable for 20 months 100.00 PF Liabilities 3.80 Sales Tax/Commercial Taxes Due * 4.80 Other Statutory Dues 2.40

* On the sales tax and commercial taxes due, the Commercial Tax Authorities have already attached one of the immovable properties of the Corporate Debtor valued at ₹ 3.50 crores.

Fixed Assets includes buildings occupied on long term lease for a period of 75 years obtained from the State Industrial Development Authority (SIDA) for ₹ 5 Crores. SIDA has also submitted their claim with the RP stating that their premium amount along with interest and penal interest is due for since last 7 years. SIDA has filed its claim as a Financial Creditor. Whereas, the Resolution Professional has requested SIDA to submit its claim as an Operational Creditor. (This amount is included in Other Current Liabilities).

Further, it was informed by the Resolution Professional that the Corporate Debtor, M/s. Gupta Infra Private Limited, who initiated a CIRP against one of its Operational Creditor, namely C-Digital Arts Private Ltd for ₹ 6 Crores and going forward, the National Company Law Tribunal (NCLT) has already ordered for initiation of Corporate Insolvency Resolution Process (CIRP). However, one of the suspended Director on the Board of C-Digital Arts Private Limited filed an appeal before the National Company Law Appellate Tribunal (NCLAT) stating that there was no notice given as required under Section 8 of the Insolvency and Bankruptcy Code, 2016 read with Rule 5 of the insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 which entails that for initiation of insolvency resolution process by an Operational Creditor, a demand notice has to be served by the unpaid Operational Debtor on the Corporate Creditor. Nevertheless, the aforesaid suspended director he has not denied the debts due. This matter is pending before NCLAT for disposal.

Investments includes investment in Foreign Subsidiary of ₹ 30 Crores and in an Indian Subsidiary of ₹ 18 Crores and Investment in shares amounting to ₹ 2 Crores in another company incorporated and registered with charitable objects and not for profit.

Inventories and Receivables realisable only for 80% of its value.

Loan from related parties is from wife and son of one Director of GIPL.

Other Current Assets includes ₹ 10 Crores paid to National Highway Authority of India (NHAI) towards a bid amount for a road project.

Other Current Assets includes ₹ 2 Crores of assets of third party held under Trust. Machinery, the carrying value of which is ₹ 1.50 crores belonging to an Indian Subsidiary is lying in one of the Units of the Corporate Debtor.

A Machinery which was acquired for dispatching to the Foreign Subsidiary is also lying in the factory premises of the Corporate Debtor having a carrying value of ₹ 3 crores.

Cranes worth ₹ 5 Crores belonging to a proprietorship concern of one of the Director is also lying the Factory premises of the Corporate Debtor.

CIRP costs payable including all expenses is ₹ 2 Crores.

The Security Interest charged for COB Bank is 91.25% and SID Bank is 8.75%. (both the financial creditors have not relinquished their security interest).

During the CIRP, in one of the Meeting of the ‘Committee of Creditors’ (CoC), Resolution Plans were discussed. Revised Resolution Plans were submitted by the prospective Resolution Applicants.

Resolution Plan was put to e-Vote and by majority of 94.79%, the Resolution Plan of ‘GIPL’ was approved.

The Resolution plan proposes for utilisation of all assets including the assets under lease. Further, the Resolution Professional has sent a letter to the Commercial Taxes Authorities to release the property attached by them and on the contrary, the Authorities informed that the Department will get their portion as per the proposed Resolution Plan.

One of the Financial Creditor (SID Bank) sent an objection with respect to the distribution of the proceeds of the resolution plan under the Resolution Plan.

SID Bank also filed seeking direction to the Resolution Professional to distribute the proceeds of the Resolution Plan and made the following prayers :

“It is most respectfully prayed that :

1.The present application may kindly be allowed and the directions be issued to the Respondent No. 1 to modify/clarify the distribution to dissenting members as per the Resolution Plan and distribute the proceeds of the resolution plan to the Applicant SID Bank, for an amount of ₹ 8.97 Crores in priority in accordance with provisions of IBC, 2016 in the interest of justice and equity.

2.Interim stay be granted on distribution of the resolution plan amount by the Resolution Professional to the Committee of Creditors till the present application is decided.”

The case of the Appellant, namely SID Bank in the Application was that, as per the security interest of the Appellant, the Appellant is entitled to 8.75% i.e. the amount of ₹ 8.97 Crores and as per voting share as approved by the CoC, the Appellant is entitled to 5.21% i.e., ₹ 5.34 Crores. The case of the Appellant SID Bank set up in the Application is that he is entitled for his distribution of plan amount as per value of the security interest of the Appellant.

The Application was objected by the Resolution Professional. The Adjudicating Authority, by its Order, upheld the decision of the CoC for distribution of proceeds of the Resolution Plan as per the voting share. The Appellant, aggrieved by the said Order, has come up with the Appeal to the National Company Law Appellate Tribunal (NCLAT).

In the light of the above case study inputs and referring to the decisions of applicable case laws with reasons and the provisions of Insolvency and Bankruptcy Code, 2016 (IBC, 2016) and the Regulations made thereunder, answer the following questions :

Insolvency and Bankruptcy Code, 2016 (the Code) primarily focus on resolution of the corporate debtor but where the resolution plan fails as the Committee of Creditors (CoC) do not approve the resolution plan and no other way can be adopted then the ultimate resort is the liquidation and dissolution of the corporate debtor. However, even in the case of liquidation of corporate debtor as held by the Supreme Court the liquidator can sale the business of the corporate debtor as a ‘going concern’. The liquidation process under chapter – III of Part – II of the Code is being regulated by the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 and the order of liquidation is also being passed by the Adjudicating Authority (AA). A resolution professional is being appointed by AA to act as liquidator. However, occasions may arise where the appointed liquidator can be threatened and may not be allowed to enter the premises of corporate debtor to carry out his functions or the appointment of the liquidator is challenged by CoC after the order of liquidation is passed by the AA. Despite the order of liquidation the entire assets of the corporate debtor do not constitute liquidation estate assets. Consider the above facts and answer the following questions :

(b)Read the following background information and answer the questions :

Vikram Deshmukh was a successful businessman who had built his empire from scratch. He had a thriving construction business, Deshmukh Constructions, and was well-known for his innovative approach to architecture. His company was booming, and for years, his fortunes seemed unstoppable.

However, as the construction market became increasingly competitive, Vikram found himself facing immense financial pressures. He had invested heavily in land acquisitions and large-scale projects, but a sudden downturn in the economy left him unable to meet his obligations. The debts began to pile up, and creditors were knocking on his door.

One fateful day, unable to meet his financial obligations and faced with the possibility of bankruptcy, one of the financial Creditor’s had filed for bankruptcy under the Insolvency and Bankruptcy Code 2016 (IBC, 2016). The date of filing marked the beginning of the legal process, and Vikram’s business was soon under scrutiny by his creditors, including banks and other financial institutions. However, before the official bankruptcy commencement date arrived, a series of events transpired that would forever change Vikram’s life.

In the weeks following his bankruptcy filing, Vikram found himself desperate to raise funds. He knew his business was struggling and feared that the creditors would seize his property once the bankruptcy proceedings began. In a bid to save some assets, he made a decision that would later become a point of contention, he sold a prime piece of commercial real estate to a buyer, Raghav, a well-known businessman in the city.

Vikram presented the sale as an opportunity for Raghav, offering him the property at a fair price. Raghav, a seasoned entrepreneur, did his due diligence and was satisfied with the terms of the transaction. Both parties agreed to the sale, and the deal was completed in good faith.

Raghav had no reason to suspect that Vikram was in financial distress or that the transaction could be problematic.

On the above background answer the following questions :

(a)Read the following background information and answer the questions :

The Insolvency and Bankruptcy Code, 2016 (IBC, 2016) creates an ecosystem for maximizing the value of assets of the Corporate Debtor (CD) and balancing the interests of all stakeholders in a time-bound manner. A significant value of insolvent entities is often locked in assets underlying avoidance transactions which are undertaken by the CD prior to the initiation of the Corporate Insolvency Resolution Process (CIRP). The Resolution Professional (RP) or the liquidator is obliged to file applications, in respect of Avoidance Transactions (Preferential, Undervalued, Fraudulent and Extortionate (PUFE) Transactions) found by him during CIRP and Liquidation Processes before the Hon’ble Adjudicating Authority (AA), seeking appropriate relief permissible under the Code.

As of end of September 2024, 1,326 Avoidance Transaction Applications involving an amount of ₹ 3.76 lakh Crore have been filed with the AA. The AA, after consideration, can order for the amount to be clawed back. The IBC has led to a direct recovery of about ₹ 3.55 Lakh Crore due to Resolution and ₹ 10,446 Crore due to Liquidation till September, 2024. The Recovery from Avoidance Transactions will add to this recovery to the Creditors. Till September 2024, 338 Avoidance Transaction Applications have been settled by the AA ordering a claw back of about ₹ 7,516 Crore.

While the RP/Liquidator may have filed an Application with the AA based on his determination, it may not always be possible for the AA to consider and dispose of the application during the tenure of the CIRP or the Liquidation Process. Section 26 of the Code clarifies that the filing of an Avoidance Application by the RP shall not affect the proceedings of CIRP. Avoidance Applications and CIRP are a separate set of proceedings and Avoidance Applications can be continued Post-completion of CIRP. The IBC provides that the Resolution/Liquidation Process should not be held up if Avoidance Transaction Applications are pending. During CIRP if the decision on Avoidance Transactions is pending before Resolution is finalised, the amount would claw back to CD for the benefit of Creditors. The CIRP Regulations mandate that a Resolution Plan should contain the details of the Party/Person who will pursue these Avoidance Transactions after the Approval of the Resolution Plan, who will get the proceeds and the manner in which the proceeds, if any, from such proceedings will be distributed.

Consequently, after the Resolution Plan is approved, the RP has no role in pursuing these transactions and Creditors / Successful Resolution Applicant (SRA) will have to make their own arrangements to pursue them before the AA.

The amount clawed back would reflect in higher bids. In cases where decision on Avoidance Transactions is not available, the Avoidance Transactions being Assets of the CD, could be permitted by the CoC to be bid by Prospective Resolution Applicants (PRAs) in the Resolution plan. In case the CoC decides to assign the Avoidance Transactions to a Resolution Applicant (RA), the specifics of Avoidance Transactions should be made explicit in the information Memorandum (IM) and Request for Resolution Plan (RFRP), allowing prospective RAs to account for the value of Avoidance Transactions while submitting their plan. The CoC in the Resolution Plan should not give the proceeds of Avoidance Transactions to the RA without detailing such transactions in the IM or RFRP and without transparent bidding for such transactions. Another option could be to invite bids for Avoidance Transactions separately after obtaining the Approval of AA and the amount recovered could be appropriated by the Creditors Post-approval from the AA.

The provisions for Avoidance Transactions aid in maximizing the value of the CD both ex-post (i.e., once the CD is in Insolvency) and Ex-ante. These provisions foster good Corporate Governance and deter solvent entities and market participants from engaging in activities involving diversion of funds from the CD. By annulling such transactions, the Code Aims to prevent the depletion of the Debtor’s Assets and protect the interest of Creditors and other Stakeholders. They would act as an additional source of Recovery for the Creditors.

The Code calls upon the Resolution Professional/Liquidator, as the case may be, to bring to the knowledge to the Adjudicating Authority, transactions of Preferential. Under- value, Extortionate, Fraudulent, or unlawful nature, if any, identified during the course of CIRP or Liquidation. Considering the huge sums involved in these transactions, provisions for the same, in IBC as well as on a global scale, is of utmost importance.

In ABC Bank Limited v. JIL, the NCLT Bench, dealt with a crucial aspect of Insolvency proceedings, that is, vulnerable transactions. The Resolution Professional (RP) of the Corporate Debtor filed application in relation to a mortgage of an immovable property belonging to the Corporate Debtor to secure the debt of a related party (that is, the Holding Company of the Corporate Debtor). The RP sought directions, inter alia so as to declare the transaction as Preferential, Undervalued and “Fraudulent and Wrongful” under the Code.

Facts in a decided case :

In ABC Bank Ltd. v. JIL, certain mortgages created by JIL in favour of the lenders of its Holding Company JAL.

l JIL was a special purpose Company promoted by JAL for certain design, engineering, development and construction projects. JAL held approximately 70% of the shares of JIL.

l JIL started facing financial difficulties and failed to honour its project completion deadlines. It also started defaulting on its loan payments due to its financial creditors.

One of the lenders declared JIL as a Non-Performing Account (‘‘NPA’’) first and other lenders declared it as a NPA subsequently.

l JIL Mortgaged 800 plus Acres of unencumbered land owned by it to secure the debt of JAL, vide Mortgage Deeds entered on various dates.

l The NCLT Admitted an application filed by one of JIL’s Financial Creditors, IDBI Bank Ltd., for initiating Insolvency Proceedings under the Code, and appointed an Interim Resolution Professional (‘‘IRP’’).

l The IRP examined various transactions entered into by JIL with its promoter shareholders, pursuant to his duties as a Resolution Professional.

l The IRP, consequently filed an Application before the NCLT seeking declarations that the Impugned Transactions were :

(i)Fraudulent Transactions under Section 66 of the Code;

(ii)Preferential Transactions under Section 43 of the Code; and

(iii)Undervalued Transactions under Section 45 of the Code; and sought consequent reliefs (‘‘Application’’).

In the light of the above information and with reference to the relevant provisions and decision of Adjudicating Authority (NCLT Bench) under IBC, 2016, answer the following Questions :

(a)Read the following background information and answer the questions :

The Insolvency and Bankruptcy Code, 2016 (IBC, 2016) creates an ecosystem for maximizing the value of assets of the Corporate Debtor (CD) and balancing the interests of all stakeholders in a time-bound manner. A significant value of insolvent entities is often locked in assets underlying avoidance transactions which are undertaken by the CD prior to the initiation of the Corporate Insolvency Resolution Process (CIRP). The Resolution Professional (RP) or the liquidator is obliged to file applications, in respect of Avoidance Transactions (Preferential, Undervalued, Fraudulent and Extortionate (PUFE) Transactions) found by him during CIRP and Liquidation Processes before the Hon’ble Adjudicating Authority (AA), seeking appropriate relief permissible under the Code.

As of end of September 2024, 1,326 Avoidance Transaction Applications involving an amount of ₹ 3.76 lakh Crore have been filed with the AA. The AA, after consideration, can order for the amount to be clawed back. The IBC has led to a direct recovery of about ₹ 3.55 Lakh Crore due to Resolution and ₹ 10,446 Crore due to Liquidation till September, 2024. The Recovery from Avoidance Transactions will add to this recovery to the Creditors. Till September 2024, 338 Avoidance Transaction Applications have been settled by the AA ordering a claw back of about ₹ 7,516 Crore.

While the RP/Liquidator may have filed an Application with the AA based on his determination, it may not always be possible for the AA to consider and dispose of the application during the tenure of the CIRP or the Liquidation Process. Section 26 of the Code clarifies that the filing of an Avoidance Application by the RP shall not affect the proceedings of CIRP. Avoidance Applications and CIRP are a separate set of proceedings and Avoidance Applications can be continued Post-completion of CIRP. The IBC provides that the Resolution/Liquidation Process should not be held up if Avoidance Transaction Applications are pending. During CIRP if the decision on Avoidance Transactions is pending before Resolution is finalised, the amount would claw back to CD for the benefit of Creditors. The CIRP Regulations mandate that a Resolution Plan should contain the details of the Party/Person who will pursue these Avoidance Transactions after the Approval of the Resolution Plan, who will get the proceeds and the manner in which the proceeds, if any, from such proceedings will be distributed.

Consequently, after the Resolution Plan is approved, the RP has no role in pursuing these transactions and Creditors / Successful Resolution Applicant (SRA) will have to make their own arrangements to pursue them before the AA.

The amount clawed back would reflect in higher bids. In cases where decision on Avoidance Transactions is not available, the Avoidance Transactions being Assets of the CD, could be permitted by the CoC to be bid by Prospective Resolution Applicants (PRAs) in the Resolution plan. In case the CoC decides to assign the Avoidance Transactions to a Resolution Applicant (RA), the specifics of Avoidance Transactions should be made explicit in the information Memorandum (IM) and Request for Resolution Plan (RFRP), allowing prospective RAs to account for the value of Avoidance Transactions while submitting their plan. The CoC in the Resolution Plan should not give the proceeds of Avoidance Transactions to the RA without detailing such transactions in the IM or RFRP and without transparent bidding for such transactions. Another option could be to invite bids for Avoidance Transactions separately after obtaining the Approval of AA and the amount recovered could be appropriated by the Creditors Post-approval from the AA.

The provisions for Avoidance Transactions aid in maximizing the value of the CD both ex-post (i.e., once the CD is in Insolvency) and Ex-ante. These provisions foster good Corporate Governance and deter solvent entities and market participants from engaging in activities involving diversion of funds from the CD. By annulling such transactions, the Code Aims to prevent the depletion of the Debtor’s Assets and protect the interest of Creditors and other Stakeholders. They would act as an additional source of Recovery for the Creditors.

The Code calls upon the Resolution Professional/Liquidator, as the case may be, to bring to the knowledge to the Adjudicating Authority, transactions of Preferential. Under- value, Extortionate, Fraudulent, or unlawful nature, if any, identified during the course of CIRP or Liquidation. Considering the huge sums involved in these transactions, provisions for the same, in IBC as well as on a global scale, is of utmost importance.

In ABC Bank Limited v. JIL, the NCLT Bench, dealt with a crucial aspect of Insolvency proceedings, that is, vulnerable transactions. The Resolution Professional (RP) of the Corporate Debtor filed application in relation to a mortgage of an immovable property belonging to the Corporate Debtor to secure the debt of a related party (that is, the Holding Company of the Corporate Debtor). The RP sought directions, inter alia so as to declare the transaction as Preferential, Undervalued and “Fraudulent and Wrongful” under the Code.

Facts in a decided case :

In ABC Bank Ltd. v. JIL, certain mortgages created by JIL in favour of the lenders of its Holding Company JAL.

l JIL was a special purpose Company promoted by JAL for certain design, engineering, development and construction projects. JAL held approximately 70% of the shares of JIL.

l JIL started facing financial difficulties and failed to honour its project completion deadlines. It also started defaulting on its loan payments due to its financial creditors.

One of the lenders declared JIL as a Non-Performing Account (‘‘NPA’’) first and other lenders declared it as a NPA subsequently.

l JIL Mortgaged 800 plus Acres of unencumbered land owned by it to secure the debt of JAL, vide Mortgage Deeds entered on various dates.

l The NCLT Admitted an application filed by one of JIL’s Financial Creditors, IDBI Bank Ltd., for initiating Insolvency Proceedings under the Code, and appointed an Interim Resolution Professional (‘‘IRP’’).

l The IRP examined various transactions entered into by JIL with its promoter shareholders, pursuant to his duties as a Resolution Professional.

l The IRP, consequently filed an Application before the NCLT seeking declarations that the Impugned Transactions were :

(i)Fraudulent Transactions under Section 66 of the Code;

(ii)Preferential Transactions under Section 43 of the Code; and

(iii)Undervalued Transactions under Section 45 of the Code; and sought consequent reliefs (‘‘Application’’).

In the light of the above information and with reference to the relevant provisions and decision of Adjudicating Authority (NCLT Bench) under IBC, 2016, answer the following Questions :

(a)Read the following background information and answer the questions :

The Insolvency and Bankruptcy Code, 2016 (IBC, 2016) creates an ecosystem for maximizing the value of assets of the Corporate Debtor (CD) and balancing the interests of all stakeholders in a time-bound manner. A significant value of insolvent entities is often locked in assets underlying avoidance transactions which are undertaken by the CD prior to the initiation of the Corporate Insolvency Resolution Process (CIRP). The Resolution Professional (RP) or the liquidator is obliged to file applications, in respect of Avoidance Transactions (Preferential, Undervalued, Fraudulent and Extortionate (PUFE) Transactions) found by him during CIRP and Liquidation Processes before the Hon’ble Adjudicating Authority (AA), seeking appropriate relief permissible under the Code.

As of end of September 2024, 1,326 Avoidance Transaction Applications involving an amount of ₹ 3.76 lakh Crore have been filed with the AA. The AA, after consideration, can order for the amount to be clawed back. The IBC has led to a direct recovery of about ₹ 3.55 Lakh Crore due to Resolution and ₹ 10,446 Crore due to Liquidation till September, 2024. The Recovery from Avoidance Transactions will add to this recovery to the Creditors. Till September 2024, 338 Avoidance Transaction Applications have been settled by the AA ordering a claw back of about ₹ 7,516 Crore.

While the RP/Liquidator may have filed an Application with the AA based on his determination, it may not always be possible for the AA to consider and dispose of the application during the tenure of the CIRP or the Liquidation Process. Section 26 of the Code clarifies that the filing of an Avoidance Application by the RP shall not affect the proceedings of CIRP. Avoidance Applications and CIRP are a separate set of proceedings and Avoidance Applications can be continued Post-completion of CIRP. The IBC provides that the Resolution/Liquidation Process should not be held up if Avoidance Transaction Applications are pending. During CIRP if the decision on Avoidance Transactions is pending before Resolution is finalised, the amount would claw back to CD for the benefit of Creditors. The CIRP Regulations mandate that a Resolution Plan should contain the details of the Party/Person who will pursue these Avoidance Transactions after the Approval of the Resolution Plan, who will get the proceeds and the manner in which the proceeds, if any, from such proceedings will be distributed.

Consequently, after the Resolution Plan is approved, the RP has no role in pursuing these transactions and Creditors / Successful Resolution Applicant (SRA) will have to make their own arrangements to pursue them before the AA.

The amount clawed back would reflect in higher bids. In cases where decision on Avoidance Transactions is not available, the Avoidance Transactions being Assets of the CD, could be permitted by the CoC to be bid by Prospective Resolution Applicants (PRAs) in the Resolution plan. In case the CoC decides to assign the Avoidance Transactions to a Resolution Applicant (RA), the specifics of Avoidance Transactions should be made explicit in the information Memorandum (IM) and Request for Resolution Plan (RFRP), allowing prospective RAs to account for the value of Avoidance Transactions while submitting their plan. The CoC in the Resolution Plan should not give the proceeds of Avoidance Transactions to the RA without detailing such transactions in the IM or RFRP and without transparent bidding for such transactions. Another option could be to invite bids for Avoidance Transactions separately after obtaining the Approval of AA and the amount recovered could be appropriated by the Creditors Post-approval from the AA.

The provisions for Avoidance Transactions aid in maximizing the value of the CD both ex-post (i.e., once the CD is in Insolvency) and Ex-ante. These provisions foster good Corporate Governance and deter solvent entities and market participants from engaging in activities involving diversion of funds from the CD. By annulling such transactions, the Code Aims to prevent the depletion of the Debtor’s Assets and protect the interest of Creditors and other Stakeholders. They would act as an additional source of Recovery for the Creditors.

The Code calls upon the Resolution Professional/Liquidator, as the case may be, to bring to the knowledge to the Adjudicating Authority, transactions of Preferential. Under- value, Extortionate, Fraudulent, or unlawful nature, if any, identified during the course of CIRP or Liquidation. Considering the huge sums involved in these transactions, provisions for the same, in IBC as well as on a global scale, is of utmost importance.

In ABC Bank Limited v. JIL, the NCLT Bench, dealt with a crucial aspect of Insolvency proceedings, that is, vulnerable transactions. The Resolution Professional (RP) of the Corporate Debtor filed application in relation to a mortgage of an immovable property belonging to the Corporate Debtor to secure the debt of a related party (that is, the Holding Company of the Corporate Debtor). The RP sought directions, inter alia so as to declare the transaction as Preferential, Undervalued and “Fraudulent and Wrongful” under the Code.

Facts in a decided case :

In ABC Bank Ltd. v. JIL, certain mortgages created by JIL in favour of the lenders of its Holding Company JAL.

l JIL was a special purpose Company promoted by JAL for certain design, engineering, development and construction projects. JAL held approximately 70% of the shares of JIL.

l JIL started facing financial difficulties and failed to honour its project completion deadlines. It also started defaulting on its loan payments due to its financial creditors.

One of the lenders declared JIL as a Non-Performing Account (‘‘NPA’’) first and other lenders declared it as a NPA subsequently.

l JIL Mortgaged 800 plus Acres of unencumbered land owned by it to secure the debt of JAL, vide Mortgage Deeds entered on various dates.

l The NCLT Admitted an application filed by one of JIL’s Financial Creditors, IDBI Bank Ltd., for initiating Insolvency Proceedings under the Code, and appointed an Interim Resolution Professional (‘‘IRP’’).

l The IRP examined various transactions entered into by JIL with its promoter shareholders, pursuant to his duties as a Resolution Professional.

l The IRP, consequently filed an Application before the NCLT seeking declarations that the Impugned Transactions were :

(i)Fraudulent Transactions under Section 66 of the Code;

(ii)Preferential Transactions under Section 43 of the Code; and

(iii)Undervalued Transactions under Section 45 of the Code; and sought consequent reliefs (‘‘Application’’).

In the light of the above information and with reference to the relevant provisions and decision of Adjudicating Authority (NCLT Bench) under IBC, 2016, answer the following Questions :

(A)Mr. K Sridhar and Mr. K. Murali are the Directors of M/s S & M Engineering Enterprises Limited (SMEEL). Unfortunately, being the victims of COVID 2019 pandemic, by both the brothers and their respective families, they could not concentrate on the day-to-day affairs of the business and in the short run, the top line and the bottom line of the business went southwards and ultimately, they had to face the brunt of huge debts.

An application for initiation of Corporate Insolvency Resolution Process (CIRP) against M/s SMEEL under the Insolvency and Bankruptcy Code, 2016 (IBC, 2016) was moved by an ‘Assignee’ of an Operational Creditor for Non-payment of dues. The Adjudicating Authority admitted the application because there was no intimation of any dispute within the 10 days.

After following all the compliances prescribed under the IBC, 2016, the Adjudicating Authority passed an order to Liquidate the Corporate Debtor, on an intimation from the Resolution Professional to do so, as decided by the Committee of Creditors (CoC) by requisite voting, before the approval of the resolution plan.

The relevant information related to M/s SMEEL for the purpose of liquidation is produced as follows :

Liabilities ₹ in Assets ₹ in Lakhs

Lakhs

Capital : Fixed Assets :

Equity 300 Land and Buildings 350 Preference 200 Plant and Machinery 150 Financial Creditors : Current Assets :

Secured 250 Inventories 100 Unsecured 150 Trade Receivables 300 Operational Creditors : Other Current Assets 50 Secured 60 Cash and Cash Equivalents 100 Unsecured 70 Fictitious Assets 190 Government Dues 50 Workmen’s Dues 80 Employees Dues 80 Total 1,240 Total 1,240 Other Information :

1.Workmen’s dues represent the amounts payable for the period of 30 months preceding the liquidation commencement date.

2.Employee’s liability includes ₹ 72 Lakhs outstanding to employees for a period of 12 months, preceding the liquidation commencement date.

3.Land and Buildings would realize 110% of its book value, Plant and Machinery would realize 60% of its book value, net of any realization cost. Inventories and Trade Receivables would realize 72% of its book value.

4.The secured financial creditors worth ₹ 45 Lakhs decided to enforce their security interest in the other current assets and they could realize 80% of its value.

5.There has been a pending court case against the Company for use of child labour which could result in a penalty of approximately ₹ 30 lakhs. This has been reflected as a contingent liability only. It has been finally decided to pay ₹ 25 lakhs and settle the case.

6.Based on the amount realized and distributed, the cost of liquidation and insolvency period cost is computed to be ₹ 20 lakhs and ₹ 12 lakhs respectively.

In the light of the above inputs and with reference to the relevant provisions of the IBC, 2016, answer the following questions :

Images Gym Ltd. was granted credit facility of ₹100 lakh under consortium arrangements.

Under the consortium, there were 5 five banks, and credit facility provided by the respective banks were as under :

A-One Bank Ltd. - ₹45 lakh, Best Bank Ltd. - ₹20 lakh, Good Deal Bank Ltd. - ₹15 lakh, Credit Arrangers Bank Ltd. - ₹10 lakh and Your Bank Ltd - ₹10 lakh Among theses the A-One Bank Ltd. was the leader.

Images Gym Ltd. was engaged in the business of manufacturing and trading of Gym exercise machines. However, due to poor demand of the products, the company could not sell out the machines and as a result the account of the company with respective banks were classified as Non-performing Advances (NPAs).

Apart from credit facility from the above banks, the company was also having outstanding dues of the creditor, which the company was not able to pay-off. The total amount outstanding of such operational creditors amounted ₹30 lakh.

The company has also not paid the salary to its employees and workers for the last 6 months and the total dues amounted to ₹10 lakh.

The leader of the consortium filed Corporate Insolvency Resolution Process (CIRP)

with the Adjudicating Authority (AA) and proposed the name of Saket Sharma, as Interim Resolution Professional (IRP).

The AA accepted the application and appointed Saket Sharma as IRP and put moratorium.

The IRP constituted the Committee of Creditors (CoC) and first meeting of the CoC was called upon.

The operational creditors objected about the constitution of the committee and asked the IRP to include operational creditors also in the CoC, which the IRP denied.

The CoC observed that IRP is not discharging his functions properly and was reluctant in calling the expression of interest from Resolution Applicant(s), so they proposed for the change of the existing IRP and appointment of the new Resolution Professional (RP) named as Anubhav Dutt.

The RP called the expression of interest from the eligible applicants and each proposal was placed before the CoC, but no consensus had arrived at. The initial period of 180 days was going to elapsed so the CoC through the RP sought extension which the Adjudicating Authority for further 90 days. The RP again called the expression of interest from other Resolutionm Applicants, but it was also not agreed upon by the CoC and after lapse of total 270 days, the Adjudicating Authority ordered for its liquidation and the present RP was appointed as Liquidator.

The Liquidator sold off the assets of the Company and realised only ₹150 lakh, whereas the outstanding dues of the various stakeholders remained as under.

Dues of ₹ in Lakhs Fee payable as Resolution Professional 10 Fee payable as Liquidator 10 Dues of the banks with interest 110 Outstanding from Operational Creditors 30 Dues of Govts. 15 Workmen’s dues 10 Employee’s salary 15 Equity shareholders 30 Total 230 Based on the above information, answer the following questions:

A Resolution Professional appointed under Insolvency & Bankruptcy Code, 2016 (IBC, 2016), placed before the Committee of Creditors (CoC), a Consortium of Banks, a Resolution Plan submitted to him. The CoC approved the Resolution Plan and National Company Law Tribunal (NCLT), sanctioned it. As the Liquidation Value is not sufficient and there is a hair-cut involved in the dues payable to the secured financial creditors, nothing is provided for the Operational Creditors under the Resolution Plan. The Operational Creditor aggrieved by the decision of the NCLT filed Appeal before National Company Law Appellate Tribunal (NCLAT). The contention of the Operational Creditor is that the Resolution Plan approved is not in compliance with the provisions of the Insolvency and Bankruptcy Code, 2016 and the Regulations made thereunder :

COB Bank filed an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC) for initiating a Corporate Insolvency Resolution Process (CIRP) against the Corporate Debtor, M/s. Gupta Infra Private Limited (GIPL). The said application was admitted by the Adjudicating Authority (AA) during October, 2018 and a Resolution Professional (RP) was appointed as an Interim Resolution Professional (IRP).

Following is the financial position of GIPL as on the date of commencement of the CIRP :

Liabilities Amount in Assets Amount in ₹

₹ Crores Crores

Share Capital – Equity 100.00 Fixed Assets – Land and 115.00

Building

Share Capital – Redeemable 75.00 Fixed Assets – Plant and 165.00 Preference Shares Machinery Share Capital – Convertible 25.00 Other Fixed Assets 70.00 Preference Shares Debentures (Unsecured fully 50.00 Investments in Subsidiaries 50.00 convertible)

Long Term Borrowings – Fully 300.00 Inventories 150.00 Secured Short Term Borrowings – Unsecured 75.00 Receivables 110.00 Loan from Related Parties 25.00 Cash and Bank Balances 15.00 Payables 65.00 Other Current Assets 25.00 Provisions 35.00 Accumulated Losses 100.00 Deferred Tax Liabilities 15.00 Other Current Liabilities 35.00 Total Liabilities 800.00 Total Assets 800.00 Other Additional information provided by the Corporate Debtor :

[Amounts stated in the table above can be treated as claims made by each of the parties in their respective category].

Other Current Liabilities include :

₹ In Crores

Workmen Wages Payable for 36 months 9.00 Salary Payable for 20 months 100.00 PF Liabilities 3.80 Sales Tax/Commercial Taxes Due * 4.80 Other Statutory Dues 2.40

* On the sales tax and commercial taxes due, the Commercial Tax Authorities have already attached one of the immovable properties of the Corporate Debtor valued at ₹ 3.50 crores.

Fixed Assets includes buildings occupied on long term lease for a period of 75 years obtained from the State Industrial Development Authority (SIDA) for ₹ 5 Crores. SIDA has also submitted their claim with the RP stating that their premium amount along with interest and penal interest is due for since last 7 years. SIDA has filed its claim as a Financial Creditor. Whereas, the Resolution Professional has requested SIDA to submit its claim as an Operational Creditor. (This amount is included in Other Current Liabilities).

Further, it was informed by the Resolution Professional that the Corporate Debtor, M/s. Gupta Infra Private Limited, who initiated a CIRP against one of its Operational Creditor, namely C-Digital Arts Private Ltd for ₹ 6 Crores and going forward, the National Company Law Tribunal (NCLT) has already ordered for initiation of Corporate Insolvency Resolution Process (CIRP). However, one of the suspended Director on the Board of C-Digital Arts Private Limited filed an appeal before the National Company Law Appellate Tribunal (NCLAT) stating that there was no notice given as required under Section 8 of the Insolvency and Bankruptcy Code, 2016 read with Rule 5 of the insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 which entails that for initiation of insolvency resolution process by an Operational Creditor, a demand notice has to be served by the unpaid Operational Debtor on the Corporate Creditor. Nevertheless, the aforesaid suspended director he has not denied the debts due. This matter is pending before NCLAT for disposal.

Investments includes investment in Foreign Subsidiary of ₹ 30 Crores and in an Indian Subsidiary of ₹ 18 Crores and Investment in shares amounting to ₹ 2 Crores in another company incorporated and registered with charitable objects and not for profit.

Inventories and Receivables realisable only for 80% of its value.

Loan from related parties is from wife and son of one Director of GIPL.

Other Current Assets includes ₹ 10 Crores paid to National Highway Authority of India (NHAI) towards a bid amount for a road project.

Other Current Assets includes ₹ 2 Crores of assets of third party held under Trust. Machinery, the carrying value of which is ₹ 1.50 crores belonging to an Indian Subsidiary is lying in one of the Units of the Corporate Debtor.

A Machinery which was acquired for dispatching to the Foreign Subsidiary is also lying in the factory premises of the Corporate Debtor having a carrying value of ₹ 3 crores.

Cranes worth ₹ 5 Crores belonging to a proprietorship concern of one of the Director is also lying the Factory premises of the Corporate Debtor.

CIRP costs payable including all expenses is ₹ 2 Crores.

The Security Interest charged for COB Bank is 91.25% and SID Bank is 8.75%. (both the financial creditors have not relinquished their security interest).

During the CIRP, in one of the Meeting of the ‘Committee of Creditors’ (CoC), Resolution Plans were discussed. Revised Resolution Plans were submitted by the prospective Resolution Applicants.

Resolution Plan was put to e-Vote and by majority of 94.79%, the Resolution Plan of ‘GIPL’ was approved.

The Resolution plan proposes for utilisation of all assets including the assets under lease. Further, the Resolution Professional has sent a letter to the Commercial Taxes Authorities to release the property attached by them and on the contrary, the Authorities informed that the Department will get their portion as per the proposed Resolution Plan.

One of the Financial Creditor (SID Bank) sent an objection with respect to the distribution of the proceeds of the resolution plan under the Resolution Plan.

SID Bank also filed seeking direction to the Resolution Professional to distribute the proceeds of the Resolution Plan and made the following prayers :

“It is most respectfully prayed that :

1.The present application may kindly be allowed and the directions be issued to the Respondent No. 1 to modify/clarify the distribution to dissenting members as per the Resolution Plan and distribute the proceeds of the resolution plan to the Applicant SID Bank, for an amount of ₹ 8.97 Crores in priority in accordance with provisions of IBC, 2016 in the interest of justice and equity.

2.Interim stay be granted on distribution of the resolution plan amount by the Resolution Professional to the Committee of Creditors till the present application is decided.”

The case of the Appellant, namely SID Bank in the Application was that, as per the security interest of the Appellant, the Appellant is entitled to 8.75% i.e. the amount of ₹ 8.97 Crores and as per voting share as approved by the CoC, the Appellant is entitled to 5.21% i.e., ₹ 5.34 Crores. The case of the Appellant SID Bank set up in the Application is that he is entitled for his distribution of plan amount as per value of the security interest of the Appellant.

The Application was objected by the Resolution Professional. The Adjudicating Authority, by its Order, upheld the decision of the CoC for distribution of proceeds of the Resolution Plan as per the voting share. The Appellant, aggrieved by the said Order, has come up with the Appeal to the National Company Law Appellate Tribunal (NCLAT).

In the light of the above case study inputs and referring to the decisions of applicable case laws with reasons and the provisions of Insolvency and Bankruptcy Code, 2016 (IBC, 2016) and the Regulations made thereunder, answer the following questions :

(A)Mr. K Sridhar and Mr. K. Murali are the Directors of M/s S & M Engineering Enterprises Limited (SMEEL). Unfortunately, being the victims of COVID 2019 pandemic, by both the brothers and their respective families, they could not concentrate on the day-to-day affairs of the business and in the short run, the top line and the bottom line of the business went southwards and ultimately, they had to face the brunt of huge debts.

An application for initiation of Corporate Insolvency Resolution Process (CIRP) against M/s SMEEL under the Insolvency and Bankruptcy Code, 2016 (IBC, 2016) was moved by an ‘Assignee’ of an Operational Creditor for Non-payment of dues. The Adjudicating Authority admitted the application because there was no intimation of any dispute within the 10 days.

After following all the compliances prescribed under the IBC, 2016, the Adjudicating Authority passed an order to Liquidate the Corporate Debtor, on an intimation from the Resolution Professional to do so, as decided by the Committee of Creditors (CoC) by requisite voting, before the approval of the resolution plan.

The relevant information related to M/s SMEEL for the purpose of liquidation is produced as follows :

Liabilities ₹ in Assets ₹ in Lakhs

Lakhs

Capital : Fixed Assets :

Equity 300 Land and Buildings 350 Preference 200 Plant and Machinery 150 Financial Creditors : Current Assets :

Secured 250 Inventories 100 Unsecured 150 Trade Receivables 300 Operational Creditors : Other Current Assets 50 Secured 60 Cash and Cash Equivalents 100 Unsecured 70 Fictitious Assets 190 Government Dues 50 Workmen’s Dues 80 Employees Dues 80 Total 1,240 Total 1,240 Other Information :

1.Workmen’s dues represent the amounts payable for the period of 30 months preceding the liquidation commencement date.

2.Employee’s liability includes ₹ 72 Lakhs outstanding to employees for a period of 12 months, preceding the liquidation commencement date.

3.Land and Buildings would realize 110% of its book value, Plant and Machinery would realize 60% of its book value, net of any realization cost. Inventories and Trade Receivables would realize 72% of its book value.

4.The secured financial creditors worth ₹ 45 Lakhs decided to enforce their security interest in the other current assets and they could realize 80% of its value.

5.There has been a pending court case against the Company for use of child labour which could result in a penalty of approximately ₹ 30 lakhs. This has been reflected as a contingent liability only. It has been finally decided to pay ₹ 25 lakhs and settle the case.

6.Based on the amount realized and distributed, the cost of liquidation and insolvency period cost is computed to be ₹ 20 lakhs and ₹ 12 lakhs respectively.

In the light of the above inputs and with reference to the relevant provisions of the IBC, 2016, answer the following questions :

(a)Two appeals were preferred by the management of a Corporate Debtor (CD) against two orders wherein the Adjudicating authority had passed orders of liquidation under Section 33(1) of the Insolvency and Bankruptcy Board Code 2016 of companies with certain directions to the liquidator.

Prior to this, two separate appeals were preferred by resolution applicant(s) in respect of the ‘Corporate Insolvency Resolution Process’ (CIRP) initiated against the above said corporate debtor wherein opportunity was given to them to submit better revised resolution plan(s) and the ‘committee of creditors’ were directed to consider them. However, subsequently, the resolution applicants withdrew their appeals.

Sekar, the appellant, raised concerns regarding the actions of the Iiquidator, Amit, specifically regarding the handling of asset sales.

The core issue was whether the liquidator had acted in accordance with the provisions of the IBC and the associated regulations, particularly regarding the maximization of asset value and the exploration of options like “going concern” sales.

The appellant argued that the liquidator’s actions, such as selling spare parts, were detrimental to the company’s value and that a “going concern” sale should have been prioritized.

On the above background referring the relevant case law(s) and provisions of the IBC, 2016 and regulations made thereunder answer the following questions :