Author name: cbclseconduser

[By Utkarsh Pandit and Samridhi Shrimali] The authors are students at the Institute of Law Nirma University, Ahmedabad. Introduction The key intent of the existence of the Insolvency and Bankruptcy Code, 2016, (hereinafter referred to as ‘IBC’) is the resolution of companies in distress. The Code prescribes specific timelines for an efficient and swift resolution. However, these timelines are not always met due to delays from both, the bar and the bench. One such cause of delay on the part of the bench is the reservation of order and delayed pronouncement.  Rule 150 of the National Company Law Tribunal Rules, 2016 (hereinafter referred to as the NCLT Rules, 2016) provides for the pronouncement of orders. This rule provides for a limited time frame of 30 days to pronounce the order which has been reserved. There still exist procedural inconsistencies when it comes to the implementation of such rules. Resultantly, these issues acknowledged as mere irregularities have given them a flavor tantamount to being insignificant. This article analyzes the dichotomous stance of the courts/Tribunals on the delay in pronouncement of orders and if such delays can be a ground to challenge an order. By definition, pronouncement means to utter formally, officially, or solemnly, to declare or affirm, as pronounce a judgment or order.[i] In other words, pronouncement means to officially communicate the order to the parties after the hearing is concluded. It becomes pertinent to comprehend the trends of the tribunals/courts as the harbinger of rampant delay in pronouncements poses a threat to the ‘speedy trial’ essence of insolvency forums. These trends encounter impediments in the smooth procedural conduction of such NCLT rules, as well as the jurisdiction of the courts/tribunals while hearing petitions/appeals challenging orders on the ground of delayed pronouncement. Kamal K. Singh v. Union of India In this case, the Bombay High Court quashed the order of NCLT Mumbai, as it violated Rule 150 to 152 of the NCLT Rules, 2016. While analyzing the ambit of the pronouncement of the order, the Court observed that mere making known or communicating the order as per section 7(7) of IBC, is not tantamount to pronouncement. It also observed that NCLT being a statutory tribunal is bound by the procedural rules or else the non-adherence would defeat the principles of natural justice and fairness. Thus, it was held that the pronouncement of order is imperative under Rule 150 of the NCLT Rules, 2016. Notably, it was further held that after the conclusion of the arguments, when the pronouncement of the order has to be done, both the parties are to be notified in advance. Though the Bombay High Court did not delve into the issue of adherence to the timeline under Rule 150(1) of the NCLT Rules, it has definitely laid down a way for the aggrieved parties to exercise the jurisdiction of the High Courts in case an order is passed in violation of the procedural rules, specifically the NCLT Rules, 2016. Rajratan Babulal Agarwal v. Solartex Pvt. Ltd. & Ors. The NCLAT PB dismissed an appeal that prayed for setting aside of an impugned order of NCLT Ahmedabad, where inter alia the pronouncement of the impugned order was done six months post the conclusion of the final arguments. The appellants argued that the delayed pronouncement of the order was a direct violation of Rules 150 and 152 of the NCLT Rules, 2016. The appellants further relied on Anil Rai V. State of Bihar, where the Supreme Court laid down the guidelines for pronouncement of judgments and emphasized that for civil matters, the judgment ought to be pronounced within two months post the conclusion of the arguments. The appellants also brought non-adherence to Rule 89 of the NCLT Rules, 2016 to the NCLAT’s notice, wherein the publication of the cause list is to be published one day in advance. In the present case, the publication was done on the same day when the judgment was pronounced. Intriguingly, NCLAT while dismissing the appeal held that “It is true that in the present case, the parties have submitted written submissions on 06.01.2020, however, the impugned order was pronounced on 28.05.2020 i.e. after about five months from the conclusion of arguments which is against the aforesaid rule as well as guidelines laid down by the Hon’ble Supreme Court.  We are of the view that only on this count the impugned order cannot be set aside which is otherwise flawless.” For the violation of Rule 89 of the NCLT Rule, 2016, the NCLAT held that “even if the cause list was published on the same day, the same would be considered as an irregularity but not an illegality.” Thus, the Appellate Authority held that even if the orders are not in coherence with these rules, the same could take a back seat if the order otherwise does not have any other inconsistencies. It is reasonable to infer from the abovementioned case that the defect on account of pronouncement of orders would not impute sufficient ground to set aside such orders. Shaji Purushothman v. Union of India The Madras High Court, in a writ petition filed against the order passed by the NCLT Chennai Bench, observed the nature of NCLT Rules. Placing reliance on Balwant Singh and Others v. Anand Kumar Sharma and Others, Sharif-ud-Din v. Abdul Gani Lone, Bhavnagar University v. Palitana Sugar Mill (P) Ltd. and Others, and Pesara Pushpamala Reddy v. G.Veeraswamy and Others, the Madras High Court laid down a test and stipulated that if the law does not provide the consequences of non-compliance of the rule, then it should be deemed to be directory in nature. On the other hand, if the law provides for the consequences of non-compliance, then it should be deemed to be mandatory. While analyzing the nature of the NCLT Rules, 2016, and Rules 150 and 153 particularly, the High Court held that as the rules do not indicate any consequences on the account of non-adherence to the timelines, therefore, they can be considered as directory

[By Neelabh Niket and Sanchita Makhija] The authors are students at the Hidayatullah National Law University. Introduction Recently, the National Company Law Appellate Tribunal (‘NCLAT’) in the case of Mr. Prashat Agarwal, Member of Suspended Board of Bombay Rayon Fashions Ltd. Vs. Vikash Parasrampuria (hereinafter referred to as the ‘Bombay Rayon case’) held that under Section 4 of the Insolvency & Bankruptcy Code (‘IBC’), an operational creditor can club the ‘interest’ with the principal amount to arrive at the threshold limit of Rs. 1 Crore, which is the default limit for filing of applications under Part II of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as the ‘IBC’), provided that the interest was perspicuously stipulated in an invoice or an agreement. In doing so, the three-judge bench effectively overruled the law laid down by the National Company Law Tribunal (‘NCLT’) Delhi in CBRE South Asia Private Limited v. United Concept and Solutions Private Limited (hereinafter referred to as the ‘CBRE case’), which had provided a ruling contrary to the Bombay Rayon case by holding that the principal and interest cannot be clubbed together to reach the Rs. 1 crore threshold limit. In this article, the authors seek to analyze the recent judgment of the Bombay Rayon case and its possible implications on similar cases pertaining to the treatment of ‘interest’ as debt. Factual Matrix The Appellant, Bombay Rayons Fashions Limited (hereinafter referred to as the ‘Corporate Debtor’) was supplied goods by the Respondent, ‘Vikash Parasrampuria’, the sole proprietor of the firm ‘Chiranjilal Yarns Trading’ (hereinafter referred to as the ‘Operational Creditor’). For the said supply, the Operational Creditor had raised nine invoices, out of which the Corporate Debtor did not make the payment for five invoices. The remaining principal amount was Rs. 97,87,220 and a condition for payment of 18% interest was made in all the invoices. The Operational Creditor, ergo, filed a Section 9 Application, which was admitted by the NCLT, and the Corporate Insolvency Resolution Process (‘CIRP’), was initiated. Aggrieved by the said order, an appeal was filed in the NCLAT by the Corporate Debtor. Ruling and Analysis The NCLAT analyzed the definition of the term ‘debt’ and subsequently the term ‘claim’ and stated that if interest has been unambiguously stipulated in an invoice or agreement, then it will fall under the ambit of the ‘right to payment,’ which has been anchored in the definition of ‘claim’ under Section 3(6) of the IBC. In doing so, the NCLAT also distinguished the judgment of NCLT Mumbai in Steel India vs. Theme Developers Pvt. Ltd.( ‘Steel India Case’)’ by stating that, unlike the Steel India case, the interest was stipulated in the invoices in the case in hand. Furthermore, the NCLAT sought the support of the case of Pavan Enterprises v. Gammon India and overruled the CBRE judgment into the bargain. In the CBRE judgment, the court, after due analysis of the definitions of the terms ‘debt’ and ‘claim,’ had held that since the definition of claim is common for both Operational and Financial Debts, the definition of both the terms shall be considered to understand the legislature’s intention. After analyzing the definitions of the said terms, the Adjudicating Authority (‘AA’) arrived at the conclusion that Operational Debt does not include interest as the definition of Operational Debt does not explicitly incorporate the term ‘interest’; unlike Financial Debt which clearly specifies the term ‘interest’. It should be noted that the Court in the CBRE case had failed to understand that the connotation of the term ‘interest’ is distinguishable in the case of an Operational Debt and a Financial Debt. The term ‘interest’ is explicitly mentioned in the definition clause of Financial Debt as it is an inherent component of the same. This interest clause as disbursed against the consideration for the time value of money makes the debt a ‘Financial Debt’. (It is another case, however, that the Supreme Court (‘SC’) has rendered this interest redundant for Financial Creditors in the case of Orator Marketing.). Per contra, ‘interest’ in the case of Operational Debt, is not something which is fundamental to the nature of the debt. It can be claimed to be a part of the debt, only if it is contractual in nature and has been clearly stipulated. Thus, ‘interest’ may or may not exist depending upon the clauses enshrined in a contract. The AA had erroneously deemed equivalent the connotation of the term ‘interest’ under both the definitions by placing them on the same pedestal, whilst in reality, they are very distinct. The term ‘interest,’ as has been mentioned in the definition clause of Financial Debt, is almost synonymous with the debt availed, while ‘interest’ in the case of an Operational Debt is a creature of a Contract that arises from a right of payment. The consideration in the case of Operational Debt is ‘the goods or services that are either sold or availed of from the operational creditor’ and there is no time value of money involved in the case of Operational Debt, as was held in the landmark case of Pioneer Urban Land and Infrastructure Ltd. v. Union of India. Therefore, unlike Financial Debt, the concept of ‘time value of money’ is not prevalent in the cases of Operational Debt. As interest is a token of representation of the ‘time value of money’, the same is not indispensable for Operational Debt, thereby rationalizing the omission of the term from the definition of Operational Debt. Implications If the CBRE judgment is strictly followed, then a part of the debt, which has been mutually agreed as interest cannot be levied and collected without a hitch, as it would require an additional case in the Debt Recovery Tribunal, rendering the clause redundant under IBC. For instance, the Real Estate industry which comprises various Lease & License agreements feeds extravagantly on the interest rates, and these amounts usually run in crores. Given that the NCLAT has recently categorized Lease & License debt as ‘Operational Debt’, the landowners would