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Qualified Institutions Placement of IDFC FIRST Bank Limited

JSA advised IDFC FIRST Bank Limited (“IDFC FIRST Bank”) in relation to their qualified institutions placement. IDFC FIRST Bank had filed a placement document on October 6, 2023, for issue of 33,24,09,972 equity shares to qualified institutional buyers aggregating to approximately ₹ 3,000 crore (the “Issue”). ICICI Securities Limited, Jefferies India Private Limited, J.P. Morgan India Private Limited and Nuvama Wealth Management Limited (formerly known as Edelweiss Securities Limited) acted as the lead managers to the Issue.

Our Transaction Team Lead Partner – Arka Mookerjee, Partner – Siddhartha Desai, Principal Associate – Anshu Bansal, Associate – Shambhavi Kumar and Pooja Tada.

Tags Banking and Finance, IDFC FIRST Bank Limited, JSA, Leading Law Firm, Leading Lawyers, QIP, Wealth Management

JSA Prism | Finance | October 2023

Please click here to download the Prism as PDF.

The Supreme Court holds that the right of redemption of mortgage stands extinguished upon the publication of the auction notice by the secured creditor in terms of Section 13(8) of the SARFAESI Act.

The Supreme Court in its recent judgement Celir LLP Vs. Bafna Motors (Mumbai) Pvt. Ltd. and others[1], has held that in terms of Section 13(8) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (“SARFAESI Act”), the right of the borrower to redeem the secured asset stands extinguished upon issuance of the notice for public auction and the same will prevail over the right of the mortgagor to redeem the mortgage under the Transfer of Property Act, 1882 (“TOPA”).

Brief Facts

Bafna Motors (Mumbai) Pvt. Ltd. (“Borrower”) availed lease rental discounting credit facility from Union Bank of India (“Bank”) to the tune of INR 100,00,00,000 (Indian Rupees one hundred crore). In order to secure the loan, certain immovable property (“Secured Asset”) was mortgaged in favour of the Bank. The Borrower defaulted in repaying the loan and was classified as non-performing asset. Consequently, the Bank took steps under the SARFAESI Act to realise the Secured Asset. The Bank issued an auction sale notice on June 14, 2023 to sell the Secured Asset at a reserve price of INR 105,00,00,000 (Indian Rupees one hundred five crore). Celir LLP (“Auction Purchaser”) submitted a bid for Rs. 105,5,00,000 (Indian Rupees one hundred five crore five lakh) and emerged as the successful bidder.

The Bank issued a sale confirmation letter on June 30, 2023 to the Auction Purchaser; and thereafter the Auction Purchaser also deposited the bid amount with the Bank. Before the sale certificate could be issued, the Borrower filed an application before Debts Recovery Tribunal – I, Mumbai (“DRT”) for redemption of mortgage over the Secured Asset for INR 123,83,00,000 (Indian Rupees one hundred twenty three crore eighty three lakh), which was higher than the bid amount of the Auction Purchaser. During the pendency of the application before the DRT, the Borrower filed a writ petition before the Bombay High Court apprehending that the application before the DRT may be dismissed; and stating that the Borrower is willing to pay INR 129,00,00,000 (Indian Rupees one hundred twenty nine crore) to the Bank towards redemption of the mortgage. The Bombay High Court allowed the writ petition vide order dated August 17, 2023 and permitted the Borrower to redeem the mortgage over the Secured Asset by paying the said sum, on or before August 31, 2023. The Bombay High Court further directed the Bank to refund the entire bid amount to the Auction Purchaser upon payment of the agreed amount by the Borrower. Against the said order, the Auction Purchaser preferred an appeal before the Supreme Court.

Decision of the Supreme Court

The primary contention of the Auction Purchaser was that the auction proceedings under SARFAESI Act attained finality since the entire consideration has been paid by the Auction Purchaser; the sale in favour of the Auction Purchaser has been confirmed by the Bank; and that in terms of Section 13(8) of the SARFAESI Act, the right of redemption of mortgage expired upon issuance of auction notice by the Bank. It was further submitted that the Bombay High Court erred in exercising writ jurisdiction when the Borrower had already availed the remedy before the DRT.

The Borrower contended even a sale under the SARFAESI Act will be governed by Section 60 of the TOPA read with Section 17 of the Registration Act, 1908 (“Registration Act”), which preserves the right of a mortgagor to redeem the mortgage until the mortgaged property is transferred to a third party under a registered conveyance deed. Reliance was placed on the judgement of the Supreme Court in Mathew Varghese v. M. Amritha Kumar[2] and judgement of the Telangana High Court in Concern Readymix, rep. by its proprietor, Smt. Y. Sunitha v. Authorised Officer, Corporation Bank[3], an appeal against which was dismissed by the Supreme Court[4]. The Borrower further contended that in compliance with the Bombay High Court’s order, the amounts have been paid; the Bank had issued no-objection certificate on August 28, 2023; and subsequently, third party rights have been created on the Secured Asset.

The Supreme Court, while rejecting the contentions of the Borrower clarified that under Section 13(8) of the SARFAESI Act as it stood prior to the amendment with effect from September 1, 2016, the borrower / mortgagor had a right to redeem the mortgage at any time prior to the secured creditor selling the mortgaged property to a third party under a registered instrument in terms of Section 60 of the TOPA read with Section 17 of the Registration Act. While Section 60 of the TOPA entitles a mortgagor to redeem the mortgage till the mortgaged property is transferred, the said right can be extinguished by act of parties. The Supreme Court held that failure on the part of the borrower to tender the due amount before the publication of auction notice under the SARFAESI Act, amounts to extinguishment of right to redeem the mortgage by its act. It was further held that in terms of the amended Section 13(8) of the SARFAESI Act effective from September 1, 2016, the right of the borrower to redeem the mortgage over the secured asset is extinguished upon publication of auction notice or notice inviting quotations / tender from public or upon entering into private treaty for transfer of secured assets by way of lease, assignment or sale under the SARFAESI Act. The Supreme Court further clarified that the SARFAESI Act being a special law, Section 13(8) of the SARFAESI Act, under which the right of redemption is available till the date of publication of notice for auction will prevail over the general right of redemption under Section 60 of the TOPA.

The Supreme Court allowed the appeal of the Auction Purchaser and confirmed the sale in its favour. While setting aside the Bombay High Court’s order, the Supreme Court reiterated that High Courts should not exercise extra-ordinary powers under writ jurisdiction to interfere with the proceedings under the SARFAESI Act when an alternate efficacious remedy is available under the SARFAESI Act.

Conclusion

There were conflicting judgements of various High Courts regarding the interpretation of the right of redemption under Section 13(8) the SARFAESI Act. The High Courts of Telangana[5], Punjab & Haryana[6] and Madras High Court[7] had held that the right of redemption of the mortgagor subsists till the property is transferred. Whereas Andhra Pradesh High Court[8] had held that in terms of Section 13(8) of the SARFAESI Act, the right of redemption is extinguished upon issuance of auction notice. This judgement of the Andhra Pradesh High Court was subsequently followed by the High Court of Telangana[9].

This judgement of the Supreme Court is significant since it settles the law on the issue by clarifying that right of redemption under Section 13(8) the SARFAESI Act is not subject to the general right of redemption under Section 60 of the TOPA; and that the right to redeem the mortgage gets extinguished once the auction sale notice issued in terms of the SARFAESI Act.

This Prism has been prepared by:

Vinod Kumar
Partner

Srinivasan M.D
Principal Associate

Ancy Jacob
Associate

For more details, please contact [email protected]

[1] Civil Appeal Nos. 5542 – 5543 of 2023 dated September 21, 2023.

[2] 2014 5 SCC 610.

[3] 2018 SCC OnLine Hyd 783.

[4] SLP(C) D. No. 28967 of 2019.

[5] Concern Readymix, rep. by its proprietor, Smt. Y. Sunitha v. Authorised Officer, Corporation Bank (2018 SCC OnLine Hyd 783); and Judgement dated 17.8.2022 in W.P. No. 11435 of 2021 in Amme Srisailam v. Union Bank of India.

[6] Pal Alloys and Metal India Private Limited v. Allahabad Bank (2021 SCC OnLine P&H 2733).

[7] Sri International v. Central Bank of India, 2023 SCCOnLine Mad 2210

[8] Sri Sai Annadhatha Polymers v. Canara Bank (2018 SCC OnLine Hyd 178)

[9] KVV Prasad Rai Gupta v. State Bank of India (2021 SCC OnLine TS 328).

Tags Finance, JSA, JSA Prism, Leading Law Firm, Leading Lawyers, Legal Updates, mo, Supreme Court

Offer for Sale by Equity International in the IPO of SAMHI Hotels Limited

JSA also advised Equity International (Blue Chandra Pte. Ltd.) in relation to its offer for sale of 8,428,510 Equity Shares aggregating to approximately ₹ 1,062 million in the initial public offering of equity shares (“IPO”) of SAMHI, comprising of a fresh issue of approximately INR 12,000 million and an offer for sale of approximately INR 1,701 million, at a price of Rs. 126 per equity share, aggregating to a total IPO size of approximately INR 13,701 million.

Equity International, as part of their pre-IPO funding round, partially exited from its investment in SAMHI by a sale of its equity shares held in SAMHI immediately prior to the IPO of SAMHI which successfully listed on September 22, 2023.

The book running lead managers to the IPO were JM Financial Limited and Kotak Mahindra Capital Company Limited.

SAMHI is a branded hotel ownership and asset management platform in India with a portfolio of 3,839 keys across 25 operating hotels in 12 of India’s key urban consumption centers, as of March 31, 2023

Our Transaction Team Comprised Lead Partner – Arka Mookerjee and Partner – Siddhartha Desai

Tags Banking and Financial Services, Equity Capital, IPO, JSA, Leading Law Firm, Leading Lawyers, Sale of Shares

Banking Regulation in India – Overview

This Banking Regulation guide provides a high level overview of the governance and supervision of banks, including legislation, regulatory bodies and the role of international standards, licensing, the rules on liquidity, foreign investment requirements, liquidation regimes and recent trends in the regulation of banks.

Please click here to read the full publication by Nand Gopal Anand, Pratish Kumar, Vrindesh Patel, and Sonali Singh.

Tags Banking and Financial Services, JSA, Leading Law Firm, Leading Lawyers

Real estate investment trusts: Recent amendments to the regulations puts the spotlight on exits and governance

Please click here to download the Prism as PDF.

Real estate investment trusts (“REITs”) are pooled investment vehicles that hold and make investments in real assets. Structurally, a REIT is no different from any other pooled investment vehicle where the sponsor sets up the fund, raises capital and appoints a trustee who manages the fund for the benefit of the beneficiaries (i.e., investors in the fund). A REIT is a professionally managed investment vehicle that allows unit holders to partake in the economic benefits of commercial real estate ownership. From the perspective of the unit holder, investment in REITs offer predictable cash flow, capital appreciation from passive ownership of real estate assets and liquidity of investment.

Ever since 2014, when the REIT framework was notified by the Securities and Exchange Board of India (“SEBI”)[1], it has emerged as a preferred vehicle for institutional investment in the real estate sector.

Despite the positive outlook, a recent report[2] puts the REIT penetration at 11%. It identifies commercial reasons for achieving a substantial upside[3].

The REIT regime has evolved over the years, and SEBI has proactively engaged with relevant stakeholders from time to time. SEBI recently published consultation papers on February 23, 2023 (“February 23 Consultation Paper”) and May 16, 2023 (“May 16 Consultation Paper”) proposing certain changes to the REIT framework. On August 16, 2023, SEBI notified the Securities and Exchange Board of India (Real Estate Investment Trusts) (Second Amendment) Regulations, 2023 (the “Amendment”). The impact of the Amendment is discussed below.

Key Changes

Sponsor ‘lock-in’ during the lifetime of the REIT

A sponsor is a person who establishes the REIT i.e., the person who files the relevant application with SEBI and procures the necessary registration from SEBI. The sponsor is also responsible for transferring the assets from the relevant special purpose vehicles (i.e., the owner of the relevant real estate asset) to the REIT, filing an application for registration of the REIT with SEBI and the appointment of trustees of the REIT.

Prior to the Amendment, the REIT Regulations mandated a minimum ownership percentage with respect to the sponsor. The minimum ownership percentage was 15% of the total number of units, and this ownership stake had to be maintained for 3 (three) years from the date of listing of the units. The Amendment has changed this position considerably. According to the newly inserted Regulation 11(3), the sponsor is required to maintain a minimum stake in the REIT throughout the term of the REIT. We explain with the help of the table below.

Time period (From the date of listing of the units)	Percentage or maximum value of units held by sponsor
First 3 (three) years	15%
From the beginning of 4^th year till end of 5^th year	5% or INR 500,00,00,000 (Indian Rupees five hundred crore) (whichever is lower)
From the beginning of 6^th year till end of 10^th year	3% or INR 500,00,00,000 (Indian Rupees five hundred crore) (whichever is lower)
From the beginning of 11^th year till 20^th year	2% or INR 500,00,00,000 (Indian Rupees five hundred crore) (whichever is lower)
After completion of 20 (twenty) years	1% or INR 500,00,00,000 (Indian Rupees five hundred crore) (whichever is lower)

The manner of arriving at the value of units has been prescribed by the Amendment. Accordingly, it provides that the value of units will be based on the net asset value of the REIT.

In relation to REITs that exist at the commencement of the Amendment, the lock in covenant will only apply in respect of fresh units issued by the REIT. The new Regulation 11(3A) of the REIT Regulations also provides that the locked-in units will remain un-encumbered. The sponsor is restricted from the creation of any security interest or rights over such units during the restricted period.

The Amendment also provides for a mechanism to evaluate compliance of the above requirements by the sponsor. It provides that an assessment of compliance will be done from the fourth year onwards: (a) at the time of each fresh issuance of units; and (b) at the beginning of change in threshold of the percentage for minimum unitholding requirement.

The rationale for the minimum lock-in stipulation is to ensure ‘skin in the game’ for the sponsor. SEBI wants the sponsor to remain invested in the REIT for as long as possible. They do not want the REIT platform to be used by unscrupulous sponsors who are looking to make a ‘quick’ buck from the REIT platform. SEBI had also raised concerns on the high levels of leverage held on the books of the REIT. In the February 23 Consultation Paper, SEBI pointed out that the sponsor contracts the debt even before the transfer of the assets to the REIT. This puts other institutional and retail investors at a disadvantage as the REIT would have to service the debt from its future cash-flow.

Appointment of a director on the board of the investment manager

Regulation 4(2)(g) of the REIT Regulations stipulates that no unitholder will enjoy superior voting rights or any other rights over other unitholders and there should not be multiple classes of units in a REIT. The Amendment has changed this position. Pursuant to the Amendment, a proviso to Regulation 4(2)(g) has been introduced. The proviso provides that unitholders who individually or collectively hold not less than 10 % of the units of the REIT are entitled to nominate a director on the board of the manager. One could argue that the proviso is a departure from the regulatory principle of treating all unitholders alike.

Since the expression “collectively” has been used, it means that one unitholder can get together with other unitholders and achieve the 10% threshold required to undertake such appointment. The May 16 Consultation Paper recognizes the disparity between the unitholders holding a majority and the rest. Essentially, the proviso is a minority-protection measure.

The REIT Regulations do not provide a framework for exercising such right. It is silent on whether such a right is to be exercised pursuant to a contract between like-minded unitholders, or an ad-hoc exercise of powers.

Framework for Self-Sponsored Managers

A new definition of ‘Self- Sponsored Manager’ by way of Regulation 2(1)(zra) has been introduced in the REIT Regulations. Accordingly, a ‘Self Sponsored Manager’ is defined in Regulation 2(1)(zra) of the REIT Regulations to mean the manager of a REIT who has dual responsibilities of both the manager as well as the sponsor.

The REIT Regulations now include a framework that enables a sponsor to transition the REIT from a sponsor-controlled REIT to a professionally managed REIT. Accordingly, a sponsor of a REIT can disassociate itself as sponsor and convert the REIT to a self-sponsored REIT subject to the fulfilment of certain conditions. The key requirements are:

The REIT has been listed for a period of at least 5 (five) years.
The REIT has undertaken not less than a minimum of 12 (twelve) distributions on a continuous basis and complied with the distribution norms set out in the REIT Regulations in the preceding 5 (five) years.
The REIT has been rated AAA by a registered credit rating agency for a continuous period of 5 (five) years immediately preceding exit of the sponsor.
The sponsor has not transferred / sold assets to the REIT in the last 3 (three) years and no assets/ projects will be acquired by the REIT from the outgoing sponsor(s) for a period of 1 (one) year from the date of conversion to self-sponsored manager.
The REIT does not have any under-construction properties acquired from the sponsor that have not commenced commercial operations.

The Amendment is currently silent on the mechanics for undertaking the above transition and one would have to wait for SEBI to provide the necessary guidance on the same.

Stewardship code for unitholders

A new ‘stewardship’ code for unitholders has been introduced. A new proviso to Regulation 4(2)(g) of the REIT Regulations provides that unitholders holding not less than 10% of the units of the REIT must comply with a ‘stewardship’ code’. The stewardship code has been specified in Schedule IX of the REIT Regulations. The stewardship code requires the unitholders to:

act in the best interests of the REIT and its unitholders.
formulate a comprehensive policy on the discharge of their stewardship responsibilities, review and update the same periodically.
implement a policy to manage issues of conflict of interest while fulfilling their stewardship responsibilities.
periodically monitor the REIT and its investee entities viz. the holding company and special purpose vehicle.
implement a policy on voting.

The May 16 Consultation Paper states that the rationale behind a stewardship code is to ensure greater responsibility on the part of institutional investors.

JSA Analysis

The requirement to ‘lock-in’ the sponsors’ holding till the lifetime of the REIT is likely to increase the investment horizon for institutional investors such as private equity funds and other strategic investment platforms. Accordingly, their exit timelines will have to be adjusted. Also, large unitholders and institutional investors will have to cede certain governance rights in favor of unitholders holding 10% or more of the units who decide to appoint a director.

The criteria to transition to a self-sponsored manager is stringent and one needs to see how many sponsors really exercise this option. There could be some practical difficulties in fulfilling all the requirements set out by SEBI. For example, the restriction on not including any under construction properties within the REIT is quite difficult to fulfil. The ground reality is that a significant portion of the assets held by a REIT are usually under construction projects acquired from the sponsor. The REITs that are currently listed are likely to find it difficult to transition the REIT to a self-sponsored manager.

This Prism has been prepared by:

Ajay G Prasad
Partner

Soham Roy
Senior Associate

For more details, please contact [email protected]

[1] SEBI notified the Securities and Exchange Board of India (Real Estate Investment Trust) Regulations, 2014 (“REIT Regulations”) in 2014.

[2] https://www.colliers.com/en-in/research/reits-june-2023-report

[3] According to the report, listed REITs in India have provided an annualized distribution yield of 6-7%. The three listed office REITs cumulatively hold approximately 74.4 (seventy four point four) million square feet of office space, representing around 11% of the total existing Grade A office stock.

Tags Banking and Finance, Corporate, Disputes, JSA, Leading Law Firm, Leading Lawyers, Legal Updates

Sale of shares by Equity International in the pre-IPO share sale of SAMHI Hotels Limited to Nuvama Crossover Opportunities Fund, Think Capital and Mrs. Madhuri Madhusudhan Kela

JSA advised Equity International, a US based private equity fund, in relation to the pre-IPO sale of shares of SAMHI Hotels Limited (SAMHI), by (a) Nuvama Crossover Opportunities Fund- Series III, Nuvama Crossover Opportunities Fund- Series IIIA and Nuvama Crossover Opportunities Fund- Series IIIB (collectively Nuvama); (b) TIMF Holdings and (c) Madhuri Madhusudan Kela.

As part of the pre-IPO funding round, Equity International partially exited from its investment in SAMHI by a sale of its equity shares held in SAMHI immediately prior to the IPO of SAMHI which successfully listed on September 22, 2023.

The Share Sale Transaction team was: Partner – Tirthankar Datta and Associate – Gail Pereira.

IPO Related Inputs from the JSA Capital Markets Team: Partner – Arka Mookerjee and Siddhartha Desai.

JSA Newsletter | Indirect Tax | September 2023

Please click here to download the Newsletter as PDF.

Recent Rulings by Courts and Authorities

Supreme Court

Dues under Customs Act do not override the rights of secured creditors

In the case of Industrial Development Bank of India (“IDBI”) v. Superintendent of Central Excise and Customs & Others[1], IDBI was providing financial support to Sri Vishnupriya Industries Limited (“SVIL”), for which SVIL inter alia hypothecated movable properties as security. This included imported machinery from Italy which was warehoused in a private bonded warehouse. SVIL did not clear the goods for home consumption even after expiry of the period for warehousing and consequently, customs authorities issued a SCN[2] demanding customs duty on the Company. However, the Company contested the SCN, resulting in the customs authorities confirming the demand of duty in the SCN and ordered for auctioning of the warehoused goods.

In the meanwhile, the petition filed by the Company for winding up was admitted by the Andhra Pradesh High Court (“AP High Court”). Thereupon, the official liquidator vide application under Section 468 of the Companies Act, 1956 (“Companies Act”) directed the customs authorities to handover possession of the imported goods, which had been put up for auction. An application before AP High Court in this regard was allowed holding that the official liquidator is a custodian of all the properties of the Company and any person making any claim against the Company has to prove his claim before the official liquidator. Aggrieved by the view of the AP High Court, the custom authorities preferred an appeal before the division bench and it was decided in their favor that the customs authorities have the first right to sell the imported goods under the Customs Act and adjust the sale proceeds towards payment of customs duty. IDBI, as a secured creditor, challenged the said decision of the division bench of AP High Court before the Supreme Court.

The Supreme Court perused the provisions of Companies Act and the Customs Act, 1962 (“Customs Act”) pertaining to preferential claims and held that the provisions in the Customs Act do not override the statutory preference in terms of Section 529A of the Companies Act, which treats the secured creditors and the workmen’s dues as overriding preferential creditors. Accordingly, the decision of the AP High Court was set aside, and Supreme Court ordered to pay the auction proceeds of the imported goods to the official liquidator, for distribution in accordance with the provisions of the Companies Act.

Interest and penalty cannot be levied on delayed payment of customs surcharge, CVD and SAD in absence of statutory provisions

In the case of Union of India & Ors. v. Mahindra and Mahindra Ltd[3], the assessee engaged in the manufacture of automobiles, filed applications before the Settlement Commission in relation to customs duty demand pertaining to under declaration of value of imported goods. The Settlement Commission confirmed the duty demand along with interest and partial penalty. The assessee approached the High Court of Bombay (“Bombay High Court”) challenging the levy of interest and penalty on additional duties of customs, such as CVD[4], SAD[5] and surcharge, arguing that there is no enabling provision under the Customs Act and rules issued thereof for imposition of interest and penalty on said duties of customs.

The Bombay High Court held that interest and penalty provisions under the Customs Act and rules issued thereof are applicable with respect to short payment of BCD[6] only, and there is no specific provision under Customs Act and rules issued thereof to levy interest or penalty on the additional duties such as CVD, SAD and surcharge. Further, a taxing statute must be construed strictly, and tax can be imposed only when the language of the statute expressly provides for it. Thus, in the absence of any substantive provision under the Customs Act and rules issued thereof the Bombay High Court quashed the orders of Settlement Commission and directed refund of interest and penalty.

Against the order of Bombay High Court, the tax authorities preferred a SLP[7] before the Supreme Court, which was dismissed and accordingly, the decision of the Bombay High Court i.e., interest/ penalty cannot be levied on delayed or non-payment of CVD/SAD and surcharge, has attained finality.

JSA Comment: This decision has reinforced the well-established principle that no demand can be sustained without necessary statutory provisions. Considering that the Department’s SLP is dismissed, the taxpayers may consider evaluating the position adopted by them and seek refund of interest and penalty paid on delayed payment of CVD and other levies.

High Court

ITC[8] cannot be denied to recipient for non-reporting by supplier, without conducting proper investigation against supplier

In the matter of Suncraft Energy Pvt. Ltd. v. The Assistant Commissioner, State Tax, Ballygunge Charge[9], the assessee was availing ITC of GST[10] paid on procurements. However, some of vendors did not report the details of the supplies made in their outward GST returns (GSTR-1) and consequently the details of such supplies did not appear in the assessee’s GSTR-2A. The tax authorities conducted scrutiny of the returns filed by the assessee and issued an SCN seeking reversal of ITC to the tune of difference in the amount between Form GSTR-3B vis-à-vis Form GSTR-2A. Further, no investigation was conducted on the concerned vendor who did not report the sales made to the assessee. Without appreciating the submissions made by the assessee in relation to the said notice, the GST demand was confirmed by the tax authorities.

Being aggrieved by the above, the assessee approached the Calcutta High Court, which ruled in favor of the assessee and made the following observations:

In order to avail ITC, the conditions under Section 16(2) of the CGST Act[11] are required to be fulfilled. In the instant case, the fact that the assessee is in possession of a valid tax invoice and has received the services is not in dispute. The payment of tax to the vendors has also been substantiated through the tax invoice and bank statement. Therefore, the tax authorities have blatantly ignored such evidence and denied ITC to the assessee, merely by relying upon the mismatch between Form GSTR-2A and Form GSTR-3B, without investigating the actions of the vendor.
There cannot be automatic reversal of ITC from the buyer on non-payment of tax by the supplier. In case of default in payment of tax by the seller, recovery thereof will be made from the seller. However, reversal of ITC availed by the buyer will also be an option available with the tax authorities, to address exceptional situations like collusion between the taxpayer and the supplier, missing dealer, closure of business by supplier or supplier not having adequate assets, etc.
Further, furnishing of outward supplies in Form GSTR-1 by the corresponding supplier and the facility to view the same in Form GSTR-2A (of the recipient) is to facilitate the taxpayers and does not impact the taxpayer’s ability to claim ITC.

On the basis of the above, the Calcutta High Court set aside the impugned demand order, with a direction to revenue authorities for proceeding against the vendor first, and only in exceptional circumstances proceedings against the buyer should be initiated.

Recipient not entitled to ITC unless tax is deposited by the supplier to Government

In contrast to the above decision, the Patna High Court in the case of Aastha Enterprises v. The State of Bihar[12], dismissed the writ petition of an assessee and reinforced the importance of fulfillment of all conditions prescribed under the CGST Act for availing ITC, making the following observations:

Section 16(2) of the CGST Act provides conditions to claim ITC. These conditions are to be fulfilled cumulatively and not in isolation. If any condition is not fulfilled, then the purchaser is not eligible to claim the ITC. ITC is a benefit or concession and not a vested right and the benefit will be available only if all the conditions for claiming the benefit are complied with.
Even though the purchaser has produced evidence in the form of invoices, account details showing payment made to the supplier and documents evidencing transportation of goods, the recipient should not be entitled for ITC unless tax is paid by the supplier. The recipient is still required to fulfil the condition provided in Section 16(2)(c) of the CGST Act, which states that credit can be availed by the purchaser only if tax has actually been paid to the government.
Moreover, the fact that there is a mode of recovery from supplier under the statute would not absolve the ultimate liability of the assessee to pay tax to the government. Further, rejecting the double taxation argument of the assessee, the Patna High Court stated that taxation is mandatory extraction for public welfare.

JSA Comment: The Patna High Court judgment has come as a wake-up call. It requires the purchasing dealer to be vigilant not only in connection with its own compliance but also in connection with compliance by the supplier in order to avail itself of the benefit of ITC. While there are judgments such as the recent order of Calcutta High Court in the matter of Suncraft Energy Pvt Ltd (supra), allowing ITC on the ground that the purchasing dealer cannot be held liable for the actions of the supplier, any default by the supplier is likely to result in litigation. Considering divergent decisions on this issue by different high courts, the matter is likely to be litigated before the Supreme Court.

Transferring digital work to foreign-recipient not OIDAR merely because of being sent electronically

In the case of Globolive 3D Private Limited v. Union of India[13], the assessee, entered into a service agreement with Emirates Defence Industries Co. PJSC for supplying satellite derived 3D city models of specific areas in Abu Dhabi. In this regard, assessee imported high-resolution stereo satellite images, processed and digitized such satellite images, and thereafter sent the same to relevant parties via file transfer protocol. The assessee adopted the position that the services supplied by them are export of services under GST, and therefore eligible for refund of unutilized ITC under section 54 of CGST Act.

The refund claims of the assessee were initially sanctioned by the revenue authorities, however, subsequently they filed an appeal against such refund order, on the ground that the activity of purchasing the satellite extracted images from unrelated party, processing it as per the customer requirements, and transferring the same through online medium was nothing but OIDAR Services[14]. The appellate authority allowed the appeal considering the submissions of the GST authorities.

Being aggrieved by the said order, the assessee filed a writ petition before the Bombay High Court on the ground that the assessee is undoubtedly involved in export of services, since the location of service recipient is outside the Indian territory, and the assessee has complied with the conditions of Section 2(6) of IGST Act[15]. The Bombay High Court allowed the writ petition and made the following observations:

The service is intended for recipient located outside India, and the place of supply was agreed to be outside India. The payment was received in convertible foreign exchange, confirming compliance with all the conditions for export of services as laid down under Section 2(6) of the IGST Act.
The classification of any service as OIDAR Services is not merely on the basis of delivery being mediated by information technology over the internet or through an electronic network. The specialized nature of services provided by the assessee, involving creation of 3D city models are not works which would be freely available on the internet and hence, did not fit the criteria of automated supply with minimal human intervention as specified in the definition of OIDAR Services. Thus, the Court emphasized that such services were not automated and characterized by human involvement, unlike typical OIDAR Services.
Adopting the revenue’s interpretation would lead to an absurd outcome, categorizing any form of electronic communication or providing of service through the medium of emails or any electronic transfer of data as OIDAR Services, which contradicted the intended meaning of OIDAR Services under IGST Act.

Notifications and Circulars

CGST (Second Amendment) Rules, 2023

Notification No. 38/2023 dated August 4, 2023

The Government has notified the following amendments to the CGST Rules[16], which have come into effect from August 4, 2023 (except expressly provided below):

Requirement to furnish details of bank account at the time of registration: Taxpayers are required to furnish information of bank account on GST portal within 30 (thirty) days from the date of registration or before filing of first GSTR-1, whichever is earlier. Contravention of this provision may lead to suspension of registration.
Extension of period for filing an application for revocation of cancellation of registration: Taxpayers can file an application for revocation of cancellation of registration within a period of 90 (ninety) days (earlier, the period was 30 (thirty) days), from the date of the service of order of cancellation of registration.
Changes related to Returns: Rule 88D has been inserted to provide for manner of dealing with difference in ITC availed in GSTR-3B and ITC reflecting in GSTR-2B. As per the said provision, the GST Council will recommend amount and percentage of difference beyond which taxpayer will be intimated in Part A of DRC-01C to pay amount equivalent to excess ITC availed or furnish explanation in respect thereof within 7 (seven) days. If the taxpayer fails to furnish any satisfactory response or pay amount equivalent to differential ITC, proceedings under Section 73 or Section 74 of the CGST Act will be initiated. In furtherance of this, Rule 59 is also amended to bar filing of GSTR-1 for subsequent tax period where (a) requisite payment or explanation is not furnished, as per Rule 88D; or (b) taxpayer has not furnished details of bank account.
Particular of tax invoices issued by e-commerce operator or supplier of OIDAR services: Rule 46 is amended to provide that tax invoice for supplies made by e-commerce operator or supplier of OIDAR services to an unregistered person only needs to contain name of State of recipient and same will be deemed as address on record of the recipient.
Value of exempt supply to include supplies from Duty Free Shops to inbound passengers: Clause (b) of Explanation to Section 17(3) of the CGST Act, allows the Government to prescribe value of such activities or transaction under Para 8(a) of Schedule III of the CGST Act viz. supply of warehoused goods, that would be included in ‘value of exempt supply’ for reversal of ITC. In furtherance of the same, Explanation is added to Rule 43 of the CGST Rules to provide that value of supply of goods from Duty Free Shops at arrival terminal in international airports to incoming passengers will be included in value of exempt supply. This amendment will be effective from October 1, 2023.
Interest on delayed refund: Rule 94 is amended to exclude following period for calculating interest on delayed refund under Section 56 of the CGST Act:
1. Period beyond 15 (fifteen) days of receipt of notice in RFD-08 taken by taxpayer to furnish reply or for submitting additional documents;
2. Period taken by taxpayer to correctly furnish or validate details of bank account.
Manual filing of appeal before the Appellate Authority: The taxpayer has been given an option of manually filing an appeal to the Appellate authority in FORM GST APL-01 along with relevant documents if;
1. The Commissioner has so notified, or,
2. The same cannot be filed electronically due to non-availability of the decision or order to be appealed against on the common portal.

In such cases, a provisional acknowledgment will be issued to the appellant immediately.

CBIC exempts LPG[17] imports from AIDC[18]

Notification No. 51/2023-Customs dated August 31, 2023

The CBIC has issued a notification to exempt imports of LPG, liquified propane and liquified butane from 15% AIDC with effect from September 1, 2023.

The CGST (Amendment) Act, 2023 and the IGST (Amendment) Act, 2023

Act No. 30/ 2023 and Act No. 31/ 2023 dated August 18, 2023

Pursuant to the recommendations of the GST Council recently, Parliament has passed 2 (two) GST Amendment Bills inter alia clarifying the taxation of online gaming, casinos and horse racing, which received assent of the President on August 18, 2023. The date on which respective provisions of these enactments would come into effect would be notified by the Government. The highlights of the key amendments proposed in the above amendment acts are as follows:

Online Gaming:
- Section 2 of the CGST Act is amended to define terms ‘online gaming’, ‘online money gaming’, ‘specified actionable claim’ (betting, casinos, gambling, horse racing, lottery and online money gaming) and ‘virtual digital asset’.
- Definition of ‘supplier’ under Section 2(105) is expanded to include person who organizes or arranges supply of specified actionable claim.
- Definition of OIDAR services is amended to exclude online money gaming from its scope.
- Entry 6 of Schedule III is amended to exclude specified actionable claims from scope of no supply transactions.
- Section 24 of CGST Act is amended to mandate GST registration for a person located outside India supplying online money gaming services in India.
- Section 14A of the IGST Act is inserted to provide for special provisions for registration when online money gaming services are supplied by a person located outside India to a person located in India.
Place of Supply:

Section 10 of the IGST Act is amended to provide for place of supply of goods supplied to an unregistered person. In such cases, place of supply will be location of address of recipient as recorded in tax invoice issued by supplier or location of supplier where address is not recorded in tax invoice.

This Newsletter has been prepared by:

Manish Mishra
Partner & Head of Practice – Indirect Tax

Shareen Gupta
Partner

Ankur Mittal
Of-Counsel

Chayank Bohra
Associate

For more details, please contact [email protected]

[1] 2023 (8) TMI 945 – Supreme Court

[2] Show Cause Notice

[3] 2023 (8) TMI 135 – SC Order

[4] Countervailing Duty

[5] Special Additional Duty

[6] Basic Customs Duty

[7] Special Leave Petition

[8] Input Tax Credit

[9] 2023 (8) TMI 174 – Calcutta High Court

[10] Good and Services Tax

[11] Central Goods and Services Tax Act, 2017

[12] 2023 (8) TMI 1038 – Patna High Court

[13] 2023 (8) TMI 1264 – Bombay High Court

[14] Online Information Database Access or Retrieval services

[15] Integrated Goods Services Tax Act, 2017

[16] Central Goods and Services Tax Rules, 2023

[17] Liquefied Petroleum Gas

[18] Agriculture Infrastructure Development Cess

Tags IDBI, Indirect Taxes, JSA, Leading Law Firm, Leading Lawyers, Legal Updates, Supreme Court

DRHP of Fedbank Financial Services Limited

JSA advised ICICI Securities Limited, BNP Paribas, Equirus Capital Private Limited and JM Financial Limited, the book running lead managers in relation to the proposed initial public offering of equity shares of Fedbank Financial Services Limited (“Company”) comprising a Fresh Issue of up to ₹ 7,500.00 million and an Offer for Sale of up to 16,497,973 Equity Shares by The Federal Bank Limited and up to 53,825,435 Equity Shares by True North Fund VI LLP

Fedbank Financial Services Limited is a retail focused non-banking finance company (“NBFC”) promoted by The Federal Bank Limited. The Company has the second lowest cost of borrowing among the micro, small and medium enterprises (“MSMEs”), gold loan and MSME & gold loan peer set in India in Fiscal 2023. (Source: CRISIL Report) As on March 31, 2023, the Company had the third fastest AUM growth among NBFCs in the peer set in India with a three-year CAGR of 33% between Fiscals 2020 and 2023. (Source: CRISIL Report) Further, the Company is one among five private banks promoted NBFCs in India and the fastest growing gold loan NBFC in India among the peer set as of March 31, 2023. (Source: CRISIL Report).

Our Transaction Team Comprised Lead Partner – Arka Mookerjee, Partner – Siddhartha Desai, Senior Associate – Anshu Bansal, Associate – Shambhavi Kumar and Varshini Puni and Junior Associate – Anvita Sinha.

Tags Banking and Finance, Capital Markets, Deal Making, DRHPs, JSA, Leading Law Firm, Leading Lawyers

JSA Finance | I&B Brief | August 2023

This is a compilation of all Finance and I&B Brief – publications, deals, events, articles, prisms and newsletters circulated in the month of August 2023 by JSA.

To read further details, click here or refer to the below document.

For more details, please contact [email protected]

*In case the document is not visible on the device you are using, please click the link above.

Tags Articles, Events, JSA, JSA Prism, Legal Updates, Newsletters, Publications

JSA Newsletter | Insolvency | May-June 2023

Please click here to download the Newsletter as PDF.

This edition of the Insolvency Newsletter covers key updates on judicial pronouncements under IBC during May – June 2023 by the Supreme Court of India, National Company Law Appellate Tribunal, and some of the National Company Law Tribunals.

Impacting initiation of CIRP by financial creditors

Vidarbha differentiated: Once payment default is established, application filed under Section 7 of IBC must be admitted

In the case of M. Suresh Kumar Reddy v. Canara Bank & Ors[1], an application was filed for initiation of CIRP against Kranthi Edifice Private Limited (“Kranthi Edifice”) by Canara Bank. The application was admitted by NCLT, Hyderabad. M. Suresh Kumar Reddy (a suspended director of Kranthi Edifice) appealed the admission order before the NCLAT, and subsequently before the Supreme Court.

The Supreme Court, following its decisions in Innoventive Industries Limited v. ICICI Bank[2] (“Innoventive Industries Judgment”) and E.S. Krishnamurthy v. Bharath Hi-Tech Builders Private Limited[3] (“E.S. Krishnamurthy Judgment”), held that once the NCLT is satisfied that a payment default has occurred, there is hardly any discretion left with it to refuse the initiation of CIRP against the CD. It is only where the NCLT finds that a debt has not yet become due and payable, that it may reject the application filed for initiation of CIRP against a CD.

The Supreme Court further clarified that its decision in Vidarbha Industries Power Limited v. Axis Bank Limited[4] cannot be construed as taking a view contrary to the Innoventive Industries Judgment and E.S. Krishnamurthy Judgment.

Petition for initiation of CIRP which is disposed of basis consent terms can be revived without consent of NCLT

In the case of IDBI Trusteeship Services Limited vs. Nirmal Lifestyle Limited[5], an application was filed by IDBI Trusteeship Services Limited (“IDBI Trusteeship”) seeking initiation of CIRP against Nirmal Lifestyle Limited (“Nirmal Lifestyle”). The application was admitted by NCLT, Mumbai. Post admission of the application, Nirmal Lifestyle and IDBI Trusteeship entered into settlement (“NL Settlement Terms”). In view of the NL Settlement Terms, the RP of Nirmal Lifestyle filed an application under Section 12A of IBC for withdrawal of the application filed for initiation of CIRP of Nirmal Lifestyle. NCLT allowed the withdrawal and took the NL Settlement Terms on record.

Thereafter, Nirmal Lifestyle failed to comply with the NL Settlement Terms. Accordingly, IDBI Trusteeship filed an application before NCLT, Mumbai for revival of the CIRP against Nirmal Lifestyle. However, NCLT, Mumbai dismissed the application observing that IBC does not provide for reopening/revival of applications. The decision of NCLT, Mumbai was challenged before NCLAT.

The NCLAT relied on the judgment in SRLK Enterprises LLP v. JALAN Transolutions (India) Ltd[6], and noted that the application for initiating CIRP against Nirmal Lifestyle was withdrawn by placing on record the NL Settlement Terms. The NCLAT held that in such cases the petition ought to be revived if the consent terms provide for revival of the petition upon default of the consent terms.

Even if the governing law of the term loan agreement is English law, a creditor can file an application for initiation of CIRP in the jurisdiction of the registered office of the corporate debtor

In the case of Rajesh Kumar Modi v. Punjab National Bank (International) Limited & Ors.[7], a shareholder of La Trendz Fabrica Private Limited (“La Trendz”) filed an appeal before NCLAT, New Delhi challenging an order of NCLT, Mumbai admitting La Trendz into CIRP. La Trendz was admitted into CIRP upon an application filed by Punjab National Bank (International) Limited as the La Trendz had failed to meet its payment obligations under the loan agreements which were governed under English law. The NCLAT held that the financial creditor can file an application for initiating CIRP against the CD in the jurisdiction of the registered office of the CD, even if the governing law of the term loan agreement is English law.

Absence of components of interest and fixed repayment period does not disqualify a debt from being a ‘financial debt’ under IBC

In the case of Shivam Agrioils Private Limited v. Shree Krishna Vanaspati Industries Private Limited[8], the NCLAT held that the liability to pay interest on a loan is not the only criterion for determining the time value of money of financial debt under IBC. It further held that that a debt is not disqualified as being financial debt merely because it carried no interest or did not have a fixed repayment term.

On the aspect of interest, the NCLAT relied upon the decision of Orator Marketing (P) Ltd. v. Samtex Desinz (P) Ltd.[9] (“Orator Judgment”) where the Supreme Court has already settled that the component of interest is not an essential condition for bringing a debt within the fold of ‘financial debt’. In the Orator Judgment, the Supreme Court had observed that “financial debt” has been defined to mean debt along with interest if any and that the words “if any” could not have been intended to be otiose. Therefore, if there is no interest payable on the loan, only the outstanding principal would qualify as a financial debt.

Impacting initiation of CIRP by Operational Creditor

A partnership firm which is an ‘operational creditor’ need not be registered for filing an application for initiating CIRP

In the case of Haren Sanghvi & Associates vs CDigital Arts & Crafts Private Limited[10] an application was filed by Haren Sanghvi & Associates (“Haren Associates”) for initiating CIRP against CDigital Arts & Crafts Private Limited (“CDigital”). CDigital contended that Haren Associates is not a registered partnership and hence has no locus to file the application for initiating CIRP against CDigital.

The NCLT held that it is well settled law that there is no requirement or a pre-condition that a partnership firm which is an operational creditor must be a registered partnership firm to be able to file an application for initiating CIRP against a CD.

Inadequacy of stamp duty paid on an agreement cannot disqualify operational claims

In the case of Smartworks Coworking Spaces Private Limited v. Turbot HQ India Private Limited[11], Smartworks Coworking Spaces Private Limited (“Smartworks”) was entitled to receive lease rentals from Turbot HQ India Private Limited (“Turbot”) for leasing the coworking office space throughout the lock-in period, as per the terms of the lease agreement. During the lock-in period, Turbot was not allowed to terminate the lease agreement. However, Turbot terminated the lease agreement much before the expiry of the lock-in period. This termination constituted a breach of contract and gave rise to an operational claim. Basis this, Smartworks filed an application for initiation of CIRP against Turbot. This was challenged by Turbot on the ground that the lease agreement, being the basis of the claim of Smartworks, was insufficiently stamped.

The NCLAT held that Turbot had acted upon the lease agreement by taking possession of the premises and paying monthly rentals, etc., despite the lease agreement being insufficiently stamped. Accordingly, having acted upon the lease agreement, Turbot is obligated to pay the dues as agreed therein, which can form the basis of initiation of CIRP. Insufficiency of stamp duty would not bar such claims.

Maintainability of an application under Section 9 of IBC for implementation of an Arbitral Award

In the case of M/s. KK Ropeways Ltd. Vs. M/s. Billion Smiles Hospitality Pvt. Ltd.[12], M/s. KK Ropeways Ltd., (“KK Ropeways”) obtained an ex-parte arbitral award of INR 26,33,022 (Indian Rupees twenty six lakh thirty three thousand twenty two only) (along with interest) (“Arbitral Award”) against Billion Smiles Hospitality (“Billion Smiles”) of recovery of lease rentals, under a lease/ rent agreement. Billion Smiles preferred an appeal under Section 34 of the Arbitration Act, before the Delhi High Court, assailing the Arbitral Award. Pending the appeal, KK Ropeways filed an application for initiation of CIRP against Billion Smiles before NCLT, Bengaluru for default on account of non-payment under the Arbitral Award. NCLT, Bengaluru dismissed KK Ropeways’ application on the ground that, inter alia, since Billion Smiles had filed an appeal against the award shows that the operational debt claimed by the creditor is ‘under dispute’.

In appeal, the NCLAT upheld the position that as Billion Smiles had challenged the Arbitral Award under the Arbitration Act, the `operational debt’ is under ‘dispute’ and accordingly petition by KK Ropeways under Section 9 of IBC is not maintainable.

For a detailed analysis, please refer to the JSA Prism of July 31, 2023.

An unsigned document attached to an email from the corporate debtor cannot be treated as an acknowledgement of debt

In the case of G.L. Shoes v. Action Udhyog Private Limited[13], Action Udhyog Private Limited (“Action Udhyog”) had attached an unsigned statement of account to an email message with no other explanatory contents. This was argued to constitute an acknowledgement of debt for the purposes of Section 18 of the Limitation Act, 1963 (“Limitation Act”). NCLT, New Delhi rejected this argument on the ground that the statement of account was contained in an ‘external file attachment’ to the main body of the email and that the statement was neither duly authenticated with the signature of an authorized person of Action Udhyog, nor did it bear its company seal. Accordingly, NCLT held that requirements of Section 18 of the Limitation Act were not getting fulfilled and the petition was therefore barred by limitation. On appeal, the NCLAT confirmed the NCLT’s decision and observed that for the purposes of Section 18 of the Limitation Act, an acknowledgment must be clear and unambiguous, and needs to be in writing and signed by the party against whom such right is claimed. The NCLAT reiterated that these requirements must be mandatorily satisfied irrespective of whether the acknowledgement is in electronic or in physical form and these cannot be exempted merely because a document is sent via e-mail.

Interest crystalized post filing of an application cannot be claimed

In the case of Hindustan Zinc Limited v. Mahindra Susten Private Limited[14], the NCLAT held that once the CD has paid the crystalised amount claimed by an operational creditor under an application filed under Section 9 of IBC, the operational creditor cannot maintain a claim for interest for the period after the filing of such application under the Section 9 application. The NCLAT held further that such a claim would not be maintainable even if the operational creditor has reserved its right (in the application) to claim further interest.

The NCLAT, however, clarified that the dismissal of such an application does not preclude the operational creditor from pursuing other legal proceeding against the CD to recover such further interest in event the liability in respect of further interest is not discharged by the CD.

Impacting initiation of CIRP by Corporate Applicant

No mandatory requirement to issue notice to the creditor(s) at pre-admission stage

In the case of SMBC Aviation Capital Ltd. vs Interim Resolution Professional of Go Airlines (India) Ltd.[15], while deciding an operational creditor’s objection in respect of initiation of CIRP by the Corporate Applicant under Section 10 of IBC, the NCLAT held that there is no mandatory requirement to issue notice to the creditor(s) of the Corporate Applicant at the pre-admission stage, while deciding an application under Section 10 of IBC.

In this regard, the NCLAT made reference to Rule 7 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 which only requires the Corporate Applicant to serve a copy of the application for initiating the CIRP to IBBI prior to filing the same before the NCLT.

The NCLAT, however, recognised that the NCLT may exercise discretion on a case to case basis, to require issuance of notice to the creditor(s) of the Corporate Applicant.

Jurisdictional issues of NCLT/NCLAT

NCLAT does not have the power to review its own judgement, but has the power to recall its judgement on specified grounds

In the case of Union Bank of India v. Dinkar T Venkatasubramanian & Ors.[16] a 5 (five) member bench of the NCLAT, New Delhi put to rest the long-standing conundrum on the NCLAT’s power to recall its orders[17]. The NCLAT held that it possesses the inherent powers to recall its judgment.

While recognizing the distinction between powers to review and recall, the NCLAT held that the power to review its judgment is not conferred upon NCLAT but power to recall its judgment is inherent to the NCLAT’s powers under Rule 11 of the National Company Law Appellate Tribunal Rules, 2016. The NCLAT, however, clarified that the power of recall cannot be used to re-hear a case and such power may only be exercised in the cases of procedural errors, or fraud.

Computation of limitation period for filing appeal ought to exclude time taken for obtaining certified copy of order

In the case of Sanket Kumar Agarwal & Anr v APG Logistics Private Limited[18], Sanket Kumar Agarwal (“Sanket”) had filed an application to initiate CIRP against APG Logistics Private Limited and the same was dismissed by the NCLT, Chennai vide order dated August 26, 2022. On September 2, 2022, Sanket filed an application for obtaining a certified copy of the NCLT dismissal order. On September 15, 2022, the order was uploaded on the website of the NCLT and a certified copy was provided to Sanket on the same day. Sanket lodged an appeal before the NCLAT on October 10, 2022 in the e-filing mode along with an Interlocutory Application seeking condonation of delay of 5 (five) days. The physical copy of the appeal was filed on October 31, 2022.

On January 9, 2023, NCLAT dismissed the appeal for being barred by limitation. NCLAT observed that the appeal was lodged through the e-portal on October 10, 2022, which was 46 (forty six) days after the NCLT order. It observed that while Section 61(2) of IBC provides a 30 (thirty) day deadline for preferring an appeal against an order of the NCLT, the NCLAT can condone a delay of upto 15 (fifteen) days if sufficient cause is shown. NCLAT also held that the ingredients of Section 61 of IBC do not stipulate that an aggrieved person has to wait till he is in receipt of a certified copy of the impugned order before preferring an appeal. Hence, Sanket filed a civil appeal before the Supreme Court.

On appeal, the Supreme Court referred to Section 12(2) of the Limitation Act which provides that the time taken for obtaining a copy of order to be filed with an appeal, has to be excluded while computing the period of limitation. The Supreme Court thereafter held that the time taken by the NCLT for providing the certified copy of the order should be excluded from computation of limitation under Section 61(2) of IBC.

Position on intervention applications filed in Section 7 proceedings

In the case of Vikash Kumar Mishra & Ors. vs. Orbis Trusteeship Service Pvt. Ltd. & Anr[19], an application was filed by Orbis Trusteeship Services Pvt. Ltd. (“Orbis”) to initiate CIRP against Kindle Infraheights Pvt. Ltd. (“Kindle”). During pendency of the Section 7 application, some of Kindle’s homebuyers filed an intervention application on the ground that the Section 7 application ought to be dismissed in view of an order of the UP RERA in their favour. The NCLT, New Delhi rejected the intervention application as non- maintainable. The decision of NCLT was challenged before NCLAT.

NCLAT relied on its judgments passed in Surinder Pal Singh & Ors. Vs. Spaze Towers Pvt. Ltd.[20] and Prayag Polytech Pvt. Ltd. v Hind Tradex Ltd.[21], and held that till the application for initiation of CIRP against Kindle is admitted, the intervention application filed by homebuyers would not be maintainable – the NCLT to consider only issues of default.

However, in contrast to the judgment of Vikash Kumar Mishra & Ors. vs. Orbis Trusteeship Service Pvt. Ltd. & Anr the NCLAT in the case of Airwil Intellicity Social Welfare Society v. Ascot Projects Private Limited and Ors.[22], has held that an intervention application by a society of unit buyers alleging fraud against the CD under Section 65 of IBC, could be allowed even prior to admission of a Section 7 application. The reason for this distinction is that a CIRP initiated with fraud and malicious intent would be a nullity before law.

Impacting resolution process and resolution plans

Secured creditor can retain security interest

In the case of M/s Vistra ITCL (India) Ltd v. Mr. Dinkar Venkatasubramanian[23], loans availed by Brassco Engineering Limited (“BEL“) and W.L.D. Investments Private Limited (“WIPL”) were secured by pledges on certain shares created by Amtek Auto Limited (“Amtek Auto”). CIRP was initiated against Amtek Auto. The claims filed by the security trustee for BEL and WIPL, as secured financial creditors were rejected by the RP. In the interim, the CoC was considering a resolution plan submitted by Deccan Value Investors (“DVI”). The NCLAT held that the security trustee was not a financial creditor of Amtek Auto and could not be treated as such in the resolution plan.

On appeal, the Supreme Court noted that a highly peculiar situation would arise in so far as secured creditors, who are neither financial creditors nor operational creditors are concerned, wherein such creditors would be denied the benefit of ‘security interest’, and yet not be treated as financial creditors or operational creditors.

It therefore held that the security trustee (acting for BEL and WIPL) will be entitled to all rights and obligations as applicable to a secured creditor in terms of Sections 52 and 53 of IBC and in accordance with the pledge agreement executed in favor of the security trustee.

No payment to related party under approved resolution plan

In the case of M.K. Rajagopalan v. Dr Periasamy Palani Gounder[24], a revised resolution plan received by the RP of Appu Hotels Limited (“Appu Hotels”) was directly placed for NCLT’s approval by the RP instead of it being placed before the CoC, for voting and approval. The NCLT subsequently approved the revised resolution plan. The approved resolution plan envisaged no payments to the related parties of Appu Hotels. The related parties of Appu Hotels challenged the approval order of the NCLT before the NCLAT. The NCLAT in its order held that the claims of a related party financial / operational creditor cannot be discriminated against from that of unrelated financial / operational creditor.

The order of the NCLAT was appealed before the Supreme Court. Some of the key questions which arose before the Supreme Court were as follows:

(i) whether the NCLT had erred in approving the resolution plan which was directly placed before it for approval after re-submission, instead of it being put up before the CoC for voting and approval; and (ii) was the NCLT order therefore void and non-est in law; and
whether the related party financial / operational creditor of a corporate debtor should be paid at par with unrelated financial / operational creditor.

On the first issue, the Supreme Court observed that what is necessary under the law concerning commercial wisdom of CoC is that the CoC ought to examine all the relevant information available before it and duly deliberate on the same. Every aspect relating to resolution plan, including its financial layout, must be placed before the CoC before it could be said to have arrived at a considered decision in its commercial wisdom. Therefore, if a modified resolution plan, regardless of how minor the modification/revision may be, is not approved by the CoC, then presenting it to the NCLT for approval is a serious irregularity that cannot be rectified.

On the second issue, it held that IBC does not provide for parity in payment between a related party financial / operational creditor and an unrelated party financial / operational creditor.

For a detailed analysis, please refer to the JSA Prism of May 18, 2023.

Time spent on pending litigations is not a modification of the resolution plan and cannot, therefore, be a ground to stop its implementation

In the case of State Bank of India v. MBL Infrastructure Limited[25], the NCLAT held that the NCLT’s order for exclusion of time from calculation of the period for implementation of an approved resolution plan on account of pending litigations could not be construed as modification of resolution plan. Hence, this was no ground for the CoC to stop the implementation of the resolution plan.

Further, the NCLAT observed that in a case where a resolution plan has been approved and the approval has also received confirmation from the Supreme Court, it is obligatory on all stake holders to initiate the implementation of the resolution plan. The viability and feasibility of the resolution plan is required to be considered at the stage when the plan is to be approved by the CoC. After the plan has been approved, the issue of viability and feasibility cannot be raised.

ARC does not require prior approval of RBI for participating as RCA

In the case of Puissant Towers India Pvt. Ltd v. Neueon Towers Limited and Ors.^[26], NCLT, Hyderabad rejected the resolution plan which was approved by the CoC of Neueon Towers Limited (“Neueon Towers“) and ordered liquidation of Neueon Towers. The NCLT observed that given that one of the RAs was an ARC, RBI approval was required for the ARC to be able to implement the plan, and such requirements made the resolution plan conditional.

On appeal, the NCLAT, taking note of RBI’s submission to this effect, held that prior permission of the RBI is not required for submission of a resolution plan by an ARC. Noting that the principal objective of IBC is ‘revival of corporate debtor and resolution’, the NCLAT set aside the order of liquidation passed by the NCLT and remanded the matter to the NCLT for approval of the resolution plan.

Copy of the resolution plan under adjudication cannot be disclosed to a non- stakeholder

In the case of Rupinder Singh Gill vs. Three C Universal Developers Pvt. Ltd. Through Resolution Professional Rakesh Kumar Gupta[27], Rupinder Singh Gill (“Rupinder”) had entered into an agreement to sale dated October 8, 2018 with Three C Universal Developers Pvt. Ltd. (“Three C”) to purchase the entire shareholding of Challengerz Websolutions Pvt. Ltd. and Hacienda Infosoftech Pvt. Ltd (“Companies”). However, the transfer of the sale shares was stopped pursuant to an injunction order of the NCLT dated April 5, 2019. Pending the final transfer of the shares, CIRP was initiated against Three C on December 17, 2019.

The resolution plan submitted by M/s Ace Infracity Developers was approved by the CoC (“Ace Resolution Plan”). The RP of Three C filed an application under Section 31 of IBC before the NCLT seeking approval of the Ace Resolution Plan. During pendency of the Section 31 application, Rupinder filed an intervention application seeking a copy of the Ace Resolution Plan. The intervention application filed by Rupinder was rejected by the NCLT, New Delhi on the ground that Rupinder did not have any locus. Further, Rupinder had not filed any claim in the CIRP of Three C. The decision of NCLT was challenged before NCLAT.

NCLAT relied upon the judgments of Association of Aggrieved Workmen of Jet Airways (India) Limited Vs. Jet Airways (India) Ltd.[28] and Vijay Kumar Jain Vs. Standard Chartered Bank & Ors.[29] to hold that the copy of the resolution plan, which is still pending adjudication by the adjudicating authority, cannot be given to a party who is neither a claimant nor a creditor nor a person entitled to attend a meeting of the CoC or a person authorized by the CoC to attend the meeting in the CIRP of a CD.

CoC in its commercial wisdom can allow revision of resolution plans through challenge process inter-se the prospective resolution applicants

In the case of Consortium of Prudent ARC Ltd. vs. Mr. Ravi Shankar Devarakonda & Ors^[30], Prudent ARC Ltd. (“Prudent”) filed an application challenging the inter-se challenge process run by the RP and the CoC of Meenakshi Energy Limited. The challenge process was being run for selection of the final resolution plan amongst the 3 (three) plans submitted by prospective resolution applicants (“Challenge Process”). Prudent contested that the Challenge Process was in contravention of Regulation 39(1A) of CIRP Regulations, 2016. NCLT dismissed the application. Prudent filed an appeal before NCLAT challenging the NCLT dismissal order.

NCLAT, following the judgment of Vistra ITCL (India) Ltd. Vs. Torrent Investments Private Limited[31] held that the CoC, in its commercial wisdom, can allow resolution applicants to submit revised plans through an inter-se Challenge Process. NCLAT also observed that the decision of the CoC to conduct the Challenge Process was supported by enabling clauses in the request for resolution plan. Hence, in view of the same the NCLAT, Chennai observed that there was no violation of Regulation 39(1A) of the CIRP Regulations, 2016 in the method adopted by the RP and the CoC in this case for finalizing resolution plans. The NCLAT’s view has been recently upheld by the Supreme Court as well.

For a detailed analysis, please refer to the JSA Prism of July 31, 2023.

Resolution plan non-compliant if the performance bank guarantee expired and does not cover resolution plan implementation schedule

In the case of Viceroy Hotels Limited filed by Dr. Govindarajula Venkata Narasimha Rao[32], the NCLT, Hyderabad noted that the performance bank guarantee submitted by the successful resolution applicant does not cover the plan implementation schedule and had expired by efflux of time. This made the resolution plan non-compliant with the provisions of the CIRP Regulations, 2016. Accordingly, the NCLT rejected the resolution plan and directed continuation of the CIRP of Viceroy Hotels Limited and to complete such CIRP within a period of 60 (sixty) days.

In case of recategorization of a creditor (post plan approval), the resolution plan will have to be placed before the reconstituted CoC for reconsideration of the plan

In the case of Dauphin Cables Pvt. Ltd. v Praveen Bansal Resolution Professional & Ors.[33], Chandgi Ram Real Estate Consultant Pvt. Ltd. (“CRREC”) being previously classified as financial creditor formed a part of the CoC at the time of plan approval. Subsequently, the NCLT, New Delhi passed an order whereby CRREC was classified as “other creditors”, and consequentially was no longer a part of the CoC. In this background, the NCLAT ordered that in view of a financial creditor going out of the CoC, the CoC has to be re-constituted and the re- constituted CoC has to re-examine the resolution plan which was considered and approved by the earlier CoC.

Full payment of admitted claims towards provident fund dues

In the case of Central Board of Trustees v Shri Kumar Rajan[34], the approved resolution plan entailed payment of only 35.13% of the provident fund dues. The NCLAT relied on the decision of the Supreme Court in the case of Jet Aircraft Maintenance Engineers Welfare Association v Ashish Chhawchharia[35], and directed the full amounts of the admitted claims of provident fund dues to be included in the resolution plan.

CoC cannot be constituted with a single operational creditor

In the case of V. Duraisamy v Jeyapriya Fruits and Vegetables Commission Agent[36], CIRP was initiated against H G S Dairies and Agro Limited (“HGS Dairies”) by on order of the NCLT, Chennai pursuant to an application filed by one of its operational creditors. Prior to the insolvency commencement date, the name of HGS Dairies was struck off by the RoC for non-filing of returns. The RP of HGS Dairies received INR 20,000 (Indian Rupees twenty thousand only) towards publication expenses from the operational creditor. All other expenses were borne by the RP himself. No claims were received by the RP against HGS Dairies. The NCLAT held that since no claims were received by the RP and the name of HGS Diaries was struck off from the records of the RoC, the CoC cannot be constituted with a single operational creditor. Accordingly, the NCLAT ordered closure of CIRP of HGS Dairies.

Impacting liquidation

There is no priority for payment of workmen dues during liquidation

In the case of Moser Baer Karamchari Union v. Union of India[37] petitioner-workers were aggrieved that they were not getting preferential payment (as contemplated under Sections 326 and 327 of the Companies Act).

Section 327 of the Companies Act provides for preferential payments to employees’ wages and statutory dues in case of liquidations under Companies Act. However, Section 327(7) provides that Section 327 (and Section 326) of the Companies Act do not apply in the event of liquidation of a company under IBC.

The Supreme Court observed that the amendment introducing Section 327(7) was undertaken to avoid inconsistencies in the provisions for winding up under Companies Act and liquidation under IBC.

The Supreme Court held that in the event of liquidation under IBC, there is no preferential payment to workmen (in terms of Section 327 of the Companies Act) and in such cases Section 53 of IBC is applicable.

GLOSSARY OF TERMS

Arbitration Act	Arbitration and Conciliation Act, 1996
ARC	Asset Reconstruction Company
CD	Corporate Debtor
CIRP	Corporate Insolvency Resolution Process
CIRP Regulations, 2016	IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016
CoC	Committee of Creditors
Companies Act	The Companies Act, 2013
Corporate Applicant	CD initiating CIRP under Section 10 of IBC
IBBI	Insolvency and Bankruptcy Board of India
IBC	Insolvency and Bankruptcy Code, 2016
NCLAT	National Company Law Appellate Tribunal
NCLT	National Company Law Tribunal
RA	Resolution Applicant
RBI	Reserve Bank of India
RoC	Registrar of Companies
RP	Resolution Professional
Supreme Court	Supreme Court of India

This Newsletter has been prepared by:

Soumitra Majumdar
Partner

Utkarsh
Bandhu
Partner

Abhay Agarwal
Principal
Associate

Vishrutyi
Sahni
Senior Associate

Akhil
Nene
Associate

For more details, please contact [email protected]

[1] May, 2023, Supreme Court [Civil Appeal No. 7121 of 2022]

[2] August, 2017, Supreme Court [Civil Appeal Nos. 8337-8338 of 2017]

[3] December, 2021 Supreme Court [Civil Appeal No. 3325 of 2020]

[4] July, 2022, Supreme Court [Civil Appeal No. 4633 of 2021]

[5] May 2023, NCLAT New Delhi, [Company Appeal (AT) (Insolvency) No. 117 of 2023]

[6] April, 2021, NCLAT New Delhi, [Company Appeal (AT) (Insolvency) No. 294 of 2021]

[7] May 2023, NCLAT, New Delhi [Company Appeal (AT) (Insolvency) No. 53 of 2023]

[8] May 2023, NCLAT, New Delhi [Company Appeal (AT)(Insolvency) No. 982 of 2022]

[9] (2023) 3 SCC 753

[10] May, 2023, NCLT Mumbai, [C.P. 4427/IB/MB/2019]

[11] May, 2023, NCLAT, New Delhi [Company Appeal (AT) (Insolvency) No. 772 of 2022]

[12] June, 2023, NCLAT, Chennai [Comp. App (AT) (CH) (INS.) No. 246 / 2021 (NCLAT Chennai]

[13] May, 2023, NCLAT, New Delhi [Company Appeal (AT)(Insolvency) No. 846 of 2022]

[14] May, 2023, NCLAT, New Delhi [Company Appeal (AT) (Insolvency) No. 34 of 2023]

[15] May, 2023, NCLAT, New Delhi [Company Appeal (AT) (Insol.) No. 593 of 2023]

[16] May, 2023, NCLAT, New Delhi [Company Appeal (AT) (Ins.) No. 729 of 2020]

[17] This judgement partially overruled the earlier position on recall taken by the NCLAT in the cases of Agarwal Coal Corporation Pvt Ltd v. Sun Paper Mill Ltd & Anr. [NCLAT, New Delhi [Company Appeal (AT) (Ins.) No. 412 of 2019]] and Rajendra Mulchand Varma & Ors v. KLJ Resources Ltd & Anr. [NCLAT, New Delhi [Company Appeal (AT) (Ins.) No. 359 of 2020].

[18] May, 2023, Supreme Court, [Civil Appeal No 748 Of 2023]

[19] May 2023, NCLAT New Delhi, [Comp. App. (AT) (Ins) No. 246 of 2023]

[20] March, 2023, NCLAT New Delhi, [Company Appeal (AT) (Insolvency) No. 354 of 2023]

[21] August 2019, NCLAT New Delhi, NCLAT, [Company Appeal (AT) (Insolvency) No. 535 of 2019]

[22] May, 2023, NCLAT, New Delhi [Company Appeal (AT) (Insolvency) No. 755 of 2021]

[23] May 2023, Supreme Court [Civil Appeal No. 3606 of 2020]

[24] May 2023, Supreme Court [Civil Appeal No. 1682-1683 of 2022]

[25] May 2023, NCLAT New Delhi [Company Appeal (AT) (Insolvency) No. 539 of 2022]

[26] June 2023, NCLAT, Chennai [Company Appeal (AT) (CH) (Ins) No. 181/2022]

[27] May, 2023, NCLT New Delhi, [Comp. App. (AT) (Ins) No. 729 of 2021]

[28] January, 2022, NCLAT New Delhi, [Company Appeal (AT) (Insolvency) No. 643 of 2021]

[29] January, 2019, Supreme Court, [Civil Appeal No. 8430 of 2018]

[30] June, 2023, NCLAT Chennai, [Company Appeal (AT) (CH) (Insolvency) No. 37 of 2023]

[31] March, 2023, NCLAT New Delhi, [Company Appeal (AT) (Insolvency) No. 132, 133, 134 & 139 of 2023]

[32] June, 2023, NCLT, Hyderabad [I.A. NO. 1343/2022 in CP (IB) No. 219/7/HDB/2017]

[33] May, 2023, NCLAT, New Delhi [Company Appeal (AT) (Insolvency) No. 634-636 of 2023]

[34] June, 2023, NCLAT Chennai [Company Appeal (AT) (CH) (Ins.) No. 268/2021]

[35] January, 2023, Supreme Court [Civil Appeal No. 407/2023]

[36] June 2023, NCLAT Chennai [Company Appeal (AT) (CH) (Ins.) No. 25/2022]

[37] 2023 SCC OnLine SC 547

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