NCLAT sets aside Section 7 IBC application; lets Section 9 application run its due course

National Company Law Appellate Tribunal: By way of six connected appeals filed under Section 61 of the Insolvency and Bankruptcy Code, 2016 (‘IBC') against the order passed by National Company Law Tribunal, Ahmedabad bench (‘NCLT'), which closed the Corporate Insolvency Resolution Process (‘CIRP') against the corporate debtor Sintex Plastics Technology Ltd(‘Sintex Plastics'),a division bench of Ashok Bhushan (Chairperson) and Alok Srivastava (Technical Member) set aside the application of withdrawal of Section 9 and consequently let CIRP run its course under the provisions of Insolvency and Bankruptcy Code, 2016 (‘IBC').

KKR India Financial Services Pvt. Ltd. — Ist Appellant

An insolvency application under Section 9 of IBC was filed by the operational creditor- Zielen Industry Pvt. Ltd., (‘Zielen Industry') however the operational debt owed by the corporate debtor-Sintex Plastics was settled on the basis of a Memorandum of Understanding. Accordingly, the corporator debtor filed an appeal seeking withdrawal of Section 9 application and setting aside of the order stating initiation of the CIRP.

National Company Law Appellate Tribunal (‘NCLAT') dismissed the appeal stating that it was not the correct forum and simultaneously stayed the constitution of Committee of Creditors (‘CoC') which was further extended by NCLT.

NCLT allowed the application for withdrawal of the Insolvency Admission Order, releasing the corporate debtor from the rigours of CIRP

-The appellant KKR India Financial Services Pvt. Ltd (‘KKR India')., by way of an appeal was successful in getting a favorable order, whereby the NCLAT stayed the implementation of the impugned order for a weekto prevent the misappropriation of funds in the corporate debtor’s 'Trust and Retention Account'

The Appellant alleged that despite a stay on the order, State Bank of India (‘SBI'), in its capacity as the lead bank of the lender’s consortium, withdrew an amount of Rs. 116.41 Crores without prior approval and knowledge of the Interim Resolution Professional (‘IRP') and also placed a hold over additional amount, in reaction to which the appellant KKR India highlighted the conduct of SBI to the Adjudicating Authority (‘AA')

Sintex Plastics Technology Ltd.- IInd Appellant

Sintex Plastics challenged the order passed by AA, whereby it had ordered CIRP against corporate debtor-Sintex BAPL Limited (‘Sintex BAPL') based on Section 7 application filed by financial creditor KKR India. However, an appeal pertaining to withdrawal of Section 9 proceedings was stayed by NCLAT with directions to the IRP to continue to operate and manage affairs of the corporate debtor

Subsequently, fresh CIRP was initiated against the corporate debtor as a result of Section 7 application even though CIRP was already initiated by way of Section 9 with IRP being in-charge.

Issue

1. Whether the CIRP initiated under Section 9 of IBC, which was later permitted to be withdrawn by NCLT and which was stayed by NCLAT with IRP continuing to operate, should be the effective CIRP against the corporate debtor?

2. Whether the CIRP initiated under Section 7 of IBC should be the effective process?

Tribunal's Observation

The Tribunal noted that while the AA passed an order effecting withdrawal of admission of Section 9, it also stayed the operation for a week. Therefore, the Tribunal was of the view that the order to maintain status quo-ante with regard to the corporate debtor and its assets means that the withdrawal of money by SBI was against the ‘stay order' and this amount as well as the hold put by SBI should be put back in the account of the corporate debtor, so that the amount remains as an asset and under the control of the corporate debtor. The Tribunal was of the view that if SBI was allowed to continue, it would be detrimental to insolvency resolution.

The Tribunal agreeing with financial creditor KKR India stated that if CIRP under Section 9 application was allowed to be closed, some creditors may have withdrawn amounts or received payments from the corporate debtor just like SBI, which would be detrimental to the interest of the other creditors specially when Section 7 application was pending.

The Tribunal stated that if the withdrawal of the Section 9 Admission order was upheld and CIRP were to start afresh from the date of admission of the Section 7 Application, it would have resulted in an inadequate insolvency resolution of the corporate debtor.

The Tribunal was of the view that once the claim and interest of financial creditor-KKR India had been noticed by AA while considering the withdrawal application and ‘protection' was granted through stay of its own order, it would have been appropriate for the CIRP to continue its due course according to Section 9 application.

The Tribunal noted that the reason why the Appellate Tribunal had ordered IRP to continue the management of the corporate debtor was because even during the appeal filed against the ‘withdrawal' order, financial and operational creditors still had large claims pending for payment by the corporate debtor-Sintex BAPL.

Thus, the Tribunal set aside application for withdrawal of Section 9 and consequently allowed the CIRP to run its course initiated under Section 9.

The Tribunal also set aside the admission order passed according to the provision of Section 7 , and closed the CIRP related to it.

Additionally, any asset of the corporate debtor which may have been given to any creditor or alienated from the corporate debtor after section 9 shall be reverted to its original position.

[Sintex Plastics Technology Ltd. v. Mahatva Plastic Products and Building Materials Pvt. Ltd., 2023 SCC OnLine NCLAT 2, decided on 03.01.2023]

Advocates who appeared in this case :

For the Appellants- Advocate Arvind Kumar Gupta

Advocate Henna George

Advocate Shivani Sharma

Advocate Vividh Tandon

Advocate Kaazvin Kapadia

Advocate Ribhu Garg

For the Respondents- Senior Advocate Arun Kathpalia,

Advocate Aman Raj Gandhi

Advocate Parth Bose

Advocate Pranay Tuteja,

Advocate Samar S. Kachwaha

Advocate Shivangi Nanda

Advocate Kavita Vinayak

Advocate Rini Mehra

Advocate Malak M. Bhatt

Advocate Rajat Bector

Advocate Varun Sharma

Advocate Vanshika Gupta

Advocate Shivam Goel