SC stays insolvency proceedings against Jaypee Infratech before NCLT

Facts of the Case:

IDBI Bank had moved National Company Law Tribunal (NCLT) for insolvency proceedings against Jaypee Infratech for default of a loan of about Rs 526 crore. IDBI Bank is a Financial Creditor through the loans amounting to Rs 526 crores issued to the corporate debtor (Jaypee Infratech)

The application to the adjudicating authority under the Insolvency and Bankruptcy Code, 2016 filed by IDBI Bank under section 7(1) as a Financial creditor was approved by National Company law Tribunal under 7(5)(a) of the code.

Under section 13 (1) (a) of the code, the NCLT has the authority to declare a Moratorium for the purposes referred to in section 14.

The purposes for which the Moratorium under section 14(1) applies includes:

(a) the institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority;

(b) transferring, encumbering, alienating or disposing of by the corporate debtor any of its assets or any legal right or beneficial interest therein;

(c) any action to foreclose, recover or enforce any security interest created by the corporate debtor in respect of its property including any action under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002;

(d) the recovery of any property by an owner or lessor where such property is occupied by or in the possession of the corporate debtor

Jaypee Group which is yet to deliver flats to around 32,000 homebuyers.

Homebuyers come under the category of 'Operational creditors' under Section 5(20) of the code since the moneys paid by home buyers to Jaypee Infratech come under the definition of 'Operational Debt' under section 5(21) of the code.

The contention of the Homebuyers who initiated the PIL in the SC, was that the NCLT order has put the homebuyers in a disadvantaged position as the order required them to fill up certain forms which will stop them from moving consumer courts. The lawyer also said the home buyers are worried about their investments in the company's projects due to the Moratorium proceedings ordered by the NCLT during the pendency of the Insolvency Resolution process.

Checking with the legal provisions of the code:

Under the code, the operational creditors also can initiate the Insolvency Resolution Process under section 9(2) of the Code. The Interim Resolution professional also may be proposed by the Operational creditors under section 16(3)(b) of the code.

One of the duties of the Interim Resolution Professional is to constitute a Committee of Creditors under section 18© of the code.

Under section 21 (2), the committee of creditors shall comprise all financial creditors of the corporate debtor.

Under section 22(2), the Committee of Creditors at its first meeting will resolve to appoint a Resolution Professional ( who may be either the Interim Resolution Professional or a new person)

Under section 24(6), at the meeting of Committee of creditors, each creditor shall vote in accordance with the voting share assigned to him based on the financial debts owed to such creditor.

This would mean that though the operational creditors

1. may initiate Insolvency resolution process
2. may propose the Interim Resolution personnel, and
3. receive invitations to the meetings of the Committee of Creditors (provided his debt is 10% of the total debt), 

They will not be part of the Committee of creditors and hence will not be able to:

1. appoint the Resolution Professional and
2. not approve the Insolvency Resolution Plan

Under section 32, The remedy available to any one aggrieved by the order of the NCLT approving the resolution plan shall be in the manner and on the grounds laid down in subsection (3) of section 61. This appeal will be to the National Company law Appellate Tribunal

Under section 61 (3) an appeal against an order approving a resolution plan under section 31 may be filed on the following grounds, namely:

(iii) the debts owed to operational creditors of the corporate debtor have not been provided for in the resolution plan in the manner specified by the Board;

(iv) the insolvency resolution process costs have not been provided for repayment in priority to all other debts;

Any further appeal against the order of the Appellate Authority shall be preferred to the Supreme Court on a question of law arising out of such order under this Code within forty five days from the date of receipt of such order under section 62(1).

Under section 64 (2) No injunction shall be granted by any court, tribunal or authority in respect of any action taken, or to be taken, in pursuance of any power conferred on the National Company Law Tribunal or the National Company Law Appellate Tribunal under this Code.

Questions that arise:

1. The adjudicating authority is only the NCLT ;

a. Appellate authority against its order is NCLAT ;
b. Appeal against the above can be preferred in SC if it involves a question of law

2. Now the Insolvency proceedings have commenced against Jaypee Infratech based on the initiation by IDBI Bank a Financial creditor. The proceedings are under progress

3. Home buyers currently are Operational creditors and hence could not be part of Committee of creditors and hence cannot take any decisions either to appoint a resolution professional or to approve a resolution plan

4. The NCLT order has not come as the Insolvency Resolution Plan seems not having been submitted In that case, under the code, SC intervention is not envisaged unless it is a question of law

Whether the rights of operational creditors to be included in the Committee of creditors by declaring their dues as Financial debt ( as pleaded in the PIL) is a question of law or not is a matter to be decided.

Without the order either from the adjudicating authority or the appellate authority, jumping 2 steps and going to SC at this stage is not contemplated in the code.

This is because, we still do not know whether the Resolution Plan which is still not presented to the Resolution professional and so not approved by the committee of creditors, does not provide adequately for the operational creditors.

To read the full article: Click here