India: Corporate Debtors To Maintain Status Quo After Filing Of A Section 10 IBC Application

Introduction

In a recent judgment¹, the National Company Law Tribunal, Chennai ("NCLT") dismissed an application filed under Section 10 of the Insolvency and Bankruptcy Code, 2016 ("IBC") as the applicant company M/s. Prithivraj Spinning Mill Private Limited ("Corporate Debtor") was no longer in existence due to the change in name granted by the Ministry of Corporate Affairs ("MCA"). The NCLT opined that the stakeholders of the Corporate Debtor will not be in a position to file their claims with the Interim Resolution Professional ("IRP")/ Resolution Professional ("RP") since they will not be in a position to identify the Corporate Debtor in its new name, leading to a failure of the process under the IBC.

Facts

A Section 10 application under the IBC was filed by the Corporate Debtor seeking initiation of Corporate Insolvency Resolution Process ("CIRP"). During the pendency of the application, the Corporate Debtor filed an application² informing the NCLT that the name of the Corporate Debtor was changed to M/s. Marappar Textiles Private Limited after getting due approval from the MCA with no change of registered office address. However, the Board of Directors of the Corporate Debtor in its meeting (after placing the request for name change with the MCA) resolved to change the address of the registered office of the Corporate Debtor by filing Form INC-22, due to which the change in address was not reflected in MCA's approval for name change.

The Corporate Debtor filed a memo³ with the NCLT placing on record that the Corporate Debtor paid off the amounts due to State Bank of India de hors the dues of the other creditors and had enclosed Form CHG 4, intimating the satisfaction of the charge, which was filed with the Registrar of Companies, Coimbatore.

Further, the Corporate Debtor filed an appeal⁴ before the National Company Law Appellate Tribunal ("NCLAT") against order of the NCLT whereby the matter was adjourned, seeking early disposal of the Section 10 application. The NCLAT directed the NCLT to prepone the hearing and dispose of the Section 10 application within a period of one week.

At the time of hearing the Section 10 application, the NCLT was informed that there are two pending applications filed by the Corporate Debtor. One of them was an application⁵ filed by the Corporate Debtor seeking orders from the NCLT for admission of the Corporate Debtor into CIRP, so as to avoid the demands made by the Electricity Board for paying the outstanding electricity charges. The other application⁶ was filed seeking direction from the NCLT to restrain the respondent from invoking provisions of the SARFAESI Act, 2002, till the disposal of the Section 10 application and to pass the order admitting the Corporate Debtor into CIRP.

Since various applications and memos were filed by the Corporate Debtor placing various facts on record post the filing of the Section 10 Application, the NCLT directed the Corporate Debtor to file an amended version of Form-VI reflecting the changes to the name and registered address of the Corporate Debtor. However, the Corporate Debtor refrained from filing the amended version of the Form-VI till the disposal of the Section 10 application.

NCLT's Judgment

The NCLT observed that despite the Corporate Debtor being aware that there was an application made to the MCA seeking change of name of the Corporate Debtor, the same was concealed and suppressed in the Form-VI filed with the Section 10 application. Further, notwithstanding the fact that the NCLT had directed the Corporate Debtor to file the revised and correct Form-VI, the Corporate Debtor deliberately chose not to file the same, reflecting that the Corporate Debtor did not come with clean hands while seeking initiation of CIRP.

The NCLT held that if the Section 10 application is admitted and the public announcement as per Section 15 of the IBC is made, due to the change in name of the Corporate Debtor, the stakeholders of the Corporate Debtor will not be in a position to identify the Corporate Debtor and file their claims, leading to breakdown of the IBC framework. The NCLT observed that since the CIRP admission order will be a judgment in rem and not in personam, the stakeholders will be kept in the dark in respect of the change in name. Thus, there is a duty upon the NCLT to protect the rights of the public at large and prevent the passing of an admission order, which will put the IBC framework into jeopardy.

As per the NCLT, once an application under Section 10 has been filed seeking declaration of the Corporate Debtor as an insolvent/to initiate CIRP, the Corporate Debtor must maintain status quo in relation to major decisions of the company, keeping the Corporate Debtor as a going concern. Activities such as making changes to the constitution of the share holding pattern, list of secured/ unsecured creditor/stakeholders, selling, buying and encumbering properties and all such related activities must be kept in abeyance by the Corporate Debtor once an application under Section 10 of the IBC has been filed before an adjudicating authority.

The NCLT held that the Corporate Debtor's action of filing applications seeking its speedy admission into CIRP are steps that have been taken by the Corporate Debtor to avoid payments to its creditors/stakeholders. The Corporate Debtor has misused the Section 10 application to avoid making payments to its creditors. 

The NCLT exercising its powers under Section 10(4)(b) of the IBC, passed an order rejecting the Section 10 application and the connected applications filed by the Corporate Debtor on two broad grounds. Firstly, the Application is incomplete as a revised Form-VI with the correct details was not filed by the Corporate Debtor. Secondly, no order initiating CIRP against the Corporate Debtor – M/s. Prithviraj Spinning Mills Private Limited can be passed by the NCLT, when no company by the said name exists as on the date of the order.

Footnotes

1. M/s. Prithivraj Spinning Mill Private Limited v. Indian Overseas Bank & Ors. [IA/636/2020 in IBA/120/2020 decided on December 9, 2020]

2. Interim Application 636 of 2020 dated August 18, 2020

3. Memo bearing Diary No. 2350 of 2020 dated August 19, 2020

4. M/s. Marappa v. IOB & Anr. [Company Appeal (AT)(Insolvency) No. 1030-1031 of 2020]

5. IA/SR/No. 1042 of 2020

6. IA/SR/No. 1167 of 2020

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