2022 (4) TMI 259 - AT - Insolvency and Bankruptcy

Appellate tribunal directs Adjudicating Authority to proceed with hearing, emphasizing expeditious resolution and compliance.

The appellate tribunal vacated the ex-parte interim order dated 09.09.2020 and directed the Adjudicating Authority to proceed with the hearing of I.A No. ... Service of process in pending matters - Ex parte interim order - Maintenance of status quo in liquidation distributions - Time bound proceedings under the Insolvency and Bankruptcy Code and its overriding effect - Regulation 43 - obligation to return excess distribution - Locus to challenge admission of claims by the liquidatorService of process in pending matters - Ex parte interim order - Application I.A. No. 368 of 2020 was filed and an ex parte interim order was passed without service of the application on affected parties - HELD THAT: - The Tribunal examined Rule 25(5) (presentation of applications in pending matters) and the record. The Adjudicating Authority itself noted on 21.10.2020 that notices had not been served by the applicant. The application had been filed in a pending matter seeking interim relief against financial creditors (including the appellant) and more than a month was available for service prior to the ex parte order dated 09.09.2020. The Tribunal concludes that the application was filed and the interim order obtained without serving copies on the parties who would be affected by the order, rendering the order ex parte. [Paras 22, 23, 24]The Tribunal found that I.A. No. 368 of 2020 was filed without serving the affected parties and that the interim order dated 09.09.2020 was ex parte.Maintenance of status quo in liquidation distributions - Time bound proceedings under the Insolvency and Bankruptcy Code and its overriding effect - Regulation 43 - obligation to return excess distribution - Whether the pendency of a counter claim before the DRT permits staying distribution to financial creditors in liquidation and whether the ex parte interim order restraining distribution should continue - HELD THAT: - The Tribunal held that pendency of proceedings before the DRT cannot, as a matter of course, be a ground to stay distributions in liquidation under the IBC, which are time bound and enjoy overriding effect under Section 238. The Tribunal observed that Regulation 43 provides a mechanism for return of any monies subsequently found to have been wrongly distributed, thereby addressing concerns of excess disbursement. Given the prolonged non decision of the recall application and the need to protect the time bound nature of IBC proceedings, the Tribunal found no justification for continuing the interim order restraining distributions. [Paras 25, 26, 27]The Tribunal concluded that pendency of the DRT proceedings is not a valid reason to continue the interim stay on distributions and that the recall application (I.A. No. 555 of 2020) ought to be allowed.Locus to challenge admission of claims by the liquidator - Ex parte interim order - Disposition of I.A. No. 368 of 2020 and the extent of the Tribunal's intervention - HELD THAT: - While the Tribunal has modified and recalled the interim order passed on 09.09.2020 by allowing I.A. No. 555 of 2020, it refrained from expressing any final view on the merits of the challenges made in I.A. No. 368 of 2020 to the liquidator's admission of claims. The Tribunal noted that hearing on I.A. No. 368 of 2020 has commenced before the Adjudicating Authority and directed that the Adjudicating Authority proceed to decide that application on merits after hearing the parties at the earliest. [Paras 27, 28]The interim order is recalled/vacated; I.A. No. 368 of 2020 is left for final adjudication on merits by the Adjudicating Authority.Final Conclusion: I.A. No. 555 of 2020 is allowed and the ex parte interim order dated 09.09.2020 (directing the liquidator to maintain status quo with regard to distribution to certain financial creditors) is recalled/vacated. The Adjudicating Authority is directed to proceed to decide I.A. No. 368 of 2020 on merits expeditiously; no final opinion is expressed on the merits of that application. Issues Involved:1. Delay in adjudicating applications I.A No. 368 of 2020 and I.A No. 555 of 2020.2. Legitimacy of the ex-parte interim order dated 09.09.2020.3. Locus standi of the Suspended Director to challenge the Liquidator's decisions.4. Impact of pending counterclaims on liquidation proceedings.5. Compliance with procedural rules regarding service of applications.Detailed Analysis:1. Delay in Adjudicating Applications:The appeal was filed by Kotak Mahindra Bank Limited, a financial creditor, seeking direction for the adjudication of applications I.A No. 368 of 2020 and I.A No. 555 of 2020. The applications remained pending despite multiple hearings and directions from the appellate tribunal and the Supreme Court to expedite the process. The Supreme Court, in its order dated 26.11.2021, emphasized the need for expeditious resolution and allowed the appellate tribunal to withdraw the matter from the Chandigarh Bench if necessary.2. Legitimacy of the Ex-Parte Interim Order:The ex-parte interim order dated 09.09.2020 directed the Liquidator to maintain status quo regarding the distribution of funds to financial creditors. Kotak Mahindra Bank filed I.A No. 555 of 2020 to recall this order. The appellate tribunal noted that the application was filed without serving a copy to the affected financial creditors, violating Rule 25(5) of the National Company Law Tribunal Rules, 2016. The tribunal found the ex-parte order unjustified and decided to vacate it.3. Locus Standi of the Suspended Director:The Suspended Director of the Corporate Debtor filed I.A No. 368 of 2020 challenging the Liquidator's acceptance of claims from financial creditors. The tribunal observed that under Section 42 of the Insolvency and Bankruptcy Code, 2016, only creditors have the right to challenge the Liquidator's decisions. Thus, the Suspended Director lacked the locus standi to file the application.4. Impact of Pending Counterclaims on Liquidation Proceedings:The Suspended Director argued that pending counterclaims before the Debt Recovery Tribunal (DRT) should halt the distribution of funds in the liquidation process. The appellate tribunal rejected this argument, stating that proceedings under the Insolvency and Bankruptcy Code are time-bound and have an overriding effect. The tribunal emphasized that liquidation proceedings cannot be dependent on other pending litigations.5. Compliance with Procedural Rules:The appellate tribunal highlighted the failure to serve a copy of I.A No. 368 of 2020 to the financial creditors, as required by Rule 25(5) of the National Company Law Tribunal Rules, 2016. This procedural lapse further invalidated the ex-parte interim order dated 09.09.2020.Conclusion:The appellate tribunal allowed I.A No. 555 of 2020, vacating the interim order dated 09.09.2020, and directed the Adjudicating Authority to proceed with the hearing of I.A No. 368 of 2020 on its merits. The tribunal's observations were confined to the procedural aspects and did not express any final opinion on the merits of I.A No. 368 of 2020. The appeal was disposed of with specific directions to expedite the adjudication process.