Initiation vs Commencement: Understanding ‘Pendency’ under Section 60(2) of the IBC

The Issue and Statutory Framework

An Application for initiating Corporate Insolvency Resolution Process [“CIRP”] against the Corporate Debtor, can be filed under Section 7, 9 or 10, as the case may be, of the Insolvency and Bankruptcy Code, 2016 [“the Code”] before the National Company Law Tribunal [“NCLT”]. However, at what date, can an Application filed for initiating CIRP, can be considered to be ‘pending’ before the NCLT? Whether at the date when the Application is filed, or the date when the Application is registered or the date when the Application is admitted by the NCLT against the Corporate Debtor?. The Code does not expressly define ‘Pending’ , however, the expressions- “Initiation date” and “insolvency commencement date” have been categorically defined under Section 5(11) and Section 5(12) of the Code, respectively.

On the other hand, Section 60(1) of the Code authorises the NCLT, having territorial jurisdiction over the place where the registered office of the Corporate Debtor is located, to initiate the CIRP against the Corporate Debtor. Section 60(2) draws out an exception to the above rule, viz. if a CIRP or liquidation proceedings pertaining to a corporate debtor is already ‘pending’ before a NCLT, then an application for initiating CIRP or liquidation of a corporate guarantor or personal guarantor as the case may be, of such corporate debtor, shall be filed before the same NCLT, wherein the CIRP of the Corporate Debtor is already ‘pending’ , notwithstanding that the registered office of the corporate guarantor may be located outside the territorial jurisdiction of the said NCLT. A three judge bench of the Supreme Court in Embassy Property Developments Pvt. Ltd. vs State of Karnataka ¹ held that the object behind Section 60 (2) of the Code is to group together-

The CIRP or liquidation proceeding of a Corporate Debtor, and
The insolvency resolution or liquidation or bankruptcy of a corporate guarantor or personal guarantor of the very same Corporate Debtor.

In order to streamline the CIRP or liquidation proceedings of Corporate Debtor and its Corporate Guarantor/Personal Guarantor, the aforesaid provision ensures that both the proceedings are not proceeded on different tracks, before different fora, leading to conflict of interests, situation or decisions.

In the aforesaid statutory background, it is imperative to discern when an application for initiating CIRP of a Corporate Debtor can be considered to be ‘pending’ before a NCLT so as to enable filing of CIRP of Corporate Guarantor of such Corporate Debtor, before the same NCLT where the CIRP of Corporate Debtor is already pending adjudication. However, the absence of an express definition of ‘pending’ under the code and separate definitions of “initiation date” and “insolvency commencement date” , has posed difficulty in interpreting the term ‘pending’ in order to apply Section 60(2) and bring CIRP proceedings of Corporate Debtor and its Corporate Guarantor under one umbrella.

Position of Law

The aforesaid issue was finally settled by the National Company Law Appellate Tribunal, Chennai [“NCLAT”] in the matter of S.Vasudevan vs IDBI Trusteeship Services Ltd. & Anr². Factual foundation of the aforesaid case is as follows-

On 29.10.2016 the Respondent No. 1/IDBI Trusteeship Services executed a Debenture Trust Deed with Ozone Project Pvt. Ltd. [“the Principal Borrower”] and extended financial assistance to Ozone to the tune of Rs 1,26,30,00,000/-
The Principal Borrower was required to repay the principal amount along with redemption premium within a period of 40 months from the date of execution, which was extended from time to time.
The obligation of Principal Borrower to repay the loan amount was secured by a Corporate Guarantee Agreement dated 29.06.2016 executed by the Corporate Guarantor (M/s Tuscan Consultants & Developers Pvt. Ltd.) in favour of Respondent No.1.
The Principal Borrower as well as the Corporate Guarantor failed to repay the loan obligation despite repeated demands of the Respondent No.1 which led the Respondent No.1 to initiate Section 7 proceedings against the Principal Borrower and the Corporate Guarantor, before the NCLT, Chennai.
NCLT Chennai admitted the Section 7 Application against the Principal Borrower and the Corporate guarantor.

It is pertinent to lay down the list of dates capturing the filing of Section 7 Applications and admission of the same by NCLT, Chennai-

Ozone Projects Pvt. Ltd [Principal Borrower]

Tuscan Consultants & Developers Ltd. [Corporate Guarantor]

Date of filing of Section 7 Application

05.08.2022

19.09.2022

Date of Registration

27.02.2023

02.05.2023

Date of Admission of Section 7 Application by NCLT

01.05.2023

09.10.23

The suspended Director of the Corporate Guarantor/Debtor challenged its Section 7 Admission Order before NCLAT Chennai on inter alia following grounds-

The registered office of the Corporate Guarantor/Debtor is situated in Bangalore, therefore, NCLT Chennai did not have the territorial jurisdiction as per Section 60(1) of the Code to entertain the Section 7 Application against it.
Section 7 Application is considered to be ‘pending’ in terms of Section 60(2) of the Code only when the Section 7 Application is admitted by the NCLT and not on mere filing of the Application.
On 19.09.2022 when Section 7 Application was filed against the Corporate Guarantor before NCLT Chennai, there was no Application ‘pending’ against the Principal Borrower in NCLT Chennai as the said application was not admitted by the NCLT on the aforesaid date.
Since there was no application ‘pending’ against the principal Borrower in terms of Section 60(2), at NCLT Chennai, the Respondent No. 1 could not have filed Section 7 Application against the Corporate Guarantor before NCLT Chennai, more particularly, when the registered office of the Corporate Guarantor is situated at Bangalore.

The Interpretation that Pendency of Section 7 Application commences only when the Section 7 Application is admitted by NCLT and mere filing of Section 7 Application does not lead to ‘Pendency’ is completely misconceived

The NCLAT observed that for interpretation of any provision of law, it is imperative to first examine the same against the basic objective of the particular statute. The NCLAT emphasised upon the object of Section 60(2) as laid down by the Supreme Court in Embassy Property Developments (supra) and reiterated by the principal bench of NCLAT in Monica Jajoo vs PHL Fininvest Pvt. Ltd. & Anr ³ viz. Section 60(2) aims to keep all the proceedings before one platform and one forum where the dispute could be commonly adjudicated between the parties i.e. the Principal Borrower and its Gurantor. The exception being carved out under Section 60(2) is for the purposes to ensure that the insolvency is resolved at the earliest and does not get side tracked by multiplicity of proceedings at different NCLTs, leading to conflicting judgments, particularly when the matter engaging consideration arises out of the same transactions between the creditors and the Principal Borrower and its guarantors. The NCLAT observed that the argument advanced by the Corporate Guarantor/Debtor that there was no ‘pendency’ of Section 7 Application against the Principal Borrower as on the date the Section 7 Application was filed against the Corporate Guarantor/Debtor, as the Section 7 Application against the Principal Borrower had not been admitted by the NCLT, on the aforesaid date, is completely misconceived and against the objective of Section 60(2) of the Act. Therefore, the Tribunal held that since the Applications praying for initiation of CIRP against both the Principal Borrower and its Corporate Guarantor on account of default are emanating from the same Debenture Trust Deed and as the Application against the Principal Borrower was filed earlier before NCLT, Chennai and is pending consideration, the proceedings in respect of the Corporate Guarantor will have to be instituted before the Ld. NCLT, Chennai, and not before Ld. NCLT Bangalore, as argued by the Corporate Guarantor.

The Definitions of “initiation” & “commencement” ought not be confused. “Pendency” as used in Section 60(2) means the period from the date of start of proceedings i.e. the date of initiation by filing Section 7, 9 or 10 Application

As per the Code, the “initiation date” and “insolvency commencement date” are separately defined and serve different legislative intent. The initiation date is the date on which the Financial Creditor, Corporate Applicant or the Operational Creditor, as the case may be, makes an application to the adjudicating authority (NCLT) for initiating CIRP. On the other hand the “insolvency commencement date” signifies the date when such application, filed under Section 7, 9 or 10, is admitted by the NCLT and CIRP process begins by imposing a moratorium on the Corporate Debtor in terms of Section 14 of the Code, thereby prohibiting institution of any legal proceedings against the Corporate Debtor. The “insolvency commencement date” marks a vital event under the Code whereby the CIRP proceedings are effectively undertaken and the time period of 180 days, in terms of Section 12 of the Code, to complete the proceedings, begins to operate. Therefore, both the aforesaid definitions are fundamentally different. On initiation date, when an application is filed under Section 7, 9, or 10 of the Code, there is no moratorium in place in terms of Section 14, however, on the insolvency commencement date”, the moratorium in terms of Section 14 takes effect and time period as per Section 12 of 180 days to complete the CIRP proceedings, begins to operate.

Section 60(2) of the Code emphasises upon “pendency” of proceedings before a NCLT. In Asgarali Nazarali Singaprowalla vs The State of Bombay⁴, the Supreme Court interpreted the term ‘pendency’ to mean commencement or start of proceedings. Similar view was taken by the Supreme Court in Raja Soap Factory and Ors. vs S.P. Shatharaj and Ors⁵. In view of the aforesaid judgments, the NCLAT in Vasudevan (supra) observed that for the purposes of Section 60(2) of the Code, in order to determine whether there is a ‘pending’ CIRP proceedings, it is enough to establish that CIRP proceedings have already been initiated under Section 7, 9, or 10 of the Code, as the case may be, as “pendency” means proceedings have started and not yet concluded. This also ought to be examined in the backdrop of the legislative intent behind Section 60(2) viz. curb multiplicity of proceedings and bring proceedings initiated against Corporate Debtor and its Guarantor before one NCLT only.

If the term “pending” falling in Section 60(2) of the Code is read to mean the “insolvency commencement date” i.e. when the CIRP Application is admitted by the NCLT, as opposed to the date when the when CIRP application is filed before the NCLT i.e. the “initiation date” then it would defeat the very object of Section 60(2) of the Code. As it is a matter of fact that a CIRP application may remain pending for a long period of time during which the Corporate Debtor may file its Reply to the Application and the Creditor may file its rejoinder thereto and only then the Application is taken up for adjudication by the NCLT to ascertain whether the application is liable to be admitted. This may consume a substantial period of time and in the meanwhile, a CIRP Application may be filed against the Corporate Guarantor of the same Corporate Debtor before a different NCLT because the Application against the Corporate Debtor, which was filed first, was not admitted by the respective NCLT so as to enable filing of the CIRP application of the Corporate Guarantor, before the very same NCLT in which the CIRP application of the Corporate Debtor is ‘pending’ adjudication under Section 60(2). This may lead to two different forums adjudicating the CIRP applications, arising out of the same transaction between the Corporate Debtor and its Guarantor, and possibly lead to conflicting judgments passed by the two different NCLTs.

A parallel can also be drawn from the decision rendered by the three judge bench of the Supreme Court in M/s Siddamsetty Infra Projects Pvt. Ltd. vs Katta Sujatha Reddy & Ors.⁶ wherein the Supreme Court was concerned with interpretation of ‘pendency’ falling under Section 52 of the Transfer of Property Act, 1882, embodying the principle of lis pendens. In the aforesaid case a two judge bench of the Supreme Court rendered a judgment dismissing the Suit for specific performance filed by the Plaintiff. Being aggrieved the Appellant/Plaintiff filed a Review Petition before Supreme Court which was taken up for consideration by the three judge bench of Supreme Court. In the meanwhile, the vendors/Defendants sold the suit property to a third party. In Review proceedings, the Vendors argued that Section 52 or lis pendens shall not be applicable to the sale of suit property as when the Suit property was sold to the third party, the Review Petition filed by the Appellant before the Supreme Court was lying under defects as pointed out by the registry. The Defendants essentially set up a case that mere filing of Review Petition, or a suit, would not render the proceedings “pending” within the meaning of Section 52 of the Transfer of Property Act especially when the Petition remained in a defective state and no notice was issued by the Court. However, the Supreme Court held that in terms of proviso to Section 52, “pendency” shall be deemed to commence from the date of institution of the proceedings in a court and not at the stage when notice is issued in the Suit proceedings, notwithstanding that the suit may be lying in a defective state. The fact that the Suit was filed, and the suit property was sold thereafter, the suit would be deemed to be ‘pending’ within the meaning of Section 52 of the Transfer of Property Act, and such property sold during the pendency of Suit proceedings would be hit by the doctrine of lis pendens. For a detailed consideration of the principle of lis pendens, refer here.

Conclusion

The Insolvency & Bankruptcy Code, 2016 not only provides that the CIRP proceedings ought to be completed in a time bound manner but also ensures that the proceedings against the Corporate Debtor and its Guarantor are adjudicated by the same NCLT, wherein the CIRP proceedings of the Corporate Debtor are pending adjudication under Section 60(2) of the Code. In order to interpret the term “pending” in a provision, it is imperative to interpret the same in the backdrop of the object of the provision. Whenever the object behind the provision is to curb multiplicity of proceedings, the Court would be disinclined to adopt a pedantic approach by considering whether “pendency” commences from the date of registration of Suit or Application or on the date when the notice is issued by the Court. In Vasudevan (supra) the NCLAT refused to cede to the arguments advanced by the Respondent that “pendency” commences only when the CIRP Application is admitted by the NCLT and mere filing of Application does not render the Application “pending”. This decision was affirmed by the Supreme Court when the Civil Appeal filed against the aforesaid order was dismissed by the Supreme Court. Similarly, the three judge of Supreme Court in Siddamsetty (supra) refused to consider the arguments advanced by the Defendants that so long the Petition is lying under defects as pointed out by registry, the Petition shall not be deemed to be “pending” within the meaning of Section 52 of the Transfer of Property Act. In both the aforesaid decisions, the Court was concerned with the underlying objective of the provision, viz. curb multiplicity of proceedings, and when that is the objective that the provision desires to achieve, the very fact that an Application or a Suit has been initiated or filed in the Court, notwithstanding the fact that such Application or Suit is lying under defects, not registered or no notice issued by the Court, the same shall be deemed to be “pending” in the Court so as to prevent multiplicity of proceedings.

By Daksh Pandit