THE MORATORIUM UNDER BANKRUPTCY CODE NOT A BAR ON SARFAESI ACTION AGAINST GUARANTOR’S PROPERTIES

The Insolvency and Bankruptcy Code, 2016 (IBC) has been introduced to yield faster results in the recovery of Corporate NPAs. The erstwhile SICA, was enacted to address the corporate debts and to facilitate faster recovery, rehabilitation and revival of the sick company. Contrary to this legislative intention to revive the sick companies, the provisions of SICA were used by the Corporate Debtors to weave a protective cocoon around themselves under BIFR. Thus once a company entered into BIFR, nobody could recover money from them. The need for a new legal system was necessitated by such inbuilt provisions of SICA which helped the Corporate Defaulters to thwart and delay the recovery process by the financial creditors.

 The IBC also stipulates for a moratorium period from the date of commencement of the Insolvency proceedings until the approval of a resolution plan under Section 31 of the Code. Unlike SICA , under the provisions of the new Code if at any time during the corporate insolvency resolution process period, if the Adjudicating Authority approves the resolution plan under Section 31(1) or passes an order for liquidation of corporate debtor under section 33, the moratorium shall cease to have effect from the date of such approval or liquidation order, as the case may be. Further the IBC has restricted the insolvency resolution process period to 180 days, beginning from the insolvency commencement date and ending on One Hundred and Eightieth day.

The Supreme Court in Innoventive Industries Ltd v. ICICI Bank Ltd (2017) had observed that the intent behind the moratorium was “to provide the debtors a breathing spell in which he is to seek to reorganize his business.” Section 14 (1) (c) of the IBC prohibits 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 SARFAESI Act during the moratorium period. The view of the Apex Court that this provision intends to give a “breathing spell” to corporate debtor raises a question as to whether the same breathing space was intended to be extended to the promoters and guarantors to the corporate debtor also. The question as to whether this moratorium envisaged under IBC shall give protection to the promoters/guarantors, whose personal properties have been mortgaged for securing the credit facilities availed by the Corporate Debtor, was not answered till the NCLAT decision in Alpha & Omega Diagnostics India Ltd v Asset Reconstruction Company of India Ltd.  

Without bothering to read between the lines to give a broader scope to the provision, the Appellate Tribunal had concurred with the view of the NCLT which had adopted the canons of literal interpretation in understanding the scope of the provision. The Tribunal pointed out that the language of the sub section is clearly prohibiting any action to recover or enforce any security interest created by the Corporate Debtor in respect of "its" property. It was held that the term “its” used in the language of Section 14 (1) (c) denotes the property owned by the Corporate Debtor, which is reflected in the balance sheet of the Corporate Debtor. The Tribunal had concluded that such properties which are not owned by the Corporate Debtor do not fall within the ambit of the Moratorium declared under the Code. The Appellate tribunal had further clarified that just by the mere fact that the assets, movable or immovable, of a third party (i.e., promoter or a guarantor) have been proceeded against before the Debt Recovery Tribunal, does not qualify to bring it within the scope of Moratorium envisaged under the Code.

From the language of this decision it becomes very clear that there is no bar for financial creditors/banks to proceed against the Guarantor/s or to initiate SARFAESI proceedings against the properties in the personal name of the promoters/guarantors which have been offered as a security for the credit facilities availed by a corporate debtor. 

COMPETENCY OF A POWER OF ATTORNEY HOLDER TO FILE AN APPLICATION UNDER INSOLVENCY & BANKRUPTCY CODE, 2016

In general all the Banks are in a practice of authorising its officers under a power of attorney document to initiate or defend any legal proceedings by or against the Bank in any court of law. In M/s. Palogix Infrastructure Pvt Ltd. Vs. ICICI Bank a question was raised before the NCLAT as to whether a Constituted Attorney authorised, prior to the enactment of Insolvency and Bankruptcy Code 2016, to file suits and/or proceedings against the company for recovery of the amount can file application for initiation of corporate insolvency process under Section 7 of the Insolvency and Bankruptcy Code (IBC) 2016 without having specifically authorized to lodge Application/Petition under IBC 2016.

Rule 23 (1) of NCLT Rules permits an ‘authorised representative’, to present an application or petition before the Tribunal. The issue which was debated in the case in hand was whether a power of attorney holder who was given power of attorney prior to the enactment of IBC 2016 can be treated as an ‘authorised representative’ under the NCLT Rules.

It was argued by the Corporate Debtor that a Power of Attorney is an authorization by a 'principal' to its 'agent' to do an act and that such authorisation can only be of acts which are in the contemplation and knowledge of the 'principal' as on the date when such authorisation is given. If the 'principal' itself is unaware of an eventuality, it cannot authorize its agent for such eventuality. This is more so when IBC sets in motion a very serious and irreversible process, therefore, according to the Corporate Debtor, the procedural pre-requisites under the IBC must be strictly construed.

The NCLAT, while determining the question of competency of a Power of Attorney holder, observed that as per Section 7 of the IBC, an application for initiation of 'Corporate Insolvency Resolution Process' requires to be filed by 'Financial Creditor' itself and that the IBC and the Adjudicating Authority Rules recognize that a 'Financial Creditor' being a juristic person can only act through an "Authorised Representative".

To understand the issue in full NCLAT had made a reference to the provisions of the Power of Attorney Act, 1882 related to the execution of a power of attorney and the decision of Hon’ble Supreme Court in  T C Mathai & Anr v District and Sessions Judge, Thiruvananthapuram, [(1999) 3 SCC 614]. In this case the Hon'ble Supreme Court had held that "Section 2 of the Power of Attorney Act, 1882 cannot override the specific provision of a statute which requires that a particular act should be done by a party in person.” In the light of this dicta and the view of the Apex Court expressed in  M/s Innoventive Industries Ltd v ICICI Bank & Anr  that the Insolvency and Bankruptcy Code 2016 is an exhaustive code on the subject matter of insolvency in relation to corporate entities, it was held by NCLAT that a 'Power of Attorney Holder' is not competent to file an application under Section 7 or Section 9 or Section 10 of IBC on behalf of a 'Financial Creditor' or 'Operational Creditor' or 'Corporate Applicant'.

However NCLAT made it unambiguously clear that this general view cannot be adopted in the case of an officer of a ‘Financial Creditor’ Bank who has been delegated powers under a power of Attorney by the Board of Directors of the Bank. It was pointed out by NCLAT that if general authorisation is made by any 'Financial Creditor' or 'Operational Creditor' or 'Corporate Applicant' in favour of its officers to do needful in legal proceedings by and against the 'Financial Creditor'/'Operational Creditor'/'Corporate Applicant', mere use of word 'Power of Attorney' while delegating such power will not take away the authority of such officer and for all purposes it is to be treated as an 'authorization' by the 'Financial Creditor'/'Operational Creditor'/'Corporate Applicant' in favour of its officer, which can be delegated even by designation. In such case, officer delegated with power can claim to be the 'Authorized Representative' for the purpose of filing any application under section 7 or Section 9 or Section 10 of IBC.

Further as it was clarified by NCLAT that while computing the 7 days period stipulated therein under Section 7 (5) of the IBC for rectifying the defects in the Application, apart from the date of receipt of the order for removal of defects, the holidays such as Saturdays, Sundays and other holidays of the Tribunal to be excluded. 

RENTING OUT OF COMMERCIAL PROPERTY - SERVICE TAX LIABILITY

The question as to upon whom the onus to pay service tax in the matter of renting out of commercial property was discussed in detail by Hon’ble Supreme Court in its recent judgement in Union of India & Ors. V. Bengal Shrachi Housing Development Limited & Anr. The judgement continues to be relevant in the GST era also as renting out of commercial property is subject to GST.

In the case in hand Indian Coast Guard had taken the premises owned by the Respondent on Lease and a lease deed was entered upon by the parties. Under clause 6 of the Lease Deed it was mentioned,  

“The lessor / lessors shall pay all rates, taxes, assessment, charges and other outgoings whatsoever of every description which under the statutes are primarily leviable upon the lessor and shall keep the premises free from all encumbrances and interference in this behalf. Rates and taxes primarily leviable upon the occupier shall be paid by the Government.”

Since disputes and differences arose between the parties as to who was liable to pay service tax for the aforesaid commercial premises the matter was challenged in the High Court and it came to Supreme Court in appeal to the decisions of the High Court.

Who is liable to bear the burden of service tax in the matter of renting out of commercial premises?

It was pointed out by the court in the earlier portion of its judgement that, by virtue of Rule 2(1)(d) of the Service Tax Rules R/w Section 68 of the Finance Act, it is the provider of the service alone who is liable for paying service tax. The question primarily before the Court was as to on whom the service tax was to be primarily leviable upon.

While answering this question the Apex Court had observed that service tax being an indirect tax, can be passed on by the service provider to the recipient of service and it shall depend upon the taxable event and taxable person. The Court pointed out that in the case in hand the “taxable event” is the service of renting out immovable property and “taxable person” is the person liable to pay the tax, namely the lessor.

It was observed by the Court that the expression ‘levy’ will include assessment also. The Court pointed out that the levy is always based on the specific aspect which ought to be taxed and not based on the assessment of any individual. In the case in hand the expression “primarily leviable” is used in relation to a person and not an activity and hence it refers to the assessee upon whom the assessment is made under the Act. Thus the Court construed that the person liable to pay the tax is the Assessee under the Act, who is the service provider and not the recipient of service.

However if the Lease Deed for renting out the premises contains an undertaking by any of the parties to the agreement, contrary to the liability imposed under the Act, the Court seems to have a different view. Mentioning the decision of High Court of Delhi in, Satya Developers P Ltd v Pearey lal Bhawan Association[1], it was pointed out that a contract has to be construed by looking at the document as a whole and the meaning of the document has to be what the parties intended to give to the document keeping the background in mind and conclusion that flouts business commonsense must yield unless expressly stated. It was observed by the Court that since payment of service tax was not contemplated by the parties and it was agreed that the lessor shall continue to pay taxes, it was evident that the parties contemplated only existing taxes and not taxes which may arise in the future. Based on the Sanction Letter of DIG Coast Guard which specifically stated that all the registration charges, stamp duty, service taxes etc will be the liability of the Lessee, the Court upheld the Single Bench Decision of the High Court that lessee should be made to pay service tax.

From the rationale of this decision it may be presumed that if a lease deed categorically requires the Lessee to pay the service tax and there is no ambiguity as to the intention of parties, then the Lessee will have to bear the burden of service tax even though the provisions of the Finance Tax imposes the liability on the Lessor, i.e., the service provider.

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[1] (2015) 225 DLT 377

GST CORNER – A READY RECKONER TO GST STATUTES INCLUDING SGSTS’

From midnight of 1^st July, India has adopted the GST regime. All States and Union Territories (UTs), except Jammu & Kashmir, have passed the State GST Acts. The States of Kerala and West Bengal have promulgated Ordinances to approve the SGST Act, while all other states and UTs have passed it in their respective legislative assemblies.

Given the special status under the Constitution, J&K needs to ratify all GST-related laws in its Assembly, unlike other states which had to pass only State GST Acts.

GST ACTS

1.  CGST Act, 2017

2.  IGST Act, 2017

3.  UTGST Act, 2017

4.  STATE GST Acts:-

ANDHRA PRADESH	KARNATAKA	SIKKIM
ARUNACHAL PRADESH	KERALA	TAMIL NADU
ASSAM	MADHYA PRADESH	TELANGANA
BIHAR	MAHARASHTRA	TRIPURA
CHHATISGARH	MANIPUR	UTTARAKHAND
DELHI	MEGHALAYA	UTTAR PRADESH
GOA	MIZORAM	WEST BENGAL
GUJARAT	NAGALAND
HARYANA	ODISHA
HIMACHAL PRADESH	PUDUCHERRY
JAMMU & KASHMIR	PUNJAB
JHARKHAND	RAJASTHAN

Banking Ombudsman Scheme Amended

The Reserve Bank of India has, vide its Notification dated 16.06.2017,  modified and widened the ambit of the Banking Ombudsman Scheme 2006. The Scheme has been modified to cover the new areas of Banking business including Bancassuarance, third party products, and has modified the existing provisions related to Card operations and electronic banking.
Under the modified scheme the deficiencies arising out of sale of insurance/ mutual fund/ other third party investment products by banks have been brought under the ambit of the Banking ombudsman.  RBI has modified and widened the deficiencies related to the Card Operations including non adherence of RBI guidelines related to Debit Card/ATM, Prepaid Card operations, Credit Cards etc under the Banking Ombudsman’s Jurisdiction. Under the modified Scheme the new/modified clauses (8) (l), (m) and (n)  has been inserted and the existing clauses (m) and (n) has been renumbered as (o), (p) (r) and likewise.  Further expanding the scope of the Banking Ombudsman Scheme, in view of the wide scale digitalisation, the customer would be now able to lodge a complaint against the bank for its non-adherence to RBI instructions with regard to Mobile Banking/ Electronic Banking services in India.
Under the original Ombudsman Scheme the pecuniary jurisdiction related to the Awards of the Banking Ombudsman was limited to Rs.10 Lakhs. Presently under the modified scheme the same has been increased to Rs. 20 Lakhs (Two Million). The existing power of the Ombudsman to award compensation of Rs. 1 Lakh taking into account the loss of the complainant's time, expenses incurred by the complainant, harassment and mental anguish suffered by the complainant which was limited only to the credit card related complaints has been extended to all the type of complaints.

The procedure for complaints settled by agreement under the Scheme has also been revised. Appeal has now been allowed for the complaints closed under Clause 13 (c) of the existing Scheme relating to rejection which was not available earlier.
The amended Scheme shall come into force from July 1, 2017. The modified Scheme is available here.

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Modified Para. 8 Clauses:-

(l). non-adherence to the instructions of Reserve Bank on ATM /Debit Card and Prepaid Card operations in India by the bank or its subsidiaries on any of the following:
i. Account debited but cash not dispensed by ATMs
ii. Account debited more than once for one withdrawal in ATMs or for POS transaction
iii. Less/Excess amount of cash dispensed by ATMs
iv. Debit in account without use of the card or details of the card
v. Use of stolen/cloned cards
vi. Others
(m). non-adherence by the bank or its subsidiaries to the instructions of Reserve Bank on credit card operations on any of the following:
i. Unsolicited calls for Add-on Cards, insurance for cards etc.
ii. Charging of Annual Fees on Cards issued free for life
iii. Wrong Billing/Wrong Debits
iv. Threatening calls/ inappropriate approach of recovery by recovery agents including non-observance of Reserve Bank guidelines on engagement of recovery agents
v. Wrong reporting of credit information to Credit Information Bureau
vi. Delay or failure to review and correct the credit status on account of wrongly reported credit information to Credit Information Bureau.
vii. Others
(n). non-adherence to the instructions of Reserve Bank with regard to Mobile Banking / Electronic Banking service in India by the bank on any of the following:
i. delay or failure to effect online payment / Fund Transfer,
ii. unauthorized electronic payment / Fund Transfer