SC Restores NCLT Order To Return Land To Group Firm

An order issued by the Allahabad bench of the National Company Law Tribunal (NCLT) directing Jaiprakash Associates Ltd (JAL) to return 758 acres of land which was pledged with several banks, to its debt-laden subsidiary firm Jaypee Infratech Ltd (JIL), has been restored by the Supreme Court.

The banks involved in the case are Axis Bank, Standard Chartered, ICICI Bank, SBI, Bank of Maharashtra, United Bank of India, Central Bank of India, UCO Bank, Karur Vyasa Bank, L&T Infrastructure Finance Company, Canara Bank, Karnataka Bank, IFCI, Allahabad Bank, Jammu & Kashmir Bank and The South Indian Bank Ltd.

These banks had advanced loans to Jaiprakash Associates, JP Group's flagship firm against the land bank owned by Jaypee Infratech.

While deciding a batch of appeals filed by JIL’s Interim Resolution Professional and others, the Supreme Court set aside the decision of the National Company Law Appellate Tribunal (NCLAT) passed on August 1, 2019.

A Supreme Court bench comprising Justice A M Khanwilkar and Justice Dinesh Maheshwari, in its 174 judgment, considered various provisions of the Insolvency & Bankruptcy Code (IBC) and reversed the NCLAT’s verdict and thus restored the order issued by the Allahabad bench of the NCLT.

“The impugned order dated August 1, 2019 as passed by NCLAT in the batch of appeals is reversed and is set aside. Consequently, the order dated May 16, 2018 so passed by NCLT is upheld in regard to the findings that the transactions in question are preferential within the meaning of Section 43 of the Code," the Supreme Court judgment stated.

The Supreme Court bench stated, that “The mortgage of properties of JIL in favor of JAL’s lenders are denuded of their value and worth by the NCLT’s order which has been approved by us. To be more specific, the security interests created by the corporate debtor JIL over the properties in question stand discharged in whole.

The SC judgment held that the lending banks of JAL “cannot claim any status as creditors of the corporate debtor JIL and there could arise no question of their making any claim to be treated as financial creditors as such”.

The Supreme Court was to deal with two “major issues” and one was “whether the transactions in question (mortgages) deserve to be avoided as being preferential, undervalued and fraudulent, in terms of Section 43, Section 45 and Section 66 of the IBC.

The Supreme Court held that the mortgages of plots of land of debt-ridden JIL to the lending banks of JAL cannot be countenanced and the lending banks of JAL cannot be held to be financial creditors of JIL.

Earlier, the NCLAT had allowed pleas of all banks as well as JAL and held that transactions were genuine and the allegation of undervaluation was not justified.

The NCLAT had quashed an NCLT Allahabad verdict which had held on May 16, 2018, that the mortgage of properties of JIL, which faced insolvency proceedings under the Insolvency and Bankruptcy Code (IBC), in favor of the lending financial institutions of holding firm JAL cannot be countenanced.

The NCLT had also held that JAL’s lenders do not fall in the category of “financial creditors” of corporate debtor JIL simply because of the mortgage of JIL's properties in favor of JAL.

The NCLT’s Allahabad bench had asked the holding firm JAL to return 758 acres of land to its subsidiary JIL, declaring the transfer of the land as “fraudulent” and “undervalued”.

It had also directed JAL to release and discharge interest created over the patch of land to lenders.