Intra Round Moot Court Competition, August

2022 Moot Problem

Cheque-Mate

1. The Republic of Angria (“Angria”) is one of the fastest growing economies in the
world. Angria is the second most populous country in the world with a large land mass,
giving an immense opportunity for establishing a reliable airline to enhance air
connectivity.

2. Wingfisher Airlines Ltd. (“Wingfisher”), was a company incorporated under the

provisions of the Angria Companies Act, 1956, having its registered office at Ballya
Towers, Nr. United Hotel, Tangalore, Angria. The company was founded by the
legendary entrepreneur Mr. Bejoy Ballya who ran the operations of the company as its
CEO. The shareholding pattern of Wingfisher is as follows:

Name Position Shareholding

Mr. Bejoy Ballya CEO 51%

Mr. Sanjoy Dutta Director (COO) 10%

Ms. Alia Kapoor Independent Director 2.5%

Ms. Deepika Singh Director (CFO) 10%

Mr. Tanvir Kapoor Independent Director 2.5%

Foreign Institutional - 7%
Investors

Public -- 17%

3. It was a well-known fact that the board of Wingfisher was effectively run by its CEO
in consultation with its COO and CFO. However, on account of an investment of US$
 10 million by Mr. & Mrs. Kapoor (“Kapoors”) coupled with their societal standing and
fame, they were allotted 5% of the company’s shares at the time of its incorporation in
2003. Wingfisher had further availed a working capital credit line of US$ 1 billion from
the State Bank of Angria to fund and kickstart its operations.

4. Wingfisher was one of the first airlines in Angria to adopt the popular ‘sale and lease
back’ model of operations and had accordingly entered into an exclusive long term
lease agreement (“master lease agreement”) with Bluesky Aviation Pvt. Ltd.
(“BlueSky”) for sale and lease back of its aircrafts.

5. BlueSky was a company incorporated under the provisions of the Angria Companies
Act, 1956, having its registered office at BlueSky Towers, Dombay, Angria.
Incorporated in the year 1995, BlueSky was one of the world’s largest aircraft lessors
and had a fleet of over 250 aircrafts. The business of BlueSky was primarily catered to
wide-body aircrafts leased to international carriers based out of the Middle-East. As per
media reports, BlueSky was reluctant to enter into any agreement with Wingfisher since
95% of its fleet was comprised of wide-body long-haul aircrafts and it would be ‘very
risky’ to venture into narrow-body aircrafts on account of its limited market. The CEO
of BlueSky, Ms. Careena Kapoor was the cousin sister of Mr. Tanvir Kapoor and as per
media reports, the Kapoors played an instrumental part in signing of the deal and
convincing Ms. Careena to invest in narrow body aircrafts on account of the terrific
opportunity in Angria.

6. As per the terms of the agreement, Wingfisher would purchase aircrafts from the
manufacturer via bulk deals, sell the aircraft to BlueSky at a fixed profit of 5% and
lease the aircrafts back at a fixed monthly lease. The lease amount was to be determined
by way of a separate agreement to be entered for every aircraft and was payable on the
30th day of every calendar month. Additionally, as required under the agreement,
Wingfisher had paid a security deposit of US$10 million along with a blank and undated
security cheque drawn on PDFC Bank, Tangalore Branch signed by its COO.

7. By 2019, Wingfisher was one of the fastest growing airlines in the world with a fleet of
over 100 airplanes, all of which were leased from BlueSky. As of 31.03.2019,
Wingfisher was paying around US$ 10 million every month in lease rentals to BlueSky
thereby enabling it to keep low costs and popularizing the ‘sale and lease back’ model
 which fueled the rise of other regional airlines in Angria. However, the monumental
expansion was at the cost of huge borrowings which stood at US$ 2.5 billion as on
31.03.2019, owed to a consortium of 11 banks led by the State Bank of Angria.

8. In an around March 2020, on account of a global pandemic fueled by the rampant

ROVID-19 virus, the entire global economy had come to a standstill. Angria entered
into a complete lockdown for over 3 months thereby completely halting all aviation
businesses in the country. The pandemic resulted into a dramatic supply shock for
Wingfisher as its revenues fell to Zero on one hand and on the other, it was faced with
a double whammy of monthly lease payments of US$ 10 million to BlueSky along with
quarterly loan repayment of US$ 40 million to the State Bank of Angria.

9. By July 2020, commercial aviation in Angria, restarted with 30% capacity. In August
2020, Wingfisher reported a net loss of US$ 50 million in the first quarter of FY 2020-
2021. In the quarterly earnings release, to the shock and surprise of all its shareholders,
the COO of Wingfisher stated that the company has no reserves and surplus as available
with other airlines and it is ‘almost impossible’ for the airline to sustain its operations
without any intervention from the government and restructuring of its loan repayment
to State Bank of Angria. The COO further stated that since the start of the pandemic,
Wingfisher has been in constant touch with BlueSky to waive its monthly lease
payments invoking the force majeure clause.

10. An article published in the Economic Times claimed that the COO’s remarks were
devoid of prudence and the fact that a company like Wingfisher, that had made over
US$ 1 billion in profits in the past 2 decades does not have enough cash reserves to stay
afloat for a few bad months was ‘impossible’ without a ‘murder of the airline’s
finances’.

11. Later in the week, a spokesperson from BlueSky confirmed that there were ‘several
disputes’ with Wingfisher regarding the lease payments and that the company had
defaulted upon payments of monthly lease rent since March 2020. However,
considering their long standing relationship, the parties were in talks to work out an
amicable settlement. Several media reports highlighted that the Kapoors had assured
Ms. Careena that the dues will be cleared once the situation improves.
12. In October 2020, Wingfisher posted a staggering net loss of US$ 88 million in the
second quarter. However, Wingfisher’s COO, stated in the quarterly earnings release
that he was ‘fairly confident’ that the airline will come out of the woods on account of
the revival in travel demand. Upon being questioned about the issues with BlueSky, the
COO responded by stating that the lease rents were being paid as ‘normal’ from October
2020 and that they are in negotiations for settling the dues for 7 unpaid lease rents
totaling to US$ 70 million.

13. The Q3 results of BlueSky as released in January 2021, noted that Wingfisher had not
paid any lease rentals from March 2020, except for one payment in the month of
October 2020 and the total dues from Wingfisher stood at US$ 100 million. The COO
of BlueSky in their earnings release stated that BlueSky was ‘on the brim of losing its
patience’ and that ‘serious legal action was only a stone’s throw away’. Upon a question
from an angry shareholder alleging that no legal action was being taken by the company
on account of Ms. Careena and her relation with the Kapoors, Ms. Careena responded
back by saying:

“My relationship with my cousin will not dictate the terms of the
company’s business. The only reason why we have not initiated any legal
proceedings is on account of the long-standing relationship since the past
two decades and more importantly because of the fact that they are one of
our biggest clients aggregating a revenue of US$120 million every year.
Issues of default in lease payments are very common these days, as we
have faced the same with our other middle eastern clients as well. The
airline industry is clearly going through a rough phase and we as their
back bone need to be supportive.”

14. In spite of record breaking losses in 2021, the airline was ‘miraculously’ able to stay
afloat on account of robust pent-up demand in the domestic market. In its earnings
release in January 2022, the COO of Wingfisher stated that it was paying regular
payments to BlueSky since March 2021. The total dues of BlueSky till March 2021
were around US$120 million and the airline had been successful in negotiating a
‘breather period’ with BlueSky till the situation improved.
15. As a final nail in the coffin, in mid-February 2022, a war broke out between the Boviet
Union and Zukraine which pushed the world economy into a deep recession with world-
wide inflation further impacting the sustainability of Wingfisher’s operations.
Immediately after the war, crude oil rose to its life time high of a staggering US$150
per barrel, making commercial aviation unsustainable throughout the world.

16. On 02.03.2022, in an unprecedented move, the company expressed its inability to meet
any of its obligations and announced grounding of the airline till further orders. A two-
page report published in The Times of Angria on 05.03.2022 claimed that Mr. Ballya
had fled the country and was under investigation by multiple authorities for fraud and
money laundering and several criminal proceedings were initiated against Mr. Ballya
and others involved in the scam. Angrian media was quick to classify the dealings of
Mr. Ballya as the “Wingfisher Scam” wherein the State Bank of Angria was duped and
scammed to the tune of US$ 2.5 billion in connivance with corrupt bank and
government officials.

17. On the same day, the Kapoors resigned as directors of Wingfisher. In a press release,
Mr. Tanvir Kapoor said:

“We were as it is sleeping directors in the company and were not involved
in the day to day affairs of the company. In the past few weeks, several
serious issues regarding the governance of the company have come to
light. We cannot in our right conscience continue as directors.”

18. On 05.03.2022, BlueSky terminated the master lease agreement with Wingfisher on
account of ‘incessant defaults’ amounting to a total of US$ 130 million and immediately
requested Wingfisher to hand over all its aircrafts back to BlueSky. BlueSky sent
another notice immediately demanding the payments of its dues, quantified at US$ 130
million, failing which, it will be constrained to initiate legal proceedings in accordance
with law.

19. On 07.03.2022, Wingfisher’s loan accounts were declared as a Non-Performing Asset

by the consortium of banks led by the State Bank of Angria. The bank stated in a press
release that it had initiated recovery proceedings against Wingfisher and its directors
by filing appropriate proceedings before the Debt Recovery Tribunal, Tangalore. The
accounts were classified as ‘fraud’ and Mr. Ballya was declared as a ‘willful defaulter’
 as per the relevant laws and appropriate criminal proceedings were initiated against
them.

20. On 09.03.2022, Wingfisher, through its COO, Mr. Sanjoy Dutta, filed an application
under Section 10, of the Insolvency and Bankruptcy Code, 2016, (“IBC”) before the
National Company Law Tribunal, Tangalore Bench (“NCLT”) inter alia praying for
initiation of corporate insolvency resolution process (“CIRP”) against itself. The
application was met with severe opposition from all stake holders including BlueSky
and State Bank of Angria stating that Wingfisher was attempting to abuse the process
of law after Mr. Ballya siphoned off all of its cash reserves and defrauded all
stakeholders.

21. Separately, BlueSky deposited the security cheque given by Wingfisher at the time of
signing of the agreement for an amount of US$ 130 million in its bank account at PDFC
Bank, Balcutta Branch which was returned unpaid on account of ‘balance insufficient’
on 30.03.2022. Consequently, on 10.04.2022, BlueSky served a statutory notice under
Section 138 of the Negotiable Instruments Act, 1881 (“NI Act”) to Wingfisher and all
its directors demanding payment of US$ 130 million within 15 days.

22. On 15.04.2022, the NCLT admitted the application filed by Wingfisher inter alia
initiating CIRP process against the company. Additionally, a moratorium as defined
under Section 14 of the IBC was declared on the company and Mr. Alan Shore was
appointed as the Interim Resolution Professional (“RP”) as per the provisions of the
Code.

23. On 01.05.2022, BlueSky initiated proceedings under Section 138 r/w 141 of the NI Act
before the court of the Chief Metropolitan Magistrate, Balcutta (“CMM”). The
complaint was filed against Wingfisher Airlines and its CEO and 4 directors. Upon
verification of the Complaint, the case was numbered as CC No. 86/2022 and the CMM
issued summons to all the accused, demanding their appearance on 15.05.2022. The
complaint in paragraph 3 stated:

“Accused No. 1- 4, being the directors of the company were in charge of

the day-to-day affairs of the company and are therefore vicariously liable
under Section 141 of the NI Act.”
24. On 15.05.2022, the Ld. Counsel appearing for Wingfisher drew the attention of the
CMM to the order dated 15.04.2022 passed by the NCLT and prayed that the
proceedings be kept in abeyance on account of the moratorium imposed under Section
14 of the Code. After hearing both the parties, the CMM was pleased to dismiss the
application inter alia stating that proceedings under Section 138 of the NI Act are
criminal in nature and would not be covered under the moratorium imposed under
Section 14 of the Code. The matter was adjourned for recording of plea of the accused
on 05.06.2022.

25. The order dated 15.05.2022, passed by the CMM was challenged by Wingfisher before
the Hon’ble High Court of Balcutta (“High Court”) by way of filing an application
under Section 482 of the Code of Criminal Procedure, 1973 (“CrPC”), inter alia
praying that the proceedings under Section 138 of NI Act would be covered u/s 14 of
the IBC. By way of an order dated 20.06.2022, the application was allowed and the
proceedings pending before the CMM were stayed till the moratorium under Section
14 was lifted by the NCLT.

26. Aggrieved by the order dated 20.06.2022, BlueSky filed SLP No. 10355/2022 under
Article 136 of the Constitution of Angria, before the Supreme Court of Angria wherein
vide order dated 1.07.2022, the decision of the High Court was partly overruled. By
way of a lengthy judgment, the Court observed that the provisions of Section 14 were
applicable to proceedings initiated against the company under Section 138 of the NI
Act. The court further held that the directors continued to be ‘statutorily liable’ and as
a result, the benefit of Section 14 would not apply to proceedings initiated against the
directors. (“SC Order”)

27. In the interregnum period, the CIRP process, led by Mr. Shore, was successfully
completed and Mr. X (“Resolution Applicant”) was awarded the winning bid by the
Committee of Creditors (“CoC”). Under the approved resolution plan, the Financial
creditors (such as State Bank of Ingria) were to be paid 50% of their claimed and
admitted dues, whereas the operational creditors (such as BlueSky, employees etc.)
were to be paid a meagre 2% of the claimed and admitted dues. The resolution plan was
approved by 90% of the CoC and consequently, an application was filed under Section
31 of the IBC before the NCLT for its final approval. Under the resolution plan, against
 claimed and admitted dues of US$ 130 million, BlueSky was to be paid US$ 2.6 million
by the Resolution Applicant.

28. On 05.06.2022, all accused, except Mr. Ballya, appeared before the CMM and plead
‘not guilty’ to the charges alleged against them. On the same day, BlueSky filed an
application under Section 143A of the NI Act for deposit of 20% interim compensation
(“Exhibit 6”). Mr. Dutta filed an application inter alia contesting that the CMM did
not have territorial jurisdiction to try the dispute since no part of the cause of action
arose in Balcutta. (“Exhibit 7”). Both the applications were admitted and were
adjourned to 11.07.2022 for final hearing. In the meantime, the parties were directed to
complete their pleadings.

29. By way of an order dated 09.07.2022, the NCLT approved the resolution plan under
Section 31 of IBC and the reins of the distraught airline were handed over to its new
owners. Consequently, the moratorium imposed under Section 14 of the Code was
lifted.

30. BlueSky as well as the State Bank of Angria challenged the order dated 09.07.2022
before the NCLAT, which is pending as on date, with no effective orders having been
passed.

31. On 10.07.2022, by way of a wire-transfer to the bank account of BlueSky at PDFC

Bank, Dombay Branch, an amount of US$ 2.6 million was paid by the successful
resolution applicant in compliance of the approved resolution plan. On the same day,
BlueSky addressed a letter to the new owners stating that the “amount was being
accepted under protest and shall be subject to the decision of the pending appeal before
NCLAT”.

32. On 11.07.2022, in the proceedings before the CMM, the Ld. Advocate appearing on
behalf of Wingfisher (now in control of the new owners) filed an application for
dismissal of proceedings annexing the order dated 09.07.2022 passed by the NCLT and
contended that since the resolution plan was approved by the NCLT, as per the
provisions of the IBC, the debt would stand extinguished and resultantly the
proceedings were infructuous. (“Exhibit 9”). The application was supported by the Ld.
Counsel appearing for Mr. Dutta as well as the Ld. Counsels appearing for the Kapoors
and Ms. Singh. After hearing both the parties, the CMM allowed the application filed
 under Exhibit 9 inter alia recording that by virtue of the provisions of the IBC, on
account of approval of the resolution plan, the proceedings qua the company would
become infructuous. However, the CMM, relying on the SC Order, held that the
directors would continue to remain ‘statutorily liable’ and therefore the proceedings
would continue qua the remaining accused.

33. Thereafter, the CMM took the application filed under Exhibit 7 for final hearing. The
Ld. Advocate for Mr. Dutta contended that BlueSky had its registered office in Dombay
and that of Wingfisher was in Tangalore. All transactions had taken place in Tangalore
and Dombay. All lease rentals till date were transferred by way of NEFT to the bank
account of BlueSky in PDFC Bank, Dombay. The security cheque issued by Wingfisher
was also drawn on PDFC Bank, Tangalore Branch. Therefore, deposit of the cheque at
Balcutta was impermissible since no part of the cause of action arose at Balcutta. Per
contra, the Ld. Advocate appearing for BlueSky contended that the ‘recovery branch’
of the company was headquartered in Balcutta and all security cheques for all its clients,
were always deposited in the Balcutta Branch and the said practice was in compliance
of law.

34. After hearing both the parties, the CMM was pleased to dismiss the application filed
under Exhibit 7, inter alia holding that since the cheque was deposited at the Balcutta
Branch in ordinary course of business, the court would have jurisdiction as per the NI
Act and CrPC.

35. Thereafter, the CMM took the application filed under Exhibit 6 filed under Section
143A for final hearing. The Ld. Advocates appearing for the accused opposed the
application arguing that there was no ‘legally enforceable debt’ remaining on account
of approval of the resolution plan and consequent extinguishment of the debt and
therefore no offence under Section 138 of NI Act can be said to be made out.
Furthermore, it was contended by the advocates appearing for Ms. Singh and the
Kapoors that his clients were mere sleeping partners and were not signatories to the
cheque and were not involved in the day-to-day affairs of the company and resultantly,
they would not be vicariously liable. It was further contended that no circumstances
were made out for exercising powers u/s 143A and it was not mandatory for the court
to allow such an application.
36. After hearing both the sides, the CMM was pleased to allow the application under
Exhibit 6 and directed that all the accused were liable to pay 20% of the cheque amount
(US$ 26 million) within 15 days of the order.

37. The order dated 11.07.2022 passed under Exhibit 9 was challenged by the 4 ex-directors
by way of filing CRMA 256/2022 before the High Court under Section 482 of CrPC. It
was contended on behalf of the ex-directors that the reliance on the SC Order was
misconceived and the same was not applicable to the facts of the present case. It was
contended that the SC order was pertaining to maintainability of Section 138
proceedings during the moratorium period under Section 14 of IBC. However, since
the moratorium under Section 14 of IBC was lifted upon approval of the resolution plan
by NCLT, the ratio decidendi of the decision would be inapplicable, since the debt was
extinguished.

38. However, by way of an order dated 20.07.2022, the said application was dismissed by
the High Court recording agreement with the findings of the CMM that the SC order
was applicable to the present case, and the debt would be extinguished only qua the
company and the directors would continue to remain ‘statutorily liable’.

39. The order dated 11.07.2022 passed under Exhibit 6 was challenged by Mr. Dutta by
way of filing CRMA 286/2022 and by the Kapoors and Ms. Singh by way of filing
CRMA 290/2022 and 291/2022 before the High Court under Section 482 of the CrPC.
The Ld. Advocate appearing for Mr. Dutta pointed out the timeline of events in the
preset case and contended that at time the offence under Section 138 can be said to have
been completed, CIRP proceedings were already initiated by the NCLT and Mr. Dutta
was not in charge of the affairs of the company and therefore he cannot be held to be
vicariously liable under Section 141 of the NI Act. Adopting the arguments advanced
on behalf of Mr. Dutta, the Ld. Advocates for the Kapoors & Ms. Singh reiterated that
admittedly, their clients were sleeping directors in the company and moreover, on
account of exceptional circumstances being made out, the court ought not to have
exercised powers u/s 143A.

40. By way of a common oral order dated 21.07.2022, the High Court summarily dismissed
CRMA 286/2022 inter alia reiterating its reference to the SC Order and stating that Mr.
Dutta, being the signatory of the cheque continue to remain ‘statutorily liable’. The
 High Court also dismissed CRMA 290 & 291/2022 holding that there was enough
material on record to indicate the involvement of the Kapoors in the transaction with
BlueSky.

41. Being aggrieved by the abovementioned four orders dated 20.07.2022 and 21.07.2022,
passed by the High Court in CRMA 256,286,290 and 291/2022, the respective parties
filed 4 SLP’s before the Supreme Court.

42. By way of an order dated 31.07.2022, considering the ‘substantial questions of law
raised in the petitions’, the Supreme Court issued notice keeping it returnable in the
first week of August 2022. For the sake of convenience, all matters were decided to be
heard together The Court framed the following indicative issues:

(i) Whether the ex-directors of the company are liable for prosecution under Section
138 r/w 141 of the NI Act after approval of the resolution plan by NCLT?

(ii) Whether the CMM has territorial jurisdiction to adjudicate the dispute?

(iii) Whether in the facts and circumstance of the present case, the offence qua the ex-
directors can be held to be complete under Section 138 r/w 141 of the NI Act?

(iv) Whether the Kapoors and Ms. Singh can be held to be liable under Section 141 of
the NI Act?

(v) Any other issues as deemed fit during the time of hearing.

--

Notes:

1. The laws of Angria are in pari materiae to the laws of India.

2. The issues framed in Paragraph 42 are indicative in nature. Participants are

highly encouraged to modify/add/remove/re-number and rearrange the issues as
they deem appropriate.

3. Participants are not expected to argue on trivial issues such as quantum of

damages, clubbing of matters, nomenclature of proceedings and other
procedural issues etc.