National Company Law Appellate Tribunal, New Delhi: In an appeal revolving around the alleged arbitrariness of CoC’s actions, the legitimacy of the Section 12-A of IBC proposal, and the readiness of funds for disbursement, a division bench comprising of Ashok Bhushan,* J., and Mr. Barun Mitra (Technical Member), held that the CoC’s rejection of the Section 12A proposal was unjustified, emphasising the appellant’s willingness to pay all outstanding dues. The NCLAT directed that the deposited amount be remitted to the Resolution Professional for distribution to creditors.
Factual Matrix
In the instant matter, the appellant-Corporate Debtor, Asian Hotels (West) Ltd., is a company registered on 08-01-2007, operating the Hyatt Regency in Mumbai. The Yes Bank provided financial assistance to the Corporate Debtor, including term loans and overdraft facilities. Due to the COVID-19 pandemic’s impact on the hotel business, the Corporate Debtor faced financial difficulties.
The Government introduced the Emergency Credit Lines Guarantee Scheme (ECLGS) to support affected businesses. The Corporate Debtor applied for additional funds under ECLGS, but Yes Bank did not release the amount. Default occurred in April 2021, leading to a Loan Recall Notice and Section 13(2) notice by Yes Bank. On 19-08-2021, the Yes Bank filed an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC) claiming a default of Rs.264,07,35,129/-. The Yes Bank also took possession of assets under the SARFAESI Act, 2002.
NCLT’s Orders
The Adjudicating Authority admitted the Section 7 application on 16-09-2022. JM Financial Asset Reconstruction Company Ltd. was permitted to substitute for Yes Bank as the Financial Creditor. The Adjudicating Authority rejected an application for impleadment filed by the Corporate Debtor on 05-08-2022.
Appeals
The Suspended Directors of the Corporate Debtor filed appeals challenging the admission of the Section 7 application and the substitution of the Financial Creditor. The Shareholders of the Corporate Debtor filed an appeal challenging the admission of the Section 7 application. The Corporate Debtor and its shareholders also filed an appeal challenging the rejection of their impleadment application. During pendency of the appeal, by assignment dated 30-11-2022, the JM Financial Asset Reconstruction Company Ltd. has assigned its debt to UV Asset Reconstruction Company Ltd (UVARCL).
Various interim orders and appeals were filed during the pendency of the case. The Corporate Debtor proposed a settlement under Section 12-A of the IBC, offering to deposit the entire outstanding amount. The CoC dissented the settlement proposal in a meeting on 13-10-2023, noting the absence of an upfront payment.
The appellants sought interim orders to restrain CoC and the Resolution Professional from taking further steps in the insolvency process until Section 12A proposal is considered. The CoC refused the settlement proposal and insisted on an upfront payment. The NCLAT vide order dated 17-10-2023, directed the appellants to deposit the entire outstanding amount, less Rs. 40 Crores already deposited as a Bank Guarantee, within four weeks. The CoC dissented the revised Section 12A proposal. A prospective resolution applicant filed an appeal before the Supreme Court against the impugned order dated 17-10-2023. The Financial Creditor rejected the amount deposited by the Corporate Debtor, stating it was deposited by a third party. Affidavits and counter-affidavits have been filed, raising objections to Section 12A proposal and the source of funds.
Appellant’s Contentions
The appellant alleged CoC’s arbitrary actions during meetings. It was contended that the appellant offered 100% dues to all creditors, with funds deposited and ready for disbursement. The appellant suggested respondent’s interest in a hostile takeover, accusing CoC of favoritism towards the respondent- UVARCL. While invoking Swiss Ribbons (P) Ltd. v. Union of India, (2019) 4 SCC 17, the appellant argued that the NCLAT can set aside CoC decisions if arbitrary.
Respondents’ Counter-arguments
The respondent argued that Promoters, including Suspended Directors, are disqualified from submitting a valid Section 12A proposal. The respondent questioned the genuineness of Section 12A proposal and contended that the Suspended Directors colluded with a third party to circumvent Section 29-A of the IBC. While referring Siti Networks Ltd. v. Assets Care and Reconstruction Enterprises Ltd., the respondent asserted that challenges against the assignment dated 21-06-2022 are unsustainable. The respondent argued in favor of considering all Resolution Plans, including its own.
Rejoinder by Appellant
The appellant emphasised that the proposal under Section 12-A of the IBC is supported by 88% shareholders, providing funds to close CIRP. It was asserted that Section 29-A of the IBC has no bearing on Section 12A proposal. The appellant requested the NCLAT to accept the Section 12A proposal, close Corporate Insolvency Resolution Process (CIRP), release funds for distribution, setting aside previous orders, and any other suitable orders in the interest of justice.
Moot Point
Whether decision of CoC, in which the respondent has 98.84% voting share, to reject the proposal under Section 12A, despite the appellant’s willingness to pay 100% of the outstanding dues, arbitrary and unsustainable?
Statutory Scheme
The introduction of Section 12-A in the IBC by Act 26 of 2018 on 06-06-2018 allowed for the withdrawal of CIRP. Prior to this, the only provision for withdrawal was Rule 8 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016. The amendment was prompted by observations made by the Supreme Court in Uttara Foods & Feeds (P) Ltd. v. Mona Pharmachem, (2018) 15 SCC 587.
Consequential amendments were made in the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, by inserting Regulation 30A on 25-07-2019.
In the case of Swiss Ribbons (P) Ltd. v. Union of India, (2019) 4 SCC 17, the Supreme Court upheld the validity of Section 12A and clarified that if the CoC arbitrarily rejects a just settlement or withdrawal claim, the NCLT and NCLAT can set aside such decision under Section 60 of the IBC.
NCLAT’s Assessment
The NCLAT observed that the appellants submitted a proposal under Section, involving Suspended Directors, Robust Hotels Ltd., and public Shareholders. The CoC was informed that approximately 88% shareholding in the Corporate Debtor had submitted a proposal with a Bank Guarantee of Rs. 40 Crore. Following deliberations, the respondent requested the original Bank Guarantee for verification, indicating willingness to accept the proposal upon verification. The respondent insisted on upfront payment to creditors, leading to CoC’s decision to consider a new proposal with 100% deposit for instant approval. A revised proposal offered to deposit the entire outstanding dues without any haircut and legal expenses. CoC decided that the proposers would deposit the entire amount within six weeks before the CoC would consider the 12A proposal. Despite the decision, the 16th CoC meeting voted against the proposal, with the respondent dissenting with a 98.84% vote share. The NCLAT observed that the appellant expressed readiness to deposit the amount in court within four weeks.
The NCLAT observed that the respondent argued that Section 12A should not circumvent Section 29A, which lists persons not eligible to submit a resolution plan. However, the NCLAT clarified that the two sections serve different purposes, with Section 29A addressing eligibility to submit a resolution plan, while Section 12A deals with the withdrawal of CIRP. The NCLAT rejected the respondent’s objection to the proposal being financed by third parties and found that the deposit was made by the shareholders and promoters, who are entitled to arrange finances, and respondent’s objections lacked merit.
The NCLAT highlighted that the Prospective Resolution Applicants have the right for their plans to be considered by the CoC but not necessarily approved. The NCLAT noted respondent’s apparent intent to reject the proposal and speculated on respondent’s interest in taking over the Corporate Debtor’s prime asset. The NCLAT criticised the respondent’s attempt to take over the corporate debtor’s prime asset without accepting the proposal. The NCLAT emphasised the CoC’s duty to consider a proposal in good faith and not to find reasons to reject it.
The NCLAT found no non-compliance in the deposit made by the appellant and condoned the delay of 1-2 days due to valid reasons mentioned in the counter-affidavit. The NCLAT noted that the CoC’s anxiety to reject the proposal and its refusal even after the amount was deposited indicated malafide intent. The NCLAT held that the CoC’s decision was arbitrary and unsustainable, especially given the appellant’s proposal to pay 100% of the outstanding dues.
The NCLAT considered the respondent’s refusal to accept the deposited amount, based on objections related to third-party financing and a one or two-day delay, as unwarranted. The NCLAT accepted the appellant’s proposal under Section 12A and closed the CIRP, setting aside the earlier order admitting the Section 7 application.
NCLAT’s Decision
The NCLAT accepted the proposal under Section 12A submitted by the appellant, closed the CIRP, and set aside the order admitting the Section 7 application. The NCLAT directed the amount deposited by the appellant to be remitted to the Resolution Professional for distribution among creditors. The NCLAT ordered the discharge of liens on Fixed Deposit Receipts (FDRs) held by banks. The NCLAT allowed the relevant interim applications. Disposed of all appeals accordingly.
[Sandeep Gupta v. JM Financial Asset Reconstruction Co. Ltd., 2024 SCC OnLine NCLAT 58, order dated 09-01-2024]
*Judgment by Ashok Bhushan
Advocates who appeared in this case :
Mr. Arun Kathpalia, Sr. Advocate, Mr. Abhijeet Sinha, Mr. Vikas Goel, Mr. Ritesh Sharma, Mr. Sidharth Aggarwal, Mr. Vivek Gupta, Ms. Anisha Dahiya, Counsel for the Appellant
Ms. Pooja Mahajan, Mr. Savar Mahajan, Ms. Shreya Mahalwar, Counsel for the RP.
Mr. Maninder Singh and Mr. Navin Pahwa, Sr. Advocates with Mr. Siddharth Garg and Mr. Nikhil Khare, Counsel for the UV ARCL.
Mr. Brijesh Kumar Tamber, Mr. Vinay Singh Bisht, Mr. Prateek Kushwaha, Mr. Sahas Bhasin and Mr. Yashu Rustagi, Counsel for the Intervenor (EPFO).
Mr. Gopal Jain, Sr. Advocate, Ms. Bhavya Shukla, Advocates for Intervenor Mr. Sumesh Dhawan, Mr. Wattan Sharma and Mr. Shaurya Shyam, Counsel for the Applicant in I.A. No. 6049 of 2023
